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,7IPZvMBhXvTcvTecpqX6xq1O9OyXxOVf7RPaa7dampGnpWXafGgsx7vnBoaWsjXYF8l19C5PASAxa7aT+4QWb5eg==910<SEC-DOCUMENT>0000897101-01-500059.txt : 2001033011<SEC-HEADER>0000897101-01-500059.hdr.sgml : 2001033012ACCESSION NUMBER: 0000897101-01-50005913CONFORMED SUBMISSION TYPE: 10-K14PUBLIC DOCUMENT COUNT: 715CONFORMED PERIOD OF REPORT: 2000123116FILED AS OF DATE: 200103291718FILER: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:31SEC FILE NUMBER: 001-1244132FILM NUMBER: 15838083334BUSINESS 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>stjude010431_10-k.txt51<DESCRIPTION>ST. JUDE MEDICAL FORM 10-K52<TEXT>53545556UNITED STATES SECURITIES AND EXCHANGE COMMISSION57WASHINGTON, D. C. 2054958------------------------------5960FORM 10-K6162ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF63THE SECURITIES EXCHANGE ACT OF 19346465FOR THE FISCAL YEAR ENDED DECEMBER 31, 20006667COMMISSION FILE NO. 0-867268------------------------------6970ST. JUDE MEDICAL, INC.71(Exact name of Registrant as specified in its charter)7273MINNESOTA 41-127689174(State or other jurisdiction (I.R.S. Employer75of incorporation or organization) Identification No.)7677ONE LILLEHEI PLAZA78ST. PAUL, MINNESOTA 5511779(Address of principal executive offices)8081(651) 483-200082(Registrant's telephone number, including area code)83------------------------------8485SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:8687COMMON STOCK ($.10 PAR VALUE) PREFERRED STOCK PURCHASE RIGHTS88(Title of class) (Title of class)8990NEW YORK STOCK EXCHANGE AND CHICAGO BOARD OPTIONS EXCHANGE91(Name of exchange on which registered)9293SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE94------------------------------9596Indicate by check mark if disclosure of delinquent filers pursuant to97Item 405 of Regulation S-K is not contained herein, and will not be contained,98to the best of the Registrant's knowledge, in definitive proxy or information99statements incorporated by reference in Part III of this Form 10-K or any100amendment to this Form 10-K. _____101102Indicate by check mark whether the Registrant: (1) has filed all103reports required to be filed by Section 13 or 15(d) of the Securities Exchange104Act of 1934 during the preceding 12 months; and (2) has been subject to such105filing requirements for the past 90 days.106107Yes X No108-------- --------109110The aggregate market value of the voting stock held by non-affiliates111of the Registrant was approximately $5.1 billion at February 21, 2001, when the112closing sale price of such stock, as reported on the New York Stock Exchange,113was $60.00 per share.114115The Registrant had 85,640,177 shares of its $0.10 par value Common116Stock outstanding as of February 21, 2001.117118119120<PAGE>121122123124125DOCUMENTS INCORPORATED BY REFERENCE126127Portions of the Company's Annual Report to Shareholders for the fiscal128year ended December 31, 2000, are incorporated by reference in Parts I, II and129IV. Portions of the Company's definitive Proxy Statement dated March 28, 2001,130are incorporated by reference in Part III.131132PART I133134ITEM 1. BUSINESS135136GENERAL137St. Jude Medical, Inc., together with its subsidiaries (collectively138"St. Jude" or the "Company") is a global leader in the development,139manufacturing and distribution of medical technology products for the cardiac140rhythm management, cardiology and vascular access, and cardiac surgery markets.141142St. Jude has two reportable segments: Cardiac Rhythm Management (CRM)143and Cardiac Surgery (CS - formerly known as Heart Valve Disease Management). The144CRM segment, which includes the results from the Company's Cardiac Rhythm145Management Division and Daig Division, develops, manufactures and distributes146bradycardia pulse generator and tachycardia implantable cardioverter147defibrillator (ICD) systems, electrophysiology and interventional cardiology148catheters, and vascular closure devices. The CS segment develops, manufactures149and distributes mechanical and tissue heart valves and valve repair products,150and suture-free devices to facilitate coronary artery bypass graft anastomoses.151152Effective September 27, 1999, St. Jude acquired Vascular Science, Inc.153("VSI"), a development-stage company focused on the development of suture-free154devices to facilitate coronary artery bypass graft anastomoses.155156Effective March 16, 1999, St. Jude purchased the Angio-Seal(TM)157business of Tyco International Ltd. Angio-Seal(TM) manufactured and marketed158hemostatic puncture closure devices.159160During 2000 and 1999, the Company acquired various businesses used in161the distribution of the Company's products.162163The Company markets its products primarily in the United States,164Western Europe and Japan through both a direct employee-based sales organization165and independent distributors. In addition, St. Jude maintains geographically166based sales and marketing organizations that are responsible for marketing,167sales and distribution of the Company's products in Eastern Europe, Africa, the168Middle East, Canada, Latin America and the Asia-Pacific region.169170Typically, the Company's net sales are somewhat higher in the first and171second quarters and lower in the third and fourth quarters. Lower net sales in172the third quarter result from patient tendency to defer, if possible, cardiac173procedures during the summer months and from the seasonality of the U.S. and174Western European markets where summer vacation schedules normally result in175fewer surgical procedures. Lower net sales in the fourth quarter result from176fewer selling days in the quarter because of holidays in the U.S. and other177markets, and patient tendency to defer, if possible, cardiac procedures during178these holiday seasons. Independent distributors randomly place large orders that179can distort the net1801811822183<PAGE>184185sales pattern just described. In addition, new product introductions,186acquisitions, and regulatory approvals can modify the typical net sales pattern.187188In 2000, approximately 78% of net sales were derived from cardiac189rhythm management segment products, and approximately 22% from cardiac surgery190segment products. Approximately 63% of the Company's 2000 net sales were in the191U.S. market, as compared with 62% in 1999. Additional segment information is set192forth in the Company's 2000 Annual Report to Shareholders on pages 21 and 22 of193the Financial Report and is incorporated herein by reference.194195CARDIAC RHYTHM MANAGEMENT196The Cardiac Rhythm Management Division ("CRMD") is headquartered in197Sylmar, California and has manufacturing facilities in California, Arizona,198South Carolina and Sweden. The Daig Division ("Daig") is headquartered in199Minnesota and has manufacturing facilities in Minnesota and Puerto Rico.200201CRMD pacemakers and related systems treat patients with hearts that202beat inappropriately slow, a condition known as bradycardia. ICDs and related203systems treat patients with hearts that beat inappropriately fast, a condition204known as tachycardia. Daig's specialized disposable cardiovascular catheters and205related devices are used in the electrophysiology portion of the cardiac rhythm206management market and the cardiology and vascular access market.207208Typically implanted pectorally, just below the collarbone, pacemakers209monitor the heart's rate and, when necessary, deliver low-level electrical210impulses that stimulate an appropriate heartbeat. The pacemaker is connected to211the heart by one or two leads that carry the electrical impulses to the heart212and information from the heart back to the pacemaker. An external programmer213enables the physician to retrieve diagnostic information from the pacemaker and214reprogram the pacemaker in accordance with the patient's changing needs.215Single-chamber pacemakers stimulate only one chamber of the heart (atrium or216ventricle), while dual-chamber devices can sense and pace in both the upper and217lower chambers.218219CRMD's current pacing products include the advanced featured220Integrity(TM) AFx Micro and the Integrity(TM) AFx models, FDA approved in221December 2000 and May 2000, respectively. The Integrity(TM) models build on the222successful platform of the Affinity(R) product line with the beat-by-beat223AutoCapture(TM) pacing system. Also available are the January 1999 FDA approved224Affinity(R), and the August 1999 FDA approved Entity(TM) family of pacemakers,225containing the proven Omnisense(TM) activity-based sensor, and the Tempo(R)226pacemaker family, which uses fifth-generation Minute Ventilation sensor227technology. These pacemaker families are highly automatic and contain many228advanced features and diagnostic capabilities to optimize cardiac therapy. All229are small and physiologic in shape to enhance patient comfort.230231Outside the United States, CRMD also offers the Integrity(TM) AFx232Micro, the world's smallest dual-chamber pacemaker, with an Atrial Suppression233algorithm called DAO (Dynamic Atrial Overdrive(TM)). DAO is a therapy designed234to suppress atrial fibrillation, a common heart arrhythmia, and is currently235under clinical investigation in the United States. The single-chamber236pacemakers, the Microny(R) SR+ and the Regency(R) pacemaker families, are also237available outside the United States; while the Microny(R) II SR+ is awaiting FDA238approval in the United States.239240The Integrity(TM), Affinity(R), Entity(TM) and Regency(R) families of241pacemakers, as well as the Microny(R) SR+, all offer the unique feature of the242beat-by-beat AutoCapture(TM) pacing system. The AutoCapture(TM) pacing system243enables the pacemaker to monitor every paced beat to verify that the heart has244been stimulated ("capture"), deliver a back-up pulse in the event of noncapture,245continuously measure threshold, and make adjustments in energy output to match246changing patient needs.2472482493250<PAGE>251252253CRMD's current pacing leads include the active-fixation Tendril(R) DX254and SDX families and the passive-fixation Passive Plus(R) DX family which are255available worldwide, and the passive-fixation Membrane(TM) EX family which is256currently available outside the United States. All three lead families feature257steroid elution, which helps suppress the body's inflammatory response to a258foreign object.259260CRMD's ICDs monitor the heartbeat and deliver higher energy electrical261impulses, or "shocks," to terminate ventricular tachycardia (VT) and ventricular262fibrillation (VF). In ventricular tachycardia, the lower chambers of the heart263contract at an abnormally rapid rate and typically deliver less blood to the264body's tissues and organs. VT can progress to VF, in which the heart beats so265rapidly and erratically that it can no longer pump blood. Like pacemakers, ICDs266are typically implanted pectorally, connected to the heart by leads, and267programmed non-invasively.268269St. Jude received FDA approval on its first dual-chamber ICD, the270Photon(R) DR, in October 2000. The Photon(R) DR is a dual chamber ICD, offering271the features of Morphology Discrimination (MD) and AV Rate Branch designed to272enhance the precision of ventricular-based arrhythmia detection. The full CRMD273ICD product offering includes the Photon(R), Profile(TM) MD, and Contour(R) MD.274275The Company's ICDs are used with the dual electrode and single276electrode TVL and TVL-ADX (active-fix) transvenous leads. The Photon(TM) DR ICD277is programmable with the APS III universal programmer. The Contour(R) MD and278Profile(TM) ICDs are currently programmable with the PR-3500 and PR-1500279programmers, and will be programmable by the APS III by mid-2001.280281The CRMD APS(R) III universal pacemaker and ICD programmer is an282intuitive, easy-to-use programmer that supports St. Jude's ICDs and pacemakers,283including the recently FDA approved Photon(R) DR dual-chamber ICD and the284Integrity(TM) pacemaker family. Older pacemaker and ICD products continue to be285supported by the APS(R) II and the PR-3500 and PR-1500 patient management286systems. All CRMD programmers allow the physician to efficiently utilize the287extensive diagnostic and therapeutic capabilities of CRMD's pacemakers and ICDs.288289Specialized disposable cardiovascular devices, sold by Daig, include290percutaneous (through the skin) catheter introducers, diagnostic guidewires,291vascular sealing devices, angiography catheters, electrophysiology (EP)292catheters and bipolar temporary pacing catheters (used with external293pacemakers). Percutaneous catheter introducers are used to create passageways294for cardiovascular catheters from outside the human body through the skin into a295vein, artery or other location inside the body. Daig's percutaneous catheter296introducer products consist primarily of peel-away and non peel-away sheaths,297sheaths with and without hemostasis valves, dilators, guidewires, repositioning298sleeves, obturators and needles. All of these products are offered in a variety299of sizes and packaging configurations. Diagnostic guidewires are used in300conjunction with percutaneous catheter introducers to aid in the introduction of301intravascular catheters. Daig's diagnostic guidewires are available in multiple302lengths and incorporate a surface finish for lasting lubricity. Vascular sealing303devices are used to close femoral artery puncture wounds following angioplasty,304stenting and diagnostic procedures.305306Angiography catheters are used in coronary angiography procedures to307obtain images of coronary arteries to identify structural cardiac diseases. EP308catheters are placed into the human body percutaneously to aid in the diagnosis309and treatment of cardiac arrhythmias (abnormal heart rhythms). Between two and310five EP catheters are generally used in each electrophysiology procedure. Daig's311EP catheters are available in multiple configurations. Bipolar temporary pacing312catheters are inserted percutaneously for temporary use (less than one hour to a313maximum of one week) with external pacemakers to provide patient stabilization314prior to implantation of a permanent pacemaker, following a heart attack, or315during surgical procedures. Daig produces and markets several designs of bipolar316temporary pacing catheters.3173183194320<PAGE>321322323CARDIAC SURGERY324The Cardiac Surgery Division (CSD) is headquartered in St. Paul,325Minnesota and has manufacturing facilities in Minnesota, Puerto Rico, Canada and326Brazil. CSD is comprised of its Heart Value Group (HVG) and its Anastomotic327Technology Group (ATG). Heart valve replacement or repair may be necessary328because the natural heart valve has deteriorated due to congenital defects or329disease. Heart valves facilitate the one-way flow of blood in the heart and330prevent significant backflow of blood into the heart and between the heart's331chambers.332333HVG offers both mechanical and tissue replacement heart valves and334valve repair products. The St. Jude Medical(R) mechanical heart valve has been335implanted in over one million patients to date. The SJM Regent(TM) mechanical336heart valve was approved for sale in Europe in December 1999 and is currently in337a clinical trial in the United States. The Company markets the Toronto SPV(R)338stentless tissue valve, a stentless tissue valve and the SJM(R) Biocor(TM)339tissue valve. The Company received FDA approval for the U.S. market release of340the Toronto SPV(R) in November 1997 at which time the product was launched and341physician training commenced. The SJM Epic(TM) tissue heart valve received342European regulatory approval in late 1998 and was launched in Europe in 1999. On343January 21, 2000 the Company discontinued sales of CSD products, including heart344valves, with Silzone(R) cuffs due to a higher incidence of perivalvular leak345associated with this product in a clinical study. The Company also recalled346unimplanted inventory of this product.347348Annuloplasty rings are prosthetic devices used to repair diseased or349damaged mitral heart valves. The Company has executed a license agreement with350Professor Jacques Seguin to manufacture and market an advanced semi-rigid351annuloplasty ring, known as the SJM(R) Seguin annuloplasty ring. HVG also352markets the SJM Tailor(TM) annuloplasty ring.353354HVG has also entered into an agreement with LifeNet Transplant355Services, which enables it to assist in the marketing of human donated allograft356heart valves.357358ATG has developed a suture-free device to facilitate coronary artery359bypass graft proximal anastomoses and commenced marketing of this product in360Western Europe in 2000. This product has been submitted to the FDA for approval,361which is expected in 2001. ATG is also developing a distal anastomoses362suture-free device and next generation proximal devices.363364SUPPLIERS365The Company purchases raw materials and other items from numerous366suppliers for use in its products. For certain materials that the Company367believes are critical and may be difficult to obtain from an alternative368supplier, the Company maintains sizable inventories of up to three years of its369projected requirements for certain materials, some of which are available only370from a single supplier. The Company has been advised from time to time that371certain of these suppliers may terminate sales of products to customers that372manufacture implantable medical devices in an effort to reduce their potential373products liability exposure. Some of these suppliers have modified their374positions and have indicated a willingness to either temporarily continue to375provide product until such time as an alternative vendor or product can be376qualified or to reconsider the supply relationship. While the Company believes377that alternative sources of raw materials are available and that there is378sufficient lead time in which to qualify such other sources, any supply379interruption could have a material adverse effect on the Company's ability to380manufacture its products.3813823835384<PAGE>385386387COMPETITION388Within the medical technology industry, competitors range from small389start-up companies to companies with significant resources. The Company's390customers consider many factors when choosing supplier partners including391product reliability, clinical outcomes, product availability, inventory392consignment, price and product services provided by the manufacturer. Market393share can shift as a result of technological innovation, product recalls and394product safety alerts, as well as other business factors. This emphasizes the395need to provide the highest quality products and services. St. Jude expects the396competition to continue to increase by using tactics such as consigned397inventory, bundled product sales and reduced pricing.398399CRMD has traditionally been a technological leader in the bradycardia400pacemaker market. The Company has strong bradycardia market share positions in401all major developed markets. There are three principal manufacturers and402suppliers of ICDs, one of which is the Company. ICD therapy is a highly403competitive market. The Company's other two competitors account for more than40480% of the worldwide ICD sales. These two competitors are larger than the405Company and have invested substantial amounts in ICD research and development.406The market areas Daig focuses on are the cardiac catheterization laboratories407and the electrophysiology laboratories throughout the world. These are growing408markets with numerous competitors.409410The Company is the world's leading manufacturer and supplier of411mechanical heart valves. There are two other principal and several other smaller412mechanical heart valve manufacturers. The Company also competes against two413principal and a large number of other smaller tissue heart valve manufacturers.414415The medical technology market is a dynamic market currently undergoing416significant change due to cost of care considerations, regulatory reform,417industry consolidation and customer consolidation. The ability to provide cost418effective clinical outcomes is becoming increasingly more important for medical419technology manufacturers.420421MARKETING422The Company's products are sold in over 100 countries throughout the423world. No distributor organization or single customer accounted for more than42410% of 2000, 1999 or 1998 consolidated net sales.425426In the United States, St. Jude sells directly to hospitals through a427combination of independent distributors and an employee based sales428organization. In Western Europe, the Company has employee based sales429organizations selling in 14 countries. Throughout the rest of the world the430Company uses a combination of independent distributor and direct sales431organizations.432433Group purchasing organizations (GPOs) in the U.S. continue to434consolidate the purchasing for some of the Company's customers. A few GPOs have435executed contracts with the Company's CRM market competitors, which exclude the436Company. These contracts, if enforced, may adversely affect the Company's sales437of CRM products to members of these GPOs.438439Payment terms worldwide are consistent with local practice. Orders are440shipped as they are received and, therefore, no material backlog exists.4414424436444<PAGE>445446447RESEARCH AND DEVELOPMENT448The Company is focused on the development of new products and449improvements to existing products. In addition, research and development expense450reflects the Company's efforts to obtain FDA approval of certain new products451and processes, and to maintain the highest quality standards of existing452products. The Company's research and development expenses, exclusive of453purchased in-process research and development, were $137,814,000 (11.7% of net454sales), $125,059,000 (11.2% of net sales) and $99,756,000 (9.8% of net sales) in4552000, 1999 and 1998, respectively.456457GOVERNMENT REGULATION458The medical devices manufactured and marketed by the Company are459subject to regulation by the FDA and, in most instances, by state and foreign460governmental authorities or their designated representatives. Under the U.S.461Federal Food, Drug and Cosmetic Act (the "Act"), and regulations thereunder,462manufacturers of medical devices must comply with certain policies and463procedures that regulate the composition, labeling, testing, manufacturing,464packaging and distribution of medical devices. Medical devices are subject to465different levels of government approval requirements, the most comprehensive of466which requires the completion of an FDA approved clinical evaluation program and467submission and approval of a pre-market approval ("PMA") application before a468device may be commercially marketed. The Company's mechanical and tissue heart469valves, ICDs, certain pacemakers and leads and certain electrophysiology470catheter applications are subject to this level of approval or as a supplement471to a PMA approval. Other pacemakers and leads, annuloplasty ring products and472other electrophysiology and interventional cardiology products are currently473marketed under the 510(k) pre-market notification procedure of the Act.474475In addition, the FDA may require testing and surveillance programs to476monitor the effect of approved products which have been commercialized and it477has the power to prevent or limit further marketing of a product based on the478results of these post-marketing programs. The FDA also conducts inspections479prior to approval of a PMA to determine compliance with the quality system480regulations which covers manufacturing and design and may, at any time after481approval of a PMA or granting of a 510(K), conduct periodic inspections to482determine compliance with both good manufacturing practice regulations and/or483current medical device reporting regulations. If the FDA were to conclude that484St. Jude was not in compliance with applicable laws or regulations, it could485institute proceedings to detain or seize products, issue a recall, impose486operating restrictions, assess civil penalties and recommend criminal487prosecution to the Department of Justice. Furthermore, the FDA could proceed to488ban, or request recall, repair, replacement or refund of the cost of, any device489manufactured or distributed.490491The FDA also regulates record keeping for medical devices and reviews492hospital and manufacturers' required reports of adverse experiences to identify493potential problems with FDA authorized devices. Aggressive regulatory action may494be taken due to adverse experience reports.495496Diagnostic-related groups ("DRG") reimbursement schedules regulate the497amount the United States government, through the Health Care Financing498Administration ("HCFA"), will reimburse hospitals and doctors for the inpatient499care of persons covered by Medicare. In response to rising Medicare and Medicaid500costs, several legislative proposals have been advanced which would restrict501future funding increases for these programs. Changes in current DRG502reimbursement levels could have an adverse effect on its domestic pricing503flexibility.5045055067507<PAGE>508509510St. Jude's business outside the United States is subject to medical511device laws in individual foreign countries. These laws range from extensive512device approval requirements in some countries for all or some of the Company's513products, to requests for data or certifications in other countries. Generally,514regulatory requirements are increasing in these countries. In the European515Economic Community ("EEC"), the regulatory systems have been harmonized and516approval to market in EEC countries (the CE Mark) can be obtained through one517agency. In addition, government funding of medical procedures is limited and in518certain instances is being reduced.519520A number of medical device regulatory agencies have begun considering521whether to continue to permit the sale of medical devices that incorporate any522bovine material because of concerns about Bovine Spongiform Encephalopathy523(BSE), sometimes referred to as "mad cow disease." It is believed that in some524instances this disease has been transmitted to humans through the consumption of525beef. There have been no reported cases of BSE in the U.S. Some of the Company's526products use bovine collagen (Angio-Seal(TM) and vascular grafts) which is527derived from the bovine component scientifically rated as least likely to528transmit the disease. Some of the Company's tissue heart valves incorporate a529strip of bovine pericardial material. The Company is cooperating with these530regulatory agencies.531532In 1994 the predecessor organization to Pacesetter, Inc. ("Pacesetter"533- - a wholly owned subsidiary of St. Jude) entered a consent decree which settled534a lawsuit brought by the United States in U.S. District Court for the District535of New Jersey. The consent decree which remains in effect indefinitely requires536that Pacesetter comply with the FDA's good manufacturing practice regulations537and identifies several specific provisions of those regulations. The consent538decree provides for FDA inspections and that Pacesetter is obligated to pay539certain costs of the inspections.540541In May 1995 Telectronics Pacing Systems, Inc. ("Telectronics" - now542part of Pacesetter) and its President entered into a consent decree with the543FDA. The consent decree, which remains in effect indefinitely, requires that544Telectronics comply with the FDA's good manufacturing practice regulations and545identifies several specific provisions of those regulations. The consent decree546provides for FDA inspections and that Telectronics is obligated to pay certain547costs of the inspections.548549PATENTS AND LICENSES550The Company's policy is to protect its intellectual property rights551related to its medical devices. Where appropriate, St. Jude applies for United552States and foreign patents. In those instances where the Company has acquired553technology from third parties, it has sought to obtain rights of ownership to554the technology through the acquisition of underlying patents or licenses.555556While the Company believes design, development, regulatory and557marketing aspects of the medical device business represent the principal558barriers to entry into such business, it also recognizes that its patents and559license rights may make it more difficult for its competitors to market products560similar to those produced by the Company. St. Jude can give no assurance that561any of its patent rights, whether issued, subject to license, or in process,562will not be circumvented or invalidated. Further, there are numerous existing563and pending patents on medical products and biomaterials. There can be no564assurance that the Company's existing or planned products do not or will not565infringe such rights or that others will not claim such infringement. No566assurance can be given that the Company will be able to prevent competitors from567challenging the Company's patents or entering markets currently served by the568Company.569570INSURANCE571The medical technology industry has historically been subject to572significant products liability claims. Such claims could be asserted against the573Company in the future for events not known to5745755768577<PAGE>578579580management at this time. Management has adopted risk management practices,581including products liability insurance coverage, which management believes are582prudent.583584California earthquake insurance is currently difficult to procure,585extremely costly, and restrictive in terms of coverage. The Company's earthquake586and related business interruption insurance for its CRMD operations located in587Sylmar and Sunnyvale, California provides for limited coverage above a588significant self-insured retention. There are several factors that preclude the589Company from determining the effect an earthquake may have on its business.590These factors include, but are not limited to, the severity and location of the591earthquake, the extent of any damage to the Company's manufacturing facilities,592the impact of such an earthquake on the Company's California workforce and the593infrastructure of the surrounding communities, and the extent, if any, of damage594to the Company's inventory and work in process. While the Company's exposure to595significant losses occasioned by a California earthquake would be partially596mitigated by its ability to manufacture certain of the CRMD products at its597Swedish manufacturing facility, any such losses could have a material adverse598effect on the Company, the duration of which cannot be reasonably predicted. The599Company has expanded the manufacturing capabilities at its Swedish facility and600has constructed a pacemaker component manufacturing facility in Arizona. In601addition, the Company has moved significant finished goods inventory to602locations outside California. These facilities and inventory transfers would603further mitigate the adverse impact of a California earthquake.604605EMPLOYEES606As of December 31, 2000, the Company had 4,951 full-time employees. It607has never experienced a work stoppage as a result of labor disputes and none of608its employees are represented by a labor organization, with the exception of the609Company's Swedish employees and certain employees in France.610611INTERNATIONAL OPERATIONS612The Company's foreign business is subject to such special risks as613exchange controls, currency devaluation, the imposition or increase of import or614export duties and surtaxes, and international credit or financial problems.615Currency exchange rate fluctuations vis-a-vis the U.S. dollar can affect616reported net earnings. The Company may hedge a portion of this exposure, from617time to time, to reduce the effect of foreign currency rate fluctuations on net618earnings. See the "Market Risk" section on pages 4 and 5 of "Management's619Discussion and Analysis of Results of Operations and Financial Condition",620incorporated herein by reference from the Company's 2000 Annual Report to621Shareholders. Operations outside the United States present complex tax and cash622management issues that necessitate sophisticated analysis and diligent623monitoring to meet the Company's financial objectives.624625ITEM 2. PROPERTIES626627St. Jude's principal executive offices are owned and are located in St.628Paul, Minnesota. Manufacturing facilities are located in California, Minnesota,629Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. The Company630owns approximately 62%, or 380,000 square feet, of the total manufacturing space631and the balance is leased.632633The Company also maintains sales and administrative offices inside the634United States at 17 locations in 7 states and outside the United States at 34635locations in 23 countries. With the exception of one location, all of these636locations are leased.6376386399640<PAGE>641642643In management's opinion, all buildings, machinery and equipment are in644good condition, suitable for their purposes and are maintained on a basis645consistent with sound operations. Currently the Company is using substantially646all of its available space to develop, manufacture and market its products.647648ITEM 3. LEGAL PROCEEDINGS649650IRS MATTERS651During 2000, the Company and the Internal Revenue Service ("IRS")652settled the IRS Tax Court suit for the tax periods 1990-1991 and subsequent year653disputes for the tax periods 1992-1997. The issues raised by the IRS related654primarily to the Company's Puerto Rican operations. The settlement did not have655a material impact on the Company's consolidated financial statements.656657SILZONE(R) LITIGATION658The Company has been sued by patients alleging defects in the Company's659mechanical heart valves with a Silzone(R) coating. The Company recalled products660with a Silzone(R) coating on January 21, 2000, and sent a Recall notice and661Advisory concerning the recall to physicians and others. Some of these cases are662seeking monitoring of patients implanted with Silzone(R)-coated valves who663allege no injury to date. Some of these cases are seeking class action status.664The Company intends to vigorously defend these cases.665666GUIDANT LITIGATION667GUIDANT'S CLAIMS AGAINST SJM On November 26, 1996, Guidant Corporation668(a competitor of St. Jude Medical) ("Guidant") and related parties filed a669lawsuit against St. Jude Medical, Inc. ("St. Jude Medical"), Pacesetter, Inc.670("Pacesetter" - a wholly owned subsidiary of St. Jude Medical), Ventritex, Inc.671("Ventritex") and certain members of the Telectronics Group in State Superior672Court in Marion County, Indiana (the "Telectronics Action"). The lawsuit673alleges, among other things, that, pursuant to an agreement entered into in6741993, certain Guidant parties granted Ventritex intellectual property licenses675relating to cardiac stimulation devices, and that such licenses would terminate676upon the consummation of the merger of Ventritex into Pacesetter (the "Merger").677The lawsuit further alleges that, pursuant to an agreement entered into in 1994678(the "Telectronics Agreement"), certain Guidant parties granted the Telectronics679Group intellectual property licenses relating to cardiac stimulation devices.680The lawsuit seeks declaratory and injunctive relief, among other things, to681prevent and invalidate the transfer of the Telectronics Agreement to Pacesetter682in connection with Pacesetter's acquisition of Telectronics' assets (the683"Telectronics Acquisition") and the application of license rights granted under684the Telectronics Agreement to the manufacture and sale by Pacesetter of685Ventritex's products following the consummation of the Merger. The court686overseeing this case issued a stay of this matter in July 1998 so that the687issues could be addressed in an arbitration requested by the Telectronics Group688and Pacesetter.689690Guidant and related parties also filed suit against St. Jude Medical,691Pacesetter and Ventritex on November 26, 1996, in the United States District692Court for the Southern District of Indiana. This second lawsuit seeks (i) a693declaratory judgment that Pacesetter's manufacture, use or sale of cardiac694stimulation devices of the type or similar to the type which Ventritex695manufactured and sold at the time the Guidant parties filed their complaint696would, upon consummation of the Merger, be unlicensed and constitute an697infringement of patent rights owned by certain Guidant parties, (ii) to enjoin698the manufacture, use or sale by St. Jude Medical, Pacesetter or Ventritex of699cardiac stimulation devices of the type which Ventritex manufactured at the time700the Guidant parties filed their complaint, and (iii) certain damages and costs.701This second lawsuit was stayed by the court in July 1998 given the order to702arbitrate, as discussed below.70370470510706<PAGE>707708709St. Jude Medical believes that the foregoing state and federal court710complaints contain a number of significant factual inaccuracies concerning the711Telectronics Acquisition and the terms and effects of the various intellectual712property license agreements referred to in such complaints. For these reasons713and others, St. Jude Medical believes that the allegations set forth in the714complaints are without merit. St. Jude Medical has vigorously defended its715interests in these cases and will continue to do so.716717ORDER TO ARBITRATE As a result of the state and federal lawsuits718brought by Guidant and related parties, the Telectronics Group and Pacesetter719filed a lawsuit in the United States District Court for the District of720Minnesota seeking (i) a declaratory judgment that the Guidant parties' claims,721as reflected in the Telectronics Action, are subject to arbitration pursuant to722the arbitration provisions of the Telectronics Agreement, (ii) an order that the723defendants arbitrate their claims against the Telectronics Group and Pacesetter724in accordance with the arbitration provisions of the Telectronics Agreement,725(iii) to enjoin the defendants preliminarily and permanently from litigating726their dispute with the Telectronics Group and Pacesetter in any other forum, and727(iv) certain costs. After the Eighth Circuit Court of Appeals ruled on an appeal728in favor of the Telectronics Group and Pacesetter in May 1998, the United States729District Court for the District of Minnesota issued an order on July 8, 1998730directing the arbitration requested by the Telectronics Group and Pacesetter to731proceed.732733STATUS OF ARBITRATION The arbitrator selected for the arbitration734initially ruled that Pacesetter and St. Jude Medical should not participate in735the arbitration proceeding which would determine whether the Telectronics736Agreement transferred to Pacesetter. Based on this ruling, the Telectronics737Group and the Guidant parties participated in the arbitration proceeding. This738proceeding occurred in late April 2000, and, on July 10, 2000, the arbitrator739issued a ruling that the attempted assignment and transfer of patent licenses in740the Telectronics Agreement by the Telectronics Group to Pacesetter was741ineffective. As a result of this decision, the Guidant parties filed papers with742the U.S. District Court for the Southern District of Indiana seeking to lift the743stay of the patent infringement court proceedings in that court which had been744entered in June 1998. The court granted Guidant's request to lift the stay and745the matter involving Guidant's patent infringement claims against St. Jude746Medical is scheduled for trial in June 2001.747748BACKGROUND CONCERNING PATENTS INVOLVED IN GUIDANT'S CLAIMS In the749patent infringement case in federal court in Indiana, the Guidant parties750initially asserted claims against St. Jude Medical and Pacesetter involving four751separate patents. One of these patents (`678) expired May 3, 1998. The other752patents involved expire, according to their terms, on March 7, 2001 (`472753patent), February 25, 2003 (`191 patent), and December 22, 2003 (`288 patent),754respectively, although St. Jude Medical has claims in the court action which, if755upheld, would cause some of the patents to expire earlier, if they apply at all.756Although Guidant has requested injunctive relief and damages as part of the757federal court lawsuit in Indiana, the request for an injunction would be barred758for any expired patent. Guidant is seeking damages for the time period prior to759expiration of the patents.760761MARKMAN RULINGS The federal district court in Indiana has issued762decisions as part of the court's Markman's process which interpret what the763claims in the patents mean. These decisions are available on the court's website764at HTTP://WWW.INSD.USCOURTS.GOV.765766Although Guidant asserted patent infringement claims against St. Jude767Medical involving four patents when it initiated the litigation in 1996, the768number of patents involving the claims Guidant is asserting against St. Jude769Medical has changed over time. First, Guidant elected to withdraw its claims770against St. Jude Medical involving the `678 patent prior to the court issuing771its Markman decisions. After the Markman decisions, St. Jude Medical moved for772summary judgment asking the court to rule that the77377477511776<PAGE>777778779`191 patent is invalid. However, before the court issued a ruling on this780summary judgment motion, Guidant and St. Jude Medical entered into a stipulation781regarding the claims involving the `191 patent. Based on this stipulation, the782court entered an order ruling that claims 1-14 in the `191 patent are invalid.783In this order, the court also dismissed Guidant's claims against St. Jude784Medical involving the `191 patent with prejudice. The order also provided that785Guidant may make an immediate appeal of the `191 patent claim construction786issues, and on February 8, 2001, Guidant filed a notice of appeal concerning the787court's rulings on the `191 patent.788789Thus, at the present time, Guidant's claims against St. Jude Medical790involving two patents (`288 and `472) remain in the case set for trial. St. Jude791Medical continues to believe that the patent infringement claims asserted by792Guidant in this litigation are without merit, and will continue to vigorously793defend its interest in this litigation.794795OTHER LITIGATION AND PROCEEDINGS796The Company is unaware of any other pending legal proceedings which it797regards as likely to have a material adverse effect on its business.798799ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS800801There were no matters submitted to a vote of security holders during802the fourth quarter of 2000.803804PART II805806ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED807SHAREHOLDER MATTERS808809The information set forth under the captions "Dividends" and "Stock810Exchange Listings" on pages 6 and 24 of the Financial Report included in the811Company's 2000 Annual Report to Shareholders is incorporated herein by812reference.813814ITEM 6. SELECTED FINANCIAL DATA815816The information set forth under the caption "Five Year Summary817Financial Data" on page 23 of the Financial Report included in the Company's8182000 Annual Report to Shareholders is incorporated herein by reference.819820ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF821OPERATIONS AND FINANCIAL CONDITION822823The information set forth under the caption "Management's Discussion824and Analysis of Results of Operations and Financial Condition" on pages 1825through 6 of the Financial Report included in the Company's 2000 Annual Report826to Shareholders is incorporated herein by reference.82782882912830<PAGE>831832833834ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK835836The information appearing under the caption "Market Risk" on pages 4837and 5 of the Financial Report included in the Company's 2000 Annual Report to838Shareholders is incorporated herein by reference.839840ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA841842The following Consolidated Financial Statements of the Company and843Report of Independent Auditors set forth on pages 7 through 22 of the Financial844Report included in the Company's 2000 Annual Report to Shareholders are845incorporated herein by reference:846847Consolidated Statements of Earnings - Fiscal Years ended December 31,8482000, 1999 and 1998849850Consolidated Balance Sheets - December 31, 2000 and 1999851852Consolidated Statements of Shareholders' Equity - Fiscal Years ended853December 31, 2000, 1999, and 1998854855Consolidated Statements of Cash Flows - Fiscal Years ended December 31,8562000, 1999 and 1998857858Notes to Consolidated Financial Statements859860ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING861AND FINANCIAL DISCLOSURE862863None.864865PART III866867ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT868869The information set forth under the caption "Board of Directors" in the870Company's definitive Proxy Statement dated March 28, 2001, is incorporated871herein by reference. Information on executive officers is as follows:872<TABLE>873<CAPTION>874875Name Age Position*876- ---------------------- ----- --------------------------------------------------------877<S> <C> <C>878Terry L. Shepherd 48 Chief Executive Officer (1999)879880Daniel J. Starks 46 President and Chief Operating Officer (2001)881882David W. Adinolfi 45 President, Daig Division (2001)883884Robert Cohen 43 Vice President, Business & Technology Development (1998)885886Michael J. Coyle 38 President, Cardiac Rhythm Management Division (2001)887888George J. Fazio 41 President, Health Care Services (1999)889890Peter L. Gove 53 Vice President, Corporate Relations (1994)891892Steven J. Healy 43 President, Cardiac Surgery Division (1999)893</TABLE>89489589613897<PAGE>898899<TABLE>900<CAPTION>901<S> <C> <C>902John C. Heinmiller 46 Vice President, Finance and Chief Financial Officer (1998)903904Jeri L. Jones 43 Vice President, Information Technology and Chief Information905Officer (2000)906907Kevin T. O'Malley 49 Vice President and General Counsel (1994)908909Frieda J. Valk 47 Vice President, Administration (1999)910</TABLE>911912- -----------------------913*Dates in brackets indicate period during which the named executive officers914began serving in such capacity.915916Executive officers serve at the pleasure of the Board of Directors.917918Mr. Shepherd's business experience is set forth in the Company's919definitive Proxy Statement dated March 28, 2001 under the section "Board of920Directors." Such information is incorporated herein by reference.921922Mr. Stark's business experience is set forth in the Company's923definitive Proxy Statement dated March 28, 2001 under the section "Board of924Directors." Such information is incorporated herein by reference.925926Mr. Adinolfi joined St. Jude in 1994 as a result of the acquisition of927Pacesetter, Inc. In February 2001, he was appointed as President of the Daig928Division after having several management positions at the Company's Cardiac929Rhythm Management Division. Prior to joining Pacesetter in 1989 as Director of930Marketing, Mr. Adinolfi spent five years at Cordis and Telectronics in a variety931of marketing, sales and management positions.932933Mr. Cohen joined the Company in 1998 as Vice President, Business &934Technology Development. Prior to joining the Company, he was employed by Sulzer935Medica. During his 16-year career in the medical device industry, Mr. Cohen has936been associated with Pfizer Inc. and GCI Medical, an investment firm focused on937the medical technology industry.938939Mr. Coyle joined St. Jude in 1994 as Director, Business Development and940was appointed President of the Cardiac Rhythm Management Division in February9412001. Mr. Coyle previously served as the Chief Operating Officer of Daig since9421997. Prior to joining St. Jude, he spent nine years with Eli Lilly & Company in943a variety of technical and business management roles in both its Pharmaceutical944and Medical Device Divisions.945946Mr. Fazio joined St. Jude in 1992 as a Heart Valve Division territory947sales representative. In 1999, he was appointed as the President, Health Care948Services. From 1997 to 1999, Mr. Fazio served as the General Manager of the949Company's Canadian affiliate.950951Mr. Gove joined the Company in 1994 as Vice President, Corporate952Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing953and Communications of Control Data Systems, Inc., a computer services company,954from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions955with Control Data Corporation. From 1970 to 1981, Mr. Gove held various956management positions with the State of Minnesota and the U.S. Government.95795895914960<PAGE>961962963Mr. Healy first joined the Company in 1983 as a Heart Valve Division964sales representative. In 1999 he was appointed as the President, Cardiac Surgery965Division (formerly known as the Heart Valve Division). From 1996 to 1999, Mr.966Healy was the Vice President of Sales and Marketing for the Heart Valve967Division. He served as the Heart Valve Division's Vice President of Marketing968from 1993 to 1996.969970Mr. Heinmiller joined the Company in 1998 as Vice President of971Corporate Business Development. In September 1998 he was appointed Vice972President, Finance and Chief Financial Officer. Prior to joining the Company,973Mr. Heinmiller was president of F3 Corporation, a privately held asset974management company, and was vice president of finance and administration for975Daig Corporation. Mr. Heinmiller is also a former audit partner in the976Minneapolis office of Grant Thornton LLP, a national public accounting firm. Mr.977Heinmiller is a director of Lifecore Biomedical, Inc. and Arctic Cat, Inc.978979Ms. Jones joined St. Jude in 1999 as Vice President, Information980Technology, and was appointed Vice President, Information Technology and Chief981Information Officer in 2000. Prior to joining the Company, Ms. Jones was Vice982President of Systems Development at U.S. Bancorp from 1993 to 1999. From 1990 to9831993, Ms. Jones was a Senior Manager in Information Technology Consulting with984Ernst & Young, LLP. From 1979 to 1990, she held several positions in Accounting985and then Information Technology with General Mills, Inc.986987Mr. O'Malley joined the Company in 1994 as Vice President and General988Counsel. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly &989Company for 15 years in various positions, including his last position of990General Counsel of the Medical Device and Diagnostics Division.991992Ms. Valk joined the Company in 1996 as Human Resources Director of St.993Jude Medical Europe. She was appointed as Vice President, Administration in9941999. Prior to joining the Company, Mrs. Valk was employed by Eli Lilly &995Company for sixteen years in various positions including pharmaceutical sales,996sales management, sales training and human resources.997998999ITEM 11. EXECUTIVE COMPENSATION10001001The information set forth under the caption "Executive Compensation" in1002the Company's definitive Proxy Statement dated March 28, 2001, is incorporated1003herein by reference.10041005ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS1006AND MANAGEMENT10071008The information set forth under the caption "Share Ownership of1009Management and Directors and Certain Beneficial Owners" in the Company's1010definitive Proxy Statement dated March 28, 2001, is incorporated herein by1011reference.10121013ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS10141015The information set forth under the captions "Governance of the1016Company" and "Executive Compensation" in the Company's definitive Proxy1017Statement dated March 28, 2001, is incorporated herein by reference.101810191020151021<PAGE>102210231024PART IV10251026ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS1027ON FORM 8-K10281029(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT10301031(1) FINANCIAL STATEMENTS10321033The following Consolidated Financial Statements of the Company and1034Report of Independent Auditors as set forth on pages 7 through 221035of the Financial Report included in the Company's 2000 Annual1036Report to Shareholders (see Exhibit 13) are incorporated herein by1037reference:10381039Consolidated Statements of Earnings - Fiscal Years ended December104031, 2000, 1999 and 199810411042Consolidated Balance Sheets - December 31, 2000 and 199910431044Consolidated Statements of Shareholders' Equity - Fiscal Years1045ended December 31, 2000, 1999, and 199810461047Consolidated Statements of Cash Flows - Fiscal Years ended1048December 31, 2000, 1999 and 199810491050Notes to Consolidated Financial Statements10511052(2) FINANCIAL STATEMENT SCHEDULE10531054Schedule II, Valuation and Qualifying Accounts, is filed as part1055of this Form 10-K Annual Report (see Item 14(d)).10561057The report of the Company's Independent Auditors with respect to the1058financial statement schedule is incorporated herein by reference from Exhibit 231059attached hereto.10601061All other financial statements and schedules not listed have been1062omitted because the required information is included in the consolidated1063financial statements or the notes thereto, or is not applicable.10641065(3) EXHIBITS10661067EXHIBIT EXHIBIT INDEX1068- ---------------- ------------------------------------------------------------106910703.1 Articles of Incorporation as amended on September 5, 1996,1071are incorporated by reference from Exhibit 3.2 of the1072Company's Form 10-K filed on March 27, 1997.107310741075161076<PAGE>1077EXHIBIT EXHIBIT INDEX1078- ---------------- ------------------------------------------------------------10793.2 Bylaws are incorporated by reference from Exhibit 3(ii) of1080the Company's Form 10-Q filed on November 10, 1997.108110824.1 Rights Agreement dated as of June 16, 1997, between the1083Company and American Stock Transfer and Trust Company, as1084Rights Agent including the Certificate of Designation,1085Preferences and Rights of Series B Junior Preferred Stock is1086incorporated by reference from Exhibit 4 of the Company's1087Form 10-Q dated August 12, 1997.108810894.2 Indenture dated as of August 21, 1996, between the Company1090and State Street Bank and Trust Company, as Trustee is1091incorporated by reference from Ventritex's Form S-3/A (no.1092333-07651) filed on August 2, 1996.1093109410.1 Employment letter dated as of March 9, 1993, between the1095Company and Ronald A. Matricaria is incorporated by1096reference from Exhibit 10.1 of the Company's Form 10-K1097Annual Report for the year ended December 31, 1993.*1098109910.2 Employment letter dated as of November 8, 1996, between the1100Company to Ronald A. Matricaria is incorporated by reference1101from Exhibit 10.2 of the Company's Form 10-K Annual Report1102for the year ended December 31, 1998.*1103110410.3 Employment letter dated as of February 23, 1999, between the1105Company and Ronald A. Matricaria is incorporated by1106reference from Exhibit 10.13 of the Company's Form 10-K1107Annual Report for the year ended December 31, 1998.*1108110910.4 Employment Agreement effective as of May 5, 1999 between the1110Company and Terry L. Shepherd is incorporated by reference1111from Exhibit 10.15 of the Company's Form 10-K Annual Report1112for the year ended December 31, 1998.*1113111410.5 Form of Indemnification Agreement that the Company has1115entered into with officers and directors. Such agreement1116recites the provisions of Minnesota Statutes Section1117302A.521 and the Company's Bylaw provisions (which are1118substantially identical to the Statute) and is incorporated1119by reference from Exhibit 10(d) of the Company's Form 10-K1120Annual Report for the year ended December 31, 1986.*112111221123171124<PAGE>11251126EXHIBIT EXHIBIT INDEX1127- ---------------- ------------------------------------------------------------112810.6 Form of Employment Agreement that the Company has entered1129into with officers relating to severance matters in1130connection with a change in control is incorporated by1131reference from Exhibit 10.4 of the Company's Form 10-K1132Annual Report for the year ended December 31, 1998.*1133113410.7 The Management Incentive Compensation Plan is incorporated1135by reference from Appendix A of the Company's definitive1136Proxy Statement dated March 26, 1999.*1137113810.8 Management Savings Plan dated February 1, 1995, is1139incorporated by reference from Exhibit 10.7 of the Company's1140Form 10-K Annual Report for the year ended December 31,11411994.*1142114310.9 Retirement Plan for members of the Board of Directors as1144amended on March 15, 1995, is incorporated by reference from1145Exhibit 10.6 of the Company's Form 10-K Annual Report for1146the year ended December 31, 1994.*1147114810.10 The St. Jude Medical, Inc. 1992 Employee Stock Purchase1149Savings Plan is incorporated by reference from the Company's1150Form S-8 Registration Statement dated June 10, 1992,1151(Commission File No. 33-48502). *1152115310.11 The St. Jude Medical, Inc. 1991 Stock Plan is incorporated1154by reference from the Company's Form S-8 Registration1155Statement dated June 28, 1991 (Commission File No.115633-41459).*1157115810.12 The St. Jude Medical, Inc. 1994 Stock Option Plan is1159incorporated by reference from the Company's Form S-81160Registration Statement dated July 1, 1994 (Commission File1161No. 33-54435).*1162116310.13 The St. Jude Medical Inc. 1997 Stock Option Plan is1164incorporated by reference from the Company's Form S-81165Registration Statement dated December 22, 1997 (Commission1166File No. 333-42945).*1167116810.14 A Split Dollar Insurance Agreement as amended April 29, 19991169between St. Jude Medical, Inc. and Ronald A. and Lucille E.1170Matricaria is incorporated by reference from Exhibit 10.141171of the Company's Form 10-K Annual Report for the year ended1172December 31, 1999.*117311741175181176<PAGE>11771178EXHIBIT EXHIBIT INDEX1179- ---------------- ------------------------------------------------------------118010.15 The St. Jude Medical Inc. 2000 Stock Option Plan is1181incorporated by reference from the Company's Form S-81182Registration Statement dated July 31, 2000 (Commission File1183No. 333-42668).*1184118510.16 The St. Jude Medical, Inc. 2000 Employee Stock Purchase1186Savings Plan is incorporated by reference from the Company's1187Form S-8 Registration Statement dated July 31, 20001188(Commission File No. 333-42658).*1189119010.17 Amended and Restated Employment Agreement dated as of March119125, 2001, between the Company and Daniel J. Starks. * #1192119310.18 Form of Severance Agreement that the Company has entered1194into with officers relating to severance matters in1195connection with a change in control.* #1196119710.19 Amended and Restated Employment Agreement dated as of March119825, 2001, between the Company and Terry L. Shepherd. * #1199120013 Portions of the 2000 Annual Report to Shareholders are1201incorporated by reference in this Annual Report on Form 10-K1202#1203120421 Subsidiaries of the Company #1205120623 Consent of Independent Auditors #1207- -----------------------------1208* Management contract or compensatory plan or arrangement.1209# Filed as an exhibit to this Annual Report on Form 10-K.12101211(B) REPORTS ON FORM 8-K DURING THE QUARTER ENDED DECEMBER 31, 20001212A Form 8-K was filed on December 1, 2000, and on December 22, 2000,1213announcing certain rulings by the U.S. District Court in Indianapolis as part of1214the court's Markman process, which further interprets certain ambiguous terms1215used in the patents which are the subject of litigation between Guidant and St.1216Jude Medical.12171218(C) EXHIBITS: Reference is made to Item 14(a)(3).12191220(D) SCHEDULES:122112221223191224<PAGE>122512261227SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS1228(DOLLARS IN THOUSANDS)1229<TABLE>1230<CAPTION>12311232COL. A COL. B COL. C COL. D COL. E1233- ------------------------------ ----------------- ----------------- ------------------ -----------------1234BALANCE AT ADDITIONS BALANCE AT1235BEGINNING OF CHARGED TO END OF1236DESCRIPTION YEAR EXPENSE DEDUCTIONS(1) YEAR1237- ------------------------------ ----------------- ----------------- ------------------ -----------------1238Allowance for doubtful accounts1239<S> <C> <C> <C> <C>12401241Fiscal Year Ended:1242December 31, 2000 $13,529 $6,913 $6,611 $13,8311243December 31, 1999 12,352 5,421 4,244 13,5291244December 31, 1998 12,712 14 374 12,3521245- --------------------------------1246(1) Uncollectible accounts written off, net of recoveries.1247</TABLE>1248124912501251For the purposes of complying with the amendments to the rules1252governing Form S-8 under the Securities Act of 1933, the undersigned Company1253hereby undertakes as follows, which undertaking shall be incorporated by1254reference into the Company's Registration Statements of Form S-8 Nos. 33-92621255(filed October 3, 1986), 33-41459 (filed June 28, 1991), 33-48502 (filed June125610, 1992), 33-54435 (filed July 1, 1994), 333-42945 (filed December 22, 1997),1257333-42658 (filed July 31, 2000), and 333-42668 (filed July 31, 2000):12581259Insofar as indemnification for liabilities arising under the1260Securities Act of 1933 may be permitted to directors, officers and1261controlling persons of the Company pursuant to the foregoing1262provisions, or otherwise, the Company has been advised that, in the1263opinion of the Securities and Exchange Commission, such indemnification1264is against public policy as expressed in the Securities Act of 1933 and1265is, therefore, unenforceable. In the event that a claim for1266indemnification against such liabilities (other than the payment by the1267Company of expenses incurred or paid by a director, officer or1268controlling person of the Company in the successful defense of any1269action, suit or proceeding) is asserted by such director, officer or1270controlling person in connection with the securities being registered,1271the Company will, unless in the opinion of its counsel the matter has1272been settled by controlling precedent, submit to a court of appropriate1273jurisdiction the question whether such indemnification by it is against1274public policy as expressed in the Act and will be governed by the final1275adjudication of such issue.1276127712781279201280<PAGE>1281128212831284SIGNATURES12851286Pursuant 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 26, 2001 By /s/ TERRY L. SHEPHERD1293-----------------------1294Terry L. Shepherd1295CHIEF EXECUTIVE OFFICER1296(PRINCIPAL EXECUTIVE OFFICER)12971298By /s/ JOHN C. HEINMILLER1299----------------------1300John C. Heinmiller1301VICE PRESIDENT, FINANCE AND1302CHIEF FINANCIAL OFFICER1303(PRINCIPAL FINANCIAL AND1304ACCOUNTING OFFICER)13051306Pursuant to the requirements of the Securities Exchange Act of 1934,1307this report has been signed below by the following persons on behalf of the1308Registrant and in the capacities and on the date indicated.1309<TABLE>1310<CAPTION>13111312<S> <C> <C> <C>1313/s/ RONALD A. MATRICARIA Director March 26, 2001 /s/ DANIEL J. STARKS Director March 26, 20011314- --------------------------- -----------------------1315Ronald A. Matricaria Daniel J. Starks131613171318/s/ LOWELL C. ANDERSON Director March 26, 2001 /s/ TERRY L. SHEPHERD Director March 26, 20011319- --------------------------- -----------------------1320Lowell C. Anderson Terry L. Shepherd132113221323/s/ STUART M. ESSIG Director March 26, 2001 /s/ DAVID A. THOMPSON Director March 26, 20011324- --------------------------- -----------------------1325Stuart M. Essig David A. Thompson132613271328/s/ THOMAS H. GARRETT III1329- --------------------------- Director March 26, 2001 _______________________ Director March 26, 20011330Thomas H. Garrett III Gail R. Wilensky133113321333/s/ WALTER L. SEMBROWICH Director March 26, 20011334- ---------------------------1335Walter L. Sembrowich1336</TABLE>133713381339211340</TEXT>1341</DOCUMENT>1342<DOCUMENT>1343<TYPE>EX-10.171344<SEQUENCE>21345<FILENAME>stjude010431_ex10-17.txt1346<DESCRIPTION>AMENDED AND RESTATED EMPLOYMENT AGREEMENT1347<TEXT>13481349EXHIBIT 10.1713501351AMENDED AND RESTATED EMPLOYMENT AGREEMENT1352-----------------------------------------13531354THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is1355made effective as of the 25TH day of March, 2001, by and between St. Jude1356Medical, Inc., a Minnesota corporation with its principal place of business at1357One Lillihei Plaza, Little Canada, Minnesota (the "Company"), and Daniel J.1358Starks, an individual residing at 7880 County Road #26, Maple Plain, MN 553591359(the "Executive") and amends and restates the EMPLOYMENT AGREEMENT dated1360February 1, 2001 between the Company and Executive.13611362RECITALS1363--------13641365Prior to the original EMPLOYMENT AGREEMENT Executive was employed by1366the Company in the capacity of President and CEO, CRM Division. The Company1367desires to continue to employ the Executive, due to his certain unique skills,1368talents, contacts, judgment and knowledge of the Company's business, strategies,1369ethics and objectives and the Executive desires to be employed by the Company.13701371The parties, intending to be legally bound, agree as follows:137213731. Term of Employment. The Term of this Agreement shall commence on the1374effective date and, subject to the further provisions of this Agreement, shall1375end on the 31st day of January, 2006.137613772. Title; Capacity. The Executive shall serve as President and Chief1378Operating Officer of the Company or in such other position as the Company's1379Board of Directors (the "Board") and CEO may determine from time to time. The1380Executive shall be subject to the supervision of, shall report directly to, and1381shall have such authority as is delegated to him by, the CEO.13821383Executive's initial responsibilities, which shall be subject to1384changes as determined from time to time by the CEO and the Board shall include1385the operations of the Company. The following functions and units shall initially1386report to Executive:13871388CRMD, Cardiac Surgery Division, Daig Division, International,1389HealthCare Services, Legal, Human Resources and Information Systems.13901391The Executive accepts such employment and agrees to undertake the1392duties and responsibilities inherent in such position and such other duties and1393responsibilities as the Board or its designee shall from time to time reasonably1394assign to him. The Executive shall devote his entire business time, attention1395and energies to the business and interests of the Company (and its affiliates as1396required by the Company's investments and the Executive's positions therein)1397during the Employment Period. The Executive shall abide by the rules,1398regulations, instructions, personnel practices and policies of the Company and1399any changes therein which may be adopted14001401140211403<PAGE>140414051406from time to time. The Executive acknowledges receipt of copies of all such1407rules and policies committed to writing as of the date of this Agreement.140814093. Compensation and Benefits.14101411a. Salary. The Company shall pay the Executive an annual base salary1412of $500,000.00 for the one-year period commencing on the Commencement Date in1413the same intervals as other exempt employers. Such salary shall be subject to1414annual increases thereafter as determined by the Board, in its sole discretion.14151416b. Bonus. The Executive's target bonus under the MICP shall be 100%1417of base salary (and shall be prorated for 2001).14181419c. Perk Package. The Executive shall be eligible for the Company's1420executive perk package at the level of $26,000.14211422d. Fringe Benefits. The Executive shall be entitled to participate1423in all bonus and benefit programs that the Company establishes and makes1424available to its Executives, if any, to the extent that Executive's position,1425tenure, salary, age, health and other qualifications make him eligible to1426participate.14271428e. Reimbursement of Expenses. The Company shall reimburse the1429Executive for all reasonable travel, entertainment and other expenses incurred1430or paid by the Executive in connection with, or related to, the performance of1431his duties, responsibilities or services under this Agreement, upon presentation1432by the Executive of documentation, expense statements, vouchers and/or such1433other supporting information in accordance with standard company policies.14341435In addition, the Company shall provide Executive with relocation1436expenses under the Company's relocation policy for employees of Executive's1437level.14381439f. Stock Options. Under separate agreement, the Executive is being1440granted a non-qualified stock option to purchase 200,000 shares of stock,1441vesting at the rate of 20% per year for five years and another non-qualified1442stock option to purchase 200,000 shares which will vest based upon performance1443criteria.144414454. Employment Termination. The employment of the Executive by the1446Company pursuant to this Agreement shall terminate upon the occurrence of any of1447the following:14481449a. Expiration of the Employment Period in accordance with Section 1;14501451b. At the election of the Company, for "Cause", immediately upon1452written notice by the Company to the Executive. "Cause" for such termination1453shall include, but not limited to, the following:14541455i. Dishonesty of the Executive with respect to the Company;14561457145821459<PAGE>146014611462ii. Willful misfeasance or nonfeasance of duty intended to injure1463or having the effect of injuring the reputation, business or business1464relationships of the Company or its respective officers, directors or1465Executives;14661467iii. Upon a charge by a governmental entity against the Executive1468of any crime involving moral turpitude which is demonstrably and materially1469injurious to the Company or upon the filing of any civil action involving a1470charge of embezzlement, theft, fraud or other similar act which is demonstrably1471and materially injurious to the Company;14721473iv. Willful or prolonged absence from work by the Executive1474(other than by reason of disability due to physical or mental illness) or1475failure, neglect or refusal by the Executive to perform his duties and1476responsibilities without the same being corrected upon ten (10) days prior1477written notice; or14781479v. Breach by the Executive of any of the covenants contained in1480this Agreement.14811482c. Immediately upon the death or disability of the Executive. As used1483in this Agreement, the term "disability" shall mean the inability of the1484Executive, due to a physical or mental disability, for a period of 90 days,1485whether or not consecutive, during any 360 day period to perform the services1486contemplated under this Agreement. A determination of disability shall be made1487by a physician to the Company.14881489d. At the election of the Company or the Executive, with or without1490cause upon 90 days written notice by one party to the other.149114925. Effect of Termination.14931494a. Termination Under Section 4.d. In the event the Executive's1495employment is terminated at the election of the Company pursuant to Section14964(d), the Company shall immediately pay to the Executive an amount equal to two1497times the Executive's then current salary and two times the Executive's then1498current target bonus.14991500b. Termination for Death or Disability. If the Executive's employment1501is terminated by death or because of disability pursuant to Section 4(c), the1502Company shall pay to the estate of the Executive or to the Executive, as the1503case may be, the compensation which would otherwise be payable to the Executive1504up to the end of the month in which the termination of his employment because of1505death or disability occurs.15061507c. Termination for Cause or Voluntary Resignation. In the event a1508termination for cause pursuant to Section 4(b) or by the voluntary resignation1509of Executive pursuant to Section 4(d), then no further compensation other than1510that already accrued shall be due to Executive under this Agreement.151115121513151431515<PAGE>151615171518d. In the event Executive is entitled to, and actually receives the1519full compensation he is entitled to, under the separate SEVERANCE AGREEMENT1520dated the same date as this Agreement, then, notwithstanding the previous1521subsections of Section 5, the Company shall have no additional obligation to1522make a payment to Executive under Section 5 of this Agreement.152315246. Notices. All notices required or permitted under this Agreement shall1525be in writing and shall be deemed effective upon personal delivery or upon1526deposit in the United States Post Office, by registered or certified mail,1527postage prepaid, addressed to the other party at the address shown above, or at1528such other address or addresses as either party shall designate to the other in1529accordance with this Section 9.153015317. Pronouns. Whenever the context may require, any pronouns used in this1532Agreement shall include the corresponding masculine, feminine or neuter forms,1533and the singular forms of nouns and pronouns shall include the plural, and vice1534versa.153515368. Entire Agreement. This Agreement constitutes the entire agreement1537between the parties and supersedes all prior agreements and understandings,1538whether written or oral, relating to the subject matter of this Agreement.153915409. Other Agreements. This Agreement is intended to supplement and not1541replace the following other agreements between the Executive and the Company:1542Non-Disclosure and Non-Competition Agreement, Indemnification Agreement,1543Severance Agreement (Change of Control), all previous stock option grants, 20011544MICP, and other employment benefits arising from Executive's prior employment1545with the Company.1546154710. Amendment. This Agreement may be amended or modified only by a written1548instrument executed by both the Company and the Executive.1549155011. Governing Law. This Agreement shall be construed, interpreted and1551enforced in accordance with the laws of the State of Minnesota, without giving1552effect to that State's conflict of laws provisions.1553155412. Choice of Venue. All actions or proceedings with respect to this1555Agreement shall be instituted only in any state or federal court sitting in1556Ramsey County, Minnesota, and by execution and delivery of this Agreement, the1557parties irrevocably and unconditionally subject to the jurisdiction (both1558subject matter and personal) of each such court and irrevocably and1559unconditionally waive: (a) any objection that the parties might now or hereafter1560have to the venue of any of such court; and (b) any claim that any action or1561proceeding brought in any such court has been brought in an inconvenient forum.1562156313. Successors and Assigns. This Agreement shall be binding upon and inure1564to the benefit of both parties and their respective successors and assigns,1565including any corporation with which or into which the Company may be merged or1566which may succeed to its assets or business, provided, however, that the1567obligations of the Executive are personal and shall not be assigned by him.15681569157041571<PAGE>15721573157414. Waiver. No delay or omission by the Company is exercising any right1575under this Agreement shall operate as a waiver of that or any other right. A1576waiver or consent given by the Company on any once occasion shall be effective1577only in that instance and shall not be construed as a bar or waiver of any right1578on any other occasion.1579158015. Captions and Headings. The captions of the sections of this Agreement1581are for convenience of reference only and in no way define, limit or affect the1582scope of substance of any section of this Agreement.1583158416. Severability. In case any provision of this Agreement shall be invalid,1585illegal or otherwise unenforceable, the validity, legality and enforceability of1586the remaining provisions shall in no way be affected or impaired thereby.1587158817. Counterparts. This Agreement may be executed in a number of couterparts1589and all of such counterparts executed by the Company or the Executive, shall1590constitute one and the same agreement, and it shall not be necessary for all1591parties to execute the same counterpart hereof.1592159318. Facsimile Signatures. The parties hereby agree that, for purposes of1594the execution of this Agreement, facsimile signatures shall constitute original1595signatures.1596159719. Incorporation by Reference. The preamble and recitals to this Agreement1598are hereby incorporated by reference and made a part hereof.159916001601IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of1602the day and year set forth above.16031604ST. JUDE MEDICAL, INC.,1605A Minnesota Corporation16061607/s/ FRIEDA J. VALK1608-------------------------------------1609Name: Frieda J. Valk1610Title: Vice President, Administration16111612Executive:16131614/s/ DANIEL J. STARKS1615-------------------------------------1616Name: Daniel J. Starks1617Title: President/COO16181619516201621</TEXT>1622</DOCUMENT>1623<DOCUMENT>1624<TYPE>EX-10.181625<SEQUENCE>31626<FILENAME>stjude010431_ex10-18.txt1627<DESCRIPTION>SEVERANCE AGREEMENT1628<TEXT>16291630916311632EXHIBIT 10.1816331634SEVERANCE AGREEMENT16351636This agreement is made as of the 26th day of March, 2001, between St.1637Jude Medical, Inc., a Minnesota corporation, with its principal offices at St.1638Paul, Minnesota (the "Company") and ___________ ("Executive"), residing at1639__________________________________.16401641WITNESSETH THAT:16421643WHEREAS, this Agreement is intended to specify the financial1644arrangements that the Company will provide to Executive upon Executive's1645separation from employment with the Company under any of the circumstances1646described herein; and16471648WHEREAS, this Agreement is intended to replace and supersede the1649existing Employment Agreement between the Company and Executive dated as of1650____________ relating to payments to be made to Executive upon a change in1651control of the Company (the "Prior Agreement"); and16521653WHEREAS, this Agreement is entered into by the Company in the belief1654that it is in the best interests of the Company and its shareholders to provide1655stable conditions of employment for Executive notwithstanding the possibility,1656threat or occurrence of certain types of change in control, thereby enhancing1657the Company's ability to attract and retain highly qualified people.16581659NOW, THEREFORE, to assure the Company that it will have the continued1660dedication of Executive notwithstanding the possibility, threat or occurrence of1661a bid to take over control of the Company, and to induce Executive to remain in1662the employ of the Company, and for other good and valuable consideration, the1663Company and Executive agree as follows:166416651. Term of Agreement. The term of this Agreement shall commence on the1666date hereof as first written above and shall continue through January 1, 2003;1667provided that commencing on January 1, 2003 and each January 1st thereafter, the1668term of this Agreement shall automatically be extended for one additional year1669unless not later than December 31 of the preceding year, the Company shall have1670given notice that it does not wish to extend this Agreement; and provided,1671further, that notwithstanding any such notice by the Company not to extend, this1672Agreement shall continue in effect for a period of 36 months beyond the term1673provided herein if a Change in Control (as defined in Section 3(i) hereof) shall1674have occurred during such term.167516762. Termination of Employment.16771678(i) Prior to a Change in Control. Executive's rights upon termination1679of employment prior to a Change in Control (as defined in Section 3(i) hereof)1680shall be governed by the Company's standard employment termination policy1681applicable to Executive in effect at the time of termination or, if applicable,1682any written employment agreement between the Company and Executive other than1683this Agreement in effect at the time of termination.16841685168611687<PAGE>168816891690(ii) After a Change in Control.16911692(a) From and after the date of a Change in Control (as defined in1693Section 3(i) hereof) during the term of this Agreement, the Company shall not1694terminate Executive from employment with the Company except as provided in this1695Section 2(ii) or as a result of Executive's Disability (as defined in Section16963(iv) hereof), Retirement (as defined in Section 3(v) hereof) or death.16971698(b) From and after the date of a Change in Control (as defined in1699Section 3(i) hereof) during the term of this Agreement, the Company shall have1700the right to terminate Executive from employment with the Company at any time1701during the term of this Agreement for Cause (as defined in Section 3(iii)1702hereof), by written notice to Executive, specifying the particulars of the1703conduct of Executive forming the basis for such termination.17041705(c) From and after the date of a Change in Control (as defined in1706Section 3(i) hereof) during the term of this Agreement: (x) the Company shall1707have the right to terminate Executive's employment without Cause (as defined in1708Section 3(iii) hereof), at any time; and (y) Executive shall, upon the1709occurrence of such a termination by the Company without Cause, or upon the1710voluntary termination of Executive's employment by Executive for Good Reason (as1711defined in Section 3(ii) hereof), be entitled to receive the benefits provided1712in Section 4 hereof. Executive shall evidence a voluntary termination for Good1713Reason by written notice to the Company given within 60 days after the date of1714the occurrence of any event that Executive knows or should reasonably have known1715constitutes Good Reason for voluntary termination. Such notice need only1716identify Executive and set forth in reasonable detail the facts and1717circumstances claimed by Executive to constitute Good Reason. Any notice give by1718Executive pursuant to this Section 2 shall be effective five business days after1719the date it is given by Executive.172017213. Definitions.17221723(i) A "Change in Control" shall mean:17241725(a) a change in control of a nature that would be required to be1726reported in response to Item 6(e) of Schedule 14A promulgated under the1727Securities Exchange Act of 1934, as amended (the "Exchange Act"), or successor1728provision thereto, whether or not the Company is then subject to such reporting1729requirement;17301731(b) any "person" (as such term is used in Sections 13(d) of the1732Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-31733promulgated under the Exchange Act), directly or indirectly, of securities of1734the Company representing 35% or more of the combined voting power of the1735Company's then outstanding securities;17361737(c) the Continuing Directors (as defined in Section 3(vi) hereof)1738cease to constitute a majority of the Company's Board of Directors; provided1739that such change is the direct or indirect result of a proxy fight and contested1740election or elections for positions on the Board of Directors; or17411742174321744<PAGE>174517461747(d) the majority of the Continuing Directors (as defined in1748Section 3(vi) hereof), excluding any Continuing Director who has this Severance1749Agreement, determine in their sole and absolute discretion that there has been a1750change in control of the Company.17511752(ii) "Good Reason" shall mean the occurrence of any of the following1753events, except for the occurrence of such an even in connection with the1754termination or reassignment of Executive's employment by the Company for Cause1755(as defined in Section 3(iii) hereof), for Disability (as defined in Section17563(iv) hereof), for Retirement (as defined in Section 3(v) hereof) or for death:17571758(a) the assignment to Executive of any duties inconsistent with1759Executive's status or position with the Company, or a substantial alteration in1760the nature or status of Executive's responsibilities from those in effect1761immediately prior to the Change in Control;17621763(b) a reduction by the Company in Executive's annual compensation1764in effect immediately prior to the Change in Control;17651766(c) the Company's requiring Executive to be based anywhere other1767than within 50 miles of Executive's office location immediately prior to a1768Change in Control except for required travel on the Company's business to an1769extent substantially consistent with Executive's business travel obligations1770immediately prior to the Change in Control;17711772(d) the failure by the Company to continue to provide Executive1773with benefits at least as favorable to those enjoyed by Executive under any of1774the Company's pension, life insurance, medical, health and accident, disability,1775deferred compensation, incentive, stock, stock purchase, stock option, savings,1776Perk Package or other plans or programs in which Executive Company which would1777directly or indirectly materially reduce any of such benefits or deprive1778Executive of any material fringe benefit enjoyed immediately prior to the Change1779in Control, or the failure by the Company to provide Executive with the number1780of paid vacation days to which Executive is entitle immediately prior to the1781Change in Control; or17821783(e) the failure of the Company to obtain, as specified in Section17846(i) hereof, an assumption of the obligations of the Company to perform this1785Agreement by any successor to the Company.17861787Notwithstanding anything herein to the contrary, if the Change in1788Control arises from a transaction or series of transactions which are not1789authorized, recommended or approved by formal action taken by the Continuing1790Directors (as defined in Section 3(vi) hereof), Executive may voluntarily1791terminate his or her employment for any reason on the 180th day following the1792Change in Control, and such termination shall be deemed "Good Reason" for all1793purposes of this agreement.17941795(iii) "Cause" shall mean termination by the Company of Executive's1796employment based upon the conviction of Executive by a court of competent1797jurisdiction for felony criminal conduct.17981799(iv) "Disability" shall mean that, as a result of incapacity due to1800physical or mental illness, Executive shall have been absent from the full-time1801performance of Executive's duties18021803180431805<PAGE>180618071808with the Company for six consecutive months, and within 30 days after written1809notice of termination is given, Executive shall not have returned to the1810full-time performance of Executive's duties. Any question as to the existence of1811Executive's Disability upon which Executive and the Company cannot agree shall1812be determined by a qualified independent physician selected by Executive (or, if1813Executive is unable to make such selection, it shall be made by any adult member1814of Executive's immediately family), and approved by the Company. The1815determination of such physician made in writing to the Company and to Executive1816shall be final and conclusive for all purposes of this Agreement.18171818(v) "Retirement" shall mean termination on or after attaining normal1819retirement age in accordance with the Company's Profit Sharing Executive Savings1820Plan and Trust.18211822(vi) "Continuing Director" shall mean any person who is a member of the1823Board of Directors of the Company, while such person is a member of the Board of1824Directors, and who (a) was a member of the Board of Directors on the date of1825this Agreement as first written above or (b) subsequently becomes a member of1826the Board of Directors, if such person's nomination for election or initial1827election to the Board of Directors is recommended or approved by a majority of1828the Continuing Directors.182918304. Benefits upon Termination under Section 2(ii)(c).18311832(i) Upon the termination (voluntary or involuntary) of the employment1833of Executive pursuant to Section 2(ii)(c) hereof, Executive shall be entitled to1834receive the benefits specified in this Section 4. The amounts due to Executive1835under this Section 4(i) shall be paid to Executive in a lump sum not later than1836one business day prior to the date that the termination of Executive's1837employment becomes effective. Subject to the provisions of Section 4(ii) hereof,1838all benefits to Executive pursuant to this Section 4(i) shall be subject to any1839applicable payroll or other taxes required by law to be withheld.18401841(a) The Company shall pay Executive, through the date the1842termination of Executive's employment became effective, Executive's base salary1843as in effect at the time of the notice of termination is given and any other1844form or type of compensation otherwise payable for such period. Executive shall1845be entitled to receive all benefits payable to Executive under the Company's1846Profit Sharing Executive Savings Plan or any successor of such Plan and any1847other plan or agreement relating to retirement benefits which shall be in1848addition to, and not reduced by, any other amounts payable to Executive under1849this Section 4. Executive shall be entitled to exercise all rights and to1850receive all benefits accruing to Executive under any and all Company stock1851purchase plans, stock option plans and other stock plans or programs, or any1852successor to any such plans or programs, which shall be in addition to, and not1853reduced by, any other amounts payable to Executive under this Section 4.18541855(b) In lieu of any further salary payments for periods subsequent1856to the date the termination of Executive's employment became effective, the1857Company shall pay a severance payment in an amount equal to three times1858Executive's Annual Compensation, as defined below. For purposes of this Section18594, "Annual Compensation" shall mean Executive's annual salary (regardless of1860whether all or any portion of such salary has been contributed to a deferred1861compensation plan), the annual amount of Executive's Perk Package, the target1862bonus for which Executive is eligible upon attainment of 100% of the target1863(regardless of whether1864186541866<PAGE>18671868such target bonus has been achieved or whether conditions of such target bonus1869are actually fulfilled), and any other type or form of compensation paid to1870Executive by the Company (or any entity affiliated with the Company1871("Affiliate") within the meaning of Section 1504 of the Internal Revenue Code of18721986, as may be amended from time to time (the "Code")) and included in1873Executive's gross income for federal tax purposes during the twelve month period1874ending immediately prior to the date that the termination of Executive's1875employment became effective but reduced by: (i) any amount actually paid to1876Executive as a cash payment of the target bonus (regardless of whether all or1877any portion of such target bonus was contributed to a deferred compensation1878plan); (ii) compensation income recognized as a result of the exercise of stock1879options or sale of the stock so acquired; and (iii) any payments actually or1880constructively received from a plan or arrangement of deferred compensation1881between the Company and Executive. All of the factors included in Annual1882Compensation shall be those in effect on the date that the termination of1883Executive's employment became effective and shall be calculated without giving1884effect to any reduction in such compensation that would constitute a breach of1885this Agreement.18861887(c) For a period of 36 months following the date that the1888termination of Executive's employment became effective or until Executive1889reaches age 65 or dies, whichever is the shorter period, the Company shall1890arrange to provide for Executive, at the Company's expense, the health,1891accident, disability and life insurance benefits substantially similar to those1892in effect for Executive immediately prior to the date that the termination of1893Executive's employment became effective.18941895(d) The Company shall pay to Executive (1) any amount earned by1896Executive as a bonus with respect to the fiscal year of the Company preceding1897the termination of Executive's employment if such bonus has not theretofore been1898paid to Executive, and (2) an amount representing credit for any vacation earned1899or accrued by Executive but not taken.19001901(e) The Company shall also pay to Executive all legal fees and1902expenses incurred by Executive as a result of such termination of employment1903(including all fees and expenses, if any, incurred by Executive in contesting or1904disputing any such termination or in seeking to obtain or enforce any right or1905benefit provided to Executive by this Agreement whether by arbitration or1906otherwise); and19071908(f) Any and all contracts, agreements or arrangements between the1909Company and Executive prohibiting or restricting Executive from owning,1910operating, participating in, or providing employment or consulting services to,1911any business or company competitive with the Company at any time or during any1912period after the date the termination of Executive's employment becomes1913effective, shall be deemed terminated and of no further force or effect as of1914the date the termination of Executive's employment becomes effective, to the1915extent, but only to the extent, such contracts, agreements or arrangements so1916prohibit or restrict Executive; provided that the foregoing provision shall not1917constitute a license or right to use any proprietary information of the Company1918and shall in no way affect any such contracts, agreements or arrangements1919insofar as they relate to nondisclosure and nonuse or proprietary information of1920the Company notwithstanding the fact that such nondisclosure and nonuse may1921prohibit or restrict Executive in certain competitive activities.19221923192451925<PAGE>192619271928(ii) In the event that any payment or benefit received or to be1929received by Executive in connection with a Change in Control of the Company or1930termination of Executive's employment (whether payable pursuant to the terms of1931this Agreement or any other plan, contract, agreement or arrangement with the1932company, with any person whose actions result in a Change in Control of the1933Company or with any person constituting a member of an "affiliated group" as1934defined in Section 280G(d)(5) of the Code, with the Company or with any person1935whose actions result in a Change in Control of the Company (collectively, the1936"Total Payments")) would be subject to the excise tax imposed by Section 4999 of1937the Code, or any successor provision thereto, or any interest, penalties or1938additions to tax with respect to such excise tax (such excise tax, together with1939any such interest, penalties or additions to tax, are collectively referred to1940as the "Excise Tax"), then Executive shall be entitled to receive from the1941Company an additional cash payment (a "Gross-Up Payment") within thirty business1942days of such determination in an amount such that after payment by Executive of1943all taxes (including any interest, penalties or additions to tax imposed with1944respect to such taxes), including any Excise Tax, imposed upon the Gross-Up1945Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise1946Tax imposed upon the Total Payments. All determinations required to be made1947under this Section 4(ii), including whether a Gross-Up Payment is required and1948the amount of such Gross-Up Payment, shall be made by the independent accounting1949firm retained by the Company on the date of the Change in Control (the1950"Accounting Firm"), which shall provide detailed supporting calculations both to1951the Company and Executive within 15 business days of the date that the1952termination of Executive's employment becomes effective, or such earlier time as1953is requested by the Company. If the Accounting Firm determines that no Excise1954Tax is payable by Executive, it shall furnish Executive with an opinion that1955Executive has substantial authority not to report any Excise Tax on Executive's1956federal income tax return.19571958Any uncertainly in the application of Section 4999 of the Code, or any1959successor provision thereto, at the time of the initial determination by the1960Accounting Firm hereunder shall be resolved in favor of Executive. As a result1961of the uncertainty in the application of Section 4999 of the Code, or any1962successor provision thereto, at the time of the initial determination by the1963Accounting Firm hereunder, it is possible that at a later time there will be a1964determination that the Gross-Up Payments made by the Company were less than the1965Gross-Up Payments that should have been made by the Company ("Underpayment"),1966consistent with the calculations required to be made hereunder. In the event1967that Executive is required to make a payment of any Excise Tax, the Accounting1968Firm shall determine the amount of the Underpayment, if any, that has occurred1969and any such Underpayment shall be promptly paid by the Company to or for the1970benefit of Executive. As a result of the uncertainty in the application of1971Section 4999 of the Code, or any successor provision thereto, at the time of the1972initial determination by the Accounting Firm hereunder, it is possible that at a1973later time there will be a determination that the Gross-Up Payments made by the1974Company were more than the Gross-Up Payments that should have been made by the1975Company ("Overpayment"), consistent with the calculations required to be made1976hereunder. Executive agrees to refund the Company the amount of any Overpayment1977that the Accounting Firm shall determine has occurred hereunder. Any good faith1978determination by the Accounting Firm as to the amount of any Gross-Up Payment,1979including the amount of any Underpayment or Overpayment, shall be binding upon1980the Company and Executive.19811982(iii) Any payment not made to Executive when due hereunder shall1983thereafter, until paid in full, bear interest at the rate of interest equal to1984the reference rate announced from time to19851986198761988<PAGE>198919901991time by Wells Fargo Bank Minnesota, National Association, plus two percent, with1992such interest to be paid to Executive upon demand or monthly in the absence of a1993demand.19941995(iv) Executive shall not be required to mitigate the amount of any1996payment provided for in this Section 4 by seeking other employment or otherwise.1997The amount of any payment or benefit provided in this section 4 shall not be1998reduced by any compensation earned by Executive as a result of any employment by1999another employer, by any retirement benefits or otherwise.200020015. Executive's Agreements.20022003Executive agrees that:20042005(i) Without the consent of the Company, Executive will not terminate2006employment with the Company without giving 30 days prior notice to the Company,2007and during such 30-day period Executive will assist the Company, as and to the2008extent reasonably requested by the Company, in training the successor to2009Executive's position with the Company. The provisions of this Section 5(i) shall2010not apply to any termination (voluntary or involuntary) of the employment of2011Executive pursuant to Section 2(ii)(c) hereof.20122013(ii) In the even that Executive has received any benefits from the2014Company under Section 4 of this Agreement, then, during the period of 36 months2015following the date that the termination of Executive's employment became2016effective, Executive, upon request by the Company:20172018(a) Will consult with one or more of the executive officers2019concerning the business and affairs of the Company for not to exceed four hours2020in any month at times and places selected by Executive as being convenient to2021him, all without compensation other than what is provided for in Section 4 of2022this Agreement; and20232024(b) Will testify as a witness on behalf of the Company in any2025legal proceedings involving the Company which arise out of events or2026circumstances that occurred or existed prior to the date that the termination of2027Executive's employment became effective (except for any such proceedings2028relating to this Agreement), without compensation other than what is provided2029for in Section 4 of this Agreement, provided that all out-of-pocket expenses2030incurred by Executive in connection with serving as a witness shall be paid by2031the Company.20322033Executive shall not be required to perform Executive's obligations2034under this Section 5(ii) if an so long as the Company is in default with respect2035to performance of any of its obligations under this Agreement.203620376. Successors and Binding Agreement.20382039(i) The Company will require any successor (whether direct or indirect,2040by purchase, merger, consolidation or otherwise to all or substantially all of2041the business and/or assets of the Company), by agreement in form and substance2042satisfactory to Executive, to expressly assume and agree to perform this2043Agreement in the same manner and to the same extent that the Company would be2044required to perform it if no such succession had taken place. Failure of the2045Company to obtain such agreement prior to the effectiveness of any such2046succession shall be a204720482049205072051<PAGE>20522053breach of this Agreement and shall entitle Executive to compensation from the2054Company in the same amount and on the same terms as Executive would be entitled2055hereunder if Executive terminated employment after a Change in Control for Good2056Reason, except that for purposes of implementing the foregoing, the date on2057which any such succession becomes effective shall be deemed the date that the2058termination of Executive's employment becomes effective. As used in this2059Agreement, "Company" shall mean the Company and any successor to its business2060and/or assets which executes and delivers the agreement provided for in this2061Section 6(i) or which otherwise becomes bound by all the terms and provisions of2062this Agreement by operation of law.20632064(ii) This Agreement is personal to Executive, and Executive may not2065assign or transfer any part of Executive's rights or duties hereunder, or any2066compensation due to him hereunder, to any other person. Notwithstanding the2067foregoing, this Agreement shall inure to the benefit of and be enforceable by2068Executive's personal or legal representatives, executors, administrators, heirs,2069distributees, devisees, and legatees.207020717. Modification; Waiver. No provisions of this Agreement may be2072modified, waived, or discharged unless such waiver, modification, or discharge2073is agreed to in a writing signed by Executive and such officer as may be2074specifically designated by the Board of Directors of the Company. No waiver by2075either party hereto at any time of any breach by the other party hereto of, or2076compliance with, any condition or provision of this Agreement to be performed by2077such other party shall be deemed a waiver or similar or dissimilar provisions or2078conditions at the same or at any prior or subsequent time.207920808. Notice. All notices, requests, demand, and all other communications2081required or permitted by either party to the other party by this Agreement2082(including, without limitation, any notice of termination of employment and any2083notice of an intention to arbitrate) shall be in writing and shall be deemed to2084have been duly given when delivered personally or received by certified or2085registered mail, return receipt requested, postage prepaid, at the address of2086the other party, as first written above (directed to the attention of the Board2087of Directors and Corporate Secretary in the case of the Company). Either party2088hereto may change its address for purposes of this Section 8 by giving 15 days2089prior notice to the other party hereto.209020919. Severability. If any term or provision of this agreement or the2092application hereof to any person or circumstances shall to any extent be invalid2093or unenforceable, the remainder of this Agreement or the application of such2094term or provision to persons or circumstances other than those as to which it is2095held invalid or unenforceable shall not be affected thereby, and each term and2096provision of this Agreement shall be valid and enforceable to the fullest extent2097permitted by law.2098209910. Counterparts. This Agreement may be executed in several2100counterparts, each of which shall be deemed an original, but all of which2101together shall constitute one and the same instrument.2102210311. Governing Law. This Agreement has been executed and delivered in2104the State of Minnesota and shall, in all respects, be governed by, and construed2105and enforced in accordance with, the laws of the State of Minnesota, including2106all matters of construction, validity and performance.21072108210982110<PAGE>21112112211312. Effect of Agreement; Entire Agreement. The Company and Executive2114understand and agree that this Agreement is intended to reflect their agreement2115only with respect to payments and benefits upon termination in certain cases and2116is not intended to create any obligation on the part of either party to continue2117employment. This Agreement supersedes any and all other oral or written2118agreements or policies made relating to the subject matter hereof (including,2119without limitation, the Prior Agreement) and constitutes the entire agreement of2120the parties relating to the subject mater hereof; provided that this Agreement2121shall not supersede or limit in any way Executive's rights under any benefit2122plan, program or arrangements in accordance with their terms (including, without2123limitation, the provisions of the Company's policy HR-1.02.25 entitled2124"Severance Pay," effective January 1, 1994, as amended from time to time, or any2125successor to such policy).2126212713. ERISA. For purposes of the Executive Retirement Income Security Act2128of 1974, this Agreement is intended to be a severance pay Executive welfare2129benefit plan, and not an Executive pension benefit plan, and shall be construed2130and administered with that intention.21312132IN WITNESS WHEREOF, the Company has caused this Agreement to be2133executed in its name by a duly authorized director and officer, and Executive2134has hereunto set his or her hand, all as of the date first written above.21352136ST. JUDE MEDICAL, INC.213721382139By2140--------------------------------2141Its2142------------------------------21432144EXECUTIVE21452146----------------------------------214721482149921502151</TEXT>2152</DOCUMENT>2153<DOCUMENT>2154<TYPE>EX-10.192155<SEQUENCE>42156<FILENAME>stjude010431_ex10-19.txt2157<DESCRIPTION>AMENDED AND RESTATED EMPLOYMENT AGREEMENT2158<TEXT>215921602161EXHIBIT 10.1921622163AMENDED AND RESTATED EMPLOYMENT AGREEMENT2164-----------------------------------------21652166THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is2167made effective as of the 25th day of March, 2001, by and between St. Jude2168Medical, Inc., a Minnesota corporation with its principal place of business at2169Lillihei Plaza, Little Canada, Minnesota (the "Company"), and Terry L. Shepherd,2170an individual residing at 1370 Meadow Avenue, Shoreview, Minnesota (the2171"Executive") and amends and restates the EMPLOYMENT AGREEMENT dated May 5, 19992172between the Company and Executive.21732174RECITALS21752176Prior to the original EMPLOYMENT AGREEMENT Executive was employed by2177the Company in the capacity of President, Heart Valve Division. The Company2178desires to continue the employ the Executive, due to his certain unique skills,2179talents, contacts, judgment and knowledge of the Company's business, strategies,2180ethics and objectives and the Executive desires to be employed by the Company.2181In consideration of the mutual covenants and promises contained herein, and2182other good and valuable consideration, the receipt and sufficiency of which are2183hereby acknowledged by the parties hereto, the parties agree as follows:218421851. Term of Employment. The Term of this Agreement shall commence on the2186date hereof and, subject to the further provisions of this Agreement, shall end2187on the 4th day of May, 2004.218821892. Title; Capacity. The Executive shall serve as President and Chief2190Executive Officer of the Company or in such other position as the Company's2191Board of Directors (the "Board") may determine from time to time. The Executive2192shall be subject to the supervision of, shall report directly to, and shall have2193such authority as is delegated to him by, the Board of Directors.21942195The Executive shall be responsible for all operations of the Company2196and all administrative functions, including strategic planning, annual profit2197planning, diversification (M&A), public relations and investor relations. The2198following functions and units shall report to the Executive: CRMD, Heart Valve2199Division, International, Administration, Legal, Finance, Corporate2200Communications, Business Development and Information Systems. Executive shall,2201if appointed or elected to the Company's Board of Directors, serve as a member2202at no additional compensation.22032204The Executive hereby accepts such employment and agrees to undertake2205the duties and responsibilities inherent in such position and such other duties2206and responsibilities as the Board or its designee shall from time to time2207reasonably assign to him. The Executive agrees to devote his entire business2208time, attention and energies to the business and interests of the Company (and2209its affiliates as required by the Company's investments and the Executive's2210positions therein) during the Employment Period. The Executive agrees to abide2211by the rules, regulations, instructions, personnel practices and policies of the2212Company and any changes therein which may be adopted from time to time. The2213Executive acknowledges receipt of copies of all such rules and policies2214committed to writing as of the date of this Agreement.22152216<PAGE>2217221822193. Compensation and Benefits.22202221a. Salary. The Company shall pay the Executive an annual base salary2222of $500,000.00 for the one-year period commencing on the Commencement Date in2223the same intervals as other exempt employers. Such salary shall be subject to2224annual increases thereafter as determined by the Board, in its sole discretion.22252226b. Bonus. The Executive's target bonus under the MICP shall be 100%2227of base salary (and shall be prorated for 1999).22282229c. Perk Package. The Executive shall be eligible for the Company's2230executive perk package at the level of $26,000.22312232d. Fringe Benefits. The Executive shall be entitled to participate2233in all bonus and benefit programs that the Company establishes and makes2234available to its Executives, if any, to the extent that Executive's position,2235tenure, salary, age, health and other qualifications make him eligible to2236participate.22372238e. Reimbursement of Expenses. The Company shall reimburse the2239Executive for all reasonable travel, entertainment and other expenses incurred2240or paid by the Executive in connection with, or related to, the performance of2241his duties, responsibilities or services under this Agreement, upon presentation2242by the Executive of documentation, expense statements, vouchers and/or such2243other supporting information in accordance with standard company policies.22442245f. Stock Options. Under separate agreement, the Executive is being2246granted a non-qualified stock option to purchase 200,000 shares of stock,2247vesting at the rate of 20% per year for five years and another non-qualified2248stock option to purchase 200,000 shares which will vest based upon performance2249criteria.225022514. Employment Termination. The employment of the Executive by the2252Company pursuant to this Agreement shall terminate upon the occurrence of any of2253the following:22542255a. Expiration of the Employment Period in accordance with Section 1;22562257b. At the election of the Company, for "Cause", immediately upon2258written notice by the Company to the Executive. "Cause" for such termination2259shall include, but not limited to, the following:22602261i. Dishonesty of the Executive with respect to the Company;22622263ii. Willful misfeasance or nonfeasance of duty intended to injure2264or having the effect of injuring the reputation, business or business2265relationships of the Company or its respective officers, directors or2266Executives;22672268iii. Upon a charge by a governmental entity against the Executive2269of any crime involving moral turpitude which is demonstrably and materially2270injurious to the22712272227322274<PAGE>227522762277Company or upon the filing of any civil action involving a charge of2278embezzlement, theft, fraud or other similar act which is demonstrably and2279materially injurious to the Company;22802281iv. Willful or prolonged absence from work by the Executive2282(other than by reason of disability due to physical or mental illness) or2283failure, neglect or refusal by the Executive to perform his duties and2284responsibilities without the same being corrected upon ten (10) days prior2285written notice; or22862287v. Breach by the Executive of any of the covenants contained in2288this Agreement.22892290c. Immediately upon the death or disability of the Executive. As2291used in this Agreement, the term "disability" shall mean the inability of the2292Executive, due to a physical or mental disability, for a period of 90 days,2293whether or not consecutive, during any 360 day period to perform the services2294contemplated under this Agreement. A determination of disability shall be made2295by a physician to the Company.22962297d. At the election of the Company or the Executive, with or without2298cause upon 90 days written notice by one party to the other.229923005. Effect of Termination.23012302a. Termination for Cause or at Election of Either Party. In the2303event the Executive's employment is terminated at the election of the Company2304pursuant to Section 4(d), the Company shall immediately pay to the Executive an2305amount equal to the two times the Executive's then current salary and two times2306the Executive's then current target bonus.23072308b. Termination for Death or Disability. If the Executive's2309employment is terminated by death or because of disability pursuant to Section23104(c), the Company shall pay to the estate of the Executive or to the Executive,2311as the case may be, the compensation which would otherwise be payable to the2312Executive up to the end of the month in which the termination of his employment2313because of death or disability occurs.23142315c. Terminate for Cause or Voluntary. In the event a termination for2316cause pursuant to Section 4(b) or by the voluntary resignation of Executive2317pursuant to Section 4(d), then no further compensation other than that already2318accrued shall be due to Executive under this Agreement.23192320d. In the event Executive is entitled to, and actually receives the2321full compensation he is entitled to, under the separate SEVERANCE AGREEMENT2322dated the same date as this Agreement, then, notwithstanding the previous2323subsections of Section 5, the Company shall have no additional obligation to2324make a payment to Executive under Section 5 of this Agreement.232523266. Notices. All notices required or permitted under this Agreement2327shall be in writing and shall be deemed effective upon personal delivery or upon2328deposit in the United States Post Office, by registered or certified mail,2329postage prepaid, addressed to the other party at23302331233232333<PAGE>233423352336the address shown above, or at such other address or addresses as either party2337shall designate to the other in accordance with this Section 9.233823397. Pronouns. Whenever the context may require, any pronouns used in2340this Agreement shall include the corresponding masculine, feminine or neuter2341forms, and the singular forms of nouns and pronouns shall include the plural,2342and vice versa.234323448. Entire Agreement. This Agreement constitutes the entire agreement2345between the parties and supersedes all prior agreements and understandings,2346whether written or oral, relating to the subject matter of this Agreement.234723489. Other Agreements. This Agreement is intended to supplement and not2349replace the following other agreements between the Executive and the Company:2350Non-Disclosure and Non-Competition Agreement, Indemnification Agreement,2351Severance Agreement (Change of Control), all previous stock option grants, 20012352MICP and other employment benefits arising from Executive's prior employment2353with the Company.2354235510. Amendment. This Agreement may be amended or modified only by a2356written instrument executed by both the Company and the Executive.2357235811. Governing Law. This Agreement shall be construed, interpreted and2359enforced in accordance with the laws of the State of Minnesota, without giving2360effect to that State's conflict of laws provisions.2361236212. Choice of Venue. All actions or proceedings with respect to this2363Agreement shall be instituted only in any state or federal court sitting in2364Ramsey County, Minnesota, and by execution and delivery of this Agreement, the2365parties irrevocably and unconditionally subject to the jurisdiction (both2366subject matter and personal) of each such court and irrevocably and2367unconditionally waive: (a) any objection that the parties might now or hereafter2368have to the venue of any of such court; and (b) any claim that any action or2369proceeding brought in any such court has been brought in an inconvenient forum.2370237113. Successors and Assigns. This Agreement shall be binding upon and2372inure to the benefit of both parties and their respective successors and2373assigns, including any corporation with which or into which the Company may be2374merged or which may succeed to its assets or business, provided, however, that2375the obligations of the Executive are personal and shall not be assigned by him.2376237714. Waiver. No delay or omission by the Company in exercising any right2378under this Agreement shall operate as a waiver of that or any other right. A2379waiver or consent given by the Company on any once occasion shall be effective2380only in that instance and shall not be construed as a bar or waiver of any right2381on any other occasion.2382238315. Captions and Headings. The captions of the sections of this2384Agreement are for convenience of reference only and in no way define, limit or2385affect the scope or substance of any section of this Agreement.23862387238842389<PAGE>23902391239216. Severability. In case any provision of this Agreement shall be2393invalid, illegal or otherwise unenforceable, the validity, legality and2394enforceability of the remaining provisions shall in no way be affected or2395impaired thereby.2396239717. Counterparts. This Agreement may be executed in a number of2398counterparts and all of such counterparts executed by the Company or the2399Executive, shall constitute one and the same agreement, and it shall not be2400necessary for all parties to execute the same counterpart hereof.2401240218. Facsimile Signatures. The parties hereby agree that, for purposes2403of the execution of this Agreement, facsimile signatures shall constitute2404original signatures.2405240619. Incorporation by Reference. The preamble and recitals to this2407Agreement are hereby incorporated by reference and made a part hereof.240824092410IN WITNESS WHEREOF, the parties hereto have executed this Agreement as2411of the day and year set forth above.24122413ST. JUDE MEDICAL, INC.,2414A MINNESOTA CORPORATION24152416/s/ FRIEDA J. VALK2417------------------------------2418Name: Frieda J. Valk2419Title: Vice President, Administration242024212422EXECUTIVE:24232424/s/ TERRY L. SHEPHERD2425------------------------------2426Name: Terry L. Shepherd2427Title: Chairman/CEO2428242952430</TEXT>2431</DOCUMENT>2432<DOCUMENT>2433<TYPE>EX-132434<SEQUENCE>52435<FILENAME>stjude010431_ex-13.txt2436<DESCRIPTION>EXHIBIT 13 - 2000 ANNUAL REPORT2437<TEXT>24382439EXHIBIT 1324402441MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL2442CONDITION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)24432444RESULTS OF OPERATIONS24452446INTRODUCTION24472448St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") is a global leader2449in the development, manufacturing and distribution of medical technology2450products for the cardiac rhythm management, cardiology and vascular access, and2451cardiac surgery markets. The Company has two reportable segments: Cardiac Rhythm2452Management (CRM) and Cardiac Surgery (CS - formerly known as Heart Valve Disease2453Management). The CRM segment, which includes the results from the Company's2454Cardiac Rhythm Management Division and Daig Division, develops, manufactures and2455distributes bradycardia pulse generator and tachycardia implantable cardioverter2456defibrillator (ICD) systems, electrophysiology and interventional cardiology2457catheters, and vascular closure devices. The CS segment develops, manufactures2458and distributes mechanical and tissue heart valves and valve repair products,2459and suture-free devices to facilitate coronary artery bypass graft anastomoses.24602461The Company utilizes a fifty-two, fifty-three week fiscal year ending on the2462Saturday nearest December 31, but for clarity of presentation describes all2463periods as if the year end is December 31. Fiscal years 2000, 1999 and 1998 each2464consisted of fifty-two weeks.24652466The commentary that follows should be read in conjunction with the Company's2467consolidated financial statements and related notes.24682469ACQUISITIONS24702471Following is a discussion on the businesses acquired by the Company during the2472last three years:24732474VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the2475outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus2476additional contingent consideration related to product development milestones2477for regulatory approvals and to future sales. VSI was a development-stage2478company focused on the development of suture-free devices to facilitate coronary2479artery bypass graft anastomoses.24802481ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the2482Angio-Seal(TM)business of Tyco International Ltd. for $167,000 in cash.2483Angio-Seal(TM)manufactured and marketed hemostatic puncture closure devices.24842485OTHER: During 2000 and 1999, the Company acquired various businesses used in the2486distribution of the Company's products. Aggregate consideration paid during 20002487and 1999 was $3,264 and $21,056, respectively, in cash and common stock.24882489The above acquisitions were recorded using the purchase method of accounting.2490The operating results of each of these acquisitions were included in the2491Company's consolidated financial statements from the date of each acquisition.2492Pro forma results of operations have not been presented for these acquisitions2493since the effects of these business acquisitions were not material to the2494Company either individually or in aggregate.24952496NET SALES24972498Net sales by geographic markets were as follows:249925002000 1999 19982501- --------------------------------------------------------------------------------2502United States $ 745,793 $ 689,051 $ 604,5242503Western Europe 235,412 259,300 248,0702504Other foreign countries 197,601 166,198 163,4002505- --------------------------------------------------------------------------------2506Total net sales $ 1,178,806 $ 1,114,549 $ 1,015,9942507================================================================================250825092510Overall, foreign exchange rate movements had an unfavorable year-to-year impact2511of $33,900 and $14,900 in 2000 and 1999, due primarily to the strengthening of2512the U.S. dollar against the major Western European currencies. This negative2513effect is not necessarily indicative of the impact on net earnings due to2514partially offsetting favorable foreign currency changes on operating costs and2515to the Company's hedging activities.2516251725182519Segment net sales were as follows:252025212000 1999 19982522- --------------------------------------------------------------------------------2523CRM $ 921,857 $ 843,117 $ 735,1232524CS 256,949 271,432 280,8712525- --------------------------------------------------------------------------------2526Total net sales $ 1,178,806 $ 1,114,549 $ 1,015,9942527================================================================================25282529253012531<PAGE>253225332534CRM 2000 net sales increased 9.3% over 1999 due primarily to increased2535bradycardia, electrophysiology (EP) catheter, and Angio-Seal(TM) unit sales,2536offset partially by the negative impact of the strengthening U.S. dollar on2537foreign sales. The increase in bradycardia sales is mainly due to the Company's2538ongoing rollout of the Affinity(R) pacemaker family and to an expanded U.S.2539sales organization. CRM 1999 net sales increased 14.7% over 1998 due primarily2540to increased bradycardia and electrophysiology (EP) catheter unit sales, and the2541acquisition of Angio-Seal(TM). The bradycardia sales increase relates to the2542Company's introduction of the Affinity(R) pacemaker family in the second quarter2543of 1999 and to an expanded U.S. sales force.25442545CS 2000 net sales decreased 5.3% from 1999 due to the effects of the stronger2546U.S. dollar, the impact of the first quarter 2000 recall of valve products2547incorporating a Silzone(R) coating, and a slight clinical preference shift from2548mechanical valves to tissue valves in the U.S. market where CS holds significant2549mechanical valve market share and a smaller share of the tissue valve market. CS25501999 net sales decreased 3.4% from 1998 due to the effects of the stronger U.S.2551dollar, reduced sales to certain distributors in emerging markets, and a slight2552clinical preference shift from mechanical valves to tissue valves in the U.S.2553market.25542555GROSS PROFIT25562557Gross profits were as follows:255825592000 1999 19982560- --------------------------------------------------------------------------------2561Gross profit $ 787,657 $ 733,647 $ 643,0542562Percentage of net sales 66.8% 65.8% 63.3%2563================================================================================25642565The Company's 2000 gross profit margin increased one percentage point over 19992566due primarily to CRM's manufacturing efficiencies, offset partially by the2567unfavorable impact on sales due to the stronger U.S. dollar. The Company's 19992568gross profit margin increased 2.5 percentage points over 1998 due primarily to2569CRM's manufacturing efficiencies and higher CRM unit sales, offset partially by2570the impact on sales of the stronger U.S. dollar and lower CS unit sales.25712572OPERATING EXPENSES25732574Certain operating expenses were as follows:257525762000 1999 19982577- --------------------------------------------------------------------------------2578Selling, general and administrative $ 416,383 $ 394,418 $ 349,3462579Percentage of net sales 35.3% 35.4% 34.4%25802581Research and development $ 137,814 $ 125,059 $ 99,7562582Percentage of net sales 11.7% 11.2% 9.8%2583================================================================================25842585SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage2586of net sales in 2000 was comparable to 1999. During the third quarter of 2000,2587the Company received a cash payment related to a non-product arbitration2588judgement pertaining to business matters occurring in 1997 and 1998. This cash2589receipt, net of other provisions for legal matters and fees, was $15,158 and was2590credited to SG&A expense. In addition, during the third quarter of 2000, the2591Company recorded additional expenses related to a $3,500 discretionary2592contribution to its charitable foundation, $6,672 primarily for write-offs of2593certain assets and related costs, and a $4,900 increase to its allowance for2594doubtful accounts. These additional costs and expenses were also recorded in2595SG&A expense for 2000.25962597SG&A expense as a percentage of net sales increased in 1999 over 1998 due2598primarily to increased sales activities, increased litigation, Year 2000 related2599expenses, and to higher intangible asset amortization related to the2600Angio-Seal(TM) acquisition.26012602RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2000 and 19992603due to increased CRM activities relating primarily to ICDs and products to treat2604emerging indications in atrial fibrillation and congestive heart failure, and CS2605activities associated with the development of suture-free devices to facilitate2606coronary artery bypass graft anastomoses.26072608PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In 1999, the Company2609recorded purchased in-process research and development charges of $47,775 and2610$67,453 in connection with the acquisitions of Angio-Seal(TM) and VSI. The2611purchased in-process research and development charges were computed by an2612independent third-party appraisal company and were expensed at close, except as2613noted below, because technological feasibility had not been established and2614because there were no alternative future uses for the technology. The values2615assigned to purchased in-process26162617261822619<PAGE>26202621research and development were determined primarily by the income approach,2622utilizing discount rates ranging from 25% to 35%. Certain other factors2623considered in these valuations included the stage of development of each2624project, which ranged from 35% to 90% complete, complexity of the work completed2625at the valuation date, and market introductions for products resulting from the2626technology beginning in late 1999 for Angio-Seal(TM) and 2000 for VSI.26272628The purchased in-process technologies requires additional development to create2629commercially viable products. This development includes completion of design,2630prototyping, and testing to ensure the technologies meet their design2631specifications, including functional, technical and economic performance2632requirements. In addition, the technology is required to undergo both2633international and domestic regulatory reviews and approvals prior to being2634commercially released to the market.26352636The total appraised value of the VSI purchased in-process research and2637development was $95,500, of which $67,453 was recorded at close. During 2000,2638the Company paid $5,000 of contingent consideration for a milestone that was2639achieved. The remaining balance of the in-process research and development2640valuation ($23,047) will be recorded in the Company's financial statements as2641purchased in-process research and development charges when payment of the2642contingent consideration is assured beyond a reasonable doubt. Contingent2643consideration payments in excess of the $23,047 will be capitalized as goodwill.26442645Management believes that the financial statement projections used in the2646Angio-Seal(TM) and VSI acquisitions are still materially valid; however, there2647can be no assurance that the projected results will be achieved. Certain2648in-process technologies acquired in the Angio-Seal(TM) and VSI acquisitions have2649been developed to the point of commercial production and sale to customers.2650Management expects to continue the development of the other in-process2651technologies acquired in the Angio-Seal(TM) and VSI acquisitions and continues2652to believe that there is a reasonable chance of successfully completing such2653development efforts. However, there is risk associated with the completion of2654the in-process technologies, and there can be no assurance that any technologies2655will meet with either technological or commercial success. Failure to2656successfully develop and commercialize these in-process technologies would2657result in the loss of the expected economic return inherent in the original fair2658value allocation. Additionally, the value of other intangible assets acquired2659may become impaired.26602661SPECIAL CHARGES: On January 21, 2000, the Company initiated a worldwide2662voluntary recall of all field inventory of heart valve replacement and repair2663products incorporating a Silzone(R) coating on the sewing cuff fabric. The2664Company concluded that it will no longer utilize a Silzone(R) coating. The2665Company recorded a special charge accrual totaling $26,101 during the first2666quarter of 2000 relating to asset write-downs ($9,465) and other costs2667($16,636), including monitoring expenses, associated with this recall and2668product discontinuance. The Company has utilized $17,634 of this special charge2669accrual through December 31, 2000. Other than the effect of this special charge,2670management believes that this recall will not materially impact the Company's2671future earnings or cash flows based primarily on the fact that the Company's2672non-Silzone(R) coated products, which represented 75% of the Company's CS2673shipments at the time of the recall, are not affected by this recall. However,2674there can be no assurance that the final costs associated with this recall,2675including litigation-related costs, will not exceed management's estimates.26762677The Company recorded a $9,754 special charge accrual in 1999 related to the2678restructuring of its international operations, of which $8,622 has been utilized2679through December 31, 2000.26802681OTHER INCOME (EXPENSE)26822683Interest expense was $28,569 in 2000, $28,104 in 1999, and $23,667 in 1998. The2684increase in 1999 over 1998 was due to increased debt levels resulting primarily2685from the Company's acquisitions and share repurchases during 1999.26862687Net investment gains of $4,062 in 2000, $848 in 1999, and $15,624 in 19982688resulted primarily from the periodic sales of the Company's marketable equity2689security holdings.26902691INCOME TAXES26922693The Company's reported effective income tax rate was 27.2% in 2000 as compared2694with 63.8% in 1999. Exclusive of the purchased in-process research and2695development and special charges, the Company's effective income tax rate was 25%26962697for 2000 and 1999. The purchased in-process research and development and special2698charges were either non-deductible for income tax purposes or were recorded in2699taxing jurisdictions with low income tax rates.27002701270232703<PAGE>270427052706The Company's reported effective income tax rate was 30.5% in 1998. The decrease2707in the effective income tax rate from 30.5% in 1998 to 25.0% in 1999, exclusive2708of purchased in-process research and development and special charges, was2709primarily attributable to higher research and development credits and foreign2710sales corporation benefits relative to pre-tax earnings in 1999.27112712The Company has not recorded deferred income taxes on its foreign subsidiaries'2713undistributed earnings as such amounts are currently intended to be reinvested2714outside the U.S. indefinitely.27152716NET EARNINGS27172718Net earnings, exclusive of purchased in-process research and development and2719special charges, were $156,307 in 2000, $143,989 in 1999, and $129,082 in 1998.2720Reported net earnings and diluted net earnings per share were $129,094, or $1.512721per share, in 2000, $24,227, or $0.29 per share, in 1999, and $129,082, or $1.502722per share, in 1998.27232724OUTLOOK27252726The Company expects that market demand, government regulation and societal2727pressures will continue to change the worldwide health care industry resulting2728in further business consolidations and alliances. The Company participates with2729industry groups to promote the use of advanced medical device technology in a2730cost conscious environment. Customer service in the form of cost-effective2731clinical outcomes will continue to be a primary focus for the Company.27322733The Company's CS business is in a highly competitive market. The market is2734segmented among mechanical heart valves, tissue heart valves, and repair2735products. During 1999 and 2000, the U.S. market continued its slight shift to2736tissue valve and repair products from mechanical heart valves resulting in a2737small overall market share loss for the Company. Competition is anticipated to2738continue to place pressure on pricing and terms, and health care reform is2739expected to result in further hospital consolidations over time.27402741The Company's CRM business is also in a highly competitive industry that has2742undergone consolidation. There are currently three principal suppliers,2743including the Company, and the Company's two principal competitors each have2744substantially more assets and sales than the Company. Rapid technological change2745is expected to continue, requiring the Company to invest heavily in R&D and to2746effectively market its products.27472748The global medical technology market is highly competitive. Competitors have2749historically employed litigation to gain a competitive advantage. In addition,2750the Company's products must continually improve technologically and provide2751improved clinical outcomes due to the competitive nature of the industry.27522753Group purchasing organizations (GPOs) in the U.S. continue to consolidate the2754purchasing for some of the Company's customers. A few GPOs have executed2755contracts with the Company's CRM market competitors, which exclude the Company.2756These contracts, if enforced, may adversely affect the Company's sales of CRM2757products to members of these GPOs.27582759MARKET RISK27602761The Company is exposed to foreign currency exchange rate fluctuations due to its2762transactions denominated primarily in Euros, currencies tied to the Euro,2763Canadian Dollars, British Pounds, and Swedish Kroners. The Company is also2764exposed to interest rate risk on its interest-bearing debt and equity market2765risk on its marketable equity security investments.27662767From time to time the Company minimizes a portion of its foreign currency2768exchange rate risk through the use of forward exchange or option contracts. The2769gains or losses on these contracts are intended to offset changes in the fair2770value of the anticipated foreign currency transactions. It is the Company's2771practice to not enter into contracts for trading purposes. The Company is2772continuing to evaluate its foreign currency exchange rate risk and the different2773mechanisms in which to help manage such risk.27742775The Company had no forward exchange contracts outstanding at December 31, 2000.2776The Company's forward exchange contracts had a fair value of ($263) at December277731, 1999. Utilizing the Company's outstanding forward exchange contracts at2778December 31, 1999, a hypothetical 10% unfavorable change in the foreign currency2779spot rates would have negatively impacted the fair value of the Company's2780forward exchange contracts by $2,745. A majority of any gains or losses on the2781fair value of these contracts would ultimately be offset by gains or losses on2782the anticipated transactions. Such offsetting gains or losses are not reflected2783in the hypothetical 10% unfavorable change.278427852786278742788<PAGE>278927902791A substantial portion of the Company's interest-bearing debt provides for2792interest at variable rates tied to the London Interbank Offered Rate ("LIBOR").2793The Company periodically enters into interest rate swap or option contracts to2794reduce its exposures to interest rate fluctuations. During the third quarter of27951999, the Company entered into an interest rate swap contract to hedge a2796substantial portion of its variable interest rate risk through January 2000 on2797$138,000 of revolving credit facility borrowings. The fair market value of this2798contract at December 31, 1999, and the impact of the contract on 1999 earnings2799were not material. The Company did not enter into any other interest rate2800contracts during 2000 or in 1998.28012802The Company periodically invests in marketable equity securities of emerging2803technology companies. The Company's investments in these companies had a fair2804value of $16,173 and $15,487 at December 31, 2000 and 1999, which is subject to2805the underlying price risk of the public equity markets.28062807On January 1, 1999, eleven of the fifteen member countries of the European2808Economic Community (EEC) established fixed conversion rates between their2809existing sovereign currencies and the Euro, and adopted the Euro as the legal2810common currency for their countries. The sovereign currencies of these countries2811will remain legal tender as denominations of the Euro between January 1, 19992812and January 1, 2002. During this transition period, public and private parties2813may pay for goods and services using either the Euro or the sovereign currency.2814Beginning January 1, 2002, these countries will issue new Euro-denominated bills2815and coins for use in cash transactions. The Company does not expect the Euro2816conversion to have a short-term material affect on the Company's operations.2817However, subsequent to December 31, 2001, cross-country pricing in the EEC may2818become more transparent, which may impact the pricing of the Company's products.2819The Company will continue to evaluate the need for changes to its computer2820systems to accommodate the conversion to the Euro.28212822NEW ACCOUNTING PRONOUNCEMENT28232824The Company is required to adopt Statement of Financial Accounting Standards No.2825133, "Accounting for Derivative Instruments and Hedging Activities" (Statement2826133), as of January 1, 2001. Statement 133 requires companies to recognize all2827derivatives on the balance sheet at fair value. Derivatives not qualifying as2828hedges must be adjusted to fair value through earnings. If the derivative2829qualifies as a hedge, depending on the nature of the hedge, changes in the fair2830value of derivatives will either be offset against the change in fair value of2831the hedged assets, liabilities, or firm commitments through earnings, or2832recognized in other comprehensive income until the hedged item is recognized in2833earnings. The ineffective portion of a derivative's change in fair value will be2834immediately recognized in earnings. The impact of adopting Statement 133 on2835January 1, 2001, was not material to the Company's consolidated results of2836operations, financial position or cash flows.28372838FINANCIAL CONDITION28392840LIQUIDITY28412842The Company's liquidity and cash flows remained strong during 2000. Cash2843provided by operating activities was $203,971 in 2000, down approximately2844$52,000 from 1999 due primarily to the increased working capital requirements2845associated with higher sales volumes. The Company's current ratio was 2.4 to 12846at December 31, 2000.28472848Accounts receivable increased $9,492 from December 31, 1999, due primarily to2849higher sales, offset in part by a weakening of the Western European currencies2850and the corresponding accounts receivable balances. Total interest bearing debt2851decreased $182,995 from December 31, 1999, due to debt repayments as a result of2852cash generated from operations and the conversion of $10,675 of convertible2853debentures into the Company's common stock.28542855The Company maintains sufficient credit facilities to fund its operations and2856investment opportunities. As of March 6, 2001, the Company had committed credit2857facilities totaling $500,000 available to back the Company's commercial paper2858program borrowings and for general purposes.28592860Management believes that cash generated from operations and cash available under2861its credit facilities will be sufficient to meet the Company's working capital2862and share repurchase plan needs in the near term. Should suitable investment2863opportunities arise, management believes that the Company's earnings, cash flows2864and balance sheet will permit the Company to obtain additional debt or equity2865capital, if necessary.28662867286852869<PAGE>2870287128722873CAPITAL STRUCTURE28742875The Company's capital structure consists of interest-bearing debt and equity.2876Interest-bearing debt as a percent of the Company's total interest-bearing debt2877and equity decreased from 38% at December 31, 1999, to 24% at December 31, 2000,2878due primarily to the paydown of debt using cash generated from operations.28792880During 1999, the Company's Board of Directors authorized the repurchase of up to2881$250,000 of the Company's outstanding common stock over a three-year period. The2882Company repurchased 977,500 shares of its common stock for $29,826 during 1999.2883No shares were repurchased during 2000.28842885DIVIDENDS28862887The Company has not declared or paid any dividends during 2000, 1999 or 1998.2888Management currently intends to utilize the Company's earnings for operating and2889investment purposes, including the repurchase of its common stock.28902891CAUTIONARY STATEMENTS28922893In this discussion and in other written or oral statements made from time to2894time, we have included and may include statements that may constitute2895"forward-looking statements" within the meaning of the safe harbor provisions of2896the Private Litigation Securities Reform Act of 1995. These forward-looking2897statements are not historical facts but instead represent our belief regarding2898future events, many of which, by their nature, are inherently uncertain and2899beyond our control. These statements relate to our future plans and objectives,2900among other things. By identifying these statements for you in this manner, we2901are alerting you to the possibility that our actual results may differ, possibly2902materially, from the results indicated by these forward-looking statements. We2903undertake no obligation to update any forward-looking statements.29042905Various factors contained in the previous discussion and those described below2906may affect the Company's operations and results. Since it is not possible to2907foresee all such factors, you should not consider these factors to be a complete2908list of all risks or uncertainties. Risk factors include the following:290929101. Administrative or legislative reforms to the U.S. Medicare and Medicaid2911systems or similar reforms of foreign reimbursement systems in a manner2912that significantly reduces reimbursement for procedures using the Company's2913medical devices or denies coverage for such procedures.29142. Acquisition of key patents by competitors that have the affect of excluding2915the Company from new market segments.29163. Economic factors, including inflation, changes in interest rates and2917changes in foreign currency exchange rates.29184. Product introductions by competitors which have advanced technology, better2919features or lower pricing.29205. Price increases by suppliers of key components, some of which are2921sole-sourced.29226. A reduction in the number of procedures using the Company's devices caused2923by cost containment pressures or preferences for alternate therapies.29247. Safety, performance or efficacy concerns about the Company's marketed2925products, many of which are expected to be implanted for many years,2926leading to recalls and advisories with the attendant expenses and declining2927sales.29288. Changes in laws, regulations or administrative practices affecting2929government regulation of the Company's products, such as FDA laws and2930regulations, that increase pre-approval testing requirements for products2931or impose additional burdens on the manufacture and sale of medical2932devices.29339. Difficulties obtaining, or the inability to obtain, appropriate levels of2934product liability insurance.293510. A serious earthquake affecting the Company's facilities in Sunnyvale or2936Sylmar, California.293711. Health care industry consolidation leading to demands for price concessions2938or the exclusion of some suppliers from significant market segments.293912. Adverse developments in litigation including product liability litigation2940and patent litigation or other intellectual property litigation including2941that arising from the Telectronics and Ventritex acquisitions.29422943294462945<PAGE>294629472948REPORT OF MANAGEMENT29492950The management of St. Jude Medical, Inc. is responsible for the preparation,2951integrity and objectivity of the accompanying financial statements. The2952financial statements were prepared in accordance with accounting principles2953generally accepted in the United States and include amounts which reflect2954management's best estimates based on its informed judgement and consideration2955given to materiality. Management is also responsible for the accuracy of the2956related data in the annual report and its consistency with the financial2957statements.29582959In the opinion of management, the Company's accounting systems and procedures,2960and related internal controls, provide reasonable assurance that transactions2961are executed in accordance with management's intention and authorization, that2962financial statements are prepared in accordance with accounting principles2963generally accepted in the United States, and that assets are properly accounted2964for and safeguarded. The concept of reasonable assurance is based on the2965recognition that there are inherent limitations in all systems of internal2966control, and that the cost of such systems should not exceed the benefits to be2967derived therefrom. Management reviews and modifies the system of internal2968controls to improve its effectiveness. The effectiveness of the controls system2969is supported by the selection, retention and training of qualified personnel, an2970organizational structure that provides an appropriate division of responsibility2971and a strong budgeting system of control.29722973St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong2974ethical climate so that the Company's affairs are conducted according to the2975highest standards of personal and business conduct. This responsibility is2976reflected in the Company's business ethics policy.29772978The adequacy of the Company's internal accounting controls, the accounting2979principles employed in its financial reporting, and the scope of independent and2980internal audits are reviewed by the Audit Committee of the Board of Directors,2981consisting solely of outside directors. The independent auditors meet with, and2982have confidential access to, the Audit Committee to discuss the results of their2983audit work.29842985/s/ Terry L. Shepherd29862987Terry L. Shepherd2988Chief Executive Officer29892990/s/ John C. Heinmiller29912992John C. Heinmiller2993Vice President, Finance and Chief Financial Officer299429952996REPORT OF INDEPENDENT AUDITORS29972998Board of Directors and Shareholders2999St. Jude Medical, Inc.30003001We have audited the accompanying consolidated balance sheets of St. Jude3002Medical, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related3003consolidated statements of earnings, shareholders' equity, and cash flows for3004each of the three fiscal years in the period ended December 31, 2000. These3005financial statements are the responsibility of the Company's management. Our3006responsibility is to express an opinion on these financial statements based on3007our audits.30083009We conducted our audits in accordance with auditing standards generally accepted3010in the United States. Those standards require that we plan and perform the audit3011to obtain reasonable assurance about whether the financial statements are free3012of material misstatement. An audit includes examining, on a test basis, evidence3013supporting the amounts and disclosures in the financial statements. An audit3014also includes assessing the accounting principles used and significant estimates3015made by management, as well as evaluating the overall financial statement3016presentation. We believe that our audits provide a reasonable basis for our3017opinion.30183019In our opinion, the financial statements referred to above present fairly, in3020all material respects, the consolidated financial position of St. Jude Medical,3021Inc. and subsidiaries at December 31, 2000 and 1999 and the consolidated results3022of their operations and their cash flows for each of the three fiscal years in3023the period ended December 31, 2000 in conformity with accounting principles3024generally accepted in the United States.30253026/s/ Ernst & Young LLP30273028Minneapolis, Minnesota3029February 6, 200130303031303273033<PAGE>30343035303630373038CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)30393040<TABLE>3041<CAPTION>3042Fiscal Year Ended December 31 2000 1999 19983043- --------------------------------------------------------------------------------------------------------------3044<S> <C> <C> <C>3045Net sales $ 1,178,806 $ 1,114,549 $ 1,015,9943046Cost of sales 391,149 380,902 372,9403047- --------------------------------------------------------------------------------------------------------------3048Gross profit 787,657 733,647 643,05430493050Selling, general and administrative expense 416,383 394,418 349,3463051Research and development expense 137,814 125,059 99,7563052Purchased in-process research and development charges 5,000 115,228 --3053Special charges 26,101 9,754 --3054- --------------------------------------------------------------------------------------------------------------3055Operating profit 202,359 89,188 193,95230563057Other income (expense) (25,050) (22,184) (8,222)3058- --------------------------------------------------------------------------------------------------------------3059Earnings before income taxes 177,309 67,004 185,73030603061Income tax expense 48,215 42,777 56,6483062- --------------------------------------------------------------------------------------------------------------30633064Net earnings $ 129,094 $ 24,227 $ 129,0823065- --------------------------------------------------------------------------------------------------------------30663067NET EARNINGS PER SHARE:3068Basic $ 1.53 $ 0.29 $ 1.513069Diluted $ 1.51 $ 0.29 $ 1.503070- --------------------------------------------------------------------------------------------------------------30713072WEIGHTED AVERAGE SHARES OUTSTANDING:3073Basic 84,253 84,274 85,7143074Diluted 85,817 84,735 86,1453075- --------------------------------------------------------------------------------------------------------------3076</TABLE>30773078SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.30793080308183082<PAGE>3083308430853086CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)30873088<TABLE>3089<CAPTION>3090December 31 2000 19993091- ------------------------------------------------------------------------------------------------3092<S> <C> <C>3093ASSETS3094CURRENT ASSETS3095Cash and equivalents $ 50,439 $ 9,6553096Marketable securities 57,423 79,2383097Accounts receivable, less allowances for doubtful accounts 303,307 293,8153098Inventories 222,238 235,4073099Deferred income taxes 35,566 36,6093100Other 35,669 35,5753101- ------------------------------------------------------------------------------------------------3102Total current assets 704,642 690,29931033104PROPERTY, PLANT AND EQUIPMENT3105Land, buildings and improvements 114,045 111,7463106Machinery and equipment 328,553 299,0283107Diagnostic equipment 176,794 163,7573108- ------------------------------------------------------------------------------------------------3109Property, plant and equipment at cost 619,392 574,5313110Less accumulated depreciation (302,213) (231,751)3111- ------------------------------------------------------------------------------------------------3112Net property, plant and equipment 317,179 342,78031133114OTHER ASSETS3115Goodwill and other intangible assets, net 430,896 452,5193116Deferred income taxes 57,482 51,8383117Other 22,517 16,6023118- ------------------------------------------------------------------------------------------------3119Total other assets 510,895 520,9593120- ------------------------------------------------------------------------------------------------3121TOTAL ASSETS $ 1,532,716 $ 1,554,0383122- ------------------------------------------------------------------------------------------------31233124LIABILITIES AND SHAREHOLDERS' EQUITY3125CURRENT LIABILITIES3126Accounts payable $ 81,340 $ 91,8743127Income taxes payable 58,224 43,7003128Accrued expenses3129Employee compensation and related benefits 81,576 67,0463130Other 76,227 79,9023131- ------------------------------------------------------------------------------------------------3132Total current liabilities 297,367 282,52231333134LONG-TERM DEBT 294,500 477,49531353136COMMITMENTS AND CONTINGENCIES -- --31373138SHAREHOLDERS' EQUITY3139Preferred stock -- --3140Common stock 8,534 8,3783141Additional paid-in capital 55,723 1093142Retained earnings 962,317 833,2233143Accumulated other comprehensive income:3144Cumulative translation adjustment (93,380) (53,977)3145Unrealized gain on available-for-sale securities 7,655 6,2883146- ------------------------------------------------------------------------------------------------3147Total shareholders' equity 940,849 794,0213148- ------------------------------------------------------------------------------------------------3149TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,532,716 $ 1,554,0383150- ------------------------------------------------------------------------------------------------3151</TABLE>31523153SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.31543155315693157<PAGE>315831593160CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)31613162<TABLE>3163<CAPTION>3164Accumulated3165Common Stock Additional Other Total3166Number of Paid-In Retained Comprehensive Shareholders'3167Shares Amount Capital Earnings Income (Loss) Equity3168- -----------------------------------------------------------------------------------------------------------------------------------3169<S> <C> <C> <C> <C> <C> <C>3170Balance at January 1, 1998 91,911,496 $ 9,191 $244,347 $746,032 $(12,548) $ 987,0223171Comprehensive income:3172Net earnings 129,082 129,0823173Other comprehensive income (loss)3174Unrealized loss on investments, net of3175taxes ($2,545) and reclassification3176adjustment (see below) (4,153) (4,153)3177Foreign currency translation adjustment (9,092) (9,092)3178-------3179Other comprehensive loss (13,245)3180--------3181Comprehensive income 115,8373182--------3183Issuance of common stock, including3184exercise of stock options, net 263,203 26 7,054 7,0803185Tax benefit from stock options 1,070 1,0703186Repurchase of common stock (8,000,000) (800) (245,815) (58,174) (304,789)3187- -----------------------------------------------------------------------------------------------------------------------------------3188Balance at December 31, 1998 84,174,699 8,417 6,656 816,940 (25,793) 806,2203189Comprehensive income:3190Net earnings 24,227 24,2273191Other comprehensive income (loss)3192Unrealized loss on investments, net of3193taxes ($712) and reclassification3194adjustment (see below) (1,161) (1,161)3195Foreign currency translation adjustment (20,735) (20,735)3196--------3197Other comprehensive loss (21,896)3198--------3199Comprehensive income 2,3313200------3201Issuance of common stock, including3202exercise of stock options, net 381,206 38 8,855 8,8933203Tax benefit from stock options 969 9693204Issuance of common stock for3205business acquisition 161,072 16 3,984 4,0003206Issuance of common stock3207in settlement of obligation 41,108 4 1,430 1,4343208Repurchase of common stock (977,500) (97) (21,785) (7,944) (29,826)3209- -----------------------------------------------------------------------------------------------------------------------------------3210Balance at December 31, 1999 83,780,585 8,378 109 833,223 (47,689) 794,0213211Comprehensive income:3212Net earnings 129,094 129,0943213Other comprehensive income (loss)3214Unrealized gain on investments,3215net of taxes ($838) and reclassification3216adjustment (see below) 1,367 1,3673217Foreign currency translation adjustment (39,403) (39,403)3218--------3219Other comprehensive loss (38,036)3220--------3221Comprehensive income 91,0583222------3223Issuance of common stock, including3224exercise of stock options, net 1,245,166 125 38,506 38,6313225Tax benefit from stock options 6,464 6,4643226Issuance of common stock for conversion3227of subordinated debentures 310,535 31 10,644 10,6753228- -----------------------------------------------------------------------------------------------------------------------------------3229BALANCE AT DECEMBER 31, 2000 85,336,286 $ 8,534 $ 55,723 $962,317 $(85,725) $ 940,8493230- -----------------------------------------------------------------------------------------------------------------------------------3231Other comprehensive income reclassification adjustments for net realized gains on the sale of marketable securities, net of3232income taxes:32331998 $ 9,28232341999 2,87532352000 2,5193236- -----------------------------------------------------------------------------------------------------------------------------------3237</TABLE>32383239SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.324032413242103243<PAGE>324432453246CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)32473248<TABLE>3249<CAPTION>3250Fiscal Year Ended December 31 2000 1999 19983251- -------------------------------------------------------------------------------------------------------------------------------3252<S> <C> <C> <C>3253OPERATING ACTIVITIES3254Net earnings $ 129,094 $ 24,227 $ 129,0823255Adjustments to reconcile net earnings to net cash from operating activities:3256Depreciation 56,699 54,588 45,9593257Amortization 35,650 31,114 22,8943258Purchased in-process research and development charges 5,000 115,228 --3259Special charges 26,101 9,754 --3260Net investment gain (4,062) (848) (15,624)3261Deferred income taxes (5,439) 369 15,4593262Changes in operating assets and liabilities, net of business acquisitions:3263Accounts receivable (40,845) (26,319) (35,236)3264Inventories 4,621 14,466 (7,458)3265Other current assets (6,519) (6,722) 4,8973266Accounts payable and accrued expenses (17,317) (1,998) (35,853)3267Income taxes 20,988 42,208 (15,651)3268- -------------------------------------------------------------------------------------------------------------------------------3269Net cash provided by operating activities 203,971 256,067 108,46932703271INVESTING ACTIVITIES3272Purchase of property, plant and equipment (39,699) (69,419) (74,197)3273Proceeds from sale or maturity of marketable securities 29,082 17,552 82,8793274Business acquisitions, net of cash acquired (8,264) (259,127) --3275Other (10,752) (19,438) 5613276- -------------------------------------------------------------------------------------------------------------------------------3277Net cash provided by (used in) investing activities (29,633) (330,432) 9,24332783279FINANCING ACTIVITIES3280Proceeds from exercise of stock options and stock issued 38,631 8,893 7,0803281Common stock repurchased -- (29,826) (304,789)3282Borrowings under debt facilities 3,703,287 989,500 785,0363283Payments under debt facilities (3,856,287) (887,000) (602,536)3284Repurchase of convertible subordinated debentures (19,320) -- (27,505)3285- -------------------------------------------------------------------------------------------------------------------------------3286Net cash provided by (used in) financing activities (133,689) 81,567 (142,714)32873288Effect of currency exchange rate changes on cash 135 (1,322) 2473289- -------------------------------------------------------------------------------------------------------------------------------3290Net increase (decrease) in cash and equivalents 40,784 5,880 (24,755)3291Cash and equivalents at beginning of year 9,655 3,775 28,5303292- -------------------------------------------------------------------------------------------------------------------------------3293Cash and equivalents at end of year $ 50,439 $ 9,655 $ 3,7753294- -------------------------------------------------------------------------------------------------------------------------------32953296Supplemental Cash Flow Information3297- -------------------------------------------------------------------------------------------------------------------------------3298Cash paid during the year for:3299Interest $ 32,467 $ 28,934 $ 21,7033300Income taxes 35,704 21,200 55,0313301- -------------------------------------------------------------------------------------------------------------------------------3302</TABLE>33033304SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.330533063307113308<PAGE>330933103311NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER3312SHARE AMOUNTS)33133314NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES33153316COMPANY OVERVIEW: St. Jude Medical, Inc. (the "Company") is a global leader in3317the development, manufacturing and distribution of medical technology products3318for the cardiac rhythm management, cardiology and vascular access, and cardiac3319surgery markets. The Company's principal products include pacemaker and3320implantable cardioverter defibrillator (ICD) systems, prosthetic heart valve3321replacement and repair products, electrophysiology and interventional cardiology3322catheters, and vascular closure devices. The Company markets its products3323primarily in the United States, Western Europe and Japan through both a direct3324employee-based sales organization and independent distributors.33253326PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the3327accounts of the Company and its wholly owned subsidiaries. Significant3328intercompany transactions and balances have been eliminated in consolidation.3329Certain reclassifications of previously reported amounts have been made to3330conform to the current year presentation.33313332FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year3333ending on the Saturday nearest December 31. For clarity of presentation, the3334Company describes all periods as if the year end is December 31. Fiscal years33352000, 1999 and 1998 each consisted of fifty-two weeks.33363337USE OF ESTIMATES: Preparation of the Company's consolidated financial statements3338in conformity with accounting principles generally accepted in the United States3339requires management to make estimates and assumptions that affect the reported3340amounts in the financial statements and accompanying notes. Actual results could3341differ from those estimates.33423343CASH EQUIVALENTS: The Company considers highly liquid temporary investments with3344an original maturity of three months or less to be a cash equivalent. Cash3345equivalents are stated at cost, which approximates market.33463347MARKETABLE SECURITIES: Marketable securities consist of equity securities, bank3348certificates of deposit, U.S. government obligations, commercial paper, notes3349and bonds. Marketable securities are classified as available-for-sale and3350recorded at fair market value, based upon quoted market prices. Gross unrealized3351gains totaling $12,347, $10,142 and $12,015, net of taxes of $4,692, $3,854 and3352$4,566, were recorded in shareholders' equity at December 31, 2000, 1999 and33531998. Realized gains from the sale of marketable securities have been recorded3354in other income and are computed using the specific identification method.33553356INVENTORIES: Inventories are stated at the lower of cost or market with cost3357determined using the first-in, first-out method. Inventories consist of the3358following:335933602000 19993361- ------------------------------------------------------------------------------3362Finished goods $ 123,696 $ 108,4493363Work in process 35,640 41,4663364Raw materials 62,902 85,4923365- ------------------------------------------------------------------------------3366$ 222,238 $ 235,4073367==============================================================================33683369PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are depreciated3370using the straight-line method over their estimated useful lives, ranging from337131 to 39 years for buildings and improvements, three to seven years for3372machinery and equipment, and five to eight years for diagnostic equipment.3373Accelerated depreciation methods are used for income tax purposes.33743375GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost3376over the fair value of identifiable net assets of businesses acquired. Other3377intangible assets consist primarily of licensed and purchased technology,3378patents and customer lists. Goodwill and other intangible assets are amortized3379on a straight-line basis using lives ranging from 5 to 20 years. Accumulated3380amortization totaled $149,904 and $115,239 at December 31, 2000 and 1999. The3381Company periodically reviews its long-lived assets, including property, plant3382and equipment, for indicators of impairment using an estimate of the3383undiscounted cash flows generated by those assets.338433853386123387<PAGE>338833893390REVENUE RECOGNITION: The Company generally recognizes revenue at such time title3391to the goods transfers to the customer. For certain products, the Company3392maintains consigned inventory at customer locations. For these products, revenue3393is recognized at the time the Company is notified that the customer has used the3394inventory. The allowance for doubtful accounts was $13,831 at December 31, 20003395and $13,529 at December 31, 1999.33963397In December 1999, the Securities and Exchange Commission issued Staff Accounting3398Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which3399among other guidance clarifies certain conditions to be met in order to3400recognize revenue. The Company's adoption of SAB 101 in the fourth quarter of34012000 did not have a material impact on the results of operations, financial3402position or cash flows.34033404RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense3405as incurred. Purchased in-process research and development is recognized in3406purchase business combinations for the portion of the purchase price allocated3407to the appraised value of in-process technologies. The portion assigned to3408in-process research and development technologies excludes the value of core and3409developed technologies, which are recognized as intangible assets.34103411STOCK-BASED COMPENSATION: The Company utilizes the intrinsic value method of3412accounting for its employee stock-based compensation. Pro forma information3413related to the fair value method of accounting is provided in Note 5.34143415EARNINGS PER SHARE: Basic earnings per share is computed by dividing net3416earnings by the weighted average number of outstanding common shares, exclusive3417of restricted shares, during the period. Diluted earnings per share is computed3418by dividing net earnings, adjusted for convertible debenture interest, if3419appropriate, by the weighted average number of outstanding common shares and3420common share equivalents, when dilutive.34213422The table below sets forth the computation of basic and diluted net earnings per3423share:34243425<TABLE>3426<CAPTION>34272000 1999 19983428- -----------------------------------------------------------------------------------------------3429<S> <C> <C> <C>3430Numerator:3431Net earnings $ 129,094 $ 24,227 $ 129,0823432Convertible debenture interest, net of taxes 95 -- --3433- -----------------------------------------------------------------------------------------------3434Adjusted net earnings $ 129,189 $ 24,227 $ 129,08234353436Denominator:3437Basic-weighted average shares outstanding 84,253,000 84,274,000 85,714,0003438Effect of dilutive securities:3439Employee stock options 1,448,000 414,000 401,0003440Restricted shares 38,000 47,000 30,0003441Convertible debentures 78,000 -- --3442- -----------------------------------------------------------------------------------------------3443Diluted-weighted average shares outstanding 85,817,000 84,735,000 86,145,0003444===============================================================================================3445Basic net earnings per share $ 1.53 $ 0.29 $ 1.513446===============================================================================================3447Diluted net earnings per share $ 1.51 $ 0.29 $ 1.503448===============================================================================================3449</TABLE>34503451Net earnings and diluted-weighted average shares outstanding for certain periods3452have not been adjusted for the Company's convertible debentures or for certain3453employee stock options and awards where the effect of those securities would3454have been anti-dilutive.34553456FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign3457currencies are translated at average exchange rates in effect throughout the3458year. Assets and liabilities of foreign operations are translated at year-end3459exchange rates. Gains and losses from translation of net assets of foreign3460operations are recorded in other comprehensive income. Foreign currency3461transaction gains and losses are included in other income (expense).346234633464133465<PAGE>346634673468FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management3469periodically utilizes derivative financial instruments to help manage a portion3470of the Company's exposure to foreign currencies and interest rates. Management3471generally utilizes forward exchange or option contracts to manage anticipated3472foreign currency exposures and interest rate swaps to manage interest rate3473exposures. Management does not enter into derivative financial instruments for3474trading purposes. The Company records the fluctuation in the fair value of the3475forward exchange or option contracts in other income (expense) and the3476fluctuation in the fair value of the interest rate swaps in interest expense.34773478NEW ACCOUNTING PRONOUNCEMENT: The Company is required to adopt Statement of3479Financial Accounting Standards No. 133, "Accounting for Derivative Instruments3480and Hedging Activities" (Statement 133), as of January 1, 2001. Statement 1333481requires companies to recognize all derivatives on the balance sheet at fair3482value. Derivatives not qualifying as hedges must be adjusted to fair value3483through earnings. If the derivative qualifies as a hedge, depending on the3484nature of the hedge, changes in the fair value of derivatives will either be3485offset against the change in fair value of the hedged assets, liabilities, or3486firm commitments through earnings, or recognized in other comprehensive income3487until the hedged item is recognized in earnings. The ineffective portion of a3488derivative's change in fair value will be immediately recognized in earnings.3489The impact of adopting Statement 133 on January 1, 2001, was not material to the3490Company's consolidated results of operations, financial position or cash flows.34913492NOTE 2 - ACQUISITIONS34933494VASCULAR SCIENCE, INC. (VSI): On September 27, 1999, the Company purchased the3495outstanding common stock of VSI for $75,071 in cash, net of cash acquired, plus3496additional contingent consideration related to product development milestones3497for regulatory approvals and to future sales. VSI was a development-stage3498company focused on the development of suture-free devices to facilitate coronary3499artery bypass graft anastomoses.35003501An independent appraisal firm performed a valuation of VSI's identifiable3502intangible assets ($580) and in-process research and development ($95,500). The3503value assigned to in-process research and development was determined by the3504income approach, utilizing discount rates ranging from 30% to 35% and3505assumptions on product introductions which began in the year 2000. The total3506consideration paid at close was allocated to the fair value of the net assets3507acquired ($7,618) and in-process research and development ($67,453). During35082000, the Company paid $5,000 of contingent consideration for a milestone that3509was achieved. The remaining balance of the in-process research and development3510valuation ($23,047) will be recorded in the Company's financial statements as3511purchased in-process research and development charges when payment of the3512contingent consideration is assured beyond a reasonable doubt. Contingent3513consideration payments in excess of the $23,047 will be capitalized as goodwill.35143515ANGIO-SEAL(TM): On March 16, 1999, the Company purchased the Angio-Seal(TM)3516business of Tyco International Ltd. for $167,000 in cash. Angio-Seal(TM)3517manufactured and marketed hemostatic puncture closure devices. Total3518consideration for Angio-Seal(TM), including the fair value of the net assets3519acquired and acquisition accounting adjustments, was $177,714, which was3520allocated to in-process research and development ($47,775), various other3521identifiable intangible assets ($90,025), and goodwill ($39,914). Valuation of3522the in-process research and development and other identifiable intangible assets3523was based upon an independent appraisal. The values assigned to in-process3524research and development and other identifiable intangible assets were3525determined primarily by the income approach, utilizing discount rates of 25% for3526in-process research and development and 19.5% to 21.5% for the other intangible3527assets, and assumptions on product introductions which began in late 1999.35283529OTHER: During 2000 and 1999, the Company acquired various businesses used in the3530distribution of the Company's products. Aggregate consideration paid during 20003531and 1999 was $3,264 and $21,056, respectively, in cash and common stock.353235333534143535<PAGE>353635373538The above acquisitions have been recorded using the purchase method of3539accounting. The operating results of each of these acquisitions are included in3540the Company's consolidated statements of earnings from the date of each3541acquisition. The values assigned to in-process research and development were3542expensed at close, except as noted above, because technological feasibility had3543not been established and because there were no alternative future uses for the3544technology. Pro forma results of operations have not been presented for these3545acquisitions since the effects of these business acquisitions were not material3546to the Company either individually or in aggregate.35473548NOTE 3 - LONG-TERM DEBT35493550Long-term debt consisted of the following:355135522000 19993553- --------------------------------------------------------------------------------3554Commercial paper borrowings $ 223,000 $ --35553556Uncommitted credit facility borrowings 71,500 148,50035573558Committed credit facility borrowings -- 299,00035593560Convertible subordinated debentures -- 29,9953561- --------------------------------------------------------------------------------3562Total long-term debt $ 294,500 $ 477,4953563================================================================================35643565COMMITTED CREDIT FACILITIES: The Company has a $350,000 unsecured, revolving3566credit facility that expires in March 2003. The Company also has a $150,0003567committed revolving credit facility that expires in March 2002. The Company's3568credit facilities provide for variable interest tied primarily to the London3569Interbank Offered Rate. The weighted-average interest rate on these borrowings3570was 6.4% at December 31, 1999.35713572UNCOMMITTED CREDIT FACILITIES: The Company borrows from time to time under3573unsecured, due-on-demand credit facilities with various banks. These credit3574facilities provide for variable interest tied to the London Interbank Offered3575Rate. The weighted-average interest rate on these borrowings was 7.1% and 6.9%3576at December 31, 2000 and 1999.35773578COMMERCIAL PAPER BORROWINGS: During 2000, the Company began issuing short-term,3579unsecured commercial paper with maturities up to 270 days. These commercial3580paper borrowings are fully backed by the above committed credit facilities and3581bear interest at varying market rates. The weighted-average interest rate on3582these borrowings was 6.9% at December 31, 2000.35833584CONVERTIBLE SUBORDINATED DEBENTURES: During the first quarter of 2000, the3585Company repurchased $19,320 of its convertible subordinated debentures in open3586market transactions, recognizing an immaterial gain. During the third quarter of35872000, all of the remaining debenture holders converted their debentures, plus3588accrued interest, into 310,535 shares of the Company's common stock.35893590OTHER: The Company's credit facility agreements contain various restrictive3591covenants such as minimum financial ratios, limitations on additional liens or3592indebtedness, and limitations on certain acquisitions and investments, which the3593Company was in compliance with at December 31, 2000.35943595The Company classifies all of its credit facility and commercial paper3596borrowings as long-term on its balance sheet as the Company has the ability to3597repay any short-term maturity with available cash from its existing long-term,3598committed credit facility. Management continually reviews the Company's cash3599flow projections and may from time to time repay a portion of the Company's3600borrowings.36013602NOTE 4 - COMMITMENTS AND CONTINGENCIES36033604LEASES: The Company leases various facilities under noncancelable operating3605lease arrangements. Future minimum lease payments under these leases are as3606follows: $7,802 in 2001; $7,423 in 2002; $6,788 in 2003; $5,455 in 2004; $5,0203607in 2005; $15,590 in years thereafter. Rent expense under all operating leases3608was $7,028, $7,397 and $7,341 in 2000, 1999 and 1998.360936103611153612<PAGE>361336143615IRS MATTERS: During 2000, the Company and the Internal Revenue Service ("IRS")3616settled the IRS Tax Court suit for the tax periods 1990-1991 and subsequent year3617disputes for the tax periods 1992-1997. The issues raised by the IRS related3618primarily to the Company's Puerto Rican operations. The settlement did not have3619a material impact on the Company's consolidated financial statements.36203621SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in3622the Company's mechanical heart valves with a Silzone(R) coating. The Company3623recalled products with a Silzone(R) coating on January 21, 2000, and sent a3624Recall Notice and Advisory concerning the recall to physicians and others. Some3625of these cases are seeking monitoring of patients implanted with3626Silzone(R)-coated valves who allege no injury to date. Some of these cases are3627seeking class action status. The Company intends to vigorously defend these3628cases. See also Note 6 regarding the fiscal year 2000 special charge for the3629Silzone(R) recall.36303631GUIDANT LITIGATION:36323633GUIDANT'S CLAIMS AGAINST SJM On November 26, 1996, Guidant Corporation (a3634competitor of St. Jude Medical) ("Guidant") and related parties filed a lawsuit3635against St. Jude Medical, Inc. ("St. Jude Medical"), Pacesetter, Inc.3636("Pacesetter" -- a wholly owned subsidiary of St. Jude Medical), Ventritex, Inc.3637("Ventritex") and certain members of the Telectronics Group in State Superior3638Court in Marion County, Indiana (the "Telectronics Action"). The lawsuit3639alleges, among other things, that, pursuant to an agreement entered into in36401993, certain Guidant parties granted Ventritex intellectual property licenses3641related to cardiac stimulation devices, and that such licenses would terminate3642upon the consummation of the merger of Ventritex into Pacesetter (the "Merger").3643The lawsuit further alleges that, pursuant to an agreement entered into in 19943644(the "Telectronics Agreement"), certain Guidant parties granted the Telectronics3645Group intellectual property licenses relating to cardiac stimulation devices.3646The lawsuit seeks declaratory and injunctive relief, among other things, to3647prevent and invalidate the transfer of the Teletronics Agreement to Pacesetter3648in connection with Pacesetter's acquisition of Telectronics' assets (the3649"Telectronics Acquisition") and the application of license rights granted under3650the Telectronics Agreement to manufacture and sale by Pacesetter of Ventritex's3651products following the consummation of the Merger. The court overseeing this3652case issued a stay of this matter in July 1998 so that the issues could be3653addressed in an arbitration requested by the Telectronics Group and Pacesetter.36543655Guidant and related parties also filed suit against St. Jude Medical, Pacesetter3656and Ventritex on November 26, 1996, in the United States District Court for the3657Southern District of Indiana. This second lawsuit seeks (i) a declaratory3658judgment that Pacesetter's manufacture, use or sale of cardiac stimulation3659devices of the type or similar to the type which Ventritex manufactured and sold3660at the time the Guidant parties filed their complaint would, upon consummation3661of the Merger, be unlicensed and constitute an infringement of patent rights3662owned by certain Guidant parties, (ii) to enjoin the manufacture, use or sale by3663St. Jude Medical, Pacesetter or Ventritex of cardiac stimulation devices of the3664type which Ventritex manufactured at the time the Guidant parties filed their3665complaint, and (iii) certain damages and costs. This second lawsuit was stayed3666by the court in July 1998 given the order to arbitrate, as discussed below.36673668St. Jude Medical believes that the foregoing state and federal court complaints3669contain a number of significant factual inaccuracies concerning the Telectronics3670Acquisition and the terms and effects of the various intellectual property3671license agreements referred to in such complaints. For these reasons and others,3672St. Jude Medical believes that the allegations set forth in the complaints are3673without merit. St. Jude Medical has vigorously defended its interests in these3674cases and will continue to do so.367536763677163678<PAGE>367936803681ORDER TO ARBITRATE As a result of the state and federal lawsuits brought by3682Guidant and related parties, the Telectronics Group and Pacesetter filed a3683lawsuit in the United States District Court for the District of Minnesota3684seeking (i) a declaratory judgment that the Guidant parties' claims, as3685reflected in the Telectronics Action, are subject to arbitration pursuant to the3686arbitration provisions of the Telectronics Agreement, (ii) an order that the3687defendants arbitrate their claims against the Telectronics Group and Pacesetter3688in accordance with the arbitration provisions of the Telectronics Agreement,3689(iii) to enjoin the defendants preliminarily and permanently from litigating3690their dispute with the Telectronics Group and Pacesetter in any other forum, and3691(iv) certain costs. After the Eighth Circuit Court of Appeals ruled on an appeal3692in favor of the Telectronics Group and Pacesetter in May 1998, the United States3693District Court for the District of Minnesota issued an order on July 8, 19983694directing the arbitration requested by the Telectronics Group and Pacesetter to3695proceed.36963697STATUS OF ARBITRATION The arbitrator selected for the arbitration initially3698ruled that Pacesetter and St. Jude Medical should not participate in the3699arbitration proceeding which would determine whether the Telectronics Agreement3700transferred to Pacesetter. Based on this ruling, the Telectronics Group and the3701Guidant parties participated in the arbitration proceeding. This proceeding3702occurred in late April 2000, and, on July 10, 2000, the arbitrator issued a3703ruling that the attempted assignment and transfer of patent licenses in the3704Telectronics Agreement by the Telectronics Group to Pacesetter was ineffective.3705As a result of this decision, the Guidant parties filed papers with the U.S.3706District Court for the Southern District of Indiana seeking to lift the stay of3707the patent infringement court proceedings in that court which had been entered3708in June 1998. The court granted Guidant's request to lift the stay and the3709matter involving Guidant's patent infringement claims against St. Jude Medical3710is scheduled for trial in June 2001.37113712BACKGROUND CONCERNING PATENTS INVOLVED IN GUIDANT'S CLAIMS In the patent3713infringement case in federal court in Indiana, the Guidant parties initially3714asserted claims against St. Jude Medical and Pacesetter involving four separate3715patents. One of these patents ('678) expired May 3, 1998. The other patents3716involved expire, according to their terms, on March 7, 2001 ('472 patent),3717February 25, 2003 ('191 patent), and December 22, 2003 ('288 patent),3718respectively, although St. Jude Medical has claims in the court action which, if3719upheld, would cause some of the patents to expire earlier, if they apply at all.3720Although Guidant has requested injunctive relief and damages as part of the3721federal court lawsuit in Indiana, the request for an injunction would be barred3722for any expired patent. Guidant is seeking damages for the time period prior to3723expiration of the patents.37243725MARKMAN RULINGS The federal district court in Indiana has issued decisions as3726part of the court's Markman's process which interpret what the claims in the3727patents mean. These decisions are available on the court's website at3728http://www.insd.uscourts.gov.37293730Although Guidant asserted patent infringement claims against St. Jude Medical3731involving four patents when it initiated the litigation in 1996, the number of3732patents involving the claims Guidant is asserting against St. Jude Medical has3733changed over time. First, Guidant elected to withdraw its claims against St.3734Jude Medical involving the '678 patent prior to the court issuing its Markman3735decisions. After the Markman decisions, St. Jude Medical moved for summary3736judgment asking the court to rule that the '191 patent is invalid. However,3737before the court issued a ruling on this summary judgment motion, Guidant and3738St. Jude Medical entered into a stipulation regarding the claims in the '1913739patent. Based on this stipulation, the court entered an order ruling that claims37401-14 in the '191 patent are invalid. In this order, the court also dismissed3741Guidant's claims against St. Jude Medical involving the '191 patent with3742prejudice. The order also provided that Guidant may make an immediate appeal of3743the '191 patent claim construction issues, and on February 8, 2001, Guidant3744filed a notice of appeal concerning the court's rulings on the '191 patent.37453746Thus, at the present time, Guidant's claims against St. Jude Medical involving3747two patents ('288 and '472) remain in the case set for trial. St. Jude Medical3748continues to believe that the patent infringement claims asserted by Guidant in3749this litigation are without merit, and will continue to vigorously defend its3750interest in this litigation.375137523753173754<PAGE>375537563757OTHER LITIGATION MATTERS: The Company is involved in various product liability3758lawsuits, claims and proceedings of a nature considered normal to its business.3759Subject to self-insured retentions, management believes the Company has product3760liability insurance sufficient to cover such claims and suits.37613762NOTE 5 - SHAREHOLDERS' EQUITY37633764CAPITAL STOCK: The Company's authorized capital consists of 25,000,000 shares of3765$1.00 per share par value preferred stock and 250,000,000 shares of $0.10 per3766share par value common stock. There were no shares of preferred stock issued or3767outstanding during 2000, 1999 or 1998.37683769SHARE REPURCHASES: In 1999, the Company's Board of Directors authorized the3770repurchase of up to $250,000 of the Company's outstanding common stock over a3771three-year period. The Company repurchased 977,500 shares of its common stock3772for $29,826 during 1999. No shares were repurchased during 2000. During 1998,3773the Company repurchased 8,000,000 shares of its common stock for $304,789 under3774a modified "Dutch Auction" self-tender offer.37753776EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase3777savings plan allows participating employees to purchase, through payroll3778deductions, shares of the Company's un-issued common stock at 85% of the fair3779market value at specified dates. Employees purchased 114,040, 94,386 and 107,5453780shares in 2000, 1999 and 1998 under this plan. At December 31, 2000, 1,000,0003781shares of additional un-issued common stock were available for purchase under3782the plan.37833784STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the3785issuance of stock-based awards, such as restricted stock or stock options, to3786directors, officers and employees. Stock option awards under these plans3787generally have an eight to ten year life, an exercise price equal to the fair3788market value on the date of grant, and a four-year vesting term. At December 31,37892000, the Company had 3,140,510 shares of common stock available for grant under3790these plans.37913792Stock option transactions under these plans during each of the three years in3793the period ended December 31, 2000, are as follows:37943795WEIGHTED-3796AVERAGE3797OPTIONS EXERCISE3798OUTSTANDING PRICE3799- --------------------------------------------------------------------------------3800Balance at January 1, 1998 9,556,858 $ 32.603801Granted 1,350,300 30.213802Cancelled (979,284) 36.093803Exercised (158,593) 20.363804- --------------------------------------------------------------------------------3805Balance at December 31, 1998 9,769,281 32.123806Granted 3,046,880 28.103807Cancelled (1,146,767) 35.393808Exercised (257,781) 22.883809- --------------------------------------------------------------------------------3810Balance at December 31, 1999 11,411,613 30.933811Granted 3,731,633 50.863812Canceled (739,340) 33.193813Exercised (1,134,086) 30.113814- --------------------------------------------------------------------------------3815Balance at December 31, 2000 13,269,820 $ 36.473816================================================================================38173818Stock options totaling 5,402,529, 4,976,093 and 3,961,943 were exercisable at3819December 31, 2000, 1999 and 1998. The following table summarizes information3820concerning currently outstanding and exercisable stock options at December 31,38212000:38223823OPTIONS OUTSTANDING OPTIONS EXERCISABLE3824- --------------------------------------------------------------------------------3825WEIGHTED-3826AVERAGE WEIGHTED- WEIGHTED-3827RANGES OF NUMBER REMAINING AVERAGE AVERAGE3828EXERCISE OUT- CONTRACTUAL EXERCISE NUMBER EXERCISE3829PRICES STANDING LIFE (YEARS) PRICE EXERCISABLE PRICE3830- --------------------------------------------------------------------------------3831$8.77-17.55 5,063 3.1 $ 17.11 5,063 $ 17.11383217.55-26.32 1,303,683 3.4 22.05 1,143,404 21.70383326.32-35.10 6,256,378 7.2 29.55 2,870,651 30.04383435.10-43.87 2,147,204 6.2 38.86 1,235,794 38.70383543.87-52.64 3,519,625 7.8 52.39 113,750 49.56383652.64-87.74 37,867 2.9 68.20 33,867 68.483837- --------------------------------------------------------------------------------383813,269,820 6.8 $ 36.47 5,402,529 $ 30.893839================================================================================384038413842183843<PAGE>384438453846The Company also granted 43,923 shares of restricted common stock during the3847three years ended December 31, 2000, under the Company's stock compensation3848plans. The value of restricted stock awards as of the date of grant is charged3849to income over the periods during which the restrictions lapse.38503851The Company's net earnings and diluted net earnings per share would have been3852reduced by $18,875, or $0.22 per share, in 2000, $18,614, or $0.22 per share, in38531999, and $11,822, or $0.14 per share, in 1998, had the fair value based method3854of accounting been used for valuing the employee stock based awards.38553856The weighted-average fair value of options granted and the assumptions used in3857the Black-Scholes options pricing model are as follows:385838592000 1999 19983860- --------------------------------------------------------------------------------3861Fair value of options granted $ 21.09 $ 11.12 $ 10.9138623863Assumptions used:3864Expected life (years) 5 5 53865Risk-free rate of return 5.3% 5.8% 4.5%3866Volatility 35.6% 33.2% 33.4%3867Dividend yield 0% 0% 0%3868================================================================================38693870SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that3871entitles shareholders to purchase one-tenth of a share of Series B Junior3872Preferred Stock at a stated price, or to purchase either the Company's shares or3873shares of an acquiring entity at half their market value, upon the occurrence of3874certain events which result in a change in control, as defined by the Plan. The3875rights related to this plan expire in 2007.38763877NOTE 6 - SPECIAL CHARGES387838792000 SPECIAL CHARGE: On January 21, 2000, the Company initiated a worldwide3880voluntary recall of all field inventory of heart valve replacement and repair3881products incorporating a Silzone(R) coating on the sewing cuff fabric. The3882Company concluded that it will no longer utilize a Silzone(R) coating. The3883Company recorded a special charge accrual totaling $26,101 during the first3884quarter of 2000 relating to asset write-downs ($9,465) and other costs3885($16,636), including monitoring expenses, associated with this recall and3886product discontinuance. The Company has utilized $17,634 of this special charge3887accrual through December 31, 2000. There can be no assurance that the final3888costs associated with this recall, including litigation-related costs, will not3889exceed management's estimates.389038911999 SPECIAL CHARGE: The Company recorded a $9,754 special charge accrual in38921999 related to the restructuring of its international operations, of which3893$8,622 has been utilized through December 31, 2000.38943895NOTE 7 - OTHER INCOME (EXPENSE)38963897Other income (expense) consists of the following:389838992000 1999 19983900- --------------------------------------------------------------------------------3901Interest expense $ (28,569) $ (28,104) $ (23,667)3902Interest income 2,640 2,726 4,1253903Net investment gain 4,062 848 15,6243904Foreign currency transaction gain (loss) (2,540) 2,666 (3,304)3905Other (643) (320) (1,000)3906- --------------------------------------------------------------------------------3907Other income (expense) $ (25,050) $ (22,184) $ (8,222)3908================================================================================390939103911NOTE 8 - INCOME TAXES39123913The Company's earnings before income taxes were generated from domestic and3914foreign operations as follows:391539162000 1999 19983917- --------------------------------------------------------------------------------3918Domestic $ 75,538 $ 2,408 $ 132,5743919Foreign 101,771 64,596 53,1563920- --------------------------------------------------------------------------------3921Earnings before income taxes $ 177,309 $ 67,004 $ 185,7303922================================================================================392339243925Income tax expense consists of the following:392639272000 1999 19983928- --------------------------------------------------------------------------------3929Current:3930Federal $ 31,859 $ 28,641 $ 28,4093931State and Puerto Rico Section 936 3,815 2,810 5,7713932Foreign 17,980 10,957 7,0093933- --------------------------------------------------------------------------------3934Total current 53,654 42,408 41,1893935Deferred (5,439) 369 15,4593936- --------------------------------------------------------------------------------3937Income tax expense $ 48,215 $ 42,777 $ 56,6483938================================================================================393939403941193942<PAGE>394339443945The tax effects of the cumulative temporary differences between the tax bases of3946assets and liabilities and their carrying amount for financial statement3947purposes are as follows:394839492000 19993950- --------------------------------------------------------------------------------3951Deferred income tax assets:3952Net operating loss carryforwards $ 42,611 $ 46,3993953Tax credit carryforwards 26,095 16,0703954Inventories 30,212 25,6783955Intangible assets 17,497 14,3653956Accrued liabilities 741 7,9133957- --------------------------------------------------------------------------------3958Deferred income tax assets 117,156 110,4253959- --------------------------------------------------------------------------------3960Deferred income tax liabilities:3961Unrealized gain on marketable securities (4,692) (3,854)3962Property, plant and equipment (19,416) (18,124)3963- --------------------------------------------------------------------------------3964Deferred income tax liabilities (24,108) (21,978)3965- --------------------------------------------------------------------------------3966Net deferred income tax asset $ 93,048 $ 88,4473967================================================================================396839693970A reconciliation of the U.S. federal statutory income tax rate to the Company's3971effective income tax rate is as follows:397239732000 1999 19983974- --------------------------------------------------------------------------------3975Income tax expense at the3976U.S. federal statutory rate $ 62,058 $ 23,451 $ 65,0063977State income taxes,3978net of federal benefit 2,725 1,811 4,0913979Foreign taxes at lower rates (12,451) (1,567) (6,212)3980Tax benefits from foreign3981sales corporation (2,280) (3,309) (5,662)3982Research and development credits (3,758) (3,679) (2,906)3983Non-deductible purchased3984in-process research and3985development charges 2,141 23,608 --3986Other (220) 2,462 2,3313987- --------------------------------------------------------------------------------3988Income tax expense $ 48,215 $ 42,777 $ 56,6483989================================================================================3990Effective income tax rate 27.2% 63.8% 30.5%3991================================================================================399239933994At December 31, 2000, the Company has net operating loss and general business3995and foreign tax credit carryforwards of approximately $121,746 and $21,443, that3996will expire from 2002 through 2020 if not utilized; such amounts are subject to3997annual usage limitations. The Company also has alternative minimum tax credit3998carryforwards of $4,652 that have an unlimited carryforward period.39994000The Company has not recorded deferred income taxes on $123,865 of its foreign4001subsidiaries' undistributed earnings as such amounts are currently intended to4002be reinvested outside the U.S. indefinitely.40034004NOTE 9 - RETIREMENT PLANS40054006DEFINED CONTRIBUTION PLANS: The Company has 401(k) profit sharing plans that4007provide retirement benefits to substantially all full-time U.S. employees.4008Eligible employees may contribute a percentage of their annual compensation,4009subject to IRS limitations, with the Company matching a portion of the4010employees' contributions. The Company also contributes a portion of its profits4011to the plans based upon Company performance. The Company's matching and profit4012sharing contributions are at the discretion of the Company's Board of Directors.4013In addition, the Company has defined contribution programs for employees outside4014the United States. The benefits under the Company's plans are based primarily on4015compensation levels. Company contributions under all defined contribution plans4016totaled $13,170, $11,416 and $9,858 in 2000, 1999 and 1998.40174018DEFINED BENEFIT PLANS: The Company has unfunded defined benefit plans for4019employees in certain countries outside the U.S. The Company has an accrued4020liability totaling approximately $7,500 at December 31, 2000, which approximates4021the actuarially calculated liability. The related pension expense was not4022material.40234024NOTE 10 - MARKET AND CONCENTRATION RISK40254026FOREIGN CURRENCY CONTRACTS: The Company had no forward exchange contracts4027outstanding at December 31, 2000. The Company had forward exchange contracts4028totaling $27,451 at December 31, 1999, related primarily to the exchange of4029Canadian Dollars, British Pounds, Swedish Kroner and the U.S. dollar. These4030instruments typically had a maturity of one year or less.403140324033204034<PAGE>403540364037INTEREST RATE CONTRACT: During the third quarter of 1999, the Company entered4038into an interest rate swap contract to hedge a substantial portion of its4039variable interest rate risk through January 2000 on $138,000 of revolving credit4040facility borrowings. The fair market value of this contract was not material at4041December 31, 1999. The impact of interest rate contracts on the Company's net4042earnings was not material during 1999. The Company did not enter into any other4043interest rate contracts during 2000 or in 1998.40444045CONCENTRATION OF CREDIT RISK: The Company grants credit to customers in the4046normal course of business but generally does not require collateral or any other4047security to support its receivables. Within the European Economic Union and in4048many emerging markets, payments of certain accounts receivable balances are made4049by the individual countries' health care system. Although the Company does not4050anticipate collection problems with these receivables, payment is dependent, to4051a certain extent, upon the economic situation within those countries. The credit4052risk associated with the Company's other trade receivables is mitigated due to4053dispersion of the receivables over a large number of customers in many4054geographic areas.40554056NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION40574058SEGMENT INFORMATION: The Company has two reportable segments: Cardiac Rhythm4059Management (CRM) and Cardiac Surgery (CS - formerly known as Heart Valve Disease4060Management). The CRM segment, which includes the results from the Company's4061Cardiac Rhythm Management Division and Daig Division, develops, manufactures and4062distributes bradycardia pulse generator and tachycardia implantable cardioverter4063defibrillator systems, electrophysiology and interventional cardiology catheters4064and vascular closure devices. The CS segment develops, manufactures and4065distributes mechanical and tissue heart valves and valve repair products, and4066suture-free devices to facilitate coronary artery bypass graft anastomoses.40674068The following table presents certain financial information about the Company's4069reportable segments:40704071<TABLE>4072<CAPTION>4073CRM CS ALL OTHER(1) TOTAL4074- -------------------------------------------------------------------------------------------------4075<S> <C> <C> <C> <C>4076Fiscal Year Ended December 31, 20004077External net sales $ 921,857 $ 256,949 $ -- $1,178,8064078Operating profit (2) 130,916 129,468 (58,025) 202,3594079Depreciation and4080amortization expense 80,388 10,525 1,436 92,3494081Assets (3) 1,176,541 219,651 136,524 1,532,7164082Expenditures for4083long-lived assets (4) 43,339 7,271 2,744 53,3544084- -------------------------------------------------------------------------------------------------40854086Fiscal Year Ended December 31, 19994087External net sales $ 843,117 $ 271,432 $ -- $1,114,5494088Operating profit (2) 96,291 145,675 (152,778) 89,1884089Depreciation and4090amortization expense 74,626 9,581 1,495 85,7024091Assets (3) 1,174,672 211,424 167,942 1,554,0384092Expenditures for4093long-lived assets (4) 71,190 5,717 1,771 78,6784094- -------------------------------------------------------------------------------------------------40954096Fiscal Year Ended December 31, 19984097External net sales $ 735,123 $ 280,871 $ -- $1,015,9944098Operating profit 70,024 147,832 (23,904) 193,9524099Depreciation and4100amortization expense 59,679 7,810 1,364 68,8534101Assets (3) 992,291 222,033 170,288 1,384,6124102Expenditures for4103long-lived assets (4) 58,323 14,546 1,328 74,1974104- -------------------------------------------------------------------------------------------------4105</TABLE>41064107(1)AMOUNTS RELATE PRIMARILY TO CORPORATE ACTIVITIES, SPECIAL CHARGES AND4108PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES.4109(2)ALL OTHER AMOUNT INCLUDES SPECIAL CHARGES TOTALING $26,101 AND $9,754 IN 20004110AND 1999, AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES OF $5,0004111AND $115,228 IN 2000 AND 1999.4112(3)ASSETS ASSOCIATED WITH INCOME PRODUCING SEGMENTS ARE INCLUDED IN THE4113SEGMENT'S ASSETS. CORPORATE ASSETS CONSIST PRINCIPALLY OF CASH, MARKETABLE4114SECURITIES, AND DEFERRED INCOME TAXES.4115(4)INCLUDES THE PURCHASE OF PROPERTY, PLANT AND EQUIPMENT, AND GOODWILL AND4116INTANGIBLE ASSET ADDITIONS, EXCLUSIVE OF THE CRM SEGMENT ACQUISITION OF4117ANGIO-SEAL(TM) AND THE CS SEGMENT ACQUISITION OF VSI IN 1999.411841194120214121<PAGE>412241234124GEOGRAPHIC INFORMATION: The following tables present certain geographical4125financial information:41264127<TABLE>4128<CAPTION>4129NET SALES 2000 1999 19984130- ------------------------------------------------------------------------------------4131<S> <C> <C> <C>4132United States $ 745,793 $ 689,051 $ 604,5244133Western Europe 235,412 259,300 248,0704134Other foreign countries 197,601 166,198 163,4004135- ------------------------------------------------------------------------------------4136$1,178,806 $1,114,549 $1,015,9944137- ------------------------------------------------------------------------------------41384139LONG-LIVED ASSETS* 2000 1999 19984140- ------------------------------------------------------------------------------------4141United States $ 599,480 $ 607,851 $ 538,4034142Western Europe 43,914 57,082 44,8604143Other foreign countries 104,681 130,366 67,4304144- ------------------------------------------------------------------------------------4145$ 748,075 $ 795,299 $ 650,6934146- ------------------------------------------------------------------------------------4147</TABLE>41484149*Long-lived assets exclude deferred income taxes and miscellaneous other assets.41504151NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)41524153Quarterly financial data for 2000 and 1999 is as follows:41544155<TABLE>4156<CAPTION>4157QUARTER4158FIRST SECOND THIRD FOURTH4159- ------------------------------------------------------------------------------------------------------4160<S> <C> <C> <C> <C>4161Fiscal Year Ended December 31, 20004162Net sales $ 295,499 $ 300,939 $ 286,969 $ 295,3994163Gross profit 193,521 202,363 193,961 197,8124164Net earnings 15,828(1) 34,119(2) 37,999(3) 41,1484165Diluted net earnings4166per share $ 0.19 $ 0.40 $ 0.44 $ 0.4741674168Fiscal Year Ended December 31, 19994169Net sales $ 266,734 $ 290,659 $ 275,814 $ 281,3424170Gross profit 173,273 190,910 181,529 187,9354171Net earnings (loss) (12,057)(4) 37,205 (36,994)(5) 36,0734172Diluted net earnings4173(loss) per share $ (0.14) $ 0.44 $ (0.44) $ 0.434174- ------------------------------------------------------------------------------------------------------4175</TABLE>41764177(1)INCLUDES PRE-TAX SPECIAL CHARGE OF $26,101 RELATING TO THE SILZONE(R)RECALL.4178(2)INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF4179$5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION.4180(3)INCLUDES A CASH RECEIPT RELATED TO A NON-PRODUCT ARBITRATION JUDGMENT4181PERTAINING TO BUSINESS MATTERS OCCURRING IN 1997 AND 1998. THIS CASH RECEIPT,4182NET OF OTHER PROVISIONS FOR LEGAL MATTERS AND FEES, WAS $15,158 AND WAS CREDITED4183TO SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ALSO, THE COMPANY RECORDED4184EXPENSES FOR A $3,500 DISCRETIONARY CONTRIBUTION TO ITS CHARITABLE FOUNDATION,4185$6,672 PRIMARILY FOR WRITE-OFFS OF CERTAIN ASSETS AND RELATED COSTS, AND A4186$4,900 INCREASE TO ITS ALLOWANCE FOR DOUBTFUL ACCOUNTS. THESE ADDITIONAL COSTS4187AND EXPENSES WERE ALSO RECORDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.4188(4)INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF4189$47,775 RELATING TO THE ANGIO-SEAL(TM) ACQUISITION.4190(5)INCLUDES PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF4191$67,453 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION, AND SPECIAL CHARGE4192OF $9,754.419341944195224196<PAGE>4197419841994200FIVE-YEAR SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)42014202<TABLE>4203<CAPTION>42042000* 1999** 1998 1997*** 1996****4205- ---------------------------------------------------------------------------------------------------------------------4206<S> <C> <C> <C> <C> <C>4207SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:4208Net sales $1,178,806 $1,114,549 $1,015,994 $ 994,396 $ 876,7474209Gross profit $ 787,657 $ 733,647 $ 643,054 $ 628,679 $ 581,8594210Percent of sales 66.8% 65.8% 63.3% 63.2% 66.4%4211Operating profit $ 202,359 $ 89,188 $ 193,952 $ 86,817 $ 69,4694212Percent of sales 17.2% 8.0% 19.1% 8.7% 7.9%4213Net earnings $ 129,094 $ 24,227 $ 129,082 $ 53,140 $ 60,6374214Percent of sales 11.0% 2.2% 12.7% 5.3% 6.9%4215Diluted earnings per share $ 1.51 $ 0.29 $ 1.50 $ 0.58 $ 0.6642164217FINANCIAL POSITION AT YEAR END:4218Cash and marketable securities $ 107,862 $ 88,893 $ 87,990 $ 184,536 $ 235,3954219Working capital 407,275 407,777 479,067 497,188 429,4514220Total assets 1,532,716 1,554,038 1,384,612 1,453,116 1,469,9944221Long-term debt 294,500 477,495 374,995 220,000 229,5004222Shareholders' equity 940,849 794,021 806,220 987,022 922,06142234224OTHER DATA:4225Diluted weighted average4226shares outstanding 85,817 84,735 86,145 92,052 92,3724227- --------------------------------------------------------------------------------------------------------------------4228</TABLE>42294230Except for 1997, all fiscal years noted above consisted of ?fty-two weeks.4231Fiscal year 1997 consisted of ?fty-three weeks. The Company has not declared or4232paid any dividends during 1996 through 2000.4233* Results for 2000 include a $26,101 special charge and a purchased4234in-process research and development charge of $5,000.4235** Results for 1999 include a $9,754 special charge and purchased4236in-process research and development charges totaling $115,228.4237*** Results for 1997 include $58,669 of special charges.4238****Results for 1996 include a $52,926 special charge and purchased4239in-process research and development charges totaling $40,350.424042414242234243<PAGE>424442454246INVESTOR INFORMATION42474248TRANSFER AGENT42494250Requests concerning the transfer or exchange of shares, lost stock certificates,4251duplicate mailings or change of address should be directed to the Company's4252Transfer Agent at:42534254First Chicago Trust Company of New York4255a division of EquiServe4256P.O. Box 25004257Jersey City, New Jersey 07303-250042581.800.317.44454259www.equiserve.com (Account Access Availability)4260Hearing impaired #TDD: 201.222.495542614262ANNUAL MEETING OF SHAREHOLDERS4263The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May426417, 2001, at the Lutheran Brotherhood Building, 625 Fourth Avenue South,4265Minneapolis, Minnesota.42664267INVESTOR CONTACT4268Laura C. Merriam, Director of Investor Relations42694270To obtain information about the Company, call 1.800.552.7664, visit our Website4271www.sjm.com, or write to:42724273Investor Relations4274St. Jude Medical, Inc.4275One Lillehei Plaza4276St. Paul, Minnesota 55117-998342774278Latest Company news releases, including quarterly results, and other information4279can be received by calling Investor Relations at a toll-free number4280(1.800.552.7664). Company news releases are also available through "Company News4281On-Call" by fax (1.800.758.5804 ext. 816662) or at http://www.prnewswire.com on4282the Internet.42834284For more information on St. Jude Medical, visit our Website at www.sjm.com. The4285Investor Relations section includes all SEC filings, a list of analyst coverage,4286analyst estimates, and a calendar of upcoming earnings announcements and IR4287events. Our NewsRoom features St. Jude Medical's press releases, company4288background information, fact sheets, executive bios, a product photo portfolio,4289and other media resources. Patient profiles can be found on our Website,4290including the patients featured in this year's annual report. The Website also4291has a special section with information for physicians and health care4292professionals.42934294COMPANY STOCK SPLITS42952:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/9042963:2 on 11/16/9542974298STOCK EXCHANGE LISTINGS4299New York Stock Exchange4300Chicago Board Options Exchange (CB)4301Symbol: STJ43024303The range of high and low prices per share for the Company's common stock for4304fiscal 2000 and 1999 is set forth below. As of February 7, 2001, the Company had43053,573 shareholders of record.43064307Fiscal Year Ended December 31 2000 19994308- --------------------------------------------------------------------------------4309Quarter High Low High Low4310- --------------------------------------------------------------------------------4311First $31.25 $23.63 $29.38 $22.944312Second $44.25 $24.19 $38.31 $23.884313Third $51.63 $36.88 $40.75 $29.754314Fourth $62.50 $46.38 $30.69 $25.1343154316TRADEMARKS43174318Aescula(TM), Affnity(R), Alliance(TM), Angio-Seal(TM), Angstrom(R),4319AutoCapture(TM) Pacing System, BiLinx(TM), Contour(R), Duo(TM), Dynamic Atrial4320Overdrive(TM), Entity(TM), Epic(TM), Flex Cuff(TM), Frontier(TM), Genesis(TM),4321Integrity(TM), Isolator(TM), Lineage(TM), Linx(TM), Livewire(TM), Livewire4322TC(TM), Microny(R), Photon(R), Response CV(TM), Silzone(R), SJM(R), SJM4323Biocor(TM), SJM Epic(TM), SJM Quattro(TM), SJM Regent(TM), SJM Tailor(TM),4324Spyglass(TM), St. Jude Medical(R), Supreme(TM), Swartz(TM), Symmetry(TM),4325Trio(TM), Tendril(R), Toronto Duo(TM), Toronto Root(TM), Toronto SPV(R),4326Trilogy(R), TVL(R), Ultimum(TM), UltraFlex(TM), Vectra(R).43274328244329</TEXT>4330</DOCUMENT>4331<DOCUMENT>4332<TYPE>EX-214333<SEQUENCE>64334<FILENAME>stjude010431_ex-21.txt4335<DESCRIPTION>EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT4336<TEXT>43374338EXHIBIT 21433943404341ST. JUDE MEDICAL, INC. AND SUBSIDIARIES43424343SUBSIDIARIES OF THE REGISTRANT43444345St. Jude Medical, Inc. Wholly Owned Subsidiaries:4346- -------------------------------------------------4347* Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven,4348South Carolina (Delaware corporation) (doing business as St. Jude Medical4349Cardiac Rhythm Management Division)4350* St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation)4351- Lifeline Medical Systems, Inc. (Illinois Corporation)4352(wholly-owned subsidiary of St. Jude Medical S.C., Inc.)4353* St. Jude Medical Sales Corporation - St. Paul, Minnesota (Barbados4354corporation)4355* St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation)4356- Brussels, Belgium branch4357* St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe,4358Quebec (Ontario, Canada corporation)4359* 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation)4360* St. Jude Medical (Hong Kong) Limited - Kowloon, Hong Kong (Hong Kong4361corporation)4362- Shanghai and Beijing, China representative offices4363- Korean and Taiwan branch offices4364- Mumbai, New Delhi, Calcutta and Chennai, India branch offices4365* St. Jude Medical, Inc., Cardiac Assist Division - St. Paul, Minnesota4366(Delaware corporation), (Assets of St. Jude Medical, Inc., Cardiac Assist4367Division sold to Bard 1/19/96)4368* St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian4369corporation)4370* St. Jude Medical Brasil, Ltda. - Sao Paulo, Brazil (Brazilian corporation)4371- Telectronics Medica, Ltda. - Sao Paulo and Belo Horizonte Brazil4372(Brazilian corporation)4373* Medical Telectronics, Ltd. - Auckland, New Zealand (New Zealand4374corporation)4375* Daig Corporation - Minnetonka, Minnesota (Minnesota corporation)4376* St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian corporation)4377* St. Jude Medical Cardiovascular Group, Inc. - Maple Grove, Minnesota4378(Minnesota corporation)4379* SJM Europe, Inc. - St. Paul, Minnesota (Delaware corporation)4380- Tokyo, Japan branch43814382<PAGE>438343844385SJM Europe Inc. Wholly Owned Subsidiaries4386- -----------------------------------------4387* St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware4388corporation)4389- St. Jude Medical Puerto Rico Holding, B.V. (Netherlands4390corporation) (wholly-owned subsidiary of St. Jude Medical Puerto4391Rico, Inc.)4392- St. Jude Medical Nederland B.V. (Netherlands corporation)4393(wholly-owned subsidiary of St. Jude Medical Puerto Rico4394Holding, B.V.)4395- Telectronics B.V. (Netherlands corporation)4396(wholly-owed subsidiary of St. Jude Medical B.V.)4397- St. Jude Medical Netherlands Distribution AB (Swedish4398corporation headquartered in the Netherlands) (wholly-owned4399subsidiary of St. Jude Medical Puerto Rico Holding, B.V.)4400- St. Jude Medical Puerto Rico B.V. (Netherlands)4401(wholly-owned subsidiary of St. Jude Medical4402Netherlands Distribution AB)4403- Puerto Rico branch of St. Jude Medical Puerto Rico4404B.V.4405- St. Jude Medical Coordination Center (Belgium branch of4406St. Jude Medical Netherlands Distribution AB)4407* St. Jude Medical AB (Swedish corporation) (formerly known as Pacesetter AB)4408* St. Jude Medical Sweden AB (Veddesta, Sweden) (Swedish corporation)4409* St. Jude Medical Danmark A/S (Danish corporation)4410- Telectronics Scandinavia Aps (Danish corporation) (wholly-owned4411subsidiary of St. Jude Medical Danmark A/S)4412* St. Jude Medical Pacesetter Sales AB (Swedish corporation)4413* St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda.4414(Portuguese corporation)4415* St. Jude Medical Export Ges.m.b.H. (Austrian corporation)4416* St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation)4417* St. Jude Medical Italia S.p.A. (Italian corporation)4418* N.V. St. Jude Medical Belgium, S.A. (Belgian corporation)4419- Portugal branch4420* St. Jude Medical Espana, S.A. (Spanish corporation)4421* St. Jude Medical France S.A. (French corporation)4422* St. Jude Medical Finland O/y (Finnish corporation)4423* St. Jude Medical Sp.zo.o. (Polish corporation)4424* St. Jude Medical GmbH (German corporation)4425* St. Jude Medical UK Limited (United Kingdom corporation)4426* St. Jude Medical AG (Swiss corporation)4427</TEXT>4428</DOCUMENT>4429<DOCUMENT>4430<TYPE>EX-234431<SEQUENCE>74432<FILENAME>stjude010431_ex-23.txt4433<DESCRIPTION>EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS4434<TEXT>44354436EXHIBIT 23443744384439CONSENT OF INDEPENDENT AUDITORS44404441We consent to the incorporation by reference in this Annual Report on Form 10-K4442of St. Jude Medical, Inc. of our report dated February 6, 2001, included in the44432000 Annual Report to Shareholders of St. Jude Medical, Inc.44444445Our audits also included the financial statement schedule of St. Jude Medical,4446Inc. listed in Item 14(a). This schedule is the responsibility of the Company's4447management. Our responsibility is to express an opinion based on our audits. In4448our opinion, the financial statement schedule referred to above, when considered4449in relation to the basic financial statements taken as a whole, presents fairly4450in all material respects the information set forth therein.44514452We also consent to the incorporation by reference in Registration Statement No.445333-9262, Registration Statement No. 33-41459, Registration Statement No.445433-48502, Registration Statement No. 33-54435, Registration Statement No.4455333-42945, Registration Statement No. 333-42658, and Registration Statement No.4456333-42668 on Form S-8 of our report dated February 6, 2001, with respect to the4457consolidated financial statements and schedule of St. Jude Medical, Inc.4458incorporated by reference in the Annual Report on Form 10-K for the fiscal year4459ended December 31, 2000.44604461/s/ ERNST & YOUNG LLP44624463Minneapolis, Minnesota4464March 21, 20014465</TEXT>4466</DOCUMENT>4467</SEC-DOCUMENT>4468-----END PRIVACY-ENHANCED MESSAGE-----446944704471