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-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7U5CtcHRn2+I1NKRIamME7C5LNhl43GusQfyy/Y7HSH73/sZ4miRJ5KK+NwBmZl+Z84RyLCP+iV6iIWC7pI9Lxpw==910<SEC-DOCUMENT>0000897101-03-000221.txt : 2003032411<SEC-HEADER>0000897101-03-000221.hdr.sgml : 2003032412<ACCEPTANCE-DATETIME>2003032415293313ACCESSION NUMBER: 0000897101-03-00022114CONFORMED SUBMISSION TYPE: 10-K15PUBLIC DOCUMENT COUNT: 716CONFORMED PERIOD OF REPORT: 2002123117FILED AS OF DATE: 200303241819FILER:2021COMPANY DATA:22COMPANY CONFORMED NAME: ST JUDE MEDICAL INC23CENTRAL INDEX KEY: 000020307724STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]25IRS NUMBER: 41127689126STATE OF INCORPORATION: MN27FISCAL YEAR END: 12312829FILING VALUES:30FORM TYPE: 10-K31SEC ACT: 1934 Act32SEC FILE NUMBER: 001-1244133FILM NUMBER: 036139153435BUSINESS ADDRESS:36STREET 1: ONE LILLEHEI PLAZA37CITY: ST PAUL38STATE: MN39ZIP: 5511740BUSINESS PHONE: 65148320004142MAIL ADDRESS:43STREET 1: ONE LILLEHEI PLAZA44CITY: ST PAUL45STATE: MN46ZIP: 5511747</SEC-HEADER>48<DOCUMENT>49<TYPE>10-K50<SEQUENCE>151<FILENAME>stjude031298_10k.txt52<DESCRIPTION>ST. JUDE MEDICAL, INC. FORM 10K53<TEXT>54================================================================================5556UNITED STATES SECURITIES AND EXCHANGE COMMISSION57WASHINGTON, D. C. 205495859FORM 10-K6061_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE62ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR6364___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES65EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO __________.6667COMMISSION 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 of (I.R.S. Employer75incorporation 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)8384------------------------------8586SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:8788(Title of class) (Name of exchange on which registered)8990COMMON STOCK ($.10 PAR VALUE) NEW YORK STOCK EXCHANGE91PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE9293SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE9495------------------------------9697Indicate by check mark whether the Registrant: (1) has filed all reports98required to be filed by Section 13 or 15(d) of the Securities Exchange Act of991934 during the preceding 12 months; and (2) has been subject to such filing100requirements for the past 90 days. Yes _X_ No ___101102Indicate by check mark if disclosure of delinquent filers pursuant to Item 405103of Regulation S-K is not contained herein, and will not be contained, to the104best of the Registrant's knowledge, in definitive proxy or information105statements incorporated by reference in Part III of this Form 10-K or any106amendment to this Form 10-K. [ ]107108Indicate by check mark whether the Registrant is an accelerated filer (as109defined in Rule 12b-2 of the Act). Yes _X_ No ___110111The aggregate market value of the voting stock held by non-affiliates of the112Registrant was approximately $6.5 billion at June 28, 2002 (the last trading day113of the Registrant's most recently completed second fiscal quarter), when the114closing sale price of such stock, as reported on the New York Stock Exchange,115was $36.97 per share.116117The Registrant had 179,168,532 shares of its $0.10 par value Common Stock118outstanding as of February 21, 2003.119120DOCUMENTS INCORPORATED BY REFERENCE121Portions of the Company's Annual Report to Shareholders for the fiscal year122ended December 31, 2002, are incorporated by reference into Parts I and II.123Portions of the Company's definitive proxy statement dated March 27, 2003, are124incorporated by reference into Part III.125126================================================================================127<PAGE>128129130TABLE OF CONTENTS131132133ITEM DESCRIPTION PAGE134- ---- ----------- ----135136PART I1371381. Business .......................................................... 11392. Properties ........................................................ 91403. Legal Proceedings ................................................. 101414. Submission of Matters to a Vote of Security Holders ............... 111424A. Executive Officers of the Registrant .............................. 11143144145PART II1461475. Market for Registrant's Common Equity and Related148Shareholder Matters ............................................. 131496. Selected Financial Data ........................................... 141507. Management's Discussion and Analysis of Results of Operations151and Financial Condition ......................................... 141527A. Quantitative and Qualitative Disclosures About Market Risk ........ 141538. Financial Statements and Supplementary Data ....................... 141549. Changes in and Disagreements with Accountants on Accounting155and Financial Disclosure ........................................ 14156157158PART III15916010. Directors and Executive Officers of the Registrant ................ 1416111. Executive Compensation ............................................ 1516212. Security Ownership of Certain Beneficial Owners and Management163and Related Shareholder Matters ................................. 1516413. Certain Relationships and Related Transactions .................... 1516514. Controls and Procedures ........................................... 16166167168PART IV16917015. Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 16171172173174<PAGE>175176177PART I178179180ITEM 1. BUSINESS181182GENERAL183184St. Jude Medical, Inc., together with its subsidiaries (collectively185"St. Jude," "St. Jude Medical" or the "Company") develops, manufactures and186distributes cardiovascular medical devices for the global cardiac rhythm187management (CRM), cardiac surgery (CS) and cardiology and vascular access (C/VA)188markets. The Company's principal products in each of these markets are189bradycardia pacemaker systems, tachycardia implantable cardioverter190defibrillator (ICD) systems and electrophysiology (EP) catheters in CRM;191mechanical and tissue heart valves, valve repair products and suture-free192devices to facilitate coronary artery bypass graft anastomoses in CS; and193vascular closure devices, catheters, guidewires and introducers in C/VA.194195The Company markets and sells its products through both a direct196employee-based sales organization and independent distributors. The principal197markets for the Company's products are the United States, Western Europe and198Japan. St. Jude also sells its products in Eastern Europe, Africa, the Middle199East, Canada, Latin America and the Asia-Pacific region.200201During 2002, 2001 and 2000, the Company acquired various businesses202involved in the distribution of the Company's products.203204In December 2002, the Company acquired the assets of a catheter205business for $5 million in cash.206207On September 17, 2002, the Company signed a stock purchase agreement to208acquire Getz Bros. Co., Ltd. (Getz), a distributor of medical technology209products in Japan and the distributor of the largest volume of the Company's210products in Japan. The Company has agreed to pay 26.9 billion Japanese yen in211cash, or approximately $224,000 using an exchange rate of 120 yen to 1 U.S.212dollar, to acquire 100% of the outstanding common stock of Getz. Net sales of213Getz in 2002 were approximately $170 million. This transaction is expected to214close during the second quarter of 2003.215216The Company manages its business on the basis of one reportable segment217- - the development, manufacture and distribution of cardiovascular medical218devices. Net sales by class of similar products were as follows:219220NET SALES 2002 2001 2000221================================================================================222Cardiac rhythm management $ 1,147,489 $ 965,968 $ 819,117223Cardiac surgery 250,957 248,045 256,949224Cardiology and vascular access 191,483 133,343 102,740225- --------------------------------------------------------------------------------226$ 1,589,929 $ 1,347,356 $ 1,178,806227================================================================================2282292301231<PAGE>232233234The following tables present certain geographical information:235236NET SALES * 2002 2001 2000237================================================================================238United States $ 1,042,766 $ 880,086 $ 745,793239International 547,163 467,270 433,013240- --------------------------------------------------------------------------------241$ 1,589,929 $ 1,347,356 $ 1,178,806242- --------------------------------------------------------------------------------243244245LONG-LIVED ASSETS ** 2002 2001 2000246================================================================================247United States $ 674,119 $ 626,140 $ 640,220248International 150,674 137,803 149,325249- --------------------------------------------------------------------------------250$ 824,793 $ 763,943 $ 789,545251================================================================================252253* NET SALES ARE ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF THE CUSTOMER.254** LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES.255256St. Jude was incorporated in Minnesota in 1976.257258259PRINCIPAL PRODUCTS260261CARDIAC RHYTHM MANAGEMENT: The Company's pacemaker systems treat262patients with hearts that beat too slowly, a condition known as bradycardia.263Typically implanted pectorally, just below the collarbone, pacemakers monitor264the heart's rate and, when necessary, deliver low-level electrical impulses that265stimulate an appropriate heartbeat. The pacemaker is connected to the heart by266one or two leads that carry the electrical impulses to the heart and information267from the heart back to the pacemaker. An external programmer enables the268physician to retrieve diagnostic information from the pacemaker and reprogram269the pacemaker in accordance with the patient's changing needs. Single-chamber270pacemakers stimulate only one chamber of the heart (atrium or ventricle), while271dual-chamber devices can sense and pace in both the upper and lower chambers.272273St. Jude's current pacing products include the advanced featured274Identity(R) family of pacemakers, approved by the U.S. Food and Drug275Administration (FDA) in November 2001. The Identity(R) pacemaker models maintain276all of the therapeutic advancements of previous St. Jude Medical pacemakers,277including the AF Suppression(TM) Algorithm and the BEAT-BY-BEAT(TM)278AutoCapture(TM) Pacing System. The Identity(R) models have arrhythmia279diagnostics, including dual-channel stored electrograms. These features are280designed to help physicians better manage pacemaker patients suffering from281atrial fibrillation (AF) - the world's most common cardiac arrhythmia.282283St. Jude Medical also offers the Integrity(R) and Integrity(R)284u (Micro) pacemaker models, which build on the Affinity(R) platform with its285BEAT-BY-BEAT(TM) AutoCapture(TM) Pacing System. Other pacing products include286the Affinity(R) pacemakers; the Entity(R) family of pacemakers, containing the287Omnisense(R) activity-based sensor; and the Tempo(R) pacemaker family, which288uses fifth-generation Minute Ventilation sensor technology. These pacemaker289families contain many advanced features and diagnostic capabilities to optimize290cardiac therapy. All are small and physiologic in shape to enhance patient291comfort. The Microny(R) II SR+ and Microny(R) K are single-chamber pacemakers292available in the United States. Other single-chamber pacemakers, the Microny(R)293SR+ and the Regency(R) pacemaker families, are also available outside the United294States.2952962972298<PAGE>299300301The Identity(R), Integrity(R), Affinity(R), Entity(R) and Regency(R)302families of pacemakers, as well as the Microny(R) SR+ pacemaker, all offer the303unique BEAT-BY-BEAT(TM) AutoCapture(TM) Pacing System. The AutoCapture(TM)304Pacing System enables the pacemaker to monitor every paced beat to verify that305the heart has been stimulated (known as "capture"), deliver a back-up pulse in306the event of noncapture, continuously measure threshold, and make adjustments in307energy output to match changing patient needs. In addition, the Identity(R) and308Integrity(R) pacemakers include St. Jude Medical's AF Suppression(TM) Algorithm,309a therapy designed to suppress atrial fibrillation.310311Outside the United States, St. Jude also markets the Genesis(TM)312System, a device-based ventricular resynchronization system designed for the313treatment of HF and suppression of atrial fibrillation. The Genesis(TM) System314includes three components: the Frontier(TM) 3x2 stimulation device, designed to315enhance cardiac function by resynchronizing the contractions of the heart's two316ventricles, the Aescula(TM) LV lead, and the Alliance(TM) or Seal-Away(TM)317Catheter Delivery System.318319St. Jude's current pacing leads include the active-fixation Tendril(R)320DX and Tendril(R) SDX lead families and the passive-fixation Passive Plus(R) DX321family, all available worldwide. All three lead families feature steroid322elution, which helps suppress the body's inflammatory response to a foreign323object. The passive-fixation IsoFlex(TM) and Membrane(R) EX families of leads324are also currently available outside the United States.325326ICD systems treat patients with hearts that beat inappropriately fast,327a condition known as tachycardia. ICDs monitor the heartbeat and deliver higher328energy electrical impulses, or "shocks," to terminate ventricular tachycardia329(VT) and ventricular fibrillation (VF). In VT, the lower chambers of the heart330contract at an abnormally rapid rate and typically deliver less blood to the331body's tissues and organs. VT can progress to VF, in which the heart beats so332rapidly and erratically that it can no longer pump blood. Like pacemakers, ICDs333are typically implanted pectorally, connected to the heart by leads, and334programmed non-invasively.335336The Company's full ICD product offering includes the Epic(TM) DR/VR337ICD, Atlas(R) DR/VR ICD, Photon(R) u (Micro) DR/VR ICD, Photon(R) DR ICD and338Contour(R) MD ICD. St. Jude received FDA approval of its Epic(TM) DR/VR ICDs in339August 2002 and European CE Marking in October 2002. The Epic(TM) ICDs are very340small devices that deliver 30 Joules of energy. The Company's Atlas(R) ICDs341offer high energy and small size without compromising charge times, longevity,342or feature set flexibility. St. Jude's Photon(R) u (Micro) DR/VR ICD family343represents the second generation in a series of downsized dual- and344single-chamber St. Jude ICDs with advanced technology. Like the Photon(R) DR345ICD, the Photon(R) u DR/VR ICD family has advanced features including precise346SVT discrimination and AV Rate Branch designed to enhance the precision of347ventricular-based arrhythmia detection. An additional ICD product, the348Profile(TM) MD ICD, is available outside the United States.349350The Company's ICDs are used with the dual-electrode Riata(R)351defibrillation leads, dual-electrode SPL(R) leads and single electrode TVL(R)352and TVL(R)-ADX (active-fix) transvenous leads. The Riata(R) family of353defibrillation leads received FDA approval in April 2002 and European CE Marking354in May 2002. The Riata(R) leads are an advanced family of small-diameter,355steroid-eluting, active or passive fixation, dual-electrode defibrillation356leads.357358In June 2002, St. Jude received European CE Marking for its Epic(TM) HF359ICD. This device is designed to treat patients suffering from heart failure (HF)360who are also at risk of dangerously fast heart rhythms. HF impairs the heart's361ability to pump blood efficiently, causing shortness of breath, fatigue,362swelling and other debilitating symptoms. One of the Company's Epic(TM) HF ICD363products, the Epic(TM) HF Model V-338 ICD, is currently in a U.S. clinical364study.3653663673368<PAGE>369370371The Model 3510 universal pacemaker and ICD programmer is an easy-to-use372programmer that supports the Company's pacemakers and ICDs, including products373for emerging indications. The Model 3510 universal programmer allows the374physician to utilize the diagnostic and therapeutic capabilities of the375Company's pacemakers and ICDs.376377Electrophysiology is the study of the electrical activity of the heart,378which controls the heart rhythm. EP catheters are placed into the human body379percutaneously (through the skin) to aid in the diagnosis and treatment of380cardiac arrhythmias (abnormal heart rhythms). Between two and five EP catheters381are generally used in each electrophysiology procedure. St. Jude's EP catheters382are available in multiple configurations.383384St. Jude's Supreme(TM) catheter product line consists of mapping385catheters for the diagnosis of various cardiac arrhythmias, including the 4386French Supreme(TM) diagnostic catheter for standard mapping applications, and387the Supreme Spiral SC(TM) catheter to assist clinicians in the diagnosis of388paroxysmal atrial fibrillation. St. Jude also offers the Livewire TC Compass(TM)389ablation catheter, which aids in clinical management of focal arrhythmias, and390the Livewire TC(TM) Bi-Directional ablation catheter, launched in January 2002391following FDA and European regulatory approval.392393CARDIAC SURGERY: Heart valve replacement or repair may be necessary394because the natural heart valve has deteriorated due to congenital defects or395disease. Heart valves facilitate the one-way flow of blood in the heart and396prevent significant backflow of blood into the heart and between the heart's397chambers. St. Jude offers both mechanical and tissue replacement heart valves398and valve repair products. The St. Jude Medical(R) mechanical heart valve has399been implanted in over 1.3 million patients worldwide. The SJM Regent(TM)400mechanical heart valve was approved for sale in Europe in December 1999 and401received FDA approval for U.S. market release in March 2002. In the United402States, the Company markets the Toronto SPV(R) stentless tissue valve, which403received FDA approval in 1997. Outside the United States, the Company markets404the SJM Epic(TM) stented tissue heart valve, the SJM Biocor(TM) stented tissue405valve, the Toronto SPV(R) stentless tissue valve and the Toronto Root(TM) tissue406valve. The Toronto Root(TM) tissue valve is a stentless aortic root407bioprosthesis used when aortic root disease accompanies valve disease. This408valve is currently in U.S. and Canadian clinical studies. The SJM Epic(TM)409stented tissue heart valve is also currently in a U.S. clinical study.410411The Company also offers a line of heart valve repair products including412the semi-rigid SJM(R) Seguin annuloplasty ring and the fully flexible SJM413Tailor(TM) annuloplasty ring. Annuloplasty rings are prosthetic devices used to414repair diseased or damaged mitral heart valves.415416In addition to prosthetic heart valves, St. Jude markets the417Symmetry(TM) Bypass System Aortic Connector (the "Aortic Connector"), a418suture-free device to facilitate coronary artery bypass graft aortic419anastomoses. St. Jude began marketing this product in Western Europe in 2000 and420in the U.S. during May 2001.421422CARDIOLOGY AND VASCULAR ACCESS: The Company produces specialized423disposable cardiovascular devices, including vascular closure devices,424angiography catheters, bipolar temporary pacing catheters, percutaneous catheter425introducers and diagnostic guidewires.426427The Company's vascular closure devices are used to close femoral artery428puncture wounds following angioplasty, stenting and diagnostic procedures. Its429newest vascular closure product, the Angio-Seal(TM) STS Platform, received430European CE Marking in July 2001 and FDA approval in August 2001. The STS431Platform incorporates a self-tightening suture, which eliminates the need for a432post-placement spring, allowing for completion of the entire procedure in the433catheterization lab. It also4344354364437<PAGE>438439440integrates a Secure-Cap(TM), which facilitates proper deployment through441audible, tactile and visual confirmations during the closure process.442443Angiography catheters, such as St. Jude's Spyglass(TM) angiography444catheters, are used in coronary angiography procedures to obtain images of445coronary arteries to identify structural cardiac diseases. St. Jude's bipolar446temporary pacing catheters are inserted percutaneously for temporary use447(ranging from less than one hour to a maximum of one week) with external448pacemakers to provide patient stabilization prior to implantation of a permanent449pacemaker, following a heart attack, or during surgical procedures. The Company450produces and markets several designs of bipolar temporary pacing catheters,451including its Pacel(TM) biopolar pacing catheters, which are available in both452torque control and flow-directed models with a broad range of curve choices and453electrode spacing options.454455Percutaneous catheter introducers are used to create passageways for456cardiovascular catheters from outside the human body through the skin into a457vein, artery or other location inside the body. St. Jude's percutaneous catheter458introducer products consist primarily of peel-away and non peel-away sheaths,459sheaths with and without hemostasis valves, dilators, guidewires, repositioning460sleeves and needles. These products are offered in a variety of sizes and461packaging configurations, including St. Jude's newest introducer platform, the462Ultimum(TM) hemostasis introducer. Diagnostic guidewires, such as St. Jude's463GuideRight(TM) and HydroSteer(TM) guidewires, are used in conjunction with464percutaneous catheter introducers to aid in the introduction of intravascular465catheters. St. Jude's diagnostic guidewires are available in multiple lengths466and incorporate a surface finish for lasting lubricity.467468SUPPLIERS469470St. Jude purchases raw materials and other products from numerous471suppliers. The Company maintains sizable inventories (in some cases, up to three472years of its projected requirements) for certain materials that it believes are473critical and may be difficult to obtain from an alternative supplier. St. Jude474has been advised periodically by some suppliers that they may terminate sales of475products to customers that manufacture implantable medical devices in an effort476to reduce their potential product liability exposure. Some of these suppliers477have modified their positions and have indicated a willingness to temporarily478continue to provide product until an alternative vendor or product can be479qualified, or to reconsider the supply relationship. While the Company believes480that alternative sources of raw materials are available and that there is481sufficient lead time in which to qualify other sources, any supply interruption482could have a material adverse effect on the Company's ability to manufacture its483products.484485COMPETITION486487The medical technology industry is highly competitive and is488characterized by rapid product development and technological change. Within the489medical technology industry, competitors range from small start-up companies to490companies with significant resources. The Company's customers consider many491factors when choosing supplier partners, including product reliability, clinical492outcomes, product availability, inventory consignment, price and product493services provided by the manufacturer. St. Jude believes that it competes on the494basis of all these factors. Market share can shift as a result of technological495innovation, product recalls and product safety alerts and other business496factors. As a result, the Company has a need to provide the highest quality497products and services. St. Jude expects the competition to continue to increase498with the use of tactics such as consigned inventory, bundled product sales and499reduced pricing.500501St. Jude is a technological leader in the global bradycardia pacemaker502market, with strong bradycardia market share in all major developed geographies.503The Company's primary competitors in this market are Medtronic, Inc. and Guidant504Corporation. St. Jude is one of three principal manufacturers and suppliers in505the highly competitive global ICD market. The Company's other two competitors,506Medtronic, Inc. and Guidant Corporation, account for more than 80% of the507worldwide ICD sales. These5085095105511<PAGE>512513514two competitors are larger than St. Jude and have invested substantial amounts515in ICD research and development.516517St. Jude is the world's leading manufacturer and supplier in the518mechanical heart valve market, which includes two other principal and several519smaller mechanical heart valve manufacturers. The Company also competes against520two principal and many other smaller tissue heart valve manufacturers.521522St. Jude is the technological leader in mechanical anastomotic523connector devices. The Company is aware of several other companies who are524investing significant dollars into developing these technologies.525526The global cardiology and vascular access market is a growing market527with numerous competitors. Approximately 80% of the Company's sales in this528market are from vascular closure devices. St. Jude currently holds the number529one position in the highly competitive vascular closure device segment of the530C/VA market. Other competitors in C/VA include Abbott Laboratories, Datascope531Corp. and Vascular Solutions, Inc.532533MARKETING534535The Company's products are sold in more than 100 countries throughout536the world. No distributor organization or single customer accounted for more537than 10% of 2002, 2001 or 2000 consolidated net sales.538539In the United States, St. Jude sells directly to hospitals through a540combination of independent distributors and an employee-based sales541organization. In Western Europe, the Company has employee- based sales542organizations selling in 14 countries. In Japan, the Company has historically543utilized independent distributors. However, when the Getz acquisition is544completed in 2003, the Company will have a direct sales organization in Japan to545sell certain products, while also continuing the use of other longstanding546independent distributor relationships. Throughout the rest of the world the547Company uses a combination of independent distributor and direct sales548organizations.549550Group purchasing organizations (GPOs) and independent delivery networks551(IDNs) in the United States continue to consolidate purchasing decisions for552some of the Company's hospital customers. The Company has contracts in place553with many of these organizations. One large GPO has executed contracts with the554Company's CRM market competitors that exclude the Company. The enforcement of555these contracts may adversely affect the Company's sales of CRM products to556members of this GPO.557558Payment terms worldwide are consistent with local country practices. In559some developed markets and in many emerging markets, payment terms are typically560longer than those in the United States. Orders are shipped as they are received561and, therefore, no material backlog exists.562563SEASONALITY564565Typically, the Company's net sales are somewhat higher in the first and566second quarters and lower in the third and fourth quarters. Lower net sales in567the third quarter result from patient tendencies to defer, if possible, cardiac568procedures during the summer months and from the seasonality of the U.S. and569European markets, where summer vacation schedules normally result in fewer570surgical procedures. Lower net sales in the fourth quarter result from fewer571selling days in the quarter because of holidays in the United States and other572markets, and patient tendencies to defer, if possible, cardiac procedures during573these holiday seasons. Independent distributors may randomly place large orders574that can distort the net sales pattern just described. In addition, new product575introductions, acquisitions and regulatory approvals can impact the typical net576sales patterns.5775785796580<PAGE>581582583RESEARCH AND DEVELOPMENT584585The Company is focused on the development of new products and on586improvements to existing products. Research and development expense reflects the587cost of these activities, as well as the costs to obtain regulatory approvals of588certain new products and processes, and to maintain the highest quality589standards with respect to existing products. The Company's research and590development expenses, exclusive of purchased in-process research and development591charges, were $200.3 million (12.6% of net sales), $164.1 million (12.2% of net592sales) and $137.8 million (11.7% of net sales) in 2002, 2001 and 2000,593respectively.594595GOVERNMENT REGULATION596597The medical devices manufactured and marketed by the Company are598subject to regulation by the FDA and foreign governmental authorities or their599designated representatives. Under the U.S. Federal Food, Drug and Cosmetic Act600(FFDCA) and associated regulations, manufacturers of medical devices must comply601with certain policies and procedures that regulate the composition, labeling,602testing, manufacturing, packaging and distribution of medical devices. Medical603devices are subject to different levels of government approval requirements. The604most comprehensive level requires the completion of an FDA-approved clinical605evaluation program and submission and approval of a pre-market approval (PMA)606application before a device may be commercially marketed. The Company's607mechanical and tissue heart valves, ICDs, certain pacemakers and leads and608certain electrophysiology catheter applications are subject to this level of609approval or as a supplement to a PMA approval. Other pacemakers and leads,610annuloplasty ring products and other electrophysiology and cardiology products611are currently marketed under the less rigorous 510(k) pre-market notification612procedure of the FFDCA.613614In addition, the FDA may require testing and surveillance programs to615monitor the effects of approved products that have been commercialized, and it616has the power to prevent or limit further marketing of a product based on the617results of these post-marketing programs. The FDA also conducts inspections618prior to approval of a PMA to determine compliance with the quality system619regulations that cover manufacturing and design. At any time after approval of a620PMA or granting of a 510(k), the FDA may conduct periodic inspections to621determine compliance with both quality system regulations and/or current medical622device reporting regulations. If the FDA were to conclude that St. Jude is not623in compliance with applicable laws or regulations, it could institute624proceedings to detain or seize products, issue a recall, impose operating625restrictions, assess civil penalties and recommend criminal prosecution to the626U.S. Department of Justice. Furthermore, the FDA could proceed to ban, or627request recall, repair, replacement or refund of the cost of any device628previously manufactured or distributed.629630The FDA also regulates recordkeeping for medical devices and reviews631hospital and manufacturers' required reports of adverse experiences to identify632potential problems with FDA- authorized devices. Regulatory actions may be taken633by the FDA due to adverse experience reports.634635Diagnostic-related groups (DRG) reimbursement schedules regulate the amount the636U.S. government, through the Centers for Medicare and Medicaid Services, will637reimburse hospitals and doctors for the inpatient care of persons covered by638Medicare. In response to rising Medicare and Medicaid costs, several legislative639proposals are under consideration that would restrict future funding increases640for these programs. Changes in current DRG reimbursement levels could have an641adverse effect on the Company's domestic pricing flexibility.642643St. Jude's international business is subject to medical device laws in644individual countries outside the United States. These laws range from extensive645device approval requirements in some countries for all or some of the Company's646products, to requests for data or certifications in other countries. Generally,647international regulatory requirements are increasing. In the European Union, the648regulatory systems have been consolidated, and approval to market in all649European Union countries (represented by the CE Mark) can be obtained through650one agency. In addition, government funding of medical procedures is limited and651in certain instances is being reduced.6526536547655<PAGE>656657658Some medical device regulatory agencies have begun considering whether659to continue to permit the sale of medical devices that incorporate any bovine660material because of concerns about Bovine Spongiform Encephalopathy (BSE),661sometimes referred to as "mad cow disease." It is believed that in some662instances this disease has been transmitted to humans through the consumption of663beef. There have been no reported cases of transmission of BSE through medical664products and no reported cases of BSE in the United States. Some of the665Company's products use bovine collagen (Angio-Seal(TM) and vascular grafts),666which is derived from the bovine component scientifically rated as least likely667to transmit the disease. Some of the Company's tissue heart valves incorporate668bovine pericardial material. The Company is cooperating with the regulatory669agencies considering these issues.670671PATENTS AND LICENSES672673The Company's policy is to protect its intellectual property rights674related to its medical devices. Where appropriate, St. Jude applies for U.S. and675foreign patents. In those instances where the Company has acquired technology676from third parties, it has sought to obtain rights of ownership to the677technology through the acquisition of underlying patents or licenses.678679While the Company believes design, development, regulatory and680marketing aspects of the medical device business represent the principal681barriers to entry, it also recognizes that the Company's patents and license682rights may make it more difficult for competitors to market products similar to683those produced by the Company. St. Jude can give no assurance that any of its684patent rights, whether issued, subject to license, or in process, will not be685circumvented or invalidated. Furthermore, there are numerous existing and686pending patents on medical products and biomaterials. There can be no assurance687that the Company's existing or planned products do not or will not infringe such688rights or that others will not claim such infringement. No assurance can be689given that the Company will be able to prevent competitors from challenging the690Company's patents or entering markets currently served by the Company.691692INSURANCE693694The Company operates in an industry that is susceptible to significant695product liability claims. These claims may be brought by individuals seeking696relief for themselves or, increasingly, by groups seeking to represent a class.697In addition, product liability claims may be asserted against the Company in the698future, relative to events that are not known to management at the present time.699While it is not possible to predict the outcome of every claim, the Company700believes that it has adequate product liability insurance to cover the costs701associated with them. The product liability insurance market has changed702dramatically since September 2001. The Company's self-insured retentions and703insurance premiums have increased and are expected to increase further in the704future. The Company's insurance program, as a result, is designed to prevent a705catastrophic loss. The Company further believes that any costs not covered by706product liability insurance, including the Company's self-insured deductible,707will not have a material adverse impact on the Company's consolidated financial708position or liquidity, but may be material to the consolidated results of709operations of a future period.710711California earthquake insurance is currently difficult to procure,712extremely costly, and restrictive in terms of coverage. The Company's earthquake713and related business interruption insurance for its CRM operations located in714Sylmar and Sunnyvale, California provides for limited coverage above a715significant self-insured retention. Several factors preclude the Company from716determining the effect an earthquake may have on its business. These factors717include, but are not limited to, the severity and location of the earthquake,718the extent of any damage to the Company's manufacturing facilities, the impact719of an earthquake on the Company's California workforce and the infrastructure of720the surrounding communities and the extent, if any, of damage to the Company's721inventory and work in process. While the Company's exposure to significant722losses from a California earthquake would be partially mitigated by its ability723to manufacture some of its CRM products at its Swedish manufacturing facility,724the losses could have a7257267278728<PAGE>729730731material adverse effect on the Company for a period of time that cannot be732predicted. The Company has expanded the manufacturing capabilities at its733Swedish facility and has constructed a pacemaker component manufacturing734facility in Arizona. In addition, the Company has moved significant finished735goods inventory to locations outside California. These facilities and inventory736transfers would further mitigate the adverse impact of a California earthquake.737738EMPLOYEES739As of December 31, 2002, the Company had 6,042 full-time employees. St.740Jude has never experienced a work stoppage as a result of labor disputes, and741none of its employees are represented by a labor organization, with the742exception of the Company's employees in Sweden and certain employees in France.743The Company believes that its relationship with its employees is generally good.744745INTERNATIONAL OPERATIONS746747The Company's international business is subject to such special risks748as currency exchange controls and fluctuations, the imposition or increase of749import or export duties and surtaxes, and international credit, financial or750political problems. Currency exchange rate fluctuations relative to the U.S.751dollar can affect reported consolidated revenues and net earnings. The Company752may hedge a portion of this exposure from time to time to reduce the effect of753foreign currency rate fluctuations on net earnings. See the "Market Risk"754section on page 7 of "Management's Discussion and Analysis of Results of755Operations and Financial Condition", incorporated herein by reference from the756Financial Report included in the Company's 2002 Annual Report to Shareholders.757Operations outside the United States also present complex tax and cash758management issues that necessitate sophisticated analysis and diligent759monitoring to meet the Company's financial objectives.760761AVAILABILITY OF SEC REPORTS762763The Company makes available free of charge its annual reports on Form76410-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any765amendments filed or furnished pursuant to Section 13(a) or 15(d) of the766Securities Exchange Act of 1934 as soon as reasonably practical after they are767filed or furnished to the Securities and Exchange Commission. Such reports are768available on the Company's website (http://www.sjm.com) under the Investor769Relations section or can be obtained by contacting the Company's Investor770Relations group at 1.800.552.7664 or at St. Jude Medical, Inc., One Lillehei771Plaza, St. Paul, Minnesota 55117. Information included on the Company's website772is not deemed to be incorporated into this Annual Report on Form 10-K.773774775ITEM 2. PROPERTIES776777St. Jude's principal executive offices are owned and are located in St.778Paul, Minnesota. Manufacturing facilities are located in California, Minnesota,779Arizona, South Carolina, Canada, Brazil, Puerto Rico and Sweden. The Company780owns approximately 56%, or 338,000 square feet, of its total manufacturing781space, and the balance is leased.782783The Company also maintains sales and administrative offices in the784United States at 16 locations in six states and outside the United States at 41785locations in 25 countries. With the exception of one location, all of these786locations are leased.787788In management's opinion, all buildings, machinery and equipment are in789good condition, suitable for their purposes and are maintained on a basis790consistent with sound operations. The Company believes that it has sufficient791space for its current operations and for foreseeable expansion in the next few792years.7937947959796<PAGE>797798799ITEM 3. LEGAL PROCEEDINGS800801SILZONE(R) LITIGATION: The Company has been sued by patients alleging802defects in the Company's mechanical heart valves and valve repair products with803Silzone(R) coating. Some of these cases, both in the United States and Canada,804are seeking monitoring of patients implanted with Silzone(R)-coated valves and805repair products who allege no injury to date. Some of these cases are seeking806class action status. The Company voluntarily recalled products with Silzone(R)807coating on January 21, 2000, and sent a Recall Notice and Advisory concerning808the recall to physicians and others.809810In 2001, the U.S. Judicial Panel on Multi-District Litigation ruled811that certain lawsuits filed in U.S. federal district court involving products812with Silzone(R) coating should be part of Multi-District Litigation proceedings813under the supervision of U.S. District Court Judge John Tunheim in Minnesota. As814a result, actions in federal court involving products with Silzone(R) coating815have been and will likely continue to be transferred to Judge Tunheim for816coordinated or consolidated pretrial proceedings. The hearing concerning817requests by certain plaintiffs to have matters proceed as class actions occurred818on October 2, 2002. Judge Tunheim is presently considering plaintiffs' motions819for class certification, and a decision by Judge Tunheim in this regard is820expected in early 2003.821822There are other actions involving products with Silzone(R) coating in823various state courts that may or may not be coordinated with the matters824presently before Judge Tunheim. The lawsuits in Canada are proceeding in825accordance with separate schedules issued by the applicable provincial courts. A826hearing concerning the certification of a class action in Ontario, Canada, is827currently scheduled for June 2003.828829While it is not possible to predict the outcome of the various cases830involving Silzone(R) products, the Company believes that it has adequate product831liability insurance to cover the costs associated with them. The Company further832believes that any costs not covered by product liability insurance will not have833a material adverse impact on the Company's financial position or liquidity, but834may be material to the consolidated results of operations of a future period.835836GUIDANT LITIGATION: In November 1996, Guidant Corporation ("Guidant")837sued St. Jude Medical alleging that the Company did not have a license to838certain patents controlled by Guidant covering ICD products and alleging that839the Company was infringing those patents. St. Jude Medical's contention was that840it had obtained a license from Guidant to the patents in issue when it acquired841certain assets of Telectronics in November 1996. In July 2000, an arbitrator842rejected St. Jude Medical's position, and in May 2001, a federal district court843judge also ruled that the Guidant patent license with Telectronics had not844transferred to St. Jude Medical.845846Guidant's suit originally alleged infringement of four patents by St.847Jude Medical. Guidant later dismissed its claim on one patent and a court ruled848that a second patent was invalid. This determination of invalidity was appealed849by Guidant and the Court of Appeals upheld the lower court's invalidity850determination. In a jury trial involving the two remaining patents (the `288 and851`472 patents), the jury found that these patents were valid and that St. Jude852Medical did not infringe the `288 patent. The jury found that the Company did853infringe the `472 patent, though such infringement was not willful. The jury854awarded damages of $140 million to Guidant. In post-trial rulings, however, the855judge overseeing the jury trial ruled that the `472 patent was invalid and also856was not infringed by St. Jude Medical, thereby eliminating the $140 million857verdict against the Company. The trial court also made other rulings as part of858the post-trial order, including a ruling that the `288 patent was invalid on859several grounds.860861In August 2002, Guidant commenced an appeal of certain of the trial862judge's post-trial decisions pertaining to the `288 patent. Guidant did not863appeal the trial court's finding of invalidity and non-infringement of the `472864patent. The parties are currently in the briefing phase of this appeal. While it865is86686786810869<PAGE>870871872not possible to predict the outcome of the appeal process, the Company believes873that it has meritorious defenses against the claims asserted by Guidant and874Guidant's continued pursuit of this case.875876OTHER LITIGATION MATTERS: The Company is involved in various product877liability lawsuits, claims and proceedings of a nature considered normal to its878business. Subject to self-insured retentions, the Company believes it has879product liability insurance sufficient to cover such claims and suits.880881882ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS883884There were no matters submitted to a vote of security holders during885the fourth quarter of 2002.886887888ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT889890Name Age Position*891- --------------------------------------------------------------------------------892893Terry L. Shepherd 50 Chairman (2002) and Chief Executive Officer894(1999)895896Daniel J. Starks 48 President and Chief Operating Officer (2001)897898David W. Adinolfi 47 President, Daig (2001)899900Michael J. Coyle 40 President, Cardiac Rhythm Management (2001)901902Peter L. Gove 55 Vice President, Corporate Relations (1994)903904John C. Heinmiller 48 Vice President, Finance, Chief Financial905Officer and Treasurer (1998)906907Jeri L. Lose 45 Vice President, Information Technology and908Chief Information Officer (2000)909910Joseph H. McCullough 53 President, International (2001)911912Thomas R. Northenscold 45 Vice President, Administration (2003)**913914Kevin T. O'Malley 51 Vice President, General Counsel and Secretary915(1994)916917Michael T. Rousseau 47 President, U.S. Sales (2001)918919Jane J. Song 40 President, Cardiac Surgery (2002)920921Frieda J. Valk 49 Vice President, Administration (1999)**922923- -----------------------------924925*Dates in brackets indicate year during which each named executive officer926began serving in such capacity.927**Mr. Northenscold was appointed March 3, 2003, and Ms. Valk will no longer be928an executive officer effective March 31, 2003.92993093111932<PAGE>933934935Executive officers serve at the pleasure of the Board of Directors.936937Mr. Shepherd joined the Company in 1994 as President of Cardiac938Surgery. In May 1999, he was appointed President and Chief Executive Officer of939St. Jude, and since February 2001 he has been the Company's Chief Executive940Officer. Mr. Shepherd has also served on St. Jude's Board of Directors since May9411999, and in May 2002 was elected Chairman of the Board of Directors.942943Mr. Starks joined St. Jude in 1996 as a result of the Company's944acquisition of Daig Corporation, where he continued as Chief Executive Officer.945In 1997, he was also appointed Chief Executive Officer of Cardiac Rhythm946Management, and in April 1998 also became President of Cardiac Rhythm947Management. He was appointed President and Chief Operating Officer of St. Jude948in February 2001. Mr. Starks has also served on the Company's Board of Directors949since 1996. Mr. Starks serves on the Board of Directors of Urologix Inc.950951Mr. Adinolfi joined St. Jude in 1994 as a result of the Company's952acquisition of Pacesetter, Inc. He served as Vice President, CRM Global Product953Planning and Identification from June 1996 to March 1998. In April 1998, he954became Senior Vice President, CRM Global Marketing, and in March 1999 became955Senior Vice President of CRM Product Portfolio Management. In February 2001, Mr.956Adinolfi was appointed President of Daig. Prior to joining Pacesetter in 1989 as957Director of Marketing, Mr. Adinolfi worked for Cordis Corporation and958Telectronics, Inc., both medical technology companies, in a variety of959marketing, sales and management positions.960961Mr. Coyle joined St. Jude in 1994 as Director, Business Development. He962served as President and Chief Operating Officer of Daig from 1997 to 2001 and963was appointed President, Cardiac Rhythm Management in February 2001. Prior to964joining St. Jude, he spent nine years with Eli Lilly & Company, a pharmaceutical965products company, in a variety of technical and business management roles in966both its Pharmaceutical and Medical Device Divisions.967968Mr. Gove joined the Company in 1994 as Vice President, Corporate969Relations. Prior to joining the Company, Mr. Gove was Vice President, Marketing970and Communications of Control Data Systems, Inc., a computer services company,971from 1991 to 1994. From 1981 to 1990, Mr. Gove held various executive positions972with Control Data Corporation. From 1970 to 1981, Mr. Gove held various973management positions with the State of Minnesota and the U.S. Government. Mr.974Gove serves on the Board of Directors of QRS Diagnostic, LLC and Information for975Public Affairs, Inc.976977Mr. Heinmiller joined the Company in May 1998 as Vice President of978Corporate Business Development. In September 1998 he was appointed Vice979President, Finance and Chief Financial Officer. Prior to joining the Company,980Mr. Heinmiller was president of F3 Corporation, a privately held asset981management company, from 1997 to 1998, and was Vice President of Finance and982Administration for Daig Corporation from 1995 to 1997. Mr. Heinmiller is also a983former audit partner in the Minneapolis office of Grant Thornton LLP, a national984public accounting firm. Mr. Heinmiller is on the Board of Directors of Lifecore985Biomedical, Inc. and Arctic Cat, Inc.986987Ms. Lose joined St. Jude in 1999 as Vice President, Information988Technology, and was also appointed Chief Information Officer in 2000. Prior to989joining the Company, Ms. Lose was Vice President of Systems Development at U.S.990Bancorp, a multi-state financial services holding company, from 1993 to 1999.991From 1990 to 1993, Ms. Lose was a Senior Manager in Information Technology992Consulting with Ernst & Young LLP, an international public accounting firm. From9931979 to 1990, she held several positions in Accounting and then Information994Technology with General Mills, Inc, a consumer food products company. Ms. Lose995serves on the Board of Directors of Apria Healthcare, Inc.99699799812999<PAGE>100010011002Mr. McCullough joined St. Jude in 1994 as a CRM Regional Sales1003Director. He became Director of CRM Marketing in 1996 and was named Vice1004President of CRM Marketing in January 1997. In December 1997, Mr. McCullough was1005appointed CRM Business Unit Director. He became Vice President, CRM Europe and1006Managing Director of the Company's manufacturing operations in Veddesta, Sweden1007in January 1999, and Senior Vice President, CRM Europe in August 1999. He was1008named President, International in July 2001. Prior to joining the Company, Mr.1009McCullough worked for several medical technology companies for more than 201010years.10111012Mr. Northenscold joined St. Jude in 2001 as Vice President, Finance and1013Administration of Daig. On March 3, 2003 he was appointed Vice President,1014Administration. Prior to joining the Company, Mr. Northenscold worked at PPT1015Vision, Inc., an industrial technology and automation company, where he served1016as Chief Financial Officer from February 1995 to January 1999, and Division1017General Manager from January 1999 to September 2001. Prior to 1995, Mr.1018Northenscold worked for Cardiac Pacemakers, Inc., a medical technology company1019that is now part of Guidant Corporation, in various finance and operations1020positions.10211022Mr. O'Malley joined the Company in 1994 as Vice President and General1023Counsel. Since December 1996, he has also served as the Company's Corporate1024Secretary. Prior to joining St. Jude, Mr. O'Malley was employed by Eli Lilly &1025Company, a pharmaceutical products company, for 15 years in various positions,1026including General Counsel of the Medical Device and Diagnostics Division.10271028Mr. Rousseau joined the Company in 1999 as Senior Vice President, CRM1029Global Marketing. In August 1999, CRM Marketing and Sales were combined under1030his leadership. In January 2001, he was named President, U.S. CRM Sales, and in1031July 2001 he was named President, U.S. Sales. Prior to joining St. Jude, Mr.1032Rousseau worked for Sulzer Intermedics, Inc., a medical device company, for 111033years. At Sulzer, he served as Vice President, Tachycardia, in 1997 and was1034appointed Vice President, U.S. Sales and Marketing in 1998.10351036Ms. Song joined St. Jude in 1998 as Senior Vice President, CRM1037Operations. In May 2002 she was appointed President, Cardiac Surgery. Prior to1038joining the Company, Ms. Song was employed by Perkin Elmer (formerly EG&G,1039Inc.), a global technology company, from 1992 to 1998 where she held executive1040positions in global operations and business development. Prior to her tenure at1041Perkin Elmer, she was employed by Coopers & Lybrand LLP, an international public1042accounting firm, and Texas Instruments Inc, a global semiconductor company.10431044Ms. Valk joined the Company in 1996 as Human Resources Director of St.1045Jude Medical Europe. She served as Vice President, Administration from 19991046through March 2003. Prior to joining the Company, Ms. Valk was employed by Eli1047Lilly & Company, a pharmaceutical products company, for 16 years in various1048positions, including pharmaceutical sales, sales management, sales training and1049human resources.105010511052PART II105310541055ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS10561057The information set forth under the captions "Dividends" and "Stock1058Exchange Listings" on pages 8 and 24 of the Financial Report included in the1059Company's 2002 Annual Report to Shareholders is incorporated herein by1060reference.106110621063131064<PAGE>106510661067ITEM 6. SELECTED FINANCIAL DATA10681069The information set forth under the caption "Five-Year Summary1070Financial Data" on page 23 of the Financial Report included in the Company's10712002 Annual Report to Shareholders is incorporated herein by reference.107210731074ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND1075FINANCIAL CONDITION10761077The information set forth under the caption "Management's Discussion1078and Analysis of Results of Operations and Financial Condition" on pages 11079through 8 of the Financial Report included in the Company's 2002 Annual Report1080to Shareholders is incorporated herein by reference.108110821083ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK10841085The information appearing under the caption "Market Risk" on page 7 of1086the Financial Report included in the Company's 2002 Annual Report to1087Shareholders is incorporated herein by reference.108810891090ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA10911092The following Consolidated Financial Statements of the Company and1093Report of Independent Auditors set forth on pages 9 through 22 of the Financial1094Report included in the Company's 2002 Annual Report to Shareholders are1095incorporated herein by reference:10961097Consolidated Statements of Earnings - Fiscal Years ended December 31,10982002, 2001 and 200010991100Consolidated Balance Sheets - December 31, 2002 and 200111011102Consolidated Statements of Shareholders' Equity - Fiscal Years ended1103December 31, 2002, 2001 and 200011041105Consolidated Statements of Cash Flows - Fiscal Years ended December 31,11062002, 2001 and 200011071108Notes to Consolidated Financial Statements110911101111ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND1112FINANCIAL DISCLOSURE11131114None.111511161117PART III11181119ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT11201121The information set forth under the caption "Board of Directors" in the1122Company's definitive proxy statement dated March 27, 2003, is incorporated1123herein by reference. Information on executive officers under Item 4A of this1124Form 10-K is incorporated herein by reference.112511261127141128<PAGE>112911301131ITEM 11. EXECUTIVE COMPENSATION11321133The information set forth under the caption "Executive Compensation" in1134the Company's definitive proxy statement dated March 27, 2003, is incorporated1135herein by reference.113611371138ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND1139RELATED SHAREHOLDER MATTERS11401141The information set forth under the caption "Share Ownership of1142Management and Directors and Certain Beneficial Owners" in the Company's1143definitive proxy statement dated March 27, 2003, is incorporated herein by1144reference.11451146EQUITY COMPENSATION PLAN INFORMATION11471148The following table provides information as of December 31, 2002 about1149the Company's common stock that may be issued under all of its existing equity1150compensation plans, including the St. Jude Medical, Inc. 1991 Stock Plan, the1151St. Jude Medical, Inc. 1994 Stock Option Plan, the St. Jude Medical, Inc. 19971152Stock Option Plan, the St. Jude Medical, Inc. 2000 Stock Plan, the St. Jude1153Medical, Inc. 2000 Employee Stock Purchase Savings Plan, and the St. Jude1154Medical, Inc. 2002 Stock Plan, As Amended. All of these plans have been approved1155by the Company's shareholders.11561157<TABLE>1158<CAPTION>1159Number of securities1160remaining available for1161future issuance under1162Number of securities to be Weighted average equity compensation plans1163issued upon exercise of exercise price of (excluding securities1164outstanding options, outstanding options, reflected in column(a))1165warrants and rights warrants and rights (c)1166Plan category (a) (b)1167============================= ============================= ======================== =========================1168<S> <C> <C> <C>1169Equity compensation plans1170approved by shareholders 29,694,922 $25.22 9,829,949(1)11711172Equity compensation plans1173not approved by shareholders - - -11741175- ----------------------------- ----------------------------- ------------------------ ---------------------------11761177Total 29,694,922 $25.22 9,829,9491178- ----------------------------- ----------------------------- ------------------------ ---------------------------1179</TABLE>11801181(1) Includes 76,256 shares available for future issuance under the St. Jude1182Medical, Inc. 2000 Stock Plan for restricted stock grants.118311841185ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS11861187The information set forth under the captions "Governance of the1188Company" and "Executive Compensation" in the Company's definitive Proxy1189Statement dated March 27, 2003, is incorporated herein by reference.119011911192151193<PAGE>119411951196ITEM 14. CONTROLS AND PROCEDURES11971198(a) Evaluation of Disclosure Controls and Procedures11991200Disclosure controls and procedures (as defined in Rules120113a-14(c) and 15d-14(c) of the Securities Exchange Act of12021934) refer to the controls and other procedures of a company1203that are designed to ensure that information required to be1204disclosed by a company in the reports that it files under the1205Exchange Act is recorded, processed, summarized and reported1206within required time periods. The Company's Chief Executive1207Officer and Chief Financial Officer have evaluated the1208effectiveness of the design and operation of the Company's1209disclosure controls and procedures within 90 days prior to the1210filing of this annual report, and they have concluded that1211such controls and procedures are effective at ensuring that1212required information will be disclosed on a timely basis in1213the Company's reports filed under the Exchange Act.12141215(b) Changes in Internal Controls12161217There have been no significant changes to the Company's1218internal controls or in other factors that could significantly1219affect these controls subsequent to the date of the most1220recent evaluation.122112221223PART IV12241225ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K12261227(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT12281229(1) FINANCIAL STATEMENTS12301231The following Consolidated Financial Statements of the Company1232and Report of Independent Auditors as set forth on pages 91233through 22 of the Financial Report included in the Company's12342002 Annual Report to Shareholders are incorporated herein by1235reference from Exhibit 13 attached hereto:12361237Consolidated Statements of Earnings - Fiscal Years ended1238December 31, 2002, 2001 and 200012391240Consolidated Balance Sheets - December 31, 2002 and 200112411242Consolidated Statements of Shareholders' Equity - Fiscal Years1243ended December 31, 2002, 2001 and 200012441245Consolidated Statements of Cash Flows - Fiscal Years ended1246December 31, 2002, 2001 and 200012471248Notes to Consolidated Financial Statements124912501251161252<PAGE>125312541255(2) FINANCIAL STATEMENT SCHEDULE12561257Schedule II, Valuation and Qualifying Accounts, is filed as1258part of this Annual Report on Form 10-K (see Item 15(d)).12591260The Report of Independent Auditors with respect to this1261financial statement schedule is incorporated herein by1262reference from Exhibit 23 attached hereto.12631264All other financial statements and schedules not listed above have been1265omitted because the required information is included in the consolidated1266financial statements or the notes thereto, or is not applicable.12671268(3) EXHIBITS12691270Pursuant to Item 601(b)(4)(iiii) of Regulation S-K, copies of1271certain instruments defining the rights of holders of certain1272long-term debt of the Company are not filed, and in lieu1273thereof, the Company agrees to furnish copies thereof to the1274Securities and Exchange Commission upon request.127512761277EXHIBIT EXHIBIT INDEX1278- ------- -----------------------------------------------------------------------127912803.1 Articles of Incorporation are incorporated by reference from Exhibit12813(a) of the Company's Form 8 filed on August 20, 1987, amending the1282Company's Quarterly Report on Form 10-Q for the quarter ended June 30,12831987.128412853.2 Articles of Amendment dated September 5, 1996, to Articles of1286Incorporation are incorporated by reference from Exhibit 3.2 of the1287Company's Annual Report on Form 10-K for the year ended December 31,12881996.128912903.3 Bylaws are incorporated by reference from Exhibit 3(ii) of the1291Company's Quarterly Report on Form 10-Q for the quarter ended September129230, 1997.129312944.1 Rights Agreement dated as of June 16, 1997, between the Company and1295American Stock Transfer and Trust Company, as Rights Agent, including1296the Certificate of Designation, Preferences and Rights of Series B1297Junior Preferred Stock is incorporated by reference from Exhibit 4 of1298the Company's Quarterly Report on Form 10-Q for the quarter ended June129930, 1997.130013014.2 Amendment, dated as of December 20, 2002, to Rights Agreement, dated as1302of June 16, 1997, is incorporated by reference from Exhibit 1 of the1303Company's Current Report on Form 8-K filed on March 21, 2003.130413051306171307<PAGE>130813091310EXHIBIT EXHIBIT INDEX1311- ------- -----------------------------------------------------------------------1312131310.1 Form of Indemnification Agreement that the Company has entered into1314with officers and directors is incorporated by reference from Exhibit131510(d) of the Company's Annual Report on Form 10-K for the year ended1316December 31, 1986. *1317131810.2 St. Jude Medical, Inc. Management Incentive Compensation Plan is1319incorporated by reference from Exhibit 10.2 of the Company's Annual1320Report on Form 10-K for the year ended December 31, 2001. *1321132210.3 Management Savings Plan dated February 1, 1995, is incorporated by1323reference from Exhibit 10.7 of the Company's Annual Report on Form 10-K1324for the year ended December 31, 1994. *1325132610.4 Retirement Plan for members of the Board of Directors, as amended on1327March 15, 1995, is incorporated by reference from Exhibit 10.6 of the1328Company's Annual Report on Form 10-K for the year ended December 31,13291994. *1330133110.5 St. Jude Medical, Inc. 1991 Stock Plan is incorporated by reference1332from the Company's Registration Statement on Form S-8 filed June 28,13331991 (Commission File No. 33-41459). *1334133510.6 St. Jude Medical, Inc. 1994 Stock Option Plan is incorporated by1336reference from Exhibit 4(a) of the Company's Registration Statement on1337Form S-8 filed July 1, 1994 (Commission File No. 33-54435). *1338133910.7 St. Jude Medical, Inc. 1997 Stock Option Plan is incorporated by1340reference from Exhibit 4.1 of the Company's Registration Statement on1341Form S-8 filed December 22, 1997 (Commission File No. 333-42945). *1342134310.8 Split Dollar Insurance Agreement as amended April 29, 1999 between St.1344Jude Medical, Inc. and Ronald A. and Lucille E. Matricaria is1345incorporated by reference from Exhibit 10.14 of the Company's Annual1346Report on Form 10-K for the year ended December 31, 1999. *1347134810.9 St. Jude Medical, Inc. 2000 Stock Plan is incorporated by reference1349from Exhibit 10.9 of the Company's Annual Report on Form 10-K for the1350year ended December 31, 2001. *135113521353181354<PAGE>135513561357EXHIBIT EXHIBIT INDEX1358- ------- -----------------------------------------------------------------------1359136010.10 St. Jude Medical, Inc. 2000 Employee Stock Purchase Savings Plan is1361incorporated by reference from Exhibit 10.10 of the Company's Annual1362Report on Form 10-K for the year ended December 31, 2001. *1363136410.11 Amended and Restated Employment Agreement dated as of March 25, 2001,1365between the Company and Daniel J. Starks is incorporated by reference1366from Exhibit 10.17 of the Company's Annual Report on Form 10-K for the1367year ended December 31, 2000. *1368136910.12 Form of Severance Agreement that the Company has entered into with1370officers relating to severance matters in connection with a change in1371control is incorporated by reference from Exhibit 10.18 of the1372Company's Annual Report on Form 10-K for the year ended December 31,13732000. *1374137510.13 Amended and Restated Employment Agreement dated as of March 25, 2001,1376between the Company and Terry L. Shepherd is incorporated by reference1377from Exhibit 10.19 of the Company's Annual Report on Form 10-K for the1378year ended December 31, 2000. *1379138010.14 St. Jude Medical, Inc. 2002 Stock Plan, As Amended, is incorporated by1381reference from Exhibit 10.14 of the Company's Quarterly Report on Form138210-Q for the quarter ended June 30, 2002. *1383138413 Portions of the Company's 2002 Annual Report to Shareholders. #1385138621 Subsidiaries of the Registrant. #1387138823 Consent of Independent Auditors. #1389139024 Power of Attorney. #1391139299.1 Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section13931350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of13942002. #1395139699.2 Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section13971350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of13982002. #13991400- ----------------------------1401* Management contract or compensatory plan or arrangement.1402# Filed as an exhibit to this Annual Report on Form 10-K.140314041405191406<PAGE>140714081409(a) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2002:14101411The Company filed a Form 8-K on November 8, 2002, to report that it had1412recently issued an alert regarding its Telectronics Meta model 1256D pacemakers,1413which had experienced premature battery depletion in 1% of the devices, and that1414it had also recently issued an Advisory Update that extends a previous advisory1415notification sent to physicians regarding certain Tempo and Meta 1256D1416pacemakers.14171418(b) EXHIBITS: Reference is made to Item 15(a)(3).14191420(c) SCHEDULES:142114221423SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS1424(DOLLARS IN THOUSANDS)14251426<TABLE>1427<CAPTION>1428COL. A COL. B COL. C COL. D COL. E1429- ------------------------- ----------------- -------------------------------- -------------------------------- ---------------1430ADDITIONS DEDUCTIONS1431BALANCE -------------------------------- --------------------------------1432AT BEGINNING CHARGED TO BALANCE AT1433DESCRIPTION OF YEAR EXPENSE OTHER(1) WRITE-OFFS(2) OTHER(1) END OF YEAR1434- ------------------------- ----------------- ---------------- -------------- ---------------- -------------- ---------------1435Allowance for doubtful accounts1436Fiscal Year Ended:1437<S> <C> <C> <C> <C> <C> <C>1438December 31, 2002 $ 17,210 $ 9,188 $ 1,752 $ (4,072) $ - $ 24,0781439December 31, 2001 13,831 6,468 - (2,738) (351) 17,2101440December 31, 2000 13,529 6,913 - (6,244) (367) 13,8311441</TABLE>14421443(1) Effects of changes in foreign currency translation.1444(2) Uncollectible accounts written off, net of recoveries.1445144614471448144914501451201452<PAGE>145314541455SIGNATURES14561457Pursuant to the requirements of Sections 13 or 15(d) of the Securities1458Exchange Act of 1934, the Registrant has duly caused this report to be signed on1459its behalf by the undersigned, thereunto duly authorized.14601461ST. JUDE MEDICAL, INC.14621463Date: March 19, 2003 By /s/ TERRY L. SHEPHERD1464---------------------1465Terry L. Shepherd1466CHAIRMAN AND CHIEF EXECUTIVE OFFICER1467(PRINCIPAL EXECUTIVE OFFICER)146814691470By /s/ JOHN C. HEINMILLER1471----------------------1472John C. Heinmiller1473VICE PRESIDENT, FINANCE AND1474CHIEF FINANCIAL OFFICER1475(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)14761477Pursuant to the requirements of the Securities Exchange Act of 1934,1478this report has been signed below by the following persons on behalf of the1479Registrant and in the capacities and on the date indicated.14801481<TABLE>1482<CAPTION>1483<S> <C>1484/s/ TERRY L. SHEPHERD Director March 19, 2003 /s/ DANIEL J. STARKS Director March 19, 20031485- --------------------- --------------------1486Terry L. Shepherd Daniel J. Starks14871488Director March 19, 2003 /s/ DAVID A. THOMPSON Director March 19, 20031489- ----------------------- ---------------------1490Richard R. Devenuti David A. Thompson14911492/s/ STUART M. ESSIG Director March 19, 2003 /s/ STEFAN K. WIDENSOHLER Director March 19, 20031493- ------------------- --------------------------1494Stuart M. Essig Stefan K. Widensohler149514961497/s/ THOMAS H. GARRETT III Director March 19, 2003 /s/ WENDY L. YARNO Director March 19, 20031498- ------------------------- ------------------1499Thomas H. Garrett III Wendy L. Yarno15001501/s/ WALTER L. SEMBROWICH Director March 19, 2003 /s/ FRANK C-P YIN Director March 19, 20031502- ------------------------ -----------------1503Walter L. Sembrowich Frank C-P Yin1504</TABLE>150515061507211508<PAGE>150915101511CERTIFICATION15121513I, Terry L. Shepherd, certify that:151415151. I have reviewed this annual report on Form 10-K of St. Jude Medical,1516Inc.;151715182. Based on my knowledge, this annual report does not contain any untrue1519statement of a material fact or omit to state a material fact1520necessary to make the statements made, in light of the circumstances1521under which such statements were made, not misleading with respect to1522the period covered by this annual report;152315243. Based on my knowledge, the financial statements, and other financial1525information included in this annual report, fairly present in all1526material respects the financial condition, results of operations and1527cash flows of the registrant as of, and for, the periods presented in1528this annual report;152915304. The registrant's other certifying officers and I are responsible for1531establishing and maintaining disclosure controls and procedures (as1532defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant1533and have:15341535a) designed such disclosure controls and procedures to ensure that1536material information relating to the registrant, including its1537consolidated subsidiaries, is made known to us by others within1538those entities, particularly during the period in which this1539annual report is being prepared;15401541b) evaluated the effectiveness of the registrant's disclosure1542controls and procedures as of a date within 90 days prior to the1543filing date of this annual report (the "Evaluation Date"); and15441545c) presented in this annual report our conclusions about the1546effectiveness of the disclosure controls and procedures based on1547our evaluation as of the Evaluation Date;154815495. The registrant's other certifying officers and I have disclosed, based1550on our most recent evaluation, to the registrant's auditors and the1551audit committee of registrant's board of directors (or persons1552performing the equivalent functions):15531554a) all significant deficiencies in the design or operation of1555internal controls which could adversely affect the registrant's1556ability to record, process, summarize and report financial data1557and have identified for the registrant's auditors any material1558weaknesses in internal controls; and15591560b) any fraud, whether or not material, that involves management or1561other employees who have a significant role in the registrant's1562internal controls; and156315646. The registrant's other certifying officers and I have indicated in1565this annual report whether there were significant changes in internal1566controls or in other factors that could significantly affect internal1567controls subsequent to the date of our most recent evaluation,1568including any corrective actions with regard to significant1569deficiencies and material weaknesses.15701571Date: March 19, 20031572--------------15731574/s/ TERRY L. SHEPHERD1575- ---------------------1576Terry L. Shepherd1577Chairman and Chief Executive Officer157815791580221581<PAGE>158215831584CERTIFICATION15851586I, John C. Heinmiller, certify that:158715881. I have reviewed this annual report on Form 10-K of St. Jude Medical,1589Inc.;159015912. Based on my knowledge, this annual report does not contain any untrue1592statement of a material fact or omit to state a material fact1593necessary to make the statements made, in light of the circumstances1594under which such statements were made, not misleading with respect to1595the period covered by this annual report;159615973. Based on my knowledge, the financial statements, and other financial1598information included in this annual report, fairly present in all1599material respects the financial condition, results of operations and1600cash flows of the registrant as of, and for, the periods presented in1601this annual report;160216034. The registrant's other certifying officers and I are responsible for1604establishing and maintaining disclosure controls and procedures (as1605defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant1606and have:16071608a) designed such disclosure controls and procedures to ensure that1609material information relating to the registrant, including its1610consolidated subsidiaries, is made known to us by others within1611those entities, particularly during the period in which this1612annual report is being prepared;16131614b) evaluated the effectiveness of the registrant's disclosure1615controls and procedures as of a date within 90 days prior to the1616filing date of this annual report (the "Evaluation Date"); and16171618c) presented in this annual report our conclusions about the1619effectiveness of the disclosure controls and procedures based on1620our evaluation as of the Evaluation Date;162116225. The registrant's other certifying officers and I have disclosed, based1623on our most recent evaluation, to the registrant's auditors and the1624audit committee of registrant's board of directors (or persons1625performing the equivalent functions):16261627a) all significant deficiencies in the design or operation of1628internal controls which could adversely affect the registrant's1629ability to record, process, summarize and report financial data1630and have identified for the registrant's auditors any material1631weaknesses in internal controls; and16321633b) any fraud, whether or not material, that involves management or1634other employees who have a significant role in the registrant's1635internal controls; and163616376. The registrant's other certifying officers and I have indicated in1638this annual report whether there were significant changes in internal1639controls or in other factors that could significantly affect internal1640controls subsequent to the date of our most recent evaluation,1641including any corrective actions with regard to significant1642deficiencies and material weaknesses.16431644Date: March 19, 20031645--------------16461647/s/ JOHN C. HEINMILLER1648- ----------------------1649John C. Heinmiller1650Chief Financial Officer1651165216532316541655</TEXT>1656</DOCUMENT>1657<DOCUMENT>1658<TYPE>EX-131659<SEQUENCE>31660<FILENAME>stjude031298_ex13.txt1661<DESCRIPTION>ANNUAL REPORT1662<TEXT>1663EXHIBIT 1316641665MANAGEMENT'S DISCUSSION AND ANALYSIS OF1666RESULTS OF OPERATIONS AND FINANCIAL CONDITION1667(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)16681669RESULTS OF OPERATIONS16701671INTRODUCTION1672St. Jude Medical, Inc. ("St. Jude Medical" or the "Company") develops,1673manufactures and distributes cardiovascular medical devices for the global1674cardiac rhythm management (CRM), cardiac surgery (CS) and cardiology and1675vascular access (C/VA) markets. The Company's principal products in each of1676these markets are bradycardia pacemaker systems, tachycardia implantable1677cardioverter defibrillator (ICD) systems and electrophysiology (EP) catheters in1678CRM; mechanical and tissue heart valves, valve repair products and suture-free1679devices to facilitate coronary artery bypass graft anastomoses in CS; and1680vascular closure devices, catheters, guidewires and introducers in C/VA.16811682The Company utilizes a fifty-two, fifty-three week fiscal year ending on the1683Saturday nearest December 31, but for simplicity of presentation, describes all1684periods as if the year end is December 31. Fiscal years 2002, 2001 and 2000 each1685consisted of fifty-two weeks.16861687The following discussion and analysis is intended to provide a summary of1688significant factors relevant to the Company's financial performance and1689condition. This discussion should be read in conjunction with the Company's1690consolidated financial statements and related notes beginning on page 10.16911692CRITICAL ACCOUNTING POLICIES AND ESTIMATES1693The Company has adopted various accounting policies to prepare the consolidated1694financial statements in accordance with accounting principles generally accepted1695in the United States. The Company's significant accounting policies are1696disclosed in Note 1 to the consolidated financial statements.16971698Preparation of the Company's consolidated financial statements in conformity1699with accounting principles generally accepted in the United States requires1700management to make estimates and assumptions that affect the reported amounts in1701the financial statements and accompanying notes. On an ongoing basis, management1702evaluates its estimates and assumptions, including those related to accounts1703receivable allowance for doubtful accounts, estimated useful lives of property,1704plant and equipment, income taxes, Silzone(R) special charges and legal1705proceedings. Management bases its estimates on historical experience and various1706other assumptions that are believed to be reasonable under the circumstances,1707and the results form the basis for making judgments about the reported values of1708assets, liabilities, revenues and expenses. Actual results may differ from these1709estimates.17101711Management believes that the following represent the Company's most critical1712accounting estimates:17131714ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company grants credit1715to customers in the normal course of business, but generally does not require1716collateral or any other security to support its receivables. The Company1717maintains an allowance for doubtful accounts for potential credit losses. The1718Company determines the adequacy of this allowance by regularly reviewing the1719accounts receivable agings, customer financial conditions and credit histories1720and current economic conditions. In some developed markets and in many emerging1721markets, payments of certain accounts receivable balances are made by the1722individual countries' healthcare systems for which payment is dependent, to some1723extent, upon the political and economic environment within those countries.1724Typically, these payment terms are longer than those in the United States.1725Though the Company considers its allowance for doubtful accounts to be adequate,1726if the financial condition of its customers or the individual countries'1727healthcare systems were to deteriorate and impair their ability to make payments1728to the Company, additional allowances may be required in future periods. The1729allowance for doubtful accounts was $24,078 at December 31, 2002 and $17,210 at1730December 31, 2001.17311732ESTIMATED USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT: Diagnostic equipment is1733recorded at cost and is depreciated using the straight-line method over its1734estimated useful life of five to eight years. Diagnostic equipment primarily1735consists of programmers that are used by physicians and healthcare professionals1736to program and analyze data from the Company's bradycardia and tachycardia1737devices. The estimated useful lives of this equipment are based on management's1738estimates of its usage by the physicians and healthcare professionals, factoring1739in new technology platforms and rollouts by the Company. To the extent that the1740Company experiences changes in the usage of this equipment or introductions of1741new technologies to the market, the estimated useful lives of this equipment may1742change in a future period. Diagnostic equipment had a net carrying value of1743$81,038 and $93,005 at December 31, 2002 and 2001.17441745INCOME TAXES: As part of the process of preparing the Company's consolidated1746financial statements, management is required to estimate the Company's income1747taxes in each of the jurisdictions in which it operates. This process involves1748estimating the actual current tax expense as well as assessing temporary1749differences resulting from17501751175211753<PAGE>175417551756differing treatment of items for tax and accounting purposes. These timing1757differences result in deferred tax assets and liabilities, which are included in1758the Company's consolidated balance sheet. The Company must then assess the1759likelihood that its deferred tax assets will be recovered from future taxable1760income, and to the extent that management believes that recovery is not likely,1761a valuation allowance must be established. At December 31, 2002, the Company had1762approximately $93,000 of gross deferred tax assets, including approximately1763$43,000 of U.S. net operating loss and tax credit carryforwards that will expire1764from 2003 to 2022, for which no valuation allowance has been recorded. The1765Company believes that its deferred tax assets, including the net operating loss1766and tax credit carryforwards, will be fully utilized based upon its estimates of1767future taxable income. If these estimates of future taxable income are not met,1768a valuation allowance for some of these deferred tax assets would be required.17691770The Company has not recorded U.S. deferred income taxes on certain of its1771non-U.S. subsidiaries' undistributed earnings, because such amounts are intended1772to be reinvested outside the United States indefinitely. However, should the1773Company change its business and tax strategies in the future and decide to1774repatriate a portion of these earnings to one of the Company's U.S.1775subsidiaries, including cash maintained by these non-U.S. subsidiaries (see1776Liquidity and Capital Resources), additional U.S. tax liabilities would be1777incurred.17781779The Company from time to time faces challenges from tax authorities regarding1780the amount of taxes due. These challenges include questions regarding the timing1781and amount of deductions and the allocation of income among various tax1782jurisdictions. The Company's U.S. Federal tax filings prior to 1998 have been1783examined by the Internal Revenue Service (IRS), and the Company has settled all1784differences arising out of those examinations. Consistent with the Company's1785status with the U.S. Federal tax authorities as a "coordinated industry case,"1786the IRS is currently in the process of examining the Company's U.S. Federal tax1787returns for the calendar years 1998, 1999 and 2000. Although the Company1788believes it has recorded an appropriate income tax provision, there can be no1789assurance that the IRS or other tax authorities will not take positions contrary1790to those taken by the Company. The Company further believes that any taxes not1791covered by the Company's income tax provision will not have a material adverse1792impact on the Company's consolidated financial position or liquidity, but may be1793material to the consolidated results of operations of a future period.17941795SILZONE(R) SPECIAL CHARGES: In January 2000, the Company initiated a worldwide1796voluntary recall of all field inventory of heart valve replacement and repair1797products incorporating Silzone(R) coating on the sewing cuff fabric. The Company1798concluded that it would no longer utilize Silzone(R) coating and recorded a1799special charge accrual totaling $26,101 during the first quarter of 20001800relating to asset write-downs and other costs, including monitoring expenses,1801associated with this recall and product discontinuance. In the second quarter of18022002, the Company determined that the Silzone(R) reserves for other costs should1803be increased by $11,000 due primarily to difficulties in obtaining certain1804reimbursements from the Company's insurance carriers under the product liability1805insurance policies. The Company has approximately $200,000 remaining in product1806liability insurance currently available for the Silzone(R)-related matters.1807There can be no assurance that the final costs associated with this recall that1808are not covered by insurance, including litigation-related costs, will not1809exceed management's estimates.18101811LEGAL PROCEEDINGS: The Company operates in an industry that is susceptible to1812significant product liability claims. These claims may be brought by individuals1813seeking relief for themselves or, increasingly, by groups seeking to represent a1814class. In addition, product liability claims may be asserted against the Company1815in the future relative to events that are not known to management at the present1816time. While it is not possible to predict the outcome of every claim, the1817Company believes that it has adequate product liability insurance to cover the1818costs associated with them. The product liability insurance market has changed1819dramatically since September 2001. The Company's self-insured retentions and1820insurance premiums have increased and are expected to increase further in the1821future. The Company's insurance program, as a result, is designed to prevent a1822catastrophic loss. The Company further believes that any costs not covered by1823product liability insurance, including the Company's self-insured deductible,1824will not have a material adverse impact on the Company's consolidated financial1825position or liquidity, but may be material to the consolidated results of1826operations of a future period.18271828ACQUISITIONS1829During 2002, 2001 and 2000, the Company acquired various businesses involved in1830the distribution of the Company's products.18311832183321834<PAGE>183518361837Aggregate consideration paid in cash during 2002, 2001 and 2000 was $24,500,1838$10,444 and $3,264, respectively.18391840In December 2002, the Company acquired the assets of a catheter business for1841$5,000 in cash. Substantially all of the purchase price was allocated to1842technology and patents with estimated useful lives of 15 years.18431844These acquisitions were recorded using the purchase method of accounting. The1845operating results of each of these acquisitions are included in the Company's1846consolidated financial statements from the date of each acquisition. Pro forma1847results of operations have not been presented for these acquisitions since the1848effects of these business acquisitions were not material to the Company either1849individually or in the aggregate.18501851During 2001 and 2000, the Company paid $10,000 and $5,000, respectively,1852relating to the September 1999 acquisition of Vascular Science, Inc. (VSI).1853These payments were for the achievement of certain milestones and were recorded1854as purchased in-process research and development charges.18551856On September 17, 2002, the Company signed a stock purchase agreement to acquire1857Getz Bros. Co., Ltd. (Getz), a distributor of medical technology products in1858Japan and the distributor of the largest volume of the Company's products in1859Japan. The Company has agreed to pay 26.9 billion Japanese yen in cash, or1860approximately $224,000 using an exchange rate of 120 yen to 1 U.S. dollar, to1861acquire 100% of the outstanding common stock of Getz. This transaction is1862expected to close during the second quarter of 2003.18631864NET SALES1865Net sales by geographic markets were as follows:186618672002 2001 20001868===============================================================================1869United States $ 1,042,766 $ 880,086 $ 745,7931870International 547,163 467,270 433,0131871- -------------------------------------------------------------------------------1872Total net sales $ 1,589,929 $ 1,347,356 $ 1,178,8061873===============================================================================18741875Foreign currency translation had a net favorable impact on 2002 net sales as1876compared with 2001 of approximately $9,000 due primarily to the strengthening of1877the Euro against the U.S. dollar, offset in part by the weakening of the1878Brazilian Real against the U.S. dollar. Foreign currency translation had an1879unfavorable impact on 2001 net sales as compared with 2000 of approximately1880$16,000 due primarily to the weakening of the Euro against the U.S. dollar.1881These amounts are not necessarily indicative of the impact on net earnings for18822002 and 2001 due to partially offsetting unfavorable and favorable foreign1883currency impacts on operating costs.18841885Net sales by class of similar products were as follows:188618872002 2001 20001888============================================================================1889Cardiac rhythm management $ 1,147,489 $ 965,968 $ 819,1171890Cardiac surgery 250,957 248,045 256,9491891Cardiology and vascular access 191,483 133,343 102,7401892- ----------------------------------------------------------------------------1893Total net sales $ 1,589,929 $ 1,347,356 $ 1,178,8061894============================================================================18951896Net sales of CRM products increased 18.8% in 2002 due primarily to increased1897bradycardia, ICD and EP catheter unit sales. The increase in bradycardia net1898sales was attributable to the ongoing success of the Company's Identity(R)1899family of pacemakers and other devices that incorporate BEAT-BY-BEAT1900AutoCapture(TM) and AF Suppression(TM) technology. The Company's ICD net sales1901benefited from the ongoing success of the Company's Atlas(R) ICD, the new1902Epic(TM) ICD that was launched worldwide in the fourth quarter of 2002 and the1903Riata(R) family of ICD leads. Net sales of CRM products increased 17.9% in 20011904due primarily to increased bradycardia, ICD and EP catheter unit sales, offset1905in part by negative foreign currency effects. The increase in bradycardia net1906sales in 2001 was driven by the mid-year introduction of the Integrity(R)1907pacemaker with atrial fibrillation suppression technology. The increase in ICD1908net sales in 2001 was primarily due to the full year sales of the Company's1909dual-chamber ICD products, which were introduced into the market in late 2000.19101911Net sales of CS products increased 1.2% in 2002, due to an increase in aortic1912connector sales as a result of the ongoing rollout of this product in the U.S.1913market. Heart valve net sales were down 3.3% from 2001 due to an ongoing1914clinical preference shift from mechanical valves to tissue valves in the U.S.1915market, where the Company holds significant mechanical valve market share and a1916smaller share of the tissue valve market. Net sales of CS products decreased19173.5% in 2001 due to a clinical preference shift from mechanical valves to tissue1918valves in the U.S. market, offset in part by an increase in aortic connector1919sales resulting from the introduction of this technology to the U.S. market1920during 2001.19211922Net sales of C/VA products increased 43.6% and 29.8% in 2002 and 2001 due1923primarily to increased Angio-Seal(TM) unit sales. Net sales in 2002 also1924benefited from the worldwide launch in early 2002 of the Company's newest1925vascular closure device, the Angio-Seal(TM) STS Platform.19261927192831929<PAGE>193019311932GROSS PROFIT1933Gross profits were as follows:193419352002 2001 20001936==============================================================================1937Gross profit $ 1,083,983 $ 888,197 $ 787,6571938Percentage of net sales 68.2% 65.9% 66.8%1939==============================================================================19401941The Company's gross profit percentage increased 2.3 percentage points to 68.2%1942in 2002. The Company's 2001 gross profit margin included $21,667 of special1943charges recorded in the third quarter of 2001 relating to inventory and1944diagnostic equipment write-offs (see further details under the SPECIAL CHARGES1945discussion). Excluding these special charges, the gross profit percentage was194667.5% in 2001. The increase in the gross profit percentage in 2002 as compared1947to 2001, excluding special charges, is due primarily to higher ICD and pacemaker1948unit volumes and increased CRM manufacturing efficiencies. The increase in gross1949profit percentage in 2001 as compared to 2000, excluding the above special1950charges, was due to higher unit volumes and increased manufacturing efficiencies1951in the Company's CRM operations, offset partially by the unfavorable impact on1952net sales due to the stronger U.S. dollar. The Company anticipates making1953further improvements in its operations through the use of total quality1954management techniques and further investments in technology in order to continue1955to improve the Company's gross profit percentage in the future. Offsetting these1956improvements for 2003 will be the acquisition accounting adjustments for1957inventory related to the planned Getz acquisition in the second quarter of 20031958and the addition of non-St. Jude Medical manufactured products sold by Getz,1959which generally have a lower gross profit margin.19601961OPERATING EXPENSES1962Certain operating expenses were as follows:196319642002 2001 20001965===============================================================================1966Selling, general and administrative $ 513,691 $ 467,113 $ 416,3831967Percentage of net sales 32.3% 34.7% 35.3%19681969Research and development $ 200,337 $ 164,101 $ 137,8141970Percentage of net sales 12.6% 12.2% 11.7%1971===============================================================================19721973SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSE: SG&A expense as a percentage1974of net sales decreased by 2.4 percentage points in 2002 due primarily to the1975elimination of goodwill amortization expense in 2002 from the Company's adoption1976of Statement of Financial Accounting Standards (SFAS) No. 142, "GOODWILL AND1977OTHER INTANGIBLE ASSETS," effective January 1, 2002, the leveraging effect of1978higher sales volumes and increased productivity of the Company's sales1979organizations. Pretax goodwill amortization expense was approximately $28,000 in19802001. During the second quarter of 2002, the Company received a cash payment of1981$18,500 relating to the settlement of certain patent litigation, which was1982recorded as a reduction of SG&A expense. Also during the second quarter of 2002,1983the Company recorded in SG&A an $11,000 charge to increase the reserve for1984expenses related to the Silzone(R) recall (see SPECIAL CHARGES) and a $7,5001985discretionary contribution to its charitable foundation. The Company expects its1986SG&A expense as a percentage of net sales to increase in 2003 due to the1987addition of the Getz direct sales organization in the second quarter of 2003 and1988to an increase of approximately 200 sales and support personnel in anticipation1989of the Company's entry into the cardiac resynchronization segment of the U.S.1990CRM market.19911992SG&A expense as a percentage of net sales decreased in 2001 as compared to 20001993due primarily to increased sales, which leveraged the Company's cost structure.19941995RESEARCH AND DEVELOPMENT (R&D) EXPENSE: R&D expense increased in 2002 and 20011996due primarily to the Company's increased activities relating to ICDs, products1997to treat emerging indications in atrial fibrillation and heart failure and1998suture-free devices to facilitate coronary artery bypass graft anastomoses.19992000PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In 1999, the Company2001recorded purchased in-process research and development charges of $67,453 in2002connection with its acquisition of VSI. The purchased in-process research and2003development charges were computed by an independent third-party appraisal2004company and were expensed at the close of the acquisition, except as noted2005below, since technological feasibility had not been established and since there2006were no alternative future uses for the technology.20072008The total appraised value of the VSI purchased in-process research and2009development was $95,500, of which $67,453 was recorded at the close of the2010acquisition. The Company paid additional amounts totaling $10,000 in 2001 and2011$5,000 in 2000 as certain product development milestones were achieved. These2012additional payments were also expensed as purchased in-process research and2013development at the time of payment. The remaining balance of the in-process2014research and development valuation ($13,047) will be recorded in the Company's2015financial statements as purchased in-process research and development expense2016when payment of the contingent consideration is assured beyond a reasonable2017doubt. Contingent20182019202042021<PAGE>202220232024consideration payments in excess of the $13,047 will be capitalized as goodwill.20252026Since 1999, the Company has continued to develop certain of the in-process2027technologies acquired in the VSI acquisition. Development of one of the VSI2028technologies (the proximal connector) was completed and regulatory approvals and2029E.U. and U.S. market releases occurred in 2000 and 2001. A second VSI in-process2030technology (the distal connector) received E.U. regulatory approval in 2001;2031however, the Company intends to make additional enhancements to this product2032prior to filing for U.S. regulatory approval and prior to releasing the product2033to either the E.U. or U.S. markets. At the date of the VSI acquisition, the2034total estimated costs necessary to complete the proximal and distal connector2035technologies into commercially viable products and to make certain subsequent2036product enhancements were approximately $1,000, all of which were scheduled to2037be incurred in 1999 and 2000. Through December 2002, the Company has incurred2038approximately $9,500 to complete the proximal connector and bring the distal2039connector to its current state. Management continues to assess what future2040distal connector design changes are desirable, along with the related costs,2041prior to filing for U.S. regulatory approval. Other in-process technologies2042acquired in the VSI acquisition continue to be reviewed for ultimate viability2043in the developing coronary artery bypass graft anastomoses market. The original2044estimated costs to complete these other technologies into commercially viable2045products were approximately $6,000, of which only a minor amount has been2046incurred to date.20472048Management believes that the financial statement projections used in the VSI2049acquisition are still materially valid; however, there can be no assurance that2050the projected results will be achieved. In addition, there are risks associated2051with being able to complete development of the VSI in-process technologies, and2052there can be no assurance that these technologies will achieve technological or2053commercial success. Failure to successfully complete the development and2054commercialize these in-process technologies would result in the loss of the2055expected economic return inherent in the original fair value allocation.20562057SPECIAL CHARGES: In July 2001, the Company initiated efforts to streamline its2058heart valve operations, consolidate its U.S. sales activities and restructure2059its international sales organization. As a result of these activities, the2060Company recorded pre-tax special charges of $20,657 in the third quarter of20612001, consisting of employee severance costs resulting from the elimination of2062approximately 90 production and administrative positions ($5,293), inventory2063write-offs and scrap ($9,490), capital equipment write-offs ($3,379) and other2064costs related primarily to lease terminations and other facility exit costs due2065to the closing and consolidation of sales offices ($2,495). The Company has2066utilized $19,865 of these special charge accruals through December 31, 2002,2067consisting of $4,783 of employee severance costs, $9,328 of inventory write-offs2068and scrap, $3,379 of capital equipment write-offs and $2,375 of other costs. The2069Company estimates that the remaining accruals will be utilized during 2003.20702071During the third quarter of 2001, the Company also wrote off $12,177 of certain2072diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer2073technology equipment that received U.S. regulatory approvals in late 2000 and2074early 2001 and was launched earlier in 2001.20752076The charges relating to employee severance costs, capital equipment write-offs2077and other costs ($11,167) were recorded in operating expenses as special2078charges. The inventory and diagnostic equipment write-offs ($21,667) were2079included in cost of sales as special charges.20802081On January 21, 2000, the Company initiated a worldwide voluntary recall of all2082field inventory of heart valve replacement and repair products incorporating2083Silzone(R) coating on the sewing cuff fabric. The Company concluded that it2084would no longer utilize Silzone(R) coating. The Company recorded a special2085charge accrual totaling $26,101 during the first quarter of 2000 relating to2086asset write-downs ($9,465) and other costs ($16,636), including monitoring2087expenses, associated with this recall and product discontinuance. In the second2088quarter of 2002, the Company determined that the Silzone(R) reserves for other2089costs should be increased by $11,000 due primarily to difficulties in obtaining2090certain reimbursements from the Company's insurance carriers under the product2091liability insurance policies. This additional accrual was included in selling,2092general and administrative expenses for the second quarter ended June 30, 2002.2093The Company has utilized $23,202 of these special charge accruals through2094December 31, 2002, consisting of $9,465 of asset write-downs and $13,737 of2095other costs. The Company estimates that the remaining accruals will be utilized2096primarily during 2003 and 2004. The Company has approximately $200,000 remaining2097in product liability insurance currently available for the Silzone(R)-related2098matters. There can be no assurance that the final costs associated with this2099recall that are not covered by insurance, including litigation-related costs,2100will not exceed management's estimates.21012102210352104<PAGE>210521062107OTHER INCOME (EXPENSE)2108The change in other income (expense) during 2002 as compared with 2001 is due2109primarily to reduced interest expense as a result of lower debt levels, lower2110interest rates on Company borrowings in 2002 and higher levels of interest2111income as a result of the increase in cash and equivalents in 2002. The change2112in other income (expense) during 2001 as compared with 2000 was due to reduced2113interest expense as a result of lower debt levels as well as lower interest2114rates on Company borrowings.21152116INCOME TAXES2117The Company's reported effective income tax rates were 26.0% in 2002, 24.3% in21182001 and 27.2% in 2000. Excluding the purchased in-process research and2119development and special charges in 2001 and 2000, the Company's effective income2120tax rate was 25.0% for both years. The purchased in-process research and2121development charges were not deductible for income tax purposes, and the special2122charges were recorded in taxing jurisdictions where income tax rates varied from2123the Company's blended 25.0% effective tax rate. The increase in the Company's2124effective income tax rate in 2002 is due to a larger percentage of the Company's2125taxable income being generated in higher taxing jurisdictions.21262127Management anticipates that the Company's effective income tax rate will2128increase in the future as a larger percentage of the Company's forecasted2129taxable income is generated in higher taxing jurisdictions.21302131NET EARNINGS2132Net earnings and diluted net earnings per share were $276,285, or $1.51 per2133share, in 2002, $172,592, or $0.97 per share, in 2001 and $129,094, or $0.75 per2134share, in 2000.21352136STOCK SPLIT2137On May 16, 2002, the Company's Board of Directors declared a two-for-one stock2138split in the form of a 100% stock dividend to shareholders of record on June 10,21392002. Net earnings per share, shares outstanding and weighted average shares2140outstanding have been restated to reflect this stock split.21412142GOVERNMENT REGULATION, COMPETITION AND OTHER CONSIDERATIONS2143The Company expects that market demand, government regulation and reimbursement2144policies and societal pressures will continue to change the worldwide healthcare2145industry resulting in further business consolidations and alliances. The Company2146participates with industry groups to promote the use of advanced medical device2147technology in a cost-conscious environment.21482149The global medical technology industry is highly competitive and is2150characterized by rapid product development and technological change. The2151Company's products must continually improve technologically and provide improved2152clinical outcomes due to the competitive nature of the industry. In addition,2153competitors have historically employed litigation to gain a competitive2154advantage.21552156The cardiac rhythm management market is highly competitive. There are currently2157three principal suppliers in this market, including the Company, and the2158Company's two principal competitors each have substantially more assets and2159sales than the Company. Rapid technological change in the CRM market is expected2160to continue, requiring the Company to invest heavily in R&D and to effectively2161market its products. Two trends began to emerge in the CRM market during 2002.2162The first involved a possible shift of some traditional pacemaker patients to2163ICD devices and the second involved the increasing use of resynchronization2164devices in both the ICD and pacemaker markets. The Company's competitors in the2165CRM market have U.S. regulatory approval to market CRM devices with2166resynchronization features. The Company currently has both a cardiac2167resynchronization ICD and pacemaker product in U.S. clinical studies. If the2168approvals of these products are delayed or not received, the Company's CRM sales2169could be adversely affected if the CRM market continues to shift towards2170products with cardiac resynchronization capabilities.21712172The cardiac surgery market, which includes mechanical heart valves, tissue heart2173valves and valve repair products, is also highly competitive. Since 1999, the2174market has shifted to tissue valves and repair products from mechanical heart2175valves, resulting in an overall market share loss for the Company. Competition2176is anticipated to continue to place pressure on pricing and terms, including a2177trend toward vendor-owned (consignment) inventory at the hospitals, and2178healthcare reform is expected to result in further hospital consolidations over2179time.21802181The cardiology and vascular access market is a growing market with numerous2182competitors. Approximately 80% of the Company's sales in this market are for2183vascular closure devices. The market for vascular closure devices is highly2184competitive, and there are several companies, in addition to St. Jude Medical,2185that manufacture and market these products worldwide.21862187218862189<PAGE>219021912192Group purchasing organizations (GPOs) and independent delivery networks (IDNs)2193in the United States continue to consolidate purchasing decisions for some of2194the Company's hospital customers. The Company has contracts in place with many2195of these organizations. One large GPO has executed contracts with the Company's2196CRM market competitors that exclude the Company. The enforcement of these2197contracts may adversely affect the Company's sales of CRM products to members of2198this GPO.21992200MARKET RISK2201The Company is exposed to foreign currency exchange rate fluctuations due to its2202transactions denominated primarily in Euros, Canadian Dollars, Brazilian Reals,2203British Pounds, and Swedish Kronor. Although in 2002 and 2001 management elected2204not to enter into any hedging contracts, from time to time the Company hedges a2205portion of its foreign currency exchange rate risk through the use of forward2206exchange or option contracts. The gains or losses on these contracts are2207intended to offset changes in the fair value of the anticipated foreign currency2208transactions. It is the Company's practice to not enter into contracts for2209trading or speculative purposes. The Company continues to evaluate its foreign2210currency exchange rate risk and the different mechanisms for use in managing2211such risk. The Company had no forward exchange or option contracts outstanding2212at December 31, 2002 or 2001.22132214In September 2002, the Company signed a stock purchase agreement to acquire Getz2215for 26.9 billion Japanese yen. The Company is exposed to foreign currency2216exchange risk on the yen purchase price of this agreement until the closing of2217the acquisition, which is expected to occur during the second quarter of 2003.2218After completing the Getz acquisition, the Company will be exposed to foreign2219currency exchange rate fluctuations from transactions by the acquired business2220that are denominated in Japanese yen.22212222The Company is also exposed to equity market risk on its marketable equity2223security investments. The Company periodically invests in marketable equity2224securities of emerging technology companies. The Company's investments in these2225companies had a fair value of $13,665 and $21,616 at December 31, 2002 and 2001,2226which are subject to the underlying price risk of the public equity markets.22272228NEW ACCOUNTING PRONOUNCEMENTS2229In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,2230"ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES" (Statement2231146). Statement 146 requires that a liability for a cost associated with an exit2232or disposal activity be recognized and measured initially at fair value when the2233liability is incurred. Statement 146 is effective for exit plans or disposal2234activities initiated after December 31, 2002. The adoption of Statement 146 in22352003 is not anticipated to have a material impact on the Company's future2236consolidated results of operations or financial position.22372238FINANCIAL CONDITION22392240LIQUIDITY AND CAPITAL RESOURCES2241The Company's liquidity and cash flows remained strong during 2002. Cash2242provided by operating activities was $417,200 in 2002, up $107,065 from 2001,2243reflecting increased earnings and improved working capital management. The2244Company's current ratio was 3 to 1 at December 31, 2002.22452246Cash and equivalents increased $253,525 during 2002, due primarily to cash2247generated from operations. At December 31, 2002, approximately one-half of the2248Company's cash and equivalents were held by the Company's non-U.S. subsidiaries.2249These funds are available for use by the Company's U.S. operations; however,2250they would be subject to additional U.S. tax upon repatriation to the United2251States. During the second quarter of 2003, management intends to utilize a2252portion of the Company's non-U.S. subsidiaries' cash and the proceeds from the2253issuance of yen-denominated debt to fund the 26.9 billion Japanese yen, or2254approximately $224,000, Getz acquisition purchase price.22552256During 2002, the Company repaid all of its interest-bearing debt utilizing cash2257generated from operations and proceeds from employee stock option exercises. The2258Company has a $350,000 unsecured, revolving credit facility that is available to2259back the Company's commercial paper program borrowings and for general purposes.2260This committed credit facility expires in March 2003; however, management does2261not intend to renew this credit facility due to the Company's existing cash2262balances, anticipated future cash flows from operations and the expenses2263associated with such a facility. However, management does intend to borrow2264Japanese yen to fund a portion of the Getz acquisition purchase price in the2265second quarter of 2003.22662267At the present time, management expects 2003 capital expenditures and business2268acquisition payments to be approximately $110,000, exclusive of the Getz2269acquisition. In 2004 through 2007, management currently expects these amounts to2270be approximately $150,000 per year.22712272227372274<PAGE>227522762277The Company has no off-balance sheet financing arrangements other than certain2278noncancelable, operating leases for various facilities. Future minimum lease2279payments under these leases are as follows: $10,401 in 2003; $8,643 in 2004;2280$8,626 in 2005; $8,259 in 2006; $7,609 in 2007; and $22,156 in years thereafter.22812282Management believes that the Company's existing cash balances and future cash2283generated from operations will be sufficient to meet the Company's working2284capital and capital investment needs in the near term, exclusive of the Getz2285acquisition. Should suitable investment opportunities arise, management believes2286that the Company's earnings, cash flows and balance sheet will permit the2287Company to obtain additional debt or equity capital, if necessary.22882289DIVIDENDS2290The Company did not declare or pay any cash dividends during 2002, 2001 or 2000.2291Management currently intends to utilize the Company's earnings for operating and2292investment purposes.22932294CAUTIONARY STATEMENTS2295In this discussion and in other written or oral statements made from time to2296time, the Company has included and may include statements that may constitute2297"forward-looking statements" within the meaning of the safe harbor provisions of2298the Private Litigation Securities Reform Act of 1995. These forward-looking2299statements are not historical facts but instead represent the Company's belief2300regarding future events, many of which, by their nature, are inherently2301uncertain and beyond the Company's control. These statements relate to the2302Company's future plans and objectives, among other things. By identifying these2303statements for you in this manner, the Company is alerting you to the2304possibility that its actual results may differ, possibly materially, from the2305results indicated by these forward-looking statements. The Company undertakes no2306obligation to update any forward-looking statements.23072308Various factors contained in the previous discussion and those described below2309may affect the Company's operations and results. Since it is not possible to2310foresee all such factors, you should not consider these factors to be a complete2311list of all risks or uncertainties. Risk factors include the following:231223131. Legislative or administrative reforms to the U.S. Medicare and Medicaid2314systems or similar reforms of international reimbursement systems in a2315manner that significantly reduces reimbursement for procedures using2316the Company's medical devices or denies coverage for such procedures.2317Adverse decisions relating to the Company's products by administrators2318of such systems in coverage or reimbursement issues.23192. Acquisition of key patents by others that have the effect of excluding2320the Company from market segments or require the Company to pay2321royalties.23223. Economic factors, including inflation, changes in interest rates and2323changes in foreign currency exchange rates.23244. Product introductions by competitors which have advanced technology,2325better features or lower pricing.23265. Price increases by suppliers of key components, some of which are2327sole-sourced.23286. A reduction in the number of procedures using the Company's devices2329caused by cost-containment pressures or preferences for alternate2330therapies.23317. Safety, performance or efficacy concerns about the Company's marketed2332products, many of which are expected to be implanted for many years,2333leading to recalls and/or advisories with the attendant expenses and2334declining sales.23358. Changes in laws, regulations or administrative practices affecting2336government regulation of the Company's products, such as FDA laws and2337regulations, that increase pre-approval testing requirements for2338products or impose additional burdens on the manufacture and sale of2339medical devices.23409. Difficulties obtaining, or the inability to obtain, appropriate levels2341of product liability insurance.234210. A serious earthquake affecting the Company's facilities in Sunnyvale or2343Sylmar, California.234411. Healthcare industry consolidation leading to demands for price2345concessions or the exclusion of some suppliers from significant market2346segments.234712. Adverse developments in litigation including product liability2348litigation and patent litigation or other intellectual property2349litigation including that arising from the Telectronics and Ventritex2350acquisitions.23512352235382354<PAGE>235523562357REPORT OF MANAGEMENT23582359The management of St. Jude Medical, Inc. is responsible for the preparation,2360integrity and objectivity of the accompanying financial statements. The2361financial statements were prepared in accordance with accounting principles2362generally accepted in the United States and include amounts which reflect2363management's best estimates based on its informed judgment and consideration2364given to materiality. Management is also responsible for the accuracy of the2365related data in the annual report and its consistency with the financial2366statements.23672368In the opinion of management, the Company's accounting systems and procedures,2369and related internal controls, provide reasonable assurance that transactions2370are executed in accordance with management's intention and authorization, that2371financial statements are prepared in accordance with accounting principles2372generally accepted in the United States and that assets are properly accounted2373for and safeguarded. The concept of reasonable assurance is based on the2374recognition that there are inherent limitations in all systems of internal2375control and that the cost of such systems should not exceed the benefits to be2376derived therefrom. Management reviews and modifies the system of internal2377controls to improve its effectiveness. The effectiveness of the controls system2378is supported by the selection, retention and training of qualified personnel, an2379organizational structure that provides an appropriate division of responsibility2380and a strong budgeting system of control.23812382St. Jude Medical, Inc. also recognizes its responsibility for fostering a strong2383ethical climate so that the Company's affairs are conducted according to the2384highest standards of personal and business conduct. This responsibility is2385reflected in the Company's Code of Business Conduct.23862387The adequacy of the Company's internal accounting controls, the accounting2388principles employed in its financial reporting and the scope of independent and2389internal audits are reviewed by the Audit Committee of the Board of Directors,2390consisting solely of outside directors. The independent auditors meet with, and2391have confidential access to, the Audit Committee to discuss the results of their2392audit work.23932394/s/ TERRY L. SHEPHERD23952396Terry L. Shepherd2397Chairman and Chief Executive Officer239823992400/s/ JOHN C. HEINMILLER24012402John C. Heinmiller2403Vice President, Finance and Chief Financial Officer2404240524062407REPORT OF INDEPENDENT AUDITORS24082409Board of Directors and Shareholders2410St. Jude Medical, Inc.24112412We have audited the accompanying consolidated balance sheets of St. Jude2413Medical, Inc. and subsidiaries as of December 31, 2002 and 2001 and the related2414consolidated statements of earnings, shareholders' equity, and cash flows for2415each of the three fiscal years in the period ended December 31, 2002. These2416financial statements are the responsibility of the Company's management. Our2417responsibility is to express an opinion on these financial statements based on2418our audits.24192420We conducted our audits in accordance with auditing standards generally accepted2421in the United States. Those standards require that we plan and perform the audit2422to obtain reasonable assurance about whether the financial statements are free2423of material misstatement. An audit includes examining, on a test basis, evidence2424supporting the amounts and disclosures in the financial statements. An audit2425also includes assessing the accounting principles used and significant estimates2426made by management, as well as evaluating the overall financial statement2427presentation. We believe that our audits provide a reasonable basis for our2428opinion.24292430In our opinion, the financial statements referred to above present fairly, in2431all material respects, the consolidated financial position of St. Jude Medical,2432Inc. and subsidiaries at December 31, 2002 and 2001 and the consolidated results2433of their operations and their cash flows for each of the three fiscal years in2434the period ended December 31, 2002 in conformity with accounting principles2435generally accepted in the United States.24362437As discussed in Note 3 to the consolidated financial statements, effective2438January 1, 2002, the Company adopted Statement of Financial Accounting Standards2439No. 142, "Goodwill and Other Intangible Assets."24402441/s/ ERNST & YOUNG LLP24422443Minneapolis, Minnesota2444January 27, 200324452446244792448<PAGE>244924502451CONSOLIDATED STATEMENTS OF EARNINGS2452(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)245324542455<TABLE>2456<CAPTION>2457Fiscal Year Ended December 31, 2002 2001 20002458=======================================================================================================================2459<S> <C> <C> <C>2460Net sales $ 1,589,929 $ 1,347,356 $ 1,178,8062461Cost of sales:2462Cost of sales before special charges 505,946 437,492 391,1492463Special charges - 21,667 -2464- -----------------------------------------------------------------------------------------------------------------------2465Total cost of sales 505,946 459,159 391,1492466- -----------------------------------------------------------------------------------------------------------------------2467Gross profit 1,083,983 888,197 787,6572468Selling, general and administrative expense 513,691 467,113 416,3832469Research and development expense 200,337 164,101 137,8142470Purchased in-process research and development charges - 10,000 5,0002471Special charges - 11,167 26,1012472- -----------------------------------------------------------------------------------------------------------------------2473Operating profit 369,955 235,816 202,3592474Other income (expense) 3,403 (7,838) (25,050)2475- -----------------------------------------------------------------------------------------------------------------------2476Earnings before income taxes 373,358 227,978 177,3092477Income tax expense 97,073 55,386 48,2152478- -----------------------------------------------------------------------------------------------------------------------2479Net earnings $ 276,285 $ 172,592 $ 129,0942480=======================================================================================================================24812482=======================================================================================================================2483NET EARNINGS PER SHARE:2484Basic $ 1.56 $ 1.00 $ 0.772485Diluted $ 1.51 $ 0.97 $ 0.752486WEIGHTED AVERAGE SHARES OUTSTANDING:2487Basic 176,570 172,428 168,5052488Diluted 183,002 178,767 171,6342489- -----------------------------------------------------------------------------------------------------------------------2490</TABLE>24912492SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.249324942495102496<PAGE>249724982499CONSOLIDATED BALANCE SHEETS2500(DOLLARS IN THOUSANDS)25012502<TABLE>2503<CAPTION>2504December 31, 2002 20012505================================================================================================================2506<S> <C> <C>2507ASSETS2508CURRENT ASSETS2509Cash and equivalents $ 401,860 $ 148,3352510Accounts receivable, less allowances for doubtful accounts 381,246 320,6832511Inventories 227,024 240,3902512Deferred income taxes 56,857 36,5632513Other 47,330 51,5752514- ----------------------------------------------------------------------------------------------------------------2515Total current assets 1,114,317 797,54625162517PROPERTY, PLANT AND EQUIPMENT2518Land, buildings and improvements 126,471 112,9022519Machinery and equipment 393,726 352,2942520Diagnostic equipment 181,117 165,9382521- ----------------------------------------------------------------------------------------------------------------2522Property, plant and equipment at cost 701,314 631,1342523Less accumulated depreciation (400,833) (335,491)2524- ----------------------------------------------------------------------------------------------------------------2525Net property, plant and equipment 300,481 295,64325262527OTHER ASSETS2528Goodwill, net 325,575 321,5622529Other intangible assets, net 89,491 68,3672530Deferred income taxes 12,269 67,2382531Other 109,246 78,3712532- ----------------------------------------------------------------------------------------------------------------2533Total other assets 536,581 535,5382534- ----------------------------------------------------------------------------------------------------------------2535TOTAL ASSETS $ 1,951,379 $ 1,628,7272536================================================================================================================25372538LIABILITIES AND SHAREHOLDERS' EQUITY2539CURRENT LIABILITIES2540Accounts payable $ 108,931 $ 88,9252541Income taxes payable 51,380 63,4752542Accrued expenses2543Employee compensation and related benefits 135,705 102,1912544Other 78,636 67,2632545- ----------------------------------------------------------------------------------------------------------------2546Total current liabilities 374,652 321,85425472548LONG-TERM DEBT - 123,12825492550COMMITMENTS AND CONTINGENCIES - -25512552SHAREHOLDERS' EQUITY2553Preferred stock - -2554Common stock 17,803 17,4422555Additional paid-in capital 216,878 126,0052556Retained earnings 1,411,194 1,134,9092557Accumulated other comprehensive income (loss):2558Cumulative translation adjustment (73,388) (103,781)2559Unrealized gain on available-for-sale securities 4,240 9,1702560- -----------------------------------------------------------------------------------------------------------------2561Total shareholders' equity 1,576,727 1,183,7452562- ----------------------------------------------------------------------------------------------------------------2563TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,951,379 $ 1,628,7272564================================================================================================================2565</TABLE>25662567SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.256825692570112571<PAGE>257225732574CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY2575(DOLLARS IN THOUSANDS)25762577<TABLE>2578<CAPTION>25792580Common Stock Accumulated2581---------------------- Additional Other Total2582Number of Paid-In Retained Comprehensive Shareholders'2583Shares Amount Capital Earnings Income (Loss) Equity2584- ------------------------------------------------------------------------------------------------------------------------------------2585<S> <C> <C> <C> <C> <C> <C>2586BALANCE AT JANUARY 1, 2000 167,561,170 $ 16,756 $ (8,269) $ 833,223 $ (47,689) $ 794,0212587Comprehensive income:2588Net earnings 129,094 129,0942589Other comprehensive income (loss):2590Unrealized gain on investments, net of taxes2591and reclassification adjustment (see below) 1,367 1,3672592Foreign currency translation adjustment (39,403) (39,403)2593-------------2594Other comprehensive loss (38,036)2595-------------2596Comprehensive income 91,0582597=============2598Common stock issued under stock2599plans and other, net 2,490,332 249 38,382 38,6312600Tax benefit from stock plans 6,464 6,4642601Issusance of common stock for conversion of2602subordinated debentures 621,070 62 10,613 10,6752603- ------------------------------------------------------------------------------------------------------------------------------------2604BALANCE AT DECEMBER 31, 2000 170,672,572 17,067 47,190 962,317 (85,725) 940,8492605Comprehensive income:2606Net earnings 172,592 172,5922607Other comprehensive income (loss):2608Unrealized gain on investments, net of taxes 1,515 1,5152609Foreign currency translation adjustment, net of taxes (10,401) (10,401)2610-------------2611Other comprehensive loss (8,886)2612-------------2613Comprehensive income 163,7062614=============2615Common stock issued under stock2616plans and other, net 3,746,140 375 57,566 57,9412617Tax benefit from stock plans 21,249 21,2492618====================================================================================================================================2619BALANCE AT DECEMBER 31, 2001 174,418,712 17,442 126,005 1,134,909 (94,611) 1,183,7452620Comprehensive income:2621Net earnings 276,285 276,2852622Other comprehensive income (loss):2623Unrealized loss on investments, net of taxes (4,930) (4,930)2624Foreign currency translation adjustment, net of taxes 30,393 30,3932625-------------2626Other comprehensive income 25,4632627-------------2628Comprehensive income 301,7482629=============2630Common stock issued under stock2631plans and other, net 3,609,417 361 65,644 66,0052632Tax benefit from stock plans 25,229 25,2292633- ------------------------------------------------------------------------------------------------------------------------------------2634BALANCE AT DECEMBER 31, 2002 178,028,129 $ 17,803 $ 216,878 $ 1,411,194 $ (69,148) $1,576,7272635====================================================================================================================================2636</TABLE>26372638Other comprehensive income reclassification adjustments for net realized gains2639on the sale of marketable securities, net of income taxes, were $2,519 in 2000.26402641SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.264226432644122645<PAGE>264626472648CONSOLIDATED STATEMENTS OF CASH FLOWS2649(DOLLARS IN THOUSANDS)26502651<TABLE>2652<CAPTION>2653FISCAL YEAR ENDED DECEMBER 31, 2002 2001 20002654=============================================================================================================================2655<S> <C> <C> <C>2656OPERATING ACTIVITIES26572658Net earnings $ 276,285 $ 172,592 $ 129,0942659Adjustments to reconcile net earnings to net cash from operating activities:2660Depreciation 67,224 58,404 56,6992661Amortization 7,696 31,895 35,6502662Purchased in-process research and development charges - 10,000 5,0002663Special charges - 32,834 26,1012664Net investment gain - - (4,062)2665Deferred income taxes 37,695 (11,681) (5,439)2666Changes in operating assets and liabilities, net of business acquisitions:2667Accounts receivable (39,146) (23,941) (40,845)2668Inventories 15,784 (32,373) 4,6212669Other current assets (8,719) 13,605 (6,519)2670Accounts payable and accrued expenses 48,376 12,907 (17,317)2671Income taxes payable 12,005 45,893 20,9882672- -----------------------------------------------------------------------------------------------------------------------------2673NET CASH PROVIDED BY OPERATING ACTIVITIES 417,200 310,135 203,97126742675INVESTING ACTIVITIES2676Purchase of property, plant and equipment (62,176) (63,129) (39,699)2677Proceeds from sale or maturity of marketable securities 7,000 15,000 29,0822678Business acquisition payments (29,500) (20,444) (8,264)2679Other (31,088) (26,220) (10,752)2680- -----------------------------------------------------------------------------------------------------------------------------2681NET CASH USED IN INVESTING ACTIVITIES (115,764) (94,793) (29,633)26822683FINANCING ACTIVITIES2684Proceeds from exercise of stock options and stock issued 66,005 57,941 38,6312685Borrowings under debt facilities 352,000 2,115,028 3,703,2872686Payments under debt facilities (475,128) (2,286,400) (3,856,287)2687Repurchase of convertible subordinated notes - - (19,320)2688- -----------------------------------------------------------------------------------------------------------------------------2689NET CASH USED IN FINANCING ACTIVITIES (57,123) (113,431) (133,689)26902691Effect of currency exchange rate changes on cash and equivalents 9,212 (4,015) 1352692- -----------------------------------------------------------------------------------------------------------------------------2693NET INCREASE IN CASH AND EQUIVALENTS 253,525 97,896 40,78426942695CASH AND EQUIVALENTS AT BEGINNING OF YEAR 148,335 50,439 9,6552696- -----------------------------------------------------------------------------------------------------------------------------2697CASH AND EQUIVALENTS AT END OF YEAR $ 401,860 $ 148,335 $ 50,4392698=============================================================================================================================26992700SUPPLEMENTAL CASH FLOW INFORMATION2701=============================================================================================================================2702Cash paid during the year for:2703Interest $ 1,473 $ 10,663 $ 32,4672704Income taxes 51,243 21,424 35,7042705- -----------------------------------------------------------------------------------------------------------------------------2706</TABLE>27072708SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.270927102711132712<PAGE>271327142715NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2716(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)271727182719NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES2720COMPANY OVERVIEW: St. Jude Medical, Inc. ("St. Jude Medical" or the "Company")2721develops, manufactures and distributes cardiovascular medical devices for the2722global cardiac rhythm management (CRM), cardiac surgery (CS) and cardiology and2723vascular access (C/VA) markets. The Company's principal products in each of2724these markets are bradycardia pacemaker systems, tachycardia implantable2725cardioverter defibrillator (ICD) systems and electrophysiology (EP) catheters in2726CRM; mechanical and tissue heart valves, valve repair products and suture-free2727devices to facilitate coronary artery bypass graft anastomoses in CS; and2728vascular closure devices, catheters, guidewires and introducers in C/VA. The2729Company markets and sells its products through both a direct employee-based2730sales organization and independent distributors. The principal markets for the2731Company's products are the United States, Western Europe and Japan.27322733PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the2734accounts of the Company and its wholly owned subsidiaries. Significant2735intercompany transactions and balances have been eliminated in consolidation.2736Certain reclassifications of previously reported amounts have been made to2737conform to the current year presentation.27382739FISCAL YEAR: The Company utilizes a fifty-two, fifty-three week fiscal year2740ending on the Saturday nearest December 31. For simplicity of presentation, the2741Company describes all periods as if the year end is December 31. Fiscal years27422002, 2001 and 2000 each consisted of fifty-two weeks.27432744USE OF ESTIMATES: Preparation of the Company's consolidated financial statements2745in conformity with accounting principles generally accepted in the United States2746requires management to make estimates and assumptions that affect the reported2747amounts in the consolidated financial statements and accompanying notes. Actual2748results could differ from those estimates.27492750CASH EQUIVALENTS: The Company considers highly liquid investments with an2751original maturity of three months or less to be cash equivalents. Cash2752equivalents are stated at cost, which approximates market. The Company's cash2753equivalents include bank certificates of deposit, money market funds and2754instruments, commercial paper investments and repurchase agreements2755collateralized by U.S. government agency securities. The Company performs2756periodic evaluations of the relative credit standing of the financial2757institutions and issuers of its cash equivalents and limits the amount of credit2758exposure with any one issuer.27592760MARKETABLE SECURITIES: Marketable securities consist of equity securities and2761bonds. Marketable securities are classified as available-for-sale, recorded at2762fair market value based upon quoted market prices and are classified with other2763current assets on the balance sheet. The net carrying value of marketable2764securities, which represents fair market value, was $13,665 and $28,710 at2765December 31, 2002 and 2001. Gross unrealized gains totaling $6,839, $14,790 and2766$12,347, net of taxes of $2,599, $5,620 and $4,692, were recorded in2767shareholders' equity at December 31, 2002, 2001 and 2000. Realized gains from2768the sale of marketable securities have been recorded in other income and are2769computed using the specific identification method.27702771ACCOUNTS RECEIVABLE: The Company grants credit to customers in the normal course2772of business, but generally does not require collateral or any other security to2773support its receivables. The Company maintains an allowance for doubtful2774accounts for potential credit losses. The allowance for doubtful accounts was2775$24,078 at December 31, 2002 and $17,210 at December 31, 2001.27762777INVENTORIES: Inventories are stated at the lower of cost or market with cost2778determined using the first-in, first-out method.27792780Inventories consist of the following at December 31:278127822002 20012783==========================================================================2784Finished goods $ 140,856 $ 135,5432785Work in process 27,481 35,9842786Raw materials 58,687 68,8632787- --------------------------------------------------------------------------2788$ 227,024 $ 240,3902789==========================================================================27902791PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at2792cost and are depreciated using the straight-line method over their estimated2793useful lives, ranging from 15 to 39 years for buildings and improvements, three2794to seven years for machinery and equipment and five to eight years for2795diagnostic equipment. Diagnostic equipment primarily consists of programmers2796that are used by physicians and healthcare professionals to program and analyze2797data from the Company's bradycardia and tachycardia devices. The estimated2798useful lives of this equipment are based on management's estimates of its usage2799by the physicians and healthcare professionals, factoring in new technology2800platforms and rollouts by the Company. To the extent that the Company2801experiences changes in the usage of this equipment or introductions of new2802technologies280328042805142806<PAGE>280728082809to the market, the estimated useful lives of this equipment may change in a2810future period. Diagnostic equipment had a net carrying value of $81,038 and2811$93,005 at December 31, 2002 and 2001. Accelerated depreciation methods are used2812for income tax purposes.28132814GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost2815over the fair value of identifiable net assets of businesses acquired. The2816Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,2817"GOODWILL AND OTHER INTANGIBLE ASSETS" (Statement 142), effective January 1,28182002. Under Statement 142, goodwill is no longer amortized, but is subject to2819annual impairment tests. See Note 3 for 2001 and 2000 pro forma net earnings and2820net earnings per share excluding goodwill amortization.28212822Other intangible assets consist primarily of purchased technology and patents2823and are amortized on a straight-line basis using lives ranging from 10 to 202824years.28252826Management reviews goodwill and other intangible assets for impairment annually2827or more frequently if a change in circumstance or the occurrence of events2828suggests the remaining value may not be recoverable. The test for impairment of2829goodwill and other intangible assets requires management to make estimates about2830fair value, most of which are based on projected future cash flows. Management2831completed its annual goodwill impairment test in the fourth quarter of 2002 and2832determined that goodwill was not impaired.28332834TECHNOLOGY LICENSE AGREEMENT: The Company has a technology license agreement2835that provides access to a significant number of patents covering a broad range2836of technology used in the Company's bradycardia pacemaker systems and2837tachycardia ICD systems. The agreement provides for payments through September28382004 at which time the Company will have a fully paid-up license, granting2839access to the underlying patents which expire at various dates through the year28402014. The Company recognizes the total estimated costs under this license2841agreement as an expense over the term of the underlying patents' lives. The2842costs deferred under this license are recorded on the balance sheet in other2843long-term assets.28442845PRODUCT WARRANTIES: The Company offers a warranty on various products, the most2846significant of which relate to pacemaker and ICD systems. The Company estimates2847the costs that may be incurred under its warranties and records a liability in2848the amount of such costs at the time the product is sold. Factors that affect2849the Company's warranty liability include the number of units sold, historical2850and anticipated rates of warranty claims and cost per claim. The Company2851periodically assesses the adequacy of its recorded warranty liabilities and2852adjusts the amounts as necessary. Changes in the Company's product warranty2853liability during 2002 and 2001 were as follows:285428552002 20012856===========================================================================2857Balance at beginning of year $ 11,369 $ 9,1562858Warranty expense recognized 5,174 6,2842859Warranty credits issued (1,788) (4,071)2860- ---------------------------------------------------------------------------2861Balance at end of year $ 14,755 $ 11,3692862===========================================================================28632864REVENUE RECOGNITION: The Company generally recognizes revenue at the time title2865to the goods transfers to the customer. For certain products, the Company2866maintains consigned inventory at customer locations. For these products, revenue2867is recognized at the time the customer has used the inventory.28682869RESEARCH AND DEVELOPMENT: Research and development costs are charged to expense2870as incurred. Purchased in-process research and development charges are2871recognized in business combinations for the portion of the purchase price2872allocated to the appraised value of in-process technologies. The portion2873assigned to in-process research and development technologies excludes the value2874of core and developed technologies, which are recognized as intangible assets.28752876STOCK-BASED COMPENSATION: The Company accounts for its stock-based employee2877compensation plans (see Note 6) under the recognition and measurement principles2878of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related2879Interpretations. The following table illustrates the effect on net earnings and2880net earnings per share if the Company had applied the fair value recognition2881provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," to its2882stock-based employee compensation.28832884<TABLE>2885<CAPTION>28862002 2001 20002887===============================================================================================2888<S> <C> <C> <C>2889Net earnings, as reported $ 276,285 $ 172,592 $ 129,0942890Less: Total stock-based2891employee compensation2892expense determined under fair2893value based method for all2894awards, net of related tax effects (33,194) (26,619) (18,875)2895- -----------------------------------------------------------------------------------------------2896Pro forma net earnings $ 243,091 $ 145,973 $ 110,2192897===============================================================================================28982899Net earnings per share:2900Basic-as reported $ 1.56 $ 1.00 $ 0.772901Basic-pro forma 1.38 0.85 0.6529022903Diluted-as reported $ 1.51 $ 0.97 $ 0.752904Diluted-pro forma 1.33 0.82 0.642905===============================================================================================2906</TABLE>29072908152909<PAGE>291029112912The weighted-average fair value of options granted and the assumptions used in2913the Black-Scholes option-pricing model are as follows:291429152002 2001 20002916===============================================================================2917Fair value of options granted $ 12.95 $ 12.84 $ 10.552918Assumptions used:2919Expected life (years) 5 5 52920Risk-free rate of return 3.3% 4.4% 5.3%2921Volatility 35.0% 30.9% 35.6%2922Dividend yield 0% 0% 0%2923===============================================================================29242925NET EARNINGS PER SHARE: Basic net earnings per share is computed by dividing net2926earnings by the weighted average number of outstanding common shares, exclusive2927of restricted shares, during the period. Diluted net earnings per share is2928computed by dividing net earnings by the weighted average number of outstanding2929common shares and dilutive securities.29302931The table below sets forth the computation of basic and diluted net earnings per2932share:29332934<TABLE>2935<CAPTION>29362002 2001 20002937=======================================================================================================2938<S> <C> <C> <C>2939Numerator:2940Net earnings $ 276,285 $ 172,592 $ 129,0942941Convertible debenture - - 952942interest, net of taxes2943- -------------------------------------------------------------------------------------------------------2944Adjusted net earnings $ 276,285 $ 172,592 $ 129,18929452946Denominator:2947Basic-weighted average 176,570,000 172,428,000 168,505,0002948shares outstanding2949Effect of dilutive securities:2950Employee stock options 6,410,000 6,269,000 2,897,0002951Restricted shares 22,000 70,000 77,0002952Convertible debentures - - 155,0002953- -------------------------------------------------------------------------------------------------------2954Diluted-weighted average2955shares outstanding 183,002,000 178,767,000 171,634,0002956=======================================================================================================2957Basic net earnings per share $ 1.56 $ 1.00 $ 0.772958=======================================================================================================2959Diluted net earnings per share $ 1.51 $ 0.97 $ 0.752960=======================================================================================================2961</TABLE>29622963Diluted-weighted average shares outstanding have not been adjusted for certain2964employee stock options and awards where the effect of those securities would2965have been anti-dilutive.29662967FOREIGN CURRENCY TRANSLATION: Sales and expenses denominated in foreign2968currencies are translated at average exchange rates in effect throughout the2969year. Assets and liabilities of foreign operations are translated at year-end2970exchange rates. Gains and losses from translation of net assets of foreign2971operations are recorded in other comprehensive income (loss). A tax provision of2972$4,291 and a tax benefit of $19,393 were offset against the cumulative2973translation adjustment in other comprehensive income (loss) during 2002 and29742001, respectively. Foreign currency transaction gains and losses are included2975in other income (expense).29762977FOREIGN CURRENCY AND INTEREST RATE RISK MANAGEMENT CONTRACTS: Management2978periodically utilizes derivative financial instruments for use in managing a2979portion of the Company's exposure to foreign currencies and interest rates.2980Management generally utilizes forward exchange or option contracts to manage2981anticipated foreign currency exposures and interest rate swaps to manage2982interest rate exposures. Management does not enter into derivative financial2983instruments for trading or speculative purposes. The Company records the2984fluctuation in the fair value of the forward exchange or option contracts in2985other income (expense) and the fluctuation in the fair value of the interest2986rate swaps in interest expense. There were no forward exchange, interest rate2987swap or option contracts outstanding at December 31, 2002 or 2001.29882989NEW ACCOUNTING PRONOUNCEMENTS: In June 2002, the Financial Accounting Standards2990Board issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR2991DISPOSAL ACTIVITIES" (Statement 146). Statement 146 requires that a liability2992for a cost associated with an exit or disposal activity be recognized and2993measured initially at fair value when the liability is incurred. Statement 1462994is effective for exit plans or disposal activities initiated after December 31,29952002. The adoption of Statement 146 in 2003 is not anticipated to have a2996material impact on the Company's future consolidated results of operations or2997financial position.29982999NOTE 2--ACQUISITIONS3000During 2002, 2001 and 2000, the Company acquired various businesses involved in3001the distribution of the Company's products. Aggregate consideration paid in cash3002during 2002, 2001 and 2000 was $24,500, $10,444 and $3,264, respectively.30033004In December 2002, the Company acquired the assets of a catheter business for3005$5,000 in cash. Substantially all of the purchase price was allocated to3006technology and patents with estimated useful lives of 15 years.30073008These acquisitions were recorded using the purchase method of accounting. The3009operating results of each of these acquisitions are included in the Company's3010consolidated financial statements from the date of each acquisition. Pro forma3011results of operations have301230133014163015<PAGE>301630173018not been presented for these acquisitions since the effects of these business3019acquisitions were not material to the Company either individually or in the3020aggregate.30213022During 2001 and 2000, the Company paid $10,000 and $5,000, respectively,3023relating to the September 1999 acquisition of Vascular Science, Inc. (VSI - see3024Note 7).30253026On September 17, 2002, the Company signed a stock purchase agreement to acquire3027Getz Bros. Co., Ltd. (Getz), a distributor of medical technology products in3028Japan and the distributor of the largest volume of the Company's products in3029Japan. The Company has agreed to pay 26.9 billion Japanese yen in cash, or3030approximately $224,000 using an exchange rate of 120 yen to 1 U.S. dollar, to3031acquire 100% of the outstanding common stock of Getz. This transaction is3032expected to close during the second quarter of 2003.30333034NOTE 3--GOODWILL AND OTHER INTANGIBLE ASSETS3035The Company ceased amortizing goodwill effective January 1, 2002 as discussed in3036Note 1 - GOODWILL AND OTHER INTANGIBLE ASSETS. The following table provides pro3037forma fiscal year 2001 and 2000 net earnings and net earnings per share had3038Statement 142 been effective January 1, 2000:303930402001 20003041============================================================================3042NET EARNINGS:3043As reported $ 172,592 $ 129,0943044Goodwill amortization, net of taxes 21,323 21,6533045- ----------------------------------------------------------------------------3046Pro forma net earnings $ 193,915 $ 150,7473047============================================================================30483049BASIC NET EARNINGS PER SHARE:3050As reported $ 1.00 $ 0.773051Goodwill amortization, net of taxes 0.12 0.133052- ----------------------------------------------------------------------------3053Pro forma basic net earnings per share $ 1.12 $ 0.903054============================================================================30553056DILUTED NET EARNINGS PER SHARE:3057As reported $ 0.97 $ 0.753058Goodwill amortization, net of taxes 0.12 0.133059- ----------------------------------------------------------------------------3060Pro forma diluted net earnings per share $ 1.08 $ 0.883061============================================================================30623063The net carrying amount of goodwill increased $4,013 during 2002 due primarily3064to translation fluctuations of non-U.S. dollar denominated goodwill balances.30653066Other intangible assets consist of the following:30673068<TABLE>3069<CAPTION>3070PURCHASED3071TECHNOLOGY3072AND PATENTS OTHER TOTAL3073==========================================================================================3074<S> <C> <C> <C>3075DECEMBER 31, 20023076Original cost $ 75,749 $ 33,741 $ 109,4903077Accumulated amortization (17,075) (2,924) (19,999)3078- ------------------------------------------------------------------------------------------3079Net carrying value $ 58,674 $ 30,817 $ 89,4913080==========================================================================================30813082DECEMBER 31, 20013083Original cost $ 72,050 $ 9,046 $ 81,0963084Accumulated amortization (12,440) (289) (12,729)3085- ------------------------------------------------------------------------------------------3086Net carrying value $ 59,610 $ 8,757 $ 68,3673087==========================================================================================3088</TABLE>30893090The "other" column above primarily represents customer relationships from the3091acquisition of various businesses involved in the distribution of the Company's3092products. These assets are amortized on a straight-line basis over ten years.30933094During the first quarter of 2002, the Company reclassified $24,599 of certain3095intangible assets to goodwill based upon the guidance provided in Statement 1423096and SFAS No. 141, "BUSINESS COMBINATIONS." This reclassification has been3097reflected in the goodwill and other intangible asset balances as of December 31,30982001, for comparative purposes.30993100Amortization expense of other intangible assets was $7,696, $3,786, and $3,5653101for the fiscal years ended December 31, 2002, 2001 and 2000, respectively.3102Estimated amortization expense for fiscal years 2003 through 2007 based on the3103current carrying value of other intangible assets is approximately $7,000 per3104year.31053106NOTE 4--LONG-TERM DEBT3107The Company issues, from time to time, short-term, unsecured commercial paper3108with maturities up to 270 days. These commercial paper borrowings are backed by3109the Company's committed credit facility and bear interest at varying market3110rates. The Company had no outstanding commercial paper borrowings at December311131, 2002 and $123,128 of commercial paper borrowings at December 31, 2001. The3112Company classified all of its commercial paper borrowings at December 31, 2001,3113as long-term on its balance sheet as the Company had the ability to repay any3114short-term maturity with available cash from its existing long-term, committed3115credit facility. During 2002, the Company repaid all of its commercial paper3116borrowings. The weighted-average interest rate on these borrowings was 2.9% at3117December 31, 2001.311831193120173121<PAGE>312231233124The Company has a $350,000 unsecured, revolving credit facility that expires in3125March 2003. This committed credit facility has a variable interest rate tied3126primarily to the London Interbank Offered Rate. There were no outstanding3127borrowings under this credit facility at December 31, 2002 or 2001. Management3128does not intend to renew this credit facility in March 2003 due to the Company's3129existing cash balances, anticipated future cash flows from operations and the3130expenses associated with such a facility. However, management does intend to3131borrow Japanese yen to fund a portion of the Getz acquisition purchase price in3132the second quarter of 2003 (see Note 2).31333134The Company's committed credit facility agreement contains various restrictive3135covenants such as minimum financial ratios, limitations on additional liens or3136indebtedness and limitations on certain acquisitions and investments, all of3137which the Company was in compliance with at December 31, 2002. The Company's3138credit facility agreement does not include a provision for termination of the3139facility or acceleration of repayment due to changes in the Company's credit3140ratings.31413142NOTE 5--COMMITMENTS AND CONTINGENCIES3143LEASES: The Company leases various facilities under noncancelable operating3144lease arrangements. Future minimum lease payments under these leases are as3145follows: $10,401 in 2003; $8,643 in 2004; $8,626 in 2005; $8,259 in 2006; $7,6093146in 2007; and $22,156 in years thereafter. Rent expense under all operating3147leases was $10,215, $8,853 and $7,028 in 2002, 2001 and 2000.31483149SILZONE(R) LITIGATION: The Company has been sued by patients alleging defects in3150the Company's mechanical heart valves and valve repair products with Silzone(R)3151coating. Some of these cases are seeking monitoring of patients implanted with3152Silzone(R)-coated valves and repair products who allege no injury to date. Some3153of these cases, both in the United States and Canada, are seeking class action3154status. The Company voluntarily recalled products with Silzone(R) coating on3155January 21, 2000, and sent a Recall Notice and Advisory concerning the recall to3156physicians and others. See also Note 7 regarding the special charges associated3157with this matter.31583159In 2001, the U.S. Judicial Panel on Multi-District Litigation ruled that certain3160lawsuits filed in U.S. federal district court involving products with Silzone(R)3161coating should be part of Multi-District Litigation proceedings under the3162supervision of U.S. District Court Judge John Tunheim in Minnesota. As a result,3163actions in federal court involving products with Silzone(R) coating have been3164and will likely continue to be transferred to Judge Tunheim for coordinated or3165consolidated pretrial proceedings. The hearing concerning requests by certain3166plaintiffs to have matters proceed as class actions occurred on October 2, 2002.3167Judge Tunheim is presently considering plaintiffs' motions for class3168certification, and a decision by Judge Tunheim in this regard is expected in3169early 2003.31703171There are other actions involving products with Silzone(R) coating in various3172state courts that may or may not be coordinated with the matters presently3173before Judge Tunheim. The lawsuits in Canada are proceeding in accordance with3174separate schedules issued by the applicable provincial courts. A hearing3175concerning the certification of a class action in Ontario, Canada, is currently3176scheduled for June 2003.31773178While it is not possible to predict the outcome of the various cases involving3179Silzone(R) products, the Company believes that it has adequate product liability3180insurance to cover the costs associated with them. The Company further believes3181that any costs not covered by product liability insurance will not have a3182material adverse impact on the Company's financial position or liquidity, but3183may be material to the consolidated results of operations of a future period.31843185GUIDANT LITIGATION: In November 1996, Guidant Corporation ("Guidant") sued St.3186Jude Medical alleging that the Company did not have a license to certain patents3187controlled by Guidant covering ICD products and alleging that the Company was3188infringing those patents. St. Jude Medical's contention was that it had obtained3189a license from Guidant to the patents in issue when it acquired certain assets3190of Telectronics in November 1996. In July 2000, an arbitrator rejected St. Jude3191Medical's position, and in May 2001, a federal district court judge also ruled3192that the Guidant patent license with Telectronics had not transferred to St.3193Jude Medical.31943195Guidant's suit originally alleged infringement of four patents by St. Jude3196Medical. Guidant later dismissed its claim on one patent and a court ruled that3197a second patent was invalid. This determination of invalidity was appealed by3198Guidant and the Court of Appeals upheld the lower court's invalidity3199determination. In a jury trial involving the two remaining patents (the '288 and3200'472 patents), the jury found that these patents were valid and that St. Jude3201Medical did not infringe the '288 patent. The jury found that the Company did3202infringe the '472 patent, though such infringement was not willful. The jury3203awarded damages of $140,000 to Guidant. In post-trial rulings, however, the3204judge overseeing the jury trial ruled that the '472 patent was invalid and also3205was not infringed by St. Jude Medical, thereby eliminating the $140,000 verdict3206against the Company. The trial court also made other rulings320732083209183210<PAGE>321132123213as part of the post-trial order, including a ruling that the '288 patent was3214invalid on several grounds.32153216In August 2002, Guidant commenced an appeal of certain of the trial judge's3217post-trial decisions pertaining to the '288 patent. Guidant did not appeal the3218trial court's finding of invalidity and non-infringement of the '472 patent. The3219parties are currently in the briefing phase of this appeal. While it is not3220possible to predict the outcome of the appeal process, the Company believes that3221it has meritorious defenses against the claims asserted by Guidant and Guidant's3222continued pursuit of this case.32233224Since the date of St. Jude Medical's acquisition of Ventritex in May 1997 and3225the inception of the Company's sales of ICD products, St. Jude Medical accrued a32263% royalty on its ICD sales under a license with Guidant that it believed it had3227acquired as part of its purchase of assets of the Telectronics cardiac3228stimulation device business. As a result of the jury's July 2001 verdict that3229St. Jude Medical's ICD products do not infringe Guidant's '288 patent, the3230Company ceased further royalty accruals. The historical accruals under this3231license at that time, which totaled approximately $15,000, remained on the3232Company's balance sheet pending further developments in the case. The Company3233evaluated the facts and circumstances of this case as part of its 2001 fiscal3234year close, including the post-trial ruling that the '288 patent was invalid,3235and concluded that the probability that the Company would have to pay any3236royalty under the license agreement was remote. As such, the Company reversed3237the $15,000 liability through selling, general and administrative expense in the3238fourth quarter of 2001.32393240In addition, the Company incurred legal fees in relation to the Guidant3241litigation that were subject to recoverability under an indemnification3242agreement between the Company and the seller of the Telectronics cardiac3243stimulation device business. The Company believed that the indemnitor would3244resist payment and, therefore, wrote off approximately $15,000 of its indemnity3245claim through selling, general and administrative expense in the fourth quarter3246of 2001.32473248OTHER LITIGATION MATTERS: The Company is involved in various product liability3249lawsuits, claims and proceedings of a nature considered normal to its business.3250Subject to self-insured retentions, the Company believes it has product3251liability insurance sufficient to cover such claims and suits.32523253During the second quarter of 2002, the Company received a cash payment of3254$18,500 relating to the settlement of certain patent litigation, which was3255recorded as a reduction of selling, general and administrative expense.32563257NOTE 6--SHAREHOLDERS' EQUITY3258CAPITAL STOCK: On May 16, 2002, the Company's Board of Directors declared a3259two-for-one stock split in the form of a 100% stock dividend to shareholders of3260record on June 10, 2002. Net earnings per share, shares outstanding and weighted3261average shares outstanding have been restated to reflect this stock split. The3262Company's authorized capital consists of 25,000,000 shares of $1.00 per share3263par value preferred stock and 250,000,000 shares of $0.10 per share par value3264common stock. There were no shares of preferred stock issued or outstanding3265during 2002, 2001 or 2000.32663267EMPLOYEE STOCK PURCHASE SAVINGS PLAN: The Company's employee stock purchase3268savings plan allows participating employees to purchase, through payroll3269deductions, newly issued shares of the Company's common stock at 85% of the fair3270market value at specified dates. Employees purchased 224,819, 286,362 and3271228,080 shares in 2002, 2001 and 2000, respectively, under this plan. At3272December 31, 2002, 1,488,819 shares of additional common stock were available3273for purchase under the plan.32743275STOCK COMPENSATION PLANS: The Company's stock compensation plans provide for the3276issuance of stock-based awards, such as restricted stock or stock options, to3277directors, officers, employees and consultants. Stock option awards under these3278plans generally have an eight to ten year life, an exercise price equal to the3279fair market value on the date of grant and a four-year vesting term. At December328031, 2002, the Company had 8,341,130 shares of common stock available for grant3281under these plans.32823283Stock option transactions under these plans during each of the three years in3284the period ended December 31, 2002 are as follows:32853286WEIGHTED3287OPTIONS AVERAGE3288OUTSTANDING EXERCISE PRICE3289============================================================================3290BALANCE AT JANUARY 1, 2000 22,823,226 $ 15.473291Granted 7,463,266 25.433292Canceled (1,478,680) 16.603293Exercised (2,268,172) 15.063294- ----------------------------------------------------------------------------3295BALANCE AT DECEMBER 31, 2000 26,539,640 18.243296Granted 6,373,310 35.943297Canceled (762,734) 21.083298Exercised (3,467,214) 15.273299- ----------------------------------------------------------------------------3300BALANCE AT DECEMBER 31, 2001 28,683,002 22.453301Granted 5,041,340 35.603302Canceled (716,452) 26.893303Exercised (3,312,968) 16.663304- ----------------------------------------------------------------------------3305BALANCE AT DECEMBER 31, 2002 29,694,922 $ 25.223306============================================================================330733083309193310<PAGE>331133123313Stock options totaling 15,432,468, 12,623,674 and 10,805,058 were exercisable at3314December 31, 2002, 2001 and 2000, respectively.33153316The following tables summarize information concerning currently outstanding and3317exercisable stock options at December 31, 2002:33183319OPTIONS OUTSTANDING3320===============================================================================3321WEIGHTED3322AVERAGE WEIGHTED3323REMAINING AVERAGE3324RANGES OF NUMBER CONTRACTUAL EXERCISE3325EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE3326===============================================================================3327$ 8.77 - $13.16 1,020,494 2.0 $ 11.11332813.16 - 17.55 9,051,344 5.1 14.79332917.55 - 21.94 2,682,286 4.4 19.65333021.94 - 26.32 5,757,893 5.9 26.23333126.32 - 35.10 4,763,278 7.7 34.19333235.10 - 43.87 6,419,627 6.9 36.953333- -------------------------------------------------------------------------------333429,694,922 5.9 $ 25.223335- -------------------------------------------------------------------------------333633373338OPTIONS EXERCISABLE3339===============================================================================3340WEIGHTED3341AVERAGE3342RANGES OF NUMBER EXERCISE3343EXERCISE PRICES EXERCISABLE PRICE3344===============================================================================3345$ 8.77 - $13.16 860,938 $ 10.89334613.16 - 17.55 7,954,404 14.89334717.55 - 21.94 2,143,886 19.53334821.94 - 26.32 2,869,518 26.22334926.32 - 35.10 176,441 31.44335035.10 - 43.87 1,427,281 36.833351- -------------------------------------------------------------------------------335215,432,468 $ 19.643353- -------------------------------------------------------------------------------33543355The Company also granted 30,470 shares of restricted common stock during the3356three years ended December 31, 2002, under the Company's stock compensation3357plans. The value of restricted stock awards as of the date of grant is charged3358to expense over the periods during which the restrictions lapse.33593360SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholder rights plan that3361entitles shareholders to purchase one-tenth of a share of Series B Junior3362Preferred Stock at a stated price, or to purchase either the Company's shares or3363shares of an acquiring entity at half their market value, upon the occurrence of3364certain events which result in a change in control, as defined by the Plan. The3365rights related to this plan expire in 2007.33663367NOTE 7--PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND SPECIAL CHARGES3368PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGES: In September 1999, the3369Company purchased VSI for $75,071 in cash, net of cash acquired, plus additional3370contingent consideration related to product development milestones for3371regulatory approvals and to future sales. The total consideration paid at close3372was allocated to the fair value of the net assets acquired ($7,618) and3373in-process research and development ($67,453). The Company paid additional3374amounts totaling $10,000 in 2001 and $5,000 in 2000, which were recorded as3375purchased in-process research and development expenses, as certain product3376development milestones were achieved. The remaining balance of the in-process3377research and development valuation ($13,047) will be recorded in the Company's3378consolidated financial statements as purchased in-process research and3379development expense when payment of the contingent consideration is assured3380beyond a reasonable doubt. Contingent consideration payments in excess of the3381$13,047 will be capitalized as goodwill.338233832001 SPECIAL CHARGE: In July 2001, the Company initiated efforts to streamline3384its heart valve operations, consolidate its U.S. sales activities and3385restructure its international sales organization. As a result of these3386activities, the Company recorded pre-tax special charges of $20,657 in the third3387quarter of 2001, consisting of employee severance costs resulting from the3388elimination of approximately 90 production and administrative positions3389($5,293), inventory write-offs and scrap ($9,490), capital equipment write-offs3390($3,379) and other costs related primarily to lease terminations and other3391facility exit costs due to the closing and consolidation of sales offices3392($2,495). The Company has utilized $19,865 of these special charge accruals3393through December 31, 2002, consisting of $4,783 of employee severance costs,3394$9,328 of inventory write-offs and scrap, $3,379 of capital equipment write-offs3395and $2,375 of other costs. The Company estimates that the remaining accruals3396will be utilized during 2003.33973398During the third quarter of 2001, the Company also wrote off $12,177 of certain3399diagnostic equipment deemed obsolete due to the overwhelming acceptance of newer3400technology equipment that received U.S. regulatory approvals in late 2000 and3401early 2001 and was launched earlier in 2001.34023403The charges relating to employee severance costs, capital equipment write-offs3404and other costs ($11,167) were recorded in operating expenses as special3405charges. The inventory and diagnostic equipment write-offs ($21,667) were3406included in cost of sales as special charges.34073408SILZONE(R) SPECIAL CHARGES: On January 21, 2000, the Company initiated a3409worldwide voluntary recall of all field inventory of heart valve replacement and3410repair products incorporating Silzone(R) coating on the sewing cuff fabric. The3411Company concluded that it would341234133414203415<PAGE>341634173418no longer utilize Silzone(R) coating. The Company recorded a special charge3419accrual totaling $26,101 during the first quarter of 2000 relating to asset3420write-downs ($9,465) and other costs ($16,636), including monitoring expenses,3421associated with this recall and product discontinuance. In the second quarter of34222002, the Company determined that the Silzone(R) reserves for other costs should3423be increased by $11,000 due primarily to difficulties in obtaining certain3424reimbursements from the Company's insurance carriers under the product liability3425insurance policies. This additional accrual was included in selling, general and3426administrative expenses for the second quarter ended June 30, 2002. The Company3427has utilized $23,202 of these special charge accruals through December 31, 2002,3428consisting of $9,465 of asset write-downs and $13,737 of other costs. The3429Company estimates that the remaining accruals will be utilized primarily during34302003 and 2004. The Company has approximately $200,000 remaining in product3431liability insurance currently available for the Silzone(R)-related matters.3432There can be no assurance that the final costs associated with this recall that3433are not covered by insurance, including litigation-related costs, will not3434exceed management's estimates.34353436NOTE 8--OTHER INCOME (EXPENSE) Other income (expense) consists of the following:343734382002 2001 20003439================================================================================3440Interest income $ 5,481 $ 3,261 $ 2,6403441Interest expense (1,754) (12,567) (28,569)3442Other (324) 1,468 8793443- --------------------------------------------------------------------------------3444Other income (expense) $ 3,403 $ (7,838) $ (25,050)3445================================================================================34463447NOTE 9--INCOME TAXES3448The Company's earnings before income taxes were generated from its U.S. and3449international operations as follows:345034512002 2001 20003452================================================================================3453U.S. $ 270,595 $ 83,128 $ 75,5383454International 102,763 144,850 101,7713455- --------------------------------------------------------------------------------3456Earnings before income taxes $ 373,358 $ 227,978 $ 177,3093457================================================================================34583459Income tax expense consists of the following:346034612002 2001 20003462================================================================================3463Current:3464U.S. federal $ 48,459 $ 48,844 $ 31,8593465U.S. state and other 4,732 4,994 3,8153466International 6,187 13,229 17,9803467- --------------------------------------------------------------------------------3468Total current 59,378 67,067 53,6543469- --------------------------------------------------------------------------------3470Deferred 37,695 (11,681) (5,439)3471- --------------------------------------------------------------------------------3472Income tax expense $ 97,073 $ 55,386 $ 48,2153473================================================================================34743475The tax effects of the cumulative temporary differences between the tax bases of3476assets and liabilities and their carrying amounts for financial statement3477purposes are as follows:347834792002 20013480================================================================================3481DEFERRED INCOME TAX ASSETS:3482Net operating loss carryforwards $ 12,732 $ 52,3493483Tax credit carryforwards 30,554 31,6783484Inventories 34,403 30,4033485Intangible assets 3,552 14,0023486Accrued liabilities and other 11,569 1,7463487- --------------------------------------------------------------------------------3488Deferred income tax assets 92,810 130,1783489- --------------------------------------------------------------------------------3490DEFERRED INCOME TAX LIABILITIES:3491Unrealized gain on available-for-sale securities (2,599) (5,620)3492Property, plant and equipment (21,085) (20,757)3493- --------------------------------------------------------------------------------3494Deferred income tax liabilities (23,684) (26,377)3495- --------------------------------------------------------------------------------3496Net deferred income tax asset $ 69,126 $ 103,8013497================================================================================34983499A reconciliation of the U.S. federal statutory income tax rate to the Company's3500effective income tax rate is as follows:35013502<TABLE>3503<CAPTION>35042002 2001 20003505- ---------------------------------------------------------------------------------------------------------3506<S> <C> <C> <C>3507Income tax expense at the U.S. federal3508statutory rate of 35% $ 130,675 $ 79,792 $ 62,0583509U.S. state income taxes, net of federal tax benefit 8,378 3,654 2,7253510International taxes at lower rates (29,972) (20,089) (12,451)3511Tax benefits from foreign sales corporation3512and extraterritorial income exclusion (3,675) (3,681) (2,280)3513Research and development credits (9,467) (5,984) (4,464)3514Non-deductible purchased in-process research3515and development charges - 3,912 2,1413516Other 1,134 (2,218) 4863517- ---------------------------------------------------------------------------------------------------------3518Income tax expense $ 97,073 $ 55,386 $ 48,2153519=========================================================================================================3520Effective income tax rate 26.0% 24.3% 27.2%3521=========================================================================================================3522</TABLE>35233524At December 31, 2002, the Company has $36,377 of net operating loss3525carryforwards and $25,633 of tax credit carryforwards that will expire from 20033526through 2022 if not utilized. These amounts are subject to annual usage3527limitations. The Company's net operating loss carryforwards arose primarily from3528acquisitions. The Company also has alternative minimum tax credit carryforwards3529of $4,921 that have an unlimited carryforward period.35303531The Company has not recorded U.S. deferred income taxes on $430,885 of its3532non-U.S. subsidiaries' undistributed earnings, because such amounts are intended3533to be reinvested outside the United States indefinitely.353435353536213537<PAGE>353835393540NOTE 10--RETIREMENT PLANS3541DEFINED CONTRIBUTION PLANS: The Company has a 401(k) profit sharing plan that3542provides retirement benefits to substantially all full-time U.S. employees.3543Eligible employees may contribute a percentage of their annual compensation,3544subject to IRS limitations, with the Company matching a portion of the3545employees' contributions. The Company also contributes a portion of its earnings3546to the plan based upon Company performance. The Company's matching and profit3547sharing contributions are at the discretion of the Company's Board of Directors.3548In addition, the Company has defined contribution programs for employees outside3549the United States. Company contributions under all defined contribution plans3550totaled $18,764, $16,249 and $13,170 in 2002, 2001 and 2000, respectively.35513552DEFINED BENEFIT PLANS: The Company has unfunded defined benefit plans for3553employees in certain countries outside the United States. The Company has an3554accrued liability totaling approximately $10,700 at December 31, 2002, which3555approximates the actuarially calculated unfunded liability. The related pension3556expense was not material.35573558NOTE 11--SEGMENT AND GEOGRAPHIC INFORMATION3559SEGMENT INFORMATION: The Company manages its business on the basis of one3560reportable segment--the development, manufacturing and distribution of3561cardiovascular medical devices. See Note 1 for a brief description of the3562Company's primary markets and principal products.35633564Net sales by class of similar products were as follows:35653566NET SALES 2002 2001 20003567================================================================================3568Cardiac rhythm management $ 1,147,489 $ 965,968 $ 819,1173569Cardiac surgery 250,957 248,045 256,9493570Cardiology and vascular access 191,483 133,343 102,7403571- --------------------------------------------------------------------------------3572$ 1,589,929 $ 1,347,356 $ 1,178,8063573================================================================================35743575GEOGRAPHIC INFORMATION: The following tables present certain geographical3576financial information:35773578NET SALES * 2002 2001 20003579- -------------------------------------------------------------------------------3580United States $ 1,042,766 $ 880,086 $ 745,7933581International 547,163 467,270 433,0133582- -------------------------------------------------------------------------------3583$ 1,589,929 $ 1,347,356 $ 1,178,8063584===============================================================================35853586LONG-LIVED ASSETS ** 2002 2001 20003587- -------------------------------------------------------------------------------3588United States $ 674,119 $ 626,140 $ 640,2203589International 150,674 137,803 149,3253590- -------------------------------------------------------------------------------3591$ 824,793 $ 763,943 $ 789,5453592===============================================================================35933594* NET SALES ARE ATTRIBUTED TO COUNTRIES BASED ON LOCATION OF THE CUSTOMER.35953596** LONG-LIVED ASSETS EXCLUDE DEFERRED INCOME TAXES.35973598NOTE 12--QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 20023599and 2001 is as follows:36003601<TABLE>3602<CAPTION>3603QUARTER3604FIRST SECOND THIRD FOURTH3605==========================================================================================================================3606<S> <C> <C> <C> <C>3607FISCAL YEAR ENDED DECEMBER 31, 2002:3608Net sales $ 371,193 $ 404,348 $ 404,857 $ 409,5313609Gross profit 252,405 275,386 276,476 279,7163610Net earnings 62,076 69,555 (1) 71,680 72,9743611Basic net earnings per share 0.35 0.39 0.40 0.413612Diluted net earnings per share $ 0.34 $ 0.38 $ 0.39 $ 0.4036133614FISCAL YEAR ENDED DECEMBER 31, 2001:3615Net sales $ 326,065 $ 336,062 $ 337,029 $ 348,2003616Gross profit 218,988 225,839 207,040 (3) 236,3303617Net earnings 47,074 43,819 (2) 31,434 (3) 50,265 (2)3618Basic net earnings per share 0.28 0.26 0.18 0.293619Diluted net earnings per share $ 0.27 $ 0.25 $ 0.18 $ 0.283620==========================================================================================================================3621</TABLE>36223623(1) INCLUDES A CASH RECEIPT OF $18,500 RELATING TO THE SETTLEMENT OF CERTAIN3624PATENT LITIGATION, WHICH WAS RECORDED AS A REDUCTION OF SG&A EXPENSE. ALSO,3625THE COMPANY RECORDED IN SG&A AN $11,000 CHARGE TO INCREASE THE RESERVE FOR3626EXPENSES RELATED TO THE SILZONE(R) RECALL AND A $7,500 DISCRETIONARY3627CONTRIBUTION TO ITS CHARITABLE FOUNDATION.36283629(2) INCLUDES A PRE-TAX PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE OF3630$5,000 RELATING TO THE VASCULAR SCIENCE, INC. ACQUISITION.36313632(3) INCLUDES A PRE-TAX SPECIAL CHARGE OF $32,834 RELATING TO A RESTRUCTURING OF3633ITS U.S. AND INTERNATIONAL SALES ORGANIZATIONS, A STREAMLINING OF ITS HEART3634VALVE OPERATIONS AND A WRITE-OFF OF CERTAIN DIAGNOSTIC EQUIPMENT. $21,667 OF3635THIS SPECIAL CHARGE WAS RECORDED IN COST OF SALES, AND THE REMAINING $11,1673636WAS RECORDED IN OPERATING EXPENSES.363736383639223640<PAGE>364136423643FIVE-YEAR SUMMARY FINANCIAL DATA3644(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)36453646<TABLE>3647<CAPTION>36482002 2001* 2000** 1999*** 19983649=====================================================================================================================3650SUMMARY OF OPERATIONS FOR THE FISCAL YEAR:3651<S> <C> <C> <C> <C> <C>3652Net sales $1,589,929 $1,347,356 $1,178,806 $1,114,549 $1,015,9943653Gross profit $1,083,983 $ 888,197 $ 787,657 $ 733,647 $ 643,0543654Percent of net sales 68.2% 65.9% 66.8% 65.8% 63.3%3655Operating profit $ 369,955 $ 235,816 $ 202,359 $ 89,188 $ 193,9523656Percent of net sales 23.3% 17.5% 17.2% 8.0% 19.1%3657Net earnings $ 276,285 $ 172,592 $ 129,094 $ 24,227 $ 129,0823658Percent of net sales 17.4% 12.8% 11.0% 2.2% 12.7%3659Diluted net earnings per share $ 1.51 $ 0.97 $ 0.75 $ 0.14 $ 0.753660- ---------------------------------------------------------------------------------------------------------------------36613662FINANCIAL POSITION AT YEAR END:3663Cash and equivalents $ 401,860 $ 148,335 $ 50,439 $ 9,655 $ 3,7753664Working capital 739,665 475,692 388,322 389,768 471,0903665Total assets 1,951,379 1,628,727 1,532,716 1,554,038 1,384,6123666Long-term debt -- 123,128 294,500 477,495 374,9953667Shareholders' equity 1,576,727 1,183,745 940,849 794,021 806,2203668- ---------------------------------------------------------------------------------------------------------------------36693670OTHER DATA:3671Diluted weighted average shares outstanding 183,002 178,767 171,634 169,470 172,2903672=====================================================================================================================3673</TABLE>36743675ALL FISCAL YEARS NOTED ABOVE CONSISTED OF FIFTY-TWO WEEKS. THE COMPANY DID NOT3676DECLARE OR PAY ANY CASH DIVIDENDS DURING 1998 THROUGH 2002.36773678*RESULTS FOR 2001 INCLUDE A $32,834 SPECIAL CHARGE AND PURCHASED IN-PROCESS3679RESEARCH AND DEVELOPMENT CHARGES OF $10,000. THE IMPACT OF THESE ITEMS ON36802001 NET EARNINGS WAS $30,517, OR $0.17 PER DILUTED SHARE.36813682**RESULTS FOR 2000 INCLUDE A $26,101 SPECIAL CHARGE AND A PURCHASED IN-PROCESS3683RESEARCH AND DEVELOPMENT CHARGE OF $5,000. THE IMPACT OF THESE ITEMS ON 20003684NET EARNINGS WAS $27,213, OR $0.16 PER DILUTED SHARE.36853686***RESULTS FOR 1999 INCLUDE A $9,754 SPECIAL CHARGE AND PURCHASED IN-PROCESS3687RESEARCH AND DEVELOPMENT CHARGES TOTALING $115,228. THE IMPACT OF THESE ITEMS3688ON 1999 NET EARNINGS WAS $119,762, OR $0.71 PER DILUTED SHARE.368936903691233692<PAGE>369336943695INVESTOR INFORMATION36963697TRANSFER AGENT3698Requests concerning the transfer or exchange of shares, lost stock certificates,3699duplicate mailings, or change of address should be directed to the Company's3700Transfer Agent at:37013702EquiServe Trust Company, N.A.3703P.O. Box 430233704Providence, RI 02940-302337051.877.282.11683706www.equiserve.com3707(Account Access Availability)3708Hearing impaired #TDD: 1.800.952.924537093710ANNUAL MEETING OF SHAREHOLDERS3711The annual meeting of shareholders will be held at 9:30 a.m. on Thursday, May 8,37122003, at the Minnesota Historical Center, 345 Kellogg Boulevard West, St. Paul,3713Minnesota, 55102.37143715INVESTOR CONTACT3716Laura C. Merriam3717Director, Investor Relations37181.651.766.302937193720To obtain information about the Company call 1.800.552.7664, visit our Web site3721at www.sjm.com, or write to:37223723Investor Relations3724St. Jude Medical, Inc.3725One Lillehei Plaza3726St. Paul, Minnesota 55117-998337273728The Investor Relations section on St. Jude Medical's Web site includes all SEC3729filings, a list of analyst coverage, analyst estimates, and a calendar of3730upcoming earnings announcements and investor relations events. St. Jude3731Medical's Newsroom features news releases, company background information, fact3732sheets, executive bios, a product photo portfolio, and other media resources.3733Patient profiles can be found on our Web site, including the patients featured3734in this year's annual report.37353736(C)2003 ST. JUDE MEDICAL, INC.37373738COMPANY INFORMATION3739(SEE COMPANY INFORMATION ON WEB SITE- WWW.SJM.COM)3740o Principles of Corporate Governance3741o Code of Business Conduct3742o SEC Filings37433744COMPANY STOCK SPLITS37452:1 on 4/27/79, 1/25/80, 9/30/86, 3/15/89 and 4/30/90 and 6/10/02;37463:2 on 11/16/9537473748STOCK EXCHANGE LISTINGS3749New York Stock Exchange3750Symbol: STJ37513752The range of high and low prices per share for the Company's common stock for3753fiscal 2002 and 2001 is set forth below. As of February 14, 2003, the Company3754had 3,606 shareholders of record.37553756FISCAL YEAR ENDED DECEMBER 31 2002 20013757- ------------------------------------------------------------------------------3758Quarter High Low High Low3759- ------------------------------------------------------------------------------3760First $ 40.80 $ 35.75 $ 32.28 $ 22.233761Second $ 43.13 $ 36.20 $ 33.00 $ 24.803762Third $ 41.00 $ 30.52 $ 36.03 $ 28.883763Fourth $ 40.35 $ 31.16 $ 39.04 $ 33.4837643765TRADEMARKS3766Aescula(TM), AF Suppression(TM), Alliance(TM), Angio-Seal(TM), Atlas(R),3767BiLinx(TM), Epic(TM), Fast-Cath(TM), Fast-cath Duo(TM), FlexCuff(TM),3768Frontier(TM), Genesis System(TM), GuideRight(TM), Housecall Plus(TM),3769HydroSteer(TM), Identity(R), Integrity(R), ISOFlex(TM), Linx(TM), Livewire(TM),3770Livewire Cannulator(TM), Livewire Spiral HP(TM), Livewire TC(TM), Microny(R),3771Maximum(TM), NaviFlex(TM), Photon(R), Response(TM), Riata(R), Seal-Away(TM),3772SJM(R), SJM Biocor(TM), SJM Epic(TM), SJM Regent(TM), SJM Tailor(TM),3773SpyglASS(TM), St. Jude Medical(R), Supreme(TM), Supreme Spiral SC(TM),3774Symmetry(TM), Tendril(R), Toronto Root(TM), Toronto SPV(R), Trio(TM), TVL(R),3775Ultimum(TM), Victory(TM).37763777Broadlane(R)and Novation(R)are registered trademarks of Broadlane, Inc. and3778Novation, respectively.3779378037812437823783</TEXT>3784</DOCUMENT>3785<DOCUMENT>3786<TYPE>EX-213787<SEQUENCE>43788<FILENAME>stjude031298_ex21.txt3789<DESCRIPTION>SUBSIDIARIES OF THE REGISTRANT3790<TEXT>3791EXHIBIT 2137923793ST. JUDE MEDICAL, INC.37943795SUBSIDIARIES OF THE REGISTRANT379637973798St. Jude Medical, Inc. Wholly Owned Subsidiaries:3799o Pacesetter, Inc. - Sylmar, California, Scottsdale, Arizona, and Maven,3800South Carolina (Delaware corporation) (doing business as St. Jude Medical3801Cardiac Rhythm Management Division)3802o St. Jude Medical S.C., Inc. - St. Paul, Minnesota (Minnesota corporation)3803- Bio-Med Sales, Inc. (Pennsylvania corporation)3804- HeartBeat Medical, Inc. (Utah corporation)3805o St. Jude Medical Europe, Inc. - St. Paul, Minnesota (Delaware corporation)3806- Brussels, Belgium branch3807o St. Jude Medical Canada, Inc. - Mississauga, Ontario and St. Hyacinthe,3808Quebec (Ontario, Canada corporation)3809o 151703 Canada, Inc. - St. Paul, Minnesota (Ontario, Canada corporation)3810o St. Jude Medical (Hong Kong) Limited - Central, Hong Kong (Hong Kong3811corporation)3812- Shanghai and Beijing, China representative offices3813- Korean and Taiwan branch offices3814- Mumbai, New Delhi, Calcutta and Chennai, India branch offices3815o St. Jude Medical, Inc., Cardiac Assist Division - St. Paul, Minnesota3816(Delaware corporation) (Assets of St. Jude Medical, Inc., Cardiac Assist3817Division sold to Bard 1/19/96)3818o St. Jude Medical Australia Pty., Ltd. - Sydney Australia (Australian3819corporation)3820o St. Jude Medical Brasil, Ltda. - Sao Paulo and Belo Horizonte, Brazil3821(Brazilian corporation)3822o Telectronics Medica, Ltda. - Sao Paulo, Brazil (Brazilian corporation)3823(ownership of Telectronics Medical, Ltda. is shared by St. Jude Medical,3824Inc., St. Jude Medical Brasil, Ltda. and SJM International, Inc. with38257,726,500, 5,748,283 and 10 shares, respectively)3826o St. Jude Medical, Daig Division, Inc.- Minnetonka, Minnesota (Minnesota3827corporation)3828o St. Jude Medical Colombia, Ltda. (Bogota, Colombia) (Colombian corporation)3829o St. Jude Medical ATG, Inc. - Maple Grove, Minnesota (Minnesota corporation)3830o SJM International, Inc. - St. Paul, Minnesota (Delaware corporation)3831- Tokyo, Japan branch383238333834<PAGE>383538363837SJM International Inc. Wholly Owned Subsidiaries3838o St. Jude Medical Puerto Rico, Inc. - Caguas, Puerto Rico (Delaware3839corporation)3840- St. Jude Medical Puerto Rico Holding, B.V. (Netherlands corporation)3841(wholly owned subsidiary of St. Jude Medical Puerto Rico, Inc.)3842- St. Jude Medical Japan KK (Japanese corporation) (wholly owned3843subsidiary of St. Jude Medical Puerto Rico Holding, B.V.3844- St. Jude Medical Nederland B.V. (Netherlands corporation) (wholly3845owned subsidiary of St. Jude Medical Puerto Rico Holding, B.V.)3846- Telectronics B.V. (Netherlands corporation) (wholly owned3847subsidiary of St. Jude Medical Nederland B.V.)3848- St. Jude Medical Netherlands Distribution AB (Swedish corporation3849headquartered in the Netherlands) (wholly owned subsidiary of St.3850Jude Medical Puerto Rico Holding, B.V.)3851- St. Jude Medical Puerto Rico B.V. (Netherlands corporation)3852(wholly owned subsidiary of St. Jude Medical Netherlands3853Distribution AB)3854- Puerto Rico branch of St. Jude Medical Puerto Rico B.V.3855- St. Jude Medical Coordination Center (Belgium branch of St.3856Jude Medical Netherlands Distribution AB)3857o St. Jude Medical AB (Swedish corporation)3858o St. Jude Medical Sweden AB (Swedish corporation)3859o St. Jude Medical Danmark A/S (Danish corporation)3860- Telectronics Scandinavia Aps (Danish corporation) (wholly owned3861subsidiary of St. Jude Medical Danmark A/S)3862o St. Jude Medical Pacesetter Sales AB (Swedish corporation)3863o St. Jude Medical (Portugal) - Distribuicao de Produtos Medicos, Lda.3864(Portuguese corporation)3865o St. Jude Medical Export Ges.m.b.H. (Austrian corporation)3866o St. Jude Medical Medizintechnik Ges.m.b.H. (Austrian corporation)3867o St. Jude Medical Italia S.p.A. (Italian corporation)3868o N.V. St. Jude Medical Belgium, S.A. (Belgian corporation)3869o St. Jude Medical Espana, S.A. (Spanish corporation)3870o St. Jude Medical France S.A. (French corporation)3871o St. Jude Medical Finland O/y (Finnish corporation)3872o St. Jude Medical Sp.zo.o. (Polish corporation)3873o St. Jude Medical GmbH (German corporation)3874o St. Jude Medical UK Limited (United Kingdom corporation)3875o St. Jude Medical AG (Swiss corporation)38763877</TEXT>3878</DOCUMENT>3879<DOCUMENT>3880<TYPE>EX-233881<SEQUENCE>53882<FILENAME>stjude031298_ex23.txt3883<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS3884<TEXT>3885EXHIBIT 23388638873888CONSENT OF INDEPENDENT AUDITORS38893890We consent to the incorporation by reference in this Annual Report on Form 10-K3891of St. Jude Medical, Inc. of our report dated January 27, 2003, included in the38922002 Annual Report to Shareholders of St. Jude Medical, Inc.38933894Our audits also included the financial statement schedule of St. Jude Medical,3895Inc. listed in Item 15(a) of this Annual Report on Form 10-K. This schedule is3896the responsibility of the Company's management. Our responsibility is to express3897an opinion based on our audits. In our opinion, the financial statement schedule3898referred to above, when considered in relation to the basic financial statements3899taken as a whole, presents fairly in all material respects the information set3900forth therein.39013902We also consent to the incorporation by reference in Registration Statement No.390333-9262, Registration Statement No. 33-41459, Registration Statement No.390433-48502, Registration Statement No. 33-54435, Registration Statement No.3905333-42945, Registration Statement No. 333-42658, Registration Statement No.3906333-42668 and Registration Statement No. 333-96697 on Form S-8 of our report3907dated January 27, 2003, with respect to the consolidated financial statements3908incorporated herein by reference, and our report in the preceding paragraph with3909respect to the financial statement schedule included in this Annual Report on3910Form 10-K of St. Jude Medical, Inc.39113912/s/ ERNST & YOUNG LLP39133914Minneapolis, Minnesota3915March 19, 200339163917</TEXT>3918</DOCUMENT>3919<DOCUMENT>3920<TYPE>EX-243921<SEQUENCE>63922<FILENAME>stjude031298_ex24.txt3923<DESCRIPTION>POWER OF ATTORNEY3924<TEXT>3925EXHIBIT 24392639273928POWER OF ATTORNEY392939303931KNOW ALL BY THESE PRESENTS, that each person whose signature appears3932below constitutes and appoints Terry L. Shepherd, John C. Heinmiller and Kevin3933T. O'Malley, each with full power to act without the other, his or her true and3934lawful attorney-in-fact and agent with full power of substitution, for him or3935her and in his or her name, place and stead, in any and all capacities, to sign3936the Annual Report on Form 10-K of St. Jude Medical, Inc. for the fiscal year3937ended December 31, 2002, and any or all amendments to said Annual Report, and to3938file the same, with all exhibits thereto, and other documents in connection3939therewith, with the Securities and Exchange Commission, and to file the same3940with such other authorities as necessary, granting unto each such3941attorney-in-fact and agent full power and authority to do and perform each and3942every act and thing requisite and necessary to be done in and about the3943premises, as fully to all intents and purposes as he or she might or could do in3944person, hereby ratifying and confirming all that each such attorney-in-fact and3945agent, or his substitute, may lawfully do or cause to be done by virtue hereof.39463947IN WITNESS WHEREOF, this Power of Attorney has been signed on this 19th3948day of March, 2003, by the following persons.3949395039513952/s/ TERRY L. SHEPHERD /s/ DANIEL J. STARKS3953- --------------------- --------------------3954Terry L. Shepherd Daniel J. Starks3955Chairman and Chief Executive Officer Director3956(Principal Executive Officer)39573958/s/ JOHN C. HEINMILLER /s/ DAVID A. THOMPSON3959- ---------------------- ---------------------3960John C. Heinmiller David A. Thompson3961Vice President, Finance and Director3962Chief Financial Officer3963(Principal Financial and Accounting Officer)39643965/s/ STEFAN K. WIDENSOHLER3966- ----------------------- -------------------------3967Richard R. Devenuti Stefan K. Widensohler3968Director Director39693970/s/ STUART M. ESSIG /s/ WENDY L. YARNO3971- ------------------- ------------------3972Stuart M. Essig Wendy L. Yarno3973Director Director39743975/s/ THOMAS H. GARRETT III /s/ FRANK C-P YIN3976- ------------------------- -----------------3977Thomas H. Garrett III Frank C-P Yin3978Director Director39793980/s/ WALTER L. SEMBROWICH3981Walter L. Sembrowich3982Director39833984</TEXT>3985</DOCUMENT>3986<DOCUMENT>3987<TYPE>EX-99.13988<SEQUENCE>73989<FILENAME>stjude031298_ex99-1.txt3990<DESCRIPTION>SECTION 906 CERTIFICATION3991<TEXT>3992EXHIBIT 99.1399339943995CERTIFICATION PURSUANT TO399618 U.S.C. SS.1350,3997AS ADOPTED PURSUANT TO3998SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002399940004001In connection with the Annual Report of St. Jude Medical, Inc., (the "Company")4002on Form 10-K for the period ended December 31, 2002, as filed with the4003Securities and Exchange Commission on the date hereof (the "Report"), I, Terry4004L. Shepherd, Chief Executive Officer of the Company, certify, pursuant to 184005U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of40062002, that:400740081. The Report fully complies with the requirements of Section 13(a) or400915(d) of the Securities Exchange Act of 1934; and401040112. The information contained in the Report fairly presents, in all4012material respects, the financial condition and results of operations4013of the Company.401440154016/s/ TERRY L. SHEPHERD4017---------------------4018Terry L. Shepherd4019Chairman and Chief Executive Officer4020March 19, 200340214022</TEXT>4023</DOCUMENT>4024<DOCUMENT>4025<TYPE>EX-99.24026<SEQUENCE>84027<FILENAME>stjude031298_ex99-2.txt4028<DESCRIPTION>SECTION 906 CERTIFICATION4029<TEXT>4030EXHIBIT 99.2403140324033CERTIFICATION PURSUANT TO403418 U.S.C. SS.1350,4035AS ADOPTED PURSUANT TO4036SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002403740384039In connection with the Annual Report of St. Jude Medical, Inc., (the "Company")4040on Form 10-K for the period ended December 31, 2002, as filed with the4041Securities and Exchange Commission on the date hereof (the "Report"), I, John C.4042Heinmiller, Chief Financial Officer of the Company, certify, pursuant to 184043U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of40442002, that:404540461. The Report fully complies with the requirements of Section 13(a) or404715(d) of the Securities Exchange Act of 1934; and404840492. The information contained in the Report fairly presents, in all4050material respects, the financial condition and results of operations4051of the Company.405240534054/s/ JOHN C. HEINMILLER4055----------------------4056John C. Heinmiller4057Chief Financial Officer4058March 19, 200340594060</TEXT>4061</DOCUMENT>4062</SEC-DOCUMENT>4063-----END PRIVACY-ENHANCED MESSAGE-----406440654066