SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
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ss. 240.14a-12
St. Jude Medical, Inc.
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other than the Registrant)
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Notice of 2004 Annual Meeting and
PROXY STATEMENT
[ST. JUDE MEDICAL LOGO]
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ST. JUDE MEDICAL, INC.
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ONE LILLEHEI PLAZA
ST. PAUL, MINNESOTA 55117
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
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TIME ...................... 9:30 a.m. CDT
Wednesday, May 12, 2004
PLACE ..................... Minnesota Historical Center
345 Kellogg Boulevard West
St. Paul, MN 55102
ITEMS OF BUSINESS ......... (1) To elect three members of the Board of
Directors, for terms ending in 2007.
(2) To consider a proposal to increase the
Company's authorized shares of the common
stock to 500 million shares.
(3) To consider a proposal to approve the Company's
Management Incentive Compensation Plan.
(4) To ratify the appointment of Ernst & Young LLP
as the Company's independent auditors for 2004.
(5) To consider a shareholder proposal regarding
compensation of the Company's senior executives.
(6) To transact such other business as may properly
come before the meeting and any adjournment.
RECORD DATE ............... Holders of St. Jude Medical, Inc. common stock of
record at the close of business on March 15, 2004,
are entitled to notice of and to vote at the
meeting.
ANNUAL REPORT ............. The Company's 2003 Annual Report, which is not a
part of the proxy soliciting material, is enclosed.
PROXY VOTING .............. It is important that your shares be represented at
the meeting. You can vote your shares by completing
and returning the enclosed proxy card as soon as
possible. You can revoke a proxy at any time prior
to its exercise at the meeting by following the
instructions in the accompanying proxy statement.
Kevin T. O'Malley
VICE PRESIDENT, GENERAL COUNSEL &
SECRETARY
March 30, 2004
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TABLE OF CONTENTS
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PAGE
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PROXY STATEMENT ....................................................................... 1
Proxies and Voting Procedures ........................................................ 1
Shareholders Entitled to Vote ........................................................ 2
Required Vote ........................................................................ 2
Cost of Proxy Solicitation ........................................................... 2
GOVERNANCE OF THE COMPANY ............................................................. 3
Principles of Corporate Governance ................................................... 3
Communications with Directors ........................................................ 3
Director Nomination Process .......................................................... 3
Attendance at Annual Shareholder Meeting ............................................. 4
Director Independence and Audit Committee Financial Expert ........................... 4
Committees of the Board of Directors ................................................. 4
Report of the Audit Committee ........................................................ 5
Compensation of Directors ............................................................ 6
Related Party Transactions ........................................................... 6
Section 16(a) Beneficial Ownership Reporting Compliance .............................. 6
BOARD OF DIRECTORS .................................................................... 8
Nominees for Term Expiring in 2007 ................................................... 8
Directors Whose Terms Will Expire in 2005 ............................................ 9
Directors Whose Terms Will Expire in 2006 ............................................ 10
SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS AND CERTAIN
BENEFICIAL OWNERS .................................................................... 11
STOCK PERFORMANCE GRAPH ............................................................... 13
EXECUTIVE COMPENSATION ................................................................ 14
Report of the Compensation Committee on Executive Compensation ....................... 14
Summary Compensation Table ........................................................... 17
Option Grants in Last Fiscal Year .................................................... 18
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values .... 18
Equity Compensation Plan Information ................................................. 19
Employment, Termination and Change in Control Agreements ............................. 20
PROPOSAL TO RATIFY THE APPOINTMENT OF AUDITORS ........................................ 21
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PAGE
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PROPOSAL TO APPROVE THE MANAGEMENT INCENTIVE COMPENSATION PLAN
(MICP) ............................................................. 23
PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK FROM 250,000,000
TO 500,000,000 ..................................................... 25
SHAREHOLDER PROPOSAL REGARDING COMPENSATION OF SENIOR EXECUTIVES..... 28
SHAREHOLDER PROPOSALS FOR THE 2005 ANNUAL MEETING ................... 31
OTHER MATTERS ....................................................... 31
APPENDIX A -- Principles of Corporate Governance .................... 32
APPENDIX B -- 2004 Management Incentive Compensation Plan ........... 35
iii
St. Jude Medical, Inc. [ST. JUDE MEDICAL LOGO]
One Lillehei Plaza
St. Paul, MN 55117
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 12, 2004
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We are providing these proxy materials in connection with the solicitation
by the Board of Directors of St. Jude Medical, Inc., of proxies to be voted at
the Company's 2004 Annual Meeting of Shareholders and at any meeting following
adjournment thereof.
You are cordially invited to attend the annual meeting on May 12, 2004,
beginning at 9:30 a.m. C.D.T. The meeting will be held in the Minnesota
Historical Center, 345 Kellogg Boulevard West, St. Paul, Minnesota. The
location is accessible to handicapped persons.
We are first mailing this proxy statement and accompanying forms of proxy
and voting instructions on or about April 6, 2004, to holders of the Company's
common stock on March 15, 2004, the record date for the meeting.
PROXIES AND VOTING PROCEDURES
YOUR VOTE IS IMPORTANT. Because many shareholders cannot attend the
meeting in person, it is necessary that a large number be represented by proxy.
Please refer to your proxy card or the information forwarded by your bank,
broker or other holder of record to see which options for voting by proxy are
available to you. By providing your voting instructions promptly, you may save
the Company the expense of a second mailing.
You can revoke your proxy at any time before it is exercised at the
meeting by timely delivery of a properly executed, later-dated proxy or by
voting by ballot at the meeting. If your shares are held in the name of a bank,
broker or other holder of record, you must obtain a proxy, executed in your
favor, from the holder of record, to be able to vote at the meeting.
All shares entitled to vote at the meeting and represented by properly
completed proxies received prior to the meeting and not revoked will be voted
at the meeting in accordance with your instructions. IF YOU DO NOT INDICATE HOW
YOUR SHARES SHOULD BE VOTED ON A MATTER, THE SHARES REPRESENTED BY YOUR
PROPERLY COMPLETED PROXY WILL BE VOTED IN ACCORDANCE WITH THE RECOMMENDATION OF
THE BOARD OF DIRECTORS, AS SET FORTH IN THIS PROXY STATEMENT.
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If any other matters are properly presented at the annual meeting for
consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the persons named as proxies will
have discretion to vote on those matters according to their best judgment to
the same extent as the person delivering the proxy would be entitled to vote.
At the date this proxy statement went to press, we did not anticipate that any
other matters would be raised at the meeting.
SHAREHOLDERS ENTITLED TO VOTE
Shareholders at the close of business on the record date are entitled to
notice of and to vote at the annual meeting. Each share is entitled to one vote
on each matter properly brought before the meeting. On the record date, March
15, 2004, there were 175,292,185 shares of common stock outstanding and,
therefore, entitled to vote at the annual meeting.
REQUIRED VOTE
The presence, in person or by proxy, of a majority of the shares
entitled to vote at the meeting is necessary to constitute a quorum for the
transaction of business at the meeting. Abstentions and broker "non-votes" are
counted as present and entitled to vote for purposes of determining a quorum. A
broker "non-vote" occurs when a broker, bank, or other nominee holding shares
for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received voting instructions from the beneficial owner.
The affirmative vote of a majority of the shares of the Company's common
stock present and entitled to vote at the annual meeting is required for the
election of each nominee for Director, to ratify the appointment of Ernst &
Young LLP as the Company's independent auditors for 2004, to approve the
Company's Management Incentive Compensation Plan, and to approve the
shareholder proposal regarding compensation of the Company's senior executives.
The affirmative vote of a majority of the shares of the Company's common stock
entitled to vote at the annual meeting is required to approve the amendment to
the Company's Articles of Incorporation to increase the number of authorized
shares of the Company's common stock. Abstentions on any matter will be counted
as shares that are present and entitled to vote for purposes of determining the
approval of such matter. Broker non-votes on any matter will not be considered
as present and entitled to vote for purposes of determining the approval of
such matter.
COST OF PROXY SOLICITATION
St. Jude Medical, Inc. will pay the cost of soliciting proxies. Proxies
may be solicited on behalf of the Company by Directors, officers or employees
of the Company in person or by telephone, facsimile or other electronic means.
These persons will not receive any additional compensation for providing this
service.
In accordance with the regulations of the Securities and Exchange
Commission and the New York Stock Exchange, we will also reimburse brokerage
firms and other custodians, nominees and fiduciaries for their reasonable
expenses incurred in sending proxies and proxy materials to beneficial owners
of St. Jude Medical stock.
The Company has retained Georgeson Shareholder Communications, Inc. to
assist in the solicitation of proxies for an estimated fee of $10,500 plus
out-of-pocket expenses.
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GOVERNANCE OF THE COMPANY
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St. Jude Medical's business, property and affairs are managed under the
direction of the Board of Directors. Members of the Board are kept informed of
the Company's business through discussion with the CEO and other officers, by
reviewing materials provided to them by the CEO and officers and by
participating in meetings of the Board and its Committees.
During 2003, the Board held five meetings and the Committees of the
Board held a total of fifteen meetings. The average attendance at the Board and
Committee meetings was 90% and each Director attended at least 75% of all
meetings of the Board and of the Committees on which the Director served.
The independent members of the Board also meet at scheduled executive
sessions at least twice a year. The Chairperson of the Governance and
Nominating Committee serves as the Presiding Director for these meetings.
PRINCIPLES OF CORPORATE GOVERNANCE
The Board of Directors amended its Principles of Corporate Governance on
February 23, 2004, which are attached as Appendix A.
COMMUNICATIONS WITH DIRECTORS
Any shareholder wishing to communicate with one or more non-management
Directors may do so by sending a letter addressed to the Director or Directors
to:
c/o Corporate Secretary
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, MN 55117
All such correspondence will be forwarded to the non-management Director
or Directors.
DIRECTOR NOMINATION PROCESS
The Governance and Nominating Committee considers suggestions from many
sources, including shareholders, for possible candidates for Directors. The
Governance and Nominating Committee would consider any candidate proposed by a
shareholder in the same manner as other possible candidates. The Governance and
Nominating Committee has not adopted any specific criteria for a Director
position.
The Governance and Nominating Committee believes that it is not
necessary to adopt criteria for the selection of Directors. The Governance and
Nominating Committee believes that the desirable background of a new individual
member of the Board of Directors may change over time and that a thoughtful,
thorough process for the selection is more important than adopting criteria for
Directors. During 2003 the Governance and Nominating Committee surveyed the
Board of Directors to assess the areas of expertise the Board of Directors
believed would be most desirable to add to the Board. Financial expertise and
industry knowledge were two of the most desirable characteristics at that time.
The Governance and Nominating Committee has recently worked with
independent search firms which assist in identifying Director candidates. Once
candidates are identified, they are evaluated through a series of interviews
with members of the Governance and Nominating Committee, several other
Directors, and members of management, including the Company's General Counsel.
Candidates are also asked to complete a Director questionnaire used by the
Company.
Any shareholder wishing to propose that a person be appointed to the
Board of Directors or that management nominate a person for election to the
Board of Directors may submit such a proposal to:
Governance and Nominating Committee
c/o Corporate Secretary
St. Jude Medical, Inc.
One Lillehei Plaza
St. Paul, MN 55117
During the past year, the Governance and Nominating Committee retained a
third party
3
search firm to assist the Committee in the process of identifying and
evaluating potential nominees for the Board.
Since the 2003 annual shareholder meeting, the Board of Directors has
appointed Mr. Rocca to the Board. Mr. Rocca was recommended for appointment by
the Governance and Nominating Committee.
ANNUAL SHAREHOLDER MEETING
Three of the Company's Directors attended the 2003 annual shareholder
meeting. The Company will reimburse a Director's travel expenses for attending
the annual shareholder meeting, but attendance by non-management directors is
not required. The Board of Directors will consider holding a Board of Directors
meeting in conjunction with the 2005 annual shareholder meeting and subsequent
annual shareholder meetings in order to facilitate attendance by Directors at
such meetings.
DIRECTOR INDEPENDENCE AND AUDIT COMMITTEE FINANCIAL EXPERT
The Board undertook a review of Director independence in February 2004.
As part of that process, the Board reviewed all transactions and relationships
between each Director (or any member of his or her immediate family) and the
Company, the Company's executive officers and the Company's auditors. As a
result of this review, the Board affirmatively determined that all of the
Directors, except Mr. Shepherd, who is retiring, Mr. Starks and Mr.
Widensohler, are independent under the Company's Principles of Corporate
Governance and the New York Stock Exchange listing standards. See "Related
Party Transactions" on page 6.
In February 2004, the Board also determined that all members of the
Audit Committee are financially literate under the New York Stock Exchange
listing standards and that Mr. Essig and Mr. Devenuti qualify as an "audit
committee financial expert" within the meaning of the rules of the Securities
and Exchange Commission.
COMMITTEES OF THE BOARD OF DIRECTORS
During 2003, the Board of Directors had three ongoing committees: the
Audit Committee, the Compensation Committee, and the Governance and Nominating
Committee. During 2003 the Audit Committee met eight times, the Compensation
Committee met four times, and the Governance and Nominating Committee met two
times.
Each Committee of the Board has a separate written charter which is
available on the Company's website at www.sjm.com.
Each member of the Audit Committee, the Compensation Committee, and the
Governance and Nominating Committee are independent under the Company's
Principles of Corporate Governance and the New York Stock Exchange listing
standards.
The Governance and Nominating Committee is responsible for recommending
good governance practices. The Governance and Nominating Committee evaluates
the qualifications of and nominates candidates for positions on the Board. The
procedures for shareholders to nominate directors can be found on page 3. In
addition, the Governance and Nominating Committee facilitates an annual
evaluation by Board members of Board and individual Director performance and
provides feedback to the entire Board.
The Compensation Committee's duties include annual approval of the
Company's compensation policies, including salary, bonus and long-term
incentive programs, evaluation of the appropriate base salary level for
executive officers, evaluation of and recommendations for changes to the total
compensation of the CEO for approval of the Board of Directors and
consideration of matters with respect to profit sharing and other employee
benefits provided by the Company.
The duties of the Audit Committee are described in its report, which
follows.
4
REPORT OF THE AUDIT COMMITTEE
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The Audit Committee reviews the Company's consolidated financial
statements, financial reporting process, and internal controls on behalf of the
Board of Directors.
We meet with management periodically to consider, among other things,
the adequacy of the Company's disclosure and internal controls and the
objectivity of its financial reporting. We discuss these matters with the
Company's independent auditors, Ernst & Young LLP, and with appropriate Company
financial personnel.
We regularly meet privately with the independent auditors who have
unrestricted access to the Audit Committee.
We also appoint the independent auditors, approve the scope of their
audit services, approve the performance of non-audit services by the
independent auditors, and review periodically their performance and
independence from management.
The Directors who serve on the Committee are all independent under the
Company's Principles of Corporate Governance and the New York Stock Exchange
listing standards.
The Board has adopted a written charter which describes the functions
the Audit Committee is to perform. In February 2004, we reviewed the charter
and recommended to the Board that no changes were needed. The charter of the
Audit Committee is available on the Company's website at www.sjm.com.
Management has the primary responsibility for the Company's consolidated
financial statements and the overall reporting process, including the Company's
system of internal controls.
The independent auditors audit the annual consolidated financial
statements prepared by management, express an opinion as to whether those
consolidated financial statements fairly present the financial position,
results of operation and cash flows of the Company in conformity with generally
accepted accounting principles and discuss with us any issues they believe
should be raised with us.
This year, we reviewed the Company's audited consolidated financial
statements and met with both management and Ernst & Young LLP to discuss these
financial statements. Management has represented to us that these financial
statements were prepared in accordance with generally accepted accounting
principles. We also considered the report of the independent auditors.
We have received from and discussed with Ernst & Young LLP the written
disclosures and the letter required by Independence Standards Board No. 1
(Independence Discussion with Audit Committees) and the independence of Ernst &
Young LLP. We have also considered the compatibility of non-audit services with
the auditor's independence. In addition, we discussed with Ernst & Young LLP
any matters required to be discussed by Statement on Auditing Standards No. 61,
as amended by Statement on Auditing Standards No. 90 (Communication with Audit
Committees). Based on our review and discussions described above, we
recommended to the Board that the Company's audited consolidated financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 filed with the Securities and Exchange
Commission.
Stuart M. Essig
Richard R. Devenuti
Thomas H. Garrett III
5
COMPENSATION OF DIRECTORS
Each non-employee director receives a retainer of $3,000 per month plus
$2,000 per diem for each Board meeting attended. Committee chairpersons receive
an additional annual fee of $9,000 and Committee members an additional annual
fee of $4,000. The Presiding Director receives an additional annual fee of
$5,000. Directors are reimbursed for expenses incurred in connection with
travel and lodging when attending meetings of the Board or otherwise engaged in
Company business. Directors may elect to receive the annual retainer fee either
as 100% cash, 50% cash plus 50% restricted stock, or 100% restricted stock.
Restricted stock is valued at the fair market value of the stock on the date of
grant. The restriction on the stock lapses on the six-month anniversary of the
grant date.
Under the Company's 2002 Stock Plan, each person who is not an employee
of the Company and who is elected, re-elected or serving an unexpired term as a
Director at any annual meeting of shareholders automatically receives, as of
the date of such meeting, an option to purchase 4,000 shares of the Company's
common stock at an exercise price per share equal to the fair market value of
the Company's common stock on such date. All such options are designated as
non-qualified stock options with eight-year terms and fully vest on the
six-month anniversary of the grant date. Further, under the 2002 Stock Plan,
non-employee Directors also are eligible to receive options from time to time
in addition to the annual grants described above, but no non-employee Director
may receive options which, together with the automatic grant of options
described above, exceed 7,500 shares in any calendar year. Directors who are
appointed between annual shareholder meetings are voted a pro-rata stock option
based upon a fraction of 4,000 shares on the same terms and conditions as the
stock options described previously, except the exercise price is the fair
market value on the date of appointment. At the 2003 annual meeting of
shareholders, each non-employee Director received an automatic grant of an
option to purchase 4,000 shares at $51.70 per share, the fair market value of
the common stock on the date of grant. No additional options were granted to
non-employee directors in 2003.
Each Director may receive reimbursement for one physical examination
every 12 months up to a maximum of $700 per exam. Board members also
participate in the Company's charitable contribution matching program under
which eligible charitable contributions are matched by the Company up to a
maximum of $1,000 each year.
Under a retirement plan for non-employee Directors that was terminated
April 1, 1996, each non-employee Director serving on the Board at that time who
serves five years or more will receive payment of an annual benefit equal to
the average of the annual retainers paid to the Director during his or her
service as a Director, with a minimum annual benefit of $24,000. The retirement
benefit will commence at the later of the time of retirement from the Board or
when the Director becomes 60 years old. The retirement benefit is payable over
a number of years equal to the Director's years of service as a member of the
Board of Directors prior to April 1, 1996.
RELATED PARTY TRANSACTIONS
Mr. Widensohler is a director of and the beneficial owner of
approximately 45% of the common stock of Invatech, an Italian company that
makes and sells products to Getz Co., Ltd, a Japanese distributor of medical
technology products that was acquired by the Company on April 1, 2003. Sales by
Invatech to Getz during 2003 were $4,747,757. In February 2004, the Board of
Directors determined that Mr. Widensohler was no longer considered an
independent Director and he ceased to be a member of the Compensation
Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and
6
Directors to file initial reports of ownership and reports of changes in
ownership of our securities with the Securities and Exchange Commission. Based
on a review of the Section 16(a) reports filed by our Directors and executive
officers in 2003 and on written representations by the Directors and executive
officers, we believe that all Section 16(a) filing requirements applicable to
our Directors and executive officers during 2003 were satisfied, except that
the following Directors each filed one Form 4 reporting one transaction three
days late: Mr. Devenuti, Mr. Essig, Mr. Garrett, Mr. Thompson, Mr. Widensohler,
Ms. Yarno, and Mr. Yin; and Mr. Rousseau failed to file a Form 4 reporting one
transaction for 10 months.
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BOARD OF DIRECTORS
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The Board of Directors is divided into three classes, whose terms expire
at successive annual meetings.
Three Directors will be elected at the annual meeting to serve for a
three-year term expiring at the Company's annual meeting in 2007. We have
nominated Mr. Rocca, Mr. Thompson and Mr. Widensohler for these positions. Each
nominee currently serves as a Director. You can find the principal occupation
of and other information about the nominees below.
Mr. Shepherd, whose term as a Director expires at the 2004 annual
meeting, will retire as a Director and as Chairman and Chief Executive Officer
at the time of the annual meeting. In connection with Mr. Shepherd's
retirement, the Board of Directors has determined to decrease the number of
Directors in this class from four to three.
The persons named on the proxy card will vote the proxy for the election
of Mr. Rocca, Mr. Thompson and Mr. Widensohler unless you indicate that your
vote for any of the nominees should be withheld. If elected, Mr. Rocca, Mr.
Thompson and Mr. Widensohler will continue in office until their successors
have been duly elected and qualified, or until the earlier of their death,
resignation or retirement. We expect all nominees to be able to serve if
elected.
Beginning on page 8, you can find the principal occupation and other
information about the Directors whose terms of office will continue after the
annual meeting. You can find the information about the St. Jude Medical stock
ownership of the nominees and those other Directors on page 11.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF MR. ROCCA,
MR. THOMPSON AND MR. WIDENSOHLER AS DIRECTORS.
PROXIES WILL BE VOTED FOR THE ELECTION OF MR. ROCCA, MR. THOMPSON AND
MR. WIDENSOHLER UNLESS OTHERWISE SPECIFIED.
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NOMINEES FOR TERM EXPIRING IN 2007
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[PHOTO] MICHAEL A. ROCCA, Director of St. Jude Medical since March
2004. Retired in 2000 from Mallinckrodt, Inc., a pharmaceutical
and medical device manufacturer, where he was Senior Vice
President and Chief Financial Officer from 1994 to 2000.
Director of Ligand Pharmaceuticals, Inc., a biotech company
that develops oncology drugs and morphine based pain
medications, and Lawson Software, Inc., a manufacturer of
enterprise software. Age 59.
[PHOTO] DAVID A. THOMPSON, Director of St. Jude Medical since 1999.
Retired in 1995 from Abbott Laboratories, a medical products
company, where he held several corporate officer positions.
Director of Third Wave Technologies, a company that develops
genomic assays. Committees: Chairperson of the Governance and
Nominating Committee and Compensation Committee Member.
Presiding Director. Age: 62
8
[PHOTO] STEFAN K. WIDENSOHLER, Director of St. Jude Medical since 2001.
President and Chief Executive Officer of Krauth Medical Group,
a European distributor of medical and surgical devices and
services, since 1992. Committee: Compensation Committee Member
through February 2004. Age: 44
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DIRECTORS WHOSE TERM WILL EXPIRE IN 2005
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[PHOTO] RICHARD R. DEVENUTI, Director of St. Jude Medical since 2001.
Vice President and Chief Information Officer of Microsoft
Corporation, a software company, since March 1999. From May
1996 to March 1999, Vice President, Worldwide Operations,
Microsoft Corporation. Committee: Audit Committee Member.
Age: 46
[PHOTO] STUART M. ESSIG, Director of St. Jude Medical since 1999.
President and Chief Executive Officer and a member of the Board
of Directors of Integra Life Sciences Holdings Corporation, a
manufacturer of medical devices, implants and biomaterials,
since December 1997. Previously a managing director of Goldman,
Sachs & Co., an investment bank, responsible for the medical
technology practice. Committees: Chairperson of the Audit
Committee and Governance and Nominating Committee
Member. Age: 42
[PHOTO] THOMAS H. GARRETT III, Director of St. Jude Medical since 1979.
Self-employed as a business consultant since June 1996.
Previously, a member of the law firm of Lindquist & Vennum PLLP
of Minneapolis, Minnesota and its Managing Partner from 1993
through 1995. Director of Lifecore Biomedical, Inc., a
biomedical and surgical device manufacturer. Committee: Audit
Committee Member. Age: 59
[PHOTO] WENDY L. YARNO, Director of St. Jude Medical since 2002.
Executive Vice President, Worldwide Human Health Marketing,
Merck & Co. Inc., a pharmaceutical company, since January 2003.
From 2000 - 2002 Senior Vice President, Human Resources, Merck
& Co., Inc. From 1997 - 1998, Vice President, Ortho McNeil
Pharmaceutical, Women's Health Care Franchise, Johnson &
Johnson, a medical products company. During 1999, Vice
President, Worldwide Human Health, and Vice President, Human
Resources, Merck & Co., Inc. Committee: Chairperson of
Compensation Committee. Age: 49
9
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DIRECTORS WHOSE TERM WILL EXPIRE IN 2006
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[PHOTO] DANIEL J. STARKS, Director of St. Jude Medical since 1996.
President and COO of St. Jude Medical since February 1, 2001.
From April 1998 to February 1, 2001, President and Chief
Executive Officer of the Cardiac Rhythm Management Division of
the Company. Previously Chief Executive Officer and President,
Daig Corporation. Director of Urologix, Inc., a urology medical
device company. Age: 49
[PHOTO] FRANK C-P YIN, Director of St. Jude Medical since 2001. The
Stephen F. and Camilla Braver Professor of Biomedical
Engineering and Chairman, Department of Biomedical Engineering,
Washington University, St. Louis, Missouri. Committee:
Compensation Committee Member. Age: 60
10
SHARE OWNERSHIP OF MANAGEMENT AND DIRECTORS AND
CERTAIN BENEFICIAL OWNERS
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The following table presents information provided to the Company as to the
beneficial ownership of the Company's common stock as of February 20, 2004, by
(a) each of the Company's Directors, Director nominees and executive officers
appearing in the summary compensation table on page 17, (b) all of the
Company's Directors and executive officers as a group and (c) each person known
to the Company to be the beneficial owner of more than 5% of the common stock.
Unless otherwise noted, these persons have sole voting and dispositive power
with respect to the shares owned by them.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
BENEFICIAL OWNERS OWNERSHIP CLASS
- -------------------------------------------------- ---------------------- -----------
Richard R. Devenuti 16,745(1) *
Stuart M. Essig 38,792(1) *
Thomas H. Garrett III 112,146(1)(2) 0.1%
Michael A. Rocca -- *
Terry L. Shepherd 1,220,089(1) 0.7%
Daniel J. Starks 3,952,396(1) 2.2%
David A. Thompson 39,622(1) *
Stephan K. Widensohler 17,000(1) *
Wendy L. Yarno 14,085(1) *
Frank C-P Yin 17,490(1) *
John C. Heinmiller 268,665(1) 0.2%
Michael T. Rousseau 251,698(1) 0.1%
Michael J. Coyle 611,863(1) 0.3%
Directors and Executive Officers as a 7,574,906(3) 4.2%
Group (20)
FMR Corp. 16,051,874(4) 9.3%
82 Devonshire Street
Boston, MA 02109
FOOTNOTES
* Less than 0.1%
(1) Includes the number of shares which each Director or executive officer may
acquire within 60 days from February 20, 2004, pursuant to the exercise of
stock options, as follows: Mr. Devenuti, 16,000; Mr. Essig, 32,000; Mr.
Garrett, 50,000; Mr. Shepherd, 1,168,480; Mr. Starks, 950,000; Mr.
Thompson, 32,000; Mr. Widensohler, 16,000; Ms. Yarno, 13,340; Mr. Yin,
16,000; Mr. Heinmiller, 178,750; Mr. Rousseau, 251,250; and Mr. Coyle,
604,450.
(2) Includes 24,000 shares owned by Mr. Garrett's wife as to which Mr. Garrett
disclaims beneficial ownership.
(3) Includes 4,317,270 shares that such individuals may acquire within 60 days
from February 20, 2004, pursuant to the exercise of stock options.
11
(4) This information and the following information is derived from a Schedule
13G dated February 16, 2004, delivered to the Company. Fidelity Management
& Research Company ("Fidelity"), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 13,457,636 shares or 7.800% of the
Common Stock outstanding of St. Jude Medical Incorporated (the "Company")
as a result of acting as an investment adviser to various investment
companies registered under Section 8 of the Investment Company Act of
1940. Edward C. Johnson 3d, FMR Corp., through its control of Fidelity,
and the funds each has sole power to dispose of the 13,457,636 shares
owned by the Funds. Neither FMR Corp. nor Edward C Johnson 3d, Chairman of
FMR Corp., has the sole power to vote or direct the voting of the shares
owned directly by the Fidelity Funds, which power resides with the Funds'
Board of Trustees. Fidelity carries out the voting of the shares under
written guidelines established by the Funds' Boards of Trustees. Fidelity
Management Trust Company, 82 Devonshire Street, Boston, Massachusetts
02109, a wholly-owned subsidiary of FMR Corp. and a ban defined in Section
3(a)(6) of the Securities Exchange Act of 1934, is the beneficial owner of
1,085,257 shares or 0.629% of the Common Stock outstanding of the Company
as a result of its serving as investment manager of the institutional
account(s). Edward C. Johnson 3d and FMR Corp., through its control of
Fidelity Management Trust Company, each has sole dispositive power over
1,085,257 shares and sole power to vote or to direct the voting of 956,857
shares, and no power to vote or to direct the voting of 128,400 shares of
Common Stock owned by the institutional account(s) as reported above.
Strategic Advisers, Inc., 82 Devonshire Street, Boston, Massachusetts
02109, a wholly-owned subsidiary of FMR Corp. and an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940,
provides investment advisory services to individuals. As such, FMR Corp's
beneficial ownership includes 200,000 shares, or 0.116%, of the Common
Stock stock outstanding of St. Jude Medical Incorporated, beneficially
owned through Strategic Advisers, Inc.
12
STOCK PERFORMANCE GRAPH
- --------------------------------------------------------------------------------
The graph below compares the cumulative total shareholder returns for St.
Jude Medical common stock for the last five years ended December 31, 2003, as
compared with the Standard & Poor's 500 Health Care Equipment Index and the
Standard & Poor's 500 Index weighted by market value at each measurement point.
The comparison assumes that $100 was invested on December 31, 1998, in St. Jude
Medical common stock and in each of these Standard & Poor's indexes and assumes
the reinvestment of any dividends.
[GRAPH APPEARS HERE]
1998 1999 2000 2001 2002 2003
----------- ----------- ----------- ----------- ----------- -----------
St. Jude Medical, Inc. .......... $ 100.0 $ 110.1 $ 220.4 $ 278.6 $ 285.0 $ 440.2
S&P 500 Health Care
Equipment Index ................ $ 100.0 $ 92.2 $ 135.3 $ 128.4 $ 112.1 $ 148.0
S&P 500 Index ................... $ 100.0 $ 120.9 $ 110.0 $ 96.9 $ 75.6 $ 97.1
13
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Our report covers the following topics:
o Role of the Compensation Committee
o Executive Compensation Philosophy and Process
o Components of Our Executive Compensation Program
o Compensation of the Chief Executive Officer
ROLE OF THE COMPENSATION COMMITTEE
We are responsible to the Company's Board of Directors and shareholders
for establishing and administering compensation programs for the Company's
executive officers. None of the members of the Compensation Committee is a
current or former employee of the Company. Each of the members of the
Compensation Committee is independent under the Company's Principles of
Corporate Governance and the New York Stock Exchange listing standards. All
decisions by the Committee relating to the compensation of the executive
officers are reviewed by the Board of Directors.
EXECUTIVE COMPENSATION PHILOSOPHY AND PROCESS
The goal of our compensation program is to attract, retain and motivate
talented executives to enable the Company to be successful in a highly
competitive industry and to enhance shareholder value. The following principles
were used in the design of the program:
o Compensation should be related to individual performance and qualifications.
o Executive officers and employees should be encouraged to own St. Jude Medical
stock.
o A substantial part of an executive officer's compensation should be
incentive-based, tied to performance, and subject to risk.
We evaluate the Company's compensation program for executive officers in
relation to the programs offered by other medical products companies. In 2003,
we engaged an independent compensation consultant to analyze the level of
executive compensation for a peer group of ten medical products companies. The
ten companies in the compensation peer group are not the same companies in the
stock performance graph on page 13. Our objective is to attract and retain
talented individuals by targeting total executive compensation for standard
performers at the 60th percentile of the market as defined by peer group
analysis. An executive officer's individual performance and experience can
cause the officer's total compensation to be higher or lower than the 60th
percentile.
When making recommendations regarding the compensation of our CEO, we
consider the results of the formal review by the Board of Directors of the
CEO's performance. When evaluating the compensation of our other executive
officers, we consider the recommendations of our CEO and of our President and
COO.
Our policy is to maximize the deductibility of compensation payments to
executive officers under Section 162(m) of the Internal Revenue Code. Our
shareholders have approved our Management Incentive Compensation Plan (the
"MICP") which is an annual cash incentive plan that is designed and
administered in such a manner that compensation awarded under the MICP is
tax-deductible. Consistent with this policy, the Board of Directors is
requesting that shareholders again approve the MICP at the 2004 annual meeting
in order to maintain the deductibility of compensation awarded under the MICP.
14
COMPONENTS OF OUR EXECUTIVE COMPENSATION PROGRAM
Our compensation program for executive officers has three components:
o Base Salary
o Annual Incentive Award
o Stock-Based Compensation
BASE SALARY. An executive officer's base salary is determined by an
assessment of his or her sustained performance, advancement potential,
experience, responsibility, scope and complexity of the position, current
salary in relation to the range designated for the job and salary levels for
comparable positions at the compensation peer group companies mentioned
previously. Additionally, the Committee sets base salaries for executive
officers based on the executive officer's contribution to the Company's success
through operational improvements and strategic initiatives. Based upon the peer
group data, the executive officers' base salary levels are currently estimated
to be within 3 percent of the 60th percentile. The base salaries of the CEO and
the President and COO are also governed by employment agreements. See
"Employment, Termination and Change of Control Agreements" on page 20.
ANNUAL INCENTIVE AWARDS. Annual incentive awards are designed to provide
executive officers an additional incentive for achieving the annual performance
goals established in the Company's yearly business plan approved by the Board
of Directors. All annual incentive awards to executive officers are awarded and
paid under MICP. Payments under the MICP are based on the Company's level of
achievement of annual earnings per share targets as well as divisional and
geographical profitability and sales targets, all as established under the
Company's annual business plan. There is a pre-assigned relative weighting
ascribed to each of these factors.
Executive officers are eligible for normal annual cash incentive
payments ranging from 45% to 70% of base salary, except for the CEO and
President and COO who are eligible for a normal annual cash incentive payment
of up to 100% of base salary. The payments can increase by up to 50% of the
normal payments based on performance above targeted levels and can decrease
substantially if actual results fail to meet targeted levels.
STOCK-BASED COMPENSATION. We believe that stock-based compensation
creates an appropriate incentive for executive officers and employees to
identify with the interests of shareholders.
STOCK OPTION AWARDS. Stock options are awarded at an exercise price
equal to or greater than the fair market value of the stock on the date of
grant and, therefore, only have value if the price of the Company's stock
appreciates from the date the stock options are granted. The executive officers
and shareholders mutually benefit from such stock price appreciation.
Stock options are awarded from time to time consistent with the
Company's objective to provide executive officers and employees with a
long-term equity interest in the Company and an opportunity for a greater
financial reward if long-term performance is sustained. To encourage a
longer-term perspective and to retain our employees, the options cannot be
exercised immediately. Generally, options become exercisable over a four-year
period. The number of options granted to each executive officer falls within a
predetermined range, set and approved annually by the Committee. Individual
grant size is dependent upon the Company's future business plans and the
executive officer's ability to positively impact those plans, the executive
officer's position and level of responsibility within the Company, and an
evaluation of the executive officer's past performance. No pre-assigned
relative weight is ascribed to any of these factors. In 2003, a total of
930,000 stock options were granted to executive officers.
RESTRICTED STOCK AWARDS. We believe restricted shares provide an
immediate and direct link to shareholder interests. The timing and
15
number of shares granted is based on the Company's future business plans and
the executive officer's ability to positively impact those plans. Restricted
stock awards generally vest over a four-year period. In 2003, we granted no
restricted stock awards to executive officers or employees.
STOCK OWNERSHIP GUIDELINES. St. Jude Medical established stock ownership
guidelines for all executive officers and Directors in 1995. These guidelines
set stock ownership targets which management and Board members are encouraged
to achieve. Targeted stock ownership levels range from one to three times base
salary for executive officers. Stock ownership guidelines for Board members are
set at five times the annual retainer for Board members.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In 2003, Mr. Shepherd, the CEO, was our most highly compensated
executive officer.
BASE SALARY. Mr. Shepherd's employment agreement, which became effective
in May 1999, provided for an initial base salary of $500,000. In May 2003, in
accordance with his employment agreement, we reviewed Mr. Shepherd's
compensation in light of the compensation peer group data and Mr. Shepherd's
performance evaluation conducted by the Board. We determined that an increase
in base compensation of approximately 5% was appropriate. Therefore, we
increased Mr. Shepherd's annual base salary from $700,000 to $735,000 effective
as of May 5, 2003. As a result of this increase, Mr. Shepherd earned a base
salary of approximately $723,000 in 2003.
ANNUAL INCENTIVE AWARD. Mr. Shepherd earned an award of $715,656 under
the MICP for 2003. His award was based 25% on the Company's achievement of the
revenue target and 75% on the Company's achievement of the earnings per share
target established under the MICP.
STOCK OPTIONS VESTING. Under criteria established at the time of grant,
155,000 stock option shares granted previously to Mr. Shepherd vested due to
time and performance during 2003.
STOCK OPTION GRANTS. Mr. Shepherd was granted a non-qualified stock
option for 200,000 shares during 2003, which vests over a four-year period. The
rationale for the stock option grant to Mr. Shepherd was based on a review of
CEO compensation from the compensation peer group and the Compensation
Committee's view that Mr. Shepherd's performance has been outstanding.
David A. Thompson
Wendy L. Yarno
Frank C-P Yin
16
EXECUTIVE COMPENSATION AND OTHER INFORMATION
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- -------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION(1) OPTIONS(2) COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------
Terry L. Shepherd 2003 722,885 715,656 -- 200,000 51,317
Chairman and 2002 656,731 812,704 -- 300,000 51,422
Chief Executive Officer 2001 549,038 658,846 -- -- 47,747
Daniel J. Starks 2003 675,769 669,012 -- 200,000 34,650
President and Chief 2002 613,462 759,159 -- 300,000 34,755
Operating Officer 2001 492,039 580,674 -- -- 31,080
John C. Heinmiller 2003 400,000 277,200 -- 80,000 34,650
Vice President -- Finance 2002 352,000 217,800 -- 80,000 34,155
and Chief Financial Officer 2001 300,000 180,000 -- 52,500 31,080
Michael T. Rousseau 2003 400,000 231,000 -- 75,000 34,650
President, U.S. Sales 2002 369,865 238,650 -- 90,000 34,755
2001 315,481 207,034 -- 205,000 31,080
Michael J. Coyle 2003 388,942 256,605 -- 75,000 34,650
President, Cardiac 2002 349,538 256,911 -- 85,000 34,755
Rhythm Management 2001 322,692 249,606 97,032 55,000 31,080
FOOTNOTES
(1) In accordance with SEC rules, perquisites or other personal benefits are
included in the table only to the extent the total exceeds the lesser of
$50,000, or 10% of total salary and bonus, of any named executive officer.
Mr. Coyle's 2001 other annual compensation includes $74,402 of relocation
expenses.
(2) No stock appreciation rights have been granted to the named executive
officers. Figures in this column represent the number of shares that can
be purchased upon the exercise of stock options granted during the year.
(3) Consists solely of matching retirement plan contributions by St. Jude
Medical, except for Mr. Shepherd whose all other compensation also
consists of a special retirement provision of $16,667 for all years.
17
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF % OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES EXERCISE PRESENT
GRANTED(1) IN FISCAL PRICE EXPIRATION VALUE(3)
NAME (#) YEAR ($/SH) DATE ($)
- ---- ---------- ------------- -------- ---------- ----------
Terry L. Shepherd 200,000(2) 4.4% $ 49.65 4/15/2011 $3,541,500
Daniel J. Starks 200,000(2) 4.4% 49.65 4/15/2011 3,541,500
John C. Heinmiller 80,000(2) 1.8% 61.90 12/8/2011 1,794,216
Michael T. Rousseau 75,000(2) 1.6% 61.90 12/8/2011 1,682,078
Michael J. Coyle 75,000(2) 1.6% 61.90 12/8/2011 1,682,078
FOOTNOTES
(1) The Company has never issued any options with a reload provision. In the
event of a change in control of the Company, all options become 100%
vested.
(2) The options have an exercise price equal to the fair market value on the
date of grant and vest in 25% increments on the first four anniversaries
of the date of grant. The dates of grant were as follows: for Messrs.
Shepherd and Starks, April 15, 2003; and for Messrs. Heinmiller, Rousseau
and Coyle, December 8, 2003.
(3) The Company uses the Black-Scholes option pricing model to establish stock
option values for purposes of this table. The actual value, if any, will
depend on the excess of the stock price over the exercise price on the
date the option is exercised. There is no assurance that the value
realized will be at or near the value as estimated by the Black-Scholes
model. The specific assumptions used in valuing the stock options under
the Black-Scholes model were as follows:
o Volatility of 35.0%, representing the estimated annual variance in the
daily percentage change in the price of the Company's common stock over a
five-year period;
o Risk-free rate of return ranging from 2.94% to 3.25%, representing the
average five-year Treasury rate on the date of grant;
o Expected term of five years; and
o Dividend yield of 0.0%.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
SHARES AT FISCAL YEAR-END (#) AT FISCAL YEAR-END(1) ($)
ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE (#) VALUE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ------------------ ----------- ------------- ----------- -------------
Terry L. Shepherd -- $ -- 1,263,800 622,200 $54,339,928 $15,956,654
Daniel J. Starks -- -- 835,000 765,000 29,336,103 20,084,760
John C. Heinmiller 49,500 1,920,043 223,750 218,750 7,826,773 3,748,911
Michael T. Rousseau 34,000 1,309,558 251,250 478,750 8,486,619 11,806,352
Michael J. Coyle -- -- 604,450 285,050 22,862,430 6,380,047
FOOTNOTES
(1) Values were calculated by subtracting the exercise price per share from the
closing sale price of $60.82 per share of the Company's common stock as
reported by the New York Stock Exchange on January 2, 2004, the last
trading day of fiscal year 2003.
18
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003 about the
Company's common stock that may be issued under all of its existing equity
compensation plans, including the St. Jude Medical, Inc. 1991 Stock Plan, the
St. Jude Medical, Inc. 1994 Stock Option Plan, the St. Jude Medical, Inc. 1997
Stock Option Plan, the St. Jude Medical, Inc. 2000 Stock Plan, the St. Jude
Medical, Inc. 2000 Employee Stock Purchase Savings Plan, and the St. Jude
Medical, Inc. 2002 Stock Plan, as Amended. All of these plans have been
approved by the Company's shareholders.
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- ------------------------------ ---------------------- ---------------------- --------------------------
Equity compensation plans
approved by shareholders 29,563,147 $ 31.09 5,712,866 (1)
Equity compensation plans not
approved by shareholders -- --
- ------------------------------ ---------- ------- -------------
Total 29,563,147 $ 31.09 5,712,866
- ------------------------------ ---------- ------- -------------
FOOTNOTES
(1) The shares available for future issuance as of December 31, 2003 included
the following:
o 1,200,378 shares available for purchase by employees under the St. Jude
Medical, Inc. 2000 Employee Stock Purchase Savings Plan; and
o 73,704 shares available under the St. Jude Medical, Inc. 2000 Stock Plan
for restricted stock grants.
19
EMPLOYMENT, TERMINATION AND CHANGE IN CONTROL AGREEMENTS
CEO EMPLOYMENT AGREEMENT. The Board of Directors appointed Mr. Shepherd
as the Company's President and Chief Executive Officer pursuant to an Agreement
effective May 5, 1999, that ends on May 4, 2004. The Agreement provides that
Mr. Shepherd will receive an annual salary of at least $500,000 subject to
annual review for possible increases by the Board of Directors, and customary
fringe benefits provided to Company officers, including an opportunity to earn
a bonus.
PRESIDENT AND COO AGREEMENT. The Board of Directors appointed Mr. Starks
as the Company's President and Chief Operating Officer pursuant to an agreement
effective March 25, 2001, that ends on January 31, 2006. The Agreement provides
that Mr. Starks will receive an annual salary of at least $500,000 subject to
annual review for possible increases by the Board of Directors, and customary
fringe benefits provided to Company officers, including an opportunity to earn
a bonus.
SEVERANCE AGREEMENTS. The Company has entered into change in control
severance agreements (the "Severance Agreements") with 20 of its senior
executives, including Mr. Shepherd and Mr. Starks and the other executive
officers appearing in the Summary compensation table. The Severance Agreements
provide for certain payments and other benefits if, following a Change in
Control, the Company terminates the executive's employment without Cause or the
executive terminates his or her employment for Good Reason. Such payments and
benefits include: (i) severance pay equal to three times the sum of the
executive's annual salary, target bonus and certain other compensation paid to
the executive during the twelve months prior to the termination; (ii) three
years of life, health and disability insurance substantially similar to that in
effect at the time of termination; (iii) the payment of legal fees and expenses
relating to the termination; (iv) the termination of any noncompetition
arrangement between the Company and the executive; and (v) a gross-up payment
for any excise tax imposed on such payments or benefits and for any tax imposed
on such gross-up. Under the Severance Agreements, "Cause" is defined as a
conviction for felony criminal conduct; "Good Reason" is defined to include a
change in the executive's responsibility or status, a reduction in salary or
benefits, or a mandatory relocation; and "Change in Control" is defined to
include a change in control of the type required to be disclosed under
Securities and Exchange Commission proxy rules, acquisition by a person or
group of 35% of the outstanding voting stock of the Company, a proxy fight or
contested election which results in Continuing Directors (as defined) not
constituting a majority of the Company's Board of Directors, or another event
the majority of the Continuing Directors determines to be a change in control.
INDEMNIFICATION AGREEMENTS. The Company has entered into indemnification
agreements with each of its Directors and executive officers which provide for
indemnification against certain costs incurred by each Director and executive
officer made or threatened to be made a party to a proceeding because of his or
her official capacity as a Director or executive officer. The indemnification
agreements, together with the Company's Bylaws, provide for indemnification to
the fullest extent permitted by Minnesota law.
20
PROPOSAL TO RATIFY THE APPOINTMENT OF AUDITORS
- --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors has appointed Ernst & Young
LLP as the Company's independent auditors for 2004, subject to shareholder
ratification. Ernst and Young LLP will audit our consolidated financial
statements for 2004 and perform other services.
AUDIT AND OTHER FEES
The following table presents Ernst & Young LLP fees for professional
services by type and amount charged by Ernst & Young LLP to the Company during
fiscal years 2003 and 2002 (in thousands):
2003 2002
------ ------
Audit Fees(1) $1,923 $1,306
Audit-Related Fees(2) 160 399
Tax Fees(3) 2,637 1,026
All Other Fees -- --
FOOTNOTES
(1) Audit fees represent amounts for the audit of the consolidated financial
statements included in the Company's Annual Report on Form 10-K, reviews
of the consolidated financial statements included in the Company's
Quarterly Reports on Form 10-Q and statutory audits of various Company
subsidiaries outside of the United States.
(2) Audit-related fees represent amounts for employee benefit plan audits, due
diligence assistance and other attestation services.
(3) Tax fees represent amounts for preparation or review of the Company's
income and related tax returns, tax planning and tax advice. Tax fees for
preparation or review of the Company's income and related tax returns
totaled $729 and $643 in fiscal years 2003 and 2002, respectively.
PREARRANGED POLICY FOR AUDIT AND PERMISSIBLE NON-AUDIT SERVICES
In 2003 the Audit Committee adopted the "Pre-approval of Independent
Auditor Services and Fees" policy. The policy requires that all services by the
Company's Auditor be approved in advance by the Audit Committee and expresses a
preference that non-audit services be performed by persons other than the
Company's independent auditors. Each year, usually in the fourth quarter, the
Audit Committee authorizes the terms, including the scope, and the fees for the
annual audit. Once a year the Audit Committee reviews general requests to
approve non-audit matters, including fees, performed by the Company's
independent auditor. In addition, specific requests for non-audit services by
the independent auditor may be brought to the Audit Committee from time to
time. The policy also prohibits engaging the independent auditor from
performing services prohibited by law.
In 2003 there were no fees paid to Ernst & Young that were not approved
in advance by the Audit Committee.
RATIFICATION OF APPOINTMENT. A proposal will be presented at the Annual
Meeting to ratify the appointment of Ernst & Young LLP as our independent
auditors. A representative of Ernst & Young LLP will be present at the meeting
with the opportunity to make a statement and to answer your questions. If the
shareholders do not ratify the appointment of Ernst & Young LLP, the Audit
Committee will reconsider its selection of independent auditors.
21
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of the Company's common
stock present and entitled to vote at the annual meeting is required to ratify
the appointment of Ernst & Young LLP. Proxies will be voted for ratification of
the appointment of Ernst & Young LLP unless otherwise specified.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION
OF THE APPOINTMENT OF ERNST & YOUNG LLP.
22
PROPOSAL TO APPROVE THE MANAGEMENT INCENTIVE
COMPENSATION PLAN (MICP)
- --------------------------------------------------------------------------------
Section 162(m) of the Internal Revenue Code of 1986 limits the Company's
deduction for federal income tax purposes of compensation in excess of $1
million per individual paid to the Company's Chief Executive Officer and its
four highest paid executive officers. Compensation plans which are performance
based within the requirements of Section 162(m) and are approved by the
Company's shareholders will not be subject to the deduction limit. Therefore,
in order to maximize the Company's tax deductions, the Board of Directors of
the Company is requesting that shareholders approve the Management Incentive
Compensation Plan ("MICP") at the annual meeting.
The following is a summary of the material features of the MICP. The
MICP is attached as Appendix B to this Proxy Statement, and the following
summary is qualified in its entirety by reference to it.
PURPOSE
The MICP is designed to attract, retain and reward highly qualified
executives who are important to the Company's success and to provide incentives
relating directly to the financial performance of the Company.
ADMINISTRATION
The MICP is administered by the Compensation Committee of the Board of
Directors. The present members of the Compensation Committee are Wendy Yarno,
David Thompson, and Frank Yin, all of whom are deemed to be outside directors
of the Company, as defined under Section 162(m). None of the members of the
Compensation Committee receives compensation from the Company in any capacity
other than as a Director of the Company. In addition, each member of the
Compensation Committee is independent under the Company's Principles of
Corporate Governance and the New York Stock Exchange listing standards.
The Compensation Committee may amend, modify, suspend or terminate the
MICP for the purpose of meeting or addressing any changes in legal requirements
of for any other purpose permitted by law. The Compensation Committee will seek
shareholder approval of any amendment determined to require shareholder
approval or advisable under the regulations of the Internal Revenue Service or
other applicable laws or regulations.
ELIGIBLE PARTICIPANTS
Individuals who are eligible to participate in the MICP include the
executive officers and certain other employees of the Company as may be
determined by the Compensation Committee. Individuals subject to the reporting
requirements of Section 16 of the Securities Exchange Act of 1934 are
considered to be executive officers for the purposes of the MICP. For the
Company's last fiscal year, 549 officers and other management employees
participated in the MICP.
AWARDS UNDER MICP
Promptly after the beginning of the fiscal year, consistent with the
requirements stated in Section 162(m), the Compensation Committee establishes
financial objectives by which the financial performance of the Company and its
divisions will be measured during the fiscal year; determines the executive
officer's eligible to participate; determines each executive officer's bonus
based on the attainment of the financial objectives for the fiscal year; and
determines the frequency at which each bonus will be paid when attained.
Individual awards will be based on attainment of financial goals based
on the stock price of the
23
Company's shares, the Company's earnings per share, market share, sales, return
on equity, asset management, the expenses or profitability of the Company or
any division or subsidiary, or divisional or any combination of such goals. For
employees other than executive officers, subjective, individual performance
goals may also be established.
The maximum bonus amount that can be paid to any employee with respect
to any one fiscal year results cannot exceed the greater of $2,000,000 or 1.5%
of the Company's consolidated after tax net profit. For 2004, the Committee has
set the maximum bonus at 150% of each individual's base salary for the fiscal
year. Such bonus amounts shall be paid within 90 days after the close of the
Company's fiscal year. The employee may elect to defer some or all of the
payment under the Company's deferred compensation plan. Bonuses will be paid
only when the Compensation Committee certifies that the relevant financial
goals established at the beginning of the fiscal year have been met, and the
Compensation Committee reserves the right to reduce the amount of any award
even if the goals have been attained.
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of the Company's common
stock present and entitled to vote at the annual meeting is required to approve
the MICP. Proxies will be voted for approval of the MICP unless otherwise
specified.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
APPROVAL OF THE COMPANY'S MANAGEMENT INCENTIVE COMPENSATION PLAN
24
PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 250,000,000 TO 500,000,000
- --------------------------------------------------------------------------------
The Articles of Incorporation of the Company, as amended and presently
in effect (the "Articles"), authorize the issuance of 250,000,000 shares of
common stock, $.10 par value per share, and 25,000,000 shares of preferred
stock, $1.00 par value per share. As of December 31, 2003, 173,014,167 shares
of common stock were outstanding and 76,985,833 shares of common stock were
authorized but unissued. Of the unissued shares, 5,712,866 shares were reserved
for issuance pursuant to the Company's various stock plans, leaving a balance
of approximately 71,272,967 authorized, unissued and unreserved shares of
common stock.
The Board of Directors recommends that the authorized number of shares
of common stock be increased from 250,000,000 to 500,000,000. If approved,
Article VII of the Articles will be amended to increase the authorized shares
of common stock of the Company to 500,000,000. No change in the authorized
preferred stock is being proposed.
PURPOSES AND EFFECTS OF THE AMENDMENT
Except for shares reserved as noted above, the Company has no agreements
or understandings concerning the issuance of any additional shares of common
stock. However, the Board of Directors believes that the increased
authorization is advisable at this time so that shares will be available for
issuance in the future on a timely basis if such need arises in connection with
stock split or dividends, financings, acquisitions, employee benefit plans or
other corporate purposes. This will enable the Company to take advantage of
market conditions, the availability of favorable financing, and opportunities
for acquisitions without the delay and expense associated with convening a
special shareholders' meeting.
The proposed shares of common stock for which authorization is sought
would be part of the existing class of common stock and would have no effect
upon the terms of the common stock or the rights of the holders of such stock.
The proposed additional authorized shares of common stock would have the same
rights and privileges as the shares of common stock presently outstanding.
Holders of the Company's common stock do not have preemptive rights to purchase
additional shares of common stock and are not entitled to cumulative voting for
the election of Directors.
Unless required by law, the Company's Articles or the rules of any stock
exchange on which the Company's shares of common stock are then listed, the
Board of Directors will be able to provide for the issuance of the additional
shares of common stock without further action by the Company's shareholders and
no further authorization by the shareholders will be sought prior to such
issuance. Under the existing New York Stock Exchange Listed Company Manual,
approval by the Company's shareholders is required prior to the listing of
additional shares of common stock in certain circumstances including (i) in
connection with certain equity compensation plans, (ii) in connection with an
issuance that will result in a change of control of the Company and (iii) in
connection with certain issuances if the voting power of the stock to be issued
is equal to or in excess of 20% of the voting power outstanding prior to the
issuance of such stock or if the number of shares to be issued is equal to or
in excess of 20% the total number of shares outstanding prior to the issuance
of such stock.
Although not designed or intended for such purposes, the effect of the
proposed increase in
25
the authorized shares of common stock might be to render more difficult or to
discourage a merger, tender offer, proxy contest or change in control of the
Company and the removal of management, which shareholders might otherwise deem
favorable. The authority of the Board of Directors to issue shares of common
stock might be used to create voting impediments or to frustrate an attempt by
another person or entity to effect a takeover or otherwise gain control of the
Company because the issuance of additional shares of common stock would dilute
the voting power of the shares of common stock then outstanding. Shares of
common stock could also be issued to purchasers who would support the Board of
Directors in opposing a takeover bid which the Board of Directors determines
not to be in the best interests of the Company and its shareholders.
In addition to the proposed amendment, the Company's Articles currently
contain provisions approved by the Company's shareholders, as do the Bylaws,
that may have the effect of discouraging certain types of tender offers and
other transactions that involve a change of control of the Company. The
Company's Directors are elected for three-year staggered terms and cumulative
voting in the election of Directors is prohibited. The Company's Articles and
Bylaws provide that a vote of 80% of the outstanding shares of voting stock,
voting together as a single class, is required to remove Directors, and that
such Directors may only be removed for cause. The affirmative vote of the
holders of a 80% of the outstanding shares of voting stock, voting together as
a single class, is required to amend provisions of the Articles relating to the
staggered terms and the removal of Directors.
The Articles contain "fair price" provisions that require the
affirmative vote of 75% of the voting power of the outstanding shares of voting
stock, voting together as a single class, to approve certain business
combinations involving the Company and a related shareholder (including
mergers, consolidations and sales of a substantial part of the Company's
assets) unless specified price criteria and procedural requirements are met or
unless the transaction is approved by a majority of the continuing Directors as
provided therein. The affirmative vote of the holders of a 80% of the
outstanding shares of voting stock, voting together as a single class, is
required to amend provisions of the Articles relating to the "fair price"
provisions.
The Articles provide that the Board of Directors retains the power to
designate series of preferred stock and to determine the powers, rights,
preferences, qualifications and limitations of each series.
On July 16, 1997, the Company's Board of Directors declared a dividend
of one preferred share purchase right ("Right") for each outstanding share of
common stock held of record as of July 28, 1997. One Right was also issued with
respect to each share of common stock issued after July 28, 1997. Each Right
entitles the holder to purchase from the Company one one-hundredth of a share
of Series B Junior Preferred Stock at a price of $200, subject to certain
adjustments. The Rights are exercisable when, and are not transferable apart
from the shares of the Company's common stock until the earlier of (i) the
tenth day following the public announcement that a person or group of
affiliated or associated persons (with certain exceptions, including an
exception for FMR Corp., so long as FMR Corp., together with its affiliates,
beneficially owns less than 20% of the Company's outstanding voting stock) has
acquired 15% or more of the voting stock of the Company (or such earlier date
as a majority of the Board of Directors shall become aware of that a person has
acquired 15% or more) or (ii) the tenth business day (or such later date as may
be determined by the Board of Directors prior to such time as any person or
group of affiliated or associated persons acquires 15% or more) following the
public announcement of intent to or commencement of a tender or exchange offer
for 15% or more of the Company's shares. If the specified percentage of the
Company's common stock is acquired, each Right will entitle the holder (other
than the
26
acquiring person or group) to receive, upon exercise, such number of shares of
common stock of either the Company or the acquiring company having a market
value equal to two times the exercise price of the Right. The Rights are
redeemable by the Company's Board of Directors in certain circumstances and
expire on July 15, 2007.
The overall effect of the foregoing provisions of the Company's Articles
and Bylaws, together with the Rights and the ability of the Board of Directors
to issue additional shares of common stock, may be to delay or prevent attempts
by others or entities to acquire control of the Company without negotiations
with the Company's Board of Directors.
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of the Company's common
stock entitled to vote at the annual meeting is required to approve the
amendment to the Articles. Proxies will be voted for approval of the amendment
to the Articles unless otherwise specified.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE FOLLOWING
RESOLUTIONS TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION:
RESOLVED, that the first sentence of Article VII of the corporation's
Articles of Incorporation be replaced with the following: "The authorized
capital stock of this corporation shall be Five Hundred Million
(500,000,000) shares of common stock of the par value of Ten Cents ($.10)
per share (the "Common Stock") and Twenty-Five Million (25,000,000) shares
of preferred stock of the par value of One Dollar ($1.00) per share (the
"Preferred Stock")."
RESOLVED FURTHER, that the officers of the corporation, acting
individually, are each authorized to execute such documents and
certificates and to take such action as may be necessary to give effect to
the previous resolution.
27
SHAREHOLDER PROPOSAL REGARDING COMPENSATION
OF SENIOR EXECUTIVES
- --------------------------------------------------------------------------------
The following Shareholder Proposal has been submitted to the Company for
action at the meeting by the United Association S & P 500 Index Fund, of 1
Freedom Valley Drive, Oaks, PA 19456, the beneficial owner of 10,865 shares of
stock. The text of the proposal is as follows:
COMMONSENSE EXECUTIVE COMPENSATION PROPOSAL
Resolved, that the shareholders of St. Jude Medical, Inc. ("Company")
request that the Company's Board of Directors and its Executive Compensation
Committee replace the current system of compensation for senior executives with
the following "Commonsense Executive Compensation" program including the
following features:
(1) SALARY -- The Chief Executive Officer's salary should be targeted at the
mean of salaries paid at peer group companies, not to exceed $1,000,000
annually. No senior executive should be paid more than the CEO.
(2) ANNUAL BONUS -- The annual bonus paid to senior executives should be based
on well-defined quantitative (financial) and qualitative (non-financial)
performance measures. The maximum level of annual bonus should be a percentage
of the executive's salary level, capped at 100% of salary.
(3) LONG-TERM EQUITY COMPENSATION -- Long-term equity compensation to senior
executives should be in the form of restricted shares, not stock options. The
restricted share program should utilize justifiable performance criteria and
challenging performance benchmarks. It should contain a vesting requirement of
at least three years. Executives should be required to hold all shares awarded
under the program for the duration of their employment. The value of the
restricted share grant should not exceed $1,000,000 on the date of grant.
(4) SEVERANCE -- The maximum severance payment to a senior executive should be
no more than one year's salary and bonus.
(5) DISCLOSURE -- Key components of the executive compensation plan should be
outlined in the Compensation Committee's report to shareholders, with variances
from the Commonsense program explained in detail.
The Commonsense compensation program should be implemented in a manner that
does not violate any existing employment agreement or equity compensation
plans.
SUPPORTING STATEMENT
We believe that compensation paid to senior executives at most
companies, including ours, is excessive, unjustified, and contrary to the
interests of the Company, its shareholders, and other important corporate
constituents. CEO pay has been described as a "wasteland that has not been
reformed." (Institutional Shareholder Services senior vice-president, WALL
STREET JOURNAL, "Executive Pay Keeps Rising, Despite Outcry," October 3, 2003).
As of 2002, the CEO-worker pay gap of 282-to-1 was nearly seven times as large
as the 1982 ratio of 42-to-1 according to the United for a Fair Economy's Tenth
Annual CEO Compensation Survey ("Executive Excess 2003 - CEO's Win, Workers and
Taxpayers Lose.")
We believe that it is long past time for shareholders to be proactive
and provide companies clear input on the parameters of what they consider to be
reasonable and fair executive
28
compensation. We believe that executive compensation should be designed to
promote the creation of long-term corporate value. The Commonsense executive
compensation principles seek to focus senior executives, not on quarterly
performance numbers, but on long-term corporate value growth, which should
benefit all the important constituents of the Company. We challenge our
Company's leadership to embrace the ideas embodied in the Commonsense proposal,
which still offers executives the opportunity to build personal long-term
wealth but only when they generate long-term corporate value.
STATEMENT OF THE BOARD OF DIRECTORS IN RESPONSE TO SHAREHOLDER PROPOSAL
The Board of Directors has considered this proposal and believes that
its adoption would not be in the best interests of the Company and its
shareholders.
The Board of Directors believes that the executive compensation program
currently in place at the Company is effective and properly motivates
executives to advance the long-term success of St. Jude Medical. The
Compensation Committee of the Board of Directors is charged with the
responsibility of establishing and administering the compensation program for
the Company's executive officers. The Board believes that a Compensation
Committee composed of independent directors is the best assurance that
executive compensation will serve the best interests of shareholders. None of
the members of the Company's Compensation Committee is a current or former
employee of the Company, and all of the members of the Committee are
independent under the rules of the Securities and Exchange Commission and the
New York Stock Exchange.
The Board of Directors and the Compensation Committee believe it is
important to preserve the flexibility of the Company's compensation program so
that the Compensation Committee can choose incentives that are in line with the
goals that the Company seeks to pursue through its compensation arrangements.
The Company's executive compensation program is evaluated in relation to the
programs offered by other medical products companies.
The Board believes that limiting the Compensation Committee's ability to
design compensation programs and set competitive compensation levels in line
with those for other companies would place St. Jude Medical at a significant
competitive disadvantage in the recruitment and retention of its executives. In
choosing the appropriate compensation arrangement to use for its executives,
the Compensation Committee must be able to consider a variety of factors such
as the goals the Board has established for the Company and management, tax
consequences of various arrangements and competitive practices of other medical
products companies.
The Board believes that its current executive compensation program meets
the concerns that executive compensation be tied to the Company's performance
and provide long-term incentives to executives, while providing the Board and
the Compensation Committee with the flexibility necessary to recruit and retain
executives in a competitive environment. Allowing the Compensation Committee to
have flexibility to adapt to changes in the market for compensation as well as
changes in the Company is the best way to assure the competitiveness of the
Company. The Board believes that its current executive compensation practices
are not only reasonable but, in light of the Company's performance, have also
delivered excellent value to the Company's shareholders.
For the reasons described above, the Board believes that this
shareholder proposal is not in the best interests of the Company and its
shareholders and therefore recommends a vote "AGAINST" the proposal.
29
REQUIRED VOTE AND BOARD RECOMMENDATION
The affirmative vote of a majority of the shares of the Company's common
stock present and entitled to vote at the annual meeting is required to approve
the shareholder proposal. Proxies will be voted against the shareholder
proposal unless otherwise specified.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE
SHAREHOLDER PROPOSAL.
30
SHAREHOLDER PROPOSALS FOR THE 2005 ANNUAL MEETING
- --------------------------------------------------------------------------------
Under SEC rules, shareholders who wish to present a proposal at the 2005
annual meeting and have it included in our proxy statement for that meeting
must submit the proposal in writing to Kevin T. O'Malley, Secretary, St. Jude
Medical, Inc., One Lillehei Plaza, St. Paul, Minnesota 55117. We must receive
your written proposal no later than December 8, 2004.
Shareholders who intend to present a proposal at the 2005 annual
meeting, but not to include the proposal in our proxy statement, must comply
with the requirements established in the Company's Bylaws. These require, among
other things, that a shareholder submit a written notice to the Secretary of
the Company of the intention to bring a proposal before the meeting not less
than 50 days nor more than 75 days prior to the meeting (or if less than 60
days' notice or prior public disclosure of the date of the annual meeting is
given to shareholders, not later than the tenth day following the day on which
the notice of the date of the annual meeting was mailed or such public
disclosure was made).
OTHER MATTERS
- --------------------------------------------------------------------------------
Whether or not you plan to attend the meeting, please mark, sign, date and
promptly return the proxy card sent to you in the envelope provided. No postage
is required for mailing in the United States.
Terry L. Shepherd
Chairman of the Board of Directors
and Chief Executive Officer
March 30, 2004
31
APPENDIX A
ST. JUDE MEDICAL, INC.
PRINCIPLES OF CORPORATE GOVERNANCE
- --------------------------------------------------------------------------------
The Board of Directors of St. Jude Medical, Inc. has adopted the following
principles of corporate governance:
I. BOARD OF DIRECTORS
A. Independence. A majority of the members of the Board of Directors
shall be independent of management.
B. Determination of Independence. The Governance and Nominating Committee
will annually review the status of each director as independent or not
independent using the following criteria from the Company's by-laws:
1. has not been employed by the corporation in an executive capacity
within the last five years;
2. is not, and is not affiliated with a company that is, an advisor
or consultant to the corporation, or a significant customer or
supplier of the corporation;
3. has no personal service contract(s) with the corporation or the
corporation's senior management;
4. is not affiliated with a not-for-profit entity that receives
significant contributions from the corporation;
5. is not employed by a public company at which an executive officer
of the corporation serves as a director;
6. does not have a relationship described in 1 through 5 above with
any affiliate of the corporation; and
7. is not a member of the immediate family of any person described
in 1 through 6 above.
In addition, the Governance and Nominating Committee will consider each
director's status as independent under the New York Stock Exchange and SEC
definitions. The Committee's recommendations will be referred to the entire
Board of Directors for final determination.
C. Committees. The board of directors has three standing Committees:
Audit, Compensation, and Governance and Nominating. Each of these
Committees has a written charter. Each Committee consists
entirely of independent directors. Committee membership is
proposed by the Governance and Nominating Committee and approved
by the entire board.
D. Sessions of the Independent Directors. At least twice each year
the independent members of the Board of Directors meet in a
separate session. These sessions are chaired by the Presiding
Director who is the Chairperson of the Governance and Nominating
Committee.
E. Annual Board Performance Review. Each year the Board of Directors
will conduct a review of its own performance as well as the
performance of its standing Committees.
F. Board Role in Strategy. The Board of Directors dedicates the
major portion of two meetings each year to the Company's
strategic plan -- one meeting at the beginning of the strategic
planning process and the second to approve the plan.
G. Board Role in Succession Planning. The board devotes a
substantial portion of one meeting each year to a
32
management-led review of the Company's succession planning
process. The major portion of one independent directors session
each year is devoted to the CEO succession plan.
H. CEO Review. Each year the Board of Directors conducts a formal
review of the CEO's performance.
I. Director Terms. Each director is elected for a three-year term.
The terms are staggered. The Board of Directors has no term limit
policy. The Board of Directors has a retirement policy of age 70
or, in the case of a director first elected to a three-year term
that would expire after the age of 70, the expiration of the
three-year term. Directors are not required to submit their
resignation upon a change in their occupation.
J. Limit of Number of Directorships. The Company has a guideline
that directors should serve on no more than three to five boards
of other publicly owned companies.
K. Director Education and Orientation. The Company has a formal
orientation program for new directors. The Company does not
require that directors attend a "director college" or similar
program.
L. Director Responsibilities. Directors are expected to have a good
attendance record at board and committee meetings, to read in
advance the meeting materials, to be generally knowledgeable
about the strategy and affairs of the Company and to approach
their duties with an independent frame of mind.
M. Access to Others. Directors have access to all the officers of
the Company and as a board or as a board committee have the
authority to directly retain independent advisors if they
consider it to be advisable.
II. COMBINATION OF CHAIRMAN AND CEO POSITIONS
The Company believes it is well served by having the positions of Chairman
of the Board and CEO combined.
III. COMPENSATION
A. Shareholder Approval of Plans. The Company submits its stock option
and other stock plans and executive bonus plans to the shareholders
for approval.
B. Repricing of Stock Options. The Company does not reprice stock
options.
C. Stock Ownership Guidelines. In order to align the interests of
shareholder's and management, the Company has stock ownership
guidelines for directors, officers and senior employees.
D. Loans to Officers and Directors. Company loans to officers and
directors are prohibited.
E. Compensation of Directors. The following principles are used to
develop the compensation of non-management directors:
1. Directors should be fairly compensated for the time commitment
and responsibility associated with service as a director.
2. Directors compensation should be comparable to the compensation
of directors of companies of similar size and nature as St. Jude
Medical, Inc.
3. Director compensation should facilitate directors acquiring an
equity position in the Company consistent with the stock
ownership guidelines.
33
F. Stock Option Accounting Treatment. The Company accounts for stock
options under FASB standard 123 using the intrinsic value method.
IV. CODE OF BUSINESS CONDUCT
The Company has adopted a Code of Business Conduct that applies to all
employees and directors. Any waivers granted under the Code must be approved by
the Board of Directors.
V. SHAREHOLDER RIGHTS PLAN
The Board of Directors has adopted a shareholders rights plan. The Board
believes that this can be used to protect shareholder interests and the Board
does not intend to use it in a manner that entrenches management.
VI. RELATIONSHIP WITH EXTERNAL AUDITORS
The Audit Committee of the Board of Directors has the authority to retain
and terminate the Company's external auditor. The Company has a policy that
prohibits the hiring of personnel from the Company's external auditor for two
years after the person has left the external auditor. The Company has a policy
prohibiting directors and executive officers from using the Company's external
auditor for tax services.
34
APPENDIX B
ST. JUDE MEDICAL, INC.
MANAGEMENT INCENTIVE COMPENSATION PLAN
(AS ADOPTED ON FEBRUARY 23, 2004)
- --------------------------------------------------------------------------------
1. PURPOSE
The St. Jude Medical, Inc. Management Incentive Compensation Plan (the
"Plan") is designed to attract, retain, and reward highly qualified executives
who are important to the Company's success and to provide incentives relating
directly to the financial performance and long-term growth of the Company.
2. DEFINITIONS
(a) BOARD - The Board of Directors of St. Jude Medical, Inc.
(b) CODE - The Internal Revenue Code of 1986, as amended.
(c) COMMITTEE - The Compensation Committee of the Board, or such other
committee of the Board that is designated by the Board to administer
the Plan, in compliance with requirements of Section 162(m) of the
Code.
(d) COMPANY - St. Jude Medical, Inc. and any other corporation in which
St. Jude Medical, Inc. controls, directly or indirectly, fifty percent
or more of the combined voting power of all classes of voting
securities.
(e) EXECUTIVE OFFICER - Any officer of the Company subject to the
reporting requirements of Section 16 of the Securities and Exchange
Act of 1934 ("Exchange Act").
(f) INCENTIVE COMPENSATION - The cash incentive awarded to a Participant
pursuant to terms and conditions of the Plan.
(g) PARTICIPANT - Any Executive Officer and any other employee or class of
management employees of the Company as may be designated by the
Committee.
(h) PLAN - The St. Jude Medical, Inc. Management Incentive Compensation
Plan.
(i) SALARY - The direct gross (as opposed to taxable) compensation earned
by the Participant as base salary during the fiscal year, excluding
any and all commissions, bonuses, incentive payments payable during
the fiscal year, and other similar payments.
3. ELIGIBILITY
The Committee shall, each fiscal year, designate those employees, including
Executive Officers of the Company who are eligible to receive Incentive
Compensation under this Plan for the fiscal year.
4. ADMINISTRATION
The awards under the Plan shall be based on the attainment of financial
performance goals for the fiscal year, as determined for each Participant by the
Committee. The Committee shall administer the Plan and shall have full power and
authority to construe, interpret, and administer the Plan necessary to comply
with the requirements of Section 162(m) of the Code. The Committee's decisions
shall be final, conclusive, and binding upon all persons. The Committee shall
certify in writing prior to commencement of payment of the bonus that the
performance goal or goals under which the bonus is to be paid has or have been
achieved. The Committee in its sole discretion has the authority to reduce or
eliminate the amount of a bonus otherwise payable to Executives upon attainment
of the performance goal established
35
for a fiscal year. At the beginning of each fiscal year consistent with the
requirements of Section 162(m), the Committee shall: (i) determine the
percentage of the Participant's Salary that may be awarded as Incentive
Compensation for the fiscal year, up to a maximum award under the Plan of the
greater of $2,000,000 or 1.5% of the Company's consolidated after tax net
profits for the fiscal year; (ii) determine the Participants eligible to
participate in the Plan for the fiscal year; (iii) determine financial
performance goals as set forth in Section 5 herein for each Participant on
which Incentive Compensation will be paid; (iv) determine each Executive's
Incentive Compensation for the fiscal year; and (v) determine the frequency at
which each Participant's Incentive Compensation will be paid when attained.
Except with respect to Incentive Compensation payable to Executive Officers
of the Company, the Committee may delegate the establishment of performance
goals, and the general powers of the Committee described above with respect to
the Plan to the Chief Executive Officer of the Company.
The Committee may amend, modify, suspend, or terminate the Plan for the
purpose of meeting or addressing any changes in legal requirements or for any
other purpose permitted by law. The Committee will seek shareholder approval of
any amendment determined to require a shareholder approval or advisable under
the regulations of the Internal Revenue Service or other applicable law or
regulation.
5. FINANCIAL PERFORMANCE GOALS
With respect to any Participant who is an Executive Officer, the Committee
shall establish performance goals based on the stock price of the Company's
shares, the Company's earnings per share, market share, sales, return on equity,
asset management or the expenses or profitability of the Company or any division
or subsidiary, or any combination of such goals for the fiscal year, or a
portion thereof. For employees other than executive officers, subjective,
individual performance goals may also be established. Any performance goal shall
be established in a manner such that a third party having knowledge of the
relevant performance results could calculate the amount to be paid to the
Participant. Any such goal shall be established when the outcome of the goal is
substantially uncertain. The Committee shall not increase the maximum amount of
the Incentive Compensation payable upon attainment of the goal after the goal
has been established. The Incentive Compensation may be paid in whole or in part
upon the attainment of any one of the goals. Any such goal shall comply with the
applicable requirements of Section 162(m) of the Code and any regulations
promulgated thereunder.
With respect to any Participant other than an Executive Officer, the
Committee may establish performance goals based on other than the financial
performance of the Company specified above.
6. PAYMENT OF INCENTIVE COMPENSATION; NONASSIGNABILITY
The Incentive Compensation shall be paid only upon certification of the
attainment of the preestablished performance goals by the Committee. Such
Incentive Compensation shall be paid within 90 days of the end of the fiscal
year, but any Participant who is eligible to participate in the Company's
deferred compensation plan may elect to defer part or all of such Incentive
Compensation under such plan. No Incentive Compensation or any other benefit
under the Plan shall be assignable or transferable by the Participant during the
Participant's lifetime.
7. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the Plan shall confer upon any employee any right to continue in
the employ of the Company or shall interfere with or restrict in any way the
right of the Company to discharge an employee at any time for any reason
whatsoever, with or without cause.
36
[ST. JUDE MEDICAL LOGO]
ST. JUDE MEDICAL, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR
THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 12, 2004
The undersigned hereby appoints Daniel J. Starks, John C. Heinmiller and Kevin
T. O'Malley or any one of them, as proxies, with full power of substitution to
vote all the shares of common stock which the undersigned would be entitled to
vote if personally present at the Annual Meeting of shareholders of St. Jude
Medical, Inc., to be held May 12, 2004 at 9:30 a.m., CDT, at the Minnesota
Historical Center, 345 Kellogg Boulevard West, St. Paul, Minnesota, or at any
adjournments thereof, upon any and all matters which may properly be brought
before the meeting or adjournments thereof, hereby revoking all former proxies.
(TO BE SIGNED ON THE REVERSE SIDE)
SEE REVERSE SIDE
ST. JUDE MEDICAL, INC.
C/O EQUISERVE TRUST COMPANY, N.A.
P.O. BOX 8694
EDISON, NJ 08818-8694
[X] PLEASE MARK
VOTE AS IN
THIS EXAMPLE
MANAGEMENT RECOMMENDS A VOTE FOR EACH OF THE DIRECTOR
NOMINEES AND FOR PROPOSALS 2, 3 AND 4.
1. Election of Directors (01) Michael A. Rocca
(02) David A. Thompson
(03) Stefan K. Widensohler
FOR ALL NOMINEES [ ] [ ] WITHHOLD AUTHORITY TO
(Except as specified below) VOTE FOR ALL NOMINEES
[ ] ____________________________
(Instructions: to withhold authority to vote for any individual nominee
write that nominee's name in the space provided above.)
FOR AGAINST ABSTAIN
2. Proposal to ratify the appointment of Ernst & [ ] [ ] [ ]
Young LLP as the Company's independent auditors
for 2004.
3. Proposal to approve the Company's Management [ ] [ ] [ ]
Incentive Compensation Plan.
4. Proposal to increase the Company's authorized [ ] [ ] [ ]
shares of common stock to 500 million shares.
MANAGEMENT RECOMMENDS A VOTE AGAINST THE FOLLOWING PROPOSAL
5. Proposal to adopt the Commonsense Executive [ ] [ ] [ ]
Compensation Proposal.
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the meeting.
MARK HERE FOR [ ] MARK HERE IF YOU [ ]
ADDRESS CHANGE PLAN TO ATTEND
AND NOTE AT LEFT THE MEETING
Please date and sign exactly as your name(s) appears hereon indicating, where
proper, official position or representative capacity in which you are signing.
When signing as executor, administrator, trustee or guardian give full title as
such; when shares have been issued in names of two or more persons, all should
sign.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED, BUT IF NO
SPECIFICATION IS MADE THE SHARES WILL BE VOTED "FOR" ALL NOMINEES FOR DIRECTORS,
"FOR" PROPOSAL 2, 3, AND 4, AGAINST PROPOSAL 5, AND IN THE DISCRETION OF THE
NAMED PROXIES ON ALL OTHER MATTERS.
Signature: _____________________________________________ Date: _________________
Signature: ____________________________________________ Date: _________________