Edwards Lifesciences 10Q 2001 Q3 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-15525

EDWARDS LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		36-4316614 (I.R.S. Employer Identification No.)
One Edwards Way, Irvine, California (Address of principal executive offices)		92614 (Zip Code)

(949) 250-2500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

The number of shares of the registrant's Common Stock, par value $1.00 per share, outstanding as of October 31, 2001, the latest practicable date, was 59,204,877 shares.

EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
For the quarterly period ended September 30, 2001

TABLE OF CONTENTS

		Page Number
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Consolidated Condensed Balance Sheets	2
	Consolidated Condensed Statements of Operations	3
	Consolidated Condensed Statements of Cash Flows	4
	Notes to Consolidated Condensed Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Part II. OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	26
Signature		27
Exhibits		28

Part I. Financial Information

Item 1. Financial Statements

EDWARDS LIFESCIENCES CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(unaudited) (in millions, except share data)

			September 30, 2001			December 31, 2000
ASSETS
Current assets
	Cash and cash equivalents		$	23.5		$	28.1
	Accounts and other receivables, net			119.0			129.3
	Inventories			80.7			73.0
	Deferred income taxes			25.9			23.3
	Prepaid expenses and other current assets			25.8			26.8

		Total current assets		274.9			280.5
Property, plant and equipment, net				176.7			182.4
Goodwill and other intangibles, net				403.0			511.0
Investments in unconsolidated affiliates				89.5			97.5
Other assets				15.5			15.4

			$	959.6		$	1,086.8

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Accounts payable and accrued liabilities		$	157.2		$	157.4
	Short-term debt			0.2			61.4

		Total current liabilities		157.4			218.8

Long-term debt				339.1			367.0
Other liabilities				50.5			61.4
Commitments and contingent liabilities
Stockholders' equity
	Common stock, $1.00 par value, 350,000,000 shares authorized, 59,175,410 and 58,668,393 shares outstanding			59.2			58.7
	Additional contributed capital			284.6			277.4
	Retained earnings			70.6			102.9
	Accumulated other comprehensive (loss) income			(1.8	)		0.6

		Total stockholders' equity		412.6			439.6

			$	959.6		$	1,086.8

The accompanying notes are an integral part of these consolidated
condensed financial statements.

EDWARDS LIFESCIENCES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(unaudited) (in millions, except per share information)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2001			2000			2001			2000
Net sales			$	147.8		$	185.8		$	532.1		$	616.4
	Cost of goods sold			64.4			96.3			255.8			329.2

Gross profit				83.4			89.5			276.3			287.2
	Selling, general and administrative expenses			46.4			46.6			152.9			165.6
	Research and development expenses			14.0			12.9			40.6			41.0
	Goodwill amortization			3.6			5.7			15.0			22.9
	Disposition of assets and other non-recurring charges, net			—			11.7			83.0			312.2
	Non-recurring spin-off expenses			—			—			—			18.4
	Other operating income			(3.9	)		(4.1	)		(12.2	)		(9.7	)

Operating income (loss)				23.3			16.7			(3.0	)		(263.2	)
	Interest expense, net			3.2			7.5			19.6			13.9
	Other expense, net			0.2			2.0			9.2			3.1

Income (loss) before provision for income taxes				19.9			7.2			(31.8	)		(280.2	)
	Provision (benefit) for income taxes			5.4			2.8			(4.8	)		7.4

Income (loss) before cumulative effect of change in accounting principle				14.5			4.4			(27.0	)		(287.6	)
	Cumulative effect of change in accounting principle, net of tax (Note 4)			—			—			(1.5	)		—

Net income (loss)			$	14.5		$	4.4		$	(28.5	)	$	(287.6	)

Share information:
	Earnings per basic share
		Income (loss) before cumulative effect of change in accounting principle	$	0.25		$	0.08		$	(0.46	)
		Cumulative effect of change in accounting principle (Note 4)	$	—		$	—		$	(0.03	)
		Net income (loss)	$	0.25		$	0.08		$	(0.49	)
	Earnings per diluted share
		Income (loss) before cumulative effect of change in accounting principle	$	0.24		$	0.07		$	(0.46	)
		Cumulative effect of change in accounting principle (Note 4)	$	—		$	—		$	(0.03	)
		Net income (loss)	$	0.24		$	0.07		$	(0.49	)
	Weighted average number of common shares outstanding
		Basic		59.0			58.4			58.8
		Diluted		61.4			60.7			58.8

The accompanying notes are an integral part of these consolidated
condensed financial statements.

EDWARDS LIFESCIENCES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

			Nine Months Ended September 30,
			2001			2000
Cash flows from operating activities
	Net loss		$	(28.5	)	$	(287.6	)
	Adjustments
		Disposition and write-down of assets and other non-recurring charges		89.4			333.4
		Depreciation and amortization		44.4			59.4
		Cumulative effect of change in accounting principle (Note 4)		1.5			—
		Deferred taxes		(9.3	)		2.6
		Other		(6.8	)		(0.1	)
	Changes in operating assets and liabilities, net of effect from asset dispositions and de-consolidation of Japan business (Notes 3 and 5)
		Accounts and other receivables		(0.4	)		(1.2	)
		Inventories		(17.9	)		10.9
		Accounts payable and accrued liabilities		(17.3	)		(18.6	)
		Other		(0.6	)		(11.3	)

	Net cash provided by operating activities			54.5			87.5

Cash flows from investing activities
	Proceeds from sale of business			45.0			10.0
	Capital expenditures			(28.1	)		(34.9	)
	Investments in unconsolidated affiliates			(9.0	)		(27.0	)
	Purchase of convertible debentures			—			(12.5	)

		Net cash provided by (used in) investing activities		7.9			(64.4	)

Cash flows from financing activities
	Proceeds from issuance of short-term debt			25.3			219.0
	Payments on short-term debt			(86.3	)		(68.4	)
	Proceeds from issuance of long-term debt			145.1			437.0
	Payments on long-term debt			(166.7	)		(87.0	)
	Debt issuance costs			(0.7	)		(3.0	)
	Proceeds from notes receivable			7.3			—
	Proceeds from stock plans			6.5			—
	Proceeds from accounts receivable securitization, net			1.4			—
	Investment by Baxter International Inc.			—			(511.0	)

		Net cash used in financing activities		(68.1	)		(13.4	)

	Effect of currency exchange rate changes on cash			1.1			3.5

Net (decrease) increase in cash and cash equivalents				(4.6	)		13.2
Cash and cash equivalents at beginning of period				28.1			—

Cash and cash equivalents at end of period			$	23.5		$	13.2

Supplemental disclosure of noncash activity
	Deconsolidation of Japan business (Note 1)		$	—		$	42.8
	Sale of inventory in exchange for note receivable			—			13.6
	Net assets sold in consideration for convertible preferred stock			—			13.0

The accompanying notes are an integral part of these consolidated condensed financial statements.

Edwards Lifesciences Corporation

Notes to Consolidated Condensed Financial Statements

September 30, 2001

(unaudited)

1. DESCRIPTION OF BUSINESS

Edwards Lifesciences Corporation ("Edwards Lifesciences") provides a comprehensive line of products and technologies to treat advanced cardiovascular disease. Edwards Lifesciences' sales are categorized in four main product and service lines: (a) cardiac surgery, (b) critical care, (c) vascular and (d) perfusion products and services. Edwards Lifesciences'cardiac surgery portfolio is comprised of products relating to heart-valve therapy, and cannulae and cardioplegia products used during open-heart surgery. Edwards Lifesciences is the world's leader in, and has been a pioneer in the development and commercialization of, tissue valves and repair products used to replace or repair a patient's diseased or defective heart valve. In thecritical care area, Edwards Lifesciences is a world leader in hemodynamic monitoring systems that are used to measure a patient's heart function, and also provides central venous access products for fluid and drug delivery. Edwards Lifesciences'vascular product lines include a line of balloon catheter-based products, surgical clips and inserts, angioscopy equipment, artificial implantable grafts and an endovascular system used to treat abdominal aortic aneurysms. In theperfusion products and services category, Edwards Lifesciences develops, manufactures and markets, in regions outside the United States and Western Europe, a diverse line of disposable products used during cardiopulmonary bypass procedures, including oxygenators, blood containers, filters and related devices. Effective June 30, 2001, the Company sold its perfusion services business in the United States to an affiliate of Fresenius Medical Care AG (see Note 3). The Company continues to maintain its perfusion services business in Europe.

Edwards Lifesciences' cardiovascular business in Japan is being operated pursuant to a joint venture under which a Japanese subsidiary of Baxter International Inc. ("Baxter") retains ownership of the Japanese business assets, but a subsidiary of Edwards Lifesciences holds a 90% profit interest. Edwards Lifesciences has an option to purchase the Japanese business assets that may be exercised no earlier than August 1, 2002 and no later than March 31, 2005. The Japanese operations are consolidated in the accompanying Consolidated Condensed Statements of Operations for the three months ended March 31, 2000, consistent with the treatment of the Company's operations while a part of Baxter. Subsequent to March 31, 2000, Edwards Lifesciences recognizes as sales its shipments into the joint venture and utilizes the equity method of accounting to record its interest in the operations of the joint venture in Other Operating Income.

Edwards Lifesciences was incorporated in Delaware on September 10, 1999. On March 31, 2000 (the "Distribution Date"), Baxter transferred its cardiovascular business (the "Edwards Lifesciences Business") to Edwards Lifesciences in connection with a tax-free spin-off (the "Distribution") by Baxter of the Edwards Lifesciences Business. References to the "Company" and "Edwards Lifesciences" refer to Baxter's cardiovascular business for periods prior to April 1, 2000 and to Edwards Lifesciences Corporation and its subsidiaries for the periods on or after such date.

No earnings per share data for the nine months ended September 30, 2000 is presented as the Edwards Lifesciences earnings were part of Baxter's earnings through the close of business on March 31, 2000. Baxter has had no ownership interest in Edwards Lifesciences after March 31, 2000. Baxter performs certain services for Edwards Lifesciences pursuant to various agreements that are outlined in Note 8. Edwards Lifesciences has indemnified Baxter against certain lease and other liabilities as outlined in Note 9.

2. FINANCIAL INFORMATION

The unaudited interim consolidated condensed financial statements of Edwards Lifesciences use Baxter's historical bases in the assets and liabilities and historical results of operations of the Edwards Lifesciences Business prior to the Distribution, operated primarily as a division of Baxter, and continuing as a separate legal entity, Edwards Lifesciences Corporation, subsequent to the Distribution. These interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the consolidated financial statements and notes included in the Company's Form 10-K for the year ended December 31, 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Certain reclassifications of previously reported amounts have been made to conform to classifications used in the current period.

The consolidated condensed financial statements include the accounts of Edwards Lifesciences and its subsidiaries. Prior to 2001, certain operations outside the United States had been included in the consolidated financial statements on the basis of fiscal years ending November 30 in order to facilitate timely consolidation. This one-month lag was eliminated as of the beginning of 2001 for these international operations as it was no longer required to achieve a timely consolidation. The December 2000 net loss from operations of $3.8 million for these entities was recorded as an adjustment to January 1, 2001 retained earnings.

In the opinion of management, the interim consolidated condensed financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

3. DISPOSITION OF ASSETS AND OTHER NON-RECURRING CHARGES

Loss on Sale of Assets ($68.2 million)

Effective June 30, 2001, the Company sold the stock of Edwards Lifesciences Cardiovascular Resources, Inc. ("ELCR") to Fresenius Medical Care AG ("Fresenius") for cash proceeds of $45 million (the "Sale"), resulting in a pre-tax loss of $68.2 million. ELCR provided and managed perfusionists, monitoring systems, capital equipment and disposable material on a contract service basis to hospitals in the United States and Puerto Rico.

The following unaudited pro forma consolidated condensed statement of operations for the nine months ended September 30, 2001 gives effect to the sale to Fresenius by Edwards Lifesciences as if the Sale had occurred on January 1, 2001 and is inclusive of the $68.2 million loss on sale of assets. The unaudited pro forma consolidated condensed statement of operations does not purport to be indicative of either the results of future operations or the results of operations that would have occurred had the Sale been consummated on January 1, 2001. The following are in millions, except per share amounts:

		Nine Months Ended September 30, 2001
Net sales		$	471.1
Net loss			27.5
Net loss per share:
	Basic		0.47
	Diluted		0.47

Other Non-recurring Charges ($14.8 million)

Based upon the non-strategic nature and declining profitability of certain products in the Company's portfolio (including certain distributed products), the Company decided during the quarter ended June 30, 2001 to discontinue its sales effort of these products. The long-lived assets and the investments related to these products were evaluated to determine whether any impairment in their recoverability existed at the determination date by assessing whether the estimated cash flows of the products or investments over the estimated lives of the related assets were sufficient to recover their costs. Where such cash flows were insufficient, the Company utilized a discounted cash flow model to estimate the fair value of assets or investments and recorded an impairment charge to adjust the carrying values to estimated fair values. As a result of this evaluation, Edwards Lifesciences recorded a non-cash charge of $14.8 million primarily related to the impairment of intangibles ($8.3 million), the impairment of an investment ($5.5 million) and the write-down of non-productive assets ($1.0 million).

4. CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2001, Edwards Lifesciences adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Accounting for the gain or loss due to changes in fair value of the derivative instrument depends on whether the derivative qualifies as a hedge. If the derivative instrument does not qualify as a hedge, the gains or losses are reported in earnings when they occur. If the derivative instrument qualifies as a hedge, the accounting varies based upon the type of risk being hedged.

Adopting the provisions of SFAS No. 133 on January 1, 2001 resulted in a one-time cumulative after-tax increase in net loss of $1.5 million. In addition, the Company recorded the following one-time cumulative after-tax adjustments in Accumulated Other Comprehensive Loss as of January 1, 2001:

		Unrealized Gain (Loss)
		(in millions)
Related to previously designated cash flow hedging relationships:
	Fair value of hedging instruments	$	(6.9	)
	Previously deferred hedging gains and losses		1.5

Total cumulative effect of adoption on Other Comprehensive Loss, net of tax		$	(5.4	)

For the three months ended September 30, 2001, the Company reclassified from Accumulated Other Comprehensive Loss a net gain of $2.5 million to Cost of Goods Sold and a net loss of $1.0 million to Interest Expense, net. For the nine months ended September 30, 2001, the Company reclassified from Accumulated Other Comprehensive Loss a net gain of $6.2 million to Cost of Goods Sold and a net loss of $8.9 million to Interest Expense, net. Included in the amounts reclassified to Interest Expense, net for the nine months ended September 30, 2001 is a $6.2 million charge related to the termination of an interest rate swap agreement.

The Company expects that during the next 12 months, it will reclassify to earnings a $1.4 million loss currently recorded in Accumulated Other Comprehensive Loss. During the three and nine months ended September 30, 2001, the Company recognized a $0.2 million and $1.9 million loss, respectively, due to hedge ineffectiveness primarily related to the time value of option contracts.

Hedging Instruments

Edwards Lifesciences maintains an overall risk management strategy that incorporates the use of a variety of interest rate and currency derivative financial instruments to mitigate its exposure to significant unplanned fluctuations in earnings caused by volatility in interest rate and currency exchange rates. Derivative instruments that are used as part of the Company's interest and foreign exchange rate management strategy include interest rate swaps, option-based products and forward exchange contracts. These instruments are designated as cash flow hedges. Edwards Lifesciences does not use any of these instruments for trading or speculative purposes.

The Company uses interest rate swaps to convert floating-rate debt to fixed-rate debt. The Company's interest rate swap agreements involve agreements to pay a fixed rate and receive a floating rate, at specified intervals, calculated on an agreed-upon notional amount. The debt and amounts that the Company hedges are determined based on prevailing market conditions and the current shape of the yield curve. Interest rate swap agreements are executed as an integral part of specific debt transactions.

The Company utilizes forward exchange contracts and option contracts to hedge a portion of its exposure to forecasted intercompany foreign currency transactions. These contracts provide for the

purchase or sale of foreign currencies at specified future dates at specified exchange rates. These contracts are entered into to reduce the risk that the Company's earnings and cash flows resulting from certain forecasted intercompany transactions will be adversely affected by changes in foreign currency exchange rates.

Derivative instruments used by Edwards Lifesciences involve, to varying degrees, elements of credit risk, in the event a counterparty should default, and market risk, as the instruments are subject to rate and price fluctuations. Credit risk is managed through the use of credit standard guidelines, counterparty diversification, monitoring of counterparty financial condition and International Swap Dealers Association master netting agreements in place with all derivative counterparties. All derivative financial instruments are with commercial banks and investment banking firms assigned investment grade ratings of "AA" or better with national rating agencies.

Accounting for Derivatives and Hedging Activities

All derivatives are recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, it designates the derivative as either (a) a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognized asset or liability (a "cash flow" hedge), or (b) a hedge of an exposure to changes in the fair value of an asset, liability, or an unrecognized firm commitment (a "fair value" hedge). Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a cash flow hedge to the extent that the hedge is effective, are recorded in Other Comprehensive Income until earnings are affected by the variability of cash flows of the hedged transaction (e.g., until periodic settlements of a variable asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceed the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a foreign-currency hedge, are recorded in either current-period earnings or Other Comprehensive Income, depending on whether the hedging relationship satisfies the criteria for a fair-value or cash-flow hedge.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges or specific firm commitments or forecasted transactions. The Company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness.

When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the Company discontinues hedge accounting prospectively. A derivative ceases to be highly effective when (a) the Company determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item such as firm commitments or forecasted transactions, (b) it is no longer probable that the forecasted transaction will occur, (c) the derivative expires or is sold, terminated, or exercised, or (d) management determines that designating the derivative as a hedging instrument is no longer appropriate.

4. CHANGE IN ACCOUNTING PRINCIPLE (Continued)

When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in Accumulated Other Comprehensive Income and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in Accumulated Other Comprehensive Income will be recognized immediately in earnings. In a situation in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current-period earnings.

5. PRO FORMA INFORMATION

The following unaudited pro forma consolidated condensed statement of operations for the nine months ended September 30, 2000 presents the combined results of Edwards Lifesciences assuming that the transactions contemplated by the Distribution had been completed as of January 1, 2000. The unaudited pro forma information has been prepared utilizing the historical combined condensed financial statements of Edwards Lifesciences.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited) (in millions, except per share data)

			Nine Months Ended September 30, 2000
						Pro Forma Adjustments
			Historical			Japan on an Equity Basis			Others			Pro Forma
Net sales			$	616.4		$	(28.9)	(a)	$	—		$	587.5
	Cost of goods sold			329.2			(12.3)	(a)		—			316.9

Gross profit				287.2			(16.6	)		—			270.6

	Selling, general and administrative expenses			165.6			(12.4)	(a)		5.2	(b)		158.4
	Research and development expenses			41.0			(0.7)	(a)		—			40.3
	Goodwill amortization			22.9			—			—			22.9
	Disposition of assets and other non-recurring charges, net			312.2			—			—			312.2
	Non-recurring spin-off expenses			18.4			—			—			18.4
	Other operating income			(9.7	)		(3.5)	(a)		—			(13.2	)

Operating loss				(263.2	)		—			(5.2	)		(268.4	)
	Interest expense, net			13.9			—			7.3	(c)		21.2
	Other expense, net			3.1			—			—			3.1

Loss before provision for income taxes				(280.2	)		—			(12.5	)		(292.7	)
	Provision (benefit) for income taxes			7.4			—			(3.3)	(d)		4.1

Net loss			$	(287.6	)	$	—		$	(9.2	)	$	(296.8	)

Share information:
	Pro forma net loss per share
		Basic										$	(5.09	)
		Diluted										$	(5.09	)
	Weighted average number of common shares outstanding
		Basic											58.3
		Diluted											58.3

Pro Forma Adjustments

(a): To reflect the Edwards Lifesciences Japanese operations on an equity basis.
(b): To reflect estimated incremental costs associated with being an independent public company, including costs associated with corporate administrative services such as accounting, tax, treasury, risk management, insurance, legal, investor relations and human resources. The Company's historical combined condensed financial statements for the three months ended March 31, 2000 include all costs incurred by Baxter on behalf of the Company. However, there are incremental and continuing costs directly attributable to the spin-off, as there is a loss of certain synergies and benefits of economies of scale that existed while Edwards Lifesciences was part of Baxter. Management estimated such incremental costs utilizing Baxter's historical headcount and cost analysis, and the Company's organization chart. The following table is a summary of the estimated incremental costs by significant function for the three months ended March 31, 2000 (in millions):

Accounting, tax and legal		$	2.0
Insurance and risk management			1.0
Human resources			1.0
Treasury, investor relations and other costs			1.2

	Total	$	5.2

(c): To reflect the estimated interest expense which would have been incurred by Edwards Lifesciences based on the incurrence of $529.0 million of debt at a weighted-average interest rate of approximately 5.5%. An increase or decrease of 0.189 points in the weighted-average interest rate would result in a per annum increase or decrease in interest expense of $1.0 million.
(d): To reflect the estimated tax impact at statutory rates, for pro forma adjustments (b) and (c), as well as the estimated impact of different tax rates available to Edwards Lifesciences as a stand-alone company.

6. INVENTORIES

Inventories consisted of the following:

	September 30, 2001		December 31, 2000
	(in millions)
Raw materials	$	23.1	$	18.6
Work in process		24.3		19.1
Finished products		33.3		35.3

	$	80.7	$	73.0

7. COMPREHENSIVE INCOME

Reconciliation of net income to comprehensive income is as follows:

		Three Months Ended September 30,					Nine Months Ended September 30,
		2001			2000		2001			2000
		(in millions)
Net income (loss)		$	14.5		$	4.4	$	(28.5	)	$	(287.6	)
Other comprehensive income (loss):
	Currency translation adjustments		(10.1	)		1.1		9.5			(6.5	)
	Unrealized net gain (loss) on marketable equity securities		(5.2	)		1.3		(6.9	)		7.3
	Unrealized net loss on derivatives		(5.9	)		—		(5.0	)		—

Comprehensive income (loss)		$	(6.7	)	$	6.8	$	(30.9	)	$	(286.8	)

8. RELATED PARTY TRANSACTIONS

Effective on the Distribution Date, Baxter and Edwards Lifesciences entered into a series of administrative services agreements pursuant to which Baxter and Edwards Lifesciences continue to provide, for a specified period of time, certain administrative services that each entity historically has provided to the other. These agreements require the parties to pay each other a fee that approximates the actual costs of these services. Edwards Lifesciences has a continuing relationship with Baxter as a customer and supplier for certain products, and uses Baxter as a distributor of the Company's products in certain regions of the world.

Prior to the Distribution, Baxter provided to the Edwards Lifesciences Business certain legal, treasury, employee benefit, insurance and administrative services. Charges for these services were based on actual costs incurred by Baxter. The bases for the amounts charged to Edwards Lifesciences varied depending on the nature of the service, but generally were determined using headcount, sales, payroll, square footage or other appropriate data, or were determined based on actual utilization of services. Management believes that the bases used for allocating service charges were reasonable. However, the terms of these transactions may differ from those that would result from transactions with unrelated third parties or had Edwards Lifesciences performed these functions on its own.

Edwards Lifesciences also participated in a centralized cash management program administered by Baxter. Short-term advances from Baxter or excess cash sent to Baxter have been treated as an adjustment to the intercompany account between Baxter and Edwards Lifesciences as of and through March 31, 2000. No interest was allocated to Edwards Lifesciences on this balance.

8. RELATED PARTY TRANSACTIONS (Continued)

The following table summarizes the charges from Baxter for the above-mentioned services prior to the Distribution, as recorded in Edwards Lifesciences' Consolidated Condensed Statements of Operations:

	Three Months Ended March 31, 2000
	(in millions)
Cost of goods sold	$	1.6
Selling, general and administrative expenses		10.5
Research and development expenses		0.7

9. COMMITMENTS AND CONTINGENCIES

Edwards Lifesciences is, or may be, a party to pending or threatened lawsuits, related primarily to products and services currently or formerly manufactured or performed, as applicable, by Edwards Lifesciences. Such cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. Upon resolution of any pending legal matters, Edwards Lifesciences may incur charges in excess of presently established reserves. While such a charge could have a material adverse impact on Edwards Lifesciences' net income or net cash flows in the period in which it is recorded or paid, management believes that no such charge would have a material adverse effect on Edwards Lifesciences' consolidated financial position.

Edwards Lifesciences is also subject to various environmental laws and regulations both within and outside of the United States. The operations of Edwards Lifesciences, like those of other medical device companies, involve the use of substances regulated under environmental laws, primarily in manufacturing and sterilization processes. While it is difficult to quantify the potential impact of compliance with environmental protection laws, management believes that such compliance will not have a material impact on Edwards Lifesciences' financial position, results of operations or liquidity.

Edwards Lifesciences filed a lawsuit on June 29, 2000 for patent infringement against Medtronic, Inc., which, as amended, alleges infringement of three Edwards Lifesciences' United States patents. On September 18, 2001, Edwards Lifesciences filed a motion to supplement the complaint against Medtronic to add a fourth Edwards Lifesciences United States patent, and also filed a separate complaint alleging infringement of the same patent in the event the motion to supplement is denied. On June 29, 2000, Edwards Lifesciences also filed a lawsuit against St. Jude Medical, Inc. alleging infringement of three patents. The Medtronic lawsuits were filed in the United States District Court for the District of Delaware and the St. Jude lawsuit was filed in the United States District Court for the Central District of California. The lawsuits seek monetary damages and injunctive relief. Each of Medtronic and St. Jude has answered, and asserted various affirmative defenses and counterclaims with respect to the lawsuits filed in June 2000. In addition, discovery is proceeding in the lawsuits filed in June 2000.

Upon the Distribution, Edwards Lifesciences assumed the defense of certain Baxter litigation involving cases and claims related to the Edwards Lifesciences Business. Edwards Lifesciences has not been named as a defendant in such matters but is defending and indemnifying Baxter for all related expenses and potential liabilities. It is possible that Edwards Lifesciences may be added as a defendant in these cases and claims.

10. SEGMENT INFORMATION

The Company manages its business on the basis of one reportable segment. Edwards Lifesciences' products and services share similar distribution channels and customers and are sold principally to hospitals and physicians. Management evaluates its various global product portfolios on a revenue basis, which is presented below, and profitability is generally evaluated on an enterprise-wide basis due to shared infrastructures. Edwards Lifesciences' principal markets are the United States, Europe and Japan.

Geographic area data includes net sales based on product shipment destination and long-lived asset data is presented based upon physical location.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2001		2000		2001		2000
	(in millions)
Net Sales by Geographic Area
United States	$	85.0	$	114.9	$	331.5	$	364.5
Japan		14.5		15.8		45.4		77.9
Other countries		48.3		55.1		155.2		174.0

	$	147.8	$	185.8	$	532.1	$	616.4

Net Sales by Major Product and Service Lines
Cardiac Surgery	$	76.8	$	73.2	$	246.8	$	233.3
Critical Care		49.3		49.2		155.4		163.7
Vascular		11.4		12.8		37.2		41.1
Perfusion Products and Services		10.1		50.6		91.5		165.2
Other		0.2		—		1.2		13.1

	$	147.8	$	185.8	$	532.1	$	616.4

	September 30, 2001		December 31, 2000
	(in millions)
Long-Lived Assets by Geographic Area
United States	$	656.2	$	777.8
Other countries		17.8		26.0

Totals	$	674.0	$	803.8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents the factors that had a material effect on the results of operations of Edwards Lifesciences during the three and nine months ended September 30, 2001 and 2000. Also discussed is Edwards Lifesciences' financial position as of September 30, 2001. You should read this discussion in conjunction with the historical consolidated condensed financial statements and related notes thereto included elsewhere in this Form 10-Q.

Overview

Edwards Lifesciences provides a comprehensive line of products and technologies to treat advanced cardiovascular disease. Edwards Lifesciences' sales are categorized in four main product and service lines: cardiac surgery, critical care, vascular, and perfusion products and services. In addition, Edwards Lifesciences offers a diverse grouping of product lines comprised mostly of select distributed products that are sold in international markets, and miscellaneous pharmaceutical products. Edwards Lifesciences is headquartered in Irvine, California, and supplies its products and services to customers in more than 80 countries, both through direct sales and distributor relationships. Edwards Lifesciences' products are manufactured in locations throughout the world, including Brazil, the Dominican Republic, Japan (through a contractual joint venture with Baxter), The Netherlands, Puerto Rico, Switzerland, and the United States.

Edwards Lifesciences'cardiac surgery portfolio is comprised of products relating to heart-valve therapy, and cannulae and cardioplegia products used during open-heart surgery. Edwards Lifesciences is the world's leader in, and has been a pioneer in the development and commercialization of, tissue valves and repair products used to replace or repair a patient's diseased or defective heart valve. In thecritical care area, Edwards Lifesciences is a world leader in hemodynamic monitoring systems used to measure a patient's heart function, and also provides central venous access products for fluid and drug delivery. Edwards Lifesciences'vascular portfolio includes a line of balloon catheter-based products, surgical clips and inserts, angioscopy equipment, artificial implantable grafts, and an endovascular system used to treat abdominal aortic aneurysms. In theperfusion products and services category, Edwards Lifesciences develops, manufactures and markets, in regions outside the United States and Western Europe, a diverse line of disposable products used during cardiopulmonary bypass procedures, including oxygenators, blood containers, filters and related devices. Effective June 30, 2001, the Company sold its perfusion services business in the United States to an affiliate of Fresenius Medical Care AG (see "Disposition of Assets and Other Non-recurring Charges"). The Company continues to maintain its perfusion services business in Europe.

The health-care marketplace continues to be competitive. There has been consolidation in Edwards Lifesciences' customer base and among its competitors, which has resulted in pricing and market share pressures. Edwards Lifesciences has experienced increases in its labor and material costs, which are primarily influenced by general inflationary trends. Competitive market conditions have minimized inflation's impact on the selling prices of Edwards Lifesciences' products and services. Management expects these trends to continue.

Joint Venture in Japan

Subsequent to the Distribution, the cardiovascular business in Japan is being operated pursuant to a joint venture under which a Japanese subsidiary of Baxter retains ownership of the Japanese business assets, but a subsidiary of Edwards Lifesciences holds a 90% profit interest. Edwards Lifesciences has an option to purchase the Japanese business assets that may be exercised no earlier than August 1, 2002 and no later than March 31, 2005. The Japanese operations are included in the Consolidated Condensed Statements of Operations for the three months ended March 31, 2000, consistent with the historical treatment of the Company's operations while a part of Baxter. Subsequent to March 31, 2000,

Edwards Lifesciences recognizes as sales its shipments into the joint venture and utilizes the equity method of accounting to record its interest in the operations of the joint venture. On a pro forma basis, sales and other income statement amounts have been adjusted to reflect the Japanese operations on this basis (see pro forma information in Note 5 of Notes to Consolidated Condensed Financial Statements).

Results of Operations

Net Sales Trends

The following is a summary of domestic and international net sales:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001		2000		Percent Change		2001		2000		Percent Change
	(Dollars in Millions)
United States	$	85.0	$	114.9	(26.0	%)	$	331.5	$	364.5	(9.1	%)
International		62.8		70.9	(11.4	%)		200.6		251.9	(20.4	%)

Total net sales	$	147.8	$	185.8	(20.5	%)	$	532.1	$	616.4	(13.7	%)

The net sales decrease in the United States for each period was due primarily to the sale of the Company's perfusion services business in the United States effective June 30, 2001 and the Company's partial divestiture of its perfusion products line effective August 31, 2000 (see "Perfusion Products and Services"), partially offset by an increase in sales of cardiac surgery products.

The decrease in international net sales for the nine months ended September 30, 2001 resulted primarily from a change in accounting for sales in Japan. Subsequent to the Distribution, Edwards Lifesciences only recognizes as sales its shipments into a joint venture with Baxter (see "Joint Venture in Japan"). Assuming the change in accounting in Japan was effective as of January 1, 2000, international net sales for the nine months ended September 30, 2001 would have decreased 10.1%, and total net sales for the nine months ended September 30, 2001 would have decreased 9.4%. The adjusted decreases in international net sales for the three and nine months ended September 30, 2001 were due primarily to the Company's divestiture of its perfusion products line in certain regions, partially offset by an increase in sales of cardiac surgery products.

Net sales were impacted by fluctuations in foreign currency exchange rates, primarily the movement of the United States dollar against the Euro and the Japanese Yen. Assuming the change in accounting in Japan was effective as of January 1, 2000 and excluding the impact of changes in foreign currency exchange rates, total net sales for the three and nine months ended September 30, 2001 would have decreased 17.7% and 6.6%, respectively. The impact of foreign currency exchange rate fluctuations on net sales would not necessarily be indicative of the impact on net income due to the corresponding effect of foreign currency exchange rate fluctuations on international manufacturing and operating costs and Edwards Lifesciences' hedging activities. For more information, see "Quantitative and Qualitative Disclosure About Market Risk."

Net Sales by Product Line

The following table is a summary of net sales by product line:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001		2000		Percent Change		2001		2000		Percent Change
	(Dollars in Millions)
Cardiac surgery	$	76.8	$	73.2	4.9	%	$	246.8	$	233.3	5.8	%
Critical care		49.3		49.2	0.2	%		155.4		163.7	(5.1	%)
Vascular		11.4		12.8	(10.9	%)		37.2		41.1	(9.5	%)
Perfusion products and services		10.1		50.6	(80.0	%)		91.5		165.2	(44.6	%)
Other		0.2		—				1.2		13.1	(90.8	%)

Total net sales	$	147.8	$	185.8	(20.5	%)	$	532.1	$	616.4	(13.7	%)

Assuming the change in accounting for sales in Japan was effective as of January 1, 2000, net sales by product line would have been as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001		2000		Percent Change		2001		2000		Percent Change
	(Dollars in Millions)
Cardiac surgery	$	76.8	$	73.2	4.9	%	$	246.8	$	230.9	6.9	%
Critical care		49.3		49.2	0.2	%		155.4		153.8	1.0	%
Vascular		11.4		12.8	(10.9	%)		37.2		40.2	(7.5	%)
Perfusion products and services		10.1		50.6	(80.0	%)		91.5		160.4	(43.0	%)
Other		0.2		—				1.2		2.2	(45.5	%)

Total net sales	$	147.8	$	185.8	(20.5	%)	$	532.1	$	587.5	(9.4	%)

Assuming the change in accounting for sales in Japan was effective as of January 1, 2000 and excluding the impact of foreign currency exchange rate fluctuations, net sales by product line ("Adjusted Net Sales") would have been as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001		2000		Percent Change		2001		2000		Percent Change
	(Dollars in Millions)
Cardiac surgery	$	77.3	$	72.0	7.4	%	$	246.6	$	225.2	9.5	%
Critical care		50.2		47.8	5.0	%		157.2		149.1	5.4	%
Vascular		11.6		12.6	(7.9	%)		37.3		38.9	(4.1	%)
Perfusion products and services		11.0		50.0	(78.0	%)		93.2		157.7	(40.9	%)
Other		0.1		—				1.2		2.2	(45.5	%)

Total net sales	$	150.2	$	182.4	(17.7	%)	$	535.5	$	573.1	(6.6	%)

Cardiac Surgery

Effective June 30, 2000, Edwards Lifesciences divested the mechanical cardiac assist product line. Assuming the divestiture occurred on January 1, 2000, Adjusted Net Sales of cardiac surgery products would have increased 7.4% and 10.6% for the three and nine months ended September 30, 2001, respectively. The growth in this product line resulted primarily from continued strong sales of

pericardial tissue valves, partially offset by a decline in porcine tissue valves. Management expects that its heart-valve therapy products will continue to serve as a key driver of Edwards Lifesciences' sales growth.

Critical Care

The Adjusted Net Sales growth for critical care products was due primarily to upgrading customers to more advanced technology catheter products from base hemodynamic catheters. Hemofiltration and access products also contributed to sales growth. Critical care products have been, and are expected to continue to be, significant contributors to Edwards Lifesciences' total sales. Management believes that future sales growth of critical care products could be negatively impacted by global pricing pressures, including anticipated decreased governmental reimbursement in Japan.

Vascular

The decline in Adjusted Net Sales for vascular products resulted primarily from the shift to less invasive therapies and non-surgical options. Management continues to see opportunities in peripheral vascular disease treatment and intends to build on its strong base franchise by developing and marketing minimally invasive therapies such as its Lifepath AAA endovascular graft system. In September 2001, the Company received approval to re-enter the market in Europe with its Lifepath AAA endovascular graft system and has recently received approval from the Food and Drug Administration to restart clinical studies for the same product in the United States.

Perfusion Products and Services

Effective August 31, 2000, Edwards Lifesciences divested its perfusion products line in the United States and Western Europe. Effective June 30, 2001, the Company sold its perfusion services business in the United States (see "Disposition of Assets and Other Non-Recurring Charges"). Assuming these actions had occurred on January 1, 2000, Adjusted Net Sales of perfusion products and services would have decreased 27.1% and 15.2% for the three and nine months ended September 30, 2001, respectively. Management believes that the decreases were due primarily to an increase in the number of "beating heart" coronary artery bypass surgeries in Western Europe, and this trend reduced the need for perfusion products and services.

Other

Other sales include a diverse grouping of product lines comprised primarily of select distributed products that are sold in international regions, and miscellaneous pharmaceutical products. This category of sales fluctuates based on the timing of new or terminated distribution agreements, foreign currency exchange rates, and other factors and events.

Gross Profit

		Three Months Ended September 30,				Nine Months Ended September 30,
		2001		2000		2001		2000
Gross profit percentage		56.4	%	48.2	%	51.9	%	46.6	%

The increases in the gross profit percentage for the three and nine months ended September 30, 2001 were due primarily to product line mix. Effective June 30, 2001, the Company sold its lower margin perfusion services business in the United States (see "Disposition of Assets and Other Non-Recurring Charges"). During 2000, the Company divested two of its lower margin product lines

(see "Net Sales by Product Line"). Additionally, during the three and nine months ended September 30, 2001, the Company achieved increased sales of higher-margin cardiac surgery products.

Selling General and Administrative (SG&A) Expenses

		Three Months Ended September 30,				Nine Months Ended September 30,
		2001		2000		2001		2000
SG&A expenses as a percentage of net sales		31.4	%	25.1	%	28.7	%	26.9	%

The increase in the percentage for the three and nine months ended September 30, 2001 was primarily due to (a) the sale of the perfusion services business in the United States (see "Disposition of Assets and Other Non-Recurring Charges") which had lower SG&A expenses as a percentage of net sales when compared to the Company's ongoing operations, (b) the current level of fixed expenses on a lower net sales base and (c) additional personnel costs and expenses associated with the Company's operation as an independent company commencing April 1, 2000.

Research and Development Expenses

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001			2000			2001			2000
	(Dollars in Millions)
Research and development expenses	$	14.0		$	12.9		$	40.6		$	41.0
Research and development expenses as a percentage of net sales		9.5	%		6.9	%		7.6	%		6.7	%

Reflecting the Japan operations on the equity method for the quarter ended March 31, 2000, and assuming the sale of the Company's perfusion services business in the United States (see "Disposition of Assets and Other Non-Recurring Charges") and the divestitures of the mechanical cardiac assist and perfusion products lines occurred on January 1, 2000, research and development expenses as a percentage of net sales ("Adjusted Percentage") would have been 9.5% and 8.6% for the three and nine months ended September 30, 2001, respectively, and 7.7% and 7.3% for the three and nine months ended September 30, 2000, respectively.

The Adjusted Percentage increases in research and development expenses for the three and nine months ended September 30, 2001 reflect Edwards Lifesciences' strong commitment to bolster its research and development spending in the future with the goal of developing and commercializing new innovative products and therapies that enhance performance and patient quality of life, and address cost-containment issues.

Goodwill Amortization

The reduction in goodwill amortization for the three months ended September 30, 2001 resulted from the sale of the perfusion services business in the United States (see "Disposition of Assets and Other Non-Recurring Charges") and the disposition of the related goodwill effective June 30, 2001.

The reduction in goodwill amortization for the nine months ended September 30, 2001 resulted primarily from (a) the sale of the perfusion services business in the United States and the disposition of the related goodwill, and (b) the write-down of goodwill related to the divestiture of the Company's line of perfusion products in the United States and Western Europe effective June 30, 2000.

Disposition of Assets and Other Non-Recurring Charges

Loss on Sale of Assets ($68.2 million)

		Nine Months Ended September 30, 2001
Net sales		$	471.1
Net loss			27.5
Net loss per share:
	Basic		0.47
	Diluted		0.47

Other Non-recurring Charges ($14.8 million)

Based upon the non-strategic nature and declining profitability of certain products in the Company's portfolio (including certain distributed products), the Company decided during the quarter ended June 30, 2001 to discontinue its sales effort of these products. The long-lived assets and the investments related to these products were evaluated to determine whether any impairment in their recoverability existed at the determination date. As a result, Edwards Lifesciences assessed whether the estimated cash flows of the products or investments over the estimated lives of the related assets were sufficient to recover their costs. Where such cash flows were insufficient, the Company utilized a discounted cash flow model to estimate the fair value of assets or investments and recorded an impairment charge to adjust the carrying values to estimated fair values. As a result of this evaluation, Edwards Lifesciences recorded a non-cash charge of $14.8 million primarily related to the impairment of intangibles ($8.3 million), the impairment of an investment ($5.5 million) and the write-down of non-productive assets ($1.0 million).

Non-recurring Spin-off Expenses

In connection with the spin-off of Edwards Lifesciences from Baxter, certain non-recurring costs totaling $18.4 million were incurred by Edwards Lifesciences during the nine months ended September 30, 2000. These costs primarily related to (a) the coordination and implementation of the transaction and (b) the recruitment of personnel to perform new corporate administrative functions.

Other Operating Income

Other operating income represents the Company's 90% profit interest in the cardiovascular business in Japan effective April 1, 2000. For more information, see "Joint Venture in Japan."

Interest Expense, net

The decrease in interest expense, net for the three months ended September 30, 2001 resulted primarily from the Company's reduction of debt combined with lower interest rates on the Company's floating rate debt.

The increase in interest expense, net for the nine months ended September 30, 2001 resulted primarily from a $6.2 million payment to unwind an interest rate swap agreement that had previously locked in a fixed interest rate on $75.0 million of floating rate debt. The decision to unwind the interest rate swap agreement resulted from the Company's recent pay-down of underlying floating rate debt not anticipated to be necessary in funding future requirements of working capital, capital expenditures and other financial commitments. The increase in interest expense, net was partially offset by the Company's reduction of its debt and lower interest rates on its floating rate debt.

Other Expense, net

The decrease in other expense, net for the three months ended September 30, 2001 resulted primarily from fluctuations in currency exchange rates related to global trade and intercompany receivable balances.

The increase in other expense, net for the nine months ended September 30, 2001 resulted primarily from a $6.5 million charge during the three months ended June 30, 2001 related to the impairment of land investments offset by fluctuations in currency exchange rates related to global trade and intercompany receivable balances.

Provision for Income Taxes

The effective income tax rates for the three months ended September 30, 2000 and the nine months ended September 30, 2001 and 2000 were impacted by the non-deductibility of the majority of the 2001 and 2000 non-recurring charges (see "Disposition of Assets and Other Non-Recurring Charges"). Excluding these non-recurring charges, Edwards Lifesciences' effective income tax rate was approximately 27% for the quarters ended September 30, 2001 and 2000, respectively. The effective income tax rate for the three months ended September 30, 2001 decreased two percentage points from the quarter ended June 30, 2001 primarily due to the reduction of non-deductible goodwill amortization associated with the sale of the perfusion services business in the United States (see "Disposition of Assets and Other Non-Recurring Charges").

Liquidity and Capital Resources

The Company's sources of cash liquidity include cash on hand and cash equivalents, cash from operations, amounts available under credit facilities and other external sources of funds. The Company believes that these sources are sufficient to fund the current requirements of working capital, capital expenditures and other financial commitments. The Company further believes that it has the financial flexibility to attract long-term capital to fund short-term and long-term growth objectives. However, no assurances can be given that such long-term capital will be available to Edwards Lifesciences on favorable terms, or at all.

Cash flows provided by operating activities for the nine months ended September 30, 2001 decreased $33.0 million due primarily to an increase in inventory levels.

Cash provided by investing activities for the nine months ended September 30, 2001 consisted primarily of $45.0 million received from the sale of the Company's stock of ELCR (see "Disposition of Assets and Other Non-Recurring Charges"), partially offset by a $4.2 million investment in PLC Systems, Inc., a $2.2 million investment in CardioFocus, Inc. and a $2.1 million investment in Converge Medical, Inc. Uses of cash for investing activities for the nine months ended September 30, 2000

included the $12.5 million purchase of two convertible debentures in Sangamo Biosciences, Inc., a $20.0 million investment in World Heart Corporation and a $7.0 million investment in A-Med Systems, Inc. Capital expenditures for the nine-month period ended September 30, 2001 were $28.1 million, and the Company expects this rate of expenditure to continue throughout the remainder of calendar year 2001.

Cash flows from financing activities during the nine months ended September 30, 2001 included $7.3 million of installment payments on a note receivable from Jostra AG and $6.5 million received by the Company from the exercise of stock options and other rights to purchase the Company's stock under employee stock purchase plans.

As of September 30, 2001, Edwards Lifesciences had credit facilities in place for $605.0 million and had borrowed $339.1 million against the credit facilities. The initial proceeds of the credit facilities were used to repay intercompany debt to Baxter, satisfy initial working capital requirements, and execute asset transfers from Baxter.

Euro Conversion

On January 1, 1999, the European Economic and Monetary Union created and introduced the Euro, the official single currency for the eleven participating member countries. A transition period is currently in effect which began January 1, 1999 and will continue through December 31, 2001, during which time transactions will be executed in both the Euro and the member countries' individual currencies. Effective January 1, 2002, Euro bank notes will be introduced and as of July 1, 2002, the Euro will be the sole legal tender of the European Economic and Monetary Union countries.

Edwards Lifesciences appointed a team of individuals to address all issues associated with the conversion to the Euro and expects to be prepared for such conversion as of the designated dates. At the time Edwards Lifesciences switches to using the Euro as the sole functional currency for the affected regions, certain modifications that are primarily related to information systems will be required. The costs associated with preparing for the conversion and continued use of the Euro will be expensed as incurred and are not expected to be material to Edwards Lifesciences' financial position, results of operations or cash flows. The ultimate impact on Edwards Lifesciences' business, including the impact on the competitive environment in which Edwards Lifesciences operates, is currently unknown.

New Accounting and Disclosure Standards Adopted

		Unrealized Gain (Loss)
		(in millions)
Related to previously designated cash flow hedging relationships:
	Fair value of hedging instruments	$	(6.9	)
	Previously deferred hedging gains and losses		1.5

Total cumulative effect of adoption on Other Comprehensive Loss, net of tax		$	(5.4	)

For the three months ended September 30, 2001, the Company reclassified from Accumulated Other Comprehensive Loss a net gain of $2.5 million to Cost of Goods Sold and a net loss of $1.0 million to Interest Expense, net. For the nine months ended September 30, 2001, the Company reclassified from Accumulated Other Comprehensive Loss a net gain of $6.2 million to Cost of Goods Sold and a net loss of $8.9 million to Interest Expense, net. Included in the amounts reclassified to Interest Expense, net for nine months ended September 30, 2001 is a $6.2 million charge related to the termination of an interest rate swap agreement.

In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement replaces SFAS No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Adoption of this standard did not have a material impact on the Company's consolidated financial statements.

New Accounting and Disclosure Standards Issued

In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interest method will be prohibited. The Company has evaluated this standard and believes that adoption will not have an impact on its consolidated financial statements.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142, which changes the accounting for goodwill from an amortization method to an impairment-only approach, will be effective for fiscal years beginning after December 15, 2001. The Company has determined that adoption of this standard will result in the annual reduction of approximately $14.0 million of goodwill amortization.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which changes the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs, will be effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact that adoption of this standard will have on its consolidated financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No. 144, which changes the accounting and reporting for the impairment of long-lived assets, will be effective for fiscal years beginning after December 15, 2001. The Company is currently assessing the impact that adoption of this standard will have on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Edwards Lifesciences operates on a global basis and therefore is subject to the exposure resulting from foreign currency exchange rate fluctuations. These exposures arise from transactions denominated in foreign currencies, primarily from translation of results of operations from outside the United States. Additionally, such exposures may change over time as changes occur in Edwards Lifesciences' international operations.

Edwards Lifesciences manages its exposure to foreign currency fluctuations to minimize earnings and cash flow volatility associated with foreign exchange rate changes. In order to reduce the risk of foreign currency exchange rate fluctuations, Edwards Lifesciences has established a policy of hedging a substantial portion of its expected foreign currency denominated cash flow from operations. The instruments that Edwards Lifesciences uses for hedging are readily marketable traded forward contracts and options with financial institutions. Edwards Lifesciences expects that the changes in fair value of such contracts will have a high correlation to the price changes in the related hedged cash flow. Edwards Lifesciences does not expect that the risk of transaction gains or losses from changes in the fair value of its foreign exchange position will be material because most transactions will occur in either the functional currency or in a currency that has a high correlation to the functional currency. The principal currencies that Edwards Lifesciences hedges are the Japanese Yen and the Euro, which present the primary risk of loss. Any gains and losses on these hedge contracts are expected to offset changes in the value of the related exposures. Edwards Lifesciences will enter into foreign currency transactions only to the extent that foreign currency exposure exists; it will not enter into foreign currency transactions for speculative purposes.

Edwards Lifesciences utilizes interest rate swap agreements in managing its exposure to interest rate fluctuations. Interest rate swap agreements are executed as an integral part of specific debt transactions. The differential paid or received on interest rate swap agreements is recorded as an adjustment to interest expense over the term of the agreements. Edwards Lifesciences' interest rate swap agreements involve agreements to receive a floating rate and pay a fixed rate, at specified intervals, calculated on an agreed-upon notional amount. As of September 30, 2001, Edwards Lifesciences had in place three interest rate swaps with a total notional amount of $177.1 million to swap floating rate United States dollar and Yen denominated debt obtained under the Company's revolving credit facilities for fixed rates. The original maturities of the interest rate swap agreements are three months.

For the period prior to the Distribution, Edwards Lifesciences was considered in Baxter's overall risk management strategy. As part of this strategy, Baxter managed its foreign currency exchange rate risk to an acceptable level based on its judgment of the appropriate trade-off between risk, opportunity and costs. With respect to Edwards Lifesciences' currency risks, Baxter primarily utilized options to hedge these exposures.

Forward-Looking Statements

This Form 10-Q and other materials filed or to be filed by Edwards Lifesciences with the SEC (as well as information included in oral statements or other written statements made, or to be made, by Edwards Lifesciences) contain, or will contain, disclosures that are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts,

and can generally be identified by the use of words such as "may", "believe," "will," "expect," "project," "estimate," "anticipate," "plan," or "continue." These forward-looking statements are based on the current plans and expectations of management and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of Edwards Lifesciences. These factors include, but are not limited to:

•: the highly competitive nature of the health care industry;
•: the efforts of insurers, health care providers and others to contain health care costs;
•: possible changes in United States or foreign programs that may further limit reimbursements to health care providers and insurers;
•: changes in federal, state or local regulation affecting the health care industry;
•: the possible enactment of federal or state health care reform;
•: the departure of key executive officers from Edwards Lifesciences;
•: claims and legal actions relating to product liability;
•: fluctuations in the market value of Edwards Lifesciences common stock;
•: changes in accounting practices;
•: changes in general economic conditions and foreign currency fluctuations;
•: product demand and risks associated with industry acceptance;
•: new product development and commercialization;
•: the receipt of timely regulatory approvals; and
•: other risk factors described in the Company's Annual Report on Form 10-K for the annual period ended December 31, 2000.

As a consequence, current plans, anticipated actions and future financial conditions and results may materially differ from those expressed in any forward-looking statements made by or on behalf of Edwards Lifesciences. Shareholders are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Form 10-Q.

Trademarks

Edwards Lifesciences, Edwards and Lifepath AAA are trademarks of Edwards Lifesciences Corporation.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

(a): Exhibits

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index hereto.

(b): Reports on Form 8-K

As previously reported, the registrant filed on July 16, 2001 a report on Form 8-K regarding its transaction with Fresenius Medical Care AG.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		EDWARDS LIFESCIENCES CORPORATION (Registrant)
Date: November 9, 2001		By:	/s/ Bruce J. Bentcover Bruce J. Bentcover Corporate Vice President, Chief Financial Officer and Treasurer

EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION

Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation of Edwards Lifesciences Corporation (a)
3.2		Amended and Restated Bylaws of Edwards Lifesciences Corporation (a)
3.3		Form of Certificate of Designation for Edwards Lifesciences Corporation Series A Junior Participating Preferred Stock (included as Exhibit A to Exhibit 10.9) (a)
4.1		Specimen form of certificate representing Edwards Lifesciences Corporation common stock (a)
10.1		Form of Agreement and Plan of Reorganization, to be entered into between Edwards Lifesciences Corporation and Baxter International Inc. (a)
10.2		Form of Tax Sharing Agreement, to be entered into between Edwards Lifesciences Corporation and Baxter International Inc. (a)
10.3		Edwards Lifesciences Corporation Long-Term Stock Incentive Compensation Program (a)
10.4		Form of Edwards Lifesciences Corporation Change in Control Severance Agreement (h)
10.5		Employment Agreement for Michael A. Mussallem (h)
10.9		Form of Rights Agreement between Edwards Lifesciences Corporation and EquiServe Trust Company, N.A., as Rights Agent, dated as of March 31, 2000 (a)
10.10		Services and Distribution Agreement between Edwards Lifesciences LLC, as successor in interest to Baxter Healthcare Corporation, and Allegiance Healthcare Corporation, dated as of October 1, 1996. CONFIDENTIAL INFORMATION APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH SECTION 24(b) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AND RULE 24b-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH ASTERISKS (a)
10.11		Form of Employment Agreement (a)
10.12		Form of Consulting Agreement (a)
10.13		Form of Outgoing Confidentiality Agreement (a)
10.14		Edwards Lifesciences Corporation Nonemployee Directors and Consultants Stock Incentive Program (a)
10.16		Form of Tokumei Kumiai Agreement by and between Baxter Limited and Edwards Lifesciences Finance Limited, dated as of April 1, 2000 (a)
10.17		Form of Option Agreement by and between Baxter Limited and Edwards Lifesciences Limited, dated as of April 1, 2000 (a)
10.18		Form of Japan Distribution Agreement by and between Baxter Limited and Edwards Lifesciences LLC, dated as of April 1, 2000 (a)
10.19		Five Year Credit Agreement dated as of March 30, 2000, among Edwards Lifesciences Corporation, a Delaware corporation; the Swiss Borrowers; the Japanese Borrowers; the Lenders from time to time party hereto; The Chase Manhattan Bank, as Administrative Agent; Chase Manhattan International Limited, as London Agent; The Fuji Bank, Limited, as the Tokyo Agent; Bank One, N.A., as Syndication Agent; and Credit Suisse First Boston, as Documentation Agent (b)

10.20		364-Day Credit Agreement dated as of March 30, 2000, among Edwards Lifesciences Corporation, a Delaware corporation; the Lenders from time to time party hereto. The Chase Manhattan Bank, as Administrative Agent; Bank One, N.A., as Syndication Agent; and Credit Suisse First Boston, as Documentation Agent (b)
10.21		Edwards Lifesciences Corporation Severance Pay Plan (b)
10.22		Contribution Agreement by and among Edwards Lifesciences LLC, Edwards Novacor LLC, WorldHeart Corporation and Valentine Acquisition Corp. dated as of May 24, 2000 (c)
10.23		Amendment No. 1, dated as of June 30, 2000, to the Five Year Credit Agreement dated as of March 30, 2000, among Edwards Lifesciences Corporation, a Delaware corporation; the Swiss Borrowers; the Japanese Borrowers; the Lenders from time to time party thereto; The Chase Manhattan Bank, as Administrative Agent; Chase Manhattan International Limited, as London Agent; The Fuji Bank, Limited, as the Tokyo Agent; Bank One, N.A., as Syndication Agent; and Credit Suisse First Boston, as Documentation Agent, and to the 364-Day Credit Agreement dated as of March 30, 2000, among Edwards Lifesciences Corporation, the Lenders from time to time party thereto, The Chase Manhattan Bank, as Administrative Agent, Bank One, N.A., as Syndication Agent and Credit Suisse First Boston, as Document Agent (c)
10.24		Edwards Lifesciences Corporation Long-Term Stock Incentive Compensation Program (as amended and restated July 12, 2000 (d)
10.25		Edwards Lifesciences Corporation Nonemployee Directors and Consultants Stock Incentive Program (as amended and restated July 12, 2000) (d)
10.26		Edwards Lifesciences Corporation Executive Option Plan (e)
10.27		Edwards Lifesciences Corporation of Puerto Rico Savings and Investment Plan (f)
10.28		Edwards Lifesciences Corporation 401(k) Savings and Investment Plan (g)
10.29		Edwards Lifesciences Corporation 2001 Incentive Plan (h)
10.30		Amendment No. 2, dated as of March 29, 2001, to the Five Year Credit Agreement dated as of March 30, 2000 among Edwards Lifesciences Corporation, a Delaware corporation; the Swiss Borrowers; the Japanese Borrowers; the Lenders from time to time party thereto; The Chase Manhattan Bank, as Administrative Agent; Chase Manhattan International Limited, as London Agent; The Fuji Bank, Limited, as the Tokyo Agent; Bank One, N.A., as Syndication Agent; and Credit Suisse First Boston, as Documentation Agent (i)
10.31		Amended and Restated 364-Day Credit Agreement dated as of March 29, 2001 among Edwards Lifesciences Corporation, as Borrower; the lenders Party hereto; The Chase Manhattan Bank, as Administrative Agent; Credit Suisse First Boston, as Syndication Agent; and The Bank of Nova Scotia, as Documentation Agent; JP Morgan, a division of Chase Securities Inc., as Advisor, Lead Arranger and Book runner (i)
10.32		Agreement between Edwards Lifesciences and Richard L. Miller, dated May 3, 2001. (j)
21.1		Subsidiaries of Edwards Lifesciences Corporation (h)

(a): Incorporation by reference to the cited exhibit in Edwards Lifesciences' Registration Statement on Form 10 (File No. 001-15525).
(b): Incorporated by reference to the cited exhibit in Edwards Lifesciences' Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, under the Securities Exchange Act of 1934.

(c): Incorporated by reference to the cited exhibit in Edwards Lifesciences' Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000, under the Securities Exchange Act of 1934.
(d): Incorporated by reference to the cited exhibit in Edwards Lifesciences' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, under the Securities Exchange Act of 1934.
(e): Incorporated by reference to Exhibit 4.4 in Edwards Lifesciences' Registration Statement on Form S-8 (File No. 333-52332).
(f): Incorporated by reference to Exhibit 4.3 in Edwards Lifesciences' Registration Statement on Form S-8 (File No. 333-40434).
(g): Incorporated by reference to Exhibit 4.3 in Edwards Lifesciences' Registration Statement on Form S-8 (File No. 333-33056).
(h): Incorporated by reference to the cited exhibit in Edwards Lifesciences Annual Report on Form 10-K for the annual period ended December 31, 2000, under the Securities Exchange Act of 1934.
(i): Incorporated by reference to the cited exhibit in Edwards Lifesciences' Quarterly Report on Form 10Q for the quarterly period ended March 31, 2001, under the Securities Exchange Act of 1934.
(j): Incorporated by reference to the cited exhibit in Edwards Lifesciences' Quarterly Report on Form 10Q for the quarterly period ended June 30, 2001, under the Securities Exchange Act of 1934.

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TABLE OF CONTENTS
Part I. Financial Information

Item 1. Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

Signature
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION

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Edwards Lifesciences (EW) 10-Q2001 Q3 Quarterly report

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