Edwards Lifesciences (EW) 10-Q 2002 Q3 Quarterly report

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

FORM 10-Q

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

For the quarterly period ended September 30, 2002

o 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	36-4316614
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Edwards Way, Irvine, California	92614
(Address of principal executive offices)	(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, 2002, the latest practicable date, was 60,056,857 shares.

EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q

For the quarterly period ended September 30, 2002

TABLE OF CONTENTS

		Page Number
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Condensed Balance Sheets	1
	Consolidated Condensed Statements of Operations	2
	Consolidated Condensed Statements of Cash Flows	3
	Notes to Consolidated Condensed Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	22
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 2.	Changes in Securities and Use of Proceeds	23
Item 6.	Exhibits and Reports on Form 8-K	24
Signature		25
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		26
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, 2002			December 31, 2001
ASSETS
Current assets
	Cash and cash equivalents		$	39.0		$	47.7
	Accounts and other receivables, net			113.2			101.5
	Inventories, net			84.4			86.6
	Deferred income taxes			22.9			18.2
	Prepaid expenses and other current assets			37.8			38.9
		Total current assets		297.3			292.9
Property, plant and equipment, net				180.1			178.3
Investments in unconsolidated affiliates				20.8			92.9
Goodwill				333.8			333.8
Other intangible assets, net				62.5			68.4
Other assets				23.9			7.1
			$	918.4		$	973.4
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Accounts payable and accrued liabilities		$	175.0		$	181.5
	Short-term debt			—			1.1
		Total current liabilities		175.0			182.6
Long-term debt				279.9			309.8
Other liabilities				4.7			22.3
Commitments and contingent liabilities
Stockholders' equity
	Common stock, $1.00 par value, 350,000,000 shares authorized, 59,974,669 and 59,327,872 shares outstanding			60.0			59.3
	Additional contributed capital			298.1			287.2
	Retained earnings			121.7			87.7
	Accumulated other comprehensive income			8.1			25.2
	Common stock in treasury, at cost			(29.1	)		(0.7	)
		Total stockholders' equity		458.8			458.7
			$	918.4		$	973.4

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

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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,
			2002			2001			2002			2001
Net sales			$	165.8		$	147.8		$	500.9		$	532.1
	Cost of goods sold			69.9			64.4			213.4			255.8
Gross profit				95.9			83.4			287.5			276.3
	Selling, general and administrative expenses			54.2			46.4			159.2			152.9
	Research and development expenses			15.5			14.0			47.5			40.6
	Goodwill amortization			—			3.6			—			15.0
	Disposition of assets and other non-recurring charges			67.4			—			67.4			83.0
	Non-recurring spin-off expenses			3.3			—			3.3			—
	Other operating income			(3.6	)		(3.9	)		(11.0	)		(12.2	)
Operating income (loss)				(40.9	)		23.3			21.1			(3.0	)
	Interest expense, net			2.7			3.2			8.5			19.6
	Other (income) expense, net			1.6			0.2			(14.1	)		9.2
Income (loss) before provision for income taxes				(45.2	)		19.9			26.7			(31.8	)
	Provision (benefit) for income taxes			(27.8	)		5.4			(7.3	)		(4.8	)
Income (loss) before cumulative effect of change in accounting principle				(17.4	)		14.5			34.0			(27.0	)
	Cumulative effect of change in accounting principle, net of tax			—			—			—			(1.5	)
Net income (loss)			$	(17.4	)	$	14.5		$	34.0		$	(28.5	)
Share information:
	Earnings perbasicshare
		Income (loss) before cumulative effect of change in accounting principle	$	(0.30	)	$	0.25		$	0.58		$	(0.46	)
		Cumulative effect of change in accounting principle	$	—		$	—		$	—		$	(0.03	)
		Net income (loss)	$	(0.30	)	$	0.25		$	0.58		$	(0.49	)
	Earnings perdilutedshare
		Income (loss) before cumulative effect of change in accounting principle	$	(0.30	)	$	0.24		$	0.55		$	(0.46	)
		Cumulative effect of change in accounting principle	$	—		$	—		$	—		$	(0.03	)
		Net income (loss)	$	(0.30	)	$	0.24		$	0.55		$	(0.49	)
	Weighted average number of common shares outstanding
		Basic		58.7			59.0			59.1			58.8
		Diluted		58.7			61.4			61.3			58.8

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

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EDWARDS LIFESCIENCES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(unaudited) (in millions)

			Nine Months Ended September 30,
			2002			2001
Cash flows from operating activities
	Net income (loss)		$	34.0		$	(28.5	)
	Income charges (credits) not affecting cash
		Disposition and write-down of assets and other non-recurring charges		70.2			89.4
		Deferred income taxes		(35.6	)		(9.3	)
		Depreciation and amortization		29.4			44.4
		Cumulative effect of change in accounting principle		—			1.5
		Other		2.2			(6.8	)
	Changes in operating assets and liabilities
		Accounts and other receivables		(11.4	)		(7.8	)
		Inventories		2.4			(3.5	)
		Accounts payable and accrued liabilities		(14.2	)		(28.8	)
		Other		(3.6	)		6.5
	Net cash provided by operating activities			73.4			57.1
Cash flows from investing activities
	Capital expenditures			(24.9	)		(28.1	)
	Proceeds from asset dispositions			2.9			7.3
	Investments in intangible assets			(4.8	)		(2.6	)
	Proceeds from sale of business			—			45.0
	Investments in unconsolidated affiliates			(1.9	)		(9.0	)
		Net cash (used in) provided by investing activities		(28.7	)		12.6
Cash flows from financing activities
	Proceeds from issuance of short-term debt			0.4			25.3
	Payments on short-term debt			(1.4	)		(86.3	)
	Proceeds from issuance of long-term debt			66.9			145.1
	Payments on long-term debt			(108.7	)		(166.7	)
	Proceeds from stock plans			10.8			6.5
	Purchases of treasury stock			(28.5	)		—
	Net proceeds from accounts receivable securitization			(0.8	)		1.4
	Debt issuance costs			(0.3	)		(0.7	)
		Net cash used in financing activities		(61.6	)		(75.4	)
		Effect of currency exchange rate changes on cash		8.2			1.1
Net decrease in cash and cash equivalents				(8.7	)		(4.6	)
Cash and cash equivalents at beginning of period				47.7			28.1
Cash and cash equivalents at end of period			$	39.0		$	23.5

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

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Edwards Lifesciences Corporation

Notes to Consolidated Condensed Financial Statements

September 30, 2002

(unaudited)

1. DESCRIPTION OF BUSINESS

        Edwards Lifesciences Corporation ("Edwards Lifesciences" or the "Company") is a global provider of products and technologies that are designed to treat advanced cardiovascular disease. Edwards Lifesciences' sales are categorized in four main product areas: cardiac surgery, critical care, vascular and perfusion. Edwards Lifesciences'cardiac surgery portfolio is comprised of products relating to heart valve therapy and other products used during open-heart surgery. 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 portfolio includes a line of balloon catheter-based products, surgical clips and inserts, angioscopy equipment, and artificial implantable grafts, as well as an endovascular system used to treat life-threatening abdominal aortic aneurysms less invasively. In theperfusion category, Edwards Lifesciences designs, develops, manufactures and markets in regions outside of 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. The Company continues to maintain its perfusion services business in Europe.

2. FINANCIAL INFORMATION

        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, 2001. 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.

        In the opinion of management, the interim consolidated condensed financial statements reflect all adjustments considered necessary for a fair presentation of the interim periods. All such adjustments are of a normal, recurring nature. 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

        As previously announced, during the quarter ended September 30, 2002, the Company recorded a $67.4 million pretax charge related to the impairment of its investment in preferred stock of World Heart Corporation ("WorldHeart"). The investment was written down to $6.2 million, which represents the value of the Company's preferred stock investment had it been converted into common stock at October 15, 2002. The decision to record the charge was based primarily on delays in WorldHeart's product development timelines, arising from its revised strategy.

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4. ACQUISITION OF JOINT VENTURE IN JAPAN

        On October 1, 2002 the Company completed its spin-off from Baxter International Inc. by acquiring for approximately $22 million, net the cardiovascular business in Japan, which it had been operating as a joint venture with Baxter International Inc. The purchase price, which is expected to be reduced pending a final audit of the business' net assets, excludes approximately $30 million of securitized accounts receivable. In the three months ended September 30, 2002, the Company recorded a $3.3 million charge for legal, administrative and regulatory expenses related to the acquisition. Commencing October 1, 2002 the Company will report the results of the Japan business on a fully consolidated basis. Previously, the Company recognized its shipments into the joint venture as sales, at distributor price, at the time the joint venture sold to the end customer, and utilized the equity method of accounting to record its 90% profit interest in the operations of the joint venture in Other Operating Income. The acquisition will not materially impact the Company's net income as the terms of the joint venture agreement enabled Edwards to record substantially all of the net profit generated by the Japan business.

        The following unaudited pro forma balance sheet and statements of operations present the results of Edwards Lifesciences assuming that the acquisition of the Japanese business had been completed as of January 1, 2001.

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PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 2002
(unaudited) (in millions)

						Pro forma Adjustments
			Historical			Acquire Net Assets (a)			Other			Pro Forma
Current assets
	Cash and cash equivalents		$	39.0		$	4.1		$	0.5		$	43.6
	Accounts and other receivables, net			113.2			17.9			(14.8	)(c)		116.3
	Inventories, net			84.4			35.7			—			120.1
	Deferred income taxes			22.9			—			—			22.9
	Prepaid expenses and other current assets			37.8			0.8			—			38.6
		Total current assets		297.3			58.5			(14.3	)		341.5
Property, plant and equipment, net				180.1			12.0			—			192.1
Investments in unconsolidated affiliates				20.8			—			—			20.8
Goodwill				333.8			—			—			333.8
Other intangible assets, net				62.5			—			—			62.5
Other assets				23.9			56.0	(b)		—			79.9
			$	918.4		$	126.5		$	(14.3	)	$	1,030.6
Current liabilities
Accounts payable and accrued liabilities			$	175.0		$	32.4		$	(14.8	)(c)	$	192.6
Long-term debt				279.9			—			20.4	(d)		300.3
Other liabilities				4.7			5.8			—			10.5
Stockholders' equity
	Common stock			60.0			—			—			60.0
	Additional contributed capital			298.1			135.3			(19.9	)		413.5
	Retained earnings			121.7			(0.6	)		—			121.1
	Accumulated other comprehensive income			8.1			(46.4	)		—			(38.3	)
	Common stock in treasury, at cost			(29.1	)		—			—			(29.1	)
		Total stockholders' equity		458.8			88.3			(19.9	)		527.2
			$	918.4		$	126.5		$	(14.3	)	$	1,030.6

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PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited) (in millions, except per share information)

					Pro Forma Adjustments
		Historical			Japan Operating Results (a)			Other (e)			Pro Forma
Net sales		$	500.9		$	77.2		$	—		$	578.1
	Cost of goods sold		213.4			31.0			—			244.4
Gross profit			287.5			46.2			—			333.7
	Selling, general and administrative expenses		159.2			34.0			—			193.2
	Research and development expenses		47.5			2.5			—			50.0
	Disposition of assets and other non-recurring charges, net		67.4			—			—			67.4
	Non-recurring spin-off expenses		3.3			—			—			3.3
	Other operating income		(11.0	)		11.0			—			—
Operating income (loss)			21.1			(1.3	)		—			19.8
	Interest expense, net		8.5			—			0.8			9.3
	Other expense, net		(14.1	)		(1.5	)		—			(15.6	)
Income (loss) before provision for income taxes			26.7			0.2			(0.8	)		26.1
	Provision (benefit) for income taxes		(7.3	)		0.1			(0.2	)		(7.4	)
Net income (loss)		$	34.0		$	0.1		$	(0.6	)	$	33.5
Share information:
	Earnings per basic share	$	0.58								$	0.56
	Earnings per diluted share	$	0.55								$	0.55

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4. ACQUISITION OF JOINT VENTURE IN JAPAN (Continued)

PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2001
(unaudited) (in millions, except per share information)

						Pro Forma Adjustments
			Historical			Japan Operating Results (a)			Other (e)			Pro Forma
Net sales			$	692.1		$	109.1		$	—		$	801.2
	Cost of goods sold			323.7			44.8			—			368.5
Gross profit				368.4			64.3			—			432.7
	Selling, general and administrative expenses			203.2			45.7			—			248.9
	Research and development expenses			55.0			2.7			—			57.7
	Goodwill amortization			18.5			—			—			18.5
	Disposition of assets and other non-recurring charges, net			83.0			—			—			83.0
	Other operating income			(16.4	)		16.4			—			—
Operating income (loss)				25.1			(0.5	)		—			24.6
	Interest expense, net			22.9			—			1.0			23.9
	Other expense, net			10.6			(1.3	)		—			9.3
Income (loss) before provision for income taxes				(8.4	)		0.8			(1.0	)		(8.6	)
	Provision (benefit) for income taxes			1.5			0.2			(0.3	)		1.4
Income (loss) before cumulative effect of change in accounting principle				(9.9	)		0.6			(0.7	)		(10.0	)
	Cumulative effect of change in accounting principle, net of tax			(1.5	)		—			—			(1.5	)
Net income (loss)			$	(11.4	)	$	0.6		$	(0.7	)	$	(11.5	)
Share information:
	Earnings per basic and diluted share
		Income (loss) before cumulative effect of change in accounting principle	$	(0.17	)							$	(0.17	)
		Cumulative effect of change in accounting principle	$	(0.02	)							$	(0.02	)
		Net income (loss)	$	(0.19	)							$	(0.20	)

Pro Forma Adjustments

(a)

To reflect Edwards Lifesciences' Japanese operations on a consolidated basis.



(b)

Balance includes a $49.0 million deferred tax asset related to a tax basis step up in connection with the acquisition of the joint venture in Japan.

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(c)

To reflect the elimination of receivables and payables between Edwards Lifesciences and the joint venture in Japan which are considered intercompany balances after the acquisition.



(d)

To reflect the incurrence of $20.4 million of long-term debt to effect the transaction.



(e)

To reflect estimated interest expense that would have been incurred by the Company based on incurrence of $20.4 million of debt at an effective interest rate of approximately 5%.

5. INVENTORIES

        Inventories consisted of the following (in millions):

	September 30, 2002		December 31, 2001
Raw materials	$	20.7	$	21.8
Work in process		20.0		23.6
Finished products		43.7		41.2
	$	84.4	$	86.6

6. COMPREHENSIVE INCOME

        Reconciliation of net income to comprehensive income is as follows (in millions):

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
Net income (loss)		$	(17.4	)	$	14.5		$	34.0		$	(28.5	)
Other comprehensive income:
	Currency translation adjustments, net of tax		0.9			(10.1	)		(5.5	)		9.5
	Unrealized net (loss) gain on investments in unconsolidated affiliates, net of tax		(1.4	)		(5.2	)		(3.1	)		(6.9	)
	Unrealized net (loss) gain on derivative financial instruments, net of tax		1.8			(5.9	)		(8.5	)		(5.0	)
Comprehensive income (loss)		$	(16.1	)	$	(6.7	)	$	16.9		$	(30.9	)

7. GOODWILL AND OTHER INTANGIBLE ASSETS

        On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," whereby goodwill is no longer amortized, but instead is subject to a periodic impairment review. As the Company's operations are comprised of one reporting unit, the Company reviews the recoverability of its goodwill by comparing the Company's fair value to the net book value of its assets. If the book value of the Company's assets exceeds the Company's fair value, the goodwill is written down to its implied fair value.

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        Pursuant to SFAS No. 142, the results for periods prior to adoption are not to be restated. If SFAS No. 142 had been effective January 1, 2001, net loss and earnings per basic and diluted share would have been as follows (in millions, except per share information):

		Three Months Ended September 30, 2001		Nine Months Ended September 30, 2001
Reported net income (loss)		$	14.5	$	(28.5	)
	Goodwill amortization, net of tax		3.6		14.5
Adjusted net income (loss)		$	18.1	$	(14.0	)
Earnings per basic share:
	Reported net income (loss)	$	0.25	$	(0.49	)
	Adjusted net income (loss)	$	0.31	$	(0.24	)
Earnings per diluted share:
	Reported net income (loss)	$	0.24	$	(0.49	)
	Adjusted net income (loss)	$	0.29	$	(0.24	)

        Other intangible assets subject to amortization consisted of the following (in millions):

September 30, 2002		Patents			Unpatented Technology			Other			Total
Cost		$	129.6		$	39.8		$	5.1		$	174.5
Accumulated amortization			(89.8	)		(18.3	)		(3.9	)		(112.0	)
	Net carrying value	$	39.8		$	21.5		$	1.2		$	62.5

December 31, 2001		Patents			Unpatented Technology			Other			Total
Cost		$	128.8		$	39.8		$	4.9		$	173.5
Accumulated amortization			(84.9	)		(16.4	)		(3.8	)		(105.1	)
	Net carrying value	$	43.9		$	23.4		$	1.1		$	68.4

        Amortization expense related to other intangible assets for the nine months ended September 30, 2002 was $7.1 million. Estimated amortization expense for each of the years ending December 31 is as follows (in millions):

2002	$	9.2
2003		8.4
2004		8.4
2005		8.4
2006		8.2

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8. EARNINGS PER SHARE

        A reconciliation of the shares used in the basic and diluted per share computations is as follows (in millions):

		Three Months Ended September 30,		Nine Months Ended September 30,
		2002	2001	2002	2001
Basic shares outstanding		58.7	59.0	59.1	58.8
	Dilutive effect of employee stock options	—	2.4	2.2	—
Diluted shares outstanding		58.7	61.4	61.3	58.8

9. COMMITMENTS AND CONTINGENCIES

        On June 29, 2000, Edwards Lifesciences filed a lawsuit against St. Jude Medical, Inc. alleging infringement of three Edwards Lifesciences United States patents. This lawsuit was filed in the United States District Court for the Central District of California, seeking monetary damages and injunctive relief. St. Jude has answered and asserted various affirmative defenses and counterclaims with respect to the lawsuits. On April 9, 2002, the court granted Edwards Lifesciences' motion to amend the complaint to add a fourth United States patent. The court rendered a claim construction decision with respect to the first three patents on June 27, 2002. The court has not yet set a trial date.

        Edwards Lifesciences is, or may be, a party to, or may be otherwise responsible for, 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 also is 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.

10. SEGMENT INFORMATION

        Edwards Lifesciences manages its business on the basis of one reportable segment. The Company's products and technologies 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,

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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 assets, based on physical location.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
	(in millions)
Net Sales by Geographic Area
United States	$	92.3	$	85.0	$	285.5	$	331.5
Europe		37.9		33.2		113.7		107.8
Japan		17.1		14.5		48.7		45.4
Other countries		18.5		15.1		53.0		47.4
	$	165.8	$	147.8	$	500.9	$	532.1
Net Sales by Major Product and Service Lines
Cardiac Surgery	$	88.4	$	76.8	$	269.0	$	246.8
Critical Care		54.8		49.3		162.5		155.4
Vascular		12.8		11.4		37.6		37.2
Perfusion		8.8		10.1		29.4		91.5
Other		1.0		0.2		2.4		1.2
	$	165.8	$	147.8	$	500.9	$	532.1

	September 30, 2002		December 31, 2001
	(in millions)
Long-Lived Assets by Geographic Area
United States	$	561.9	$	647.1
Other countries		41.5		33.4
	$	603.4	$	680.5

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

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements concerning the Company's future operations, financial condition and prospects, and business strategies. The words "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan," "continue," and other similar expressions generally identify forward-looking statements. Investors are cautioned not to unduly rely on such forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause the Company's future business, financial condition, results of operations, or performance to differ materially from the Company's historical results or those expressed in any forward-looking statements contained in this report. Investors should carefully review the information contained in the Company's Form 10-K for the year ended December 31, 2001, including under the caption "Certain Business Risks" beginning on page 10 of the Form 10-K, and elsewhere in, or incorporated by reference into, the Form 10-K or this report.

        The following discussion and analysis presents the factors that had a material effect on the results of operations of Edwards Lifesciences for the three and nine months ended September 30, 2002 and 2001. Also discussed is Edwards Lifesciences' financial position as of September 30, 2002. You should read this discussion in conjunction with the Company's Form 10-K for the year ended December 31, 2001 and the historical consolidated condensed financial statements and related notes thereto included elsewhere in this Form 10-Q.

Overview

        Edwards Lifesciences is a global provider of products and technologies that are designed to treat advanced cardiovascular disease. Edwards Lifesciences focuses on providing products and technologies to address four main cardiovascular disease states:

•

heart valve disease;



•

coronary artery disease;



•

peripheral vascular disease; and



•

congestive heart failure.

        The products and technologies provided by Edwards Lifesciences to treat cardiovascular disease are categorized into four main areas:

•

Cardiac Surgery;



•

Critical Care;



•

Vascular; and



•

Perfusion.

        Edwards Lifesciences'cardiac surgery portfolio is comprised of products relating to heart-valve therapy and other 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 life-threatening abdominal aortic aneurysms less invasively. In theperfusion category, Edwards Lifesciences develops, manufactures and markets, in regions outside the United States and Western

13

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. The Company continues to maintain its perfusion services business in Europe.

Joint Venture in Japan

        On October 1, 2002 the Company completed its spin-off from Baxter International Inc. by acquiring for approximately $22 million, net the cardiovascular business in Japan, which it had been operating as a joint venture with Baxter International Inc. The purchase price, which is expected to be reduced pending a final audit of the business' net assets, excludes approximately $30 million of securitized accounts receivable. In the three months ended September 30, 2002, the Company recorded a $3.3 million charge for legal, administrative and regulatory expenses related to the acquisition. Commencing October 1, 2002 the Company will report the results of the Japan business on a fully consolidated basis. Previously, the Company recognized its shipments into the joint venture as sales, at distributor price, at the time the joint venture sold to the end customer, and utilized the equity method of accounting to record its 90% profit interest in the operations of the joint venture in Other Operating Income. The acquisition will not materially impact the Company's net income as the terms of the joint venture agreement enabled Edwards to record substantially all of the net profit generated by the Japan business.

Results of Operations

Net Sales Trends

        The following is a summary of United States and international net sales (dollars in millions):

		Three Months Ended September 30,						Nine Months Ended September 30,
						Percent Change						Percent Change
		2002		2001				2002		2001
United States		$	92.3	$	85.0	8.6	%	$	285.5	$	331.5	(13.9	%)
International			73.5		62.8	17.0	%		215.4		200.6	7.4	%
	Total net sales	$	165.8	$	147.8	12.2	%	$	500.9	$	532.1	(5.9	%)

        The net sales increase in the United States for the three months ended September 30, 2002 was due primarily to increased sales of cardiac surgery and critical care products. The net sales decrease for the nine months ended September 30, 2002 was due primarily to the sale of the Company's perfusion services business in the United States effective June 30, 2001, partially offset by an increase in sales of cardiac surgery products. Excluding the net sales from the perfusion services business in 2001, net sales in the United States would have increased 4.7% for the nine months ended September 30, 2002.

        The changes in international net sales for the three and nine months ended September 30, 2002 were due primarily to increased sales of cardiac surgery and critical care products and the impact of changes in foreign currency exchange rates (primarily the movement of the United States dollar against the Euro and the Japanese Yen). Excluding the impact of foreign currency exchange rate fluctuations, international net sales would have increased 11.9% and 8.2% for the three and nine months ended September 30, 2002, 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, the location of the Company's manufacturing plants and Edwards Lifesciences' hedging activities. For more information, see "Quantitative and Qualitative Disclosures About Market Risk."

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Net Sales by Product Line

        The following table is a summary of net sales by product line (dollars in millions):

		Three Months Ended September 30,						Nine Months Ended September 30,
						Percent Change						Percent Change
		2002		2001				2002		2001
Cardiac Surgery		$	88.4	$	76.8	15.1	%	$	269.0	$	246.8	9.0	%
Critical Care			54.8		49.3	11.2	%		162.5		155.4	4.6	%
Vascular			12.8		11.4	12.3	%		37.6		37.2	1.1	%
Perfusion			8.8		10.1	(12.9	%)		29.4		91.5	(67.9	%)
Other			1.0		0.2	400	%		2.4		1.2	100.0	%
	Total net sales	$	165.8	$	147.8	12.2	%	$	500.9	$	532.1	(5.9	%)

        Excluding the impact of foreign currency exchange rate fluctuations and assuming the sale of the perfusion services business to Fresenius Medical Care AG had occurred as of January 1, 2001, net sales by product line ("Adjusted Net Sales") would have changed as follows (dollars in millions):

		Three Months Ended September 30,						Nine Months Ended September 30,
						Percent Change						Percent Change
		2002		2001				2002		2001
Cardiac Surgery		$	86.9	$	77.0	12.9	%	$	268.3	$	246.1	9.0	%
Critical Care			54.3		49.9	8.8	%		164.6		156.5	5.2	%
Vascular			12.6		11.4	10.5	%		37.5		37.2	0.8	%
Perfusion			8.9		10.2	(12.7	%)		30.5		32.9	(7.3	%)
Other			0.9		0.2	350	%		2.3		1.1	109.1	%
	Total net sales	$	163.6	$	148.7	10.0	%	$	503.2	$	473.8	6.2	%

Cardiac Surgery

        The Adjusted Net Sales growth for cardiac surgery products for the three and nine months ended September 30, 2002 resulted primarily from sales growth of pericardial heart valves and valve repair products, partially offset by continued declines in sales of porcine valves. During the quarter ended September 30, 2002, the Company received product approvals in Europe for theCarpentier-Edwards Perimount Magna heart valve and theEdwards MC³ tricuspid annuloplasty system. Management expects that its cardiac surgery 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 for the three and nine months ended September 30, 2002 was due primarily to sales growth in all regions of advanced technology catheters and pressure monitoring products, partially offset by the decline in base hemodynamic catheter products. Critical care products have been, and are expected to continue to be, significant contributors to Edwards Lifesciences' total sales.

Vascular

        The Adjusted Net Sales growth for vascular products for the three months ended September 30, 2002 was primarily the result of sales growth of the Company's base vascular products and the

15

contribution of the Company'sLifepath AAA endovascular graft system. Management continues to see opportunities in less invasive peripheral vascular disease treatments and intends to build on the Company's strong base franchise by developing and marketing products such as itsLifepath AAA endovascular graft system, which is currently being marketed in Europe and undergoing clinical studies in the United States, and a broad peripheral stent offering, which is scheduled for launch in 2003.

Perfusion

        The Adjusted Net Sales decrease for perfusion for the three and nine months ended September 30, 2002 was due primarily to a continual reduction of distributed product sales and product sales to Jostra AG, the purchaser during 2000 of the Company's line of perfusion products in Western Europe and the United States. The Company anticipates that its sales to Jostra will continue to decline as Jostra expands its capabilities to self-manufacture all required products.

Gross Profit

	Three Months Ended September 30,				Nine Months Ended September 30,
	2002		2001		2002		2001
Gross profit percentage	57.8	%	56.4	%	57.4	%	51.9	%

        Assuming the sale of the perfusion services business had occurred on January 1, 2001, the gross profit percentage would have been 56.2% for the nine months ended September 30, 2001. The increases for the three and nine months ended September 30, 2002 are due primarily to 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,
	2002		2001		2002		2001
SG&A expenses as a percentage of net sales	32.7	%	31.4	%	31.8	%	28.7	%

        Assuming the sale of the perfusion services business had occurred on January 1, 2001, SG&A expenses as a percentage of net sales would have been 31.0% for the nine months ended September 30, 2001. The increases for the three and nine months ended September 30, 2002 are due primarily to additional expenses related to the Company's growth initiatives and the impact of strengthening foreign currencies against the United States Dollar.

Research and Development Expenses

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
	(dollars in millions)
Research and development expenses	$	15.5		$	14.0		$	47.5		$	40.6
Research and development expenses as a percentage of net sales		9.3	%		9.5	%		9.5	%		7.6	%

        Assuming the sale of the perfusion services business had occurred on January 1, 2001, research and development expenses as a percentage of net sales would have been 8.6% for the nine months ended September 30, 2001. The expense increases for the three and nine months ended September 30, 2002 are related primarily to investments in the Company's peripheral vascular disease platform.

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Goodwill Amortization

        No goodwill amortization was recorded for the three or nine months ended September 30, 2002. The elimination of goodwill amortization resulted from the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. See"New Accounting and Disclosure Standards Adopted" and Note 7 to the consolidated condensed financial statements for more information.

Disposition of Assets and Other Non-recurring Charges

        As previously announced, during the three months ended September 30, 2002, the Company recorded a $67.4 million pretax charge related to the impairment of its investment in preferred stock of World Heart Corporation ("WorldHeart"). The investment was written down to $6.2 million, which represents the value of the Company's preferred stock investment had it been converted into common stock at October 15, 2002. The decision to record the charge was based primarily on delays in WorldHeart's product development timelines, arising from its revised strategy.

        During the three months ended September 30, 2002, the Company recorded a $3.3 million charge for legal, administrative and regulatory expenses related to the acquisition of cardiovascular business in Japan (see "Joint Venture in Japan").

Other Operating Income

        Other operating income represents the Company's 90% profit interest in the cardiovascular business in Japan (see "Joint Venture in Japan"). Other operating income was $3.6 million and $3.9 million for the three months ended September 30, 2002 and 2001, respectively, and $11.0 million and $12.2 million for the nine months ended September 30, 2002 and 2001, respectively. These decreases are due to several one-time expenses in the three and nine months ended September 30, 2002 partially offset by strong sales of cardiac surgery products.

Interest Expense, net

        Interest expense, net was $2.7 million and $3.2 million during the three months ended September 30, 2002 and 2001, respectively, and $8.5 million and $19.6 million during the nine months ended September 30, 2002 and 2001, respectively. The decreases in interest expense, net resulted from (a) the Company's reduction of debt, (b) lower interest rates on its floating rate debt and (c) a $6.2 million charge during the three months ended June 30, 2001 related to a payment to unwind an interest rate swap agreement.

17

Other (Income) Expense, net

        The following is a summary of other (income) expense, net (in millions):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2002		2001			2002			2001
Legal settlement, net	$	—	$	—		$	(14.7	)	$	—
Sale of property development rights		—		—			(1.8	)		—
Foreign exchange loss (gain)		1.3		(0.2	)		(1.2	)		2.9
Asset dispositions and write-downs, net		—		—			1.3			6.5
Investment write-offs		—		—			1.4			—
Other		0.3		0.4			0.9			(0.2	)
	$	1.6	$	0.2		$	(14.1	)	$	9.2

        Legal settlement, net relates to an agreement effective on April 24, 2002 between Edwards Lifesciences and Medtronic, Inc. settling certain patent infringement claims pursuant to which the Company received a one-time cash payment of $20.0 million (recorded as a gain of $14.7 million, net of legal expenses).

        Foreign exchange gains and losses relate to global trade and intercompany receivable balances.

Provision for Income Taxes

        The effective income tax rates for the three and nine months ended September 30, 2002 and 2001 were impacted by several non-recurring items as follows (in millions):

		Three Months Ended September 30,					Nine Months Ended September 30,
		2002			2001		2002			2001
Provision for income taxes on recurring operations		$	6.6		$	5.4	$	21.5		$	18.2
	Tax benefit from sale of perfusion services subsidiary in 2001		(20.1	)		—		(20.1	)		(11.9	)
	Tax benefit from impairment charge on WorldHeart investment		(13.3	)		—		(13.3	)
	Impact of legal settlement		—			—		5.6			—
	Other		(1.0	)		—		(1.0	)		(11.1	)
Provision (benefit) for income taxes, as reported		$	(27.8	)	$	5.4	$	(7.3	)	$	(4.8	)

        As a result of recent tax law developments and the filing of the Company's 2001 tax return, the Company recorded a $20.1 million tax benefit during the quarter ended September 30, 2002 related to the loss on sale of its United States perfusion services business in June 2001.

        Excluding the impact of non-recurring items, the effective income tax rate was 26% for the three and nine months ended September 30, 2002 and 27% and 28.5% for the three and nine months ended September 30, 2001, respectively. The decrease in the effective income tax rate for the three months ended September 30, 2002 as compared to the same period a year ago was due primarily to the elimination of all non-deductible goodwill amortization upon the adoption of SFAS No. 142 effective January 1, 2002. For more information see "New Accounting and Disclosure Standards Adopted."

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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.

        The Company has two unsecured revolving credit agreements providing for up to an aggregate of $530.0 million in borrowings in multiple currencies. One credit agreement provides for borrowings up to an aggregate of $430.0 million and expires on March 30, 2005. The other credit agreement provides for borrowings up to an aggregate of $100.0 million through March 27, 2003. As of September 30, 2002, borrowings of $279.9 million were outstanding under the $430.0 million credit agreement and no borrowings were outstanding under the $100.0 million credit agreement. All amounts outstanding under the $430.0 million credit agreement have been classified as long-term obligations, as these borrowings will continue to be refinanced pursuant to this credit agreement.

        On October 1, 2002, the Company incurred an additional $20.4 million of debt under the $430.0 million credit agreement to effect the acquisition of the joint venture in Japan.

        There have been no material changes in the Company's significant contractual obligations and commercial commitments as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2001.

        Cash flows provided by operating activities for the nine months ended September 30, 2002 increased $16.3 million from the same period a year ago due primarily to a legal settlement and lower net cash outflows related to accounts payable and accrued liabilities.

        Cash used in investing activities for the nine months ended September 30, 2002 consisted primarily of $24.9 million of capital expenditures and $4.8 million in patent related investments, partially offset by a $2.4 million receipt of an installment payment on a note receivable from Jostra AG. The Company expects to make capital investments of approximately $4 million during the three months ended December 31, 2002 primarily for information systems related to its Japanese business acquired on October 1, 2002.

        Cash used for financing activities for the nine months ended September 30, 2002 consisted primarily of net payments on long-term debt. In addition, the Company repurchased approximately 1,208,000 shares of its common stock, for an aggregate of $28.5 million, during the nine months ended September 30, 2002 through the stock repurchase program initiated in 2001, bringing the total shares repurchased program-to-date to approximately 1,235,000.

Critical Accounting Policies

        The Company's results of operations and financial position are determined based upon the application of the Company's accounting policies, as discussed in the notes to the consolidated financial statements. Certain of the Company's accounting policies represent a selection among acceptable alternatives under Generally Accepted Accounting Principles in the United States ("GAAP"). In evaluating the Company's transactions, management assesses all relevant GAAP and chooses the accounting policy that most accurately reflects the nature of the transactions. Management has not determined how reported amounts would differ based on the application of different accounting policies. Management has also not determined the likelihood that materially different amounts could be reported under different conditions or using different assumptions.

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        The application of accounting policies requires the use of judgment and estimates. As it relates to the Company, estimates and forecasts are required to determine sales returns and reserves, rebate reserves, allowances for doubtful accounts, reserves for excess and obsolete inventory, investments in unconsolidated affiliates, workers' compensation liabilities, employee benefit related liabilities, deferred tax asset valuation allowances, any impairments of assets, anticipated transactions to be hedged, reserves and contingencies.

        These matters that are subject to judgments and estimation are inherently uncertain, and different amounts could be reported using different assumptions and estimates. Management uses its best estimates and judgments in determining the appropriate amount to reflect in the financial statements, using historical experience and all available information. The Company also uses outside experts where appropriate. The Company applies estimation methodologies consistently from year to year.

New Accounting and Disclosure Standards Adopted

        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, is effective for fiscal years beginning after December 15, 2001. No transition adjustment was recorded upon adoption of this standard on January 1, 2002. However, adoption of this standard resulted in the elimination of goodwill amortization commencing January 1, 2002. See Note 7 to the consolidated condensed financial statements for more information.

        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, is effective for fiscal years beginning after December 15, 2001. 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. 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 does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 changes the accounting and reporting for costs associated with exit or disposal activities, termination benefits and other costs to exit an activity, including certain costs incurred in a restructuring. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency 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

20

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 foreign currency impact 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.

Interest Rate Risk

        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, 2002, Edwards Lifesciences had in place interest rate swap agreements with a total notional amount of $196.8 million to swap floating rate United States dollar and Yen denominated debt obtained under the Company's revolving credit facilities for fixed rates.

Investment Risk

        Edwards Lifesciences is exposed to investment risks related to changes in the fair values of its investments. The Company invests in equity instruments of public and private companies. These investments are classified in "Investments in unconsolidated affiliates" on the consolidated condensed balance sheets.

        During the quarter ended September 30, 2002, the Company recorded a $67.4 million pretax charge related to the impairment of its investment in preferred stock of WorldHeart. The investment was written down to $6.2 million, which represents the value of the Company's preferred stock investment had it been converted into common stock at October 15, 2002. The decision to record the charge was based primarily on delays in WorldHeart's product development timelines, arising from its revised strategy. Should WorldHeart fail to meet certain future development and financing milestones, further impairment charges may be necessary.

        In addition to the investment in WorldHeart, Edwards Lifesciences had approximately $14.6 million of investments in equity instruments of other companies. At September 30, 2002, the Company has recorded unrealized losses on these investments of $8.3 million in "Accumulated Other Comprehensive Income," net of tax. Management considers these declines temporary in nature based upon the individual companies' operating results, financial condition and product development milestones. Should these companies experience a decline in financial condition or fail to meet certain development milestones, the decline in the investments values may be considered other than temporary and impairment charges may be necessary.

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Item 4. Controls and Procedures

        The Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company's disclosure controls and procedures as of a date within 90 days of the filing of this report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have determined that such controls and procedures are designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to them, particularly during the period in which this Form 10-Q was being prepared. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the Evaluation.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

        On June 29, 2000, Edwards Lifesciences filed a lawsuit against St. Jude Medical, Inc. alleging infringement of three Edwards Lifesciences United States patents. This lawsuit was filed in the United States District Court for the Central District of California, seeking monetary damages and injunctive relief. St. Jude has answered and asserted various affirmative defenses and counterclaims with respect to the lawsuits. On April 9, 2002, the court granted Edwards Lifesciences' motion to amend the complaint to add a fourth United States patent. The court rendered a claim construction decision with respect to the first three patents on June 27, 2002. The court has not yet set a trial date.

        Edwards Lifesciences is, or may be, a party to, or may be otherwise responsible for, 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 also is 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.

Item 2. Changes in Securities and Use of Proceeds

        On August 16, 2002, the Company inadvertently sold 172 shares of its common stock without exemption in an ordinary broker's transaction to reverse excess purchases in connection with the Company's Executive Option Plan and paid commissions of $15, resulting in net proceeds of $4,379.

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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 and include the following

10.34	Supplemental Reorganization Agreement and Amendment to Tax Sharing Agreement, dated as of July 25, 2002, by and between Baxter International Inc. and Edwards Lifesciences Corporation
10.35	Kaisha Bunkatsu and Stock Purchase Agreement, dated as of July 25, 2002, entered into by and among Baxter Limited; Baxter Holdings Limited; Edwards Lifesciences Limited; and Edwards Lifesciences AG
10.36	Amendment No. 3, dated as of October 21, 2002, 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; JPMorgan Chase Bank, as Administrative Agent; J. P. Morgan Europe Limited, as London Agent; Mizuho Corporate Bank, LTD., as the Tokyo Agent; Bank One, N.A., as Syndication Agent; and Credit Suisse First Boston, as Documentation Agent
10.37	Amendment No. 1, dated as of October 21, 2002, to the 364-Day Amended And Restated Credit Agreement dated as of March 28, 2002 among Edwards Lifesciences Corporation, a Delaware corporation; the Lenders from time to time party thereto, JPMorgan Chase Bank, as Administrative Agent; Credit Suisse First Boston, Cayman Islands Branch and Wachovia Bank, N.A., as Co-Syndication Agents and The Bank of Nova Scotia and Bank of America, N.A., as Co-Documentation Agents
99.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)

Reports on Form 8-K

None

24

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 13, 2002
By:/s/ Bruce J. Bentcover
Bruce J. Bentcover
Corporate Vice President, Chief
Financial Officer and Treasurer
(Chief Accounting Officer)

25

EDWARDS LIFESCIENCES CORPORATION

CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Michael A. Mussallem, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Edwards Lifesciences Corporation;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002
By:/s/ Michael A. Mussallem
Michael A. Mussallem
Chairman of the Board and
Chief Executive Officer

26

CERTIFICATION

I, Bruce J. Bentcover, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Edwards Lifesciences Corporation;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002
By:/s/ Bruce J. Bentcover
Bruce J. Bentcover
Corporate Vice President, Chief
Financial Officer and Treasurer
(Chief Accounting Officer)

27

EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION

Exhibit No.	Description
3.1	Restated Certificate of Incorporation of Edwards Lifesciences Corporation (l)
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 (i)
*10.5	Employment Agreement for Michael A. Mussallem (i)
*10.6	Promissory Note Secured by Deed of Trust for Michael A. Mussallem dated December 11, 2001 (l)
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)

28

10.19	Five Year Credit Agreement dated as of March 31, 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 Documentation 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 March 2001) (h)
*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 2002 Incentive Plan. 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 (m)
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 (j)

29

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 Bookrunner (j)
10.32	Agreement between Edwards Lifesciences Corporation and Richard L. Miller, dated May 3, 2001 (k)
10.33	Amendment and Restatement Agreement (to the 364-Day Credit Agreement dated as of March 30, 2000 and the Amended and Restated 364-Day Credit Agreement dated as of March 29, 2001) dated as of March 28, 2002 among Edwards Lifesciences Corporation, as Borrower, the lenders Party hereto; JPMorgan Chase Bank, as Administrative Agent; Credit Suisse First Boston, Cayman Islands Branch and Wachovia Bank, N.A. as Co-Syndication Agents; and the Bank of Nova Scotia and Bank of America, N.A. as Co- Documentation Agents; JPMorgan Securities Inc., as Lead Arranger and Bookrunner (m)
10.34	Supplemental Reorganization Agreement and Amendment to Tax Sharing Agreement, dated as of July 25, 2002, by and between Baxter International Inc. and Edwards Lifesciences Corporation
10.35	Kaisha Bunkatsu and Stock Purchase Agreement, dated as of July 25, 2002, entered into by and among Baxter Limited; Baxter Holdings Limited; Edwards Lifesciences Limited; and Edwards Lifesciences AG
10.36	Amendment No. 3, dated as of October 21, 2002, 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; JPMorgan Chase Bank, as Administrative Agent; J.P. Morgan Europe Limited, as London Agent; Mizuho Corporate Bank, LTD., as the Tokyo Agent; Bank One, N.A., as Syndication Agent; and Credit Suisse First Boston, as Documentation Agent
10.37	Amendment No. 1, dated as of October 21, 2002, to the 364-Day Amended And Restated Credit Agreement dated as of March 28, 2002 among Edwards Lifesciences Corporation, a Delaware corporation; the Lenders from time to time party thereto, JPMorgan Chase Bank, as Administrative Agent; Credit Suisse First Boston, Cayman Islands Branch and Wachovia Bank, N.A., as Co-Syndication Agents and The Bank of Nova Scotia and Bank of America, N.A., as Co-Documentation Agents
21.1	Subsidiaries of Edwards Lifesciences Corporation (l)
99.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(a)

Incorporated 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' 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' report on Form 10-Q for the quarterly period ended June 30, 2000, under the Securities Exchange Act of 1934.

30

(d)

Incorporated by reference to the cited exhibit in Edwards Lifesciences' 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 Exhibit 4.6 in Edwards Lifesciences' Registration Statement on Form S-8 (File No. 333-60670).

(i)

Incorporated by reference to the cited exhibit in Edwards Lifesciences' report on Form 10-K for the fiscal year ended December 31, 2000, under the Securities Exchange Act of 1934.

(j)

Incorporated by reference to the cited exhibit in Edwards Lifesciences' report on Form 10-Q for the quarterly period ended March 31, 2001, under the Securities Exchange Act of 1934.

(k)

Incorporated by reference to the cited exhibit in Edwards Lifesciences' report on Form 10-Q for the quarterly period ended June 30, 2001, under the Securities Exchange Act of 1934.

(l)

Incorporated by reference to the cited exhibit in Edwards Lifesciences' report on Form 10-K for the fiscal year ended December 31, 2001, under the Securities Exchange Act of 1934.

(m)

Incorporated by reference to the cited exhibit in Edwards Lifesciences' report on Form 10-Q for the quarterly period ended March 31, 2002, under the Securities Exchange Act of 1934.

*

Represents management contract or compensatory plan

31

QuickLinks

TABLE OF CONTENTS
Part I. Financial Information

Item 1. Financial Statements

CONSOLIDATED CONDENSED BALANCE SHEET SEPTEMBER 30, 2002 (unaudited)(in millions)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited)(in millions, except per share information)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)(in millions)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K.

Signature
EDWARDS LIFESCIENCES CORPORATION CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION