Edwards Lifesciences Corporation 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 cannulae 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 the critical 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 the perfusion 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 (see Note 3 ). 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 Corporation was incorporated under the original name of CVG Controlled Inc. in Delaware on September 10 , 1999 , as a subsidiary of Baxter International Inc. (“Baxter”). 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 by Baxter of the Edwards Lifesciences 

## note 1. 

## DESCRIPTION OF BUSINESS 

Business. The spin-off was effected on the Distribution Date through a distribution of 58.1 million shares of Edwards Lifesciences’ common stock (the “Distribution”) to Baxter stockholders of record on March 29 , 2000 , resulting in Edwards Lifesciences operating as an independent entity commencing April 1 , 2000 with publicly traded common stock. Unless the context indicates otherwise, 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 annual earnings per share data are presented for 1999 and 2000 as the Edwards Lifesciences earnings were part of Baxter’s earnings through the close of business on March 31 , 2000 . 

Baxter performs certain services for Edwards Lifesciences pursuant to various agreements that are outlined in Note 10 . However, unless released by third parties, Baxter may remain liable for certain lease and other obligations and liabilities that were transferred to and assumed by Edwards Lifesciences. Edwards Lifesciences is obligated to indemnify Baxter for liabilities related to those transferred obligations and liabilities. 

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 consolidated in the accompanying Consolidated Statements of Operations for periods prior to the Distribution, consistent with the treatment of the Company’s operations while a part of Baxter. Subsequent to the Distribution, Edwards Lifesciences (a) recognizes its shipments into the joint venture as sales at distributor price at the time the joint venture sells to the end customer, and (b) utilizes the equity method of accounting to record its interest in the operations of the joint venture in Other Operating Income in the Consolidated Statements of Operations. 

## SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

The consolidated financial statements of Edwards Lifesciences have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”) and have been applied consistently in all material respects. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, sales returns and reserves, rebate reserves, allowances for doubtful accounts, excess and obsolete, inventory, investments in unconsolidated affiliates, workers’ compensation, employee benefits, income taxes, reserves and contingencies. 

The consolidated financial statements have been prepared using Baxter’s historical bases in the assets and liabilities and the 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 and its subsidiaries, subse- quent to the Distribution. All material intercompany balances have been eliminated. Prior to the Distribution, the combined financial statements included allocations of certain Baxter corporate assets, liabilities and expenses to the Edwards Lifesciences Business, which were allocated on the basis that was considered by Baxter management to reflect most fairly or reasonably the utilization of the services provided to or the benefit obtained by the Edwards Lifesciences Business (see Note 10 ). Typical measures and activity indicators used for allocation purposes included headcount, sales, payroll expense, or the specific level of activity related to the allocated item. Management believes the methods used to allocate amounts were reasonable. However, the financial information included herein does not necessarily reflect what the financial position, results of operations and cash flows of the Company would have been had it operated as a stand-alone public entity 

## note 2. 

## Basis of Presentation 

during the periods prior to the Distribution, and may not be indicative of future operations, cash flows or financial position. The consolidated financial statements do not include an allocation of Baxter’s consolidated debt and interest expense prior to the Distribution. Certain reclassifications of previously reported amounts have been made to conform to classifications used in the current year, and a $ 14 million reclassification between inventory and accounts payable at December 31 , 2000 was made to correct certain intercompany transactions outside the United States. 

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 $ 4 million for these entities was recorded as an adjustment to retained earnings on January 1 , 2001 . 

The Company follows the principles of Statement of Financial Accounting Standards (“SFAS”) No. 52 , “Foreign Currency Translation.” Accordingly, when the local currency of its foreign entities is the functional currency, all assets and liabilities, other than those located in highly inflationary countries, are translated into United States dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted average exchange rate prevailing during the period. The effects of foreign currency translation adjustments for these entities are deferred and included as a component of stockholders’ equity. When foreign affiliates operate in highly inflationary countries, non-monetary amounts are remeasured at historical exchange rates while monetary assets and liabilities are remeasured at the current rate with the related adjustments reflected in Other Expense, net. The effects of foreign currency transactions denominated in a currency other than the Company’s functional currency are included in Other Expense, net. 

## Fiscal Year of International Operations 

## Foreign Currency Translation 

