Management’s Discussion and Analysis  of Financial Condition and Results of Operations Management’s Discussion and Analysis  of Financial Condition and Results of Operations New Accounting and Disclosure Standards Issued Interest Rate Risk Currency Risk Quantitative and Qualitative Disclosure About Market Risk Euro Conversion New Accounting and Disclosure Standards Adopted Cash flows provided by operating activities for the year 2000 decreased $ 38 million from the year  1999 due primarily to reduced accounts receivable collections (included in cash flows for  1999 was approximately $ 25 million related to insurance proceeds associated with hurricane damage at one of the Company’s manufacturing facilities) and lower earnings (resulting primarily from interest expense and corporate costs associated with the Company’s operation as an independent company commencing April  1 , 2000 ). Uses of cash for investing activities during the year  2001 included $ 11 million of investments in various unconsolidated affiliates, an investment in peripheral stent patent technology and other patent-related investments. Cash flows provided by investing activities included $ 45 million received from the sale of the Company’s stock of ELCR and $ 10 million of installment payments received against a note receivable from Jostra AG (see “Disposition of Assets and Other Non-Recurring Charges, net”). Uses of cash for investing activities during the year  2000 included the purchase of two convertible debentures in Sangamo Biosciences, Inc. (totaling $ 13 million), which were subse- quently converted into common stock during the second quarter  2000 , an $ 8 million investment in A-Med Systems, Inc. and a  $ 20 million investment in World Heart Corporation. During 2000 , the Company received $ 12 million related to the sale of certain of the Company’s perfusion product assets (see “Dis- position of Assets and Other Non-Recurring Charges, net”). Capital expenditures decreased $ 8 million to $ 38 million in  2001, from $ 46  million in  2000 . Capital expenditures during 2001, related primarily to support for manufacturing facilities, information systems and equipment placed at customers. The reduction in  2001 resulted primarily from the completion during  2000 of the expansion and renovation of the Company’s corporate headquarters and the sale of the perfusion product line and the perfusion services business. In  2002 , the Company expects capital expenditures to be less than $ 40 million. On January  1 , 1999 , the European Economic and Monetary Union created and introduced the Euro, the official single currency for the  11 participating member countries. A transition period was in effect from January  1 , 1999 through December  31 , 2001 , during which time transactions were executed in both the Euro and the member countries’ individual currencies. Effective January  1 , 2002 , Euro bank notes were introduced and as of July  1 , 2002 , the Euro will Effective January  1 , 2001 , Edwards Lifesciences adopted the provisions of 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 trans- fers of financial assets and collateral. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguish- ments 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. Effective January  1 , 2001 , Edwards Lifesciences adopted the provisions of SFAS  133 , “Accounting for Derivative Instruments and Hedging Activities,” 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 cumu- lative after-tax increase in net loss of $ 1 million and a $ 5 million decrease in Accumulated Other Comprehensive Income. Edwards Lifesciences appointed a team of individuals to address all issues associated with the conversion to the Euro. At the time Edwards Lifesciences switched to using the Euro as the sole functional currency for the affected countries, certain modifications that were primarily related to information systems were required. The costs associated with preparing for the conversion and continued use of the Euro were expensed as incurred and were not material to Edwards Lifesciences’ financial position, results of operations or cash flows. The potential effects on Edwards Lifesciences’ operations include the competitive impact of cross-border price transparency, which may make it more difficult for a business to charge different prices for the same products on a country-by-country basis now that the Euro has begun circulation. be the sole legal tender of the European Economic and Monetary Union countries. 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 . 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 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 . The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements. The Company’s business and financial results are affected by fluctuations in world financial markets, including currency exchange rates and interest rates. The Company’s hedging policy attempts to manage these risks to an acceptable level based on management’s judgment of the appropriate trade-off  between risk, opportunity and costs. Edwards Lifesciences maintains an overall risk manage- ment strategy that utilizes a variety of interest rate and currency derivative financial instruments to mitigate its exposure to fluctuations in interest rate and currency exchange exposures. The derivative instruments used include interest rate swaps, option-based products and forward currency contracts. The Company does not use any of these instruments for trading or speculative purposes. The total notional amounts of the Company’s derivative financial instruments at December  31 , 2001 and  2000 were $ 324 million and $ 415 million, respectively. The notional amounts of interest rate swap agreements, option- The Company is primarily exposed to currency exchange-rate risk with respect to its transactions and net assets denominated in Japanese Yen and the Euro. Business activities in various currencies expose the Company to the risk that the eventual net dollar cash inflows resulting from transactions with foreign customers and suppliers denominated in foreign currencies may be adversely affected by changes in currency exchange rates. The Company manages these risks utilizing various types of foreign exchange contracts. The Company also enters into foreign exchange contracts to hedge anticipated, but not yet committed, sales expected to be denominated in foreign currencies. In addition, the Company hedges certain of its net investments in international affiliates. Such contracts hedge the United States dollar value of foreign currency denominated net assets from the effects of volatility in currency exchange rates by creating debt denominated in the respective currencies of the underlying net assets. Any changes in the carrying value of these net investments that are a result of fluctuations in currency exchange rates are offset by changes in the carrying value of the foreign currency denominated debt that are a result of the same fluctuations in currency exchange rates. As part of its overall risk-management program, the Company performs sensitivity analyses to assess potential gains and losses in earnings and changes in fair values to hypothetical movements in interest rates. A  47 basis-point increase in interest rates (approximately  10 percent of the Company’s weighted average interest rate) affecting the Company’s financial instruments, including debt obligations and related derivatives and investments, would increase the Company’s annual interest expense by approximately $ 0.7 million. The Company 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 or on a portfolio basis. 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. based products and forward currency contracts do not represent amounts exchanged by the parties and are not a measure of the Company’s exposure through its use of derivatives. 22 Edwards Lifesciences Corporation 23 Edwards Lifesciences Corporation