<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-15525
------------------------
EDWARDS LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-4316614
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE EDWARDS WAY, IRVINE, CALIFORNIA 92614
(formerly 17221 Red Hill Avenue, Irvine, California) (Zip Code)
(Address of principal executive offices)
</TABLE>
(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 July 31, 2000, the latest practicable date, was
58,436,511 shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets..................... 2
Consolidated Condensed Statements of Income............... 3
Consolidated Condensed Statements of Cash Flows........... 4
Notes to Consolidated Condensed Financial Statements...... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 25
Signature............................................................. 26
Exhibits.............................................................. 27
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) (IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 2 $ --
Accounts receivable, net.................................. 162 155
Inventories............................................... 95 169
Prepaid expenses and other current assets................. 36 32
------ ------
Total current assets.................................... 295 356
Property, plant and equipment, net.......................... 178 226
Investments in equity instruments........................... 99 1
Goodwill and other intangibles, net......................... 528 819
Other assets................................................ 23 35
------ ------
$1,123 $1,437
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................. $ 121 $ 156
Short-term debt........................................... 210 --
------ ------
Total current liabilities............................... 331 156
------ ------
Long-term debt.............................................. 321 --
Other....................................................... 60 57
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common stock, $1 par value, authorized 350,000,000 shares,
58,426,091 shares outstanding........................... 58 --
Additional contributed capital............................ 274 --
Retained earnings......................................... 83 418
Investment by Baxter International Inc., net.............. -- 833
Accumulated other comprehensive loss...................... (4) (27)
------ ------
Total stockholders' equity.............................. 411 1,224
------ ------
$1,123 $1,437
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
2
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................................. $ 205 $ 233 $ 431 $ 454
Cost of goods sold......................................... (115) (115) (233) (228)
------ ----- ----- -----
Gross profit............................................... 90 118 198 226
------ ----- ----- -----
Selling, general and administrative expenses............. 59 60 119 118
Research and development expenses........................ 14 13 28 25
Goodwill amortization.................................... 9 9 18 18
Disposition of assets and other non-recurring charges,
net.................................................... 301 -- 301 --
Non-recurring spin-off expenses.......................... 17 -- 18 --
Other operating income................................... (6) -- (6) --
------ ----- ----- -----
394 82 478 161
------ ----- ----- -----
Operating income (loss).................................... (304) 36 (280) 65
Interest expense......................................... (6) -- (6) --
Other expense, net....................................... (1) (3) (2) (2)
------ ----- ----- -----
Income (loss) before provision for income taxes............ (311) 33 (288) 63
Benefit (provision) for income taxes....................... 2 (9) (4) (17)
------ ----- ----- -----
Net income (loss).......................................... $ (309) $ 24 $(292) $ 46
====== ===== ===== =====
Share information:
Net loss per share
Basic.................................................. $(5.31)
Diluted................................................ $(5.31)
Weighted average number of common shares outstanding
Basic.................................................. 58.2
Diluted................................................ 58.2
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- --------
(BRACKETS DENOTE
CASH OUTFLOWS)
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income (loss)......................................... $(292) $ 46
Adjustments
Dispositions and write-downs of assets and other
non-recurring charges, net............................ 323 --
Depreciation and amortization........................... 44 43
Deferred tax expense.................................... 3 --
Other................................................... 1 1
Changes in operating assets and liabilities, net of effect
from deconsolidation of Japan business (Note 1)
Accounts receivable..................................... (12) 12
Inventories............................................. 11 (23)
Accounts payable and accrued liabilities................ (20) (12)
Other................................................... (13) (6)
----- ----
Net cash provided by operating activities............. 45 61
----- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (21) (22)
Purchases of convertible debt and equity instruments...... (40) --
----- ----
Net cash used in investing activities................. (61) (22)
----- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt................. 210 --
Proceeds from issuance of long-term debt.................. 352 --
Payments on long-term debt................................ (32) --
Debt issuance costs....................................... (3) --
Payments to Baxter International Inc., net................ (511) (39)
----- ----
Net cash provided by (used in) financing activities... 16 (39)
----- ----
Effect of currency exchange rate changes on cash............ 2 --
----- ----
Net increase in cash and cash equivalents................... 2 --
Cash and cash equivalents at beginning of period............ -- --
----- ----
Cash and cash equivalents at end of period.................. $ 2 $ --
===== ====
Supplemental disclosures of non-cash activities:
Deconsolidation of Japan business (Note 1)................ $ 43
Net assets sold in consideration for convertible preferred
stock................................................... 13
Unrealized gain on available-for-sale securities.......... 6
Issuance of common stock under employee stock plans....... 4
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Edwards Lifesciences Corporation (Edwards Lifesciences or the Company) 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
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. The Company has authorized the issuance of
50 million shares of preferred stock, par value $.01 per share. No shares of
preferred stock have been issued. No earnings per share data for the three and
six months ended June 30, 1999 and the six months ended June 30, 2000 is
presented as the Edwards Lifesciences earnings were part of Baxter's earnings
through the close of business on March 31, 2000.
Baxter has no ownership interest in Edwards Lifesciences after March 31,
2000, but performs certain services for Edwards Lifesciences pursuant to various
agreements that are outlined in Note 8. 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 28 months following the Distribution Date and no later than 60 months
following the Distribution Date. The Japanese operations are consolidated in the
accompanying Consolidated Condensed Statements of Income 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
recognizes as sales its shipments into the joint venture and utilizes the equity
method of accounting to record its interest in the operations of the joint
venture.
Edwards Lifesciences is a global leader in providing the manufacturing,
marketing and selling of a comprehensive line of products and services to treat
late-stage cardiovascular disease. Edwards Lifesciences' sales are categorized
in four main product areas: (a) cardiac surgery, (b) critical care,
(c) vascular and (d) perfusion products and services. Edwards Lifesciences'
CARDIAC SURGERY portfolio is comprised of products relating to heart-valve
therapy, mechanical cardiac assist (see Note 4), and cannulae and cardioplegia
products used during open-heart surgery. Edwards Lifesciences is the world's
leader in, and has been a pioneer in the development and commercialization of,
tissue valves and repair products used to replace or repair a patient's diseased
or defective heart valve. In 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 product lines include a
line of balloon catheter-based products, surgical clips and inserts, angioscopy
equipment, and artificial implantable grafts, as well as an
5
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
1. DESCRIPTION OF BUSINESS (CONTINUED)
endovascular system under development to be used to treat less invasively
life-threatening abdominal aortic aneurysms. In the PERFUSION PRODUCTS AND
SERVICES category, Edwards Lifesciences designs, develops, manufactures and
markets a diverse line of disposable products used during cardiopulmonary bypass
procedures, including oxygenators, blood containers, filters and related
devices, as well as bypass equipment (see Note 4). Edwards Lifesciences also is
the world's leading provider of perfusion services, employing approximately 400
certified perfusionists who perform an aggregate of approximately 50,000
perfusion cases for open heart surgery per year.
2. FINANCIAL INFORMATION
The unaudited interim consolidated condensed financial statements of Edwards
Lifesciences prior to the Distribution use Baxter's historical bases in the
assets, liabilities and historical results of operations of the cardiovascular
business, operated primarily as a division of Baxter, and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
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 have been made to
prior periods for consistency purposes. These interim consolidated condensed
financial statements should be read in conjunction with the financial statements
and notes included in the Company's Registration Statement on Form 10, as
amended and filed with the Securities and Exchange Commission on April 5, 2000
(the Form 10).
In the opinion of management, the interim consolidated condensed financial
statements reflect all adjustments 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. PRO FORMA INFORMATION
The following unaudited pro forma consolidated condensed statement of income
for the six months ended June 30, 2000 presents the consolidated results of
Edwards Lifesciences assuming that the transactions contemplated by the
Distribution had been completed as of January 1, 2000. The unaudited pro forma
information has been prepared utilizing the historical consolidated condensed
financial statements of Edwards Lifesciences.
6
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
3. PRO FORMA INFORMATION (CONTINUED)
EDWARDS LIFESCIENCES CORPORATION
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------
PRO FORMA
ADJUSTMENTS
--------------------
JAPAN ON
AN EQUITY
HISTORICAL BASIS OTHERS PRO FORMA
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net sales............................................... $ 431 $(29)(a) $ 402
Cost of goods sold...................................... (233) 12 (a) (221)
----- ---- ------
Gross profit............................................ 198 (17) 181
----- ---- ------
Selling, general and administrative expenses.......... 119 (12)(a) $ 5(b) 112
Research and development expenses..................... 28 (1)(a) 27
Goodwill amortization................................. 18 18
Disposition of assets and other non-recurring charges,
net................................................. 301 301
Non-recurring spin-off expenses....................... 18 18
Other operating income................................ (6) (4)(a) (10)
----- ---- ---- ------
478 (17) 5 466
----- ---- ---- ------
Operating loss.......................................... (280) -- (5) (285)
Interest expense...................................... (6) (7)(c) (13)
Other expense, net.................................... (2) (2)
----- ---- ---- ------
Loss before provision for income taxes.................. (288) -- (12) (300)
Benefit (provision) for income taxes.................... (4) 3(d) (1)
----- ---- ---- ------
Net loss................................................ $(292) $ -- $ (9) $ (301)
===== ==== ==== ======
Share information:
Pro forma net loss per share
Basic............................................... $(5.17)
Diluted............................................. $(5.17)
Weighted average number of common shares outstanding
Basic............................................... 58.2(e)
Diluted............................................. 58.2(e)
</TABLE>
------------------------
PRO FORMA ADJUSTMENTS
(a) To reflect the Edwards Lifesciences Japanese operations on an equity basis
for the three months ended March 31, 2000 (Note 1).
7
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
3. PRO FORMA INFORMATION (CONTINUED)
(b) To reflect estimated incremental costs associated with being an independent
public company for the three months ended March 31, 2000, including costs
associated with corporate administrative services such as accounting, tax,
treasury, risk management, insurance, legal, investor relations and human
resources. The Company's historical consolidated condensed financial
statements for the three months ended March 31, 2000 include all costs
incurred by Baxter on behalf of the Company. However, there are incremental
and continuing costs directly attributable to the spin-off, as there is a
loss of certain synergies and benefits of economies of scale that existed
while Edwards Lifesciences was part of Baxter. Management estimated such
incremental costs utilizing Baxter's historical headcount and cost analysis,
and the Company's organization chart. The following is a summary of the
estimated incremental costs by significant function for the three months
ended March 31, 2000 (in millions):
<TABLE>
<S> <C>
Accounting, tax and legal................................... $ 2
Insurance and risk management............................... 1
Human resources............................................. 1
Treasury, investor relations and other costs................ 1
---
Total..................................................... $ 5
===
</TABLE>
(c) To reflect the estimated interest expense which would have been incurred by
Edwards Lifesciences for the three months ended March 31, 2000 based on the
incurrence of $529 million of debt at a weighted-average interest rate of
approximately 5%. An increase or decrease of 0.2 points in the
weighted-average interest rate would result in a per annum increase or
decrease in interest expense of approximately $1 million.
(d) To reflect the estimated tax impact at statutory rates, for pro forma
adjustments (b) and (c), as well as the estimated impact of different tax
rates available to Edwards Lifesciences as a stand-alone company for the
three months ended March 31, 2000.
(e) Computed as if the 58.2 million common shares of Edwards Lifesciences had
been outstanding as of January 1, 2000 (comprised of 58.1 million common
shares of Edwards Lifesciences distributed to Baxter shareholders on the
Distribution Date and approximately 0.1 million common shares of Edwards
Lifesciences distributed to Edwards Lifesciences' hourly employees
subsequent to the Distribution Date). Due to the net loss for the six-months
ended June 30, 2000, the pro forma basic and diluted net loss per share are
the same amounts since the impact of the common stock equivalents (of
approximately 1.2 million shares) would be anti-dilutive.
8
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
4. DISPOSITION OF ASSETS AND OTHER NON-RECURRING CHARGES, NET
LOSS ON SALE AND ABANDONMENT OF ASSETS ($291 MILLION)
Effective July 15, 2000, the Company entered into a definitive agreement,
subject to customary closing conditions including regulatory approvals, to sell
the majority of its United States and Western European assets and rights related
to its perfusion products to Jostra AG for cash proceeds of approximately
$30 million. Sales of the Company's impacted perfusion products were
approximately $17 million during the second quarter 2000. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and Staff Accounting Bulletin No. 100, "Restructuring and Impairment
Charges," the Company recorded a pre-tax impairment charge of $291 million in
the second quarter of 2000 to reduce the carrying value of these assets to fair
value based upon the estimated net proceeds from the sale. Assets subject to
this impairment charge consist primarily of goodwill ($245 million) and
special-use manufacturing and support assets. The goodwill impairment charge was
calculated based upon a pro rata allocation of the goodwill using the relative
fair values of the affected long-lived assets and identifiable intangibles
acquired at the inception date of the goodwill.
In conjunction with the planned sale of the perfusion products, the Company
anticipates incurring an additional $10 million pre-tax charge during the third
quarter of 2000 related to personnel costs, at which time the Company expects it
will have met the criteria of Emerging Issues Task Force ("EITF") No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." The personnel costs will consist primarily of severance,
medical plan continuation and outplacement services for employees expected to be
terminated. As of July 31, 2000, no such payments have been made to these
employees.
GAIN ON SALE OF ASSETS ($35 MILLION)
On June 30, 2000, Edwards Lifesciences transferred the rights, intellectual
property and U.S. assets of its mechanical cardiac assist product line to World
Heart Corporation (World Heart). In return, the Company received (a) preferred
stock of a subsidiary of World Heart which, at Edwards' option, can be exchanged
for approximately 5 million shares of World Heart's common stock commencing
July 2002 and (b) exclusive worldwide distribution rights to the Novacor left
ventricular assist system and any ventricular assist technologies developed by
World Heart. Edwards Lifesciences also will provide components and technical
support to World Heart for ventricular assist products at agreed upon prices.
The Company recorded a pre-tax gain of $35 million in connection with this
transaction. Sales of the Company's impacted mechanical cardiac assist products
were approximately $1 million during the second quarter 2000.
As part of the transaction with World Heart, the Company invested
$20 million in World Heart convertible preferred stock. The preferred stock
bears a cumulative dividend, is callable at any time by World Heart and is
convertible by the Company into World Heart common stock commencing July 2006.
Edwards Lifesciences reports its investment in World Heart as available-for-sale
securities.
9
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
4. DISPOSITION OF ASSETS AND OTHER NON-RECURRING CHARGES, NET (CONTINUED)
OTHER NON-RECURRING CHARGES ($45 MILLION)
As a result of Edwards Lifesciences' continuing efforts to focus the
Company's product portfolio and affect the Company's business strategy following
the spin-off from Baxter, the Company decided to discontinue certain products in
its portfolio that did not meet the objectives of its business strategy. The
long-lived assets or the investments in these products were evaluated to
determine whether any impairment in their recoverability existed at the
determination date. As a result, Edwards Lifesciences assessed whether the
estimated cash flows of the products over the estimated lives of the related
assets were sufficient to recover their costs. Where such cash flows were
insufficient, the Company utilized a discounted cash flow model to estimate the
fair value of assets or investments and recorded an impairment charge to adjust
the carrying values to estimated fair values. As a result of this evaluation,
Edwards Lifesciences recorded a non-cash charge of $45 million primarily related
to the impairment of goodwill unrelated to perfusion products ($37 million),
impairment of other intangibles ($5 million) and the write-down of
non-productive assets ($3 million).
5. INVENTORIES
Inventories consisted of the following (see Note 1):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN MILLIONS)
<S> <C> <C>
Raw materials........................................ $22 $ 29
Work in process...................................... 22 28
Finished products.................................... 51 112
--- ----
Total inventories.................................... $95 $169
=== ====
</TABLE>
6. COMMON STOCK AND STOCK OPTIONS
On April 3, 2000, the Company granted options to purchase shares of Edwards
Lifesciences Common Stock under the Edwards Lifesciences Long-Term Incentive
Stock Plan (the Plan). The Plan includes two stock option programs: Founders
Options and Edwards Conversion Options. The Founders Options were awarded to all
salaried employees of the Company, and permit the purchase of approximately
5.7 million shares at an exercise price of $13.875, the fair market value at the
date of grant. The Founders Options vest 30% after two years, and the balance
vests after three years. The Founders Options include approximately 634,000
options granted to non-employees of the Company in Japan (deemed to be employees
of Baxter as described in Note 1). In accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
$4.2 million value of these options is being amortized over the three-year
vesting period on a straight-line basis. The Edwards Conversion Options permit
the purchase of approximately 2.4 million shares at an exercise price based upon
an equitable conversion of the exercise price under the Baxter stock option
plan, with reference to the when-issued price of the Company's stock and the
closing price of Baxter's common
10
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
6. COMMON STOCK AND STOCK OPTIONS (CONTINUED)
stock on March 31, 2000. The Edwards Conversion Options retained the vesting
periods under the Baxter stock option plan, resulting in various vesting periods
through September 2001.
During the quarter ended June 30, 2000, Edwards Lifesciences issued to
certain hourly employees approximately 125,000 shares of the Company's common
stock valued at $1.7 million.
On April 1, 2000, Edwards Lifesciences' five non-employee directors were
each granted 5,000 shares of the Company's common stock, valued at $339,000,
with restrictions that lapse over a two-year period.
7. COMPREHENSIVE INCOME
The reconciliation of net income to comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net income (loss)................................. $(309) $24 $(292) $46
Other comprehensive income:
Currency translation adjustments................ (4) (3) (8) (6)
Unrealized gain on marketable securities........ 6 -- 6 --
----- --- ----- ---
Comprehensive income.............................. $(307) $21 $(294) $40
===== === ===== ===
</TABLE>
8. RELATED PARTY TRANSACTIONS
Prior to the Distribution Date, Baxter provided to Edwards Lifesciences
certain legal, treasury, employee benefit, insurance and administrative
services. Charges for these services were based on actual costs incurred by
Baxter. The bases for the amounts charged to Edwards Lifesciences varied
depending on the nature of the service, but generally were determined using
headcount, sales, payroll, square footage or other appropriate data, or were
determined based on actual utilization of services. Management believes that the
bases used for allocating service charges are reasonable. However, the terms of
these transactions may differ from those that would result from transactions
with unrelated third parties or had Edwards Lifesciences performed these
functions on its own.
Prior to the Distribution Date, Edwards Lifesciences participated in a
centralized cash management program administered by Baxter. Short-term advances
from Baxter or excess cash sent to Baxter have been treated as an adjustment to
the "Investment by Baxter International Inc., net" account as of and through
March 31, 2000. No interest was charged on this balance.
Effective on the Distribution Date, Baxter and Edwards Lifesciences entered
into a series of administrative services agreements pursuant to which Baxter and
Edwards Lifesciences will continue to provide, for a specified period of time,
certain administrative services (primarily information systems support, payroll,
accounting and warehousing and logistics support) that each entity historically
has
11
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
provided to the other. These agreements require the parties to pay each other a
fee that approximates the actual costs of these services. Additionally,
subsequent to March 31, 2000, Edwards Lifesciences has continuing relationships
with Baxter as a customer and supplier for certain products, and uses Baxter as
a distributor of the Company's products in certain regions of the world.
The following table summarizes the charges from Baxter for the
above-mentioned services, as recorded in Edwards Lifesciences Consolidated
Condensed Statements of Income:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cost of goods sold................................ $1 $ 1 $ 3 $ 3
Selling, general and administrative expenses...... 3 10 13 21
Research and development expenses................. -- 1 1 1
</TABLE>
Sales to Baxter represented approximately 14% of the Company's total net
sales for the three months ended June 30, 2000.
9. COMMITMENTS AND CONTINGENCIES
Upon the Distribution, Edwards Lifesciences assumed the defense of certain
Baxter litigation involving cases and claims related to the Edwards Lifesciences
business. Edwards Lifesciences has not been named as a defendant in such matters
but will be defending and indemnifying Baxter for all related expenses and
potential liabilities. It is possible that Edwards Lifesciences may be added as
a defendant in these cases and claims.
Edwards Lifesciences is also subject to various environmental laws and
regulations both within and outside of the United States. The operations of
Edwards Lifesciences, like those of other medical device companies, involve the
use of substances regulated under environmental laws, primarily in manufacturing
and sterilization processes. While it is difficult to quantify the potential
impact of compliance with environmental protection laws, management believes
that such compliance will not have a material impact on Edwards Lifesciences'
financial position, results of operations or liquidity.
As previously announced, on June 29, 2000 Edwards Lifesciences filed a
lawsuit for patent infringement against Medtronic, Inc. alleging infringement of
two of Edwards Lifesciences' United States patents, and against St. Jude
Medical, Inc. alleging infringement of three patents. The Medtronic lawsuit was
filed in the United States District Court for the District of Delaware and the
St. Jude lawsuit in the United States District Court for the Central District of
California. Both lawsuits seek monetary damages and injunctive relief. Medtronic
has answered, and asserted various affirmative defenses and counterclaims. No
responsive pleadings from St. Jude have been served upon Edwards Lifesciences.
Edwards Lifesciences is, or may be, a party to pending or threatened
lawsuits, related primarily to products and services currently or formerly
manufactured or performed, as applicable, by Edwards
12
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
10. SEGMENT INFORMATION
The Company manages its business on the basis of one reportable segment.
Edwards Lifesciences' products and services share similar distribution channels
and customers and are sold principally to hospitals and physicians. Management
evaluates its various global product portfolios on a revenue basis, which is
presented below, and profitability is generally evaluated on an enterprise-wide
basis due to shared infrastructures. Edwards Lifesciences' principal markets are
the United States, Europe and Japan.
13
<PAGE>
EDWARDS LIFESCIENCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2000
(UNAUDITED)
10. SEGMENT INFORMATION (CONTINUED)
Geographic area data includes net sales based on product shipment
destination and long-lived asset data is presented based upon physical location.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
NET SALES BY GEOGRAPHIC AREA
United States..................................... $124 $132 $249 $257
Japan (see Note 1)................................ 17 39 63 82
Other countries................................... 64 62 119 115
---- ---- ---- ----
Totals............................................ $205 $233 $431 $454
==== ==== ==== ====
NET SALES BY MAJOR PRODUCT AND SERVICE AREA
Cardiac Surgery................................... $ 81 $ 80 $160 $156
Critical Care..................................... 53 59 114 119
Vascular.......................................... 14 16 29 31
Perfusion Products and Services................... 55 61 115 121
Other............................................. 2 17 13 27
---- ---- ---- ----
Totals............................................ $205 $233 $431 $454
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(IN MILLIONS)
<S> <C> <C>
LONG-LIVED ASSETS BY GEOGRAPHIC AREA
United States........................................... $798 $1,022
Other countries......................................... 24 39
---- ------
Totals.................................................. $822 $1,061
==== ======
</TABLE>
Sales to Allegiance Corporation, a subsidiary of Cardinal Health, Inc.,
represented approximately 12% of the Company's total net sales for the three and
six months ended June 30, 2000, and approximately 9% of the Company's total net
sales for the three and six months ended June 30, 1999.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents the factors that had a
material effect on the results of operations of Edwards Lifesciences during the
three and six months ended June 30, 2000 and 1999. Also discussed is Edwards
Lifesciences' financial position as of June 30, 2000. You should read this
discussion in conjunction with the historical and pro forma consolidated
condensed financial statements and related notes thereto included elsewhere in
this Form 10-Q.
OVERVIEW
Edwards Lifesciences provides a comprehensive line of products and services
to treat late-stage cardiovascular disease. Edwards Lifesciences' sales are
categorized in four main product areas: cardiac surgery, critical care,
vascular, and perfusion products and services. In addition, Edwards Lifesciences
also offers a diverse grouping of product lines comprised mostly of select
distributed products that are sold in international markets, and miscellaneous
pharmaceutical products. Edwards Lifesciences is headquartered in Irvine,
California, and supplies its products and services to customers in more than 80
countries, both through direct sales and distributor relationships. Edwards
Lifesciences' products are manufactured in locations throughout the world,
including Brazil, the Dominican Republic, The Netherlands, Puerto Rico,
Switzerland and the United States.
Edwards Lifesciences' CARDIAC SURGERY portfolio is comprised of products
relating to heart-valve therapy, mechanical cardiac assist (see "Disposition of
Assets and other Non-recurring Charges, net"), and cannulae and cardioplegia
products used during open-heart surgery. Edwards Lifesciences is the world's
leader in, and has been a pioneer in the development and commercialization of,
tissue valves and repair products, used to replace or repair a patient's
diseased or defective heart valve. In the CRITICAL 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 product lines include a
line of balloon catheter-based products, surgical clips and inserts, angioscopy
equipment, and artificial implantable grafts, as well as an endovascular system
under development to be used to treat less invasively life-threatening abdominal
aortic aneurysms. In the PERFUSION PRODUCTS AND SERVICES category, Edwards
Lifesciences designs, develops, manufactures and markets a diverse line of
disposable products used during cardiopulmonary bypass procedures, including
oxygenators, blood containers, filters and related devices, as well as bypass
equipment (see "Disposition of Assets and other Non-recurring Charges, net" for
a description of the pending sale of the majority of perfusion products to
Jostra AG). Edwards Lifesciences also is the world's leading provider of
perfusion services, employing approximately 400 certified perfusionists who
perform an aggregate of approximately 50,000 perfusion cases for open heart
surgery per year.
Cardiovascular disease is the leading cause of death in the world. Edwards
Lifesciences believes that there is a continual and growing need for the
treatment of cardiovascular disease primarily due to the aging population, the
progressive nature of the disease, and the continued economic development of
countries around the world that allows for additional funds to be allocated for
the treatment of chronic health conditions. Edwards Lifesciences' business
strategy is to develop, manufacture and market products and services that result
in improved therapeutic outcomes for patients with late-stage cardiovascular
disease. Edwards Lifesciences plans to aggressively expand its leading product
offerings and develop new products and therapies that improve the quality of
patient care and reduce overall treatment costs.
The health-care marketplace continues to be competitive. There has been
consolidation in Edwards Lifesciences' customer base and among its competitors,
which has resulted in pricing and market share pressures. Edwards Lifesciences
has experienced increases in its labor and material costs, which are primarily
influenced by general inflationary trends. Competitive market conditions have
minimized
15
<PAGE>
inflation's impact on the selling prices of Edwards Lifesciences' products and
services. Management expects these trends to continue.
RESULTS OF OPERATIONS
NET SALES TRENDS
The following is a summary of domestic and international net sales:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
United States............................ $ 124 132 $ 249 $257
% CHANGE IN 2000....................... (6.1%) (3.1%)
International............................ 81 101 182 197
% CHANGE IN 2000....................... (19.8%) (7.6%)
------ ---- ----- ----
Total net sales.......................... $ 205 $233 $ 431 $454
====== ==== ===== ====
% CHANGE IN 2000....................... (12.0%) (5.1%)
</TABLE>
The decrease in international net sales resulted primarily from a change in
accounting for sales in Japan. Subsequent to the Distribution, Edwards
Lifesciences only recognizes as sales its shipments into a joint venture with
Baxter (see "Joint Venture in Japan" below). Excluding this change in accounting
in Japan, international net sales for the three and six months ended June 30,
2000 would have increased 1.3% and 0.9%, respectively, and total net sales for
the three and six months ended June 30, 2000 would have decreased 3.0% and 1.4%,
respectively. The net sales decrease in the United States was due primarily to
(a) declines in the vascular and perfusion product lines and (b) a one-time
$5 million sale of a patent in the second quarter last year.
Net sales within product lines were impacted by fluctuations in foreign
currency exchange rates, primarily the movement of the U.S. dollar against the
Euro and the Japanese yen. Excluding the change in accounting in Japan and the
impact of changes in foreign currency exchange rates, sales for the three and
six months ended June 30, 2000 would have decreased 0.4% and increased 0.1%,
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 operating
costs and expenses and Edwards Lifesciences' hedging activities. For more
information, see "Currency and Interest Rate Risk" below.
16
<PAGE>
The following is a summary of net sales by product line:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cardiac surgery......................... $ 81 $ 80 $ 160 $156
% CHANGE IN 2000...................... 1.3% 2.6%
Critical care........................... 53 59 114 119
% CHANGE IN 2000...................... (10.2%) (4.2%)
Vascular................................ 14 16 29 31
% CHANGE IN 2000...................... (12.5%) (6.5%)
Perfusion products and services......... 55 61 115 121
% CHANGE IN 2000...................... (9.8%) (5.0%)
Other................................... 2 17 13 27
% CHANGE IN 2000...................... (88.2%) (51.9%)
------ ---- ------ ----
Total net sales......................... $ 205 $233 $ 431 $454
====== ==== ====== ====
% CHANGE IN 2000...................... (12.0%) (5.1%)
</TABLE>
CARDIAC SURGERY
Excluding the change in accounting for sales in Japan, net sales of cardiac
surgery products would have increased 4.3% and 4.0% for the three and six months
ended June 30, 2000, respectively. Additionally, excluding the impact of foreign
currency exchange rate fluctuations, net sales would have increased 6.7% and
6.5% for the three and six months ended June 30, 2000, respectively.
The growth in this product line resulted primarily from continued,
double-digit sales growth in pericardial tissue valves, particularly in Europe
and Japan, offset primarily by declines in porcine tissue valves (as a result of
competition) and other non-valve products. Management expects that its heart-
valve therapy products will continue to serve as a key driver of Edwards
Lifesciences' sales growth as a result of the shift from mechanical to tissue
valve use, as well as the Company's expectation of FDA approval for the
Carpentier-Edwards PERIMOUNT mitral pericardial tissue valve.
CRITICAL CARE
Excluding the change in accounting for sales in Japan, net sales of critical
care products would have increased 3.2% and 1.4% for the three and six months
ended June 30, 2000, respectively. Additionally, excluding the impact of foreign
currency exchange rate fluctuations, net sales would have increased 5.4% and
3.8% for the three and six months ended June 30, 2000, respectively.
The growth in this product line was due primarily to strong sales in the
access and hemofiltration product categories, as well as solid sales in base
hemodynamic monitoring products. During the quarter ended June 30, 2000, Edwards
Lifesciences received FDA clearance to commence U.S. sales of its Vantex central
venous catheter. Critical Care products have been, and are expected to continue
to be, significant contributors to Edwards Lifesciences' total sales,
particularly as the Vantex catheter becomes available and hemofiltration
products gain acceptance in new markets. Management believes that future sales
growth of Critical Care products could be negatively impacted by global pricing
pressures, including anticipated decreased governmental reimbursement in Japan.
VASCULAR
Excluding the change in accounting for sales in Japan, net sales of vascular
products would have decreased 8.6% and 6.1% for the three and six months ended
June 30, 2000, respectively. Additionally,
17
<PAGE>
excluding the impact of foreign currency exchange rate fluctuations, net sales
would have decreased 6.0% and 3.2% for the three and six months ended June 30,
2000, respectively.
The decline in this product line resulted primarily from lower unit sales in
several surgery-based product categories. During the quarter ended June 30,
2000, Edwards Lifesciences received FDA approval to commence U.S. sales of its
Thrombex Percutaneous Mechanical Thrombectomy System, a device used for removing
blood clots from the access grafts of hemodialysis patients. Management expects
that this new product will have a positive impact on future vascular sales.
Edwards Lifesciences has made a significant commitment to the development of
endovascular grafts, which are used to treat potentially life-threatening
abdominal aortic aneurysms (AAA) cases, through a minimally invasive approach.
In 1999, Edwards Lifesciences commercially launched its Lifepath AAA
Endovascular Graft System in certain regions. In April 2000, the Company
voluntarily suspended its clinical trials in the United States and sales of its
Lifepath AAA Endovascular Graft System following the discovery of cases in which
the products' wireform had fractured. The Company has undertaken a review of all
Lifepath AAA cases and will determine what further action is required to resume
clinical trials and sales of this product.
PERFUSION PRODUCTS AND SERVICES
Excluding the change in accounting for sales in Japan, net sales of
perfusion products and services would have decreased 4.8% and 3.2% for the three
and six months ended June 30, 2000, respectively. Additionally, excluding the
impact of foreign currency exchange rate fluctuations, net sales would have
decreased 3.3% and 2.3% for the three and six months ended June 30, 2000,
respectively.
Management believes that the decrease in sales of perfusion products and
services was due primarily to an increase in the number of "beating heart"
coronary artery bypass surgeries, particularly in the U.S. and Western Europe,
and this trend has reduced the need for perfusion services and the use of many
traditional perfusion products manufactured and sold by Edwards Lifesciences. In
addition, there continues to be a slowing in the number of coronary artery
bypass graft procedures on a worldwide basis, as well as continuing pricing
pressures. Management believes that the slowdown in the number of traditional
coronary bypass graft procedure surgeries has been caused by increased
acceptance of newer, less-invasive procedures such as coronary stenting, which
often eliminates or defers the need for cardiac surgery.
Effective July 15, 2000, Edwards Lifesciences entered into a definitive
agreement, subject to customary closing conditions including regulatory
approvals, to sell a majority of its perfusion products business to Jostra AG,
which will allow Edwards Lifesciences to exit the perfusion products business in
the United States and Western Europe, while retaining certain portions of the
operation that will continue to support its existing selling organization.
Management expects this transaction to be completed by September 30, 2000 and to
have a positive impact on earnings thereafter.
OTHER
Other sales include a diverse grouping of product lines comprised primarily
of select distributed products that are sold in international regions (primarily
Japan), and miscellaneous pharmaceutical products. This category of sales, which
generally represents less than ten percent of Edwards Lifesciences' total sales,
decreased for the three and six months ended June 30, 2000 primarily due to the
change in accounting for sales in Japan and a one-time $5 million sale of a
patent in the second quarter last year.
JOINT VENTURE IN JAPAN
Subsequent to the Distribution, the cardiovascular business in Japan is
being operated pursuant to a joint venture under which a Japanese subsidiary of
Baxter retains ownership of the Japanese business
18
<PAGE>
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 28 months following the Distribution Date and
no later than 60 months following the Distribution Date. The Japanese operations
are included in the accompanying Consolidated Condensed Statements of Income for
periods prior to the Distribution, consistent with the historical treatment of
the Company's operations while a part of Baxter. Subsequent to the Distribution,
Edwards Lifesciences recognizes as sales its shipments into the joint venture
and utilizes the equity method of accounting to record its interest in the
operations of the joint venture. On a pro forma basis, sales and other income
statement amounts have been adjusted to reflect the Japanese operations on this
basis, resulting in pro forma sales of $402 million for the six months ended
June 30, 2000 (see further pro forma information in Note 3 of Notes to
Consolidated Condensed Financial Statements).
GROSS MARGIN
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Gross margin percentage................... 44.0% 50.6% 45.9% 49.8%
CHANGE IN 2000.......................... (6.6 pts.) (3.9 pts.)
</TABLE>
Excluding the impact of foreign currency exchange rate fluctuations, the
gross margin percentage would have decreased 5.6 points and 2.9 points for the
three and six months ended June 30, 2000, respectively. The decrease in the
gross margin percentage for the three months ended June 30, 2000 was due
primarily to a change commencing April 1, 2000 in the Company's accounting for
Japan's operations (see "Joint Venture in Japan" above), one-time unusual items
in the prior year, costs associated with the relocation of certain manufacturing
operations during the year 2000 and pricing pressures within the industry,
partially offset by increased sales of higher-margin cardiac surgery products.
The decrease in the gross margin percentage for the six months ended
June 30, 2000 resulted primarily from the same factors mentioned immediately
above, except the impact is reduced since the change in Japan's operations and
the prior year one-time items affect only the three months ended June 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE (S, G & A) EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
S, G & A expenses as a percentage of
sales.................................... 28.8% 25.8% 27.6% 26.0%
CHANGE IN 2000........................... 3.0 pts. 1.6 pts.
</TABLE>
Excluding the impact of foreign currency exchange rate fluctuations,
S, G & A expenses as a percentage of sales would have increased 3.7 points and
2.0 points for the three and six months ended June 30, 2000, respectively. These
increases are due primarily to (a) the establishment of $9.5 million of reserves
during the second quarter 2000 for litigation, property taxes and uncollectable
receivables and (b) additional personnel costs associated with the Company's
operation as an independent company commencing April 1, 2000, partially offset
by reduced spending in its perfusion products and cardiac assist product lines
(see "Disposition of Assets and Other Non-Recurring Charges, net").
19
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Research and development expenses............ $ 14 $ 13 $ 28 $ 25
% CHANGE IN 2000........................... 7.7% 12.0%
Research and development expenses as a
percentage of sales........................ 6.8% 5.6% 6.5% 5.5%
</TABLE>
Edwards Lifesciences is engaged in ongoing research and development to
introduce new products, to maximize the effectiveness, ease of use, safety and
reliability of its existing products and to expand the applications of its
products as appropriate. The increases in research and development expenses for
the three and six months ended June 30, 2000 reflect Edwards Lifesciences'
strong commitment to bolster its research and development activities in the
future with the goal of developing and commercializing new innovative products
and therapies that enhance performance and patient quality of life and address
cost-containment issues.
DISPOSITION OF ASSETS AND OTHER NON-RECURRING CHARGES, NET
During the second quarter of 2000, the Company recorded a non-recurring net
charge comprised of three items as follows:
Loss on Sale and Abandonment of Assets ($291 million)
Effective July 15, 2000, the Company entered into a definitive agreement,
subject to customary closing conditions including regulatory approvals, to sell
the majority of its United States and Western European assets and rights related
to its perfusion products to Jostra AG for cash proceeds of approximately
$30 million. Sales of the Company's impacted perfusion products were
approximately $17 million during the second quarter 2000. In accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges,"
the Company recorded a pre-tax impairment charge of $291 million in the second
quarter of 2000 to reduce the carrying value of these assets to fair value based
upon the estimated net proceeds from the sale. Assets subject to this impairment
charge consist primarily of goodwill ($245 million) and special-use
manufacturing and support assets. The goodwill impairment charge was calculated
based upon a pro rata allocation of the goodwill using the relative fair values
of the affected long-lived assets and identifiable intangibles acquired at the
inception date of the goodwill.
In conjunction with the planned sale of the perfusion products, the Company
anticipates incurring an additional $10 million pre-tax charge during the third
quarter of 2000 related to personnel costs, at which time the Company expects it
will have met the criteria of EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." The
personnel costs will consist primarily of severance, medical plan continuation
and outplacement services for employees expected to be terminated. As of
July 31, 2000, no such payments have been made to these employees.
Gain on Sale of Assets ($35 million)
On June 30, 2000, Edwards Lifesciences transferred the rights, intellectual
property and U.S. assets of its mechanical cardiac assist product line to World
Heart Corporation (World Heart). In return, the Company received (a) preferred
stock of a subsidiary of World Heart which, at Edwards' option, can be exchanged
for approximately 5 million shares of World Heart's common stock commencing
July 2002 and (b) exclusive worldwide distribution rights to the Novacor left
ventricular assist system and any
20
<PAGE>
ventricular assist technologies developed by World Heart. Edwards Lifesciences
also will provide components and technical support to World Heart for
ventricular assist products at agreed upon prices. The Company recorded a
pre-tax gain of $35 million in connection with this transaction. Sales of the
Company's impacted mechanical cardiac assist products were approximately
$1 million during the second quarter 2000.
As part of the transaction with World Heart, the Company invested
$20 million in World Heart convertible preferred stock. The preferred stock
bears a cumulative dividend, is callable at any time by World Heart and is
convertible by the Company into World Heart common stock commencing July 2006.
Edwards Lifesciences reports its investment in World Heart as available-for-sale
securities.
Other Non-recurring Charges ($45 million)
As a result of Edwards Lifesciences' continuing efforts to focus the
Company's product portfolio and affect the Company's business strategy following
the spin-off from Baxter, the Company decided to discontinue certain products in
its portfolio that did not meet the objectives of its business strategy. The
long-lived assets or the investments in these products were evaluated to
determine whether any impairment in their recoverability existed at the
determination date. As a result, Edwards Lifesciences assessed whether the
estimated cash flows of the products over the estimated lives of the related
assets were sufficient to recover their costs. Where such cash flows were
insufficient, the Company utilized a discounted cash flow model to estimate the
fair value of assets or investments and recorded an impairment charge to adjust
the carrying values to estimated fair values. As a result of this evaluation,
Edwards Lifesciences recorded a non-cash charge of $45 million primarily related
to the impairment of goodwill unrelated to perfusion products ($37 million),
impairment of other intangibles ($5 million) and the write-down of
non-productive assets ($3 million).
NON-RECURRING SPIN-OFF EXPENSES
In connection with the spin-off of Edwards Lifesciences from Baxter, certain
one-time costs totaling $17 million and $18 million were incurred by Edwards
Lifesciences during the three and six months ended June 30, 2000, respectively.
These costs primarily related to (a) the coordination and implementation of the
transaction and (b) the recruitment of personnel to perform new corporate
administrative functions.
OTHER OPERATING INCOME
Other operating income represents the Company's 90% profit interest in the
cardiovascular business in Japan effective April 1, 2000. For more information,
see "Joint Venture in Japan" above.
OTHER EXPENSE, NET
The decrease in Other Expense, net for the three months ended June 30, 2000
results primarily from fluctuations in currency exchange rates.
INCOME TAXES
The effective income tax rate for the three and six months ended June 30,
2000 was impacted by the non-deductibility of the majority of the $301 million
non-recurring second quarter 2000 charge (see "Disposition of Assets and Other
Non-recurring Charges, net" above). The Company expects its effective tax rate
will be 27% for the remainder of the current year.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operating activities for the six months ended
June 30, 2000 decreased $16 million due primarily to reduced accounts receivable
collections, increased payments to vendors and lower earnings, partially offset
by reduced inventory. Included in cash flows provided by operating activities
for 1999 was approximately $25 million related to insurance proceeds associated
with hurricane damage at one of the Company's manufacturing facilities, and
approximately $7 million in additional proceeds relating to the sale of certain
trade receivables in Japan to an independent financial institution. An
insignificant loss was recognized on the sale of receivables.
Uses of cash for investing activities during the six months ended June 30,
2000 included the purchase of two convertible debentures in Sangamo
Biosciences, Inc. ($13 million) which were subsequently converted into common
stock during the second quarter 2000, and investments in A-Med Systems, Inc.
($7 million) and World Heart Corporation ($20 million). Capital expenditures
have remained relatively constant.
As of the Distribution Date, Edwards Lifescience had revolving credit
facilities in place for $650 million. As of June 30, 2000, Edwards Lifesciences
had borrowed $531 million against the credit facilities. The proceeds of the
credit facilities were used to repay intercompany debt to Baxter, satisfy
initial working capital requirements, and execute asset transfers from Baxter.
The Company incurred approximately $3 million of fees during the six months
ended June 30, 2000 associated with obtaining the credit facilities.
In addition to the revolving credit facilities, Management believes that it
has sufficient cash flow from operations and 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.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union created and
introduced the Euro, the official single Eurocurrency for the eleven
participating member countries. A transition period is currently in effect which
began January 1, 1999 and will continue through December 31, 2001, during which
time transactions will be executed in both the Euro and the member countries'
individual currencies. Effective January 1, 2002, Euro bank notes will be
introduced and as of July 1, 2002, the Euro will be the sole legal tender of the
European Economic and Monetary Union countries.
Edwards Lifesciences has appointed a team of individuals to address all
issues associated with the conversion to the Euro and expects to be prepared for
such conversion as of the designated dates. At the time Edwards Lifesciences
switches to using the Euro as the sole functional currency for the affected
regions, certain modifications that are primarily related to information systems
will be required. The costs associated with preparing for the conversion and
continued use of the Euro will be expensed as incurred and are not expected to
be material to Edwards Lifesciences' financial position, results of operations
or cash flows. The ultimate impact on Edwards Lifesciences' business, including
the impact on the competitive environment in which Edwards Lifesciences
operates, is currently unknown.
NEW ACCOUNTING AND DISCLOSURE STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains and losses resulting from changes in the values of
those derivatives would be accounted for as either components of earnings or
accumulated other
22
<PAGE>
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--an Amendment of FASB Statement No. 133," which
amends the accounting and reporting standards of SFAS No. 133. The Company has
not determined the impact that adoption of these Standards will have on its
consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which was amended by SAB No. 101A in March 2000 and SAB No. 101B in
June 2000. SAB 101A and 101B delayed the implementation date of SAB No. 101.
These SABs, which provide guidance on the recognition, presentation and
disclosure of revenue in financial statements, are effective in the fourth
quarter of 2000. Management has evaluated these Bulletins and believes that
adoption will not have a material impact on Edwards Lifesciences' consolidated
financial statements.
CURRENCY AND INTEREST RATE 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.
For all periods prior to April 1, 2000, Edwards Lifesciences was considered
in Baxter's overall risk management strategy. As part of this strategy, Baxter
managed its foreign currency exchange rate risk to an acceptable level based on
management's judgment of the appropriate trade-off between risk, opportunity and
costs. With respect to Edwards Lifesciences' currency risks, Baxter primarily
utilized options to hedge these exposures.
As a stand-alone company, Edwards Lifesciences manages its exposure to
foreign currency and interest rate fluctuations to minimize earnings and cash
flow volatility associated with foreign exchange rate changes. In order to
reduce the risk of foreign currency exchange rate fluctuations, Edwards
Lifesciences has established a policy of hedging a substantial portion of its
expected foreign currency denominated cash flow from operations. The instruments
that Edwards Lifesciences uses for hedging are readily marketable traded forward
contracts and options with financial institutions. Edwards Lifesciences expects
that the changes in fair value of such contracts will have a high correlation to
the price changes in the related hedged cash flow. Edwards Lifesciences does not
expect that the risk of transaction gains or losses from changes in the fair
value of its foreign exchange position will be material because most
transactions will occur in either the functional currency or in a currency that
has a high correlation to the functional currency. The principal currencies that
Edwards Lifesciences hedges are the Japanese Yen and the Euro, which present the
primary risk of loss. Any gains and losses on these hedge contracts are expected
to offset changes in the value of the related exposures. Edwards Lifesciences
will enter into foreign currency transactions only to the extent that foreign
currency exposure exists; it will not enter into foreign currency transactions
for speculative purposes.
Edwards Lifesciences utilizes interest rate swap agreements in managing its
exposure to interest rate fluctuations. Interest rate swap agreements are
executed as an integral part of specific debt transactions. The differential
paid or received on interest rate swap agreements is recorded on an accrual
basis 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 July 31, 2000,
23
<PAGE>
Edwards Lifesciences had in place four interest rate swap agreements with a
total notional amount of $263 million to swap floating rate U.S. dollar and Yen
denominated debt obtained under the Company's revolving credit facilities for
fixed rates. The original maturities of the interest rate swap agreements are
three months.
FORWARD-LOOKING STATEMENTS
This Form 10-Q and other materials filed or to be filed by Edwards
Lifesciences with the SEC (as well as information included in oral statements or
other written statements made, or to be made, by Edwards Lifesciences) contain,
or will contain, disclosures that are "forward-looking statements."
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can generally be identified by the use of words
such as "may," "believe," "will," "expect," "project," "estimate," "anticipate,"
"plan," or "continue." These forward-looking statements address, among other
things, strategic objectives and the effects of the Distribution. These
forward-looking statements are based on the current plans and expectations of
management and are subject to a number of uncertainties and risks that could
significantly affect current plans and expectations and the future financial
condition and results of Edwards Lifesciences. These factors include, but are
not limited to:
- the highly competitive nature of the health care industry;
- the efforts of insurers, health care providers and others to contain
health care costs;
- possible changes in United States or foreign programs that may further
limit reimbursements to health care providers and insurers;
- changes in federal, state or local regulation affecting the health care
industry;
- the possible enactment of federal or state health care reform;
- the departure of key executive officers from Edwards Lifesciences;
- claims and legal actions relating to product and other liability;
- fluctuations in the market value of Edwards Lifesciences common stock;
- changes in accounting practices;
- changes in general economic conditions and foreign currency fluctuations;
- product demand and risks associated with industry acceptance;
- the receipt of timely regulatory approvals;
- new product development and commercialization; and
- other risk factors described above.
As a consequence, current plans, anticipated actions and future financial
conditions and results may materially differ from those expressed in any
forward-looking statements made by or on behalf of Edwards Lifesciences.
Shareholders are cautioned not to unduly rely on such forward-looking statements
when evaluating the information presented in this Form 10-Q.
TRADEMARKS
Edwards Lifesciences, Edwards, Lifepath AAA, Thrombex PMT and Vantex are
trademarks of Edwards Lifesciences Corporation. Carpentier-Edwards and PERIMOUNT
are trademarks of Edwards Lifesciences Corporation and are registered in the
U.S. Patent and Trademark office.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously announced, on June 29, 2000 Edwards Lifesciences filed a
lawsuit for patent infringement against Medtronic, Inc. alleging infringement of
two of Edwards Lifesciences' United States patents, and against St. Jude
Medical, Inc. alleging infringement of three patents. The Medtronic lawsuit was
filed in the United States District Court for the District of Delaware and the
St. Jude lawsuit in the United States District Court for the Central District of
California. Both lawsuits seek monetary damages and injunctive relief. Medtronic
has answered, and asserted various affirmative defenses and counterclaims. No
responsive pleadings from St. Jude have been served upon Edwards Lifesciences.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index hereto.
(b) Reports on Form 8-K
During the quarter for which this Report on Form 10-Q is filed, the
registrant filed no reports on Form 8-K.
25
<PAGE>
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.
<TABLE>
<S> <C> <C>
EDWARDS LIFESCIENCES CORPORATION
(Registrant)
Date: August 11, 2000 By: /s/ BRUCE J. BENTCOVER
------------------------------------------
Bruce J. Bentcover
CORPORATE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
</TABLE>
26
<PAGE>
EXHIBITS FILED WITH SECURITIES AND EXCHANGE COMMISSION
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of Edwards
Lifesciences Corporation
3.2* Amended and Restated Bylaws of Edwards Lifesciences
Corporation
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)
4.1* Specimen form of certificate representing Edwards
Lifesciences Corporation common stock
10.1* Agreement and Plan of Reorganization, dated March 31, 2000,
between Edwards Lifesciences Corporation and Baxter
International Inc.
10.2* Tax Sharing Agreement, dated March 31, 2000, between Edwards
Lifesciences Corporation and Baxter International Inc.
10.3* Edwards Lifesciences Corporation Long-Term Stock Incentive
Compensation Program
10.4* Edwards Lifesciences Corporation Change in Control Severance
Agreement
10.5* Employment Agreement for Michael A. Mussallem
10.6* Edwards Lifesciences Corporation Employee Stock Purchase
Plan for United States Employees
10.7* Edwards Lifesciences Corporation Deferred Compensation Plan
10.8* Edwards Lifesciences Corporation Chief Executive Officer
Change in Control Severance Agreement
10.9* Rights Agreement between Edwards Lifesciences Corporation
and EquiServe Trust Company, N.A, as Rights Agent, dated as
of March 31, 2000
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.
10.11* Form of Employment Agreement
10.12* Form of Consulting Agreement
10.13* Form of Outgoing Confidentiality Agreement
10.14* Edwards Lifesciences Corporation Nonemployee Directors and
Consultants Stock Incentive Program
10.15* Edwards Lifesciences Corporation Employee Stock Purchase
Plan for International Employees
10.16* Tokumei Kumiai Agreement by and between Baxter Limited and
Edwards Lifesciences Finance Limited, dated as of April 1,
2000
10.17* Option Agreement by and between Baxter Limited and Edwards
Lifesciences Limited, dated as of April 1, 2000
10.18* Japan Distribution Agreement by and between Baxter Limited
and Edwards Lifesciences LLC, dated as of April 1, 2000
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
<C> <S>
10.19** Five Year Credit Agreement dated as of March 30, 2000, among
Edwards Lifesciences Corporation, a Delaware corporation;
the Swiss Borrowers; the Japanese Borrowers; the Lenders
from time to time party hereto, The Chase Manhattan Bank, as
Administrative Agent; Chase Manhattan International Limited,
as London Agent; The Fuji Bank, Limited, as the Tokyo Agent;
Bank One, N.A., as Syndication Agent; and Credit Suisse
First Boston, as Documentation Agent.
10.20** 364-Day Credit Agreement dated as of March 30, 2000, among
Edwards Lifesciences Corporation, a Delaware corporation
(the "Company"); 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.
10.21** Edwards Lifesciences Corporation Severance Pay Plan
10.22 Contribution Agreement By and Among Edwards Lifesciences
LLC, Edwards Novacor LLC, World Heart Corporation and
Valentine Acquisition Corp. Dated as of May 24, 2000
10.23 AMENDMENT NO. 1, dated as of June 30, 2000 (this
"AMENDMENT"), to the FIVE YEAR CREDIT AGREEMENT dated as of
March 30, 2000 (the "FIVE YEAR CREDIT AGREEMENT"), among
EDWARDS LIFESCIENCES CORPORATION, a Delaware corporation
(the "COMPANY"); the SWISS BORROWERS (as defined in the
Credit Agreement); the JAPANESE BORROWERS (as defined in the
Credit Agreement); 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 (the "364 DAY CREDIT AGREEMENT"
and together with the Five Year Credit Agreement the "CREDIT
AGREEMENTS") among the Company, 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.
21.1* Subsidiaries of Edwards Lifesciences Corporation
27.1* Financial Data Schedule -- December 31, 1999
27.2* Financial Data Schedule -- December 31, 1998
27.3* Financial Data Schedule -- December 31, 1997
27.4** Financial Data Schedule -- March 31, 2000
27.5 Financial Data Schedule -- June 30, 2000
</TABLE>
------------------------
* Incorporated by reference from Registrant's Registration Statement on Form
10, as amended, under the Securities Exchange Act of 1934.
** Incorporated by reference from Registrant's Registration Form 10-Q for the
quarterly period ended March 31, 2000, under the Securities Exchange Act of
1934.
28
