-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J2k5Eht4bpVS+qk711B1uAmL+ewgvZUatV9B/y9F9tRxYLZsb6qUWLnizdrlZ2iz VvdPbQmQOlRCUDHlhup9XQ== 0000742112-00-000009.txt : 20000331 0000742112-00-000009.hdr.sgml : 20000331 ACCESSION NUMBER: 0000742112-00-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVACARE CORP CENTRAL INDEX KEY: 0000742112 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 952680965 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15103 FILM NUMBER: 585748 BUSINESS ADDRESS: STREET 1: ONE INVACARE WAY STREET 2: P O BOX 4028 CITY: ELYRIA STATE: OH ZIP: 44036 BUSINESS PHONE: 4403296000 10-K 1 INVACARE FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ------------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ________________ Commission file number 0-12938 INVACARE CORPORATION ------------------------------------------------------- (Exact name of Registrant as specified in its charter) Ohio 95-2680965 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) One Invacare Way, P. O. Box 4028, Elyria, Ohio 44036 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (440) 329-6000 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on which Registered - ------------------- ------------------------------------ Common Shares, without par value New York Stock Exchange Rights to Purchase Commons Shares New York Stock Exchange of Invacare, without par value Securities registered pursuant to Section 12(g) of the Act: None ---- 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 the filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 1 As of February 25, 2000, 28,567,037 Common Shares and 1,432,599 Class B Common Shares were outstanding. At that date, the aggregate market value of the 25,999,533 Common Shares of the Registrant held by non-affiliates was $620,738,850 and the aggregate market value of the 89,757 Class B Common Shares of the Registrant held by non-affiliates was $2,142,948. While the Class B Common Shares are not listed for public trading on any exchange or market system, shares of that class are convertible into Common Shares at any time on a share-for-share basis. The market values indicated were calculated based upon the last sale price of the Common Shares as reported by New York Stock Exchange on February 25, 2000, which was $23.88. For purposes of this information, the 2,567,504 Common Shares and 1,342,842 Class B Common Shares which were held by Executive Officers and Directors were deemed to be the Common Shares and Class B Common Shares held by affiliates. Documents Incorporated By Reference Part of Form 10-K Document Incorporated By Reference Part III (Items 10, 11, Portions of the Registrant's 12 and 13) definitive Proxy Statement to be used in connection with its 2000 Annual Meeting of Shareholders. Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of December 31, 1999. 2 PART I Item 1. Business. (a) General Development of Business. Invacare Corporation is the world's leading manufacturer and distributor of non-acute health care products based upon its distribution channels, the breadth of its product line and sales. The company designs, manufactures and distributes an extensive line of health care products for the non-acute care environment including the home health care, retail and extended care markets. Invacare continuously revises and expands its product lines to meet changing market demands and currently offers over two dozen product lines. The company's products are sold principally to over 10,000 home health care and medical equipment provider locations in the U.S., Australia, Canada, Europe and New Zealand, with the remainder of its sales being primarily to government agencies and distributors. Invacare's products are sold through its world-wide distribution network by its sales force, telemarketing employees and various organizations of independent manufacturer's representatives. The company also distributes medical equipment and related supplies manufactured by others. Invacare is committed to design, manufacture and distribute the best value in mobility products and medical equipment for people with disabilities and those requiring care in the non-acute environment. Invacare will achieve this vision by: * designing and developing innovative and technologically superior products; * ensuring continued focus on our primary market - the non-acute health care market; * marketing our broad range of products under the "Total One Stop Shoppingsm" strategy; * providing the industry's most professional and cost-effective sales, customer service and distribution organization; * supplying superior and innovative provider support and aggressive product line extensions; * building a strong referral base among health care professionals; * building brand preference with consumers; * handling the retail channel through a dedicated sales and marketing structure; * continuous advancement/recruitment of top management candidates; * empowering all employees; * providing a performance-based reward environment; and * continually striving for total quality throughout the organization. When the company was acquired in December 1979 by a group of investors, including certain members of management and the Board of Directors, it had $19.5 million in net sales and a limited product line of standard wheelchairs and patient aids. In 1999, Invacare reached $878 million in net sales, representing a 21.0% compound average sales growth rate since 1979, and currently is the leading company in the industry which manufactures, distributes and markets products in each of the following major non-acute medical equipment categories: power and manual wheelchairs, patient aids, home care beds, home respiratory products, low air loss therapy products, seating and positioning products and bathing equipment. The company's executive offices are located at One Invacare Way, Elyria, Ohio and its telephone number is (440) 329-6000. In this report, "Invacare" and the "company" refer to Invacare Corporation and, unless the context otherwise indicates, its consolidated subsidiaries. (b) Financial Information About Industry Segments. The company operates predominantly in the home medical equipment industry segment. For information relating to net sales, operating income, identifiable assets and other information for this industry segment, see the Consolidated Financial Statements of the company. (c) Narrative Description of Business. 3 THE HOME MEDICAL EQUIPMENT INDUSTRY North America and Australasia The home medical equipment market includes home health care products, physical rehabilitation products and other non-disposable products used for the recovery and long-term care of patients. The company believes that sales of domestic home medical equipment products will continue to grow during the next decade as a result of several factors, including: Growth in population over age 65. The nation's overall life expectancy increases with every passing year reaching its current all time high of 76.9 years. The over 65 age group represents the vast majority of home health care patients and continues to grow. A significant percentage of people using home and community-based health care services are 65 years of age and older and it is estimated that this segment of the population will double during the next ten years. Also, it has been widely reported that in the year 2000, one American will turn 50 every nine seconds. Treatment trends. Many medical professionals and patients prefer home health care over institutional care because they believe that it results in greater patient independence, increased patient responsibility and improved responsiveness to treatment as familiar surroundings are believed to be conducive to improved patient outcomes. Health care professionals, public payors and private payors agree that home care is a cost effective, clinically appropriate alternative to facility-based care. Recent surveys show that approximately 70% of adults would rather recover from accident or illness in their home, while approximately 90% of the older population showed preference for home-based long-term care. Technological trends. Technological advances have made medical equipment increasingly adaptable for use in the home as current hospital procedures often allow for earlier patient discharge, thereby lengthening recuperation periods outside of the traditional institutional setting. In addition, continuing medical advances prolong the life of adults and children, thus increasing the demand for home medical care equipment. Healthcare cost containment trends. In 1996, spending on health care in the U.S. surpassed $1 trillion dollars, which is approximately 14.0% of Gross Domestic Product (GDP). In 2007, the nation's health care spending is projected to increase to $2.1 trillion, averaging annual increases of 7%. Over this same period, spending on health care is expected to increase from approximately 14% to 17% as a share of GDP in the years 1996 through 2007. The rising cost of health care has caused many payors of health care expenses to look for ways to contain costs. Home health care has gained wide-spread acceptance among health care providers and public policy makers as a cost effective, clinically appropriate and patient preferred alternative to facility-based care for a variety of acute and long-term illnesses and disabilities. Thus, the company believes that home health care and home medical equipment will play a significant role in reducing health care costs. Society's mainstreaming of people with disabilities. People with disabilities are part of the fabric of society, and this has increased, in large part, due to the Americans with Disabilities Act which became law in 1991. This legislation provides mainstream opportunities to people with disabilities. The Americans with Disabilities Act imposes requirements on certain components of society to make "reasonable accommodations" to integrate people with disabilities into the community and the workplace. Distribution channels. The changing home health care market continues to provide new ways of reaching the end user. The distribution network for products has expanded to include not only specialized home health care providers and extended care facilities but retail drug stores, surgical supply houses, rental, hospital and HMO-based stores, home health agencies, mass merchandisers and direct sales. Europe The company believes that, while many of the market factors influencing demand in the U.S. are also present in Europe - aging of the population, technological trends and society's acceptance of people with disabilities - each of the major national markets within Europe has distinctive characteristics. The European health care industry is heavily socialized and is more influenced by government regulation and fiscal policy. Variations in product specifications, regulatory approvals, distribution requirements and reimbursement policies require the company to tailor its approach to each market. Management believes that as the European markets become more homogeneous and the company continues to refine its distribution channels, the company can more effectively penetrate these markets. 4 GEOGRAPHICAL SEGMENTS AND PRODUCT CATEGORIES North America North American operations, are aligned into five primary product groups, which manufacture and market products in all of the major home medical equipment categories. In Canada, the company principally sells Invacare products manufactured in the U.S. The company also sells standard wheelchairs and seating and positioning products manufactured in Canada and certain patient aids manufactured in Europe. REHAB PRODUCTS Power wheelchairs. Invacare manufactures a complete line of power wheelchairs for individuals who require independent powered mobility. The range includes products that can be significantly customized to meet an individual's specific needs, as well as products that are inherently versatile to meet a broad range of individual requirements. Power wheelchair lines are marketed under the Invacare(R) brand name and include a full range of powered mobility products. The Arrow(TM) front wheel drive chair was introduced in 1999, is more maneuverable in tight spaces and provides better seating and positioning capabilities. Custom manual wheelchairs. Invacare manufactures and markets a range of custom manual wheelchairs for everyday, sports and recreational uses. These lightweight chairs are marketed under the Action and Action Top End(R) product names. The chairs provide mobility for people with moderate to severe disabilities in their everyday activities as well as for various sports such as basketball, racing, skiing and tennis. Scooters. Invacare distributes three- and four-wheeled motorized scooters, including rear wheel drive models for both outdoor and indoor use and markets them under the Invacare brand name. In 1999, a complete line of scooters was introduced under the Lynx(TM) and Panther(TM) product names. Seating and positioning products. Invacare manufactures seat cushions, back positioners and a variety of attachments used for comfort, support, pressure relief and posture control and markets them under the Invacare(R) brand name. Additional seating products marketed under the Invacare brand, include the Tarsys(TM) range of powered tilt and recline seating systems for use on power wheelchairs. The Tarsys 2G(TM) was introduced in 1999 and brings weight shift technology to both tilt and recline seating systems. This technology allows the seat to be positioned further back on the chair base and translates into a shorter, more maneuverable chair. STANDARD PRODUCTS Manual wheelchairs. Invacare's manual wheelchairs are sold for use in the home, institutional setting or public places (e.g.: airports, malls, etc.) by people who are chronically or temporarily disabled but do not require or qualify under medical reimbursement programs for customization in terms of size, basic performance characteristics, or frame modification. Examples of Invacare's standard wheelchair lines, which are marketed under the Invacare(R) brand name, include the 9000 and TracerTM product lines. Both standard and prescription manual wheelchairs are designed to accommodate the diverse capabilities of the individual. Personal care. Invacare manufactures and/or distributes a full line of patient aids, including ambulatory aids such as crutches, canes, walkers and wheeled walkers; bath safety aids such as tub transfer benches, shower chairs and grab bars; and patient care products such as commodes, lift-out chairs and foam products. Home care beds. Invacare manufactures and distributes a wide variety of manual, semi-electric and fully-electric beds for home use under the Invacare(R) brand name. Home care bed accessories include bed side rails, mattresses, overbed tables, trapeze bars and traction equipment. Low air loss therapy products. Invacare manufactures and markets a complete line of mattress overlays and replacement products, under the Invacare(R) brand name, which use air flotation to redistribute weight and move moisture away from patients who are immobile and spend a great deal of time in bed. 5 CONTINUING CARE / DISTRIBUTED PRODUCTS Distributed products. Invacare distributes a line of personal medical care products manufactured by others, including bedding and ostomy, incontinence, diabetic and wound care supplies. Patient transport. Invacare manufactures and markets products for use in the home and institutional settings, including patient lifts and slings, multi-position recliners and bathing equipment. Health Care Furnishings. Invacare, operating as Invacare Continuing Care Group, is a manufacturer and distributor of beds and furnishings for the non-acute care markets. RESPIRATORY PRODUCTS Home respiratory products. Invacare manufactures and/or distributes home respiratory products including oxygen concentrators, nebulizer compressors and respiratory disposables, sleep therapy products, portable compressed oxygen systems and liquid oxygen systems. Invacare's home respiratory products are marketed predominantly under the Invacare(R) brand name. OTHER PRODUCTS Accessory Products. Invacare also manufactures, markets and distributes many accessory products, including spare parts, wheelchair cushions, arm rests, wheels and respiratory parts. In some cases, Invacare's accessory items are built to be interchangeable so that they can be used to replace parts on products manufactured by others. Australasia The company's Australasia operations consist of Invacare Australia, which imports and distributes the Invacare range of products and manufactures and distributes the Rollerchair range of custom power wheelchairs, Dynamic Controls, a New Zealand manufacturer of operating components used in power wheelchairs and Invacare New Zealand, a distribution business. Europe The company's European operations operate as a "common market" company with sales throughout Western Europe. The European operation currently sells a limited line of products providing significant room for growth as Invacare continues to broaden its product line offerings to mirror that of the North American operations. Most wheelchair products sold in Europe are designed and manufactured locally to meet specific market requirements. However, as a result of Invacare's worldwide development efforts, the Action 2000, a manual lightweight design that originated in the U.S., was the first wheelchair in Europe to meet the high standards of quality required to receive the Community European (CE) mark. In addition, certain power wheelchair products sold in the United States are adaptations of products originally designed for the European markets. The company manufactures and/or assembles both manual and power wheelchair products at nine of its European facilities - Invacare (UK) Ltd. and SMI UK Ltd. in the U.K., Poirier Groupe Invacare S.A. in France, Invacare Deutschland GmbH in Germany, Fabrioto Lda in Portugal, Kuschall Design AG in Switzerland, SM Niltek A/S and SM Radius A/S in Denmark, and SM Reastolen AB in Sweden. Motorized scooters are manufactured in Germany and in Denmark. Beds are manufactured in Denmark and in Sweden. Self care products, bath tubs, patient lifts and slings are also manufactured in the United Kingdom, France, and Holland. Oxygen products are imported from Invacare's U.S. operations. WARRANTY Generally, the company's products are covered by warranties against defects in material and workmanship for periods up to six years from the date of sale to the customer. Certain components carry a lifetime warranty. A non-renewable warranty also is offered on various products for a maximum period of five years. COMPETITION In each of the company's major product lines, both domestically and internationally, there are a limited number of significant national competitors and a number of regional and local competitors. In some countries or in certain product lines, the company may face competition from other manufacturers that have larger market shares, greater resources or other competitive advantages. 6 Invacare believes that it is the leading home medical equipment manufacturer based on its distribution channels, breadth of product line and sales. North America and Australasia The home medical equipment (HME) market is highly competitive, and Invacare's products face significant competition from other well-established manufacturers. The company believes that its success in increasing market share is dependent on providing value to the customer based on the quality, performance and price of the company's products, the range of products offered, the technical expertise of the sales force, the effectiveness of the company's distribution system, the strength of the dealer and distributor network and the availability of prompt and reliable service for its products. The company believes that its "Total One Stop Shoppingsm" approach provides the competitive advantage necessary for continuing profitability and market share growth. Various manufacturers have, from time to time, instituted price-cutting programs in an effort to gain market share. There can be no assurance that other HME manufacturers will not attempt to implement such aggressive pricing in the future. Europe As a result of the differences encountered in the European marketplace, competition generally varies from one country to another. The company typically encounters one or two strong competitors in each country, some of them becoming regional leaders in specific product lines. MARKETING AND DISTRIBUTION North America and Australasia Invacare's products are marketed in the United States and Australasia primarily to providers who in turn sell or rent these products directly to consumers within the non-acute care setting. Invacare's primary customer is the HME provider. The company also employs a "pull-through" marketing strategy to medical professionals, including physical and occupational therapists, who refer their patients to HME providers to obtain specific types of home medical equipment. Invacare's domestic sales and marketing organization consists primarily of a home care sales force, which markets and sells Invacare(R) branded products to HME providers. A combination of direct sales and manufacturers' representatives market and sell Invacare products through the company's Invacare Continuing Care Group (ICCG) to the non-acute care market; and a separate manufacturer's representatives' sales force markets and sells the company's retail brand to the mass retail channels of distribution. Each member of Invacare's home care sales force functions as a Territory Business Manager (TBM) and handles all product and service needs for an account, thus saving customers valuable time. The TBM also provides training and servicing information to providers, as well as product literature, point-of-sales materials and other advertising and merchandising aids. In Canada, products are sold by a direct sales force and distributed through regional distribution centers in British Columbia, Ontario and Quebec to health care providers throughout Canada. The company sells distributed products, primarily soft goods and disposable medical supplies, through its Suburban Ostomy subsidiary. The acquisition of Suburban in 1998 was an important addition to Invacare's "Total One Stop Shoppingsm" program, through which Invacare offers HME providers of all sizes the broadest range of products and services at the total lowest cost. Suburban's products include ostomy, incontinence, wound care and diabetic supplies, as well as other soft goods and disposable products. These products are complementary to Invacare's products and are purchased by many of the same customers that buy Invacare's equipment products. Suburban markets its products through an inside telesales and customer service department, in addition to Invacare's 100+ HME field sales force. Suburban also markets a Home Delivery program to HME providers through which Suburban drop-ships supplies in the provider's name to the customer's address. Providers have no products to stock, no minimum orders and delivery within 24-48 hours nationwide. In 1999, the company further refined its brand strategy to focus exclusively on the Invacare(R) brand name. Action, which was a product series for all rehab products, including power chairs, custom manual chairs and seating systems was folded into the Invacare(R) brand name. As part of the company's efforts to fully leverage the Invacare(R) brand name amongst all of the company's various audiences, a product relabeling initiative was advanced. A stronger emphasis was placed on the Invacare brand by separating the placement of the Invacare medallion logo from the placement of the product name label. All product lines feature the medallion as the primary identity on each and every product, with the medallion positioned at the most prominent visual point on the product. This unified approach to product labeling will help strengthen the Invacare brand and family of products through a clear and consistent application. 7 In 1999, Invacare continued refining its strategic advertising campaign in home health care magazines and trade publications which complement the company's focused brand strategy. The "umbrella" HME campaign which was introduced in 1998, featuring the company's chairman and CEO, A. Malachi Mixon, III as its spokesperson, was continued. Mr. Mixon continues to be featured in all of the company's trade advertising. The company also contributed extensively to editorial coverage in trade publications on articles concerning products it manufactures. Company representatives attended numerous trade shows and conferences on a national and regional basis in which Invacare products were displayed to providers, health care professionals and consumers. Invacare continues to enhance its sales and marketing programs to generate greater consumer awareness of Invacare and its products, as evidenced by enhancements made to its consumer marketing program in 1999 through sponsorship of a variety of wheelchair activities and support of various charitable causes which benefit the users of its products. Invacare continued for the sixth year as a National Corporate Sponsor of Easter Seals, one of the most recognizable charities in the United States that annually meets the needs of over 40 million children and adults who have various types of disabilities. The company further enhanced its sponsorship of over 75 individual wheelchair athletes and teams, including the top-ranked wheelchair racer in the world, and several of the top-ranked men's and women's wheelchair tennis players in the world. Invacare participated for the fourth year in a row as the title sponsor of the Invacare World Team Cup tennis tournament, which took place during the summer in Flushing Meadows, New York. Mr. Mixon participated in opening ceremonies with New York City Mayor Rudolph Giuliani. The company devotes significant time and resources in training providers, rehabilitation therapists and others in the sale, use, maintenance and repair of its products. In 1999, Invacare enhanced its training and education program by launching Invacare LEEP (Learning Enrichment and Education Program) which consists of two learning alternatives: nine Invacare Expos which combine three-day training and education forums with a two-day product fair; and more than 90 Invacare Satellite Training courses which consist of single day, shorter sessions on specific topics. The company's top ten customers accounted for approximately 17% of 1999 net sales. The loss of business of one or more of these customers or buying groups may have a significant impact on the company, although no single customer accounted for more than 5% of the company's 1999 net sales. Providers, who are part of a buying group, generally make individual purchasing decisions and are invoiced directly by the company. Europe The company's European operations consist primarily of manufacturing, marketing and distribution operations in Western Europe and export sales activities through local distributors elsewhere in the world. The company has a direct sales force and distribution centers in the United Kingdom, France, Germany, Belgium, Portugal, Spain, Denmark, Sweden, Switzerland, Norway and the Netherlands, and sells through distributors elsewhere in Europe. In markets where the company has its own sales force, product sales are typically made through dealers of medical equipment and, in certain markets, directly to government agencies. In most markets, government health care and reimbursement policies play an important role in determining the types of equipment sold and price levels for such products. The company continues to focus on the implementation of the "Total One Stop Shoppingsm" concept in Europe. PRODUCT LIABILITY COSTS Invacare supports its dealers by defending product liability claims in an effort to hold down costs. The company's captive insurance company, formed in 1986, insures the first $1 million per claim, up to annual aggregate policy losses of $4 million, of the company's domestic product liability exposure. The company also has additional layers of coverage insuring up to $70 million for a total of $74 million in annual aggregate losses arising from individual losses that exceed $1 million per claim or annual policy aggregate losses of $4 million. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at an affordable rate. PRODUCT DEVELOPMENT AND ENGINEERING Invacare is committed to continuously improving, expanding and broadening its existing product lines. During the past three years, new product introductions included: major improvements in the power wheelchair line in terms of electronics, functionality and aesthetics; new models of power wheelchairs; new additions/enhancements to the electronic controllers for power wheelchairs; new models of aluminum frame ultralight wheelchairs; a comprehensive new line of innovative seating and positioning products; a complete line of home respiratory products, including nebulizer compressors, flowmeters, aspirators, oxygen analyzer, and respiratory disposables; and an improved line of ambulatory and safety products. 8 New product development remains a key component of Invacare's strategy to grow market share and maintain competitive advantage. To this end, Invacare's efforts in 1999 continued to focus resources on innovative manufacturing concepts while also investing significant resources in cost reduction and design improvement. Important new technologies were added, as well as many line extensions and refinements to existing categories. In 1999, over 30 new products were introduced with the most significant being: North America The Invacare(R) R2(TM) Jr. FWD with integrated sling seat power chair is a front-wheel drive chair designed for young adults. It is extremely maneuverable with a front-turning radius as low as 13.5-inches and a full-turning radius as low as 25-inches. The Invacare(R) Arrow(R) FWD power chair is a front-wheel drive chair for adults. It features a tight front-turning radius, a tight full-turning radius, has independent front-wheel suspension and a new 90 degree footboard. The Invacare(R) MZM Multi Zone Mattress is for patients at greatest risk for pressure ulcers. It features a firm base, polyurethane foam sides and a comfortable foam top layer, supported by continuous three-zone variable bladder inflation. Once inflated, the mattress can be used with or without the power unit if silent operation is required. A new line of motorized scooters, featuring five different models, is available in both 3 and 4-wheel models, and offers superior looks, performance and functionality. The Invacare(R) Tracer(R) SX Full Recliner manual wheelchair, provides the durability of a standard wheelchair frame with the versatility and comfort of a full-reclining back. The wide range of recline and seat widths that can be achieved with the Tracer(R) SX Recliner provides proper positioning and pressure relief as well as proper back and head support for users. The Invacare(R) Polaris(TM) LT Continuous Positive Airway Pressure (CPAP) Flow Generator, provides reliability and convenience at an economical cost. Lightweight and ultra quiet, its design incorporates a 20-minute therapy-delayed time feature, and includes a built-in tubing holder to provide convenient mask storage when the device is not in use. New innovations in seating technology include the Invacare(R) Infinity(TM) DualFlex Back, Invacare(R) Infinity(TM) UniBack and Invacare(R) Infinity(TM) Cushions. The Infinity(TM) DualFlex Back and Infinity(TM) UniBack are designed for those with simple to moderately complex seating needs, providing custom adjustability in a modular back. Infinity(TM) Cushions provide optimal pressure redistribution away from high-risk areas. The structural design of the cushions also works to provide postural stability and support. Invacare developed the Venture(TM) HomeFill(TM) complete home oxygen system that enables patients to refill their own oxygen cylinders with a concentrator at home instead of remaining dependent on providers for oxygen service. HomeFillTM provides a long-awaited sense of freedom and convenience for patients. A Heavy Duty Product Catalog has recently been published featuring a wide array of new products for bariatric patients. Products featured include power chairs, lifts and slings, beds, commodes and more. Australasia Invacare developed a wheelchair control that uses a finger touchpad. The controller operates much like the "mouse" on a laptop computer, to make operation even easier for those with limited use of their hands. The digital technology gives new freedom to power chair users who have difficulty manipulating the conventional joystick control. Europe During 1999, European operations also introduced several new products and continued to update existing products as required by the market. Key introductions and updates in 1999 included: The Invacare(R) SMI Vortex Wheelchair incorporates removable motorized wheels that provide propulsion when the user rotates the handrims forward. This power assist feature allows users to go up ramps, cover long distances and climb over small obstacles that otherwise they could not. These motorized wheels, with the motor in the hub, can be added to most manual wheelchairs. 9 The Invacare(R) SMI Manual Wheelchair, designed and manufactured in Europe, features a low seat to floor height for use by stroke patients who can only use one leg for propulsion. The Invacare(R) SMI Comfort Wheelchair is a new European manual wheelchair that provides deluxe seating and body support features for unparalleled comfort, such as required by long-term users. MANUFACTURING AND SUPPLIERS The company's objective is to maintain its commitment to be the total lowest-cost manufacturer in its industry, as well as the highest-quality producer. The company believes that it is achieving this objective not only through improved product design, but also by taking a number of steps to lower manufacturing costs. In 1997, the company initiated plans to close and consolidate a number of manufacturing operations, the cost of which was included in charges taken in the third and fourth quarters. These consolidations were completed in 1999. The company also makes substantial investments in its facilities and equipment in order to increase productivity, and to improve quality and delivery. Over the past three years, the company has invested $90.3 million in capital improvements and acquisition of facilities. North America / Australasia The company has vertically integrated its manufacturing processes by fabricating, coating, plating and assembling many of the components of each product. The company designs and manufactures electronics for power wheelchairs, from insertion of components into printed circuit boards to final assembly and testing. Invacare has focused on "value engineering" which reduces manufacturing costs by eliminating product complexity and using common components. Value engineering has been applied to all product introductions in the last three years, including the latest generation of oxygen concentrators, electronic controls, wheelchairs, patient lifts, beds and bath safety products. Investments continue to be made in manufacturing automation. The company has initiated programs to reduce manufacturing lead times, shorten production cycles, increase associate training, encourage employee involvement in decision-making and improve manufacturing quality. Associate involvement teams participate in engineering, production and processing strategies and associates have been given responsibility for their own quality assurance. The manufacturing operations for the company's wheelchairs and replacement parts, patient aids and home care beds consist of a variety of metal fabricating procedures, electronics production, coating, plating and assembly operations. Manufacturing operations for the company's oxygen concentrators, nebulizer compressors, and seating and positioning products consist primarily of assembly operations. The company purchases raw materials, fabricated components and services from a variety of suppliers. Where appropriate, Invacare does employ long term contracts with its suppliers. In those situations in which long term contracts are not advantageous, the company believes its relationship with those suppliers to be satisfactory with alternative sources of supply readily available. Europe As in other areas, manufacturing and operational issues faced in the U.S. are also present in Europe. The European operation has challenged and rationalized the mission of each manufacturing location allowing for the realization of significant synergies and identified areas for further cost reductions and improved efficiencies for 2000, including the elimination and consolidation of certain facilities. ACQUISITIONS During 1999, the company acquired Scandinavian Mobility International A/S (SMI), a producer and distributor of rehabilitation products, mobility aids and related products for approximately $142 million. As a result of the company's ongoing search for opportunities, coupled with the industry trend toward consolidation, other acquisition opportunities were evaluated in 1999. The company focuses on acquisitions intended to fulfill the following objectives: Tactical. Grow market share or extend current product lines. Strategic. Enter new market segments that complement existing businesses or utilize the company's distribution strengths. Geographic. Enable rapid entry into new foreign markets. 10 GOVERNMENT REGULATION The company is directly affected by government regulation and reimbursement policies in virtually every country in which it operates. Government regulations and health care policy differ from country to country and, within the U.S. and Canada, from state to state or province to province. Changes in regulations and health care policy take place frequently and can impact the size, growth potential and profitability of products sold in each market. In the U.S., the growth of health care costs has increased at rates in excess of the rate of inflation and as a percentage of GDP for several decades. A number of efforts to control the federal deficit have impacted reimbursement guidelines for government sponsored health care programs and changes in federal programs are often imitated by private insurance companies. Reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain and thus affect the product mix, pricing and payment patterns of the company's customers who are the HME providers. Congress expressed its displeasure with the way the Health Care Financing Administration (HCFA) and its agents the Durable Medical Equipment Regional Carriers (DMERC) were trying to implement some of the provisions contained in the Balanced Budget Act of 1997. For example, during the third quarter, the DMERC published a proposal to reduce fees paid for seven items by as much as 47% using its national inherent reasonableness (IR) authority. Congress questioned the data and methodology used and passed legislation requiring HCFA to use statistically relevant and reliable data and a sound costing methodology. Congress suspended HCFA's IR authority until such time as a final rule reflecting this mandate is published in the Federal Register. This provision and the requirement that HCFA must solicit input from the industry means that cuts of the magnitude proposed last year are unlikely to materialize. Congress also lifted the freeze on Medicare fees for durable medical equipment giving providers modest increases in fiscal years 2001 and 2002. While HCFA was able to get its first competitive bidding demonstration project off the ground in 1999, the agency has run into several problems delaying start-up of a second demonstration until well into 2000. HCFA had no problems with its "mission critical" computer systems. All systems proved to be Y2K compliant and the agency anticipates no problems in paying providers arising from the so-called millennium bug or Y2K conversion. The company continues its aggressive, pro-active efforts to shape public policy which impacts home and community-based, non-acute health care. Invacare believes these efforts give the company a competitive advantage in two ways. First is the frequently expressed appreciation of our customers for our efforts on behalf of the entire industry. The other is the ability to anticipate and plan for changes in public policy, unlike most other HME manufacturers who must react to change after it occurs. The Safe Medical Devices Act of 1990 and Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetics Act of 1938 (the "Acts") provide for regulation by the United States Food and Drug Administration (the "FDA") of the manufacture and sale of medical devices. Under the Acts, medical devices are classified as Class I, Class II or Class III devices. The company's principal products are designated as Class I or Class II devices. In general, Class I devices must comply with labeling and record keeping requirements and are subject to other general controls. In addition to general controls, certain Class II devices must comply with product design and manufacturing controls established by the FDA. Manufacturers of all medical devices are subject to periodic inspections by the FDA. Furthermore, state, local and foreign governments have adopted regulations relating to the manufacture and marketing of health care products. The company believes that it is presently in material compliance with applicable regulations promulgated by FDA, for which the failure to comply would have a material adverse effect. BACKLOG The company generally manufactures most of its products to meet near term demands by shipping from stock or by building to order based on the specialty nature of certain products. Therefore, the company does not have substantial backlog of orders of any particular products nor does it believe that backlog is a significant factor for its business. EMPLOYEES As of December 31, 1999, the company had approximately 5,531 employees. (d)Financial Information about Foreign and Domestic Operations and Export Sales. The company also markets its products for export to other foreign countries. The company had product sales in over 80 countries worldwide. 11 For information relating to net sales, operating income and identifiable assets of the company's foreign and domestic operations, see Business Segments in the Notes to the Consolidated Financial Statements. Item 2. Properties. The company owns or leases its warehouses, offices and manufacturing facilities and believes these facilities to be well maintained, adequately insured and suitable for their present and intended uses. Information concerning certain of the leased facilities of the company as of December 31, 1999, is set forth in Leases and Commitments in the Notes to the Consolidated Financial Statements of the company and in the table below:
Ownership or Expiration Renewal North American Operations Square Feet Date of Lease Options Use - ------------------------- ----------- ------------- ------- --- Ashland, Virginia 36,000 September 2000 none Warehouse and offices Atlanta, Georgia 137,284 January 2000 one (3 yr.) Warehouse and offices Atlanta, Georgia 48,000 August 2006 none Distribution Belle, Missouri 39,200 Own - Manufacturing and offices Beltsville, Maryland 33,329 August 2001 one (2 yr.) Manufacturing, offices, and Distribution Chesterfield, Missouri 8,466 December 2000 one (1 yr.) Offices Cleveland, Tennessee 21,820 June 2000 two (1 yr.) Manufacturing Delta, British Columbia 6,900 January 2000 none Warehouse and offices Edison, New Jersey 42,362 March 2000 none Distribution Edison, New Jersey 48,400 October 2001 one (3 yr.) Warehouse and sales office Elyria, Ohio - Taylor Street 240,744 Own - Manufacturing and offices - Cleveland Street 226,998 September 2004 one (5 yr.) Manufacturing and offices - One Invacare Way 50,000 Own - Headquarters Grand Prairie, Texas 87,508 December 2001 one (3 yr.) Warehouse and offices Grand Prairie, Texas 54,000 November 2000 none Distribution (sublet) Holliston, Massachusetts 59,500 August 2006 none Warehouse and offices Kirkland, Quebec 13,241 November 2002 one (5 yr.) Manufacturing, warehouse and offices
12
Ownership or Expiration Renewal North American Operations Square Feet Date of Lease Options Use - -------------------------- ----------- ------------- ------- --- Mississauga, Ontario 81,004 January 2005 none Manufacturing, warehouse and offices Mississauga, Ontario 10,881 July 2004 none Warehouse North Olmsted, Ohio 2,280 October 2003 one (5 yr.) Warehouse and offices North Ridgeville, Ohio 139,200 Own - Manufacturing, warehouses and offices Obetz, Ohio 274,698 April 2004 one (5 yr.) Warehouse Pharr, Texas 2,500 December 2000 one (1 yr.) Warehouse Pinellas Park, Florida 12,000 July 2000 two (1 yr.) Manufacturing and offices Rancho Cucamonga, California 22,928 September 2000 none Warehouse Reynosa, Mexico 135,200 Own - Manufacturing and offices Sacramento, California 26,900 May 2003 none Manufacturing, warehouse and offices Sanford, Florida 113,034 Own - Manufacturing and offices Sanford, Florida 99,892 Own - Manufacturing and offices Santa Fe Springs, California 150,754 May 2004 one (5yr.) Warehouse Sarasota, Florida 15,450 February 2002 five (5 yr.) Manufacturing, warehouse and offices South Bend, Indiana 30,000 July 2003 none Warehouse Spicewood, Texas 6,500 September 2002 one (3yr.) Manufacturing and offices Traverse City, Michigan 15,000 April 2000 two (3 yr.) Manufacturing and offices Wright City, Missouri 11,880 July 2000 one (1yr.) Warehouse Australasia Operations - -------------------------- Adelaide, Australia 11,500 June 2000 two (2 yr.) Manufacturing, warehouse and offices Auckland, New Zealand 33,154 March 2000 none Manufacturing, warehouse and offices Auckland, New Zealand 5,000 June 2001 none Warehouse
13
Ownership or Expiration Renewal Australasia Operations Square Feet Date of Lease Options Use - -------------------------- ----------- ------------- ------- --- Christchurch, New Zealand 57,682 December 2005 three (3 yr.) Manufacturing and offices Sydney, Australia 2,550 August 2000 one (2 yr.) Warehouse and offices European Operations - -------------------------- Aalborg, Denmark 9,000 June 2000 none Manufacturing, warehouse and offices Askersund, Sweden 10,000 Own - Warehouse Bad Oeynhausen, Germany 76,600 June 2000 one (2 yr.) Manufacturing, warehouse and offices Basel, Switzerland 36,000 Own - Manufacturing and offices Bergen, Norway 1,000 May 2004 one (5yr.) Warehouse and offices Birmingham, England 19,378 Own - Manufacturing and offices Bridgend, Wales 131,522 Own - Manufacturing and offices Brondby, Denmark 3,500 April 2001 - Head Office Brondby, Denmark 38,700 August 2000 - Manufacturing, warehouse and offices Buskerudsveien, Norway 500 Month notice - Offices Buskerudsveien, Norway 2,800 Month notice - Warehouse Corby, United Kingdom 19,460 April 2001 - Manufacturing and offices Corby, United Kingdom 10,930 April 2000 - Warehouse and offices Ede, The Netherlands 13,500 May 2009 one (5 yr.) Warehouse and offices Girona, Spain 13,600 November 2004 one (1 yr.) Warehouse and offices Goteborg, Sweden 6,470 September 2002 - Warehouse and offices Hannover, Germany 15,050 August 2005 one (5 yr.) Warehouse and offices Hong, Denmark 149,375 Own - Manufacturing, warehouse and offices LaRochelle, France 101,718 July 2002 - Manufacturing and warehouse
14
Ownership or Expiration Renewal European Operations Square Feet Date of Lease Options Use - -------------------------- ----------- ------------- ------- --- LaRochelle, France 21,400 August 2002 - Warehouse Landskrona, Sweden 2,880 April 2001 - Warehouse Oisterwijk, The Netherlands 27,000 Own - Manufacturing, warehouse and offices Oporto, Portugal 27,800 November 2003 - Manufacturing and offices Oskarshamn, Sweden 6,300 December 2000 - Warehouse Oslo, Norway 30,650 September 2001 one (5 yr.) Manufacturing, warehouse and offices Sandviken, Sweden 48,000 December 2001 - Manufacturing, warehouse and offices Saeby, Denmark 31,108 October 2000 - Warehouse and offices Spanga, Sweden 8,300 October 2001 one (3 yr.) Warehouse and offices Spanga, Sweden 16,250 Own - Warehouse and offices Tours, France 86,000 November 2007 none Manufacturing Tours, France 104,500 Own - Manufacturing, warehouse and offices Trondheim, Norway 3,000 December 2001 one (5 yr.) Services and offices Vaxjovagen, Sweden 92,400 Own - Manufacturing and offices Veenendaal, The Netherlands 6,790 November 2000 one (2 yr.) Warehouse and offices
Item 3. Legal Proceedings. Invacare is a defendant in a number of product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of these actions have been referred to the company's insurance carriers and are being vigorously contested. The primary carrier for the first layer of insurance coverage per claim or annual policy aggregate losses of $ 1 million to $3 million or $1 million to $4 million, depending on the policy year, is a subsidiary of the company which was established in September 1986, to provide the first layer of product liability insurance for the company. The company currently has additional layers of coverage insuring up to $70 million for a total of $74 million in annual aggregate losses arising from individual losses that exceed the first layer of the company's domestic product liability exposure. Management does not believe that the outcome of any of these actions will have a material adverse effect upon its business or financial condition. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 15 Executive Officers of the Registrant.* The following table sets forth the names of the executive officers and certain other key employees of Invacare, each of whom serves at the pleasure of the Board of Directors, as well as certain other information.
Name Age Position - --------------------- --- ----------------------------------------------------------------- A. Malachi Mixon, III 59 Chairman of the Board of Directors and Chief Executive Officer Gerald B. Blouch 53 President, Chief Operating Officer and Director Thomas R. Miklich 52 Chief Financial Officer, General Counsel and Corporate Secretary Joseph B. Richey, II 63 President - Invacare Technologies & Invacare Senior Vice President - Total Quality Management and Director Louis F.J. Slangen 52 Senior Vice President - Sales & Marketing Larry E. Steward 47 Corporate Vice President - Human Resources M. Louis Tabickman 55 President - Invacare Europe Neal J. Curran 42 Vice President - Rehab Group David A. Johnson 38 Vice President - Invacare Continuing Care Group and Home Medical Equipment Group Warren D. Lowery 42 Vice President - Respiratory Group David Pessel 52 Vice President and Chief Information Officer Michael A. Perry 45 Vice President - Distributed Products Ken Sparrow 52 Managing Director - Australasia
CORPORATE OFFICERS A. Malachi Mixon, III has been Chief Executive Officer and a Director of the company since December 1979 and Chairman of the Board since September 1983. Mr. Mixon had been President of the company from December 1979 until November 1996. Gerald B. Blouch was named President and a Director of the company in November 1996. Mr. Blouch has been Chief Operating Officer since December 1994 and Chairman - Invacare International since December 1993. Previously, Mr. Blouch was President - Home Care Division from March 1994 to December 1994 and Senior Vice President - Home Care Division from September 1992 to March 1994. Mr. Blouch served as Chief Financial Officer from May 1990 to May 1993 and Treasurer from March 1991 to May 1993. Thomas R. Miklich has been Chief Financial Officer and General Counsel since May 1993 and in September 1993 was named Corporate Secretary. Previously, Mr. Miklich was Treasurer from May 1993 until October 1999, Executive Vice President and Chief Financial Officer of Van Dorn Company from 1991 to 1993 and Chief Financial Officer of The Sherwin-Williams Company from 1986 to 1991. 16 Joseph B. Richey, II has been a Director since 1980 and in September 1992 was named President-Invacare Technologies and Senior Vice President - Total Quality Management. Previously, Mr. Richey was Senior Vice President of Product Development from July 1984 to September 1992 and Senior Vice President and General Manager of North American Operations from September 1989 to September 1992. Louis F. J. Slangen was named Senior Vice President - Sales & Marketing in December 1994 and from September 1989 to December 1994 was Vice President - Sales and Marketing. Mr. Slangen was previously President - Rehab Division from March 1994 to December 1994 and Vice President and General Manager - Rehab Division from September 1992 to March 1994. Larry E. Steward was named Corporate Vice President of Human Resources in April 1997. From April 1996 to April 1997, Mr. Steward was Director of Human Resources for the Rehab Group. Mr. Steward has more than 18 years of experience in labor and employee relations, gained during tenures at LTV Steel Company and Mellon Bank, where he held various human resource positions of increasing responsibility. OPERATING OFFICERS M. Louis Tabickman was named President, Invacare Europe in July 1998. Prior to this, Mr. Tabickman held the positions of Senior Vice President - Respiratory Products from October 1997 to July 1998 and, from August 1995 to October 1997, was Group Vice President Rehab Products. Previously, Mr. Tabickman was Vice President & General Manager - Power Business Unit from December 1994 to August 1995, President, Invacare Canada from March 1994 to December 1994 and Vice President and General Manager - Invacare Canada from September 1992 to March 1994. Mr. Tabickman was also Vice President and General Manager of Service and Distribution from July 1985 until September 1992. Mr. Tabickman has been an officer since July 1985. Neal J. Curran was named Vice President of the Rehab Group in July of 1999. Mr. Curran has been with the company since 1983 and has previously held positions as Vice President - Respiratory Group in July of 1998 until July 1999, Vice President - Seating and Custom Mobility Products in October 1997 and General Manager of the Custom Manual Business Unit since December 1994. From September 1992 to December 1994, Mr. Curran served as the Power Business Unit leader and Vice President of Rehab engineering from January 1991 to September 1992. David A. Johnson was named Vice President Invacare Continuing Care Group and Home Medical Equipment Group in November 1998. Previously, Mr. Johnson had been Director Business/Systems Integration for Herman Miller, Inc. from 1997 to November 1998. Mr. Johnson was also General Manager of The Chattanooga Group, Inc. from 1994 to 1997. From 1990 to 1994, Mr. Johnson held various operations positions for the Stryker Corporation-Medical Group. Warren D. Lowery was named Vice President - Respiratory Group in August 1999. Mr. Lowery has been with the company since 1988 and has previously held positions as Director of Operations for Invacare's Respiratory facility from January 1996 until August 1999, and Director of Operations for Invacare's Florida manufacturing plant from January 1995 until January 1996. From March 1988 until January 1995, Mr. Lowery held various manufacturing and finance positions of increasing responsibility at Invacare's Florida manufacturing plant. David Pessel was named Vice President and Chief Information Officer in April 1998. Mr. Pessel has more than 20 years of experience in information technology gained during tenures at The University of Rochester; British Petroleum in London, England, where he served as director of information technology at BP Research; and, most recently, at Roadway/Caliber/FDX, in Akron, Ohio. Michael A. Perry was named Vice President of Distributed Products in July of 1998. Previously, Mr. Perry was General Manager of Account Services, Vice President of National Accounts, Vice President of Retail Sales and Vice President of Clinical Application Consumer Marketing since 1995. In 1994, Mr. Perry served as Area Vice President of Sales. Kenneth A. Sparrow was named Managing Director of Australasia in January 1998. Previously, Mr. Sparrow has been the General Manager of Operations for the Lyttelton Port Company from December 1995 to January 1998. Prior to this, Mr. Sparrow was a Divisional General Manager for Skellerup Industries from July 1992 to November 1995. * The description of executive officers is included pursuant to Instruction 3 to Section (b) of Item 401 of Regulation S-K. 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Invacare's Common Shares, without par value, began trading on the New York Stock Exchange (NYSE) under the symbol IVC on June 25, 1999. Prior to listing the Common Shares on the NYSE, the Common Shares were included for trading and quotation on the NASDAQ National Market System under the symbol IVCR. Ownership of the company's Class B Common Shares (which are not listed on NYSE) cannot be transferred, except, in general, to family members. Class B Common Shares may be converted into Common Shares at any time on a share-for-share basis. The approximate number of record holders of the company's Common Shares and Class B Common Shares at February 25, 2000 was 6,502 and 35, respectively. The closing sale price for the Common Shares on February 25, 2000 as reported by NYSE, was $23.88. The prices set forth below do not include retail markups, markdowns or commissions. The range of high and low quarterly prices of the Common Shares in each of the two most recent fiscal years are as follows: 1999 1998 ---- ---- Quarter Ended: High Low High Low December 31 $22.69 $17.75 $25.19 $20.50 September 30 26.69 18.25 26.88 20.13 June 30 26.75 22.56 28.63 24.25 March 31 25.25 21.69 26.00 19.88 During 1999, the Board of Directors of Invacare Corporation declared dividends of $.05 per Common Share and $.045 per Class B Common Share. For information regarding limitations on the payment of dividends in the company's loan and note agreements, see Long Term Obligations in the Notes to the Consolidated Financial Statements. The Common Shares are entitled to receive cash dividends at a rate of at least 110% of cash dividends paid on the Class B Common Shares. 18 Item 6. Selected Financial Data
For the Year Ended December 31, 1999* 1998 1997** 1996 1995 1994 ----- ---- ------ ---- ---- ---- (In thousands except per share and ratio data) Earnings Net Sales $878,261 $797,529 $653,414 $619,498 $504,032 $411,123 Income from Operations 82,108 86,654 8,457 65,393 54,144 43,736 Net Earnings 41,494 45,792 1,563 38,918 32,165 26,377 Net Earnings per Share - Basic 1.38 1.53 .05 1.33 1.10*** .91*** Net Earnings per Share - Assuming Dilution 1.36 1.50 .05 1.28 1.07*** .89*** Dividends per Common Share .05000 .05000 .05000 .05000 .03750*** .01875*** Dividends per Class B Common Share .04545 .04545 .04545 .04545 .03409*** .01705*** As of December 31, 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- Balance Sheet Current Assets $418,620 $336,742 $275,211 $258,720 $204,685 $180,435 Total Assets 955,285 738,756 529,923 509,628 408,750 338,109 Current Liabilities 177,471 133,964 109,553 97,768 84,936 67,667 Working Capital 241,149 202,778 165,658 160,952 119,749 112,768 Long-Term Obligations 458,942 323,904 183,955 173,263 122,456 105,528 Shareholders' Equity 318,872 280,888 236,415 238,597 201,319 164,007 Other Data Research and Development Expenditures $ 15,534 $ 12,980 $ 12,706 $ 11,060 $9,002 $7,651 Capital Expenditures, net of Disposals 21,954 28,527 37,962 22,465 11,027 12,217 Depreciation and Amortization 25,978 23,754 18,348 17,896 14,159 12,686 Key Ratios Return on Sales 4.7% 5.7% .2% 6.3% 6.4% 6.4% Return on Average Assets 4.9% 7.2% .3% 8.5% 8.6% 8.4% Return on Beginning 14.8% 19.4% .7% 19.3% 19.6% 19.5% Shareholders' Equity Current Ratio 2.4:1 2.5:1 2.5:1 2.6:1 2.4:1 2.7:1 Debt-to-Equity Ratio 1.4:1 1.2:1 .8:1 .7:1 .6:1 .6:1
* Reflects non-recurring and unusual charge of $14,800 ($9,028 or $.29 per share assuming dilution after tax) taken in 1999. ** Reflects non-recurring and unusual charge of $61,039 ($38,839 or $1.28 per share assuming dilution after tax) taken in 1997. *** As adjusted for the 2-for-1 splits effected in the form of a 100% share dividend in October 1995. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS 1999 Versus 1998 Non-recurring and Unusual Charges. The review of results that follows excludes the impact of the non-recurring and unusual charges ("the charge") taken in 1999. The reasons for the charges and the impact on the company's current and future performance, as well as the utilization thereof, are explained under the heading "Non-recurring and Unusual Charges" later in this section and in the Notes to the Financial Statements. Net Sales. Consolidated net sales for 1999 increased 10% for the year despite a 1% negative impact from foreign currency translation. Acquisitions contributed 7% of the increase. Net sales increased in each of the three business segments with Europe and Australasia reporting significant improvement. The increase was principally due to an overall increase in unit volume, with the exception of Rehab products, partially offset by the effects of a continuing competitive pricing environment throughout most product lines. European and Respiratory operations posted the largest dollar increases primarily as a result of increased unit volumes. The company believes that its sales grew faster than the overall industry, resulting in market share gains. This was due in part to its cost-effective "Total One Stop Shoppingsm" distribution system that is supported by the company's broad range of products and services. North American Operations North American sales, consisting of Rehab (power wheelchairs, custom manual wheelchairs, seating), Standard (manual wheelchairs, personal care, retail), Beds and Continuing Care (beds, low air loss therapy, furniture, patient transport equipment), Respiratory (oxygen concentrators, liquid oxygen, aerosol therapy and associated respiratory) and Distributed (ostomy, incontinence, wound care, other medical supplies) products net of acquisitions and divestitures grew 4% over the prior year. The gain was due primarily to Respiratory products up 13% as concentrators, sleep therapy and aerosol products had strong sales increases. Sales of custom manual wheelchairs also increased 9% from the prior year due in part to continued new product introductions and the success of the company's "Team Action" athletes, as many of the high-tech design features in high-performance sport wheelchairs are incorporated in the everyday Action chairs. Sales for the Personal Care product line also increased 8% over the prior year. Sales for the Distributed products group increased 9% net of divestitures as Suburban Ostomy Supply Company, a national direct marketing wholesaler of medical supplies and related products to the home care industry acquired in January 1998, continued to capitalize on Invacare's strong sales force. Rehab products sales were weak in 1999 due to the tightening by The Health Care Financing Administration (HCFA) of the requirements for Medicare beneficiaries to qualify for reimbursement for a power wheelchair. In late 1999, Invacare received 510(k) clearance from the U.S. Food and Drug Administration (F.D.A.) on the Invacare(R) Venture(TM) HomeFill(TM) Complete Home Oxygen System, which was developed in response to Medicare oxygen reimbursement cuts. The HomeFill system is a revolutionary oxygen-filling system that allows a patient to fill his or her own high pressure oxygen cylinders, thus eliminating time-consuming and costly service calls by the oxygen providers, while at the same time improving the patient's quality of life. We expect that the receipt of this approval will help augment North American sales growth in 2000. Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had a 9% sales increase for the year. Sales for the company's Canadian operation increased 12%, including a slight negative impact from foreign currency translation. The increase was a result of volume increases as prices remained relatively constant for the year. Australasia Operations The Australasia products group consists of Invacare Australia, which imports and distributes the Invacare range of products and manufactures and distributes the Rollerchair range of custom power wheelchairs, Dynamic Controls, a New Zealand manufacturer of operating components used in power wheelchairs and Invacare New Zealand, a distribution business. Sales for the Australasia group increased $5,933,000 or 30% from the prior year, excluding a slight negative impact from foreign currency translation. The increase was due to new product introductions by Dynamic Controls as well as increased focus on the Australasian market. 20 European Operations European sales increased 11%, excluding a net favorable impact of 34% from acquisition and foreign currency translation. Sales growth improved in 1999 despite continuing governmental budget trends which resulted in pressure on reimbursement levels. The company acquired Scandinavian Mobility International A/S (SMI), a producer and distributor of rehabilitation products, mobility aids and related products, in the third quarter of 1999 for approximately $142 million in cash. Taking into account the SMI acquisition, on a pro-forma basis, European sales advanced 11%, excluding a 2% negative impact from foreign currency. The acquisition gives Invacare's European operation strategic distribution capabilities in the Nordic countries as well as an expanded product offering. Gross Profit. Consolidated gross profit as a percentage of net sales increased to 31% from 30% last year. The increase was a result of a company-wide initiative focusing on redesigning products in order to lower manufacturing costs while improving quality and reliability and implementing other spending reductions necessary to remain competitive and improve profitability. The increase in gross profit as a percentage of net sales was offset, to some extent, by a shift in product mix and continued pricing pressure in the industry. North American gross profit from operations as a percentage of net sales remained constant with the prior year as productivity improvements and facilities rationalization were somewhat offset by price declines and a shift in product mix as sales of Respiratory products increased while sales of higher margin Rehab products decreased. Gross profit in Australasia increased as a percentage of sales to 28% from 25% in the prior year. The $2,001,000 increase includes the continued effects of a strong U.S. dollar which negatively impacted margins. Excluding the negative impact of foreign currency translation, gross profit increased $2,189,000 from the prior year. Gross profit in Europe as a percent to sales increased three percentage points from the prior year. Excluding the impact from the acquisition of SMI, gross profit from operations as a percentage of net sales increased to 28% from 26% in the prior year despite the continued negative effects of a strong U.S. dollar. The increase in European profitability is primarily a result of productivity improvements and cost containment programs introduced by new European management put in place during the third quarter of 1998. The management team has simplified and improved accountability while reducing costs to be more in line with its sales levels. In addition, greater emphasis is being placed on leveraging U.S. research and development efforts to accelerate new product development in a cost-effective manner. Inventory turns decreased slightly for 1999, principally due to the effect of businesses acquired, particularly SMI, which had inventory turns lower than the combined overall average of the company's existing business. The company expects turns will show improvement in 2000 as inventory control initiatives instituted throughout the company's existing business are implemented at the SMI locations. Selling, General and Administrative. Consolidated selling, general and administrative expense as a percentage of net sales increased to 20% in 1999 compared to 19% in 1998. The overall dollar increase was $22,420,000 or 15%, with acquisitions increasing selling, general and administrative costs by approximately $14,002,000 or 9%. Higher distribution, selling and administrative expenses in 1999 throughout the company and sluggish domestic sales growth resulted in an increase in the overall expense as a percentage of net sales. The company believes, with its proven ability to focus on improving productivity and with the successful execution of the SMI acquisition integration plan, it can favorably impact selling, general and administrative expense as a percentage of net sales in 2000. North American operations' selling, general and administrative costs increased as a percentage of net sales by approximately 1% from the prior year. The overall dollar increase was $10,456,000 or 9% with acquisitions accounting for $1,572,000 or 1% of the increase from the prior year. The company utilized activity-based budgeting aimed at allocating the expense dollars to the programs that most effectively supported the company's business strategy. The company also invested in additional sales and marketing programs to enhance North American sales growth. 21 Australasia operations' selling, general and administrative expenses decreased approximately 16% from the prior year. The decrease is primarily a result of cost control initiatives, which began in 1998 and continued throughout 1999. The overall dollar decrease between years was $1,242,000. The strong dollar also had a favorable effect on the reported line of selling, general and administrative expense for Australasia operations. European operations' selling, general and administrative expenses increased $13,206,000 or 40% from the prior year. The increase was primarily a result of the acquisition of SMI which increased selling, general and administrative costs by $12,430,000 or 37%. European selling, general and administrative expenses were positively impacted by continued cost containment initiatives implemented throughout 1999 and the strong dollar, which reduced selling, general and administrative expenses reported in dollars by $789,000. Interest. Interest income decreased in 1999 to $7,929,000 from $9,031,000 in the prior year, representing a 12% decrease. The decrease was due to a slightly lower yield on new notes booked throughout 1999 combined with a slight decrease in the average term of the new notes from 12.8 months in 1998 to 10.6 months in 1999. Interest expense increased to $22,093,000 from $20,616,000 representing a 7% increase resulting from additional borrowings incurred to fund the 1999 acquisition of Scandinavian Mobility, Inc. As a result of the increased borrowing, the company's debt-to-equity ratio increased to 1.4:1 from 1.2:1in the prior year. Income Taxes. The company had an effective tax rate of 39% in both 1999 and 1998, including the effects of the unusual and non-recurring charge taken in the current year. See Income Taxes in the Notes to Consolidated Financial Statements for further discussion. Research and Development. The company continues to increase its research and development activities to maintain its competitive advantage. While the competitive environment requires that research and development expenditures be focused on the cost reduction of products while increasing functionality and reliability, the company continues to dedicate dollars to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures increased to $15,534,000 from $12,980,000 in 1998. The expenditures, as a percentage of sales, increased to 1.8% from 1.6% in the prior year. 1998 Versus 1997 Non-recurring and Unusual Charges. The review of results that follows excludes the impact of the non-recurring and unusual charges ("the charge") taken in 1997. The reasons for the charge and the impact on the company's current and future performance, as well as the utilization thereof, is explained under the heading "Non-recurring and Unusual Charges" later in this section and in the Notes to the Financial Statements. Net Sales. Consolidated net sales for 1998 increased 22% for the year despite a 2% negative impact from foreign currency translation. Acquisitions contributed 16% of the increase. The net sales increase of 8%, excluding acquisitions and the impact of foreign currency translation, was due to an overall increase in unit volume primarily relating to new products introduced in the prior year. The volume increases were partially offset by the effects of a continuing competitive pricing environment throughout existing product lines. Sales were also negatively impacted by approximately 1% due to reduced purchases by the company's largest customer. Power wheelchairs, products for the non-acute market and personal care products posted the largest dollar increases primarily as a result of increased unit volumes. The company believes that its sales grew faster than the overall industry resulting in market share gains. This was due in part to its cost-effective "Total One Stop Shoppingsm" distribution system that is supported by the company's broad range of products and services. The company's financial objective is to grow sales 10% to 13%, excluding acquisitions and earnings per share 13% to 16% annually, although there can be no assurance that it will be able to achieve this goal. North American Operations North American sales, consisting of Rehab (power wheelchairs, custom manual wheelchairs, seating), Standard (manual wheelchairs, personal care, retail), Beds and Continuing Care (beds, low air loss therapy, furniture,patient transport equipment), Respiratory (oxygen concentrators, liquid oxygen, aerosol therapy and associated respiratory) and Distributed (ostomy, incontinence, wound care, other medical supplies) products grew 28% over the prior year. The gain was due principally to acquisitions, which contributed $101,117,000 or 20% along with dollar and unit volume growth in Rehab products. Sales increases for North American operations included Rehab up 32% and Beds and Continuing Care products up 7%, excluding acquisitions. The Respiratory product line also recorded an increase of 5% over the prior year. Offsetting these increases was a decrease in sales of Standard products of 3%, which is primarily the result of decreased sales to a major customer. 22 The sales increase attributed to acquisitions relates primarily to Suburban Ostomy Supply Company, a national direct marketing wholesaler of medical supplies and related products to the home care industry, acquired in January 1998. Acquisitions made in 1997 which positively impacted 1998 sales growth included Allied Medical Supply Corporation (acquired October 7, 1997), a distributor of soft goods and disposable products and Silcraft Corporation (acquired May 6, 1997), a manufacturer of bathing equipment and patient lifts. Rehab product sales increases were primarily attributable to the significant sales growth of the Power Mid-Wheel-Drive chairs and the Tarsys(R) Weight Shift Tilt Seating Systems. The power wheelchair line achieved strong sales growth over the prior year as sales increased 41%. Sales of custom manual wheelchairs increased 11% due to new product introductions and the continued success of the company's "Team Action" athletes, as many of the high-tech design features in high-performance sport wheelchairs are incorporated in the everyday Action chairs. The Action Orbit(TM) tilt-in-space, a pediatric product, was initially introduced during 1997 and has gained widespread acceptance in the market. Unit growth exceeded the dollar increase due to pricing pressure in this product category. The U.S. Food and Drug Administration (F.D.A.) has indicated that 510(k) clearance is needed for the Invacare(R) Venture(TM) HomeFill(TM) product released in the latter part of 1997. Invacare voluntarily suspended shipments of this product during the third quarter, pending resolution of the F.D.A.'s comments. Invacare is actively working with the F.D.A. in order to expedite the resolution of this issue. The delay is not having a material impact on the company's operating results. Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had a 2% sales increase for the year. Sales for the company's Canadian operation increased 13%, excluding an 8% negative impact from foreign currency translation. The increase was a result of volume increases as prices declined modestly for the year. Australasia Operations The Australasia products group consists of Invacare Australia, which imports and distributes the Invacare range of products and manufactures and distributes the Rollerchair range of custom power wheelchairs and Dynamic Controls, a New Zealand manufacturer of operating components used in power wheelchairs. Sales for the Australasia group increased $3,550,000 or 17% from the prior year, excluding $4,733,000 or 22% negative impact from foreign currency translation. European Operations European sales increased 6%, excluding a negative impact of 2% from foreign currency translation. Sales growth improved steadily throughout the second half of 1998 despite continuing governmental budget trends, especially in Germany and France, which resulted in reduced reimbursement levels and caused providers to utilize more refurbished equipment. Gross Profit. Consolidated gross profit as a percentage of net sales decreased to 30% from 31% last year. The decline was a result of a shift in product sales mix and continuing pricing pressures experienced across most major product lines. The company is focused on redesigning products in order to lower manufacturing costs while improving quality and reliability and implementing other spending reductions necessary to remain competitive and improve profitability. North American gross profit from operations as a percentage of net sales declined slightly principally due to the effect of businesses acquired, particularly Suburban Ostomy Supply Company, which had margins lower than the combined overall average of the company's existing business. Additionally, the effects of the company's manufacturing productivity improvements and facilities rationalization were somewhat offset by the impact of reduced purchases by a major customer in 1998. Gross profit in Australasia decreased $869,000 as the continued effects of a strong U.S. dollar negatively impacted margins. Excluding the negative impact of foreign currency translation, gross profit increased $367,000 or 6% from the prior year. Gross profit in Europe remained flat with the prior year. The continued effects of a strong U.S. dollar and overall price declines negatively impacted margins. 23 Inventory turns improved for 1998, as the plan for realignment of manufacturing facilities initiated in 1997 continued to prove effective. The company expects turns will continue to show improvement in 1999 as strategic partnerships, formed with major suppliers, begin to take effect and the facilities consolidation in Europe is completed. Selling, General and Administrative. Consolidated selling, general and administrative expense as a percentage of net sales decreased to 19% in 1998 compared to 20% in 1997. The overall dollar increase was $19,586,000 or 15%, with acquisitions increasing selling, general and administrative costs by approximately $18,899,000 or 14%. Tight expense control throughout the company resulted in a reduction in the overall expense as a percentage of sales for 1998. The company believes, with its proven ability to focus on improving productivity and with successful completion of the acquisition integration plan, it can continue to favorably impact selling, general and administrative expense as a percentage of net sales. North American operations' selling, general and administrative costs decreased as a percentage of net sales by approximately 1% from the prior year, as the focus on expense control continued during 1998. The dollar increase of $18,491,000 was entirely due to acquisitions, which increased selling, general and administrative costs by $18,899,000. The company continued its implementation of activity-based budgeting aimed at allocating the expense dollars to the programs that most effectively supported the company's business strategy. Australasia operations' selling, general and administrative expenses, increased approximately 6% from the prior year. The increase is primarily a result of restructuring costs incurred as part of the company-wide manufacturing rationalization initiative. The overall dollar increase between years was $472,000. European operations' selling, general and administrative expenses, as a percentage of net sales, remained constant at 26% with the dollar increase amounting to $623,000 or 2%. European selling, general and administrative expenses were positively impacted by continued cost containment initiatives implemented throughout 1998 and 1997 and the strong dollar, which reduced selling, general and administrative expenses reported in dollars by 6%. Interest. Interest income decreased in 1998 to $9,031,000 from $9,321,000 last year, representing a 3% decrease. The decrease was a result of an overall decrease in the volume of installment loans written during the year, coupled with a slight decrease in the portfolio's effective rate. Interest expense increased to $20,616,000 from $12,555,000, representing a 64% increase resulting from additional borrowings incurred to fund the 1998 acquisition of Suburban Ostomy Supply Company. As a result, the company's debt-to-equity ratio increased to 1.2:1 from .8:1. Income Taxes. The company had an effective tax rate of 39% in 1998 and 1997, excluding the effects of the unusual and non-recurring charge taken in the prior year. Including the effects of the charge, the effective tax rate in 1997 was 70% due to the impact of increased permanent differences applied against reduced pretax earnings. See Income Taxes in the Notes to Consolidated Financial Statements for further discussion. Research and Development. The company continues to increase its research and development activities to maintain its competitive advantage. While the competitive environment requires that research and development expenditures be focused on the cost reduction of products while increasing functionality and reliability, the company continues to dedicate dollars to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures increased to $12,980,000 from $12,706,000 in 1997. The expenditures, as a percentage of sales, decreased slightly as a result of the acquisition of Suburban Ostomy Supply Company. Suburban Ostomy, a national direct marketing wholesaler of medical supplies and related products to the home care industry, by the nature of its business, does not typically incur research and development costs. INFLATION Although the company cannot determine the precise effects of inflation, management believes that inflation does continue to have an influence on the cost of materials, salaries and benefits, utilities and outside services. The company attempts to minimize or offset the effects through increased sales volume, capital expenditure programs designed to improve productivity, alternative sourcing of material and other cost control measures. In 1999 and 1998, the company was able to offset the majority of the impact of price increases from suppliers by productivity improvements and other cost reduction activities. 24 LIQUIDITY AND CAPITAL RESOURCES The company continues to maintain an adequate liquidity position through its unused bank lines of credit (see Long-Term Obligations in the Notes to Consolidated Financial Statements) and working capital management. The company maintains various bank lines of credit to finance its world-wide operations. In 1997, the company completed a $425,000,000 multi-currency, long-term revolving credit agreement, which expires on October 31, 2002, or such later date as mutually agreed upon by the company and the banks. Additionally, the company maintains various other demand lines of credit totaling a U.S. dollar equivalent of approximately $15,476,000 as of December 31, 1999. The lines of credit have been and will continue to be used to fund the company's domestic and foreign working capital, capital expenditures and acquisition requirements. As of December 31, 1999, the company had approximately $108,464,000 available under its various lines of credit. In 1998, the company completed a private placement of $100,000,000 in senior notes having a blended fixed coupon rate of 6.69% with $20,000,000 maturing in the year 2005 and $80,000,000 maturing in 2008. The proceeds were used to pay-down revolving credit debt incurred to fund the acquisition of Suburban Ostomy Supply Co., Inc., which was consummated on January 28, 1998. The company's borrowing arrangements contain covenants with respect to net worth, dividend payments, working capital, funded debt to capitalization and interest coverage, as defined in the company's bank agreements and agreement with its note holders. The company is in compliance with all covenant requirements. Under the most restrictive covenant of the company's borrowing arrangements, the company may borrow up to an additional $151,543,000 as of December 31, 1999. While there is general concern about the potential for rising interest rates, exposure to interest fluctuations is manageable as the majority of debt is at fixed rates through 2001. The fixed interest debt coupled with free cash flow ensures Invacare's ability to absorb the expected modest rate increases in the months ahead. However, there will be a need to refinance a portion of debt sometime during the next three years as the existing revolving credit agreement matures in 2002. CAPITAL EXPENDITURES There are no individually material capital expenditure commitments outstanding as of December 31, 1999. The company expects to invest in capital projects at a rate that equals or slightly exceeds depreciation and amortization in order to maintain and improve the company's competitive position. The company estimates that capital investments for 2000 will approximate $28,000,000. The company believes that its balances of cash and cash equivalents, together with funds generated from operations and existing borrowing facilities will be sufficient to meet its operating cash requirements and fund required capital expenditures for the foreseeable future. CASH FLOWS Cash flows provided by operating activities were $72,840,000, compared to $49,950,000 last year. The increase is primarily the result of the net change in accrued expenses and trades receivables versus the net change in the prior year. The non-cash effects of the non-recurring charge also favorably impacted net cash provided by operating activities. The changes in operating assets and liabilities are not apparent from the face of the balance sheet as funds expensed for assets acquired through business acquisitions are accounted for in the investment activities section of the Consolidated Statement of Cash Flows. Cash flows required for investing activities increased $10,384,000. The increase was primarily a result of the acquisition of Scandinavian Mobility International AS in 1999, which required more cash than the Suburban Ostomy Supply acquisition in 1998, and an increase in net installment receivables. Cash flows provided by financing activities in 1999 were $134,162,000, slightly less than in 1998. The decrease in cash provided by financing activities was principally a result of a decrease in net borrowing activity during the year, despite the acquisition of Scandinavian Mobility International AS. In addition to acquisition activities, the effect of foreign currency translation results in amounts being shown for cash flows in the Consolidated Statement of Cash Flows that are different from the changes reflected in the respective balance sheet captions. 25 DIVIDEND POLICY It is the company's policy to pay a nominal dividend in order for its stock to be more attractive to a broader range of investors. The current annual dividend rate remains at $.05 per Common Share and $.045 per Class B Common Share. It is not anticipated that this will change materially as the company continues to have available significant growth opportunities through internal development and acquisitions. For 1999, a dividend of $.05 per Common Share and $.045 per Class B Common Share was declared and paid. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using the last two digits rather than four to define the applicable year. Thus, many programs are unable to properly distinguish between the year 1900 and the year 2000. This is frequently referred to as the "Year 2000 Problem." The company currently is not aware of any significant problems that have arisen for its customers and suppliers. The company completed a comprehensive project, which included the modification of existing information technology in order to recognize the year 2000 and the conversion of its critical data processing systems. The project consisted of an iterative process of assessing, remediating, testing and implementing new software as required. The company was also in contact with each of its major customers and vendors to make sure that they were also year 2000 compliant. The company spent approximately $6.3 million on the project and funded it entirely through operating cash flows. The estimate includes the cost of a combination of existing internal and external resources and excludes the costs to upgrade and replace systems in the normal course of business. The project did not have a material effect on the company's results of operations or financial position. The company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the company does not expect any significant impact on its ongoing business as a result of the Year 2000 Problem. However, it is possible that the full impact of the Year 2000 Problem has not been fully recognized. EURO CONVERSION On January 1, 1999, 11 of the 15 member countries of the European Union (the "participating countries") established a fixed rate between their existing sovereign currencies (the "legacy currencies") and the Euro. The legacy currencies are scheduled to remain legal tender in the participating countries between January 1, 1999 and July 1, 2002. Beginning January 1, 2002, the Euro currency will be introduced and the legacy currencies withdrawn from circulation six months later. The company believes with modifications to existing computer software and conversion to new software, the Euro conversion issue will not pose significant operational problems to its normal business activities. The company does not expect costs associated with the Euro conversion project to have a material effect on the company's results of operations or financial position. NON-RECURRING AND UNUSUAL CHARGE In 1999, the company announced non-recurring and unusual charges of $14,800,000 ($9,028,000 or $.29 diluted per share after-tax) primarily related to the acquisition of Scandinavian Mobility International AS ("SMI"). The charges included a provision for the shut down of facilities, personnel reductions, write-off of assets that will no longer be used in the business and the write-off of costs incurred in conjunction with acquisitions that were not completed. The shut down of facilities and personnel reductions are related to the integration of SMI and are required to obtain the expected synergies from the acquisition. The company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $3,300,000. During 1999, approximately $2,503,000 for asset write-downs and $146,000 in employee severance costs were utilized. The company anticipates all initiatives for which charges have been reported will be substantially completed in 2000. See Non-Recurring and Unusual charges in the Notes to Consolidated Financial Statements for further discussion. In 1997, the company announced non-recurring and unusual charges of $61,039,000 ($38,839,000 or $1.28 diluted per share after tax) for the acceleration of certain strategic initiatives and other items. The components of the charges included the acceleration of global manufacturing facility consolidations and the elimination of certain non-strategic product lines, the acceleration of certain global systems' initiatives, an increase in the company's bad debt reserve and asset write-downs and an increase in reserves for litigation. The 26 portion of the charge identified for certain global systems initiatives related to the write-off of assets that will not benefit future periods due to new systems replacements or the change in scope of the original project. There were no Year 2000 costs charged to the reserve as these costs are expensed as incurred. The remaining accrual balance at December 31, 1999, is $690,000 and relates primarily to litigation. The company expects substantially all of the remaining charge to be utilized over the next few months. See Non-Recurring and Unusual charges in the Notes to Consolidated Financial Statements for further discussion. Item 7a. Quantitative and Qualitative Disclosure about Market Risk The company is exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. The Company uses interest swap agreements to mitigate its exposure to interest rate fluctuations. Based on December 31, 1999 debt levels, a 1% change in interest rates would impact interest expense by approximately $1,635,000. Additionally, the company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany loans, and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized. The company does not believe that any potential loss related to these financial instruments will have a material adverse effect on the company's financial condition or results of operations. PRIVATE SECURITIES LITIGATION REFORM ACT This Annual Report on Form 10-K contains forward-looking statements based on current expectations which are covered under the "safe harbor" provision within the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning our possible or assumed future results of operations and statements in which we use words such as "expect," "will," "believe," "anticipate," "intend," "plan," "estimate," "project" or similar expressions. Actual results and events, including the results from the acquisition and integration of Scandinavian Mobility and the acceleration of certain strategic initiatives for which a non-recurring charge has been reported, may differ significantly from those anticipated as a result of risks and uncertainties which include, but are not limited to, pricing pressures, the consolidations of health care customers and competitors, the availability of strategic acquisition candidates, government reimbursement issues including those that affect the viability of customers, the effect in offering customers competitive financing terms, Invacare's ability to effectively integrate acquired companies, the difficulties in managing and operating businesses in many different foreign jurisdictions, the timely completion of facility consolidations, the overall economic, market and industry growth conditions, foreign currency and interest rate risk, as well as the risks described from time to time in Invacare's reports as filed with the Securities and Exchange Commission. Item 8. Financial Statements and Supplementary Data. Reference is made to the Report of Independent Auditors, Consolidated Balance Sheet, Consolidated Statement of Earnings, Consolidated Statement of Cash Flows, Consolidated Statement of Shareholders' Equity, Notes to Consolidated Financial Statements and Financial Statement Schedule which appear on pages FS -1 to FS - 22 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by Item 10 as to the Directors of the company is incorporated herein by reference to the information set forth under the caption "Election of Directors" in the company's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the company's fiscal year pursuant to Regulation 14A. Information required by Item 10 as to the Executive Officers of the company is included in Part I of this Report on Form 10-K. 27 Item 11. Executive Compensation. The information required by Item 11 is incorporated by reference to the information set forth under the captions "Compensation of Executive Officers" and "Compensation of Directors" in the company's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the company's fiscal year pursuant to Regulation 14A. Item. 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Item 12 is incorporated by reference to the information set forth under the caption "Share Ownership of Principal Holders and Management" in the company's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the company's fiscal year pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions. The information required by Item 13 is incorporated by reference to the information set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the company's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the company's fiscal year pursuant to Regulation 14A. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) Financial Statements The following financial statements of the company are included in Part II, Item 8: Consolidated Statement of Earnings - years ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheet - December 31, 1999 and 1998 Consolidated Statement of Cash Flows - years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Shareholders' Equity - years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (a)(2)Financial Statement Schedules. The following financial statement schedule of the company is included in Part II, Item 8: Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits. See Exhibit Index at page number I-29 of this Report on Form 10-K. (b) Reports on Form 8-K. None 28 Pursuant to the requirements of Section 13 or 15(d) 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 on March 30, 2000. INVACARE CORPORATION By: /S/ A. Malachi Mixon, III ------------------------------------------- A. Malachi Mixon, III Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2000. Signature Title /S/ A. Malachi Mixon, III Chairman of the Board of Directors and - ------------------------- Chief Executive Officer (Principal Executive A. Malachi Mixon, III Officer) /S/ Gerald B. Blouch President, Chief Operating Officer and Director - ------------------------- Gerald B. Blouch /S/ Thomas R. Miklich Chief Financial Officer, General Counsel and - ------------------------- Corporate Secretary (Principal Financial and Thomas R. Miklich Accounting Officer) /S/ Frank B. Carr Director - ------------------------- Frank B. Carr /S/ Michael F. Delaney Director - ------------------------- Michael F. Delaney /S/ Whitney Evans Director - ------------------------- Whitney Evans /S/ Dan T. Moore, III Director - ------------------------- Dan T. Moore, III /S/ E. P. Nalley Director - ------------------------- E. P. Nalley /S/ Joseph B. Richey, II Director - ------------------------- Joseph B. Richey, II /S/ William M. Weber Director - ------------------------- William M. Weber /S/ Dr. Bernadine P. Healy Director - ------------------------- Dr. Bernadine P. Healy /S/ James C. Boland Director - ------------------------- James C. Boland 29
INVACARE CORPORATION Report on Form 10-K for the fiscal year ended December 31, 1999. Exhibit Index Official Exhibit No Description Sequential Page No. - ---------- ----------- ------------------- 3(a) - Amended and Restated Articles of Incorporation, as amended through (A) May 29, 1987 3(b) - Code of Regulations, as amended on May 22, 1996 (V) 3(c) - Amended and Restated Articles of Incorporation, as amended through February 2, 1996 (T) 4(a) - Specimen Share Certificate for Common Shares, as revised (H) 4(b) - Specimen Share Certificate for Class B Common Shares (H) 4(d) - Rights agreement between Invacare Corporation and Rights Agent dated as of (S) July 7, 1995 10(a) - Stock Option Plan, adopted in February 1984 (B)* 10(b) - Amendment to Stock Option Plan, adopted in May 1987 (C)* 10(c) - Amendment to Stock Option Plan, adopted in May 1988 (D)* 10(d) - Amendment to Stock Option Plan, adopted in May 1991 (I)* 10(h) - Assignment of Patent Application and License of Know-how dated January 14, 1981, and an (E) amendment thereto dated October 12, 1981, with respect to certain royalty payments to be made to the former owners of the company's home care bed subsidiary 10(p) - Form of Indemnity Agreement entered into by and between the company and certain of its (H) Directors and officers and Schedule of all such Agreements with current Directors and officers 10(r) - Master Note, between Invacare Corporation and Sanwa Bank, Limited (J) 10(s) - Employees' Stock Bonus Trust and Plan as amended and restated effective (G)* January 1, 1988 and as amended on April 13, 1988, April 3, 1990, and May 24, 1991 10(t) - Profit Sharing and Savings Trust and Plan effective as of January 1, 1988 and as amended (G)* on November 28, 1988, September 12, 1990, October 9, 1990, and May 24, 1991 10(u) - Agreement between Invacare Corporation and Weber, Wood, Medinger, Inc. (J) 10(v) - Real Property Purchase Agreement by and between Invacare Corporation and Taylor Street (N) limited partnership 10(z) - Note Agreement dated February 1, 1993 among Invacare Corporation and five purchasers of (P) an aggregate of $25,000,000, 7.45% Senior Notes due February 1, 2003 10(aa) - Amendments to Stock Option Plan adopted in May 1992 (M)* 30 10(ab) - 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (K) 10(ac) - Deferred Compensation Plan for Non-Employee Directors, adopted in May 1992 (L) 10(ad) - Shares Purchase and Contribution Agreement dated July 27, 1992 (O) 10(af) - Invacare Corporation 1994 Performance Plan approved January 28, 1994 (Q)* 10(ag) - Real Property Purchase Agreement between Mobilite Building Corporation (a newly formed (R) subsidiary of Invacare Corporation as of February 15, 1994) and I-M Associates, LTD. dated February 28, 1994 10(ar) - First Amendment to Note Agreement among Invacare Corporation and five purchasers of (U) Senior Notes dated March 20, 1997 10(as) - Loan Agreement by and among Invacare Corporation, the Banks, certain borrowing (F) subsidiaries, the Banks named therein, NBD Bank, as agent for the Banks and KeyBank National Association, as co-agent for the Banks 10(at) - Agreement and Plan of Merger, dated December 17, 1997, between Invacare Corporation, (W) Inva Acquisition Corp. and Suburban Ostomy Supply Co., Inc. 10(au) - Note Purchase Agreement dated as of February 27, 1998 for $80,000,000 6.71% Series A (X) Senior Notes Due February 27, 2008 and $20,000,000 6.60% Series B Senior Notes Due February 27, 2005 10(av) - Amendment No. 1 to the Invacare Corporation 1994 Performance Plan approved May 28, 1998. 21 - Subsidiaries of the company 23 - Consent of Independent Auditors 27 - Financial data schedule 99(a) - Executive Liability and Defense Coverage Insurance Policy (H) 99(b) - Supplemental Executive Retirement Plan (Y)
* Management contract, compensatory plan or arrangement 31 (A) Reference is made to Exhibit A of the company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 28, 1987, which Exhibit is incorporated herein by reference. (B) Reference is made to the appropriate Exhibit of the company's Report on Form 10-K for the fiscal year ended December 31, 1984, which Exhibit is incorporated herein by reference. (C) Reference is made to the appropriate Exhibit of the company's report on Form 10-K for the fiscal year ended December 31, 1987, which Exhibit is incorporated herein by reference. (D) Reference is made to Exhibit A of the company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 25, 1988, which Exhibit is incorporated herein by reference. (E) Reference is made to the appropriate Exhibit of the company's Form 8 Amendment No. 1 (filed on September 23, 1987) to its Registration Statement on Form 8-A (Reg. No. 0-12938, effective as of October 21, 1986), which Exhibit is incorporated herein by reference. (F) Reference is made to the appropriate Exhibit of the company's report on Form 10-K for the fiscal year ended December 31, 1997, as amended, which is incorporated herein by reference. (G) Reference is made to the appropriate Exhibit of the company's report on Form 10-K for the fiscal year ended December 31, 1990, as amended, which is incorporated herein by reference. (H) Reference is made to the appropriate Exhibit of the company's Registration Statement on Form S-3 (Reg. No. 33-40168), effective as of April 26, 1991, which Exhibit is incorporated herein by reference. (I) Reference is made to Exhibit A of the company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 24, 1991, which Exhibit is incorporated herein by reference. (J) Reference is made to the appropriate Exhibit of the company's report on Form 10-K for the fiscal year ended December 31, 1991, as amended, which is incorporated herein by reference. (K) Reference is made to Exhibit A of the company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 27, 1992, which Exhibit is incorporated herein by reference. (L) Reference is made to Exhibit B of the company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 27, 1992, which Exhibit is incorporated herein by reference. (M) Reference is made to Exhibit C of the company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 27, 1992, which Exhibit is incorporated herein by reference. (N) Reference is made to the appropriate Exhibit of the company's report on Form 10-Q for the quarter ended June 30, 1992, which Exhibit is incorporated herein by reference. (O) Reference is made to Exhibit 2 of the company's report on Form 8-K, dated October 29, 1992, which Exhibit is incorporated herein by reference. (P) Reference is made to the appropriate Exhibit of the company's report on Form 10-K for the fiscal year ended December 31, 1992, which Exhibit is incorporated herein by reference. (Q) Reference is made to Exhibit A of the company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 23, 1994, which Exhibit is incorporated herein by reference. (R) Reference is made to the appropriate Exhibit of the company's report on Form 10-K for the fiscal year ended December 31, 1993, which Exhibit is incorporated herein by reference. 32 (S) Reference is made to Exhibit 1 of the company's report on Form 8-A, dated July 18, 1995, which Exhibit is incorporated herein by reference. (T) Reference is made to the appropriate Exhibit of the Company's Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 22, 1996, which Exhibit is incorporated herein by reference. (U) Reference is made to the appropriate Exhibit of the company's report on Form 10-Q for the quarter ended March 31, 1997, which Exhibit is incorporated herein by reference. (V) Reference is made to the appropriate Exhibit of the company's report on Form 10-Q for the quarter ended September 30, 1996, which Exhibit is incorporated herein by reference. (W) Reference is made to the appropriate Exhibit to the company's report on Form 8-K, dated January 23, 1998, which Exhibit is incorporated herein by reference. (X) Reference is made to the appropriate Exhibit of the company's report on Form 10-Q for the quarter ended March 31, 1998, which Exhibit is incorporated herein by reference. (Y) Reference is made to the appropriate Exhibit of the company's report on Form 10-K for the fiscal year ended December 31, 1996, which Exhibit is incorporated herein by reference. 33 Report of Independent Auditors Shareholders and Board of Directors Invacare Corporation We have audited the accompanying consolidated balance sheet of Invacare Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14 (a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Invacare Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Cleveland, Ohio January 25, 2000 34 CONSOLIDATED STATEMENT OF EARNINGS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 1999 1998 1997 ---------------------------------------- (In thousands, except per share data) Net sales $878,261 $797,529 $653,414 Cost of products sold 607,074 559,016 455,036 -------- -------- -------- Gross Profit 271,187 238,513 198,378 Selling, general and administrative expenses 177,579 157,595 160,060 Non-recurring and unusual items 11,500* (5,736)** 29,861*** -------- -------- -------- Income from Operations 82,108 86,654 8,457 Interest income 7,929 9,031 9,321 Interest expense (22,093) (20,616) (12,555) -------- -------- -------- Earnings before Income Taxes 67,944 75,069 5,223 Income taxes 26,450 29,277 3,660 -------- -------- -------- Net Earnings $ 41,494 $ 45,792 $ 1,563 ======== ======== ======== Net Earnings per Share - Basic $ 1.38 $ 1.53 $ .05 ======== ======== ======== Weighted Average Shares Outstanding - Basic 30,138 29,932 29,569 ======== ======== ======== Net Earnings per Share - Assuming Dilution $ 1.36 $ 1.50 $ .05 ======== ======== ======== Weighted Average Shares Outstanding - Assuming Dilution 30,619 30,583 30,374 ======== ======== ========
* The company recorded pre-tax charges aggregating $14,800 ($.29 diluted per share after-tax) in the fourth quarter of 1999, principally related to the acquisition of Scandinavian Mobility International AS ("SMI"). The charges were recorded in selling, general and administrative expenses ($3,300) and as non-recurring and unusual items ($11,500). ** Represents changes in the components of the non-recurring and unusual charges reported in 1997, to reflect 1998 activity. These changes were offset by additional charges primarily for asset write-downs affecting cost of sales and selling, general and administrative expenses by $2,596 and $3,072, respectively. The net effect of these changes had no material impact on earnings for the year. *** Excludes amounts included in cost of products sold and selling, general and administrative expenses of $3,391 and $27,787, respectively, in 1997. See notes to consolidated financial statements. 35 CONSOLIDATED BALANCE SHEET INVACARE CORPORATION AND SUBSIDIARIES
December 31, December 31, 1999 1998 ------------ ------------ (In thousands) Assets Current Assets Cash and cash equivalents $ 18,258 $9,460 Marketable securities 1,593 2,634 Trade receivables, net 181,550 156,694 Installment receivables, net 70,378 60,330 Inventories 108,535 81,740 Deferred income taxes 26,561 17,331 Other current assets 11,745 8,553 -------- -------- Total Current Assets 418,620 336,742 Other Assets 71,316 62,388 Property and Equipment, net 137,132 112,944 Goodwill, net 328,217 226,682 -------- -------- Total Assets $955,285 $738,756 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 58,367 $ 47,628 Accrued expenses 97,156 65,505 Accrued income taxes 15,547 12,339 Current maturities of long-term obligations 6,401 8,492 -------- -------- Total Current Liabilities 177,471 133,964 Long-Term Debt 440,795 311,260 Other Long-Term Obligations 18,147 12,644 Shareholders' Equity Preferred Shares (Authorized 300 shares; none outstanding) 0 0 Common Shares (Authorized 100,000 shares; 29,125 and 29,066 issued in 1999 and 1998, respectively) 7,282 7,267 Class B Common Shares (Authorized 12,000 shares; 1,433 and 1,434, issued and outstanding in 1999 and 1998, respectively) 358 358 Additional paid-in-capital 79,470 79,863 Retained earnings 251,955 211,954 Accumulated other comprehensive earnings (loss) (8,976) (7,712) Treasury shares (579 and 607 shares in 1999 and 1998, respectively) (11,217) (10,842) -------- -------- Total Shareholders' Equity 318,872 280,888 -------- -------- Total Liabilities and Shareholders' Equity $955,285 $738,756 ======== ========
See notes to consolidated financial statements. 36 CONSOLIDATED STATEMENT OF CASH FLOWS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 1999 1998 1997 --------- --------- --------- (In thousands) Operating Activities Net earnings $ 41,494 $ 45,792 $1,563 Adjustments to reconcile net earnings to net cash provided by operating activities: Non-recurring unusual charge, (non cash) 9,360 5,049 40,226 Depreciation and amortization 25,978 23,754 18,348 Provision for losses on trade and installment receivables 6,783 2,802 1,411 Provision for deferred income taxes 4,608 6,425 (18,867) Provision for other deferred liabilities 559 1,131 2,546 Changes in operating assets and liabilities: Trade receivables (22,402) (34,315) (13,265) Inventories (7,465) (2,176) (1,817) Other current assets (729) (2,518) (1,911) Accounts payable 3,345 2,857 1,001 Accrued expenses 11,309 1,149 8,700 --------- --------- --------- Net Cash Provided by Operating Activities 72,840 49,950 37,935 Investing Activities Purchases of property and equipment (22,607) (29,331) (38,485) Capitalized consulting costs related to systems implementation (10,201) (10,978) (1,011) Proceeds from sale of property and equipment 653 804 523 Installment contracts written (86,833) (72,641) (74,104) Payments received on installment contracts 72,642 64,036 67,265 Marketable securities purchased (623) (571) (4,018) Marketable securities sold 1,481 1,512 4,140 Business acquisitions, net of cash acquired (141,536) (129,318) (3,997) (Increase)/decrease in other investments (3,609) (3,212) 4,316 Increase in other long-term assets (9,700) (13,123) (5,394) Other 2,178 5,051 (2,272) --------- --------- --------- Net Cash Required for Investing Activities (198,155) (187,771) (53,037) Financing Activities Proceeds from revolving lines of credit and long-term borrowings 344,908 371,512 79,169 Principal payments on revolving lines of credit, long-term debt and capital lease obligations (208,033) (231,427) (64,993) Proceeds from exercise of stock options 1,441 4,754 3,766 Payment of dividends (1,493) (1,487) (1,475) Purchase of treasury stock (2,661) (2,517) 0 --------- --------- --------- Net Cash Provided by Financing Activities 134,162 140,835 16,467 Effect of exchange rate changes on cash (49) 750 (100) --------- --------- --------- Increase in cash and cash equivalents 8,798 3,764 1,265 Cash and cash equivalents at beginning of year 9,460 5,696 4,431 --------- --------- --------- Cash and cash equivalents at end of year $ 18,258 $ 9,460 $ 5,696 ========= ========= =========
See notes to consolidated financial statements. 37 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY INVACARE CORPORATION AND SUBSIDIARIES
(In thousands) Accumulated Additional Other Common Class B Paid-in- Retained Comprehensive Treasury Stock Shares Stock Shares Capital Earnings Earnings(Loss) Stock Shares Total ------- ------ ------- ------ ---------- -------- -------------- --------- ------ ----- January 1, 1997 Balance $ 7,103 28,408 $360 1,442 $71,143 $167,561 $ (833) $ (6,737) (418) $238,597 Conversion of shares from Class B to Common 1 4 (1) (4) - Exercise of stock options 78 312 3,811 3,889 Net earnings 1,563 1,563 Foreign currency translation adjustments (6,074) (6,074) Marketable securities holding gain/(loss), net of tax 401 401 --- Total comprehensive loss - net of tax (4,110) Dividends - $.05 per share (1,475) (1,475) Repurchase of treasury shares (486) (20) (486) - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1997 Balance 7,182 28,724 359 1,438 74,954 167,649 (6,506) (7,223) (438) 236,415 Conversion of shares from Class B to Common 1 4 (1) (4) - Excercise of stock options 84 338 4,909 4,993 Net earnings 45,792 45,792 Foreign currency translation adjustments (561) (561) Marketable securities holding gain/(loss), net of tax (645) (645) ----- Total comprehensive income - net of tax 44,586 Dividends - $.05 per share (1,487) (1,487) Repurchase of treasury shares (3,619) (169) (3,619) - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1998 Balance 7,267 29,066 358 1,434 79,863 211,954 (7,712) (10,842) (607) 280,888 Conversion of shares from Class B to Common 1 (1) - Excercise of stock options 15 58 (393) 2,286 148 1,908 Net earnings 41,494 41,494 Foreign currency translation adjustments (1,561) (1,561) Marketable securities holding gain/(loss), net of tax 297 297 --- Total comprehensive income - net of tax 40,230 Dividends - $.05 per share (1,493) (1,493) Repurchase of treasury shares (2,661) (120) (2,661) - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1999 Balance $7,282 29,125 $358 1,433 $79,470 $251,955 $(8,976) $(11,217) (579) $318,872
See notes to consolidated financial statements. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVACARE CORPORATION AND SUBSIDIARIES ACCOUNTING POLICIES Nature of Operations: Invacare Corporation and its subsidiaries (the "company") is the leading home medical equipment manufacturer in the world based on its distribution channels, the breadth of its product line and sales. The company designs, manufactures and distributes an extensive line of medical equipment for the home health care, retail and extended care markets. The company's products include standard manual wheelchairs, motorized and lightweight prescription wheelchairs, seating and positioning systems, motorized scooters, patient aids, home care beds and low air loss therapy products. Principles of Consolidation: The consolidated financial statements include the accounts of the company and are prepared in conformity with accounting principles generally accepted in the United States which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates. Certain foreign subsidiaries are consolidated using a November 30 fiscal year end. All significant intercompany transactions are eliminated. Recently Issued Accounting Pronouncements: In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and for Hedging Activities. This statement requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for certain types of hedges. The company must adopt the statement no later than the first quarter of 2001. Management is currently studying the potential effects of the adoption of this statement but does not anticipate a significant impact on the company's financial position or results of operations. Marketable Securities: Current marketable securities consist of short-term investments in repurchase agreements, government and corporate securities, certificates of deposit and equity securities. Marketable securities with original maturities of less than three months are treated as cash equivalents. The company has classified its marketable securities as available for sale. The securities are carried at their fair value and net unrealized holding gains and losses, net of tax, are carried as a component of accumulated other comprehensive earnings (loss). Inventories: Inventories are stated at the lower of cost or market with cost principally determined for domestic manufacturing inventories by the last-in, first-out (LIFO) method and for non-domestic inventories and domestic finished products purchased for resale ($81,841,000 and $50,106,000 at December 1999 and 1998, respectively) by the first-in, first-out (FIFO) method. Market costs are based on the lower of replacement cost or estimated net realizable value. Property and Equipment: Property and equipment are stated on the basis of cost. The company principally uses the straight-line method of depreciation for financial reporting purposes based on annual rates sufficient to amortize the cost of the assets over their estimated useful lives. Accelerated methods of depreciation are used for Federal income tax purposes. Expenditures for maintenance and repairs are charged to expense as incurred. Estimated Liability for Future Warranty Cost: Generally, the company's products are covered by warranties against defects in material and workmanship for periods up to five years from the date of sale to the customer. Certain parts and components carry a lifetime warranty. A non-renewable warranty is also offered on various products for a maximum period of five years. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. Research and Development: Research and development costs are expensed as incurred. The company's annual expenditures for product development and engineering were approximately $15,534,000, $12,980,000, and $12,706,000 for 1999, 1998, and 1997, respectively. Revenue Recognition: The company recognizes revenue when the product is shipped and provides an appropriate allowance for estimated returns and adjustments. Income Taxes: The company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities in the balance sheet. The liability method requires that deferred income taxes reflect the tax consequences of currently enacted rates for differences between the tax and financial reporting bases of assets and liabilities. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES ACCOUNTING POLICIES--Continued Net Earnings Per Share: Basic earnings per share are computed based on the weighted-average number of Common Shares and Class B Common Shares outstanding during the year. Diluted earnings per share are computed based on the weighted-average number of Common Shares and Class B Common Shares outstanding plus the effects of dilutive stock options outstanding during the year. Foreign Currency Translation: Substantially all the assets and liabilities of the company's foreign subsidiaries are translated into U.S. dollars at year end exchange rates. Revenues and expenses are translated at weighted average exchange rates. Gains and losses resulting from translation are included in accumulated other comprehensive earnings (loss). Goodwill: The excess of the aggregate purchase price over the fair value of net assets acquired is amortized by use of the straight line method for periods ranging from 20 to 40 years. The accumulated amortization was $27,298,000 and $20,039,000 at December 31, 1999 and 1998, respectively. The carrying value of goodwill is reviewed at each balance sheet date to determine whether goodwill has been impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the company's carrying value of the goodwill would be reduced by the estimated shortfall of discounted cash flows. Based on the company's review as of December 31, 1999, no impairment of goodwill was evident. Advertising: Advertising costs are expensed as incurred and included in "selling, general and administrative expenses." Advertising expenses amounted to $17,391,000, $13,386,000 and $10,419,000 for 1999, 1998 and 1997, respectively. RECEIVABLES Trade receivables are net of allowances for doubtful accounts of $14,339,000 and $5,566,000 in 1999 and 1998, respectively. Installment receivables as of December 31, 1999 and 1998 consist of the following:
1999 1998 ---- ---- Long- Long- (In thousands) Current Term* Total Current Term* Total ------- ----- ----- ------- ----- ----- Installment receivables $78,701 $26,817 $105,518 $67,876 $23,661 $91,537 Less: Unearned interest (3,380) (1,653) (5,033) (3,663) (1,592) (5,255) Allowance for doubtful accounts (4,943) (2,152) (7,095) (3,883) (1,536) (5,419) ------- ------- ------- ------- ------- ------- $70,378 $23,012 $93,390 $60,330 $20,533 $80,863 ======= ======= ======= ======= ======= =======
* Long - term installment receivables are included in "Other Assets" on the consolidated balance sheet. INVENTORIES Inventories as of December 31, 1999 and 1998 consist of the following: 1999 1998 ------- ------- (In thousands) Raw materials $33,564 $21,019 Work in process 16,825 14,928 Finished goods 58,146 45,793 -------- ------- $108,535 $81,740 ======== ======= The value of inventory on the LIFO method is approximately equal to its current cost as of December 31, 1999. As of December 31, 1998, the current cost exceeds the LIFO value of inventories by approximately $209,000. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1999 and 1998 consist of the following: 1999 1998 ---------- ---------- (In thousands) Land, buildings and improvements $ 58,974 $ 44,797 Machinery and equipment 163,717 140,577 Furniture and fixtures 14,776 11,950 Leasehold improvements 9,985 7,628 ---------- ---------- 247,452 204,952 Less allowance for depreciation 110,320 92,008 ---------- ---------- $ 137,132 $ 112,944 ========== ========== CURRENT LIABILITIES Accrued expenses as of December 31, 1999 and 1998 consist of the following: 1999 1998 ---------- ---------- (In thousands) Accrued salaries and wages $ 24,991 $ 20,560 Acquisition reserves 15,267 6,283 Accrued insurance 8,259 7,591 Accrued warranty cost 7,758 6,619 Accrued rebates 5,001 3,663 Accrued interest 4,660 3,739 Accrued product liability, current portion 1,142 1,434 Other accrued items 30,078 15,616 ---------- ---------- $ 97,156 $ 65,505 ========== ========== ACQUISITIONS Effective July 31, 1999, IVC Holdings Denmark A/S ("Holdings"), a wholly owned subsidiary of Invacare Corporation, acquired substantially all of the outstanding shares of common stock of Scandinavian Mobility International A/S ("SMI"), a Danish corporation for approximately $142 million in cash. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the estimated fair value of the common stock acquired is being amortized over 40 years. SMI is a producer and distributor of rehabilitation products, mobility aids and related products in Europe. In connection with the acquisition, restructuring reserves of $13.2 million were included in the preliminary purchase price allocation for Invacare's business restructuring plan to consolidate and integrate the operations of SMI and Invacare. The reserves consist of accruals for severance and other employee related costs ($8.5 million) and costs associated with the closure of facilities ($4.7 million). Payments charged against the SMI restructuring reserve totaled approximately $1 million for severance and other employee related costs as of December 31, 1999. The following unaudited pro forma consolidated results of operations give effect to the SMI acquisition as though it had occurred on January 1, 1998 and include certain adjustments, such as additional amortization expense as a result of goodwill and increased interest expense related to debt incurred for the acquisition. Twelve Months Ended December 31, 1999 1998 -------- -------- Net sales $958,754 $906,493 Net income 42,017 45,833 Income per share - basic 1.39 1.53 Income per share - diluted 1.37 1.50 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES ACQUISITIONS--Continued Pro forma net sales and net income are not necessarily indicative of the net sales and net income that would have occurred had the acquisition been made at the beginning of the period or the results that may occur in the future. In January 1998, the company acquired for approximately $132 million in cash all outstanding shares of Suburban Ostomy Supply Company, Incorporated a leading national direct marketing wholesaler of medical supplies and related products to the home care industry. Suburban complements Invacare's industry-leading "Total One Stop Shoppingsm" strategy and significantly strengthens our industry-leading position by adding a complete line of medical supplies and soft goods. In May 1997, the company purchased all of the outstanding shares of Silcraft Corporation. Silcraft manufactures and distributes bath tubs, barrier-free showers and patient lifts for use primarily in extended-care facilities. In October 1997, the company purchased all of the outstanding shares of Allied Medical Supply Corporation, a distributor of medical soft goods and disposables. The operating results of all acquisitions are included in the company's consolidated results of operations from the respective dates of acquisition. The above transactions have been accounted for by the purchase method of accounting. The results of operations of the acquired businesses (except for Scandinavian Mobility International and Suburban) prior to the date of acquisition were not material to the company. LEASES AND COMMITMENTS The company leases a substantial portion of its facilities, transportation equipment, data processing equipment and certain other equipment. These leases have terms of up to 10 years and provide for renewal options. Generally, the company is required to pay taxes and normal expenses of operating the facilities and equipment. As of December 31, 1999, the company is committed under non-cancelable operating leases which have initial or remaining terms in excess of one year and expire on various dates through 2006. Lease expenses were approximately $9,178,000 in 1999, $7,975,000 in 1998 and $6,978,000 in 1997. Future minimum operating lease commitments as of December 31, 1999, are as follows: Year Amount ---- ------ (In thousands) 2000 $ 7,397 2001 5,330 2002 3,577 2003 3,232 2004 1,926 Thereafter 1,373 ------- Total Future Minimum Lease Payments $22,835 ======= The amount of buildings and equipment capitalized in connection with capital leases was $3,713,000 and $4,403,000 at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, accumulated amortization was $2,172,000 and $2,257,000, respectively. RETIREMENT AND BENEFIT PLANS Substantially all full-time salaried and hourly domestic employees are included in two profit sharing plans sponsored by the company. The company makes matching contributions up to 66.7% of the first 3% of employees' contributions and may make discretionary contributions to the domestic plans based on an annual resolution of the Board of Directors. The company has no requirement to make the discretionary contribution. The contributions can either be in the form of cash or property to the Profit Sharing Plan or in the form of cash, Common Shares or property to the Employee Stock Bonus Trust and Plan. Cash contributions to the Employee Stock Bonus Trust and Plan are used to purchase the company's Common Shares on the open market. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES RETIREMENT AND BENEFIT PLANS--Continued The company sponsors a 401(k) Benefit Equalization Plan covering certain employees, which provides for retirement payments so that the total retirement payments equal amounts that would have been payable from the company's principal retirement plans if it were not for limitations imposed by income tax regulations. Contribution expense for the above plans in 1999, 1998 and 1997 was $5,328,000, $4,308,000 and $3,925,000, respectively. In 1995, the company introduced a non-qualified defined benefit Supplemental Executive Retirement Plan (SERP) effective May 1, 1995 for certain key executives to recapture benefits lost due to governmental limitations on qualified plan contributions. The projected benefit obligation related to this unfunded plan was $23,294,000 at December 31, 1999. Pension expense for the plan in 1999, 1998 and 1997 was $1,168,000, $1,085,000 and $923,000, respectively. The company utilizes a Voluntary Employee Benefit Association (VEBA) to provide for the payment of self-funded employee health benefits for current employees. Contribution expense for each of 1999, 1998 and 1997 was $1,400,000. SHAREHOLDERS' EQUITY TRANSACTIONS At December 31, 1999, the company had 100,000,000 authorized Common Shares, without par value, and 12,000,000 authorized Class B Common Shares, without par value. In general, the Common Shares and the Class B Common Shares have identical rights, terms and conditions and vote together as a single class on most issues, except that the Class B Common Shares have ten votes per share, carry a 10% lower cash dividend rate and, in general, can only be transferred to family members. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis. At December 31, 1999, the company had 300,000 shares of Serial Preferred Shares authorized, none of which were issued or outstanding. Serial Preferred Shares are entitled to one vote per share. During 1994, the Board of Directors adopted and the Shareholders approved the 1994 Performance Plan (the "1994 Plan"). The 1994 Plan provides for the issuance of up to 3,500,000 Common Shares in connection with stock options and other awards granted under the 1994 Plan. The 1994 Plan, as amended, allows the Compensation Committee of the Board of Directors (the "Committee") to grant incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including the use of restricted stock). The Committee has the authority to determine the employees and directors that will receive awards, the amount of the awards and the other terms and conditions of the awards. Payments of the stock appreciation rights may be made in cash, Common Shares or a combination thereof. There were no stock appreciation rights outstanding at December 31, 1999, 1998 or 1997. During 1999, the Committee, under the 1994 Plan, granted 1,397,080 non-qualified stock options for a term of ten years at 100% of the fair market value of the underlying shares on the date of grant. The company also has a Stock Option Plan for non-employee Directors. The plan was approved May 27, 1992 and provides for the granting of up to a maximum of 100,000 options to eligible new Directors. Directors will receive grants with exercise prices at 100% of the fair market value of the company's stock on the date of grant. At December 31, 1999, there were 12,550 options outstanding under this plan. During 1999, no options were granted under this plan. The Plans have provisions for the net share settlement of options. Under these provisions, the company acquired 78,433 treasury shares for $1,860,663 in 1999, 144,489 treasury shares for $3,120,476 in 1998 and 19,951 treasury shares for $486,000 in 1997. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES SHAREHOLDERS' EQUITY TRANSACTIONS--Continued As of December 31, 1999, an aggregate of 9,287,694 Common Shares were reserved for conversion of Class B Common Shares, future rights (as defined below) and the exercise and future grant of options.
Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise 1999 Price 1998 Price 1997 Price ---- ------- ---- -------- ---- -------- Options outstanding at January 1, 3,057,020 $16.90 2,967,762 $15.05 2,758,587 $12.12 Granted 1,397,080 20.75 517,707 23.68 582,250 25.13 Exercised (285,575) 7.39 (337,933) 9.29 (311,575) 6.22 Canceled (109,392) 23.70 (90,516) 23.67 (61,500) 23.01 --------- ------ -------- ------ --------- ------ Options outstanding at December 31, 4,059,133 $18.70 3,057,020 $16.90 2,967,762 $15.05 ========= ====== ========= ====== ========= ====== Options price range at December 31, $ 2.19 $ 2.19 $ 2.13 to to to $ 27.50 $ 27.50 $ 26.75 Options exercisable at December 31, 2,018,674 1,906,538 1,872,552 Options available for grant at December 31, 356,460 1,644,148 572,839
The company utilizes the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS 123, the company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
(In thousands except per share data) 1999 1998 1997 -------------------------------------------------------------------------------------------------------------- Net earnings - as reported $41,494 $45,792 $ 1,563 Net earnings/(loss) - pro forma $38,639 $43,302 $ (234) Earnings per share as reported - basic $ 1.38 $ 1.53 $ .05 Earnings per share as reported - assuming dilution $ 1.36 $ 1.50 $ .05 Pro forma earnings/(loss) per share - basic $ 1.28 $ 1.45 $ (.01) Pro forma earnings/(loss) per share - assuming dilution $ 1.26 $ 1.42 $ (.01)
The assumption regarding the stock options issued in 1999, 1998 and 1997 was that 25% of such options vested in the year following issuance. The stock options awarded during the year provided a four year vesting period whereby options vest equally in each year. SFAS 123's pro forma disclosure was prospective from 1995, as retroactive application was prohibited. Therefore, since compensation expense associated with an award is recognized over the four year vesting period, pro forma net income may not be representative of compensation expense in future years, when the effect of the amortization of multiple awards would be reflected in the income statement. Furthermore, current and prior years pro forma disclosures may be adjusted for forfeitures of awards that will not vest because service or employment requirements have not been met. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999: dividend yield of 1.74%; expected volatility of 29.2%; risk-free interest rate of 6.61%; and an expected life of 6.5 years. The weighted-average present value of options granted during the year, per the Black-Scholes model based on the expected exercise year of 2006, is $6.83. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES SHAREHOLDERS' EQUITY TRANSACTIONS--Continued The plans provide that shares granted come from the company's authorized but unissued common stock or treasury shares. Pursuant to the plan, the Committee has established that the 1999 grants may not be exercised within one year from the date granted and options must be exercised within ten years from the date granted. The weighted-average remaining contractual life of options outstanding at December 31, 1999 is 7.2 years. On July 7, 1995, the company adopted a Rights Plan whereby each holder of a Common Share and Class B Common Share received one purchase right (the "Rights") for each share owned. Under certain conditions, each Right may be exercised to purchase one-tenth of one Common Share at a price of $8 per one-tenth of a share. The Rights may only be exercised 10 days after a third party has acquired 30% or more of the company's outstanding voting power or 10 days after a third party commences a tender offer for 30% or more of the voting power (an "Acquiring Party"). In addition, if an Acquiring Party merges with the company and the company's Common Shares are not changed or exchanged, or if an Acquiring Party engages in one of a number of self-dealing transactions, each holder of a Right (other than the Acquiring Party) will have the right to receive that number of Common Shares or similar securities of the resulting entity having a market value equal to two times the exercise price of the Right. The company may redeem the Rights at a price of $.005 per Right at any time prior to 10 days following a public announcement that an Acquiring Party has acquired beneficial ownership of 30% or more of the company's outstanding voting power, and in certain other circumstances as approved by the Board of Directors. The Rights will expire on July 7, 2005. Coincident with adoption of the Plan, the company redeemed Rights outstanding under a prior plan at the price of $.005 per Right. NET EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted net earnings per common share.
1999 1998 1997 ---- ---- ---- (In thousands except per share data) Basic Average common shares outstanding 30,138 29,932 29,569 Net earnings $41,494 $45,792 $ 1,563 Net earnings per common share $ 1.38 $ 1.53 $ .05 Diluted Average common shares outstanding 30,138 29,932 29,569 Stock options 481 651 805 -------- -------- -------- Average common shares assuming dilution 30,619 30,583 30,374 Net earnings $ 41,494 $ 45,792 $ 1,563 Net earnings per common share $ 1.36 $ 1.50 $ .05
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES OTHER COMPREHENSIVE EARNINGS (LOSS) The components of other comprehensive earnings (loss) are as follows:
(In thousands) Unrealized Gain (Loss) Currency on Available- Translation for-Sale Adjustments Securities Total ----------- ------------- ----- Balance at January 1, 1997 $(1,501) $ 668 $(833) Foreign currency translation adjustments (6,074) (6,074) Unrealized gain (loss) on available for sale securities 1,341 1,341 Deferred tax (expense) benefit relating to unrealized gain (loss) on available for sale securities (940) (940) ---------------------------------------- Balance at December 31, 1997 (7,575) 1,069 (6,506) Foreign currency translation adjustments (561) (561) Unrealized gain (loss) on available for sale securities (1,057) (1,057) Deferred tax (expense) benefit relating to unrealized gain (loss) on available for sale securities 412 412 ---------------------------------------- Balance at December 31, 1998 (8,136) 424 (7,712) Foreign currency translation adjustments (1,561) (1,561) Unrealized gain (loss) on available for sale securities 487 487 Deferred tax (expense) benefit relating to unrealized gain (loss) on available for sale securities (190) (190) ---------------------------------------- Balance at December 31, 1999 $(9,697) $ 721 $(8,976) ========================================
LONG-TERM OBLIGATIONS Long-term obligations as of December 31, 1999 and 1998 consist of the following:
1999 1998 ---------- ---------- (In thousands) $25,000,000 senior notes at 7.45%, mature in February 2003 $14,285 $17,856 $80,000,000 senior notes at 6.71%, mature in February 2008 80,000 80,000 $20,000,000 senior notes at 6.60%, mature in February 2005 20,000 20,000 Revolving credit agreement ($425,000,000 multi-currency) at .185% to .375% above local interbank offered rates, expires October 31, 2002 326,873 191,662 Notes payable to banks and other third parties - 2,556 Notes and mortgages payable, secured by buildings and equipment 2,374 2,734 Capitalized lease obligations 1,584 2,177 Product liability 5,683 5,512 Deferred federal income taxes 1,172 - Other 13,372 9,899 ---------- ---------- 465,343 332,396 Less current maturities of long-term obligations 6,401 8,492 ---------- ---------- $458,942 $323,904 ========== ==========
In 1993, the company completed a private placement of $25,000,000 in senior notes at 7.45% which contain covenants similar to the revolving credit agreement described below. At December 31, 1999, $120,041,835 of retained earnings is available for dividends. The notes are due in 2003 and require principal payments of $3,571,429 per year. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES LONG-TERM OBLIGATIONS--Continued In November 1999, the company fixed the interest rate on $25,000,000 of its U.S. dollar borrowings through an interest rate swap agreement. The effect of the swap is to exchange a short-term floating interest rate for a fixed rate of 6.29% for a two year term. In November 1999, the company fixed the interest rate on $26,000,000 of its EURO borrowings through two interest rate swap agreements. Each agreement is for $13,000,000 Euros. The effect of the swaps is to exchange a short-term floating interest rate for a fixed rate of 4.67% for a three year term on both agreements. In November 1999, the company fixed the interest rate on $10,000,000 of its EURO borrowings through an interest rate swap agreement. The effect of the swap is to exchange a short-term floating interest rate for a fixed rate of 4.49% for a three year term. In September 1999, the company fixed the interest rate on $30,000,000 of its EURO borrowings through two interest rate swap agreements. Each agreement is for $15,000,000 Euros. The effect of the swaps is to exchange a short-term floating interest rate for a fixed rate of 4.17% on one agreement and 4.14% on the other agreement. Both interest rate swap agreements have been arranged for a three year term. As of December 31, 1999 the weighted average floating interest rate on Euro debt was 2.20%. In September 1999, the company fixed the interest rate on $150,000,000 of its DKK borrowings through an interest rate swap agreement. The effect of the swap is to exchange a short-term floating interest rate for a fixed rate of 4.87% for a three year term. As of December 31, 1999, the weighted average floating interest rate on Danish Kroner debt was 3.47%. In May 1999, the company fixed the interest rate on $20,000,000 of its U.S. dollar borrowings through two interest rate swap agreements. Each agreement is for $10,000,000 U.S. dollars. The effect of the swaps is to exchange a short-term floating interest rate for a fixed rate of 5.63% for a four year term on both agreements. During 1998, the company completed a private placement of $20,000,000 in senior notes at 6.60% and a private placement of $80,000,000 in senior notes at 6.71%. The notes are due in 2005 and 2008 respectively and require a lump sum principal payment on final maturity date. In 1997, the company entered into a $425,000,000 multi-currency revolving credit agreement with a group of commercial banks, which expires on October 31, 2002, or such later date as mutually agreed upon by the company and the banks. The borrowing rates under the agreement are determined based on the funded debt to capitalization ratio of the company as defined in the agreement and range from .185% to .375% above the various interbank offered rates. The agreement requires the company to maintain certain conditions with respect to net worth, funded debt to capitalization, and interest coverage as defined in the agreement. In September 1997, the company fixed the interest rate on 7,500,000 of its New Zealand dollar borrowings through an interest rate swap agreement. The effect of the swap is to exchange a short-term floating interest rate for a fixed rate of 7.30% for a five year term. As of December 31, 1999 and 1998, the weighted average floating interest rate on the New Zealand dollar debt was 5.08% and 8.90%, respectively. In July 1997, the company fixed the interest rate on 50,000,000 of its French franc borrowings through an interest rate swap agreement. The effect of the swap is to exchange a short-term floating interest rate for a fixed rate of 4.14% for a three year term. As of December 31, 1999 and 1998, the weighted average floating interest rate on the French franc debt was 3.27% and 3.88%, respectively. In May 1997, the company fixed the interest rate on $15,000,000 of its U.S. dollar borrowings through two interest rate swap agreements. Each agreement is for $7,500,000 U.S. dollars. The effect of the swaps is to exchange a short-term floating interest rate for a fixed rate of 6.18% for a two year term, extendible for an additional year at the counterparty's option in one agreement and 6.285% for a three year term in the other agreement. As of December 31, 1999 and 1998, the weighted average floating interest rate on the U.S. dollar debt was 5.68% and 5.32%, respectively. In May 1995, the company fixed the interest rate on $5,000,000 of its U.S. dollar borrowings through an interest rate swap agreement. The effect of the swap is to exchange a short-term floating interest rate for a fixed rate of 6.38% for a five year term. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES LONG-TERM OBLIGATIONS--Continued Notes payable to banks and other third parties consists of borrowings by the company and its subsidiaries under term lending arrangements for certain assets or licensing or service contracts. The notes and mortgages payable financed the purchase of certain buildings and equipment which secure the obligations. The notes and mortgages payable bear interest at rates from 4.3% to 10.4% and mature through 2003. The capital leases at December 31, 1999 are principally for a manufacturing facility and computer systems, with payments due through 2007. The company is self-insured for a portion of its product liability and certain other liability exposures. Product liability for domestically manufactured products is insured through the company's captive insurance company, which insures the first $1,000,000 per claim or annual policy aggregate losses of $4,000,000. The company also has additional layers of coverage insuring up to $74,000,000 in aggregate losses arising from individual losses that exceed $1,000,000 or annual policy aggregate losses that exceed $4,000,000. The aggregate minimum combined maturities of long-term obligations are approximately $6,401,000 in 2000, $5,640,000 in 2001, $330,825,000 in 2002, $3,872,000 in 2003, $115,000 in 2004 and $100,346,000 thereafter. Interest paid on borrowings was $21,646,000, $18,995,000 and $10,612,000 in 1999, 1998 and 1997, respectively. INCOME TAXES Earnings/(loss) before income taxes consist of the following:
1999 1998 1997 ---------- ---------- ---------- (In thousands) Domestic $ 52,924 $ 69,037 $ 10,734 Foreign 15,020 6,032 (5,511) ---------- ---------- ---------- $ 67,944 $ 75,069 $ 5,223 ========== ========== ==========
The company has provided for income taxes as follows:
1999 1998 1997 ---------- ---------- ---------- (In thousands) Current: Federal $ 10,157 $ 16,428 $ 18,030 State 2,800 4,000 2,800 Foreign 8,755 4,642 1,250 ---------- ---------- ---------- 21,712 25,070 22,080 Deferred: Federal 7,698 4,471 (13,320) State - - (2,400) Foreign (2,960) (264) (2,700) ---------- ---------- ---------- 4,738 4,207 (18,420) ---------- ---------- ---------- Income Taxes $ 26,450 $ 29,277 $ 3,660 ========== ========== ==========
At December 31, 1999, the company had foreign tax loss carryforwards of approximately $2,730,000 of which $2,480,000 are non-expiring and $250,000 expire between 2001 and 2004. The company made income tax payments of $13,264,000, $13,731,000 and $19,907,000 during the years ended December 31, 1999, 1998 and 1997, respectively. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES INCOME TAXES--Continued A reconciliation to the effective income tax rate from the federal statutory rate follows:
1999 1998 1997 ------- ------- ------- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 2.7 3.5 5.0 Tax credits (2.1) (2.3) (23.0) Goodwill 3.8 2.9 59.3 Other, net (.5) (.1) (6.2) ------- ------- ------- 38.9% 39.0% 70.1% ======= ======= =======
Significant components of deferred income tax assets and liabilities at December 31, 1999 and 1998 are as follows:
1999 1998 ---------- ---------- (In thousands) Current deferred income tax assets, net: Bad debt $ 7,056 $ 4,242 Warranty 1,336 1,397 Inventory 3,313 1,862 Other accrued expenses and reserves 7,005 3,840 State and local taxes 2,019 1,180 Litigation reserves 2,367 19 Compensation and benefits 2,175 3,519 Product liability 274 274 Loss carryforwards 72 167 Other, net 944 831 ---------- ---------- $ 26,561 $ 17,331 ---------- ---------- Long-term deferred income tax assets (liabilities), net: Fixed assets (7,303) $ 293 Product liability 1,144 1,128 Loss carryforwards (48) 818 Compensation and benefits 3,725 1,976 State and local taxes 2,400 2,400 Other, net (1,090) (345) ---------- ---------- $(1,172) $ 6,270 ---------- ---------- Net Deferred Income Taxes $ 25,389 $ 23,601 ======== ========
RELATED PARTY TRANSACTIONS The Company became an investor in Unique Mobility, Inc. in 1996 and J.B. Richey, an executive and director of the Company serves on Unique Mobility's board of directors. The Company purchased Gearless/Brushless motors from Unique Mobility totaling approximately $2,000,000 and $155,000 in 1999 and 1998 respectively. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES INTERIM FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED (In thousands, except per share data) 1999 March 31, June 30, September 30, December 31, ---- ---------- --------- ------------- ------------- Net sales $196,092 $202,195 $223,335 $256,639 Gross profit 56,737 62,085 70,507 81,858 Earnings before income taxes 13,922 19,538 23,068 11,416 Net earnings 8,492 11,914 14,077 7,011 Net earnings per share - basic .28 .39 .46 .23 Net earnings per share - assuming dilution .28 .39 .46 .23 1998 March 31, June 30, September 30, December 31, ---- ---------- ---------- -------------- ------------- Net sales $181,066 $202,779 $203,351 $210,333 Gross profit 51,453 60,688 62,365 64,007 Earnings before income taxes 12,365 18,066 21,302 23,336 Net earnings 7,542 11,021 12,994 14,235 Net earnings per share - basic .25 .37 .43 .48 Net earnings per share - assuming dilution .25 .36 .43 .47
BUSINESS SEGMENTS In accordance with SFAS No. 131, the company operates in three primary business segments based on geographical area: North America, Europe and Australasia. All reporting segments amounts shown for periods prior to adoption have been restated to conform to the provisions of SFAS No. 131. The three reportable segments represent operating groups which offer products to different geographic regions. The North America segment consists of five operating groups which sell the following products: wheelchairs, scooters, seating products, self care products, home care beds, low air loss therapy products, patient transport products, distributed products, extended care and furniture products, respiratory and other products. The Europe segment consists of one operating group that sells primarily wheelchairs, scooters, self care products, patient lifts and slings and oxygen products. The Australasia segment consists of two operating groups which sell custom power wheelchairs, electronic wheelchair controllers and patient aids. Each business segment sells to the home health care, retail and extended care markets. The company evaluates performance and allocates resources based on profit or loss from operations before income taxes for each reportable segment. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company's consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element. Therefore, intercompany profit or loss on intersegment sales and transfers are not considered in evaluating segment performance. Intersegment revenue for reportable segments are $57,027,000, $47,881,000 and $39,250,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The information by segment is as follows (In thousands):
Year ended December 31, 1999 North Australia/ All America Europe Asia Other* Consolidated -------------------------------------------------------------------- Revenues from external customers $661,855 $189,157 $ 25,590 $ 1,659 $878,261 Depreciation and amortization 18,115 6,230 1,633 - 25,978 Net interest expense 14,792 1,605 459 (2,692) 14,164 Earnings (loss) before income taxes 109,134 (541) 8,590 (49,239) 67,944 Assets 529,397 302,465 29,679 93,744 955,285 Expenditures for assets 16,881 3,586 2,140 - 22,607
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES BUSINESS SEGMENTS--Continued
Year ended December 31, 1998 North Australia/ All America Europe Asia Other* Consolidated --------------------------------------------------------------------- Revenues from external customers $647,372 $130,075 $ 19,949 $ 133 $797,529 Depreciation and amortization 18,283 5,327 140 4 23,754 Net interest expense 11,729 1,765 1,398 (3,307) 11,585 Earnings (loss) before income taxes 122,730 (1,002) 2,862 (49,521) 75,069 Assets 507,397 134,143 25,010 72,206 738,756 Expenditures for assets 24,241 4,997 93 - 29,331 Year ended December 31, 1997 North Australia/ All America Europe Asia Other* Consolidated --------------------------------------------------------------------- Revenues from external customers $506,197 $125,677 $ 21,132 $ 408 $653,414 Depreciation and amortization 13,410 4,770 159 9 18,348 Net interest expense 2,459 2,171 1,797 (3,193) 3,234 Earnings (loss) before income taxes 52,797 (11,556) 118 (36,136) 5,223 Assets 318,757 119,939 28,068 63,159 529,923 Expenditures for assets 35,579 2,878 28 - 38,485
* Consists of the Invacare captive insurance unit, domestic export unit and corporate selling, general and administrative costs, which do not meet the quantitative criteria for determining reportable segments. In accordance with SFAS No. 131, net sales by product, are as follows:
North America 1999 1998 1997 ------------- ------------------------------------------- Rehab $175,247 $175,812 $145,012 Standard Wheelchairs 96,598 102,326 101,170 Distributed 100,980 93,372 - Personal Care/Patient Transport/Beds 138,076 129,084 134,281 Respiratory 79,693 70,626 67,321 Institutional products 32,100 31,419 16,576 Parts 18,601 17,881 18,044 Other 20,560 26,852 23,793 ---------- ---------- ---------- $661,855 $647,372 $506,197 ========== ========== ========== Europe 1999 1998 1997 ------ ------------------------------------------- Rehab $127,140 $ 89,006 $ 85,087 Personal Care/Patient Transport/Beds 39,140 21,966 22,702 Respiratory 6,314 4,633 3,273 Other 16,563 14,470 14,615 ---------- ---------- ---------- $189,157 $130,075 $125,677 ========== ========== ========== Australasia 1999 1998 1997 ----------- ------------------------------------------- Rehab $ 20,378 $ 19,949 $ 21,132 Respiratory 4,779 - - Beds 255 - - Standard Wheelchairs 178 - - ---------- ---------- ---------- $ 25,590 $ 19,949 $ 21,132 ========== ========== ==========
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES BUSINESS SEGMENTS--Continued
1999 1998 1997 ------------------------------------------- Other $ 1,659 $ 133 $ 408 ----- ========== ========== ========== Total Consolidated $878,261 $797,529 $653,414 ------------------ ========== ========== ==========
No single customer accounted for more than 5% of the company's sales. CONCENTRATION OF CREDIT RISK The company manufactures and distributes durable medical equipment and supplies to the home health care, retail and extended care markets. The company performs credit evaluations of its customers' financial condition. To further assist dealers in reducing their cash requirements for inventory and rental equipment, the company provides various financing options for certain types of products through Invacare Credit Corporation "ICC". In a typical financing arrangement, the company sells the equipment on a financing contract to the dealer for periods ranging from 6 to 39 months. The company also introduced a revolving credit agreement, known as Invacard, which provides an additional financing option to our dealer base. In addition, the majority of these transactions are secured with a UCC-1 filing, purchase money securities and/or personal guarantees. At this time, all ICC note obligations are serviced and managed by the company. The note obligations are not sold to third parties. Substantially all of the company's receivables are due from health care, medical equipment dealers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, are ultimately funded through government reimbursement programs such as Medicare and Medicaid. In addition, the company has seen significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. Credit losses are provided for in the financial statements. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the company in estimating its fair value disclosures for financial instruments: Cash, cash equivalents and marketable securities: The carrying amount reported in the balance sheet for cash, cash equivalents and marketable securities approximates its fair value. Installment receivables: The carrying amount reported in the balance sheet for installment receivables approximates its fair value. The majority of the portfolio contains receivables with terms less than three years, of which a large concentration is due in less than one year. The interest rates associated with these receivables have not varied significantly over the past three years. Management believes that after consideration of the credit risk, the net book value of the installment receivables approximates market value. Long-term debt: The carrying amounts of the company's borrowings under its long-term revolving credit agreements approximate their fair value. Fair values for the company's senior notes are estimated using discounted cash flow analyses, based on the company's current incremental borrowing rate for similar borrowing arrangements. Interest Rate Swaps: The company is a party to interest rate swap agreements with off-balance sheet risk which are entered into in the normal course of business to reduce exposure to fluctuations in interest rates. The agreements are with major financial institutions which are expected to fully perform under the terms of the agreements thereby mitigating the credit risk from the transactions. The agreements are contracts to exchange floating rate payments with fixed rate payments over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of such agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The amounts to be paid or received under the interest rate swap agreements are accrued consistent with the terms of the agreements and market interest rates. Fair value for the company's interest rate swaps are based on independent pricing models. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued Other investments: The company has made other investments in limited partnerships and non-marketable equity securities. These investments were acquired in private placements and there are no quoted market prices or stated rates of return. It is not practicable to estimate the fair value of these investments because of the limited information available and because of the significance of the cost to obtain an outside appraisal. The investments are carried at their cost of $13,651,000 in 1999 and $10,041,000 in 1998 and are accounted for using the cost method. The carrying amounts and fair values of the company's financial instruments at December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (In thousands) Cash and cash equivalents $18,258 $18,258 $ 9,460 $ 9,460 Marketable securities 2,188 2,188 4,749 4,749 Installment receivables 93,390 93,390 80,863 80,863 Long-term debt (including current 443,532 430,936 314,808 315,107 maturities) Interest rate swaps (fair value liability) - 1,105 - 340
Forward Contracts: The company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany loans, and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized and accounted for as hedging instruments. The company does not use derivative financial instruments for speculative purposes. The gains and losses that result from the forward contracts are deferred and recognized when the offsetting gains and losses for the identified transactions are recognized. At December 31, 1999 and 1998, the gain/(loss) resulting from forward contracts was not material to the financial statements. The following table represents the fair value of all outstanding forward contracts at December 31, 1999 and 1998. The valuations are based on market rates. All forward contracts noted below mature before January, 2001 and January, 2000 respectively.
December 31, 1999 Cost Market Value U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell ---------------------------------------------------------------------------------------------------------- British pound $ (331) $ (67) $ (398) New Zealand dollar (12,054) (421) (12,475) German mark 3,742 208 3,950 Australian dollar 144 3 147 Canadian dollar 5,049 (109) 4,940 French franc 2,857 157 3,014 Danish Kroner (275) 16 (259) December 31, 1998 Cost Market Value U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell ---------------------------------------------------------------------------------------------------------- British pound (1,042) $ (64) $(1,106) New Zealand dollar (14,244) 74 (14,170) German mark 3,987 (18) 3,969 Australian dollar 310 (2) 308 Canadian dollar 4,919 (4) 4,915 French franc 2,040 (64) 1,976
53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES NON-RECURRING AND UNUSUAL CHARGES In 1999, the company announced non-recurring and unusual charges of $14,800,000 ($9,028,000 or $.29 diluted per share after-tax) primarily related to the acquisition of Scandinavian Mobility International AS ("SMI"). The charges included a provision for the shut down of facilities, personnel reductions, write-off of assets that will no longer be used in the business and the write-off of costs incurred in conjunction with acquisitions that were not completed. The shut down of facilities and personnel reductions are related to Invacare's integration of SMI and are required to obtain the expected synergies from the acquisition. The company anticipates all initiatives for which charges have been reported will be substantially completed in 2000. The company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $3,300,000. The following table summarizes the non-recurring and unusual charges through December 31, 1999:
Amounts Balance Total Charges Utilized as of December 31, 1999 Dec. 31, 1999 1999 ---- ------------- ---- (In thousands) Exit costs primarily for employee severance and lease terminations $ 8,528 $ 146 $ 8,382 Asset write downs and other non-recurring items 2,972 2,503 469 Provision for doubtful accounts 3,300 3,300 - ------- ------- ------- Total $14,800 $ 5,949 $ 8,851 ======= ======= =======
Included in the exit costs and the asset write downs and other non-recurring items categories above are $4,079,000 of employee severance costs. These costs consist of cash compensation and related expenses to 162 people. In 1997, the company recorded non-recurring and unusual charges aggregating $61,039,000 ($38,839,000 or $1.28 diluted per share after tax) for the acceleration of certain strategic initiatives and other items. The charge included global manufacturing facility consolidations, the elimination of certain non-strategic product lines, asset write downs related to global systems initiatives, principally as a result of changes in project scope, an increase in the company's bad debt reserve, other asset write-downs and an increase in reserves for litigation. During 1998, the company reviewed the charges and updated the components to reflect current year activity and estimates. Based on this review, reserves for accelerated facilities consolidations and product line exits were reduced by $3,300,000 and $4,201,000 respectively. These changes were substantially offset by additional reserves of $2,384,000 for litigation and charges of $5,049,000 for additional asset write-downs. The net effect of these changes had no material impact on reported net earnings for the year. In 1999, $2,585,000 was utilized relating to the consolidation of European facilities. The company also reviewed the charges and updated the components to reflect current year estimates. As a result, accelerated facilities consolidations were reduced by $1,404,000. This change was offset by additional reserves primarily for asset write-downs. The remaining accrual balance at December 31, 1999, in the amount of $690,000, relates primarily to litigation. The company expects substantially all of the remaining charges to be utilized over the next six months. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INVACARE CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E ------ ------ ------ ------ ------ ADDITIONS --------- Balance Charged Charged To Balance At To Other At Beginning Cost And Accounts Deductions- End Of Description Of Period Expenses Describe Describe Period ----------- --------- -------- ---------- ----------- ------- (In thousands) Year Ended December 31, 1999 - ---------------------------- Deducted from asset accounts -- Allowance for doubtful accounts $10,985 $10,139 $1,550(C) $1,240(A) $21,434 Inventory obsolescence reserve 6,296 4,606 3,875(C) 4,095(B) 10,682 Accrued warranty cost 6,619 8,056 - 6,917(B) 7,758 Accrued product liability 6,946 3,247 - 3,368(D) 6,825 Year Ended December 31, 1998 - ---------------------------- Deducted from asset accounts -- Allowance for doubtful accounts $15,179 $ 3,390 $ 860(C) $8,444(A) $10,985 Inventory obsolescence reserve 4,787 3,269 298(C) 2,058(B) 6,296 Accrued warranty cost 6,385 6,183 - 5,949(B) 6,619 Accrued product liability 6,772 2,742 - 2,568(D) 6,946 Year Ended December 31, 1997 - ---------------------------- Deducted from asset accounts -- Allowance for doubtful accounts $ 5,478 $15,942 $ 75(C) $6,316(A) $15,179 Inventory obsolescence reserve 4,963 1,650 - 1,826(B) 4,787 Accrued warranty cost 6,052 4,931 - 4,598(B) 6,385 Accrued product liability 6,128 3,218 - 2,574(D) 6,772
NOTE (A)--Uncollectible accounts written off, net of recoveries. NOTE (B)--Amounts written off or payments incurred. NOTE (C)--Amounts recorded due to acquisition of subsidiaries. NOTE (D)--Loss and loss adjustment expense. 55 EX-21 2 INVACARE CORP EXHIBIT 21 Exhibit 21 1. Canyon Products Corporation, an Ohio corporation and wholly owned subsidiary.* 2. Invacare (UK) Ltd., an English corporation and wholly owned subsidiary, except for one share registered in the name of Mr. Kevin Crumpler as nominee for Invacare Holdings Corporation. 3. Invacare Canada Inc., an Ontario corporation and wholly owned subsidiary. 4. Invacare Deutschland GmbH, a German corporation and wholly owned subsidiary. 5. Invacare Holdings Corporation, an Ohio corporation and wholly owned subsidiary. 6. Invacare International Corporation, an Ohio corporation and wholly owned subsidiary. 7. Invacare Respiratory Corporation, an Ohio corporation and wholly owned subsidiary. 8. Invacare Trading Company, Inc., a United States Territory of the Virgin Islands corporation and wholly owned subsidiary. 9. Invamex, S.A. de C.V., a Mexican corporation and wholly owned subsidiary. 10. Invacare Credit Corporation, an Ohio corporation and wholly owned subsidiary. 11. Invatection Insurance company, a Vermont corporation and wholly owned subsidiary. 12. Mobilife Corporation, a Missouri corporation and wholly owned subsidiary. 13. Mobilite Corporation, a Florida corporation and wholly owned subsidiary. 14. Option 5 Inc., a Quebec corporation and wholly owned subsidiary. 15. Poirier Groupe Invacare, a French corporation and wholly owned subsidiary. 16. POK - Rollstuhle GmbH, a German corporation and wholly owned subsidiary. 17. Dynamic Controls Ltd., a New Zealand corporation and wholly owned subsidiary. 18. Quantrix Consultants Ltd., a New Zealand corporation and wholly owned subsidiary. 19. Controls Dynamic Ltd., an English corporation and wholly owned subsidiary. 20. Geomarine Systems Inc., a New York corporation and wholly owned subsidiary. 21. Sci Des Hautes Roches, a French partnership and wholly owned subsidiary. 22. Sci Des Roches, a French partnership and wholly owned subsidiary. 23. Mobilite Building Corporation, a Florida corporation and wholly owned subsidiary. 24. Rehadap, S.A., a Spanish corporation and wholly owned subsidiary. 25. Genus Medical Products USA, Inc., a New York corporation and wholly owned subsidiary. 26. Beram, AB, a Swedish corporation and wholly owned subsidiary. 27. Invacare Florida, a Delaware corporation and wholly owned subsidiary. 28. Patient Solutions, Inc., a Delaware corporation and wholly owned subsidiary. 1 29. Medical Equipment Repair Services, Inc., a Florida corporation and wholly owned subsidiary. 30. Invacare New Zealand Limited, a New Zealand corporation and wholly owned subsidiary. 31. Bencraft Limited, an English corporation and wholly owned subsidiary. 32. Kuschall Design AG, a Switzerland corporation and wholly owned subsidiary. 33. Healthtech, Inc., a Missouri corporation and wholly owned subsidiary. 34. Frohock Stewart, Inc., a Massachusetts corporation and wholly owned subsidiary. 35. Invacare Portugual Lda, a Portugal company and wholly owned subsidiary. 36. Production Research Corporation, a Maryland corporation and wholly owned subsidiary. 37. Inva Acquisition Corporation, re-named Suburban Ostomy Supply Company, Inc. 38. Roller Chair Pty. Ltd., an Australian corporation and wholly owned subsidiary. 39. Special Health Systems, a Canadian corporation and wholly owned subsidiary. 40. Group Pharmaceutical Limited, a New Zealand corporation and wholly owned subsidiary. 41. Thompson Rehab, a New Zealand corporation and wholly owned subsidiary. 42. Silcraft Corporation, a Michigan corporation and wholly owned subsidiary. 43. Suburban Ostomy Supply Company, Inc., a Massachusetts corporation and wholly owned subsidiary. 44. St. Louis Ostomy Distributors, Inc. ., a Massachusetts corporation and wholly owned subsidiary. 45. Patient-Care Medical Sales., a Massachusetts corporation and wholly owned subsidiary. 46. Peiser's, Inc., a Massachusetts corporation and wholly owned subsidiary. 47. Care Management Enterprises, Inc., a Massachusetts corporation and wholly owned subsidiary. 48. The Aftermarket Group, Inc., a Delaware corporation and wholly owned subsidiary. 49. Invacare Holdings Denmark A/S, a Danish corporation and wholly owned subsidiary. 50. Scandinavian Mobility International A/S, a Danish corporation and wholly owned subsidiary. 51. SM EC-Hong A/S, a Danish corporation and wholly owned subsidiary. 52. SM A/S, a Danish corporation and wholly owned subsidiary. 53. SM Niltek A/S, a Danish corporation and wholly owned subsidiary. 54. SM Radius A/S, a Danish corporation and wholly owned subsidiary. 55. EC-Invest A/S, a Danish corporation and wholly owned subsidiary. 56. Scandinavian Mobility A/S, a Norwegian corporation and wholly owned subsidiary. 57. Groas A/S, a Norwegian corporation and wholly owned subsidiary. 2 58. SM Holding AB, a Swedish corporation and wholly owned subsidiary. 59. SM Mobility AB, a Swedish corporation and wholly owned subsidiary. 60. SM Reastolen AB, a Swedish corporation and wholly owned subsidiary. 61. France Reval SA, a French corporation and wholly owned subsidiary. 62. Matia SA, a French corporation and wholly owned subsidiary. 63. R2P S.a.r.l., a French corporation and wholly owned subsidiary. 64. SM GmbH, a German corporation and wholly owned subsidiary. 65. SM IMAB N.V., a Belgiun corporation and wholly owned subsidiary. 66. SM France S.a.r.l., a French corporation and wholly owned subsidiary. 67. SM UK Ltd., an English corporation and wholly owned subsidiary. 68. Reval Holding B.V., a Netherlands corporation and wholly owned subsidiary. 69. SM B.V. a Netherlands corporation and wholly owned subsidiary. 70. Lopital B.V. a Netherlands corporation and wholly owned subsidiary. 71. Samarite B.V. a Netherlands corporation and wholly owned subsidiary. 72. Revato B.V. a Netherlands corporation and wholly owned subsidiary. 73. SM Medical Services B.V. a Netherlands corporation and wholly owned subsidiary. 74. Invacare Norge, a Norwegain corporation and wholly owned subsidiary. 75. Invacare Australia PTY, Ltd., an Australian corporation and wholly owned subsidiary. 76. Adaptive Switch Laboratories, Inc., a Texas corporation and wholly owned subsidiary. 77. Adaptive Research Laboratories, Inc., a Texas corporation and wholly owned subsidiary. 78. Garden City Medical, a Delaware corporation and wholly owned subsidiary. --------------------- * "Wholly owned subsidiary" refers to indirect, as well as direct, wholly owned subsidiaries. 3 EX-23 3 INVACARE CORP EXHIBIT 23 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Forms S-8, No. 33-24619 dated October 10, 1988, No. 33-45993 dated February 24, 1992 and No. 33-87052 dated December 5, 1994) pertaining to the Invacare Corporation stock option plans, of our report dated January 25, 2000, with respect to the consolidated financial statements and schedule of Invacare Corporation and Subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1999. ERNST & YOUNG LLP Cleveland, Ohio March 29, 2000. EX-27 4 INVACARE CORP EXHIBIT 27
5 1,000 YEAR DEC-31-1999 DEC-31-1999 18,258 1,593 195,889 (14,339) 108,535 418,620 247,452 (110,320) 955,285 177,471 0 0 0 7,640 311,232 955,285 878,261 878,261 607,074 607,074 189,079 0 14,164 67,944 26,450 41,494 0 0 0 41,494 1.38 1.36
EX-10.AV 5 AMENDMENT NO. 1 TO 1994 PERFORMANCE PLAN AMENDMENT NO. 1 to the INVACARE CORPORATION 1994 PERFORMANCE PLAN Invacare Corporation hereby adopts Amendment No. 1 to the Invacare Corporation 1994 Performance Plan (the "Plan") pursuant to the following terms and provisions: 1. Section 2(i) of the Plan is hereby deleted and restated in its entirety to read as follows: "(i) "Committee" - means the Compensation Committee of the Board of Directors, or any other committee of the Board of Directors that the Board of Directors or the Compensation Committee authorizes to administer all or any aspect of this Plan." 2. Section 2 of the Plan is hereby amended by adding thereto the following additional paragraph as subsection (s) and by re-designating Section 2(s) through Section 2(y) as Section 2(t) through Section 2(z) respectively: "(s) "Performance Objectives" - means the achievement of performance objectives established pursuant to this Plan. Performance Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of the individual Participant or the subsidiary, division, department or function within the Company in respect of which the Participant performs services. Any Performance Objectives applicable to Awards intended to qualify as "performance-based compensation" under Section 162(m) of the Code (the "Performance-Based Exception") shall be limited to specified levels of or increases in the Company's, or subsidiary's, or division's, or department's, or function's return on equity, earnings per Common Share, total earnings, earnings growth, return on capital, operating measures (including, but not limited to, operating margin and operating costs) return on assets, or increase in the Fair Market Value of the Common Shares. Except in the case of such an Award intended to qualify under Section 162(m) of the Code, if the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Objectives unsuitable, the Committee may modify such Performance Objectives or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable. The Committee shall have the discretion to adjust the determinations of the degree of attainment of the pre-established Performance Objectives; provided, however, that Awards which are designed to qualify for the Performance-Based Exception, may not be adjusted upward (the Committee shall retain the discretion to adjust such Awards downward). In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards which shall not qualify for the Performance-Based Exception, the Committee may make such grants without satisfying the requirements of Code Section 162(m)." 3. Section 3 of the Plan is hereby deleted and restated in its entirety to read as follows: "All Directors and employees of the Company and its Affiliates are eligible for the grant of Awards. The selection of any such persons to receive Awards will be within the discretion of the Committee. More than one Award may be granted to the same person. Notwithstanding the foregoing, any individual who renounces in writing any right that he or she may have to receive Awards under the Plan shall not be eligible to receive any Awards hereunder." 4. Section 4(a) of the Plan is hereby deleted and restated in its entirety to read as follows, subject to shareholder approval at the 1998 Annual Meeting of Shareholders: 1 "(a) Number of Common Shares. The aggregate number of Common Shares that may be subject to Awards, including Stock Options, granted under this Plan during the term of this Plan will be equal to Three Million, Five Hundred Thousand (3,500,000) Common Shares, subject to any adjustments made in accordance with the terms of this Section 4. The assumption of obligations in respect of awards granted by an organization acquired by the Company, or the grant of Awards under this Plan in substitution for any such awards, will not reduce the number of Common Shares available in any fiscal year for the grant of Awards under this Plan. Common Shares subject to an Award that is forfeited, terminated, or canceled without having been exercised (other than Common Shares subject to a Stock Option that is canceled upon the exercise of a related Stock Appreciation Right) will again be available for grant under this Plan, without reducing the number of Common Shares available in any fiscal year for grant of Awards under this Plan, except to the extent that the availability of those Common Shares would cause this Plan or any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3. In addition, any Common Shares which are retained to satisfy a Participant's withholding tax obligations or which are transferred to the Company by a Participant to satisfy such obligations or to pay all or any portion of the exercise price of the Award in accordance with the terms of the Plan, the Award Agreement or the Notice of Award, may be made available for reoffering under the Plan to any Participant, except to the extent that the availability of those Common Shares would cause this Plan or any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3." 5. Section 5(b) of the Plan is hereby deleted and restated in its entirety to read as follows: "(b) Delegation. The Committee may delegate any of its authority to any other person or persons that it deems appropriate." 6. Section 6(b)(iii) of the Plan is hereby deleted and restated in its entirety to read as follows: "(iii) Stock Option - means a right to purchase a specified number of Common Shares, during a specified period, and at a specified exercise price, all as determined by the Committee. A Stock Option may be an Incentive Stock Option or a Stock Option that does not qualify as an Incentive Stock Option. In addition to the terms, conditions, vesting periods, and restrictions established by the Committee, Incentive Stock Options must comply with the requirements of Section 422 of the Code and regulations promulgated thereunder, including the requirement that the aggregate Fair Market Value of the Common Shares with respect to which the Incentive Stock Option first becomes exercisable in any calendar year shall not exceed $100,000 (measured as of the effective date of the award of an Incentive Stock Option). The exercise price of a Stock Option that does not qualify as an Incentive Stock Option may be more or less than the Fair Market Value of the Common Shares on the date the Stock Option is granted." 7. Section 6(b)(iv) of the Plan is hereby deleted and restated in its entirety to read as follows: "(iv) Cash Award - An award denominated in cash. All or part of any Cash Award may be subject to conditions established by the Committee, including but not limited to future service with the Company or the achievement of the Performance Objectives." 8. Section 6(c) of the Plan is hereby deleted and restated in its entirety to read as follows: "(c) Limits on Awards. The maximum aggregate number of Common Shares (i) for which Stock Options may be granted, and (ii) with respect to which Stock Appreciation Rights may be granted, to any particular employee during any calendar year during the term of this Plan is 200,000 Common Shares, subject to adjustment in accordance with Section 4(c) hereof. The maximum aggregate amount of cash which may be granted or awarded to any particular employee during any calendar year during the term of this Plan is $500,000." 2 9. Section 12 of the Plan is hereby deleted and restated in its entirety to read as follows: "In the event of a Change in Control of the Company, unless and to the extent otherwise determined by the Board of Directors, (i) all Stock Appreciation Rights and Stock Options then outstanding will become fully exercisable as of the date of the Change in Control; (ii) all restrictions and conditions applicable to Restricted Stock and other Stock Awards will be deemed to have been satisfied as of the date of the Change in Control, and (iii) all Cash Awards shall be released and/or deemed to have been fully earned as of the date of the Change in Control. Any such determination by the Board of Directors that is made after the occurrence of a Change in Control will not be effective unless a majority of the Directors then in office are Continuing Directors and the determination is approved by a majority of the Continuing Directors." 10. Section 15 of the Plan is hereby deleted and restated in its entirety to read as follows: "Unless otherwise determined by the Committee, (i) no Award granted under the Plan may be transferred or assigned by the Participant to whom it is granted other than by will, pursuant to the laws of descent and distribution, and (ii) an Award granted under this Plan may be exercised, during the Participant's lifetime, only by the Participant." IN WITNESS WHEREOF, Invacare Corporation, by its appropriate officers duly authorized, has executed this instrument as of the 30th day of January, 1998. INVACARE CORPORATION By: /S/ A. Malachi Mixon, III ----------------------------------------------------- A. Malachi Mixon, III, Chairman of the Board, President and Chief Executive Officer By: /S/ Thomas R. Miklich ------------------------------------------------------ Thomas R. Miklich, Chief Financial Officer, General Counsel, Treasurer and Corporate Secretary 3 -----END PRIVACY-ENHANCED MESSAGE-----