-----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, Qfu1r2pilDeyx0tBx2/UdLrX5GU7BRUHiczGiDWQN0exk3m8eidB/2/DpKeAVyfo srRVg0x1RwGrqeX4HZL18Q== 0000742112-02-000003.txt : 20020414 0000742112-02-000003.hdr.sgml : 20020414 ACCESSION NUMBER: 0000742112-02-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020215 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: 1934 Act SEC FILE NUMBER: 001-15103 FILM NUMBER: 02552004 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 k2001.txt 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, 2001 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 incorporation or organization) Number) 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 of New York Stock Exchange 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. [ ] As of February 12, 2002, 29,613,441 Common Shares and 1,112,187 Class B Common Shares were outstanding. At that date, the aggregate market value of the 26,596,434 Common Shares of the Registrant held by non-affiliates was $891,512,468 and the aggregate market value of the 32,013 Class B Common Shares of the Registrant held by non-affiliates was $1,073,076. 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 12, 2002, which was $33.52. For purposes of this information, the 3,017,007 Common Shares and 1,080,174 Class B Common Shares which were held by Executive Officers and Directors of the Registrant 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 2002 Annual Meeting of Shareholders. Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of December 31, 2001. I -1 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 its 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 worldwide distribution network by its sales force, telesales associates and various organizations of independent manufacturers' representatives and distributors. 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 intends to 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 Shopping(sm)" 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 2001, Invacare reached $1,054 million in net sales, representing a 20% 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, bathing equipment and distributed products. The company 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 (HME) 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. I-2 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 continues to increase, and the current life expectancy based on 1999 data is now an all-time high of approximately 76.7 years. Based on a 1999 U.S. government report, 13% of the U.S. population in 1997 was 65 or older, and this percentage is expected to increase to 20% by 2030. 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 also 65 years of age and older. 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 because 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. 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 lives of adults and children, thus increasing the demand for home medical care equipment. Healthcare cost containment trends. In 1999, spending on health care in the U.S. totaled $1.2 trillion dollars, approximately 13% of the Gross Domestic Product (GDP), the highest among industrialized countries. 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 to approximately 17% as a share of GDP. 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, direct sales and the Internet. 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 more heavily socialized and; therefore, 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. I-3 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 sells Invacare products manufactured in the U.S and Canada. 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 and meet a broad range of individual requirements. Power wheelchair lines are marketed under the Invacare(R) Storm Series(R) and Xterra(TM) brand names and include a full range of powered mobility products. The new 3G Storm Series with TrueTrack, introduced in 2001, utilizes proprietary technology that improves the directional control of the wheelchair, especially for consumers who drive on rough terrain or have difficulty controlling conventional wheelchairs. The Xterra(TM) GT(TM), also new for 2001, is designed with the patent-pending SureStep(TM) Technology to smoothly handle inclines, obstacles and transitions. 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 Invacare(R) and Invacare Top End(R) brand names. The chairs provide mobility for people with moderate to severe disabilities in their everyday activities as well as for use in 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(R) brand name which includes scooters under the Lynx(TM) and Panther(TM) product names. Seating and positioning products. Invacare markets seat cushions, back supports and accessories under three series. Invacare(R) Essential(TM) Series provides simple seating solutions for comfort, fit and function. Invacare Infinity(TM) Series includes versatile modular seating, providing optimal rehab solutions. Invacare PinDot(R) Series offers custom seating solutions personalized for the most challenged clients. In 2001, Invacare introduced the Personal Seat VF, providing a more affordable option in a pressure-relieving cushion. The Infinity DualFlex(TM)10 Back and UniBack(TM)10 offer improved flexibility and support compared to original Infinity backs and the improved hardware allows for setup in less than 10 minutes. STANDARD PRODUCTS Manual wheelchairs. Invacare's manual wheelchairs are sold for use inside and outside the home, institutional settings, or public places (e.g., airports, malls, etc.). Our clients include people who are chronically or temporarily disabled and require basic mobility performance with little or no frame modification. Examples of Invacare manual wheelchair lines, which are marketed under the Invacare(R) brand name, include the 9000 and Tracer(R) product lines. These lines offer wheelchairs which are designed to accommodate the diverse capabilities and unique needs of the individual from petite to bariatric sizes. Personal care. Invacare manufactures and/or distributes a full line of personal care products, including ambulatory aids such as crutches, canes, walkers and wheeled walkers. This line also features one of Invacare's latest product innovations, the Rollite(TM) Rollator, a truly unique solution in patient mobility. Also available are safety aids such as tub transfer benches, shower chairs and grab bars, and patient care products such as commodes and other toilet assist aids. 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 bedside rails, mattresses, overbed tables, trapeze bars and traction equipment. Also available are the new bariatric beds and accompanying accessories to serve the special needs of bariatric patients. Low air loss therapy products. Invacare manufactures and markets a complete line of mattress overlays and replacement products, under the Invacare(R) brand name. These products, which use air flotation to redistribute weight and move moisture away from patients, assist in the total care of those who are immobile and spend a great deal of time in bed. Patient Transport. Invacare manufactures and markets products needed to assist in transferring individuals from surface to surface (bed to chair) or transporting from room to room. Designed for use in the home and institutional settings, these products include patient lifts and slings, and a new series of mobile multi-functional recliners. I-4 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 home respiratory products are marketed predominantly under the Invacare(R) brand name. DISTRIBUTED PRODUCTS Distributed products. Invacare distributes numerous lines of branded medical supplies including ostomy, incontinence, diabetic, wound care, and miscellaneous home medical products, as well as HME aids to daily living. CONTINUING CARE 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. 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 line of custom power wheelchairs, Dynamic Controls, a New Zealand manufacturer of operating components used in power wheelchairs, and Invacare New Zealand, a distribution business and a manufacturer of the Thompson line of mobility products. Europe The company's European operations operate as a "common market" company with sales throughout Europe. The European operation currently sells a 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. With the acquisition of Scandinavian Mobility, Invacare not only has improved access of such products to Nordic markets, but has expanded the company's range of premium designs which are exported worldwide including the Far East and Southern Europe. The company manufactures and/or assembles both manual and power wheelchair products at six of its European facilities - Invacare Ltd. in the U.K., Invacare Poirier S.A. in France, Invacare Deutschland GmbH in Germany, Invacare Portugal Lda. in Portugal, Invacare AG in Switzerland, and Invacare Rea AB in Sweden. Motorized scooters are manufactured in Germany. Beds are manufactured at Invacare EC Hoeng in Denmark. Self-care products, bathtubs, patient lifts and slings also are 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. 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 multi-national 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. Invacare believes that it is the leading home medical equipment manufacturer based on its distribution channels, breadth of product line and sales. I-5 North America and Australasia The home medical equipment market is highly competitive and Invacare 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 products, the range of products offered, the technical expertise of the sales force, the effectiveness of the company 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 Shopping(sm)" 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. 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-sale 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. Manufacturers' representatives market and sell Invacare products through the company's Invacare Continuing Care Group to the non-acute care market. To complement its outside direct sales force, and to support its efforts to increase business with smaller-to-medium-sized customers, the company formed an Inside Sales Department in 2000. The Inside Sales Department was established to significantly grow sales to customers with annual purchases up to $100,000. Working in tandem with the company's outside sales force, the inside sales representatives support their customers with a targeted telesales effort. Customer response has continued to be very positive in the second year of the program, resulting in a sales increase in the targeted accounts in excess of 31% in 2001. In 2001, the company further enhanced the Service Referral Network, which it launched in 2000. Through the Service Referral Network, the company introduced a Warranty Labor Reimbursement Program, which enables service providers who make repairs under warranty claims to receive reimbursement for the labor expense associated with such claims for certain Invacare products. The reimbursement program gives service providers the opportunity to honor Invacare's product warranties while at the same time establishing a relationship with consumers that may lead to future purchases. Invacare launched the Service Referral Network to help ensure that all consumers using Invacare products receive quality service and support that is consistent with the Invacare brand promise. The company sells distributed products, primarily soft goods and disposable medical supplies, through the Invacare Supply Group (ISG). ISG is an important addition to Invacare's "Total One Stop Shopping(sm)" program, through which Invacare offers HME providers of all sizes the broadest range of products and services at the total lowest cost. ISG products include ostomy, incontinence, wound care and diabetic supplies, as well as other soft goods and disposable products. These products are complementary to Invacare products and are purchased by many of the same customers that buy Invacare equipment products. ISG markets its products through an inside telesales and customer service department, the Internet and Invacare's greater than 100-person HME field sales force. ISG also markets a Home Delivery Program to HME providers through which ISG drop-ships supplies in the provider's name to the customer's address. Thus, providers have no products to stock, no minimum orders and delivery is made within 24 to 48 hours nationwide. In 2001, at the industry's largest trade show, Medtrade, the company announced Arnold Palmer as its worldwide spokesperson. Mr. Palmer will become an integral part of Invacare's "Yes, you can(TM)" promotional and marketing efforts to encourage consumers to achieve personal independence and participate in the activities of life, facilitated by the home health care products which Invacare manufactures and markets throughout the world. The company believes that Mr. Palmer, serving as it spokesperson, will help I-6 accomplish three objectives: (i) create attention and awareness for the category of home health care products, (ii) accelerate the acceptance of these products as lifestyle enhancing so that consumers want these products and not just need them, and (iii) establish the Invacare brand as the consumer category-brand for home health care products. Mr. Palmer will be featured throughout Invacare's marketing communications, including Invacare direct-response television commercials, print advertising, point-of-purchase displays, and other merchandising and marketing materials. The company expects to launch its new, direct-response television campaign featuring Mr. Palmer during the first half of 2002. As part of its ongoing effort to continue building the company's leadership position in e-commerce in the HME industry, Invacare further enhanced its web site at www.invacare.com with the implementation of BroadVision Inc.'s suite of personalized e-business applications. The BroadVision software now allows Invacare to offer web site visitors a personalized experience through dynamic, customized web pages. The package supports Invacare's extensive online product catalog, in addition to other web-based content. It provides a "shopping cart" function and platform for conducting business-to-business transactions with Invacare's HME provider-customers. Customers also can easily access their own personalized account information, including order status, credit availability and other account specific information. The new web site conforms to the World Wide Web Consortium guidelines for web content accessibility for people with disabilities. In 2001, Invacare expanded its strategic advertising campaign in home health care magazines and trade publications which complement the company's focused brand strategy through the use of four-page and eight-page advertising inserts versus the traditional two-page spread ads which the company had run for a number of years. The company also contributed extensively to editorial coverage in trade publications on articles concerning the 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 generate greater consumer awareness of the company and its products, as evidenced by enhancements made to its consumer marketing program in 2001 through sponsorship of a variety of wheelchair events and support of various philanthropic causes which benefit the consumers of its products. Invacare continued for the eighth year as a National Corporate Partner with Easter Seals, one of the most recognized charities in the United States that meets the needs of both children and adults with various types of disabilities. The company further continued its sponsorship of 75 individual wheelchair athletes and teams, including several of the top-ranked men and women racers and handcyclists, and several of the top-ranked men and women wheelchair tennis players in the world. Invacare participated for the sixth year in a row as the title sponsor of the Invacare World Team Cup Tennis Tournament, which took place during the summer in Sion, Switzerland. The company also continued its support of disabled veterans through its sponsorship of the 21st National Veterans Wheelchair Games, the largest annual wheelchair sporting event in the world. The games bring a competitive and recreational sports experience to all military service veterans who use wheelchairs for their mobility needs due to spinal cord injury, neurological conditions or amputation. The company's top ten customers accounted for approximately 15% of 2001 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 2001 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 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. PRODUCT LIABILITY COSTS The company's captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures annual aggregate policy losses of $5 million of the company's domestic product liability exposure. The company also has additional layers of coverage insuring $90 million in annual aggregate losses arising from individual claims that exceed the captive insurance company policy limits. ISG distributed products are covered under a conventional insurance program with third party carriers on a guaranteed cost basis and layered limits up to $76 million. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at an affordable rate. I-7 PRODUCT DEVELOPMENT AND ENGINEERING Invacare is committed to continuously improving, expanding and broadening its existing product lines. In 2001, new product development was given an even stronger emphasis as part of Invacare's strategy to gain market share and maintain competitive advantage. To this end, the company introduced 75 new products in 2001. The following are some of the most significant introductions: North America The Invacare(R) 3G Storm Series(R) with TrueTrack power wheelchairs, featuring sporty looks and breakthrough improvements in navigation; The Invacare(R) Xterra(TM) GT(TM) power wheelchair for active users who want powered mobility with new styling on a durable, two-inch steel frame; The Invacare(R) Nutron(TM) Series, a traditional rear-wheel-drive power chair offering a wide range of configurations; The Invacare(R) Pronto(TM) M71 power wheelchair featuring the patent-pending SureStep(TM) suspension system that enables the chair to power over two-inch obstacles easily and smoothly; The redesigned Invacare(R) MVP(TM) and MVP(TM) Jr. custom manual wheelchairs for active consumers of all ages who want the convenience of a folding chair without sacrificing performance; The Invacare(R) Rollite(TM) Rollator, a cross between a traditional walker and a rollator offering a wide variety of features to meet diverse ambulatory and support needs; The Invacare(R) Overnight Hand-Held Printing Pulse Oximeter, making it easier than ever to help qualify or re-qualify patients for supplemental oxygen use; The Invacare(R) Poseidon Passover Humidifier, an easy-to-maintain humidifier that interfaces with a variety of CPAP systems; and An expanded Invacare(R) Bariatric line of products, including new innovations such as the Bariatric commode, Bariatric Crutches and Bariatric Trapeze, to accommodate higher weight levels, while enhancing the safety and comfort of patients and caregivers alike. Australasia While no major new product introductions were made in Australasia during 2001, various design improvements were made to their existing product line. Europe During 2001, European operations also introduced several new products and continued to update existing products as required by the market. Key introductions and updates in 2001 included: The Invacare(R) Storm 3 next generation of Storm power wheelchairs designed and manufactured in Europe which have new styling, improved functionality and are product rationalizations of the former Scandinavian Mobility International AS (SMI) and Invacare products for this segment across all European markets. Improved functionality includes a forward moving seat riser, additional seating options and seat height adjustment standard on all chairs. The Invacare(R) Auriga Scooters are new 3 and 4 wheel midsize scooters cooperatively designed in Europe and the Far East, manufactured in the Far East and currently sold in the United Kingdom and German markets. The product line includes a unique combination of competitive features, including higher 150-kilogram user weight, longer range, user-friendly adjustable tiller and the latest design aesthetics to differentiate from other low price scooters. I-8 The Invacare(R) Wheeler pediatric wheelchair creates a new market segment in innovative modular rigid pediatric wheelchairs that are highly adjustable, modular and can grow with the child's size and ability. The wide range of wheelchair types include comfort, all around transport and tilt-in-space versions that have interchangeable parts and accessories. This new segment covers Germany, France, Scandinavian and the Benelux markets. The Invacare(R) Variable Plus wheelchair replaces two existing wheelchairs and incorporates updated styling, improved functionality with a reclining backrest and swing in/ swing out footrest, and interchangeable options for the range of Invacare standard steel wheelchairs. Improved profitability and market share maintenance are in the United Kingdom, French, Belgian and Dutch markets. The Invacare(R) Swan Ceiling hoist is a new innovative hoist that offers the most comprehensive range of safety devices and repositions Invacare in the United Kingdom and Scandinavia to grow market share. Features include emergency stop and mechanical lower functions coupled with a "fail safe" centrifugal stop system. The versatile hoist is available in motorized or manual traverse models and capable of running on ceiling tracks or gantries. The Invacare(R) Alize is a new range of eight bath and shower products for elderly or handicap people. The additional products complete Invacare's bath and shower product range and generate cross selling opportunities with other patient aid product ranges. Alize products share the same seat and backrest ergonomical components, designed to bring an unsurpassed comfort to the user. The Invacare(R) SOLO Bed is a cost competitive bed which addresses the new regulations in the German market for improved electrical safety. In addition, the Invacare SOLO bed has increased lifting range and wooden bed ends and siderails specially designed for use in home care facilities. The Invacare(R) Staccata bed is for hospitals and institutions and addresses new market segments for Invacare in Spain, Portugual, the United Kingdom and export markets and also improves the product offering in Holland and Scandinavian markets. The bed offers increased functionality, including quick release of the backrest for Cardiopulmonary Resuscitation and blocking of electrical functions. The Invacare(R) Blade II pediatric wheelchair is the next generation of foldable, active, low-end wheelchairs. Improved functionality with swing away footrests, armrests and outrigger caster options make this a more competitive chair for the United Kingdom and French markets. MANUFACTURING AND SUPPLIERS The company's objective is to maintain its commitment to be the highest quality and lowest-cost manufacturer in its industry. 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. The company initiated plans to close and consolidate several distribution and manufacturing operations, the cost of which was included in a charge taken in the fourth quarter of 2000. These plans were completed during 2001. The company opened up a new Far East sourcing office during 2001. While the company believes the opportunities are significant to reduce overall costs, the short-term emphasis will be on building the professional disciplines in the area of sourcing, quality and logistics focusing on sourcing components and finished goods to each of the business segments. 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 lean manufacturing 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. I-9 The manufacturing operations for the company 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 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, both domestically and from the Far East. 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 has identified areas for further cost reductions and improved efficiencies for 2002. ACQUISITIONS During 2001, the company did not make any significant acquisitions. However, as a result of the company's ongoing search for opportunities, coupled with the industry trend toward consolidation, various acquisition opportunities were evaluated in 2001. 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. 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., Australia 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 levels 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. In late 2000, Congress enacted legislation (the Benefits Improvement and Protection Act or BIPA) that provides several victories for the homecare and HME services industries. First, Congress provided a full restoration of the annual cost-of-living adjustment for the Durable Medical Equipment Industry (DME) for fiscal 2001. This will amount to a 3.27% increase in the Medicare fee schedules for most Invacare products. BIPA also provides a measure of security for home health agencies by questioning the need for a 15% reduction in fees paid for home health services. BIPA also called for a study of the way supplies and equipment are billed to Medicare when the patient is enrolled in a plan of care through a home health agency. A final ruling implementing the consumer choice, or DME Upgrade, provision originally contained in the Balanced Budget Act of 1997 was issued on October 22, 2001. This provision makes it easier for consumers to choose more functional products than the minimally medically necessary items currently paid for by Medicare. Invacare anticipates this rule will have a positive impact on the sales of high-end products in every product line. The new rule was effective on January 1, 2002. The company continues its aggressive, pro-active efforts to shape public policy that impacts home and community-based, non-acute health care. We are currently supporting legislation that would extend Medicare coverage to products such as patient lifts, bath safety products and other items designed to provide physical safety and well being. 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. I-10 Congress and the new Administration once again have placed Medicare reform high on the priority list for change. Another item being discussed is prescription drug coverage. Both these areas will provide ample opportunities to re-educate policymakers on the fact that homecare is a clinically appropriate, cost-effective and patient preferred alternative to facility based care. As the "graying of America" continues, homecare will play an increasingly important role in meeting the health care needs of our citizens. 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 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 the 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 product nor does it believe that backlog is a significant factor for its business. EMPLOYEES As of December 31, 2001, the company had approximately 5,400 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. 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 leased facilities of the company as of December 31, 2001 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 2003 None Sublet Atlanta, Georgia 137,284 January 2005 One (3 yr.) Warehouse and offices Atlanta, Georgia 48,000 August 2006 None Sublet Belle, Missouri 34,125 Own - Manufacturing and offices Beltsville, Maryland 33,329 August 2004 One (3 yr.) Manufacturing, offices, and warehouse Chesterfield, Missouri 8,466 December 2002 None Offices Delta, British Columbia 6,900 January 2005 None Warehouse and offices Edison, New Jersey 93,220 March 2005 None Warehouse and offices
I-11
Ownership or Expiration Renewal North American Operations Square Feet Date of Lease Options Use - ------------------------- ----------- -------------- ------------ --------------------------- Elyria, Ohio - Taylor Street 251,656 Own - Manufacturing and offices - Cleveland Street 226,998 September 2004 One (5 yr.) Manufacturing and offices - One Invacare Way 50,000 Own - Headquarters - 1320 Taylor Street 30,000 January 2005 Two (5 yr.) Offices - 1160 Taylor Street 4,800 Own - Warehouse and offices Grand Prairie, Texas 43,754 February 2005 None Warehouse and offices Holliston, Massachusetts 57,420 August 2006 None Warehouse and offices Kirkland, Quebec 13,241 November 2002 One (5 yr.) Manufacturing, warehouse and offices Mississauga, Ontario 81,004 January 2005 One (5 yr.) Sublet Mississauga, Ontario 26,380 November 2011 Two (5 yr.) Warehouse and offices North Ridgeville, Ohio 152,861 Own - Manufacturing, warehouses and offices Obetz, Ohio 130,377 April 2004 One (5 yr.) Sublet Pinellas Park, Florida 11,400 July 2002 One (1 yr.) Manufacturing and offices Rancho Cucamonga, California 35,900 June 2005 One (60 day) Warehouse Reynosa, Mexico 129,690 Own - Manufacturing and offices Sacramento, California 26,900 May 2003 One (3 yr.) Manufacturing, warehouse and offices Sanford, Florida 113,158 Own - Manufacturing and offices Sanford, Florida 100,000 Own - Manufacturing and offices Santa Fe Springs, California 151,217 April 2004 One (5 yr.) Sublet Sarasota, Florida 15,450 February 2002 None Manufacturing, warehouse and offices South Bend, Indiana 30,000 July 2003 None Warehouse Spicewood, Texas 6,500 September 2002 One (3 yr.) Manufacturing and offices Traverse City, Michigan 15,850 April 2003 One (3 yr.) Manufacturing and offices Wright City, Missouri 17,350 Month to Month None Warehouse
I-12
Ownership or Expiration Renewal Australasia Operations Square Feet Date of Lease Options Use - ------------------------- ----------- -------------- ------------ --------------------------- Adelaide, Australia 21,668 June 2005 One (1 yr.) Manufacturing, warehouse and offices Auckland, New Zealand 27,000 September 2008 Two (3 yr.) Manufacturing, warehouse and offices Christchurch, New Zealand 57,682 December 2005 Three (3 yr.) Manufacturing and offices Hamilton , New Zealand 15,285 July 2002 Two (1 yr.) Manufacturing and warehouse Melbourne, Australia - Capella Crescent 7,212 Month to Month None Manufacturing - Wickham Road 3,229 Month to Month None Manufacturing - 6-8 Commercial Road 7,320 May 2002 Month to Month Manufacturing and officess - 10 Commerical Road 4,435 Month to Month Month to Month Manufacturing Napier, New Zealand 15,490 March 2002 One (2 yr.) Warehouse and offices North Olmsted, Ohio 2,280 October 2003 One (5 yr.) Warehouse and offices Sydney, Australia 2,700 February 2004 None Warehouse and offices European Operations - ---------------------- Allschwil, Switzerland 36,000 Own - Manufacturing and offices Bad Oeynhausen, Germany 78,000 June 2003 One (2 yr.) Manufacturing, warehouse and offices Bergen, Norway 1,000 May 2004 One (5 yr.) Warehouse and offices Bridgend, Wales 131,522 Own - Manufacturing and offices Brondy, Denmark 16,142 December 2002 One (1 yr.) 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 7,500 September 2002 None Warehouse and offices Hong, Denmark 172,305 Own - Manufacturing, warehouse and offices Jarfalla, Sweden 7,177 February 2003 None Warehouse and offices LaRochelle, France 101,718 July 2002 Every 3 years Manufacturing, warehouse and offices Loppem, Belgium 6,000 December 2005 One (5 yr.) Warehouse and offices Landskrona, Sweden 3,099 August 2003 None Warehouse
I-13
Ownership or Expiration Renewal European Operations Square Feet Date of Lease Options Use - ------------------------- ----------- -------------- ------------ --------------------------- Oisterwijk, The Netherlands 27,000 Own - Manufacturing, warehouse and offices Oporto, Portugal 27,800 November 2003 None Manufacturing, warehouse and offices Oskarshamn, Sweden 3,551 December 2004 None Warehouse Oslo, Norway 30,650 September 2006 None Manufacturing, warehouse and offices Saeby, Denmark 87,425 Own - Warehouse Spanga, Sweden 3,228 October 2002 One (1 yr.) Warehouse and offices Spanga, Sweden 16,140 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 2004 One (3 yr.) Services and offices Werste, Germany 15,000 March 2002 One (5 yr.) Warehouse Vaxjovagen, Sweden 107,600 Own - Manufacturing 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. Coverage territory is worldwide with the exception of those countries with respect to which, at the time product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. 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. 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 61 Chairman of the Board of Directors and Chief Executive Officer Gerald B. Blouch 55 President, Chief Operating Officer and Director Thomas R. Miklich 54 Chief Financial Officer, General Counsel and Corporate Secretary
I-14 Name Age Position - --------------------- ---- ------------------------------------------------------ Joseph B. Richey, II 65 President - Invacare Technologies, Senior Vice President - Electronics and Design Engineering and Director Louis F.J. Slangen 54 Senior Vice President - Sales & Marketing Thomas Kroeger 52 Senior Vice President - Human Resources Kenneth A. Sparrow 54 President - Invacare Europe Neal J. Curran 44 Vice President - Engineering and Product Development David A. Johnson 39 Vice President - Operations and Logistics Michael A. Perry 47 Vice President - Distributed Products Hugh L. Martyn 43 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 was 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. Mr. Miklich is a director of the OM Group, a NYSE listed company. Mr. Miklich was Interim Vice President - Human Resources from March 2000 until May 2001 and Treasurer from May 1993 until October 1999. Previously, Mr. Miklich was 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. Joseph B. Richey, II has been a Director since 1980 and in September 1992 was named President - Invacare Technologies and Senior Vice President - Electronics and Design Engineering. 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. Thomas Kroeger joined Invacare as Senior Vice President - Human Resources in May 2001. Before coming to Invacare, Mr. Kroeger was the Executive Vice President - Organization and People for Office Depot from July 1997 until April 2001 and Corporate Vice President - Human Resources for The Sherwin-Williams Company from October 1987 to July 1997. OPERATING OFFICERS - ------------------ Kenneth A. Sparrow was named President - Invacare Europe in September 2001. Previously, Mr. Sparrow was Director of Australasia from January 1998 to September 2001. Before coming to Invacare, Mr. Sparrow was General Manager of Operations for the Lyttelton Port Company from December 1995 to January 1998 and Divisional General Manager for Skellerup Industries from July 1992 to November 1995. I-15 Neal J. Curran was named Vice President of Engineering and Product Development in August 2000. Mr. Curran has been with the company since 1983 and has previously held positions as Vice President - Rehab Group July 1999 to August 2000, Vice President - Respiratory Group July 1998 to July 1999, Vice President - - Seating and Custom Mobility Products October 1997 to July 1998 and General Manager of the Custom Manual Business Unit from December 1994 to October 1997. Prior to 1994, Mr. Curran held the positions of Power Business Unit leader September 1992 to December 1994 and Vice President of Rehab engineering January 1991 to September 1992. David A. Johnson was named Vice President of Operations and Logistics in November 2000. Previous positions include Vice President - Rehab Group and Personal Care Products from August 2000 until November 2000, and Vice President - - Invacare Continuing Care Group and Home Medical Equipment Group from November 1998 until August 2000. 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. 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. Hugh L. Martyn was named Managing Director of Australasia in September 2001. Previously, Mr. Martyn was Chief Executive Officer of Dynamic Controls Ltd. from September 1998 to September 2001. Prior to this, Mr. Martyn was the Managing Director of Whisper-Tech Limited from December 1997 to September 1998, and the General Manager, Country Fare Bakeries (Christchurch, NZ) Ltd. from September 1996 to December 1997. * The description of executive officers is included pursuant to Instruction 3 to Section (b) of Item 401 of Regulation S-K. PART II ------- Item 5. Market for Registrant Common Equity and Related Stockholder Matters. Invacare 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 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 Common Shares and Class B Common Shares at February 12, 2002 was 5,652 and 30, respectively. The closing sale price for the Common Shares on February 12, 2002 as reported by NYSE, was $33.52. 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: 2001 2000 ---- ---- Quarter Ended: High Low High Low ------------- ------ ------ ------ ------ December 31 $38.84 $28.91 $34.38 $24.19 September 30 40.98 35.16 32.19 22.75 June 30 40.00 34.20 27.13 24.69 March 31 39.52 31.38 28.00 18.63
During 2001, the Board of Directors 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 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. I-16 Item 6. Selected Financial Data
2001* 2000 1999** 1998 1997*** ---- ---- ---- ---- ---- (In thousands, except per share and ratio data) Earnings Net Sales $1,053,639 $1,013,162 $882,774 $801,189 $654,409 Net Earnings 35,190 59,911 41,494 45,792 1,563 Net Earnings per Share - Basic 1.15 1.99 1.38 1.53 .05 Net Earnings per Share - Assuming Dilution 1.11 1.95 1.36 1.50 .05 Dividends per Common Share .05000 .05000 .05000 .05000 .05000 Dividends per Class B Common Share .04545 .04545 .04545 .04545 .04545 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Balance Sheet Current Assets $428,401 $432,408 $418,620 $336,742 $275,211 Total Assets 914,537 951,855 955,285 738,756 529,923 Current Liabilities 175,423 203,436 177,471 133,964 109,553 Working Capital 252,978 228,972 241,149 202,778 165,658 Long-Term Obligations 357,564 398,646 458,942 323,904 183,955 Shareholders' Equity 381,550 349,773 318,872 280,888 236,415 Other Data Research and Development Expenditures $ 17,394 $ 16,231 $ 15,534 $ 12,980 $ 12,706 Capital Expenditures, net of Disposals 19,486 26,268 32,155 39,505 37,962 Depreciation and Amortization 33,448 31,469 25,978 23,754 18,348 Key Ratios Return on Sales 3.3% 5.9% 4.7% 5.7% .2% Return on Average Assets 3.8% 6.3% 4.9% 7.2% .3% Return on Beginning Shareholders' Equity 10.1% 18.8% 14.8% 19.4% .7% Current Ratio 2.4:1 2.1:1 2.4:1 2.5:1 2.5:1 Debt-to-Equity Ratio .9:1 1.1:1 1.4:1 1.2:1 .8:1 * Reflects non-recurring impairment reserves of $31,950 ($25,250 or $.80 per share assuming dilution after tax) primarily related to certain investments and notes receivable. ** Reflects non-recurring and unusual charge of $14,800 ($9,028 or $.29 per share assuming dilution after tax). *** Reflects non-recurring and unusual charge of $61,039 ($38,839 or $1.28 per share assuming dilution after tax).
I -17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS 2001 Versus 2000 Reclassifications. The following Management's Discussion and Analysis of Financial Condition and Results of Operations reflect certain reclassifications made to the prior years' consolidated financial statements to conform to the presentation used for the year ended December 31, 2001. Non-recurring and Unusual Items. The review of results that follows excludes the impact of the non-recurring and unusual items recorded in 2001 and 2000. In 2001, the company recorded a fourth quarter non-cash charge of approximately $31,950,000 ($25,250,000 after tax) to reserve the value of certain investments and notes receivable. The decline in value of these investments was determined to be other than temporary due in part to the recent economic decline and tightening of the capital markets which has made obtaining the additional funding they require difficult. In 2000, as a result of repaying EURO and DKK denominated debt, the company realized a non-recurring pre-tax foreign currency gain of approximately $20,130,000. The gain was offset by charges in the fourth quarter aggregating $8,700,000 related primarily to closing two distribution centers and a manufacturing plant ($3,700,000), severance costs due to staff reductions (nine individuals) primarily at the corporate office ($1,000,000) and costs associated with the settlement of litigation ($4,000,000). In addition, during the fourth quarter of 2000, the company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $8,000,000. Net Sales. Consolidated net sales for 2001 increased 4% for the year despite a 2% negative impact from foreign currency translation. Net sales increased in all three business segments excluding currency. Sales gains were lower than last year due to the slowing economy and tightening of the credit markets. Growth also was impacted by the economic shock and market uncertainty resulting from the September terrorist attacks. However, the company believes its sales grew faster than the overall industry, resulting in market share gains. This sales growth was due in part to additional marketing and branding programs and its cost-effective "Total One Stop Shopping(sm)" 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 and scooters), Standard (manual wheelchairs, personal care, bed products, patient transport and low air loss therapy), Continuing Care (beds and furniture), Respiratory (oxygen concentrators, liquid oxygen, aerosol therapy, sleep and associated respiratory) and Distributed (ostomy, incontinence, wound care and other medical supplies) products grew 5% over the prior year excluding the negative impact of currency translation. All major product lines showed growth for the year. The largest gains were recorded in Continuing Care, Respiratory, and Rehab primarily due to the increased unit volumes of these products. Distributed sales increased approximately 5%. Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had a 5% sales increase for the year primarily as a result of volume increases. 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 $10,134,000 or 30% from the prior year. Excluding the impact of foreign exchange, sales increased 41% for the year. The increase was the result of continued expansion into the market, with volume increases in Standard wheelchairs and Respiratory products. European Operations European sales improved 4% over the prior year excluding a 5% negative impact from foreign currency translation. European sales were less than expected due to reimbursement pressure in key markets throughout the year and the weak Euro. Sales growth was driven by volume increases in Patient Aids, Homecare Beds and Patient Transport product lines. I-18 Gross Profit. Consolidated gross profit as a percentage of net sales was 30% in 2001 and 31% in 2000, primarily due to product mix, pricing pressures and the decline in the Euro. Continued productivity improvements and cost reduction activities partially offset these negative impacts. North American gross profit from operations as a percentage of net sales was flat as a result of depressed margins due to pricing pressures in the Supplies business offset by productivity improvements and cost reduction activities realized in the North American plants. Gross profit in Australasia as a percentage of sales was down by one percent from last year. A negative impact from foreign currency was offset by continued cost reduction activities. Gross profit in Europe as a percent to sales declined by two percentage points from prior year. The decline is attributable to the unfavorable impact of both product and country mix, unfavorable pricing particularly in the beds and power wheelchair product lines, the negative impact of the Euro and rising freight costs. Selling, General and Administrative. Consolidated selling, general and administrative expense, excluding the non-recurring charge taken in the fourth quarter of 2000, as a percentage of net sales was approximately 19% in 2001 and 2000. The overall dollar increase was $2,031,000 or 1%, with currency translation decreasing selling, general and administrative costs by approximately $3,668,000 or 2%. The minimal increase is the result of administrative cost control and the utilization of activity-based budgeting aimed at allocating the expense dollars to the programs that most effectively support the company's business strategy. North American operations' selling, general and administrative expenses as a percentage of net sales increased 2% or $3,005,000 compared to 2000. Australasia operations' selling, general and administrative expenses decreased approximately 8% from the prior year. The overall dollar decline between years was $702,000 primarily due to the strong dollar, which reduced the expense by $590,000. European operations' selling, general and administrative expenses increased $265,000 or 1% from the prior year. European selling, general and administrative expenses were positively impacted by continued cost containment initiatives and the strong dollar, which reduced selling, general and administrative expenses reported in dollars by $2,803,000. Interest. Interest income decreased in 2001 to $7,303,000 from $7,807,000 in the prior year, representing a 7% decrease. The decrease was primarily due to a 37% decrease in installment sales volume booked in 2001, partially offset by loan origination fees received on new business written as a result of our third-party financing arrangement with DLL, a subsidiary of Rabo Bank of the Netherlands. Interest expense decreased to $22,764,000 from $27,853,000 representing an 18% decrease. This was attributable to the declining interest rate environment throughout 2001, in conjunction with a decrease in our average borrowings outstanding under our revolver facility. The company's debt-to-equity ratio decreased to .9:1 from 1.1:1 in the prior year. Income Taxes. The company had an effective tax rate of 38.5% in 2001 and 39.0% in 2000, excluding the effects of the unusual and non-recurring charge recorded in 2001. The effective rate for 2001 including the unusual and non-recurring charge was 47% as a result of the valuation reserve recorded in the fourth quarter of 2001 which was not entirely deductible for tax purposes due to limitations on capital losses. The effective tax rate for 2002 is expected to be approximately 33% as a result of tax restructuring completed in the fourth quarter of 2001 and the benefit of the change in accounting for goodwill. See Income Taxes and Non-Recurring and Unusual Items 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 $17,394,000 from $16,231,000 in 2000. The expenditures, as a percentage of sales, increased to 1.7% from 1.6% in the prior year. 2000 Versus 1999 Non-recurring and Unusual Items. The review of results that follows excludes the impact of the non-recurring and unusual items recorded in 2000 and 1999. In 2000, as a result of repaying EURO and DKK denominated debt, the company realized a non-recurring pre-tax foreign currency gain of approximately $20,130,000. The gain was offset by charges in the fourth quarter aggregating $8,700,000 related primarily to closing two distribution centers and a manufacturing plant ($3,700,000), severance costs due to staff reductions (nine individuals) primarily at the corporate office ($1,000,000) and costs associated with the settlement of litigation I-19 ($4,000,000). In addition, during the fourth quarter of 2000, the company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $8,000,000. In 1999, the company announced non-recurring and unusual charges of $11,500,000 in the fourth quarter primarily related to the consolidation and integration of the operations of SMI and Invacare. The charges included reserves for employee severance ($3,000,000), plant shutdowns and lease terminations ($4,400,000), and asset write-downs and other non-recurring items ($4,100,000). The personnel reductions and shut down of facilities are related to the integration of SMI and are required to obtain the expected synergies from the acquisition. In addition, during the fourth quarter of 1999, the company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $3,300,000. Net Sales. Consolidated net sales for 2000 increased 15% for the year despite a 3% negative impact from foreign currency translation. Acquisitions contributed 9% of the increase. Net sales increased in two of the three business segments while Europe sales were flat. The overall increase was principally due to an increase in unit volume. The Standard and Distributed 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 additional marketing programs and its cost-effective "Total One Stop Shopping(sm)" 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 and scooters), Standard (manual wheelchairs, personal care, bed products, patient transport and low air loss therapy), Continuing Care (beds and furniture), Respiratory (oxygen concentrators, liquid oxygen, aerosol therapy, sleep and associated respiratory) and Distributed (ostomy, incontinence, wound care and other medical supplies) products net of acquisitions and divestitures grew 11% over the prior year. The gain was due primarily to Standard products, up 14%, as manual wheelchairs, personal care and bed products had strong sales increases. Distributed product sales increased 17% from the prior year. Sales for the Rehab product line, driven by Seating and Custom Manual, also increased 7% over the prior year. Respiratory sales were up approximately 4% offset by a similar decline in Continuing Care products. Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had an 11% sales increase for the year. Sales for the company's Canadian operation increased 9%. The increase was a result of volume increases. 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 $12,291,000 or 48% from the prior year, excluding a negative impact from foreign currency translation of 21% and a 4% impact from acquisitions. The increase was due to an increase in market share in the Australasian market. European Operations On a pro-forma basis, European sales were flat for the year excluding a 13% negative impact from foreign currency translation. European sales were less than expected due to the weak Euro and the company's focus on the integration of SMI. Gross Profit. Consolidated gross profit as a percentage of net sales was 31% in 2000 and 1999. This was a result of the company's continued focus on redesigning products in order to lower manufacturing costs while improving quality and reliability and other cost reductions made to remain competitive and improve profitability. North American gross profit from operations as a percentage of net sales remained constant with the prior year as a result of a shift in product mix to lower margin products. Gross profit in Australasia increased as a percentage of net sales to 30% from 28% in the prior year. The $2,965,000 increase includes the continued effects of a strong U.S. dollar which negatively impacted margins. Excluding the negative impact of foreign currency translation and a slight impact from acquisitions, gross profit increased $5,905,000 from the prior year. I-20 Gross profit in Europe as a percentage of net sales increased over one percentage point from the prior year. 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 improved slightly for 2000, as inventory control initiatives instituted throughout the company's existing business were implemented at the SMI locations. Selling, General and Administrative. Consolidated selling, general and administrative expense, excluding unusual charges, as a percentage of net sales were approximately 19% in 2000 and 1999. The overall dollar increase was $26,522,000 or 16%, with acquisitions increasing selling, general and administrative costs by approximately $21,267,000 or 13%. High distribution costs in 2000 throughout the company resulted in the same expense as a percentage of net sales as last year. North American operations' selling, general and administrative costs as a percentage of net sales remained flat compared to 1999. Selling, general and administrative costs increased $15,693,000 or 13% with acquisitions accounting for $776,000 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. Australasia operations' selling, general and administrative expenses increased approximately 34% from the prior year. The increase is primarily a result of the increased growth in business in Australasia. The overall dollar increase between years was $2,224,000. The strong dollar reduced selling, general and administrative expense for Australasia operations by $1,479,000. European operations' selling, general and administrative expenses increased $6,816,000 or 15% from the prior year. The increase was primarily a result of the acquisition of SMI. 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 $5,077,000. Interest. Interest income decreased in 2000 to $7,807,000 from $7,929,000 in the prior year, representing a 2% decrease. The decrease was due to a 32% decrease in new installment receivables booked throughout 2000. Interest expense increased to $27,853,000 from $22,093,000 representing a 26% increase resulting from additional borrowings in the first half of the year related to the Scandinavian Mobility acquisition, and also to an increasing interest rate environment. However, as a result of debt paydown efforts in the third and fourth quarters, the company's debt-to-equity ratio decreased to 1.1:1 from 1.4:1 in the prior year. Income Taxes. The company had an effective tax rate of 39% in both 2000 and 1999. 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 $16,231,000 from $15,534,000 in 1999. The expenditures, as a percentage of sales, decreased to 1.6% from 1.8% in the prior year. 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 2001 and 2000, the company was able to offset the majority of the impact of price increases from suppliers by productivity improvements and other cost reduction activities. 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 worldwide operations. In 2001, the company completed a $325,000,000 multi-currency, long-term revolving credit agreement which expires on October 17, 2006 and a $100,000,000 364- day facility which expires on October 16, 2002, or such later I-21 dates as mutually agreed upon by the company and the banks. These agreements terminate all commitments under the replaced 1997 credit agreement. Additionally, the company maintains various other demand lines of credit totaling a U.S. dollar equivalent of approximately $20,110,000 as of December 31, 2001. 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, 2001, the company had approximately $200,681,000 available under its various lines of credit, excluding debt covenant restrictions. The company's borrowing arrangements contain covenants with respect to interest coverage, 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 has the capacity to borrow up to an additional $50,665,000 as of December 31, 2001. While there is general concern about the potential for rising interest rates, exposure to interest fluctuations is manageable as a portion of the debt is at fixed rates through 2004. The fixed interest debt coupled with free cash flow should allow Invacare to absorb the expected modest rate increases in the months ahead without any material impact on our liquidity or capital resources. CAPITAL EXPENDITURES There are no individually material capital expenditure commitments outstanding as of December 31, 2001. The company estimates that capital investments for 2002 will approximate $22,000,000. 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 $58,478,000, compared to $78,426,000 last year. The decrease is due primarily to changes in working capital accounts including payments made in 2001 on restructuring items and legal liabilities. Cash flows required for investing activities decreased $17,524,000. The decrease is principally a result of payments received on existing installment receivables. The company no longer enters into installment contracts as a result of its third party financing arrangement with DLL. In addition, current year capital expenditures were lower than in 2000 as many of the company's systems improvements were completed in 2000 and prior years. Cash flows required by financing activities in 2001 were $35,305,000, compared to $49,480,000 in 2000. The decrease was principally a result of the company paying down less debt in 2001 than in 2000 partially offset by the impact of the purchases of treasury shares in 2001. 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. 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 2001, a dividend of $.05 per Common Share and $.045 per Class B Common Share was declared and paid. 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. On January 1, 2002, the Euro currency was introduced and the legacy currencies will be withdrawn from circulation by July 1, 2002. The company believes that, with the modifications made 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 ITEMS In 2001, the company recorded a fourth quarter non-cash charge of approximately $31,950,000 ($25,250,000 after tax) to reserve the value of certain investments and notes receivable. The decline in value of these investments was determined to be other than temporary due in part to the recent economic decline and tightening of the capital markets which has made obtaining the additional funding they require difficult. I-22 In 2000, as a result of repaying EURO and DKK denominated debt, the company realized a non-recurring pre-tax foreign currency gain of approximately $20,130,000. The gain was offset by charges in the fourth quarter aggregating $8,700,000 related primarily to closing two distribution centers and a manufacturing plant ($3,700,000), severance costs due to staff reductions (nine individuals) primarily at the corporate office ($1,000,000) and costs associated with the settlement of litigation ($4,000,000). Of these charges, $3,035,000 have been utilized related to closing two distribution centers and a manufacturing plant, $957,000 have been utilized related to severance costs, and $4,000,000 related to settlement of litigation. In addition, during the fourth quarter of 2000, the company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $8,000,000. In 1999, the company announced non-recurring and unusual charges of $11,500,000 in the fourth quarter primarily related to the consolidation and integration of the operations of SMI and Invacare. The charges included reserves for employee severance ($3,000,000), plant shutdowns and lease terminations ($4,400,000), and asset write-downs and other non-recurring items ($4,100,000). The personnel reductions and shut down of facilities are related to the integration of SMI and are required to obtain the expected synergies from the acquisition. Of these charges, $2,885,000 has been utilized related to employee severance, $4,400,000 has been utilized related to plant shutdown and lease termination, and $3,566,000 has been utilized related to asset write-downs and other non-recurring items. In addition, during the fourth quarter of 1999, the company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $3,300,000. All initiatives for which charges were reported have been substantially completed at December 31, 2001. CRITICAL ACCOUNTING POLICIES The consolidated financial statements include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Revenue Recognition Invacare's revenues are recognized when products are shipped to unaffiliated customers. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101. Allowance for Uncollectible Accounts Receivable Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. 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. The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of the customer. In addition, as a result of the third party financing arrangement with DLL, management monitors the collection status of these contracts in accordance with the company's limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts. Inventories and Related Allowance for Obsolete and Excess Inventory Inventories are valued at the lower of cost or market value and have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management's review of inventories on hand compared to estimated future usage and sales. Goodwill, Intangible and Other Long-Lived Assets Property, plant and equipment, goodwill, intangible and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. I-23 Product Liability The company's captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures annual aggregate policy losses of $5 million of the company's domestic product liability exposure. The company also has additional layers of coverage insuring $90 million in annual aggregate losses arising from individual claims that exceed the captive insurance company policy limits. Invacare Supply Group's distributed products are covered under a conventional insurance program with third party carriers on a guaranteed cost basis and layered limits up to $76 million. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at an affordable rate. The company provides reserves for product liability using an estimation process that considers company specific and industry data as well as management's assumptions. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In August, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, SFAS No. 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale. The distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The adoption of the statement effective January 1, 2002, did not have a material impact on the consolidated financial position or results of operations of the company. In June 2001, the FASB issued SFAS No. 141, Accounting for Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS No. 142 is expected to result in an increase in net income for the year. The company will perform the first of the required impairment tests under SFAS No. 142 of the goodwill and indefinite lived intangible assets as of January 1, 2002. The company's current policy for measuring goodwill impairment is based upon an analysis of undiscounted cash flows, which does not result in an indicated impairment as of December 31, 2001. Under SFAS No. 142, goodwill must be assigned to reporting units and measured for impairment based upon the fair value of the reporting units. The Company has not yet determined its reporting units under SFAS No. 142 and what the effect of these new impairment tests will be on its consolidated financial position or results of operations. 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, 2001 debt levels, a 1% change in interest rates would impact interest expense by approximately $2,454,000. 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. FASB No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133), requires companies to recognize all of its derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. The company adopted the statement on January 1, 2001 and, accordingly, recognized a cumulative effect adjustment to other comprehensive income of $802,000. The company does not believe that any potential loss related to these financial instruments would have a material adverse effect on the company's financial condition or results of operations. PRIVATE SECURITIES LITIGATION REFORM ACT The statements contained in this form 10-K constitute forward-looking statements within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Terms such as "will," "should," "achieve," "increase," "plan," "can," "expect," "pursue," "benefit," "continue," "exceed," "improve," "believe," "anticipate," "build," "strengthen," "new," "lower," "drive," "seek," "hope," and "create," as well as similar comments, are forward-looking in nature. Actual results and events may differ significantly from those expressed or anticipated as a result of risks and uncertainties which include, but are not limited to, the following: pricing pressures, increasing raw material costs, the consolidations of health care customers and competitors, government reimbursement issues including those that affect the viability of customers, the effect of offering customers competitive financing terms, Invacare's ability to effectively identify, acquire and integrate strategic acquisition candidates, the difficulties in managing and I-24 operating businesses in many different foreign jurisdictions, the timely and efficient completion of facility consolidations, the difficulties in acquiring and maintaining a proprietary intellectual property ownership position, the overall economic, market and industry growth conditions, foreign currency and interest rate risk, Invacare's ability to improve financing terms and reduce working capital, as well as the risks described from time to time in Invacare's reports as filed with the Securities and Exchange Commission. The company undertakes no obligation to update any of the forward-looking or other information contained herein. 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 2002 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 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. 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 definitive Proxy Statement for the 2002 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 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 2002 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 definitive Proxy Statement for the 2002 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 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, 2001, 2000 and 1999 Consolidated Balance Sheet - December 31, 2001 and 2000 I-25 Consolidated Statement of Cash Flows - years ended December 31, 2001, 2000, and 1999 Consolidated Statement of Shareholders' Equity - years ended December 31, 2001, 2000, and 1999 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-28 of this Report on Form 10-K. (b) Reports on Form 8-K. An 8-K was filed on November 20, 2001 under Item 5, Other Events. The filing included the 5-year credit agreement dated October 17, 2001 and the 364-day credit agreement dated October 17, 2001 which were filed as exhibits 10(ax) and 10(ay). An 8-K was filed on December 12, 2001 under Item 5, Other Events. The filing contained Invacare Corporation's news release dated December 12, 2001. 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 February 15, 2002. INVACARE CORPORATION By: /S/ A. Malachi Mixon, III -------------------------- A. Malachi Mixon, III Chairman of the Board of Directors and Chief Executive Officer I-26 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 February 15, 2002. Signature Title --------- ----- /S/ A. Malachi Mixon, III Chairman of the Board of Directors --------------------- and Chief Executive Officer A. Malachi Mixon, III (Principal Executive Officer) /S/ Gerald B. Blouch President, Chief Operating Officer --------------------- and Director Gerald B. Blouch /S/ Thomas R. Miklich Chief Financial Officer, General --------------------- Counsel, Corporate Secretary Thomas R. Miklich (Principal Financial and Accounting Officer) /S/ James C. Boland Director --------------------- James C. Boland /S/ Frank B. Carr Director --------------------- Frank B. Carr /S/ Michael F. Delaney Director --------------------- Michael F. Delaney /S/ Whitney Evans Director --------------------- Whitney Evans /S/ Bernadine P. Healy, M.D. Director --------------------- Bernadine P. Healy, M.D. /S/ John R. Kasich Director --------------------- John R. Kasich /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 I-27
INVACARE CORPORATION Report on Form 10-K for the fiscal year ended December 31, 2001. Exhibit Index Official Sequential Exhibit No Description 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)* 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) I-28 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 Invacare Supply Group, formerly Suburban Ostomy Supply Company, 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. (Z) 10(aw) - Amendment No. 2 to the Invacare Corporation 1994 Performance Plan approved May 24, 2000. (AA) 10(ax) - Five-Year Credit Agreement between Invacare Corporation and Subsidiaries, the banks (AB) named therein, Bank One, as agent for the banks, dated October 17, 2001. 10(ay) - 364-Day Credit Agreement between Invacare Corporation and Subsidiaries, the banks (AC) named therein, Bank One, as agent for the banks, dated October 17, 2001. 21 - Subsidiaries of the company 23 - Consent of Independent Auditors 99(a) - Executive Liability and Defense Coverage Insurance Policy (H) 99(b) - Supplemental Executive Retirement Plan (Y) * Management contract, compensatory plan or arrangement
(A) Reference is made to Exhibit A of the company 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 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 Definitive Proxy Statement used in connection with the Annual Meeting of Shareholders held on May 25, 1988, which Exhibit is incorporated herein by reference. I-29 (E) Reference is made to the appropriate Exhibit of the company 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 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 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 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 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 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 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 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 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 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 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 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 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 report on Form 10-K for the fiscal year ended December 31, 1993, which Exhibit is incorporated herein by reference. (S) Reference is made to Exhibit 1 of the company 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 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 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 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 report on Form 8-K, dated January 23, 1998, which Exhibit is incorporated herein by reference. I-30 (X) Reference is made to the appropriate Exhibit of the company 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 report on Form 10-K for the fiscal year ended December 31, 1996, which Exhibit is incorporated herein by reference. (Z) Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 1999, which Exhibit is incorporated herein by reference. (AA) Reference is made to the appropriate Exhibit of the company report on Form S-8, dated March 30, 2001, which Exhibit is incorporated herein by reference. (AB) Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated October 17, 2001, which Exhibit is incorporated herein by reference. (AC) Reference is made to Exhibit 10.2 of the company report on Form 8-K, dated October 17, 2001, which Exhibit is incorporated herein by reference. I-31 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, 2001 and 2000, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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 16, 2002 FS-1 CONSOLIDATED STATEMENT OF EARNINGS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2001 2000 1999 ------- ------- ------- (In thousands, except per share data) Net sales $1,053,639 $1,013,162 $882,774 Cost of products sold 735,292 695,888 611,587 ------- ------- ------- Gross Profit 318,347 317,274 271,187 Selling, general and administrative expenses 195,574 201,543 170,321 Amortization of goodwill 8,972 8,899 7,258 Non-recurring and unusual items 31,950 (11,430) 11,500 Interest expense 22,764 27,853 22,093 Interest income (7,303) (7,807) (7,929) ------ ------ ------ Earnings before Income Taxes 66,390 98,216 67,944 Income taxes 31,200 38,305 26,450 ------ ------ ------ Net Earnings $ 35,190 $ 59,911 $ 41,494 ====== ====== ====== Net Earnings per Share - Basic $ 1.15 $ 1.99 $ 1.38 ====== ====== ====== Weighted Average Shares Outstanding - Basic 30,620 30,128 30,138 ====== ====== ====== Net Earnings per Share - Assuming Dilution $ 1.11 $ 1.95 $ 1.36 ====== ====== ====== Weighted Average Shares Outstanding - Assuming Dilution 31,683 30,761 30,619 ====== ====== ======
See notes to consolidated financial statements. FS-2 CONSOLIDATED BALANCE SHEET INVACARE CORPORATION AND SUBSIDIARIES
December 31, December 31, 2001 2000 ------- ------- (In thousands) Assets Current Assets Cash and cash equivalents $ 16,683 $ 12,357 Marketable securities 1,188 845 Trade receivables, net 219,844 211,372 Installment receivables, net 35,423 56,659 Inventories, net 111,868 105,295 Deferred income taxes 24,125 31,605 Other current assets 19,270 14,275 ------- ------- Total Current Assets 428,401 432,408 Other Assets 50,398 74,305 Property and Equipment, net 132,202 134,913 Goodwill, net 303,536 310,229 ------- ------- Total Assets $914,537 $951,855 ======= ======= Liabilities and Shareholders' Equity Current Liabilities Accounts payable $ 74,133 $ 81,316 Accrued expenses 76,000 92,453 Accrued income taxes 16,207 23,860 Current maturities of long-term obligations 9,083 5,807 ------- ------- Total Current Liabilities 175,423 203,436 Long-Term Debt 342,724 384,316 Other Long-Term Obligations 14,840 14,330 Shareholders' Equity Preferred Shares (Authorized 300 shares; none outstanding) 0 0 Common Shares (Authorized 100,000 shares; 29,838 and 29,186 issued in 2001 and 2000, respectively) 7,466 7,301 Class B Common Shares (Authorized 12,000 shares; 1,112 and 1,372, issued and outstanding in 2001 and 2000, respectively) 278 343 Additional paid-in-capital 87,209 79,105 Retained earnings 344,032 310,367 Accumulated other comprehensive loss (48,129) (43,430) Treasury shares (249 and 177 shares in 2001 and 2000, respectively) (9,306) (3,913) ------- ------- Total Shareholders' Equity 381,550 349,773 Total Liabilities and Shareholders' Equity $914,537 $951,855 ======= =======
See notes to consolidated financial statements. FS-3 CONSOLIDATED STATEMENT OF CASH FLOWS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2001 2000 1999 ------- ------- ------- (In thousands) Operating Activities Net earnings $ 35,190 $ 59,911 $ 41,494 Adjustments to reconcile net earnings to net cash provided by operating activities: Non-recurring and unusual items 29,950 1,070 5,810 Depreciation and amortization 33,448 31,469 25,978 Provision for losses on trade and installment receivables 7,150 14,109 10,333 Provision for deferred income taxes 6,220 (178) 4,608 Provision for other deferred liabilities 267 868 559 Changes in operating assets and liabilities: Trade receivables (11,114) (38,341) (22,402) Inventories (7,010) (6,494) (7,465) Other current assets (6,165) (3,192) (729) Accounts payable (6,835) 24,195 3,345 Accrued expenses (22,623) (4,991) 11,309 ------- ------- ------- Net Cash Provided by Operating Activities 58,478 78,426 72,840 Investing Activities Purchases of property and equipment (20,182) (26,445) (32,808) Proceeds from sale of property and equipment 696 177 653 Installment sales contracts, net 25,946 12,440 (14,191) Marketable securities (165) 516 858 Business acquisitions, net of cash acquired - (2,814) (141,536) Increase in other investments (1,642) (4,257) (3,609) Increase in other long-term assets (13,817) (8,745) (9,700) Other (1,063) 1,377 2,178 ------- ------- ------- Net Cash Required for Investing Activities (10,227) (27,751) (198,155) Financing Activities Proceeds from revolving lines of credit and long-term borrowings 304,778 109,588 344,908 Principal payments on revolving lines of credit, long-term debt and capital lease obligations (339,941) (163,534) (208,033) Proceeds from exercise of stock options 8,854 5,965 1,441 Payment of dividends (1,525) (1,499) (1,493) Purchase of treasury stock (7,471) 0 (2,661) ------- ------- ------- Net Cash Provided (Required) by Financing Activities (35,305) (49,480) 134,162 Effect of exchange rate changes on cash (8,620) (7,096) (49) ------- ------- ------- Increase (decrease) in cash and cash equivalents 4,326 (5,901) 8,798 Cash and cash equivalents at beginning of year 12,357 18,258 9,460 ------- ------- ------- Cash and cash equivalents at end of year $ 16,683 $ 12,357 $ 18,258 ======= ======= =======
See notes to consolidated financial statements. FS-4 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY INVACARE CORPORATION AND SUBSIDIARIES
(In thousands) Accumulated Additional Retained Other Common Stock Class B Stock Paid-in- Earnings Comprehensive Treasury Stock Amount Shares Amount Shares Capital (Loss) Earnings(Loss) Amount Shares Total -------- -------- -------- ------ ----------- ---------- ------------- ---------- --------- -------- January 1, 1999 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) - Exercise of stock options, including tax benefit 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, net of tax 297 297 Total comprehensive income 40,230 Dividends - $.05 per common share, $.045 per class B share (1,493) (1,493) Repurchase of treasury shares (2,661) (120) (2,661) - ------------------------- -------- -------- -------- ------ ----------- ---------- ------------- ---------- --------- -------- December 31, 1999 7,282 29,125 358 1,433 79,470 251,955 (8,976) (11,217) (579) 318,872 Balance Conversion of shares from Class B to Common 15 61 (15) (61) - Exercise of stock options, including tax benefit 4 (365) 7,304 402 6,943 Net earnings 59,911 59,911 Foreign currency translation adjustments (34,793) (34,793) Marketable securities holding gain, net of tax 339 339 Total comprehensive income 25,457 Dividends - $.05 per common share, $.045 per class B share (1,499) (1,499) - ------------------------- -------- -------- -------- ------ ----------- ---------- ------------- ---------- --------- -------- December 31, 2000 7,301 29,186 343 1,372 79,105 310,367 (43,430) (3,913) (177) 349,773 Balance Conversion of shares from Class B to Common 65 260 (65) (260) - Exercise of stock options, including tax benefit 94 368 7,932 2,078 128 10,104 Stock Awards 6 24 172 178 Net earnings 35,190 35,190 Foreign currency translation adjustments (3,342) (3,342) Cumulative effect upon adoption of FAS 133, net of tax 521 521 Unrealized losses on cash flow hedges, net of tax (1,561) (1,561) Marketable securities holding (loss), net of tax (317) (317) Total comprehensive income 30,491 Dividends - $.05 per common share, $.045 per class B share (1,525) (1,525) Repurchase of treasury shares (7,471) (200) (7,471) - ------------------------- -------- -------- -------- ------ ----------- ---------- ------------- ---------- --------- -------- December 31, 2001 $7,466 29,838 $278 1,112 $87,209 $344,032 $(48,129) $(9,306) (249) $381,550 Balance
See notes to consolidated financial statements. FS-5 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, low air loss therapy products, respiratory products and distributed products. Principles of Consolidation: The consolidated financial statements include the accounts of the company and its majority owned subsidiaries. Certain foreign subsidiaries are consolidated using a November 30 fiscal year end. All significant intercompany transactions are eliminated. Reclassifications: Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the presentation used for the year ended December 31, 2001. Use of Estimates: The consolidated financial statements 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. Accounting Policy for Derivative Instruments: Financial Accounting Standards Board Statement (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, requires companies to recognize all of its derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. The company adopted the statement on January 1, 2001 and, accordingly, recognized a pre-tax cumulative effect adjustment to other comprehensive income of $802,000. A majority of the company's derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. The derivatives designated as fair value hedges are perfectly effective; thus, the entire gain or loss associated with the derivative instrument directly affects the value of the debt by increasing or decreasing its carrying value. The company has entered into interest rate swap agreements that qualify as cash flow hedges and effectively convert $45 million of its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense. The company has also entered into interest rate swap agreements that qualify as fair value hedges and effectively convert $50 million of fixed-rate debt to floating-rate debt, so the company can avoid paying higher than market interest rates. For the year, the company recognized a net loss of $1,041,000 related to its swap agreements, which is reflected in interest expense on the statement of earnings. To protect against decreases/increases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the company utilizes cash flow hedges to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The company recognized a net loss of $828,000 on foreign currency cash flow hedges for the year, which is included in cost of products sold and selling, general and administrative costs. The company used forward contracts that do not qualify for special hedging, but do effectively limit the company's exposure to foreign currency fluctuations between the peso and U.S. dollar. During 2001, the company recognized a $953,000 gain related to the forward contracts which is included in costs of products sold on the statement of earnings. The company recognized no gain or loss related to hedge ineffectiveness or discontinued cash flow hedges. If it is later determined that a hedged forecasted transaction is unlikely to occur, any gains or losses on the forward contracts would be reclassified from other comprehensive income into earnings. The company does not expect this to occur during the next twelve months. Recently Issued Accounting Pronouncements: In August, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, provides a single accounting model for long- FS-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES ACCOUNTING POLICIES-Continued lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. The distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The adoption of the statement effective January 1, 2002, did not have a material impact on the consolidated financial position or results of operations of the company. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Accounting for Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statement is expected to result in an increase in net income for the year. The Company will perform the first of the required impairment tests under SFAS No. 142 of the goodwill and indefinite lived intangible assets as of January 1, 2002. The Company's current policy for measuring goodwill impairment is based upon an analysis of undiscounted cash flows, which does not result in an indicated impairment as of December 31, 2001. Under SFAS No. 142, goodwill must be assigned to reporting units and measured for impairment based upon the fair value of the reporting units. The Company has not yet determined its reporting units under SFAS No. 142 and what the effect of these new impairment tests will be on its consolidated financial position or results of operations. Marketable Securities: 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 ($72,025,000 and $74,878,000 at December 2001 and 2000, 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 six years from the date of sale to the customer. Certain components carry a lifetime warranty. 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 $17,394,000, $16,231,000, and $15,534,000 for 2001, 2000, and 1999, respectively. Revenue Recognition: The company recognizes revenue when the product is shipped and provides an appropriate allowance for estimated returns and adjustments. The cost of shipping products is treated as a component of costs of products sold and the related revenue from shipping products is treated as a component of net sales. 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. Undistributed earnings of the company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. or state income taxes has been provided. FS-7 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 $45,186,000 and $36,187,000 at December 31, 2001 and 2000, 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, 2001, 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 $18,792,000, $18,261,000 and $17,391,000 for 2001, 2000, and 1999, respectively. RECEIVABLES Trade receivables are net of allowances for doubtful accounts of $14,043,000 and $13,048,000 in 2001 and 2000, respectively. Installment receivables as of December 31, 2001 and 2000 consist of the following:
2001 2000 ---- ---- Long- Long- (In thousands) Current Term* Total Current Term* Total ------- ------- ------- ------- ------- ------- Installment receivables $50,218 $4,370 $54,588 $75,306 $15,865 $91,171 Less: Unearned interest (1,111) (94) (1,205) (2,868) (1,047) (3,915) Allowance for doubtful accounts (13,684) (1,070) (14,754) (15,779) (1,910) (17,689) ------- ------- ------- ------- ------- ------- $35,423 $3,206 $38,629 $56,659 $12,908 $69,567 ======= ======= ======= ======= ======= =======
Beginning in the fourth quarter of 2000, the company is not entering into any new installment receivables. See the "Concentration of Credit Risk" footnote for a description of the current third party financing arrangement. * Long-term installment receivables are included in "Other Assets" on the consolidated balance sheet. INVENTORIES Inventories as of December 31, 2001 and 2000 consist of the following: 2001 2000 ---- ---- (In thousands) Raw materials $ 35,333 $ 29,417 Work in process 11,326 15,039 Finished goods 65,209 60,839 ------- ------- $ 111,868 $ 105,295 ======= ======= The value of inventory on the LIFO method is approximately equal to its current cost as of December 31, 2001 and as of December 31, 2000. FS-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2001 and 2000 consist of the following: 2001 2000 ---- ---- (In thousands) Machinery and equipment $186,622 $176,885 Land, buildings and improvements 54,308 55,760 Furniture and fixtures 14,516 13,443 Leasehold improvements 11,648 10,308 ------- ------- 267,094 256,396 Less allowance for depreciation 134,892 121,483 ------- ------- $ 132,202 $ 134,913 ======= ======= CURRENT LIABILITIES Accrued expenses as of December 31, 2001 and 2000 consist of the following: 2001 2000 ---- ----- (In thousands) Accrued salaries and wages $ 21,538 $ 29,124 Acquisition reserves 5,750 10,286 Accrued insurance 1,784 4,452 Accrued warranty cost 7,607 7,917 Accrued rebates 3,083 4,137 Accrued interest 7,909 4,350 Accrued product liability, current portion 2,469 679 Accrued freight 3,766 3,172 Accrued SERP liability 8,039 6,049 Other accrued items 14,055 22,287 ------ ------ $ 76,000 $ 92,453 ====== ====== ACQUISITIONS Effective July 31, 1999, the company acquired substantially all of the outstanding shares 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, the purchase price allocation included restructuring reserves consisting of accruals for severance and other employee related costs ($9.8 million) and costs associated with the closure of facilities ($10.8 million). As of December 31, 2001, the accruals for severance and other employee related costs have been fully utilized and the company expects the remaining accruals of $5.8 million for costs associated with the closure of facilities to be utilized during 2002. 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, 2001, 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 2008. Lease expenses were approximately $12,045,000 in 2001, $11,269,000 in 2000, and $9,178,000 in 1999. Future minimum operating lease commitments as of December 31, 2001, are as follows: FS-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES LEASES AND COMMITMENTS-Continued Year Amount ---- ------ (In thousands) 2002 $ 9,797 2003 7,389 2004 4,444 2005 2,088 2006 738 Thereafter 300 ------ Total Future Minimum Lease Payments $24,756 ====== The amount of buildings and equipment capitalized in connection with capital leases was $4,429,000 and $4,360,000 at December 31, 2001 and 2000, respectively. At December 31, 2001 and 2000, accumulated amortization was $2,326,000 and $2,033,000, respectively. RETIREMENT AND BENEFIT PLANS Effective January 1, 2001, the Employee Stock Bonus Trust and Plan was merged into the Profit Sharing Plan and the Profit Sharing Plan was renamed the Invacare Retirement Savings Plan. Substantially all full-time salaried and hourly domestic employees are included in the Retirement Savings Plan sponsored by the company. The company makes matching contributions in the form of cash 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 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 2001, 2000 and 1999 was $5,788,000, $5,071,000, and $5,328,000, respectively. The company also sponsors a non-qualified defined benefit Supplemental Executive Retirement Plan (SERP) 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 $25,254,000 at December 31, 2001. Pension expense for the plan in 2001, 2000 and 1999 was $2,059,000, $1,714,000, and $1,168,000, respectively. SHAREHOLDERS' EQUITY TRANSACTIONS At December 31, 2001, 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, 2001, 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"). In May, 2000, the 1994 Plan was amended to increase the number of Common Shares reserved for issuance by 2,000,000 Common Shares. The 1994 Plan, as amended, provides for the issuance of up to 5,500,000 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, FS-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES SHAREHOLDERS' EQUITY TRANSACTIONS -Continued Common Shares or a combination thereof. There were no stock appreciation rights outstanding at December 31, 2001, 2000 or 1999. During 2001, the Committee, under the 1994 Plan, granted 561,885 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. In 2001, restricted stock awards for 24,020 shares were granted without cost to the recipients. Under the terms of the restricted stock awards, the shares granted vest four years after the award date. Unearned restricted stock compensation of $949,000, determined as the market value of the shares at the date of grant, is being amortized on a straight-line basis over the four-year vesting period. Compensation expense of $178,000 was recognized in 2001. No other restricted awards have been granted. 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, 2001, there were 12,550 options outstanding under this plan. During 2001, no options were granted under this plan. The Plans have provisions for the net share settlement of options. Under these provisions, the company settled 124,823 treasury shares for $4,781,114 in 2001, 79,922 treasury shares for $2,663,062 in 2000 and 78,433 treasury shares for $1,860,663 in 1999. As of December 31, 2001, an aggregate of 9,789,744 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 2001 Price 2000 Price 1999 Price ---- ----- ---- ----- ---- ----- Options outstanding at January 1, 4,289,763 $21.08 4,059,133 $18.70 3,057,020 $16.90 Granted 585,905 33.59 1,082,056 24.33 1,397,080 20.75 Exercised (636,933) 16.84 (659,187) 11.35 (285,575) 7.39 Canceled (36,792) 22.31 (192,239) 22.37 (109,392) 23.70 --------- ------ --------- ------ --------- ------ Options outstanding at December 31, 4,201,943 $23.27 4,289,763 $21.08 4,059,133 $18.70 ========= ====== ========= ====== ========= ====== Options price range at December 31, $ 9.30 to $ 7.50 to $ 2.19 to $ 37.56 $ 31.25 $ 27.50 Options exercisable at December 31, 2,101,706 1,965,220 2,018,674 Options available for grant at December 31, 917,530 1,466,643 356,460
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, except the expense recorded related to the 24,020 restricted stock awards. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards in 2001, 2000 and 1999 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) 2001 2000 1999 -------------------------------------------------------------------------------------------------------------- Net earnings - as reported $35,190 $59,911 $41,494 Net earnings - pro forma $30,744 $55,839 $38,639 Earnings per share as reported - basic $ 1.15 $ 1.99 $ 1.38 Earnings per share as reported - assuming dilution $ 1.11 $ 1.95 $ 1.36 Pro forma earnings per share - basic $ 1.00 $ 1.85 $ 1.28 Pro forma earnings per share - assuming dilution $ .97 $ 1.82 $ 1.26
FS-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES SHAREHOLDERS' EQUITY TRANSACTIONS -Continued The assumption regarding the stock options issued in 2001, 2000 and 1999 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. 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 2001: dividend yield of .90%; expected volatility of 33.8%; risk-free interest rate of 4.53%; and an expected life of 6.0 years. The weighted-average fair value of options granted during the year 2001, per the Black-Scholes model based on the expected exercise year of 2007, is $12.24. 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 2001 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, 2001 is 7.4 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. NET EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net earnings per common share. 2001 2000 1999 ---- ---- ---- (In thousands except per share data) Basic Average common shares outstanding 30,620 30,128 30,138 Net earnings $35,190 $59,911 $41,494 Net earnings per common share $ 1.15 $ 1.99 $ 1.38 Diluted Average common shares outstanding 30,620 30,128 30,138 Stock options 1,063 633 481 ------ ------ ------ Average common shares assuming dilution 31,683 30,761 30,619 Net earnings $35,190 $59,911 $ 41,494 Net earnings per common share $ 1.11 $ 1.95 $1.36
FS-12 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 Unrealized Gain (Loss)on Currency Gain (Loss)on Derivative Translation Available-for- Financial Adjustments Sale Securities Instruments Total ---------------- ----------------- ----------------- ------------ Balance at January 1, 1999 $ (8,136) $ 424 $ 0 $ (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 0 (8,976) Foreign currency translation adjustments (34,793) (34,793) Unrealized gain (loss) on available for sale securities 556 556 Deferred tax (expense) benefit relating to unrealized gain (loss) on available for sale securities (217) (217) ---------------- ----------------- ----------------- ------------ Balance at December 31, 2000 (44,490) 1,060 0 (43,430) Foreign currency translation adjustments (3,342) (3,342) Unrealized gain (loss) on available for sale securities (515) (515) Deferred tax (expense) benefit relating to unrealized gain (loss) on available for sale securities 198 198 Cumulative effect upon adoption of FAS 133 802 802 Current period unrealized gain (loss) on cash flow hedges (2,402) (2,402) Deferred tax (expense) benefit relating to unrealized gain (loss) on derivative financial instruments 560 560 ---------------- ----------------- ----------------- ------------ Balance at December 31, 2001 $(47,832) $ 743 $ (1,040) $(48,129) ================ ================= ================= ============
During 2001, a net loss of $1,975,000 was reclassified into earnings related to derivative instruments designated and qualifying as cash flow hedges. FS-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES LONG-TERM OBLIGATIONS Long-term obligations as of December 31, 2001 and 2000 consist of the following:
2001 2000 ---- ---- (In thousands) $25,000,000 senior notes at 7.45%, mature in February 2003 $7,143 $10,715 $80,000,000 senior notes at 6.71%, due in February 2008 78,822 80,000 $20,000,000 senior notes at 6.60%, due in February 2005 20,000 20,000 Revolving credit agreement ($425,000,000 multi-currency) at .185% to .375% above local interbank offered rates, replaced October 17, 2001 - 271,584 Revolving credit agreements ($325,000,000 multi-currency), at .675% to 1.40% above local interbank offered rates, expires October 17, 2006 237,177 - ------- ------- Senior notes and revolver debt 343,142 382,299 Notes and mortgages payable, secured by buildings, equipment and other assets 5,416 4,215 Capitalized lease obligations 1,859 2,465 Product liability 3,347 2,201 Deferred federal income taxes 217 2,886 Other, principally deferred compensation 12,666 10,387 ------- ------- Other debt 23,505 22,154 Total long-term and short-term obligations 366,647 404,453 Less current maturities of long-term obligations 9,083 5,807 ------- ------- Total long-term obligations $357,564 $398,646 ======= =======
In 2001, the company entered into a $325,000,000 5-year, multi-currency revolving credit agreement and a $100,000,000 364 day facility with a group of commercial banks, which expire on October 17, 2006 and October 16, 2002 respectively, or such later dates as mutually agreed upon by the company and the banks. Borrowings denominated in foreign currencies aggregated $22,915,000 at December 31, 2001 and $45,220,000 at December 31, 2000. The borrowing rates under the agreements are determined based on the debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of the company as defined in the agreement and range from .675% to 1.40% above the various interbank offered rates. As of December 31, 2001 and 2000, the weighted average floating interest rate on U.S. borrowings was 4.22% and 6.15%, respectively. 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. At December 31, 2001, $164,569,092 of retained earnings is available for dividends pursuant to the most restrictive covenants. Under the most restrictive covenants of the company's borrowing arrangements, the company has the capacity to borrow up to an additional $50,665,000 as of December 31, 2001. In December 2001, the company exchanged the fixed rate of 6.71% on $50,000,000 of the $80,000,000 in Senior Notes due in February 2008. The three agreements for $25,000,000, $15,000,000 and $10,000,000 exchange the fixed rate of 6.71% for variable rates equal to LIBOR plus 1.9%, 1.71% and 1.62% respectively. The effect of these swaps is to exchange a fixed rate of 6.71% for floating rates to avoid paying higher than market interest rates. In March 2000, the company fixed the interest rate on $25,000,000 of its U.S. dollar borrowings through two interest rate swap agreements. One agreement is for $15,000,000 U.S. dollars and the other 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 7.03% on one agreement and 7.04% on the other agreement. 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. The notes and mortgages payable financed the purchase of certain buildings, equipment and other assets which secure the obligations. The notes and mortgages payable bear interest at rates from 5.7% to 12.3% and mature through 2021. FS-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES LONG-TERM OBLIGATIONS -Continued The capital leases are principally for manufacturing facilities with payments due through 2009. The company's captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures annual aggregate policy losses of $5 million of the company's domestic product liability exposure. The company also has additional layers of coverage insuring $90,000,000 in annual aggregate losses arising from individual claims that exceed the captive insurance company policy limits. Invacare Supply Group's distributed products are covered under a conventional insurance program with third party carriers on a guaranteed cost basis and layered limits up to $76,000,000. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at an affordable rate. The aggregate minimum combined maturities of long-term obligations are approximately $9,083,000 in 2002, $4,496,000 in 2003, $372,000 in 2004, $20,353,000 in 2005, $240,738,000 in 2006 and $81,146,000 thereafter. Interest paid on borrowings was $26,361,000, $29,987,000 and $21,646,000 in 2001, 2000 and 1999, respectively. INCOME TAXES Earnings before income taxes consist of the following:
2001 2000 1999 ---- ---- ---- (In thousands) Domestic $ 38,848 $ 67,730 $ 52,924 Foreign 27,542 30,486 15,020 ------ ------ ------ $ 66,390 $ 98,216 $ 67,944 ====== ====== ====== The company has provided for income taxes as follows: 2001 2000 1999 ---- ---- ---- (In thousands) Current: Federal $ 11,985 $ 24,704 $ 10,157 State 3,800 4,100 2,800 Foreign 9,195 11,134 8,755 ------ ------ ------ 24,980 39,938 21,712 Deferred: Federal 5,170 (2,192) 7,698 Foreign 1,050 559 (2,960) ------ ------ ------ 6,220 (1,633) 4,738 ------ ------ ------ Income Taxes $ 31,200 $ 38,305 $ 26,450 ====== ====== ======
At December 31, 2001, the company had foreign tax loss carryforwards of approximately $6,000,000 of which $4,800,000 are non-expiring, and $1,200,000 expire between 2002 and 2005. The company made income tax payments of $27,104,000, $28,626,000 and $13,264,000 during the years ended December 31, 2001, 2000 and 1999, respectively. FS-15 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:
2001 2000 1999 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of Federal income tax benefit 3.7 2.7 2.7 Tax credits (1.8) (1.9) (2.1) Goodwill 4.8 3.2 3.8 Valuation reserve for investments 7.5 Other, net (2.2) - (.5) ---- ---- ---- 47.0% 39.0% 38.9% ==== ==== ====
Significant components of deferred income tax assets and liabilities at December 31, 2001 and 2000 are as follows:
2001 2000 ---- ---- (In thousands) Current deferred income tax assets, net: Bad debt $ 9,132 $ 12,360 Warranty 1,912 1,794 Inventory 2,611 2,102 Other accrued expenses and reserves 2,548 5,680 State and local taxes 3,242 1,932 Litigation reserves 2,209 3,730 Compensation and benefits 1,282 2,422 Product liability 335 254 Loss carryforwards 300 1,555 Other, net 554 (224) ------ ------ $ 24,125 $ 31,605 ====== ====== Long-term deferred income tax assets (liabilities), net: Fixed assets (10,469) (9,477) Product liability 600 899 Loss carryforwards 1,550 1,015 Compensation and benefits 5,438 4,590 State and local taxes 2,400 2,400 Valuation reserve (1,414) (1,092) Other, net 1,678 (1,221) ------ ------ $ (217) $ (2,886) ------ ------ Net Deferred Income Taxes $ 23,908 $ 28,719 ====== ======
FS-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES INTERIM FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED ------------- (In thousands, except per share data) 2001 March 31, June 30, September 30, December 31, ---- ------- -------- -------- -------- Net sales $254,149 $265,704 $272,210 $261,576 Gross profit 76,890 80,855 83,838 76,764 Earnings (loss) before income taxes 18,791 26,123 31,452 (9,976) Net earnings (loss) 11,556 16,066 19,343 (11,775) Net earnings (loss) per share - basic .38 .52 .63 (.38) Net earnings (loss) per share - assuming dilution .37 .51 .61 (.37) 2000 March 31, June 30, September 30, December 31, ---- ------- -------- -------- -------- Net sales $245,593 $247,542 $251,728 $268,299 Gross profit 72,880 79,669 79,324 85,401 Earnings before income taxes 16,351 22,440 28,551 30,874 Net earnings 9,974 13,689 17,416 18,832 Net earnings per share - basic .33 .46 .58 .62 Net earnings per share - assuming dilution .33 .45 .57 .61
See non-recurring and unusual items footnote for disclosure of credits/charges taken in the fourth quarter of 2001 and 2000. BUSINESS SEGMENTS The company operates in three primary business segments based on geographical area: North America, Europe and Australasia. 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, beds and furniture products, respiratory and other products. The Europe segment consists of one operating group that sells primarily wheelchairs, scooters, self care products, beds, patient lifts, slings and oxygen products. The Australasia segment consists of two operating groups which sell primarily custom power wheelchairs, electronic wheelchair controllers, oxygen products 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 is not considered in evaluating segment performance. Intersegment revenue for reportable segments are $66,565,000, $61,372,000 and $57,027,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The information by segment is as follows (In thousands):
Year ended December 31, 2001 North Australia/ All America Europe Asia Other* Consolidated --------- --------- --------- --------- --------- Revenues from external customers $773,713 $236,093 $43,833 - $1,053,639 Depreciation and amortization 15,590 7,974 2,047 7,837 33,448 Net interest expense 16,154 6,459 9 (7,161) 15,461 Earnings (loss) before income taxes 126,861 8,444 14,009 (82,924) 66,390 Assets 507,943 276,152 32,781 97,661 914,537 Expenditures for assets 5,532 6,401 1,734 6,515 20,182
FS-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES BUSINESS SEGMENTS-Continued
Year ended December 31, 2000 North Australia/ All America Europe Asia Other* Consolidated --------- --------- --------- --------- --------- Revenues from external customers $741,255 $238,208 $ 33,699 - $1,013,162 Depreciation and amortization 15,307 8,814 1,585 5,763 31,469 Net interest expense 19,867 7,342 195 (7,358) 20,046 Earnings (loss) before income taxes 125,188 12,142 10,859 (49,973) 98,216 Assets 535,067 278,591 32,601 105,596 951,855 Expenditures for assets 7,738 7,922 1,639 9,146 26,445 Year ended December 31, 1999 North Australia/ All America Europe Asia Other* Consolidated --------- --------- --------- --------- --------- Revenues from external customers $667,658 $189,371 $ 25,745 - $882,774 Depreciation and amortization 14,400 6,230 1,633 3,715 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 11,672 3,586 2,140 15,410 32,808
* 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.
Net sales by product, are as follows: North America 2001 2000 1999 ------------- ------- ------- -------- Rehab $196,524 $190,228 $176,022 Standard Wheelchairs 111,865 110,101 97,108 Distributed 127,975 122,991 104,264 Personal Care/Patient Transport/Beds 168,073 162,675 138,672 Respiratory 88,833 84,074 80,021 Institutional products 36,033 30,833 32,223 Parts 20,817 19,472 18,671 Other 23,593 20,881 20,677 ------- ------- -------- $773,713 $741,255 $667,658 ======= ======= ======= Europe 2001 2000 1999 ------------- ------- ------- -------- Rehab $ 89,272 $ 92,668 $50,579 Standard Wheelchairs 37,969 46,401 76,705 Personal Care/Patient Transport/Beds 53,966 46,218 39,184 Respiratory 7,476 7,150 6,321 Institutional products 11,393 11,349 - Parts 36,017 28,714 - Other - 5,708 16,582 ------- ------- -------- $236,093 $238,208 $189,371 ======= ======= ======= FS-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES BUSINESS SEGMENTS-Continued Australasia 2001 2000 1999 ------------- ------- ------- -------- Rehab $ 20,251 $ 25,652 $ 20,502 Standard Wheelchairs 7,232 1,282 179 Distributed 395 221 - Personal Care/Patient Transport/Beds - 1,138 256 Respiratory 12,449 4,817 4,808 Institutional products 2,893 - - Other 613 589 - ------- ------- ------- $ 43,833 $ 33,699 $ 25,745 ======= ======= ======= Total Consolidated $1,053,639 $1,013,162 $882,774 ========= ========= =======
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. Prior to December 2000, the company leased equipment to the dealer for periods ranging from 6 to 39 months. The majority of these transactions were secured with a UCC-1 filing, purchase money securities and/or personal guarantees. In December 2000, Invacare entered into an agreement with DLL, a third party financing company, to utilize DLL to provide all future lease financing to Invacare's customers. The intent of Invacare is to collect the remaining installment receivables on its books and cease entering into new installment contracts with its customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a limited recourse obligation ($4.5 million at December 31, 2001) to DLL for events of default under the contracts (total balance outstanding of $28.6 million at December 31, 2001). Accordingly, the company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts. 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. FS-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES FAIR VALUES OF FINANCIAL INSTRUMENTS -Continued 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 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 or fixed rate payments for floating 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. Other investments: The company has made other investments in limited partnerships and non-marketable equity securities which are accounted for using the cost method. These investments were acquired in private placements and there are no quoted market prices or stated rates of return. During 2001, a decline in market value of certain of these investments was determined to be other than temporary, and accordingly, a valuation reserve was established. See the Non-Recurring and Unusual Items footnote. The carrying amounts and fair values of the company's financial instruments at December 31, 2001 and 2000 are as follows:
2001 2000 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ------ ------ ------ ------ (In thousands) Cash and cash equivalents $ 16,683 $ 16,683 $12,357 $12,357 Marketable securities 1,522 1,522 2,060 2,060 Other investments 9,018 9,018 21,838 21,838 Installment receivables 38,629 38,629 69,567 69,567 Long-term debt (including current 348,558 347,193 386,514 381,649 maturities) Interest rate swaps (2,903) (2,903) - (267)
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 majority of the forward contracts are deferred and recognized when the offsetting gains and losses for the identified transactions are recognized. At December 31, 2001 and 2000, 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, 2001 and 2000. The valuations are based on market rates. All forward contracts noted below mature before January, 2003 and January, 2002 respectively.
December 31, 2001 Cost Market Value U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell ---------------------------------------------------------------------------------------------------------- Canadian Dollar 7,800 $103 7,903 Euro 7,500 87 7,587 New Zealand Dollar (11,050) (106) (11,156) Swedish Kroner (6,750) 42 (6,708) FS-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued INVACARE CORPORATION AND SUBSIDIARIES FAIR VALUES OF FINANCIAL INSTRUMENTS -Continued December 31, 2000 Cost Market Value U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell ---------------------------------------------------------------------------------------------------------- British Pound $ 502 $ 9 $ 511 New Zealand Dollar (8,753) 95 (8,658) Euro 13,035 979 14,014 Mexican Peso 3,344 (14) 3,330
NON-RECURRING AND UNUSUAL ITEMS In 2001, the company recorded a fourth quarter non-cash charge of approximately $31,950,000 ($25,250,000 after tax) to reserve the value of certain investments and notes receivable. The decline in value of these investments was determined to be other than temporary due in part to the recent economic decline and tightening of the capital markets which has made obtaining the additional funding they require difficult. In 2000, as a result of repaying EURO and DKK denominated debt, the company realized a non-recurring pre-tax foreign currency gain of approximately $20,130,000. The gain was offset by charges in the fourth quarter aggregating $8,700,000 related primarily to closing two distribution centers and a manufacturing plant ($3,700,000), severance costs due to staff reductions (nine individuals) primarily at the corporate office ($1,000,000) and costs associated with the settlement of litigation ($4,000,000). Of these charges $3,035,000 have been utilized related to closing two distribution centers and a manufacturing plant, $957,000 have been utilized related to severance costs, and $4,000,000 related to settlement of litigation. In addition, during the fourth quarter of 2000, the company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $8,000,000. In 1999, the company announced non-recurring and unusual charges of $11,500,000 in the fourth quarter primarily related to the consolidation and integration of the operations of SMI and Invacare. The charges included reserves for employee severance ($3,000,000), plant shutdowns and lease terminations ($4,400,000), and asset write-downs and other non-recurring items ($4,100,000). The personnel reductions and shut down of facilities are related to the integration of SMI and are required to obtain the expected synergies from the acquisition. Of these charges $2,885,000 have been utilized related to employee severance, $4,400,000 have been utilized related to plant shutdown and lease termination and $3,566,000 have been utilized related to asset write-downs and other non-recurring items. In addition, during the fourth quarter of 1999, the company also increased its bad debt reserve impacting selling, general and administrative expenses by approximately $3,300,000. All initiatives for which charges were reported have been substantially completed at December 31, 2001. FS-21 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, 2001 - ---------------------------- Deducted from asset accounts -- Allowance for doubtful accounts $30,737 $7,533 - $9,473(A) $28,797 Inventory obsolescence reserve 6,233 3,363 - 4,133(B) 5,463 Investments and related notes receivable - 29,000 - - 29,000 Accrued warranty cost 7,917 5,587 - 5,897(B) 7,607 Accrued product liability 2,881 8,029 - 5,094(D) 5,816 Year Ended December 31, 2000 - ---------------------------- Deducted from asset accounts -- Allowance for doubtful accounts $21,434 $ 13,731 - $4,428(A) $30,737 Inventory obsolescence reserve 10,682 3,970 - 8,419(B) 6,233 Accrued warranty cost 7,758 7,446 - 7,287(B) 7,917 Accrued product liability 6,825 7,114 - 11,058(D) 2,881 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
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. FS-22 Exhibit 21 1. Invacare Ltd., a U.K. corporation and wholly owned subsidiary. * 2. Invacare Canada Inc., an Ontario corporation and wholly owned subsidiary. 3. Invacare Deutschland GmbH, a German corporation and wholly owned subsidiary. 4. Invacare International Corporation, an Ohio corporation and wholly owned subsidiary. 5. Invacare Trading Company, Inc., a United States Territory of the Virgin Islands corporation and wholly owned subsidiary. 6. Invamex, S.A. de R.L. C.V., a Mexican corporation and wholly owned subsidiary. 7. Invacare Credit Corporation, an Ohio corporation and wholly owned subsidiary. 8. Invatection Insurance company, a Vermont corporation and wholly owned subsidiary. 9. Lam Craft Industries, a Missouri corporation and wholly owned subsidiary. 10. Invacare Poirier S.A., a French corporation and wholly owned subsidiary. 11. Dynamic Controls Ltd., a New Zealand corporation and wholly owned subsidiary. 12. Quantrix Consultants Ltd., a New Zealand corporation and wholly owned subsidiary. 13. Dynamic Europe Ltd., a U.K. corporation and wholly owned subsidiary. 14. Sci Des Hautes Roches, a French partnership and wholly owned subsidiary. 15. Sci Des Roches, a French partnership and wholly owned subsidiary. 16. Mobilite Building Corporation, a Florida corporation and wholly owned subsidiary. 17. Genus Medical Products USA, Inc., a New York corporation and wholly owned subsidiary. 18. Invacare Florida, a Delaware corporation and wholly owned subsidiary. 19. Infusion Systems, Inc., a Delaware corporation and wholly owned subsidiary. 20. Invacare New Zealand Ltd., a New Zealand corporation and wholly owned subsidiary. 21. Invacare AG, a Switzerland corporation and wholly owned subsidiary. 22. Healthtech, Inc., a Missouri corporation and wholly owned subsidiary. 23. Invacare Portugual Lda., a Portugal company and wholly owned subsidiary. 24. Production Research Corporation, a Maryland corporation and wholly owned subsidiary. 25. Inva Acquisition Corporation, re-named Suburban Ostomy Supply Company, Inc., a Massachusetts corporation and wholly owned subsidiary. 26. Roller Chair Pty. Ltd., an Australian corporation and wholly owned subsidiary. 27. Silcraft Corporation, a Michigan corporation and wholly owned subsidiary. I-32 28. Invacare Supply Group, a Massachusetts corporation and wholly owned subsidiary. 29. The Aftermarket Group, Inc., a Delaware corporation and wholly owned subsidiary. 30. Invacare Holdings Denmark ApS, a Danish corporation and wholly owned subsidiary. 31. Scandinavian Mobility International ApS, a Danish corporation and wholly owned subsidiary. 32. Invacare EC-Hong A/S, a Danish corporation and wholly owned subsidiary. 33. Invacare A/S, a Danish corporation and wholly owned subsidiary. 34. Invacare AB, a Swedish corporation and wholly owned subsidiary. 35. Invacare NV, a Belgium corporation and wholly owned subsidiary. 36. Scandinavian Mobility Niltek A/S, a Danish corporation and wholly owned subsidiary. 37. Scandinavian Mobility Radius A/S, a Danish corporation and wholly owned subsidiary. 38. EC-Invest A/S, a Danish corporation and wholly owned subsidiary. 39. Invacare Holdings AS, a Norwegian corporation and wholly owned subsidiary. 40. Groas A/S, a Norwegian corporation and wholly owned subsidiary. 41. Invacare Rea AB, a Swedish corporation and wholly owned subsidiary. 42. France Reval SA, a French corporation and wholly owned subsidiary. 43. Matia SA, a French corporation and wholly owned subsidiary. 44. R2P S.a.r.L., a French corporation and wholly owned subsidiary. 45. Scandinavian Mobility GmbH, a German corporation and wholly owned subsidiary. 46. France Reval GmbH, a German corporation and wholly owned subsidiary. 47. Invacare B.V., a Netherlands corporation and wholly owned subsidiary. 48. Samarite B.V. a Netherlands corporation and wholly owned subsidiary. 49. Revato B.V. a Netherlands corporation and wholly owned subsidiary. 50. Scandinavian Mobility Medical Services B.V., a Netherlands corporation and wholly owned subsidiary. 51. Invacare Australia Pty, Ltd., an Australian corporation and wholly owned subsidiary. 52. Adaptive Switch Laboratories, Inc., a Texas corporation and wholly owned subsidiary. 53. Adaptive Research Laboratories, Inc., a Texas corporation and wholly owned subsidiary. 54. Garden City Medical, a Delaware corporation and wholly owned subsidiary. 55. Hatfield Mobility Limited, a New Zealand corporation and wholly owned subsidiary. 56. Pro Med Equipment Pty, Ltd., an Australian corporation and wholly owned subsidiary. I-33 57. Pro Med Australia Pty, Ltd., and Australian corporation and wholly owned subsidiary. 58. Invacare, S.A., a Spanish corporation and wholly owned subsidiary. 59. Invacare Holdings Two AB, a Swedish corporation and wholly owned subsidiary. 60. Invacare Holdings AB, a Swedish corporation and wholly owned subsidiary. 61. Invacare Holdings CV, a Netherlands corporation and wholly owned subsidiary. 62. Invacare Holdings BV, a Netherlands corporation and wholly owned subsidiary. 63. Invacare Verwaltungs GmbH, a German corporation and wholly owned subsidiary. 64. Invacare GmbH and Co. KG, a German corporation and wholly owned subsidiary. 65. Invacare Holdings Two BV, a Netherlands corporation and wholly owned subsidiary. 66. Invacare Holdings, a New Zealand corporation and wholly owned subsidiary. _____________________ * "Wholly owned subsidiary" refers to indirect, as well as direct, wholly owned subsidiaries. I-34 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, No. 33-87052 dated December 5, 1994 and No. 33-57978 dated March 30, 2001) pertaining to the Invacare Corporation stock option plans, of our report dated January 16, 2002, 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, 2001. ERNST & YOUNG LLP Cleveland, Ohio February 14, 2002 I-35 -----END PRIVACY-ENHANCED MESSAGE-----