-----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, WacOGrmVtSccU1ZrNaYmaWLR+GTJ+ncP6e+ixntRQW3XpVPOeYkGEreP+U1gFI26 gBljN/wB45WIRGY2P4SLtw== 0000742112-03-000005.txt : 20030310 0000742112-03-000005.hdr.sgml : 20030310 20030310143318 ACCESSION NUMBER: 0000742112-03-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030310 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: 03597777 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 q40210k.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, 2002 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 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 of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ----- ----- As of February 27, 2003, 29,661,183 Common Shares and 1,112,023 Class B Common Shares were outstanding. As of June 30, 2002, the aggregate market value of the 26,951,244 Common Shares of the Registrant held by non-affiliates was $997,196,028 and the aggregate market value of the 31,849 Class B Common Shares of the Registrant held by non-affiliates was $1,178,413. 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 The New York Stock Exchange on June 30, 2002, which was $37.00. For purposes of this information, the 2,905,723 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 2003 Annual Meeting of Shareholders. Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of December 31, 2002. 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 net 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 25,000 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 deliver the best value in medical products which promote recovery and active lifestyles for people requiring home and other non-acute health care. 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 ourbroad 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 2002, Invacare reached $1,089 million in net sales, representing a 19% compound average sales growth rate since 1979, and currently is the leading company in the industry that 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 predominately 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 - ------------- 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. The latest report from the U.S. Department of Health and Human Services (DHHS) states that the average life expectancy for men and women who reach the age of 65 is now 81 and 84, respectively. The DHHS also reports that people age 65 or older, which represent the vast majority of home health care patients, will increase from 12% of the population in 2000 to 20% of the population by the year 2050. A significant percentage of people using home and community-based health care services are 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 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 2000, spending on health care in the U.S. totaled $1.3 trillion dollars or approximately 13% of the Gross Domestic Product (GDP), the highest among industrialized countries. In 2012, the nation's health care spending is projected to increase to $3.1 trillion growing at an average annual rate of 7.3%. Over this same period, spending on health care is expected to increase to approximately 17.7% 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 1991 Americans with Disabilities Act (ADA). This legislation provides mainstream opportunities to people with disabilities. The ADA 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/Australasia - ------------------ The company believes that while many of the market factors influencing demand in the U.S. are also present in Europe and Australasia - aging of the population, technological trends and society's acceptance of people with disabilities - each of the major national markets within Europe and in Australasia have distinctive characteristics. The 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. Likewise, the company expects to increase its sales in the highly fragmented Australian and New Zealand 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 primarily sells Invacare products manufactured in the U.S. 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 Pronto(TM) Series Power Wheelchairs with SureStep(TM), introduced in 2002, feature center-wheel drive performance for exceptional maneuverability and intuitive driving. 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 2002, the Infinity(TM) FloGel and ViscoFoam Cushions were redesigned with reshaped contouring that enhances pelvic stability and improves pressure redistribution. 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 that 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 and portable compressed oxygen systems. Invacare home respiratory products are marketed predominantly under the Invacare(R) brand name. The Invacare Venture HomeFill II Oxygen Compressor enables people to safely and easily make compressed oxygen in their home and store it in cylinders for future use. 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 for 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. In addition, certain home medical equipment also is sold through this channel. OTHER PRODUCTS Accessory Products. Invacare also manufactures, markets and distributes many accessory products, including spare parts, wheelchair cushions, arm rests, wheels and respiratory parts. In some cases, Invacare's accessory items are built to be interchangeable so that they can be used to replace parts on products manufactured by others. Australasia - ----------- The company's Australasia operations consist of Invacare Australia, which imports and distributes the Invacare range of products and manufactures and distributes the Rollerchair range of custom power wheelchairs and Pro Med lifts; Dynamic Controls, a New Zealand manufacturer of operating components used in power wheelchairs and scooters; and Invacare New Zealand, a manufacturer of wheelchairs and beds and a distributor of a wide range of home medical equipment. Europe - ------ The company's European operations operate as a "common market" company with sales throughout Europe. The European operations currently sell a line of products providing significant room for growth as Invacare continues to broaden its product line offerings to more closely resemble that of the North American operations. Most wheelchair products sold in Europe are designed and manufactured locally to meet specific market requirements. With the acquisition of Scandinavian Mobility in 1999, 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 to 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 United Kingdom, Invacare Poirier S.A.S in France, Invacare Deutschland GmbH in Germany, Invacare Lda. in Portugal, Invacare AG in Switzerland, and Invacare Rea AB in Sweden. Motorized scooters are manufactured in Germany. Beds are manufactured at Invacare 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. For information relating to net sales by product group, see Business Segments in Notes to the Consolidated Financial Statements. 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 net 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, from time to time, have 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 home medical equipment (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, as well as to consumers who express a product or brand preference. 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 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 the efforts of the company's field sales force and to increase business with smaller-to-medium-sized customers, the company utilizes an Inside Sales Department. The Inside Sales Department provides expanded account coverage in a cost-effective manner, through targeted telesales initiatives, and continues to be received positively by customers. The company's internet initiatives also continue to complement the efforts of the field sales force, as eCommerce accounted for approximately 14% of the company's North American sales in 2002. In 2002, the company launched the Invacare Service and Parts Division to further enhance the technical service and parts support provided to the company's providers. The company also further enhanced the Service Referral Network, which it had launched in 2000, increasing the number of providers in the network to nearly 600. Through the Service Referral Network, the company provides 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 provides 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 sales. 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 component of Invacare's "Total One Stop Shopping(sm)" program, through which Invacare offers HME providers of all sizes a broader range of products and services at a lower total cost. ISG products include ostomy, incontinence, wound care and diabetic supplies, as well as other soft goods and disposables which complement other Invacare products that are purchased by many of the same customers who buy Invacare equipment. ISG markets its products through an inside telesales and customer service department, the Internet and Invacare's more 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 order requirements and delivery is made within 24 to 48 hours nationwide. In 2002, the company introduced new direct response television commercials designed to generate demand for Invacare products sold by the HME provider. These commercials feature Arnold Palmer, Invacare's worldwide spokesperson. Mr. Palmer is becoming an integral part of Invacare's "Yes, you can(TM)" promotional and marketing efforts encouraging consumers to achieve personal I-6 independence and participate in the activities of life, facilitated by the home health care products which Invacare manufactures, distributes and/or markets throughout the world. The company believes that Mr. Palmer, serving as its spokesperson, will help 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 is featured throughout Invacare's marketing communications, including Invacare direct-response television commercials, print advertising, point-of-purchase displays, and other merchandising and marketing materials. 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. Customers can easily access their own personalized account information, including order status, credit availability and other account specific information. In addition, serial number tracking has emerged as a customer directed initiative to review configurations for service parts, and self-service invoice history has been added to the account information available online. The web site conforms to the World Wide Web Consortium guidelines for web content accessibility for people with disabilities. Invacare's extensive online product catalog is supported by BroadVision's suite of personalized e-business applications and includes product specifications and an interactive comparison chart. Interactive 3-D product demos were added in 2002 for significant product introductions. Another addition to the online product catalog is an area dedicated to providing technical information, including diagnostic tips, service manuals and a parts catalog which features diagrams and a point-and-click shopping function. In 2002, Invacare also launched a provider web site program through which the company leverages its own online product catalog for providers to build their own transactional web sites. More than 325 provider sites were developed and launched in 2002, promoting the Invacare brand across the World Wide Web. In 2002, Invacare continued its strategic advertising campaign in trade publications that reach the providers of home medical equipment. This campaign supports 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 2002 through sponsorships of a variety of wheelchair sporting events and support of various philanthropic causes which benefit the consumers of its products. For the ninth consecutive year, Invacare continued 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 sponsorships of 75 individual wheelchair athletes and teams, including several of the top-ranked male and female racers, hand cyclists, and wheelchair tennis players in the world. Invacare was the title sponsor of the Invacare World Team Cup Tennis Tournament, which took place in September in Tremosine, Italy for the seventh year in a row. The company also continued its support of disabled veterans through its sponsorship of the 22nd National Veterans Wheelchair Games, the largest annual wheelchair sports event in the world, which was held in Cleveland, Ohio, near Invacare's world headquarters in Elyria. The games bring a competitive and recreational sports experience to 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 13% of 2002 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 2002 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 $10 million of the company's North American 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. Invatection records product liability reserves based upon independent actuarial valuations. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at affordable rates. I-7 PRODUCT DEVELOPMENT AND ENGINEERING - ----------------------------------- Invacare is committed to continuously improving, expanding and broadening its existing product lines. Starting 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 45 new products in 2002. The following are some of the most significant product introductions: North America - ------------- The Pronto(TM) Series Power Wheelchairs with SureStep(TM), including the M91(TM), the M51(TM) and the M50(TM) power wheelchairs feature center-wheel drive performance for exceptional maneuverability and intuitive driving. The M91 has high-speed motors and a 300-pound weight capacity. The Platinum 5 Concentrator, the workhorse of the industry in oxygen concentrators, has a top handle, filter access door, quieter operation, diagnostics memory, low flow alarm and is HomeFill(TM) II compatible. The HomeFill(TM) II Convenience Pack, combines an integrated pneumatic conserving device with HomeFill II cylinders in a pack that provides patients with over 4.5 hours of oxygen, yet weighs less than 4.5 pounds. The A4(TM) Custom Manual Wheelchair features a new super lightweight frame and a streamlined design. The IVC(TM) Manual Wheelchairs feature a new design that offers interchangeability of various components with the company's Tracer 9000 series. The number of frames were consolidated to 10 from 18, while offering more features, options and functionality. The Blue-Release Walker offers a wide, deep, stable frame at an attractive price in both junior and adult sizes. The dual blue-release mechanism provides both visual and audible "locked" cues. The Infinity(TM) FloGel and ViscoFoam Cushions were redesigned with reshaped contouring that enhances pelvic stability and improves pressure redistribution. The 3G Arrow(R) TTHD Package was introduced for the 3G Arrow, featuring a TrueTrack Heavy Duty package that delivers 40% more power and 60% more speed - up to 7.5 mph. Australasia - ----------- Dynamic Controls released the "Shark" wheelchair controller in 2002. Additionally, various range extensions and design improvements were made to existing product lines within Australasia. Europe - ------ During 2002, European operations also introduced several new products and continued to update existing products as required by the market. Key introductions and updates in 2002 included: The Invacare(R) Action 3000(R) is the next generation of standard lightweight manual wheelchairs designed and manufactured in Europe. The Action is a modern design with improved functionality, rapid assessment and easy adjustment. The Invacare(R) Electra is a micro scooter designed in Europe and the Far East, manufactured in the Far East and currently sold in the United Kingdom and German markets. The Electra is compact and easily disassembles to be transported in a car trunk. The Invacare(R) Meteor is a large electric scooter cooperatively designed in Europe and the Far East, manufactured in the Far East and currently sold in the United Kingdom and German markets. The Meteor is primarily for outdoor use and possesses easily adjustable seating and controls for comfort and safety. The Invacare(R) Flamingo is a new, affordable, high feature floor lifter tested to 180kg capacity. With a superior lifting range and depth, and an enlarged leg space, the Flamingo enables easy positioning during bed, chair and floor transfers. The Invacare(R) Alegio is a new, affordable, and robust bed designed for the French and Southern Europe markets which was designed and manufactured by the Invacare Hong facility. The New Kuschall Champion(R) is a 'folding rigid' active chair with an improved and lighter-weight folding mechanism. The chair was designed for very active and independent individuals who require high performance with easy vehicle transfer. The Invacare(R) Action 2000 Junior is a standard lightweight chair to complete the range of pediatric manual chairs. I-8 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. In addition, during the fourth quarter of 2002, the company announced the closing of its Florida respiratory plant to be completed in the first half of 2003. The closing did not have a material impact on the company's financial results. The company opened up a new Far East sourcing office during 2001. While the company believes that the opportunities to reduce overall costs are significant, the short-term emphasis will be on building the professional disciplines in the areas of sourcing, quality and logistics with particular focus 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. The manufacturing of wheelchairs, replacement parts, patient aids and home care beds consists of a variety of metal fabricating procedures, electronics production, coating, plating and assembly operations. Manufacturing of oxygen concentrators, nebulizer compressors, and seating and positioning products consists 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 that its relationship with those suppliers are satisfactory and that alternative sources of supply are readily available. Europe - ------ As in other areas, manufacturing and operational issues faced in the U.S. are also present in Europe. The European operations have challenged and rationalized the mission of each European manufacturing location allowing for the realization of significant synergies and has identified areas for further cost reductions and improved efficiencies for 2003. ACQUISITIONS - ------------ During 2002, the company did not make any acquisitions. However, as a result of the company's ongoing search for opportunities, coupled with the industry trend toward consolidation, the company evaluated various acquisition opportunities in 2002. 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 private insurance companies often imitate changes made in federal programs. 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. I-9 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 and subsequent years. This amounts to a 3.27% increase in the Medicare fee schedules for most Invacare products. BIPA 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 that Medicare previously had reimbursed patients for. 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 that these efforts give the company a competitive advantage in two ways. First, customers frequently express appreciation for our efforts on behalf of the entire industry. Second, we have the ability to anticipate and plan for changes in public policy, unlike most other HME manufacturers who must react to change after it occurs. 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 of these areas will provide ample opportunities to re-educate policymakers on the fact that homecare is a clinically appropriate, cost-effective and a 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. Invacare was a leading force in thwarting the efforts of a small number of Congressmen and Senators from changing the way Medicare reimburses providers for DME from a fee-for-service model to a nationwide competitive bidding or competitive acquisition system. This is the top priority for our customers of all sizes who have looked to Invacare for leadership on this important issue. 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. Nonetheless, from time to time, the company may undertake voluntary recalls of its products to maintain ongoing customer relationships as well as its reputation for adhering to high standards of quality and safety. 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, 2002, the company had approximately 5,300 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. (e) Available Information. - -------------------------- The company files annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (SEC). The public may read and copy any material that the company files with the SEC at the SEC's Public Reference Room located at 450 Fifth Street, NW, Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website, www.sec.gov, that contains all reports, proxy statements and other information filed by the company with the SEC. Invacare filings with the SEC - Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto - are available on the company's website, www.invacare.com. In addition, copies of the company's filings can be requested, free of charge, by writing to: Shareholder Relations Department, Invacare Corporation, One Invacare Way, P.O. Box 4028, Elyria, OH 44036-2125. I-10 Item 2. Properties. - -------------------- The company owns or leases its warehouses, offices and manufacturing facilities and believes that these facilities are well maintained, adequately insured and suitable for their present and intended uses. Information concerning certain leased facilities of the company as of December 31, 2002 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 Beltsville, Maryland 33,329 August 2004 One (3 yr.) Manufacturing, Offices, and Warehouse Delta, British Columbia 6,900 January 2005 None Warehouse and Offices Edison, New Jersey 105,014 March 2005 None Warehouse and Offices 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 17,010 November 2007 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 2005 Three (1 yr.) Manufacturing and Offices Rancho Cucamonga, California 35,900 June 2005 One (60 day) Warehouse Reynosa, Mexico 129,690 Own - Manufacturing and Offices
I-11
Ownership Or Expiration Renewal North American Operations Square Feet Date of Lease Options Use - ------------------------- ----------- ------------- ------- --- 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 St. Louis, Missouri 67,500 May 2007 Two (3 yr.) Manufacturing, Warehouse and Offices South Bend, Indiana 30,000 July 2003 None Warehouse Spicewood, Texas 6,500 Month to Month None Manufacturing and Offices Traverse City, Michigan 15,850 April 2003 One (3 yr.) Manufacturing and Offices Australasia Operations - ---------------------- 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 Birmingham, United Kingdom 6,000 December 2003 None Warehouse and Offices Christchurch, New Zealand 24,799 December 2004 Two (1 yr.) Manufacturing and Offices Christchurch, New Zealand 66,833 December 2005 Two (3 yr.) Manufacturing and Offices Melbourne, Australia 19,629 July 2004 One (2 yr.) Manufacturing and Offices Napier, New Zealand 15,490 Month to Month None 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 December 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 2003 One (1 yr.) Warehouse and Offices
I-12
Ownership Or Expiration Renewal European Operations Square Feet Date of Lease Options Use - ------------------------- ----------- ------------- ------- --- Dio, Sweden 107,600 Own - Manufacturing 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 Gland, Switzerland 4,306 September 2007 None Offices Goteberg, Sweden 7,500 September 2003 None Warehouse and Offices Hong, Denmark 172,305 Own - Manufacturing, Warehouse and Offices Jarfalla, Sweden 7,177 February 2003 None Warehouse and Offices Loppem, Belgium 6,000 December 2005 One (5 yr.) Warehouse and Offices Landskrona, Sweden 3,099 August 2003 None Warehouse 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 Rehme, Germany 43,000 December 2003 One (1 yr.) Warehouse Saeby, Denmark 87,425 Own - Warehouse Spanga, Sweden 3,228 October 2004 One (1 yr.) Warehouse and Offices Spanga, Sweden 16,140 Own - Warehouse and Offices Tours, France 86,000 November 2007 None Manufacturing Trondheim, Norway 3,000 December 2004 One (3 yr.) Services and Offices
Item 3. Legal Proceedings. - -------------------------- In the ordinary course of its business, Invacare is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All of the product liability lawsuits have been referred to the company's insurance carriers and are being contested vigorously. Coverage territory is worldwide with the exception of those countries with respect to which, at the time the 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. I-13
Name Age Position - --------------------- --- -------------------------------------------------------------- A. Malachi Mixon, III 62 Chairman of the Board of Directors and Chief Executive Officer Gerald B. Blouch 56 President, Chief Operating Officer and Director Gregory C. Thompson 47 Senior Vice President and Chief Financial Officer Joseph B. Richey, II 66 President - Invacare Technologies, Senior Vice President - Electronics and Design Engineering and Director Louis F.J. Slangen 55 Senior Vice President - Sales & Marketing Thomas Kroeger 53 Senior Vice President - Human Resources Kenneth A. Sparrow 55 President - Invacare Europe Neal J. Curran 45 Vice President - Engineering and Product Development Michael A. Perry 48 Vice President - Distributed Products Bridget Miller 55 Vice President - General Counsel Hugh L. Martyn 44 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. Gregory C. Thompson was named Senior Vice President and Chief Financial Officer in November 2002. Before coming to Invacare, Mr. Thompson served as Senior Vice President and Chief Financial Officer of Sensormatic Electronics Corporation, a global manufacturer of electronic security products, from October 2000 to January 2002 and was Vice President and Controller from February 1997 to October 2000. Previously, Mr. Thompson was Vice President and Corporate Controller for Wang Laboratories from August 1994 to February 1997 and Assistant Corporate Controller from October 1990 to August 1994. 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, the world's largest seller of office products, from July 1997 until April 2001 and Corporate Vice President - Human Resources for The Sherwin-Williams Company from October 1987 to July 1997. I-14 OPERATING OFFICERS - ------------------ Kenneth A. Sparrow was named President - Invacare Europe in September 2001. Previously, Mr. Sparrow was Managing 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. 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. Michael A. Perry was named Vice President of Distributed Products in November 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. Bridget A. Miller was named Vice President and General Counsel in November 2002, after serving as Acting General Counsel from May 2002 until November 2002. Mrs. Miller has been with the company since July 1993 and has previously served as Assistant General Counsel from July 1998 to November 2002, Staff Counsel from July 1994 to July 1998 and Corporate Risk Manager since joining Invacare in 1993. She is licensed to practice law in the State of Ohio. Hugh L. Martyn was named Managing Director of Australasia in September 2001. Previously, Mr. Martyn was Chief Executive Officer of Dynamic Controls Unlimited, a wholly owned subsidiary of Invacare Corporation, 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 27, 2003 was 5,450 and 29, respectively. The closing sale price for the Common Shares on February 27, 2003 as reported by NYSE, was $30.95. 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: 2002 2001 ---- ---- Quarter Ended: High Low High Low ------------- ------ ------ ------ ------ December 31 $34.85 $30.59 $38.84 $28.91 September 30 36.40 29.28 40.98 35.16 June 30 39.80 33.86 40.00 34.20 March 31 37.59 31.98 39.52 31.38 During 2002 and 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 Debt 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. Information regarding the securities authorized for issuance under equity compensation plans 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 2003 Annual Meeting of Shareholders, since such Proxy Statement will be filed with the SEC not later than 120 days after the end of the company's fiscal year pursuant to Regulation 14A. I-15 Item 6. Selected Financial Data - --------------------------------
2002 2001* 2000 1999** 1998 ---- ---- ---- ---- ---- (In thousands, except per share and ratio data) Earnings Net Sales $1,089,161 $1,053,639 $1,013,162 $882,774 $801,189 Net Earnings *** 64,770 35,190 59,911 41,494 45,792 Net Earnings per Share - Basic 2.10 1.15 1.99 1.38 1.53 Net Earnings per Share - Assuming Dilution 2.05 1.11 1.95 1.36 1.50 Dividends per Common Share .05000 .05000 .05000 .05000 .05000 Dividends per Class B Common Share .04545 .04545 .04545 .04545 .04545 2002 2001* 2000 1999** 1998 ---- ---- ---- ---- ---- Balance Sheet Current Assets $398,812 $428,401 $432,408 $418,620 $336,742 Total Assets 906,703 914,537 951,855 955,285 738,756 Current Liabilities 167,453 167,453 197,387 173,119 130,780 Working Capital 231,359 260,948 235,021 245,501 205,962 Long-Term Debt 234,134 342,724 384,316 440,795 311,260 Shareholders' Equity 480,312 381,550 349,773 318,872 280,888 Other Data Research and Development Expenditures $17,934 $17,394 $16,231 $15,534 $12,980 Capital Expenditures, net of Disposals 19,718 19,486 26,268 32,155 39,505 Depreciation and Amortization 26,638 33,448 31,469 25,978 23,754 Key Ratios Return on Sales 5.9% 3.3% 5.9% 4.7% 5.7% Return on Average Assets 7.1% 3.8% 6.3% 4.9% 7.2% Return on Beginning Shareholders' Equity 17.0% 10.1% 18.8% 14.8% 19.4% Current Ratio 2.4:1 2.6:1 2.2:1 2.4:1 2.6:1 Debt-to-Equity Ratio .5:1 .9:1 1.1:1 1.4:1 1.1:1
* Reflects non-recurring and unusual charge of $31,950 ($25,250 after tax or $.80 per share assuming dilution). ** Reflects non-recurring and unusual charge of $14,800 ($9,028 after tax or $.29 per share assuming dilution). *** Amortization of goodwill ceased in 2002, net earnings for prior years includes amortization expense of $8,972 in 2001, $8,899 in 2000, $7,258 in 1999 and $6,332 in 1998. I-16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- 2002 Versus 2001 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, 2002. Non-recurring and Unusual Items. The review of results that follows excludes the impact of the non-recurring and unusual items recorded in 2001. 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 economic decline and tightening of the capital markets which made obtaining the additional funding that these entities require difficult. Net Sales. Consolidated net sales for 2002 increased 3% for the year with net sales increasing in all business segments on a reported basis. Excluding the impact of foreign currency, North America and Europe achieved sales gains of 3% and 2%, while Australasian sales declined 8%. The overall growth was primarily driven by new product introductions. North American Operations North American net sales, consisting of Rehab (power wheelchairs, custom manual wheelchairs, scooters and seating), Standard (manual wheelchairs, personal care, bed products, low air loss therapy and patient transport), Continuing Care (beds and furniture), Respiratory (oxygen concentrators, aerosol therapy, sleep, homefill and associated respiratory) and Distributed (ostomy, incontinence, diabetic, wound care and other medical supplies) products grew 4% over the prior year, adjusting for the exit of two product lines with currency translation having no material impact. For the year, net sales of Rehab products increased by 9% driven by the continued strengthening in sales of consumer power products introduced during 2002. Net sales of distributed products increased by 15%. However, standard and respiratory product net sales were down 4% and 7%, respectively, or 2% and 5%, respectively, adjusting for the exit of two product lines. The standard products net sales decline is primarily due to pricing pressure from low cost imports from the Far East, the company's exit from the lift out chair product line, and slow transition by customers to the new standard wheelchair product line introduced in the fourth quarter. The decline in respiratory net sales was driven by slow purchases by national accounts and the company's exit from the liquid oxygen product line. With reimbursement and economic uncertainty, many dealers have limited their purchases of replacement products for their rental fleets in order to preserve cash. Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had a 3% net sales decrease 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. Net sales for the Australasia group increased 1% from the prior year. Excluding the impact of foreign exchange, net sales decreased 8% for the year. The decrease was the result of volume declines, primarily in the company's Dynamic Controls subsidiary. Weak global economic conditions tend to have a more significant impact on this business than the other businesses of the company. European Operations European net sales improved 7% over the prior year, including a 5% positive impact from foreign currency translation. Sales growth was driven by volume increases in power wheelchairs, manual wheelchairs, high-action wheelchairs, patient aids and scooters. Gross Profit. Consolidated gross profit as a percentage of net sales was 30.1% in 2002 and 30.2% in 2001. Margins remained flat as the company was able to offset unfavorable product mix and pricing pressures with improved manufacturing performance. I-17 North American gross profit from operations as a percentage of net sales was 29.9% in 2002 versus 30.6% in 2001. The decrease was primarily attributable to a shift towards lower margin product lines (distributed, respiratory, and consumer power products) and higher freight and warranty costs. Gross profit in Australasia was down by 3.9 percentage points from last year. The decline was due principally to volume declines in core markets and an increase in mix towards lower margin products, which was partially offset by manufacturing cost reductions. Gross profit in Europe as a percentage of net sales improved 2.4 percentage points from the prior year. The improvement is attributable to a shift in product mix towards higher margin products, outsourcing projects that improved the European cost position and favorable currency translation. Selling, General and Administrative. Consolidated selling, general and administrative expenses as a percentage of net sales were 20.2% in 2002 and 18.6% in 2001. The overall dollar increase was $24,722,000 or 13% with currency translation increasing selling, general and administrative costs by approximately $1,970,000 or 1%. The increase is primarily in North America and the result of continued investment in marketing and branding programs being implemented to drive future growth, higher employee benefit costs, increased investment in additional headcount, additional provision for bad debts and significant increases in insurance costs largely due to general market conditions. North American operations selling, general and administrative expenses as a percentage of net sales increased 18% or $24,352,000 compared to 2001. As noted above, this increase is primarily in marketing and branding programs, additional provision for bad debt, higher employee benefit costs and significant increases in insurance costs. Australasia operations selling, general and administrative expenses decreased approximately 25% from the prior year. The overall dollar decline between years was $1,883,000 despite foreign currency increasing the expense by $458,000. The decline was due to tight expense controls. European operations selling, general and administrative expenses increased $2,284,000 or 5% from the prior year. European selling, general and administrative expenses were negatively impacted by foreign currency translation, which increased selling, general and administrative expenses reported in dollars by $1,581,000. The remaining increase was due to increased systems costs and depreciation expense. Interest. Interest expense decreased to $15,122,000 in 2002 from $22,764,000 in 2001, representing a 34% decrease. This decrease was attributable to the reduction in borrowings outstanding under the company's revolving credit facility and also a reduction in borrowing costs due to the low interest rate environment. The company's debt-to-equity ratio decreased to .5:1 as of December 31, 2002 from .9:1 as of the end of the prior year. Interest income decreased in 2002 to $4,550,000 from $7,303,000 in the prior year, representing a 38% decrease. The decrease is a direct result of the minimal amount of new installment contracts that were written internally. Interest income primarily represents loan origination fees received from De Lage Landen Inc. (DLL). Since December 2000, Invacare customers primarily utilize the third-party financing arrangement with DLL, a subsidiary of Rabo Bank of the Netherlands, to provide financing. Income Taxes. The company had an effective tax rate of 32.9% in 2002 compared to 38.5% in 2001, 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 lower effective tax rate for 2002 is primarily due to 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 of these items. 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, which are included in costs of products sold, increased to $17,934,000 in 2002 from $17,394,000 in 2001. The expenditures, as a percentage of net sales, were 1.6% in 2002 and 1.7% in the prior year. I-18 2001 Versus 2000 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 that these entities 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. All initiatives for which charges were reported have been completed. 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 translation. Net sales gains were lower than last year primarily 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 net sales grew faster than the overall industry, resulting in market share gains. This net 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 net 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 product lines primarily due to the increased unit volumes of these products. Distributed net sales increased approximately 5% over the prior year. Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had a 5% net 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. Net sales for the Australasia group increased $10,134,000 or 30% from the prior year. Excluding the impact of foreign exchange, net 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 net 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. Net sales growth was driven by volume increases in Patient Aids, Homecare Beds and Patient Transport product lines. 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 which was offset by productivity improvements and cost reduction activities realized in the North American plants. I-19 Gross profit in Australasia as a percentage of net 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 percentage of net sales declined by two percentage points from prior year. The decline is primarily 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 expenses as a percentage of net sales were 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 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 in 2001 from $27,853,000 in 2000, representing an 18% decrease. This decrease was attributable to the declining interest rate environment throughout 2001, in conjunction with a decrease in our average borrowing outstanding under our revolver facility. The company's debt-to-equity ratio decreased to .9:1 as of December 31, 2002 from 1.1:1 as of the end of the prior year. Income Taxes. The company had an effective tax rate of 38.5% in 2001 compared to 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. See Income Taxes and Non-Recurring and Unusual Items in the Notes to Consolidated Financial Statements for further discussion of these items. 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, which are recorded in costs of products sold, increased to $17,394,000 in 2001 from $16,231,000 in 2000. The expenditures, as a percentage of net sales, increased to 1.7% from 1.6% 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 2002 and 2001, 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 Debt 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, renewed in 2002, which expires on October 15, I-20 2003, or such later dates as mutually agreed upon by the company and the banks. Additionally, the company maintains various other demand lines of credit totaling a U.S. dollar equivalent of approximately $8,378,000 as of December 31, 2002. The lines of credit along with cash generated from operations 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, 2002, the company had approximately $307,604,000 available under its various lines of credit, excluding debt covenant restrictions. The company's borrowing arrangements contain covenants with respect to, among other items, interest coverage, net worth, dividend payments, working capital, and funded debt to capitalization, 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 $209,457,000 as of December 31, 2002. While there is general concern about the potential for rising interest rates, exposure to interest fluctuations is manageable given that a portion of the debt is at fixed rates through 2004. In addition, the ability to utilize interest rate swaps to fix a higher percentage of the company's 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. As of December 31, 2002, the weighted average floating interest rate on U.S. borrowings was 3.66%. CAPITAL EXPENDITURES - -------------------- There are no individually material capital expenditure commitments outstanding as of December 31, 2002. The company estimates that capital investments for 2003 will be approximately $28,000,000. The company believes that its balances of cash and cash equivalents, together with funds generated from operations and existing borrowing facilities, will be sufficient to meet its operating cash requirements and fund required capital expenditures for the foreseeable future. CASH FLOWS - ---------- Cash flows provided by operating activities were $124,181,000 in 2002, compared to $54,222,000 last year. The increase is due primarily to changes in working capital accounts. Improvements in accounts receivable collections and inventory turns as well as better cash management regarding accounts payable were principally responsible for the increase in operating cash flows. Cash flows required for investing activities were comparable to 2001, decreasing slightly by $829,000. Net property and equipment activity was relatively unchanged compared to the prior year while cash received from installment sales contracts decreased significantly due to the fact that the company no longer enters into new installment contracts as a result of its third party financing arrangement with DLL. Cash flows used for financing activities in 2002 were $120,157,000, compared to $34,127,000 in 2001. The increase in cash used was principally a result of the company using cash flows generated during the year to decrease its debt in 2002 by approximately $123,070,000 compared to $33,985,000 in 2001. In addition to acquisition activities, the effect of foreign currency translation results in amounts being shown 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 2002, dividends of $.05 per Common Share and $.045 per Class B Common Share were declared and paid. 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 that these entities 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 I-21 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). The entire amount of these charges have been utilized in accordance with their initial designation. 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. 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. 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 a 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, equipment, intangibles 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. As a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets in 2002, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests in accordance with the Statement. Furthermore, goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company completed the required initial analysis of goodwill as of January 1, 2002 as well the annual impairment test in the fourth quarter of 2002. The results of these analyses indicated no impairment of goodwill. 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 individual losses up to $10 million and annual aggregate policy losses of $10 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. Invatection records product liability reserves for both known claims and incurred but not reported claims based upon independent actuarial valuations. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at an affordable rate. Warranty Generally, the company's products are covered by warranties against defects in material and workmanship for periods up to six years from the date of sale to the customer. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. See Current Liabilities in the Notes to the Consolidated Financial Statements for a reconciliation of the changes in the warranty accrual. I-22 Accounting for Stock-Based Compensation The company accounts for options under its stock-based compensation plans using the intrinsic value method proscribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant; thus, no compensation cost has been reflected in the Consolidated Statement of Earnings for these options. In addition, restricted stock awards have been granted without cost to the recipients and are being expensed on a straight-line basis over the vesting periods. If the company had applied the fair value recognition provisions of SFAS No. 123 Accounting for Stock-Based Compensation for all stock options granted, net earnings per share assuming dilution would have been reduced by $.15 in 2002, $.14 in 2001 and $.13 in 2000. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides guidance for those companies wishing to voluntarily change to the fair value based method of accounting for stock-based compensation. The statement also amends the disclosure requirements of SFAS No. 123. While Invacare continues to utilize the disclosure-only provisions of SFAS No. 123, the company has modified its disclosures to comply with the new statement. See the company's Accounting Policies and Shareholders' Equity Transactions in the Notes to the Consolidated Financial Statements. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In June 2002, the FASB issued SFAS No. 146, Accounting for the Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. The provisions of this Statement, which is effective for exit or disposal activities that are initiated after December 31, 2002, are not expected to have a material impact on the Company's financial position, results of operations or cash flows. 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 $1,852,000. Additionally, the company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany loans, and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized. The company does not believe that any potential loss related to these financial instruments 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," "estimate," "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 customer, the ability to design, manufacture and distribute new products with higher functionality and lower costs and the ability to accelerate market acceptance of and transition to new products, the effect of offering customers competitive financing terms, Invacare's ability to effectively identify, acquire and integrate acquisition candidates, the difficulties in managing and operating businesses in many different foreign jurisdictions, the timely and efficient completion of facility consolidations, the vagaries of any litigation or regulatory investigations that the company may be or become involved in at any time, 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. I-23 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 2003 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 Annual 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's definitive Proxy Statement for the 2003 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 2003 Annual Meeting of Shareholders, since such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the company's fiscal year pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------- The information required by Item 13 is incorporated by reference to the information set forth under the caption Compensation Committee Interlocks and Insider Participation in the company's definitive Proxy Statement for the 2003 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 14. Controls and Procedures. - ---------------------------------- As of December 31, 2002, an evaluation was performed under the supervision and with the participation of the company's management, including the CEO and CFO, of the effectiveness of the design and operation of the company's disclosure controls and procedures. Based on that evaluation, the company's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2002 in ensuring that information required to be disclosed by the company in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There have been no significant changes subsequent to December 31, 2002 and prior to the date of this filing in the company's internal controls or in other factors that could significantly affect internal controls. PART IV ------- Item 15. 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, 2002, 2001 and 2000 Consolidated Balance Sheet - December 31, 2002 and 2001 Consolidated Statement of Cash Flows - years ended December 31, 2002, 2001, and 2000 Consolidated Statement of Shareholders' Equity - years ended December 31, 2002, 2001, and 2000 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 I-24 All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits. - ------------------ See Exhibit Index at page number I-29 of this Report on Form 10-K. (b) Reports on Form 8-K. - ------------------------ An 8-K was filed on October 16, 2002 under Item 5, Other Events. The filing included a 364-day credit renewal agreement dated October 16, 2002 which was filed as exhibit 10(u). An 8-K was filed on October 28, 2002 under Item 5, Other Events. The filing contained Invacare Corporation's news release dated October 24, 2002. 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 as of March 10, 2003. INVACARE CORPORATION By: /S/ A. Malachi Mixon, III ---------------------- A. Malachi Mixon, III Chairman of the Board of Directors and Chief Executive Officer I-25 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 as of March 7, 2003. 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/Gregory C. Thompson Senior Vice President and Chief - ------------------------------------ Financial Officer Gregory C. Thompson (Principal Financial and Accounting Officer) /s/James C. Boland Director - ------------------------------------ James C. Boland /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-26 CERTIFICATIONS I, Gregory C. Thompson, certify that: 1. I have reviewed this annual report on Form 10-K of Invacare Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a). designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b). evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c). presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a). all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b). any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. INVACARE CORPORATION By:/s/Gregory C. Thompson ----------------------- Gregory C. Thompson Chief Financial Officer Date: March 10, 2003 I-27 CERTIFICATIONS I, A. Malachi Mixon, III, certify that: 1. I have reviewed this annual report on Form 10-K of Invacare Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a). designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b). evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c). presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a). all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b). any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. INVACARE CORPORATION By:/S/A. Malachi Mixon, III ------------------------ A. Malachi Mixon, III Chief Executive Officer Date: March 10, 2003 I-28
INVACARE CORPORATION Report on Form 10-K for the fiscal year ended December 31, 2002. Exhibit Index Official Sequential Exhibit No Description Page No. - ---------- ----------- -------- 3(a) - Amended and Restated Articles of Incorporation, as amended through February 2, 1996 (A) 3(b) - Code of Regulations, as amended on May 22, 1996 (B) 4(a) - Specimen Share Certificate for Common Shares, as revised (C) 4(b) - Specimen Share Certificate for Class B Common Shares (C) 4(c) - Rights agreement between Invacare Corporation and Rights Agent dated as of July 7, 1995 (D) 10(a) - Stock Option Plan, adopted in February 1984 (E)* 10(b) - Amendment to Stock Option Plan, adopted in May 1987 (F)* 10(c) - Amendment to Stock Option Plan, adopted in May 1988 (G)* 10(d) - Amendment to Stock Option Plan, adopted in May 1991 (H)* 10(e) - Assignment of Patent Application and License of Know-how dated January 14, 1981, and an (I) 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(f) - Agreement between Invacare Corporation and Weber, Wood, Medinger, Inc. (J) 10(g) - Note Agreement dated February 1, 1993 among Invacare Corporation and five purchasers of an (K) aggregate of $25,000,000, 7.45% Senior Notes due February 1, 2003 10(h) - Amendments to Stock Option Plan adopted in May 1992 (L)* 10(i) - 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (M) 10(j) - Deferred Compensation Plan for Non-Employee Directors, adopted in May 1992 (N) 10(k) - Invacare Corporation 1994 Performance Plan approved January 28, 1994 (O)* 10(l) - First Amendment to Note Agreement among Invacare Corporation and five purchasers of Senior Notes (P) dated March 20, 1997 10(m) - Loan Agreement by and among Invacare Corporation, the Banks, certain borrowing subsidiaries, the (Q) Banks named therein, NBD Bank, as agent for the Banks and KeyBank National Association, as co-agent for the Banks 10(n) - Agreement and Plan of Merger, dated December 17, 1997, between Invacare Corporation, Inva (R) Acquisition Corp. and Invacare Supply Group, formerly Suburban Ostomy Supply Company, Inc. 10(o) - Note Purchase Agreement dated as of February 27, 1998 for $80,000,000 6.71% Series A Senior Notes Due February 27, 2008 and $20,000,000 6.60% Series B Senior Notes Due February (S) 27, 2005 10(p) - Amendment No. 1 to the Invacare Corporation 1994 Performance Plan approved May 28, 1998. (T) 10(q) - Amendment No. 2 to the Invacare Corporation 1994 Performance Plan approved May 24, 2000. (U)
I-29
Official Sequential Exhibit No Description Page No. - ---------- ----------- -------- 10(r) - Five-Year Credit Agreement between Invacare Corporation and Subsidiaries, the banks named (V) therein, Bank One, as agent for the banks, dated October 17, 2001. 10(s) - 364-Day Credit Agreement between Invacare Corporation and Subsidiaries, the banks named therein, (W) Bank One, as agent for the banks, dated October 17, 2001. 10(t) - Invacare Retirement Savings Plan, effective January 1, 2001 (X) 10(u) - 364-Day Credit Renewal Agreement dated October 16, 2002 (Y) 10(v)** - Form of Change of Control Agreement entered into by and between the company and certain of its executive officers and Schedule of all such agreements with current executive officers 10(w)** - Form of Indemnity Agreement entered into by and between the company and certain of its Directors and executive officers and Schedule of all such Agreements with current Directors and executive officers 10(x)** - Employment Agreement entered into by and between the company and Chief Financial Officer 10(y)** - Employment Agreement entered into by and between the company and Chief Operating Officer 21 - Subsidiaries of the company 23 - Consent of Independent Auditors 99(a) - Executive Liability and Defense Coverage Insurance Policy (C) 99(b) - Supplemental Executive Retirement Plan (Z)
* Management contract, compensatory plan or arrangement ** Management contract, compensatory plan or arrangement filed herein. (A) 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. (B) 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. (C) 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. (D) 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. (E) 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. (F) 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. (G) 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-30 (H) 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. (I) 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. (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 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. (L) 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. (M) 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. (N) 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. (O) 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. (P) 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. (Q) 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. (R) 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. (S) 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. (T) 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. (U) 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. (V) 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. (W) 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. (X) Reference is made to Exhibit 10.1 of the company report on Form 10-Q, dated September 30, 2002, which Exhibit is incorporated herein by reference. (Y) Reference is made to Exhibit 10.1 of the company report on Form 8-K, dated October 16, 2002, 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, 1996, 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, 2002 and 2001, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15 (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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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. As discussed in "Goodwill" in the Notes to the Consolidated Financial Statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. ERNST & YOUNG LLP Cleveland, Ohio January 22, 2003 FS-1 CONSOLIDATED STATEMENT OF EARNINGS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2002 2001 2000 ------- ------- ------- (In thousands, except per share data) Net sales $1,089,161 $1,053,639 $1,013,162 Cost of products sold 761,763 735,292 695,888 ------- ------- ------- Gross Profit 327,398 318,347 317,274 Selling, general and administrative expenses 220,296 195,574 201,543 Amortization of goodwill - 8,972 8,899 Non-recurring and unusual items - 31,950 (11,430) Interest expense 15,122 22,764 27,853 Interest income (4,550) (7,303) (7,807) ------- ------- ------- Earnings before Income Taxes 96,530 66,390 98,216 Income taxes 31,760 31,200 38,305 ------- ------- ------- Net Earnings $64,770 $35,190 $59,911 ======= ======= ======= Net Earnings per Share - Basic $2.10 $1.15 $1.99 ======= ======= ======= Weighted Average Shares Outstanding - Basic 30,867 30,620 30,128 ======= ======= ======= Net Earnings per Share - Assuming Dilution $2.05 $1.11 $1.95 ======= ======= ======= Weighted Average Shares Outstanding - Assuming Dilution 31,664 31,683 30,761 ======= ======= =======
See notes to consolidated financial statements. FS-2 CONSOLIDATED BALANCE SHEET INVACARE CORPORATION AND SUBSIDIARIES
December 31, December 31, 2002 2001 ------- ------- (In thousands) Assets - ------ Current Assets Cash and cash equivalents $13,086 $16,683 Marketable securities 1,350 1,188 Trade receivables, net 200,388 219,844 Installment receivables, net 20,953 35,423 Inventories, net 111,382 111,868 Deferred income taxes 26,053 24,125 Other current assets 25,600 19,270 ------- ------- Total Current Assets 398,812 428,401 Other Assets 51,031 44,492 Other Intangibles 4,779 5,906 Property and Equipment, net 130,963 132,202 Goodwill, net 321,118 303,536 ------- ------- Total Assets $906,703 $914,537 ======== ======== Liabilities and Shareholders' Equity - ------------------------------------ Current Liabilities Accounts payable $80,511 $74,133 Accrued expenses 66,414 68,030 Accrued income taxes 16,049 16,207 Current maturities of long-term obligations 4,479 9,083 ------- ------- Total Current Liabilities 167,453 167,453 Long-Term Debt 234,134 342,724 Other Long-Term Obligations 24,804 22,810 Shareholders' Equity Preferred Shares (Authorized 300 shares; none outstanding) - - Common Shares (Authorized 100,000 shares; 30,294 and 29,838 issued in 2002 and 2001, respectively) 7,580 7,466 Class B Common Shares (Authorized 12,000 shares; 1,112, issued and outstanding) 278 278 Additional paid-in-capital 98,995 87,980 Retained earnings 407,235 344,032 Accumulated other comprehensive loss (18,729) (48,129) Unearned compensation on stock awards (1,204) (771) Treasury shares (387 and 249 shares in 2002 and 2001, respectively) (13,843) (9,306) ------- ------- Total Shareholders' Equity 480,312 381,550 ------- ------- Total Liabilities and Shareholders' Equity $906,703 $914,537 ======== ========
See notes to consolidated financial statements. FS-3 CONSOLIDATED STATEMENT OF CASH FLOWS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2002 2001 2000 - ------- ------- ------- (In thousands) Operating Activities Net earnings $64,770 $35,190 $59,911 Adjustments to reconcile net earnings to net cash provided by operating activities: Non-recurring and unusual items - 29,950 1,070 Depreciation and amortization 26,638 33,448 31,469 Provision for losses on trade and installment receivables 10,792 7,150 14,109 Provision for deferred income taxes (3,050) 6,220 (178) Provision for other deferred liabilities 4,007 (714) 2,564 Changes in operating assets and liabilities: Trade receivables 19,740 (11,114) (38,341) Inventories 6,208 (7,010) (6,494) Other current assets (4,193) (6,165) (3,192) Accounts payable 2,576 (6,835) 24,195 Accrued expenses (3,307) (25,898) (13,014) ------- ------- ------- Net Cash Provided by Operating Activities 124,181 54,222 72,099 Investing Activities Purchases of property and equipment (22,109) (20,182) (26,445) Proceeds from sale of property and equipment 2,391 696 177 Installment sales contracts, net 11,435 25,946 12,440 Marketable securities (43) (165) 516 Business acquisitions, net of cash acquired - - (2,814) Increase in other investments (317) (1,642) (4,257) Increase in other long-term assets (1,834) (13,817) (8,745) Other 1,079 (1,063) 1,377 ------- ------- ------- Net Cash Required for Investing Activities (9,398) (10,227) (27,751) Financing Activities Proceeds from revolving lines of credit and long-term borrowings 254,512 305,956 109,588 Payments on revolving lines of credit and long-term borrowings (377,582) (339,941) (163,534) Proceeds from exercise of stock options 6,154 8,854 5,965 Payment of dividends (1,567) (1,525) (1,499) Purchase of treasury stock (1,674) (7,471) - ------- ------- ------- Net Cash Required for Financing Activities (120,157) (34,127) (49,480) Effect of exchange rate changes on cash 1,777 (5,542) (769) ------- ------- ------- Increase (decrease) in cash and cash equivalents (3,597) 4,326 (5,901) Cash and cash equivalents at beginning of year 16,683 12,357 18,258 ------- ------- ------- Cash and cash equivalents at end of year $13,086 $16,683 $12,357 ======== ======== ========
See notes to consolidated financial statements. FS-4 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY INVACARE CORPORATION AND SUBSIDIARIES (In thousands) Accumulated Additional Other Unearned Common Class B Paid-in- Retained Comprehensive Compen- Treasury Stock Stock Capital Earnings Earnings(Loss) sation Stock Total ---------- --------- ----------- ---------- --------------- ---------- ---------- --------- January 1, 2000 Balance $7,282 $358 $79,470 $251,955 $(8,976) $ - $(11,217) $318,872 Conversion of shares from Class B to Common 15 (15) - Exercise of stock options, including tax benefit 4 (365) 7,304 6,943 Net earnings 59,911 59,911 Foreign currency translation adjustments (34,793) (34,793) Marketable securities holding gain 339 339 ------- Total comprehensive income 25,457 Dividends (1,499) (1,499) - ----------------------------------------------------------------------------------------------------------------------------------- December 31, 2000 Balance 7,301 343 79,105 310,367 (43,430) - (3,913) 349,773 Conversion of shares from Class B to Common 65 (65) - Exercise of stock options, including tax benefit 94 7,932 2,078 10,104 Restricted stock awards 6 943 (949) - Restricted stock award expense 178 178 Net earnings 35,190 35,190 Foreign currency translation adjustments (3,342) (3,342) Cumulative effect upon adopting FAS 133 521 521 Unrealized losses on cash flow hedges (1,561) (1,561) Marketable securities holding loss (317) (317) ------- Total comprehensive income 30,491 Dividends 1,525) (1,525) Purchase of treasury shares (7,471) (7,471) - ----------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 Balance 7,466 278 87,980 344,032 (48,129) (771) (9,306) 381,550 Exercise of stock options, including tax benefit 105 9,834 (2,863) 7,076 Restricted stock awards 9 1,181 (1,190) - Restricted stock award expense 757 757 Net earnings 64,770 64,770 Foreign currency translation adjustments 28,214 28,214 Unrealized gains on cash flow hedges 1,349 1,349 Marketable securities holding loss (163) (163) ------- Total comprehensive income 94,170 Dividends (1,567) (1,567) Purchase of treasury shares (1,674) (1,674) - ----------------------------------------------------------------------------------------------------------------------------------- December 31, 2002 Balance $7,580 $278 $98,995 $407,235 $(18,729) $(1,204) $(13,843) $480,312 ====== ==== ======= ======== ========= ======== ========= ========
See notes to consolidated financial statements. FS-5 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 net 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, 2002. 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. 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 ($74,037,000 and $72,025,000 at December 2002 and 2001, respectively) by the first-in, first-out (FIFO) method. Market costs are based on the lower of replacement cost or estimated net realizable value. The value of inventory on the LIFO method is approximately equal to its current cost as of December 31, 2002 and 2001. 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. Effective January 1, 2002, the company adopted, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement addresses the conditions under which an impairment charge should be recorded related to long-lived assets (excluding goodwill) to be held and used or to be disposed of by sale or otherwise. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. The asset would be considered impaired when the future net undiscounted cash flows generating by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value. The adoption of SFAS No. 144 did not have an impact on the company's consolidated financial position or results of operations. Goodwill and Other Intangibles: Effective January 1, 2002, Invacare adopted SFAS No. 142, Goodwill and Other Intangible Assets and accordingly, discontinued amortization of goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization approach to a non-amortization approach requiring periodic testing for impairment. For purposes of the impairment test, the fair value of each reporting unit is estimated by forecasting cash flows and discounting those cash flows using appropriate discount rates. The fair values are then compared to the carrying value of the net assets of each reporting unit. The company completed the required initial analysis as of January 1, 2002 as well as the annual impairment test in the fourth quarter of 2002. The results of both tests indicated no impairment of goodwill. FS-6 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ACCOUNTING POLICIES--Continued Accrued 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. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. See the Current Liabilities footnote for a reconciliation of the changes in the warranty accrual. Product Liability Cost: The company's captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures individual losses up to $10 million and annual aggregate policy losses of $10 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. Invatection records product liability reserves for both known claims and incurred but not reported claims based upon independent actuarial valuations. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at an affordable rate. 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. Research and Development: Research and development costs are expensed as incurred and included in cost of products sold. The company's annual expenditures for product development and engineering were approximately $17,934,000, $17,394,000, and $16,231,000 for 2002, 2001, and 2000, respectively. Advertising: Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expenses amounted to $20,189,000, $18,792,000, and $18,261,000 for 2002, 2001, and 2000, respectively. Stock-Based Compensation Plans: The company accounts for options under its stock-based compensation plans using the intrinsic value method proscribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant, thus no compensation cost has been reflected in the consolidated statement of earnings for these options. In addition, restricted stock awards have been granted without cost to the recipients and are being expensed on a straight-line basis over the vesting periods. If the company had applied the fair value recognition provisions of SFAS No. 123 Accounting for Stock-Based Compensation for all stock options granted, net earnings per share assuming dilution would have been reduced by $.15 in 2002, $.14 in 2001 and $.13 in 2000. In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides guidance for those companies wishing to voluntarily change to the fair value based method of accounting for stock-based compensation. The statement also amends the disclosure requirements of Statement 123, requiring prominent disclosure in annual and interim financial statements regarding a company's method for accounting for stock-based employee compensation and the effect of the method on reported results. While Invacare continues to utilize the disclosure-only provisions of Statement 123, the company has modified its disclosures to comply with the new statement. See the Shareholders' Equity Transactions footnote. Income Taxes: The company uses the liability method to measure the provision for income taxes and recognizing deferred tax assets and liabilities on 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 United States federal income taxes has been provided. FS-7 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued ACCOUNTING POLICIES--Continued Derivative Instruments: Financial Accounting Standards Board Statement (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, requires companies to recognize derivative instruments as either assets or liabilities in the consolidated balance sheet measured at fair value. The company adopted the statement on January 1, 2001 and, accordingly, recognized a net-of-tax cumulative effect adjustment to other comprehensive income of $521,000. 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 fair value 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 $20 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 $80 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 gain of $773,000 related to its swap agreements, which is reflected in interest expense on the consolidated 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 gain in 2002 of $1,252,000 versus a net loss of $828,000 in 2001 on foreign currency cash flow hedges. The gains or losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of earnings. The company uses forward contracts that do not qualify for special hedging, but do effectively limit the company's exposure to foreign currency fluctuations between the Mexican Peso and U.S. Dollar. During 2002, the company recognized a loss of $68,000 versus a gain of $953,000 in 2001 related to these forward contracts, which are included in costs of products sold on the consolidated 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. 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). 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. Recently Issued Accounting Pronouncements: In June 2002, the FASB issued SFAS No. 146, Accounting for the Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. The provisions of this Statement, which is effective for exit or disposal activities that are initiated after December 31, 2002, are not expected to have a material impact on the Company's financial position, results of operations or cash flows. FS-8 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued RECEIVABLES Trade accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts ($19,067,000 in 2002 and $14,043,000 in 2001) is based primarily on management's evaluation of the financial condition of the customer. Installment receivables as of December 31, 2002 and 2001 consist of the following: 2002 2001 ---- ---- Long- Long- (In thousands) Current Term Total Current Term Total ------- ------- ------- ------- ------- ------- Installment receivables $33,942 $2,648 $36,590 $50,218 $4,370 $54,588 Less: Unearned interest (451) (11) (462) (1,111) (94) (1,205) Allowance for doubtful accounts (12,538) (1,127) (13,665) (13,684) (1,070) (14,754) ------- ------- ------- ------- ------- ------- $20,953 $1,510 $22,463 $35,423 $3,206 $38,629 ======= ======= ======= ======= ======= =======
The company no longer enters into new installment receivable contracts. 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. See the "Concentration of Credit Risk" footnote for a description of the financing arrangement. Long-term installment receivables are included in "Other Assets" on the consolidated balance sheet. INVENTORIES Inventories as of December 31, 2002 and 2001 consist of the following: 2002 2001 ------- ------- (In thousands) Raw materials $35,457 $35,333 Work in process 12,789 11,326 Finished goods 63,136 65,209 ------- ------- $111,382 $111,868 ======= ======= PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2002 and 2001 consist of the following: 2002 2001 ------- ------- (In thousands) Machinery and equipment $199,448 $186,622 Land, buildings and improvements 55,232 54,308 Furniture and fixtures 15,641 14,516 Leasehold improvements 13,874 11,648 ------- ------- 284,195 267,094 Less allowance for depreciation (153,232) (134,892) ------- ------- $130,963 $132,202 ======= ======= FS-9 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued GOODWILL In accordance with the provisions of SFAS No. 142, effective January 1, 2002, the company ceased amortization of goodwill. The following comparative disclosure shows the impact on 2001 and 2000 as if SFAS No. 142 had been adopted as of the beginning of each year. (In thousands, except per share data) 2002 2001 2000 ------- ------- ------ Reported net income $64,770 $35,190 $59,911 Goodwill amortization - 8,972 8,899 ------- ------- ------ Adjusted net income $64,770 $44,162 $68,810 ======= ======= ====== Basic earnings per share: Reported net income $2.10 $1.15 $1.99 Goodwill amortization - 0.29 0.30 ------- ------- ------ Adjusted net income $2.10 $1.44 $2.29 ======= ======= ====== Diluted earnings per share: Reported net income $2.05 $1.11 $1.95 Goodwill amortization - 0.28 0.29 ------- ------- ------ Adjusted net income $2.05 $1.39 $2.24 ======= ======= ====== The carrying amount of goodwill by operating segment is as follows:
2002 2001 --------------------------------------------------- --------------------------------------------------- (In thousands) North North America Europe Australasia Consolidated America Europe Australasia Consolidated ------- ------ ----------- ------------ ------- ------ ----------- ------------ Balance as of January 1 $153,548 $141,566 $8,422 $303,536 $158,741 $141,907 $9,581 $310,229 Amortization - - - - (4,402) (3,978) (592) (8,972) Foreign currency translation 135 15,759 1,688 17,582 (791) 3,637 (567) 2,279 ------- ------- ------- ------- ------- ------- ------- ------- Balance as of December 31 $153,683 $157,325 $10,110 $321,118 $153,548 $141,566 $8,422 $303,536 ======= ======= ======= ======= ======= ======= ======= =======
OTHER INTANGIBLES All of the company's other intangible assets have definite lives and continue to be amortized over their useful lives. The company's intangibles consist of the following:
December 31, 2002 December 31, 2001 ------------------------------- -------------------------------- (In thousands) Accumulated Accumulated Historical Cost Amortization Historical Cost Amortization --------------- ------------ --------------- ------------ License agreements $6,037 $3,875 $5,882 $3,185 Patents 2,396 880 2,450 679 Other 2,576 1,475 2,516 1,078 ------ ------ ------ ------ $11,009 $6,230 $10,848 $4,942 ====== ====== ======= ======
Amortization expense related to other intangibles was $1,288,000 and $1,462,000 for 2002 and 2001, respectively. Estimated amortization expense for each of the next five years is expected to be $1,136,000 for 2003, $1,130,000 in 2004, $669,000 in 2005, $270,000 in 2006 and $242,000 in 2007. FS-10 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued CURRENT LIABILITIES Accrued expenses as of December 31, 2002 and 2001 consist of the following: 2002 2001 ---- ---- (In thousands) Accrued salaries and wages $20,266 $21,538 Acquisition reserves 3,960 5,750 Accrued insurance 2,304 1,784 Accrued warranty cost 11,448 7,607 Accrued rebates 3,669 3,083 Accrued interest 3,504 2,609 Accrued product liability, current portion 2,996 2,469 Accrued freight 3,548 3,766 Other accrued items 14,719 19,424 ------ ------ $66,414 $68,030 ======= ======= Changes in accrued warranty costs were as follows: 2002 2001 ---- ---- (In thousands) Balance as of January 1 $7,607 $7,917 Warranties issued during the period 7,571 5,213 Settlements made during the period (7,854) (5,897) Changes in liability for pre-existing warranties during the period, including expirations 4,124 374 ------ ----- Balance as of December 31 $11,448 $7,607 ======= ====== LONG-TERM DEBT Long-term debt as of December 31, 2002 and 2001 consist of the following: 2002 2001 ---- ---- (In thousands) $25,000,000 senior notes at 7.45%, mature in February 2003 $ 3,571 $ 7,143 $80,000,000 senior notes at 6.71%, due in February 2008 87,456 78,822 $20,000,000 senior notes at 6.60%, due in February 2005 20,000 20,000 Revolving credit agreement ($325,000,000 multi-currency), at .675% to 1.40% above local interbank offered rates, expires October 17, 2006 126,128 237,177 Other notes 1,363 7,275 ------ ------ 238,518 350,417 Less current maturities (4,384) (7,693) ------ ------ $234,134 $342,724 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. The 364-day facility was renewed in 2002. The multi-currency revolving credit agreement and the 364-day facility expire on October 17, 2006 and October 15, 2003 respectively, or such later dates as mutually agreed upon by the company and the banks. Borrowings denominated in foreign currencies aggregated $12,842,000 at December 31, 2002 and $22,915,000 at December 31, 2001. The borrowing rates under the agreements are determined based on the ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of the company as defined in the agreements and range from .675% to 1.40% above the various interbank offered rates. As of December 31, 2002 and 2001, the weighted average floating interest rate on U.S. borrowings were 3.66% and 4.22%, respectively. The agreements require the company to maintain certain conditions with respect to net worth, funded debt to capitalization, and interest coverage as defined in the agreements. At December 31, 2002, $195,415,000 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 $209,457,000 as of December 31, 2002. FS-11 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued LONG-TERM DEBT--Continued 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 for variable rates equal to LIBOR plus 1.9%, 1.71% and 1.62% respectively. In January 2002, the company exchanged the fixed rate of 6.71% on the remaining $30,000,000 of the $80,000,000 in Senior Notes due in February 2008. The two agreements for $10,000,000 and $20,000,000 exchange the fixed rate for variable rates equal to LIBOR plus 1.05% and 1.08%, 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 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 these 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 aggregate minimum maturities of long-term debt for each of the next five years is as follows: $4,384,000 in 2003, $176,000 in 2004, $138,000 in 2005, $145,329,000 in 2006, and $109,000 in 2007. Interest paid on borrowings was $13,465,000, $26,361,000 and $29,987,000 in 2002, 2001 and 2000, respectively. OTHER LONG-TERM OBLIGATIONS Other long-term obligations as of December 31, 2002 and 2001 consist of the following: 2002 2001 ---- ---- (In thousands) Supplemental Executive Retirement Plan liability $9,460 $7,970 Product liability 5,276 3,347 Other, principally deferred compensation 10,163 12,883 ------ ------ 24,899 24,200 Less current maturities of long-term obligations (95) (1,390) ------ ------ Total long-term obligations $24,804 $22,810 ======= ======= 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, 2002, 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 2009. Lease expenses were approximately $12,575,000 in 2002, $12,045,000 in 2001, and $11,269,000 in 2000. Future minimum operating lease commitments as of December 31, 2002, are as follows: (In thousands) Year Amount ---- ------ 2003 $11,807 2004 7,625 2005 3,783 2006 1,940 2007 1,158 Thereafter 129 ------ Total Future Minimum Lease Payments $26,442 ======= The amount of buildings and equipment capitalized in connection with capital leases was $4,567,000 and $4,429,000 at December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, accumulated amortization was $2,508,000 and $2,326,000, respectively. FS-12 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued RETIREMENT AND BENEFIT PLANS Substantially all full-time salaried and hourly domestic employees are included in the Invacare Retirement Savings Plan sponsored by the company. The company makes matching cash contributions up to 66.7% of employees' contributions up to 3% of compensation and may make discretionary contributions to the domestic plans based on an annual resolution by 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 2002, 2001 and 2000 was $5,444,000, $5,788,000, and $5,071,000, respectively. The company also sponsors a non-qualified defined benefit Supplemental Executive Retirement Plan for certain key executives. The projected benefit obligation related to this unfunded plan was $21,603,000 at December 31, 2002, of which approximately $9,823,000 has been accrued. Expense for the plan in 2002, 2001, and 2000 was $2,147,000, $2,059,000, and $1,714,000, respectively. SHAREHOLDERS' EQUITY TRANSACTIONS The Common Shares and the Class B Common Shares generally 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. The 1994 Performance Plan (the "1994 Plan"), as amended, allows the Compensation Committee of the Board of Directors (the "Committee") to grant up to 5,500,000 Common Shares in connection with 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 which employees and directors will receive awards, the amount of the awards and the other terms and conditions of the awards. There were no stock appreciation rights outstanding at December 31, 2002, 2001 or 2000. During 2002, the Committee granted 619,868 non-qualified stock options for a term of ten years at the fair market value of the company's stock on the date of grant. Restricted stock awards for 37,289 shares were granted in 2002 (24,020 in 2001) without cost to the recipients. Under the terms of the restricted stock awards, 54,809 of the shares granted vest four years after the award date and 6,500 of the shares granted vest 2 years after the award date. Unearned restricted stock compensation of $1,190,000 in 2002 and $949,000 in 2001, determined as the market value of the shares at the date of grant, is being amortized on a straight-line basis over the vesting period. Compensation expense of $757,000 was recognized in 2002 and $178,000 was recognized in 2001 related to restricted stock awards granted in 2002 and 2001. The company also had a Stock Option Plan for non-employee Directors which provided for the granting of up to 100,000 options to eligible Directors. Directors were granted stock options with exercise prices at the fair market value of the company's stock on the date of grant. At December 31, 2002, there were 12,550 options outstanding under this plan. During 2002, no options were granted under this plan, which expired in 2002. The Plans have provisions for the net share settlement of options. Under these provisions, the company acquired 85,043 treasury shares for $2,868,514 in 2002, 124,823 treasury shares for $4,781,114 in 2001 and 79,922 treasury shares for $2,663,062 in 2000. FS-13 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued SHAREHOLDERS' EQUITY TRANSACTIONS--Continued As of December 31, 2002, an aggregate of 9,234,168 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 2002 Price 2001 Price 2000 Price ---- ----- ---- ----- ---- ----- Options outstanding at January 1 4,201,943 $23.27 4,289,763 $21.08 4,059,133 $18.70 Granted 619,868 33.59 585,905 33.59 1,082,056 24.33 Exercised (418,432) 18.28 (636,933) 16.84 (659,187) 11.35 Canceled (145,957) 27.32 (36,792) 22.31 (192,239) 22.37 --------- ------ --------- ------ --------- ------- Options outstanding at December 31 4,257,422 $25.23 4,201,943 $23.27 4,289,763 $21.08 ========= ====== ========= ====== ========= ====== Options price range at December 31 $11.88 to $9.30 to $7.50 to $36.84 $37.56 $31.25 Options exercisable at December 31 2,347,721 2,101,706 1,965,220 Options available for grant at December 31 * 296,860 917,530 1,466,643
* Options available for grant as of December 31, 2002 reduced by net restricted stock award activity of 59,309 and the expiration of 87,450 shares related to the 1992 Non-Employee Directors Stock Option Plan. 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 61,309 restricted stock awards granted in 2002 and 2001. Had compensation cost for the company's stock option plans been determined based on the fair value at the grant date for awards in 2002, 2001 and 2000 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:
2002 2001 2000 ---- ---- ---- (In thousands except per share data) Net earnings - as reported * $64,770 $35,190 $59,911 Less: compensation expense determined based on the fair-value method for all awards granted at market value, net of related tax effects 4,504 4,446 4,072 ------ ------ ------ Net earnings - pro forma $60,266 $30,744 $55,839 ======= ======= ======= Earnings per share as reported - basic $2.10 $1.15 $1.99 Earnings per share as reported - assuming dilution $2.05 $1.11 $1.95 Pro forma earnings per share - basic $1.95 $1.00 $1.85 Pro forma earnings per share - assuming dilution $1.90 $.97 $1.82 * Includes stock compensation expense, net of tax, on restricted awards granted without cost of: $492 $116 -
FS-14 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued SHAREHOLDERS' EQUITY TRANSACTIONS--Continued The assumption regarding the stock options issued in 2002, 2001 and 2000 was that 25% of such options vested in the year following issuance. The stock options awarded during such years 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: 2002 2001 2000 ---- ---- ---- Expected dividend yield .80% .90% 1.35% Expected stock price volatility 31.4% 33.8% 29.7% Risk-free interest rate 3.26% 4.53% 4.96% Expected life (years) 5.4 6.0 6.8 The weighted-average fair value of options granted during 2002, 2001 and 2000, based upon an expected exercise year of 2007, was $10.71, $12.24 and $8.99, respectively. 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 2002 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, 2002 is 7.2 years. On July 7, 1995, the company adopted a Rights Plan whereby each holder of a Common Share and a 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. CAPITAL STOCK Capital stock activity for 2002, 2001 and 2000 consisted of the following (In thousands of shares):
Common Stock Class B Treasury Shares Shares Shares ----------------- ---------- --------- January 1, 2000 Balance 29,125 1,433 (579) Conversion of shares from Class B to Common 61 (61) - Exercise of stock options - - 402 ------------------------------------------------------------------- ----------------- ---------- -------- December 31, 2000 Balance 29,186 1,372 (177) Conversion of shares from Class B to Common 260 (260) - Exercise of stock options 368 - 128 Stock Awards 24 - - Repurchase of treasury shares - - (200) ------------------------------------------------------------------- ----------------- ---------- -------- December 31, 2001 Balance 29,838 1,112 (249) Exercise of stock options 419 - (85) Stock Awards 37 - - Repurchase of treasury shares - - (53) ------------------------------------------------------------------- ----------------- ---------- -------- December 31, 2002 Balance 30,294 1,112 (387) ====== ===== ====
FS-15 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued OTHER COMPREHENSIVE EARNINGS (LOSS) The components of other comprehensive earnings (loss) are as follows: (In thousands)
Unrealized Unrealized Gain Gain (Loss) on Currency (Loss) on Derivative Translation Available-for-Sale Financial Adjustments Securities Instruments Total ----------- ------------------ ------------- --------- Balance at January 1, 2000 $(9,697) $721 $ - $(8,976) Foreign currency translation adjustments (34,793) (34,793) Unrealized gain on available for sale securities 556 556 Deferred tax expense relating to unrealized gain on available for sale securities (217) (217) ------- ------- ------- ------- Balance at December 31, 2000 (44,490) 1,060 - (43,430) Foreign currency translation adjustments (3,342) (3,342) Unrealized loss on available for sale securities (515) (515) Deferred tax benefit relating to unrealized loss on available for sale securities 198 198 Cumulative effect upon adoption of FAS 133 802 802 Current period unrealized loss on cash flow hedges (2,402) (2,402) Deferred tax benefit relating to unrealized loss on derivative financial instruments 560 560 ------- ------- ------- ------- Balance at December 31, 2001 (47,832) 743 (1,040) (48,129) Foreign currency translation adjustments 28,214 28,214 Unrealized loss on available for sale securities (251) (251) Deferred tax benefit relating to unrealized loss on available for sale securities 88 88 Current period unrealized gain on cash flow hedges 2,074 2,074 Deferred tax expense relating to unrealized gain on derivative financial instruments (725) (725) ------- ------- ------- ------- Balance at December 31, 2002 $(19,618) $580 $309 $(18,729) ======= ======= ======= =======
Net losses of $402,000 and $1,975,000 were reclassified into earnings related to derivative instruments designated and qualifying as cash flow hedges in 2002 and 2001, respectively. INCOME TAXES Earnings before income taxes consist of the following: 2002 2001 2000 ---- ---- ---- (In thousands) Domestic $51,512 $38,848 $67,730 Foreign 45,018 27,542 30,486 ------- ------- ------- $96,530 $66,390 $98,216 ======= ======= ======= FS-16 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INCOME TAXES --Continued The company has provided for income taxes as follows: 2002 2001 2000 ------ ------ ------ (In thousands) Current: Federal $21,415 $11,985 $24,704 State 2,200 3,800 4,100 Foreign 11,195 9,195 11,134 ------ ------ ------ 34,810 24,980 39,938 Deferred: Federal (4,620) 5,170 (2,192) Foreign 1,570 1,050 559 ------ ------ ------ (3,050) 6,220 (1,633) ------ ------ ------ Income Taxes $31,760 $31,200 $38,305 ====== ======= ====== A reconciliation to the effective income tax rate from the federal statutory rate follows: 2002 2001 2000 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 1.5 3.7 2.7 Tax credits (2.3) (1.8) (1.9) Goodwill - 4.8 3.2 Valuation reserve for investments - 7.5 - Foreign taxes at less than the federal statutory rate, excluding goodwill (2.6) (1.7) (.5) Other, net 1.3 (.5) .5 --- --- --- 32.9% 47.0% 39.0% ==== ==== ==== Significant components of deferred income tax assets and liabilities at December 31, 2002 and 2001 are as follows: 2002 2001 ----- ---- (In thousands) Current deferred income tax assets, net: Bad debt $11,669 $9,132 Warranty 2,378 1,912 Inventory 2,278 2,611 Other accrued expenses and reserves 2,600 2,548 State and local taxes 3,242 3,242 Litigation reserves 2,171 2,209 Compensation and benefits 674 1,282 Product liability 292 335 Loss carryforwards 860 300 Other, net (111) 554 ---- --- $26,053 $24,125 ======= ======= FS-17 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued INCOME TAXES --Continued Long-term deferred income tax assets (liabilities), net: Fixed assets (11,012) (10,469) Product liability 1,282 600 Loss carryforwards 768 1,550 Compensation and benefits 6,172 5,438 State and local taxes 2,400 2,400 Valuation reserve (768) (1,414) Other, net 2,047 1,678 ---- ------ $ 889 $ (217) ---- ------ Net Deferred Income Taxes $26,942 $23,908 ======= ======= At December 31, 2002, the company had foreign tax loss carryforwards of approximately $5,280,000 of which all are non-expiring. The company made income tax payments of $28,769,000, $27,104,000 and $28,626,000 during the years ended December 31, 2002, 2001 and 2000, respectively. NET EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted net earnings per common share.
2002 2001 2000 ---- ---- ---- (In thousands except per share data) Basic Average common shares outstanding 30,867 30,620 30,128 Net earnings $64,770 $35,190 $59,911 Net earnings per common share $2.10 $1.15 $1.99 Diluted Average common shares outstanding 30,867 30,620 30,128 Stock options 797 1,063 633 ------ ------ ------ Average common shares assuming dilution 31,664 31,683 30,761 Net earnings $64,770 $35,190 $59,911 Net earnings per common share $2.05 $1.11 $1.95
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 certain customers for periods ranging from 6 to 39 months. In December 2000, Invacare entered into an agreement with DLL, a third party financing company, to provide all future lease financing to Invacare's customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a limited recourse obligation ($12.3 million at December 31, 2002) to DLL for events of default under the contracts (total balance outstanding of $43.5 million at December 31, 2002). 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. FS-18 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued 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 which are due in less than one year. The interest rates associated with these receivables have not varied significantly since inception. Management believes that after consideration of the credit risk, the net book value of the installment receivables approximates market value. Long-term debt: The carrying amounts of the company's borrowings under its long-term revolving credit agreements approximate their fair value. Fair values for the company's senior notes are estimated using discounted cash flow analyses, based on the company's current incremental borrowing rate for similar borrowing arrangements. Interest Rate Swaps: The company is a party to interest rate swap agreements 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, 2002 and 2001 are as follows:
2002 2001 ---- ---- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- (In thousands) Cash and cash equivalents $13,086 $13,086 $16,683 $16,683 Marketable securities 1,350 1,350 1,522 1,522 Other investments 8,774 8,774 9,018 9,018 Installment receivables 22,463 22,463 38,629 38,629 Long-term debt (including current maturities) 238,518 241,051 350,417 349,052 Interest rate swaps 6,369 6,369 (2,903) (2,903)
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. The company recognized gains of $1,185,000 in 2002 and $124,000 in 2001 on forward contracts which were recognized in cost of products sold and selling, general and administrative expenses. FS-19 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued The following table represents the fair value of all outstanding forward contracts at December 31, 2002 and 2001. The valuations are based on market rates. All forward contracts noted below mature before January 2004 and January 2003, respectively.
December 31, 2002 Cost Market Value U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell -------------------------- ---------- ----------- ---------- Canadian Dollar $8,700 $88 $8,788 Euro 8,725 (450) 8,275 New Zealand Dollar (10,670) 1,540 (9,130) Swedish Kroner (13,271) 384 (12,887) Mexican Peso (6,530) (84) (6,614) 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)
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 that these entities 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). The entire amount of these charges have been utilized in accordance with their initial designation. 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. 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 sells each of five primary product lines which includes: standard, rehab, distributed, respiratory, and continuing care products. Europe and Australasia sell the same product lines with the exception of distributed products. 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 $61,178,000, $66,565,000 and $61,372,000 for the years ended December 31, 2002, 2001 and 2000, respectively. FS-20 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued BUSINESS SEGMENTS--Continued In 2002, management changed how certain income and expense items should be allocated for management reporting purposes. In particular, various selling, general, and administrative expenses, previously not considered part of any particular segment and disclosed in the "Other" category, are now assigned to the North American segment. Additionally, management now assesses the Australasia segment excluding inter-company profit. Accordingly, the "Other" category now includes Australasian inter-company profit. Prior period amounts have been restated to reflect these changes. The information by segment is as follows (In thousands): 2002 2001 2000 -------- -------- ------- Revenues from external customers North America $793,464 $773,713 $741,255 Europe 251,443 236,093 238,208 Australasia 44,254 43,833 33,699 -------- -------- -------- Consolidated $1,089,161 $1,053,639 $1,013,162 ========= ========= ========= Depreciation and amortization North America $19,232 $23,365 $21,010 Europe 5,699 7,974 8,814 Australasia 1,623 2,047 1,585 All Other (1) 84 62 60 -------- -------- -------- Consolidated $26,638 $33,448 $31,469 ========= ========= ========= Net interest expense (income) North America $11,910 $16,154 $19,867 Europe 5,256 6,459 7,342 Australasia (282) 9 195 All Other (1) (6,312) (7,161) (7,358) -------- -------- -------- Consolidated $10,572 $15,461 $20,046 ========= ========= ========= Earnings (loss) before income taxes North America $76,548 $84,208 $82,957 Europe 19,979 8,444 12,142 Australasia 5,740 4,739 981 All Other (1) (5,737) 949 2,136 Non-recurring and unusual item - (31,950) - -------- -------- -------- Consolidated $96,530 $66,390 $98,216 ========= ========= ========= Assets North America $510,135 $575,238 $593,271 Europe 295,085 254,970 257,240 Australasia 41,185 32,727 32,542 All Other (1) 60,298 51,602 68,802 -------- -------- -------- Consolidated $906,703 $914,537 $951,855 ========= ========= ========= Expenditures for assets North America $11,172 $11,980 $16,704 Europe 7,956 6,401 7,922 Australasia 2,381 1,734 1,639 All Other (1) 600 67 180 -------- ------- ------ Consolidated $22,109 $20,182 $26,445 ======== ======= ====== (1) Consists of the domestic export unit, un-allocated corporate selling, general and administrative costs, the Invacare captive insurance unit and inter-company profits, which do not meet the quantitative criteria for determining reportable segments. FS-21 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued BUSINESS SEGMENTS--Continued Net sales by product, are as follows (In thousands): North America 2002 2001 2000 ------------- ------- ------- ------- Standard $281,126 $292,360 $285,568 Rehab 211,096 195,955 189,515 Distributed 146,573 127,975 121,662 Respiratory 82,528 88,915 84,284 Continuing Care 41,953 41,499 36,400 Other 30,188 27,009 23,826 ------- ------- ------- $793,464 $773,713 $741,255 ======= ======= ======= Europe 2002 2001 2000 ------ ------- ------- ------- Standard $125,996 $121,355 $131,327 Rehab 113,162 102,801 96,786 Respiratory 7,664 7,607 6,352 Continuing Care 4,621 4,330 3,743 ------- ------- ------- $251,443 $236,093 $238,208 ======= ======= ======= Australasia 2002 2001 2000 ----------- ------- ------- ------- Rehab $32,752 $33,154 $25,731 Respiratory 4,207 5,440 4,329 Standard 2,917 2,394 1,597 Continuing Care 1,763 1,882 307 Other 2,615 963 1,735 ------- ------- ------- $44,254 $43,833 $33,699 ======= ======== ======== Total Consolidated $1,089,161 $1,053,639 $1,013,162 ========= ========= ========= No single customer accounted for more than 5% of the company's sales. INTERIM FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED -------------- (In thousands, except per share data) 2002 March 31, June 30, September 30, December 31, ---- --------- --------- ------------- ------------ Net sales $255,081 $271,846 $280,253 $281,981 Gross profit 74,634 80,618 87,353 84,793 Earnings before income taxes 17,678 23,992 28,562 26,298 Net earnings 11,868 16,102 19,162 17,638 Net earnings per share - basic .39 .52 .62 .57 Net earnings per share - assuming dilution .38 .51 .61 .56 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)
See non-recurring and unusual items footnote for disclosure of charge taken in the fourth quarter of 2001. FS-22 INVACARE CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands) COL A. COL B. COL C. COL D. ------ ------ ------ ------ Balance Charged To Balance At Beginning Cost And Deductions At End Of Period Expenses Describe Of Period Year Ended December 31, 2002 ------------ ---------- ---------- --------- ---------------------------- Deducted from asset accounts - Allowance for doubtful accounts $28,797 $10,792 $(6,857)(A) $32,732 Inventory obsolescence reserve 5,463 2,137 (2,263)(B) 5,337 Investments and related notes 29,000 - - 29,000 receivable Accrued warranty cost 7,607 11,695 (7,854)(B) 11,448 Accrued product liability 5,816 5,086 (2,630)(C) 8,272 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 - 29,000 - 29,000 receivable Accrued warranty cost 7,917 5,587 (5,897)(B) 7,607 Accrued product liability 2,881 4,366 (1,431)(C) 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 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 2,664 (6,608)(C) 2,881
Note (A) - Uncollectible accounts written off, net of recoveries. Note (B) - Amounts written off or payments incurred. Note (C) - Loss and loss adjustment. FS-23 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, Incorporated, a Missouri corporation and wholly owned subsidiary. 10. Invacare Poirier S.A.S., a French corporation and wholly owned subsidiary. 11. Dynamic Controls Unlimited, a New Zealand corporation and wholly owned subsidiary. 12. Quantrix Consultants Unlimited, 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 Corporation, a Delaware corporation and wholly owned subsidiary. 19. Invacare New Zealand Unlimited, a New Zealand corporation and wholly owned subsidiary. 20. Invacare AG, a Swiss corporation and wholly owned subsidiary. 21. Invacare International Sarl, a Swiss corporation and wholly owned subsidiary. 22. Healthtech Products, Inc., a Missouri corporation and wholly owned subsidiary. 23. Invacare Lda., a Portugal company and wholly owned subsidiary. 24. Invacare Supply Group, formerly Suburban Ostomy Supply Company, Inc., a Massachusetts corporation and wholly owned subsidiary. 25. Roller Chair Pty. Ltd., an Australian corporation and wholly owned subsidiary. 26. Silcraft Corporation, a Michigan corporation and wholly owned subsidiary. 27. The Aftermarket Group, Inc., a Delaware corporation and wholly owned subsidiary. 28. Scandinavian Mobility International ApS, a Danish corporation and wholly owned subsidiary. I-32 29. Invacare Hong A/S, a Danish corporation and wholly owned subsidiary. 30. Invacare A/S, a Danish corporation and wholly owned subsidiary. 31. Invacare AB, a Swedish corporation and wholly owned subsidiary. 32. Invacare NV, a Belgium corporation and wholly owned subsidiary. 33. Scandinavian Mobility Niltek A/S, a Danish corporation and wholly owned subsidiary. 34. Scandinavian Mobility Radius A/S, a Danish corporation and wholly owned subsidiary. 35. EC-Invest A/S, a Danish corporation and wholly owned subsidiary. 36. Invacare Holdings AS, a Norwegian corporation and wholly owned subsidiary. 37. Groas A/S, a Norwegian corporation and wholly owned subsidiary. 38. Invacare Rea AB, a Swedish corporation and wholly owned subsidiary. 39. France Reval GmbH, a French corporation and wholly owned subsidiary. 40. Scandinavian Mobility GmbH, a German corporation and wholly owned subsidiary. 41. Invacare B.V., a Netherlands corporation and wholly owned subsidiary. 42. Samarite B.V., a Netherlands corporation and wholly owned subsidiary. 43. Revato B.V., a Netherlands corporation and wholly owned subsidiary. 44. Scandinavian Mobility Medical Services B.V., a Netherlands corporation and wholly owned subsidiary. 45. Invacare Australia Pty, Ltd., an Australian corporation and wholly owned subsidiary. 46. Adaptive Switch Laboratories, Inc., a Texas corporation and wholly owned subsidiary. 47. Garden City Medical Inc., a Delaware corporation and wholly owned subsidiary. 48. Hatfield Mobility Unlimited, a New Zealand corporation and wholly owned subsidiary. 49. Pro Med Equipment Pty, Ltd., an Australian corporation and wholly owned subsidiary. 50. Invacare AS, a Norwegian corporation and wholly owned subsidiary. 51. Pro Med Australia Pty, Ltd., an Australian corporation and wholly owned subsidiary. 52. Invacare, S.A., a Spanish corporation and wholly owned subsidiary. 53. Invacare Holdings Two AB, a Swedish corporation and wholly owned subsidiary. 54. Invacare Holdings AB, a Swedish corporation and wholly owned subsidiary. 55. Invacare Holdings CV, a Netherlands corporation and wholly owned subsidiary. 56. Invacare Holdings BV, a Netherlands corporation and wholly owned subsidiary. 57. Invacare Verwaltungs GmbH, a German corporation and wholly owned subsidiary. I-33 58. Invacare GmbH and Co. KG, a German corporation and wholly owned subsidiary. 59. Invacare Holdings Two BV, a Netherlands corporation and wholly owned subsidiary. 60. Invacare Holdings New Zealand, a New Zealand corporation and wholly owned subsidiary. 61. Invacare Bencraft Ltd., a U.K. 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. 33-45993 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 22, 2003, 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, 2002. ERNST & YOUNG LLP Cleveland, Ohio March 5, 2003 I-35 EX-10 3 cfoagreement.txt EXHIBIT 10(X) Exhibit 10(x) September 25, 2002 Mr. Gregory Thompson 3923 NW 53rd Street Boca Raton, FL 33486 Dear Greg: We are pleased to confirm our offer of the position of Senior Vice President and Chief Financial Officer reporting directly to A. Malachi Mixon, III, Chairman and CEO. The following represents the terms and conditions of your employment: 1. Salary Your starting base salary for this position will be $26,250.00 per month, which is $315,000 when calculated on an annual basis. 2. Bonus Beginning in January, 2003, as a member of Invacare's senior management group, your target bonus eligibility will be at the seventy-fifth (75th) percent bonus level. This bonus will be based on corporate performance. For 2002, you will receive a prorata portion of any bonus earned under the plan based on your start date. For 2003, we will guarantee a minimum bonus payment of $70,000, regardless of performance. 3. Sign-On Bonus You will receive a sign-on bonus in the amount of $26,000, payable upon the first day you commence employment with Invacare Corporation, providing that date is on or before November 4, 2002. 4. Stock Option Program Upon acceptance of our offer, you will be eligible to receive non-qualified options to purchase 50,000 shares, without par value, of Invacare stock pursuant to the Company's Executive Stock Option Plan. Stock options vest at a rate of 25% per year with an exercise period of ten (10) years. Additionally, you will receive non-qualified options to purchase 32,000 shares, without par value, as a participant of the Annual Executive Stock Option Program. 5. Restricted Stock Upon acceptance of our offer, you will be eligible to receive a restricted stock grant in the amount of 4,600 shares. Restrictions lapse at 25% per year. Subject to review and approval by the Compensation Committee of the Board of Directors of Invacare Corporation, you will be eligible to receive restricted stock grants on an annual basis. 6. Automobile Leasing & Insurance Program You will be eligible to participate in Invacare's automobile leasing program. Under this program, the Company will provide a monthly allowance of $850 for auto leasing purposes. The details of this plan will be covered with you upon your employment with Invacare. In addition to the leasing program, personal auto insurance will be provided for all automobiles owned by you and your spouse. 7. Benefits Medical - You will be eligible to participate in CHOICEPlus, Invacare's flexible benefits program. CHOICEPlus includes medical, dental and vision coverage, as well as increased term life insurance for eligible dependents. This program will be available to you on the first day of the month following employment. In addition, you will be eligible for the Company's Life Insurance, Short and Long Term Disability, Retirement Plan and Educational Assistance programs. The average benefit package adds approximately 28% to your base salary. Retirement Plan - Invacare offers a qualified plan, The Invacare Retirement Savings Plan, and a non-qualified plan, The 401(k) Plus Benefit Equalization Plan ("Plus Plan"). The Invacare Retirement Savings Plan includes a 401(k) program, Employer Match and Invacare Quarterly Contribution (IQC). The Plus Plan is offered to those individuals whose annual income exceeds $90,000 and includes an enhanced employee contribution plan along with the Employer Match and Invacare Quarterly Contribution. The Plus Plan allows you to contribute up to 50% of your compensation. Invacare will make matching contributions equal to 100% of the first 1% of your salary deferrals, plus 50% of the next 2% of your salary deferrals after you have completed six months of service. The Quarterly Contribution is equal to 4% of your eligible earnings and will be made at the conclusion of each calendar quarter after you have completed six months of service. You do not have to contribute to either Plan to receive the Quarterly Contribution. Vacation - You are eligible for three weeks vacation beginning in January 2003. 8. Executive Benefits (Additional details of each of these plans are enclosed) Supplemental Executive Retirement Plan (SERP) - You will be eligible to participate in the Invacare SERP. The SERP is a non-qualified plan that provides retirement income to supplement income available from Invacare's qualified plans and to supplement the 401(k) Plus Plan. The Target Retirement Ratio is 50% of final compensation. You will receive a service credit of five (5) years to count toward the fifteen (15) year service requirement. Life Insurance Plan - You will be eligible to participate in the Executive Life Insurance plan. This plan provides a level of death benefit equal to three (3) times compensation at pre-retirement and one (1) times final compensation at post-retirement. Disability Income Plan - You will be eligible to participate in the Executive Disability Income Plan. This disability plan, combined with the Invacare Group Long Term Disability Income plan, can provide disability income of up to 70% of your compensation. Health Management Program - You will be eligible to participate in the Executive Health Management Program. Through this program, you will be entitled to one physical exam every two years performed at the Cleveland Clinic Department of Preventative Medicine. Club Membership - You are eligible to become a member of a golf/social club of your choosing. Invacare Corporation will pay all initiation fees and annual membership dues. Personal Liability - Invacare will also provide 5 million dollars of personal umbrella coverage over certain underlying retention amounts. This coverage provides you with liability coverage anywhere in the world subject to the terms and conditions of the policy. This coverage will become effective on January 10, 2003 upon the policy renewal. 9. Relocation You will be entitled to all benefits under Invacare's Relocation policy, including home sale and purchase assistance, movement of household goods and temporary living up to six months. You will also receive a one-time lump payment of $15,000 to offset miscellaneous expenses you may incur during your move. You will be eligible to receive the relocation benefits outlined in the attached policy for up to two years from your date of hire. 10. Severance If you are terminated for any reason other than cause during your employment, you will be provided one year of salary continuation as severance pay. You will also receive a prorata portion of your target bonus based on the date of termination. In addition, Invacare will continue to provide health insurance during your severance period, or until you obtain employment that provides you with such coverage, whichever comes first. Termination for cause is defined as fraud, misrepresentation, theft or embezzlement of company assets, intentional violations of law or company policies or a substantial failure to perform assigned duties. 11. Change of Control The Change in Control agreement would include provisions for a lump sum cash amount equal to three (3) times annual base salary plus target bonus and continued participation in the Company's employee benefit plans, as described in more detail in the enclosed Change in Control Agreement. This offer is contingent upon verification of employment under the provisions of the Immigration Reform and Control Act of 1986. Upon reporting to work, you will be required to present your Social Security card or birth certificate and state-issued photo identification. You will be required to review and sign a non-compete agreement and a conflict of interest document as a condition of your employment. This offer is also contingent upon you successfully completing a pre-employment drug screen, post-offer physical examination and reference-checking process. Please contact Ann Wilgor at 440/329-6906 to arrange for your drug screen and post-offer physical examination. Greg, we are excited at the prospect of you joining the Invacare team. Upon signing this offer, a mutually agreed upon start date will be determined. In the interim, if there are any questions regarding this offer, please contact me at 440/329-6427. Sincerely, /s/Thomas Kroeger ----------------- Thomas Kroeger SVP, Human Resources I acknowledge acceptance of this offer and its conditions for the position of Senior Vice President and Chief Financial Officer, and have signed two copies of this letter and am returning one to your attention. /s/ Gregory C. Thompson October 2002 - --------------------------------- ------------------------ Signature Date EX-10 4 changecontrol.txt EXHIBIT 10(V) Exhibit 10(v) FORM OF AGREEMENT This AGREEMENT ("Agreement"), is made as of the ____ day of ____________, 20--, between INVACARE CORPORATION, an Ohio corporation ("Invacare"), and ____________ (the "Executive"). Invacare is entering into this Agreement in recognition of the importance of the Executive's services to the continuity of management of Invacare and based upon its determination that it will be in the best interests of Invacare to encourage the Executive's continued attention and dedication to the Executive's duties in the potentially disruptive circumstances of a possible Change of Control of Invacare. (As used in this Agreement, the term "Change of Control" and certain other capitalized terms have the meanings ascribed to them in Section 9 hereof.) Invacare and the Executive agree, effective as of the date first set forth above (the "Effective Date"), as follows: 1. Retention Bonus if Executive is Employed by Invacare on First Anniversary of the Date of a Change of Control. If, following the occurrence of a Change of Control, the Executive continues to be employed by Invacare on the first anniversary of the date of the Change of Control, Invacare shall pay to the Executive, within ten business days after such first anniversary, a lump-sum amount equal to the sum of (a) the Executive's Annual Base Salary plus (b) the Executive's Target Bonus. 2. Severance Benefits if Employment is Terminated in Certain Circumstances Within Three Years of a Change of Control. If, within three years following the occurrence of a Change of Control, the Executive's employment with Invacare is terminated by Invacare for any reason other than Cause, Disability, or death, or by the Executive for Good Reason, this Section 2 shall become applicable and Invacare shall pay to the Executive the amounts specified in Sections 2.1, 2.2, and 2.3 on the dates indicated therein and shall provide to the Executive the benefits specified in Sections 2.4, 2.5, 2.6, and 2.7 for the respective periods specified therein, and shall cause certain rights of the Executive to vest as provided in Sections 2.7 and 2.8. 2.1 Lump Sum Severance Benefit. Invacare shall pay to the Executive, within ten business days after the Termination Date, a lump sum severance benefit equal to (a) minus (b) below where: (a) equals three times the sum of (i) the Executive's Annual Base Salary plus (ii) the Executive's Target Bonus; and (b) equals the amount, if any, paid to the Executive pursuant to Section 1 above. 2.2 401(k) Profit Sharing. Invacare shall pay to the Executive, within 60 days after the Termination Date, a lump sum amount equal to three times the highest amount of total contributions (including both matching contributions and Profit Sharing Contributions) made by Invacare to the Invacare 401(k) Profit Sharing Plan with respect to the Executive for any single plan year ending on or after the date that is three years before the date of the Change of Control. 2.3 SERP. Invacare shall pay to the Executive, within 60 days after the Termination Date, a lump sum amount equal to the amount by which (a) the actuarial equivalent of the annual SERP Benefit that would have been payable under Section 6.7 of the Invacare Supplemental Executive Retirement Plan, as in effect on the Termination Date, calculated as though the Executive had continued in the employ of Invacare through the third anniversary of the Termination Date with annual compensation for each of those three years equal to the highest annual compensation received by the Executive from Invacare during any year ending on or after the date that is three years before the date of the Change of Control, exceeds (b) the actuarial equivalent of the annual SERP Benefit that is payable under that Section 6.7 taking into account only Executive's employment with Invacare through the Termination Date. 2.4 Insurance Benefits. Invacare shall provide to the Executive, from the Termination Date through the third anniversary of the Termination Date, continuing coverage under health, life, and disability insurance programs at least equal in all respects to the highest level of such coverage provided by Invacare to the Executive at any time during the period beginning one year before the Change in Control and ending on the Termination Date. 2.5 Club Dues. During the period from the Termination Date through the third anniversary of the Termination Date, Invacare shall continue to reimburse the Executive for club dues on at least as favorable basis as the most favorable basis in effect at any time during the period beginning one year before the Change of Control and ending on the Termination Date. 2.6 Automobile. During the period from the Termination Date through the third anniversary of the Termination Date, Invacare shall continue to provide to the Executive an automobile (and reimbursement for mileage, maintenance, insurance, repairs, and similar items) on at least as favorable basis as the most favorable basis in effect at any time during the period beginning one year before the Change of Control and ending on the Termination Date. 2.7 Stock Options. In respect of all options to purchase Invacare stock that have been previously granted to the Executive pursuant to any stock option plan or arrangement sponsored by Invacare, and notwithstanding any other provision to the contrary contained in any stock option plan or arrangement, Invacare shall cause such options: (a) to become exercisable in full as of the Termination Date; and (b) to continue to be exercisable until the earlier to occur of the second anniversary of the Termination Date or the expiration date of the option; and (c) to be exercisable (and/or to satisfy any tax withholding requirements in connection with the exercise of the options) using shares 2 of Invacare common stock previously owned by the Executive and/or shares subject to the options being exercised as consideration in lieu of a cash payment or other arrangement, but only if any such exercise of the option would not result in Invacare being required to take a charge in respect of such exercise in determining its net income for financial accounting purposes. 2.8 Vesting of Certain Rights. Invacare shall cause the Executive's rights under (a) the Invacare 401(k) Profit Sharing Plan, and (b) the Invacare Supplemental Executive Retirement Plan, to become, as of the Termination Date, immediately vested. 2.9 Death of the Executive. In the event of the Executive's death at any time from the Termination Date through the third anniversary of the Termination Date, then, assuming any applicable conditions precedent set forth above are satisfied: (a) the amount described in Section 1, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death; (b) the amount described in Section 2.1, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death; (c) the amount described in Section 2.2, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death; (d) the amount described in Section 2.3, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death; (e) any person who would have been entitled to coverage as the Executive's dependent (or otherwise because of the Executive's coverage) under any health insurance program maintained by Invacare (as described in Section 2.4) shall continue to be provided with such coverage as though the Executive had survived through the third anniversary of the Termination Date; (f) the benefits described in Sections 2.5 and 2.6 shall cease to be provided on the first to occur of either (i) the 60th day following the Executive's death or (ii) the third anniversary of the Termination Date; (g) such persons as may be entitled thereto shall receive such benefits as may be provided under any Employee Benefit Plans in accordance with the terms of such Employee Benefit Plans; (h) such persons as may be entitled thereto shall receive such benefits as may be provided under any other agreement the Executive may have with Invacare or an Affiliate including, without limitation, any agreement relating to options to purchase Invacare stock. 3 2.10 Alternate Form of Benefit. Notwithstanding the preceding provisions of this Section 2, to the extent the Executive cannot, as a matter of law, or pursuant to the customs or policies of any insurance underwriter, realize any benefit or advantage described above in this Section 2, or if Invacare reasonably believes that providing the Executive with any such benefit or advantage would be economically disadvantageous because doing so would cause Invacare to lose tax or other benefits, Invacare shall notify the Executive and shall pay to the Executive an additional amount which shall, taking account of any federal, state and local income taxes incurred by the Executive in respect of such payments, place the Executive in the same position, on an after-tax basis, as though he had realized such benefit or advantage; provided, further, that the amount of any payment to the Executive pursuant to the preceding clause shall be calculated at the Company's cost and expense by the Accounting Firm, and its determination of such amount shall be final and binding upon both the Executive and Invacare, and the Executive and Invacare shall each provide the Accounting Firm with such information as it may reasonably request in order to calculate any such amount. 3. Excess Parachute Payment Gross-Up. 3.1 Potential for Excess Parachute Payments. Invacare and the Executive acknowledge that, following a Change of Control, one or more payments or distributions to be made by Invacare to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, under some other plan, agreement, or arrangement, or otherwise) (a "Payment") may be determined to be an "excess parachute payment" that is not deductible by Invacare for Federal income tax purposes and with respect to which the Executive will be subject to an excise tax because of Sections 28OG and 4999, respectively, of the Internal Revenue Code. If benefits become payable to the Executive under Sections 1 or 2 of this Agreement, the Accounting Firm, which shall make all determinations required to be made under this Section 3, shall determine whether any Payment would be an excess parachute payment and shall communicate its determination, together with detailed supporting calculations, to Invacare and to the Executive within 30 days after the Termination Date or such earlier time as is requested by Invacare. Invacare and the Executive shall cooperate with each other and the Accounting Firm and shall provide necessary information so that the Accounting Firm may make all such determinations. Invacare shall pay all of the fees of the Accounting Firm for services performed by the Accounting Firm as contemplated in this Section 3. 3.2 Gross-Up of Payments. If any Payment gives rise, directly or indirectly, to liability on the part of the Executive for excise tax under Section 4999 of the Internal Revenue Code, Invacare shall make additional cash payments to the Executive, from time to time and at the same time, as any Payment constituting an excess parachute payment is paid or provided to the Executive (or as soon thereafter as is practicable and, in any event, no later than March 15 of the calendar year which follows the calendar year in which the excess parachute payment was made or provided to the Executive), in such amounts as are necessary to put the Executive in the same position, after payment of all federal, state, and local taxes (whether income taxes, excise taxes under Section 4999 of the Code or otherwise, or other taxes), as the Executive would have been in after payment of all federal, state, and local income taxes if the Payments had not given rise to an excise tax under Section 4999 of the Internal Revenue Code. 4 4. Other Benefits. 4.1 Reimbursement of Certain Expenses After a Change of Control. Invacare shall pay, as incurred, all expenses incurred by the Executive, including the reasonable fees of counsel engaged by the Executive, in respect of enforcing the Executive's rights hereunder and/or defending any action brought to have this Agreement declared invalid or unenforceable. 4.2 Incapacity of Executive. If, after a Change of Control and prior to the Termination Date, the Executive is unable to perform services for Invacare for any period by reason of accidental bodily injury or sickness, Invacare will pay and provide to the Executive all compensation and benefits to which the Executive would have been entitled had the Executive continued to be actively employed by Invacare through the earliest of the following dates: (a) the first date on which the Executive is again capable of performing services for Invacare consistent with past practice, or (b) the date on which the Executive's employment is terminated by Invacare by reason of Disability, or (c) the date on which Invacare has paid and provided 36 months of compensation and benefits to the Executive during the period of the Executive's incapacity, or (d) the date of the Executive's death. 5. No Set-Off; No Obligation to Seek Other Employment or to Otherwise Mitigate Damages; No Effect Upon Other Plans. Invacare's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim whatsoever which Invacare may have against the Executive. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise. The amount of any payment provided for under this Agreement shall not be reduced by any compensation or benefits earned by the Executive as the result of employment by another employer or otherwise after the termination of the Executive's employment. 6. Taxes; Withholding of Taxes. Without limiting the right of Invacare to withhold taxes pursuant to this Section 6, the Executive shall be responsible (after taking into account all payments to be made by Invacare to or on behalf of the Executive under Sections 1 or 2 hereof) for all income, excise, and other taxes (federal, state, city, or other) imposed on or incurred by the Executive as a result of receiving the payments provided in this Agreement, including, without limitation, the payments provided under Sections 1 or 2 of this Agreement. Subject to Section 3.1 hereof, Invacare may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as Invacare shall determine to be required pursuant to any law or government regulation or ruling. Without limiting the generality of the foregoing, Invacare may withhold from any amount payable under any of Section 1 and/or Sections 2.1 through 2.3 of this Agreement amounts sufficient to satisfy any withholding requirements that may arise out of any benefit provided to or in respect of the Executive by Invacare under Section 2 of this Agreement. 5 7. Term of this Agreement. This Agreement shall be effective as of the date first above written and shall thereafter apply to any Change of Control occurring on or before December 31, 2000 or during any succeeding applicable term, and on December 31, 2000 and on December 31 of each succeeding year thereafter (a "Renewal Date"), the term of this Agreement, if not previously terminated, shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in advance of that Renewal Date, that the Agreement shall not apply to any Change of Control occurring after that Renewal Date. 7.1 Termination of Agreement Upon Termination of Employment Before a Change of Control. This Agreement shall automatically terminate on the first date occurring before a Change of Control on which the Executive is no longer employed by Invacare, except that, for purposes of this Agreement, any termination of employment of the Executive that is effected before and primarily in contemplation of a Change of Control that actually occurs after the date of the termination shall be deemed to be a termination of the Executive's employment as of the date immediately after that Change of Control. 7.2 No Termination of Agreement During Three Year Period Beginning on Date of a Change of Control. After a Change of Control, this Agreement may not be terminated. However, if the Executive's employment with Invacare continues for more than three years following the occurrence of a Change of Control, then, for all purposes of this Agreement other than Sections 1 and 3.1, that particular Change of Control shall thereafter be treated as if it never occurred. 8. Miscellaneous. 8.1 Successor to Invacare. Invacare shall not consolidate with or merge into any other corporation, or transfer all or substantially all of its assets to another corporation, unless such other corporation shall assume this Agreement in a signed writing and deliver a copy thereof to the Executive. Upon such assumption, the successor corporation shall become obligated to perform the obligations of Invacare under this Agreement and the term "Invacare" as used in this Agreement shall be deemed to refer to such successor corporation. 8.2 Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or by confirmed facsimile transmission (to the General Counsel of Invacare in the case of notices to Invacare and to the Executive in the case of notices to the Executive) or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows: 6 If to Invacare: Invacare Corporation One Invacare Way Elyria, OH 44035 Attention: General Counsel If to the Executive: ====================== ---------------------- or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8.3 Employment Rights. Nothing expressed or implied in this Agreement shall create any right or duty on the part of Invacare or the Executive to have the Executive continue as an officer of Invacare or to remain in the employment of Invacare. 8.4 Administration. Invacare shall be responsible for the general administration of this Agreement and for making payments under this Agreement. All fees and expenses billed by the Accounting Firm for services contemplated under this Agreement shall be the responsibility of Invacare. 8.5 Source of Payments. Any payment specified in this Agreement to be made by Invacare may be made directly by Invacare solely from its general assets, and the Executive shall have the rights of an unsecured general creditor of Invacare with respect thereto. 8.6 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. 8.7 Modification; Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by the Executive and Invacare. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. 8.8 Entire Agreement; Supercession. Except as otherwise specifically provided herein, this Agreement, including its attachments, contains the entire agreement between the parties concerning the subject matter hereof and 7 incorporates and supersedes any and all prior discussions or agreements, written or oral, the parties may have had with respect to such subject matter; provided, however, that except as expressly provided otherwise herein nothing in this Agreement shall affect any rights the Executive or anyone claiming through the Executive may have in respect of either (a) any Employee Benefit Plan which provides benefits to or in respect of the Executive or (b) any other agreements the Executive may have with Invacare or an Affiliate, except to the extent any such Employee Benefit Plan or other agreement provides benefits which are duplicative of those provided under this Agreement. 8.9 Post-Mortem Payments; Designation of Beneficiary. In the event that, following the termination of the Executive's employment with Invacare, the Executive is entitled to receive any payments pursuant to this Agreement and the Executive dies, such payments shall be made to the Executive's Beneficiary designated hereunder. At any time after the execution of this Agreement, the Executive may prepare, execute, and file with the Secretary of the Company a copy of the Designation of Beneficiary form attached to this Agreement as Exhibit A. The Executive shall thereafter be free to amend, alter or change such form; provided, however, that any such amendment, alteration or change shall be made by filing a new Designation of Beneficiary form with the Secretary of the Company. In the event the Executive fails to designate a beneficiary, following the death of the Executive all payments of the amounts specified by this Agreement which would have been paid to the Executive's designated beneficiary pursuant to this Agreement shall instead be paid to the Executive's spouse, if any, if she survives the Executive or, if there is no spouse or she does not survive the Executive, to the Executive's estate. 8.10 Service with Affiliates. Any services the Executive performs for an Affiliate shall be deemed performed for Invacare. Any transfer of the Executive's employment from Invacare to an Affiliate, or from an Affiliate to Invacare, or from an Affiliate to another Affiliate shall be deemed not to constitute a termination of the Executive's employment with Invacare. 8.11 Time Periods. Any action required to be taken under this Agreement within a certain number of days shall be taken within that number of calendar days; provided, however, that if the last day for taking such action falls on a weekend or a holiday, the period during which such action may be taken shall be automatically extended to the next business day. If the day for taking any action under this Agreement falls on a weekend or a holiday, such action may be taken on the next business day. 8.12 Incorporation by Reference. The incorporation herein of any terms by reference to another document shall not be affected by the termination of any agreement set forth in such other document or the invalidity of any provisions thereof. 8.13 Binding Effect; Construction of Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal representatives, executors, administrators, successors, heirs, and designees (including, without limitation, the Beneficiary). Upon the Executive's death, for purposes of this Agreement, the term "Executive" shall be deemed to include, 8 as applicable, any person (including, without limitation, the Beneficiary) who is entitled to benefits under this Agreement following the Executive's death. 8.14 Governing Law. All questions concerning the construction, validity and interpretation of this Agreement and the exhibits hereto will be governed by and construed in accordance with the internal laws of the State of Ohio, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Ohio or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Ohio. 8.15 Representations and Warranties of Invacare. Invacare represents and warrants to the Executive that (i) Invacare is a corporation duly organized, validly existing, and in good standing under the laws of the State of Ohio; (ii) Invacare has the power and authority to enter into and carry out this Agreement, and there exists no contractual or other restriction upon its so doing; (iii) Invacare has taken such corporate action as is necessary or appropriate to enable it to enter into and perform its obligations under this Agreement; and (iv) this Agreement constitutes the legal, valid and binding obligation of Invacare, enforceable against Invacare in accordance with its terms. 9. Definitions. 9.1 Accounting Firm. The term "Accounting Firm" means the independent auditors of Invacare for the fiscal year preceding the year in which the Change of Control occurred and such firm's successor or successors; provided, however, if such firm is unable or unwilling to serve and perform in the capacity contemplated by this Agreement, Invacare shall select another national accounting firm of recognized standing to serve and perform in that capacity under this Agreement, except that such other accounting firm shall not be the then independent auditors for Invacare or any of its Affiliates. 9.2 Affiliate. The term "Affiliate" shall mean, with respect to any person or entity, any other person or entity which controls, is controlled by, or is under common control with such person or entity. 9.3 Annual Base Salary. "Annual Base Salary" means the highest annual rate of base salary payable by Invacare to the Executive at any time between the Effective Date and the Termination Date. 9.4 Beneficiary. "Beneficiary" means the person designated by the Executive as his beneficiary pursuant to Section 8.9 or such other person as determined pursuant to Section 8.9 hereof. 9.5 Cause. The employment of the Executive by Invacare shall have been terminated for "Cause" if, after a Change of Control and prior to the termination of employment, any of the following has occurred: (a) the Executive shall have been convicted of a felony, 9 (b) the Executive commits an act or series of acts of dishonesty in the course of the Executive's employment which are materially inimical to the best interests of Invacare and which constitutes the commission of a felony, all as determined by the vote of three-fourths of all of the members of the Board of Directors of Invacare (other than the Executive, if the Executive is a Director of Invacare), which determination is confirmed by a panel of three arbitrators appointed and acting in accordance with the rules of the American Arbitration Association for the purpose of reviewing that determination, (c) any federal or state regulatory agency with jurisdiction over Invacare has issued a final order, with no further right of appeal, that has the effect of suspending, removing, or barring the Executive from continuing his service as an officer or director of Invacare, or (d) after being notified in writing by the Board of Directors of Invacare to cease any particular Competitive Activity, the Executive shall intentionally continue to engage in such Competitive Activity while the Executive remains in the employ of Invacare. 9.6 Change of Control. A "Change of Control" shall be deemed to have occurred at the first time on which, after the Effective Date: (a) (1) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the Securities Exchange Act of 1934, as amended, disclosing the acquisition, in a transaction or series of transactions by any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than A. Malachi Mixon and/or any Affiliate of A. Malachi Mixon, of such number of shares of Invacare as entitles that person to exercise 20% or more of the voting power of Invacare in the election of Directors and (2) a majority of those members of the Board of Directors who are not individually a party to an agreement which is, mutatis mutandis, substantially similar to this Agreement (the "Disinterested Directors") determine that the acquisition (the "Reported Acquisition") is likely to result in a change in the effective control of Invacare; or (b) During any period of 24 consecutive calendar months, individuals who at the beginning of such period constitute the Directors of Invacare cease for any reason to constitute at least a majority of the Directors of Invacare unless the election of each new Director of Invacare was approved or recommended by the vote of at least two-thirds of the Directors of Invacare then still in office who were Directors of Invacare at the beginning of the period; or (c) There is a merger, consolidation, combination (as defined in Section 1701.01(Q), Ohio Revised Code), majority share acquisition (as defined in Section 1701.01(R), Ohio Revised Code), or control share acquisition (as defined in Section 1701.01(Z)(1), Ohio Revised Code, or in Invacare's Articles of Incorporation) involving Invacare and as 10 a result of which the holders of shares of Invacare prior to the transaction become, by reason of the transaction, the holders of such number of shares of the surviving or acquiring corporation as entitles them to exercise less than fifty percent (50 %) of the voting power of the surviving or acquiring corporation in the election of Directors; or (d) There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Invacare, but only if the transferee of the assets in such transaction is not an Affiliate of Invacare; or (e) The shareholders of Invacare approve any plan or proposal for the liquidation or dissolution of Invacare, but only if the transferee of the assets of Invacare in such liquidation or dissolution is not an Affiliate of Invacare. If an event described in any of Clauses (b), (c), (d), and (e) occurs, a Change in Control shall be deemed to have occurred for all purposes of this Agreement and, except as provided in the last sentence of Section 7.2, that Change in Control shall be irrevocable. If an event described in Clause (a) occurs, a Change of Control (hereinafter, sometimes referred to as a "Clause (a) Change of Control") shall be deemed to have occurred; but a Clause (a) Change of Control shall be subject to reversal, and shall be deemed to have been reversed if, on a subsequent date, a two thirds majority of the Disinterested Directors determine that the Reported Acquisition is no longer likely to result in a change in the effective control of Invacare; provided, that any such subsequent determination may not be made after the Termination Date or after the occurrence of any event described in any of Clauses (b), (c), (d), and (e). If a Clause (a) Change of Control is deemed to have been reversed as a result of the two-thirds majority determination described above, then, from and after the date of the reversal, that Clause (a) Change of Control shall be treated for purposes of this Agreement as if it had never occurred. 9.7 Competitive Activity. The Executive shall be deemed to have engaged in "Competitive Activity" if the Executive engages in any business or business activity (other than as a director, officer, or employee of Invacare) in which Invacare engages as of the time of the notice provided in Section 9.5(d). 9.8 Demotion or Removal. The Executive shall be deemed to have been subjected to "Demotion or Removal" if, during the three year period commencing on the date of a Change of Control, other than by Voluntary Resignation or with the Executive's written consent, the Executive ceases to hold the highest position held by him at any time during the one year period ending on the date of the Change of Control with all of the duties, authority, and responsibilities of that office as in effect at any time during the one year period ending on the date of the Change of Control. 9.9 Disability. For purposes of this Agreement, the Executive's employment will have been terminated by Invacare by reason of "Disability" of the Executive only if (a) as a result of accidental bodily injury or sickness, the Executive has been unable to perform his normal duties for Invacare for a period of 180 consecutive days, and (b) the Executive begins to receive payments under the 11 executive long term disability plan sponsored by Invacare not later than 30 days after the Termination Date. 9.10 Employee Benefit Plan. "Employee Benefit Plan" means any plan or arrangement defined as such in 29 U.S.C.ss.1002 which provides benefits to the employees of Invacare or its Affiliates. 9.11 Good Reason. The Executive shall have "Good Reason" to terminate his employment under this Agreement if, at any time after a Change of Control has occurred and before the third anniversary of that Change of Control, one or more of the events listed in (a) through (f) of this Section 9.11 occurs and, based on that event, the Executive gives notice of his intention to terminate his employment effective on a date that is both (i) within 90 days of the occurrence of that event and (ii) not later than the third anniversary of that Change of Control: (a) The Executive is subjected to Demotion or Removal; or (b) The Executive's Annual Base Salary is reduced; or (c) The Executive's opportunity for incentive compensation is reduced from the level of his opportunity for incentive compensation as in effect immediately before the date of the Change of Control or from time to time thereafter; or (d) The Executive is excluded from full participation in any benefit plan or arrangement maintained for senior executives of Invacare generally; or (e) The Executive determines in good faith that his responsibilities, duties, or authority with Invacare are at any time materially less than or reduced from those held by him immediately before the Change of Control and the shortfall or reduction has not been cured within 90 days after the Executive gives notice to the Board of Directors of Invacare of his election to terminate his employment for Good Reason based upon that shortfall or reduction; or (f) The Executive's principal place of employment for Invacare is relocated more than 35 miles from One Invacare Way, Elyria, Ohio. 9.12 Internal Revenue Code. A reference to any provision of the Internal Revenue Code means that provision of the Internal Revenue Code of 1986, as amended, and any successor provision, and any applicable regulations promulgated thereunder. 9.13 Target Bonus. "Target Bonus" means the Executive's Annual Base Salary multiplied by the higher of (a) the target bonus percentage in effect for the Executive under Invacare's bonus plan during the fiscal year immediately preceding the fiscal year in which the Change of Control occurs, or (b) the target bonus percentage in effect for the Executive under Invacare's bonus plan during the fiscal year in which the Change of Control occurs. 12 9.14 Termination Date. "Termination Date" means the date on which the Executive's employment with Invacare terminates. 9.15 Voluntary Resignation. A "Voluntary Resignation" shall have occurred if the Executive terminates his employment with Invacare by voluntarily resigning at his own instance without having been requested to so resign by Invacare, except that any resignation by the Executive will not be deemed to be a Voluntary Resignation if, at the time of that resignation, the Executive had Good Reason to resign. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. INVACARE CORPORATION ("Invacare") By -------------------- -------------------- (the "Executive") 13 Schedule of Agreements with Current Executive Officers Name Position Date of Agreement - ---- -------- ----------------- A. Malachi Mixon, III Chairman of the Board of Directors April 1, 2000 and Chief Executive Officer Gerald B. Blouch President, Chief Operating Officer April 1, 2000 Gregory C. Thompson Senior Vice President and Chief November 12, 2002 Financial Officer Joseph B. Richey, II President - Invacare Technologies, April 1, 2000 Senior Vice President - Electronics and Design Engineering Louis F.J. Slangen Senior Vice President - Sales & April 1, 2000 Marketing Diane J. Davie Senior Vice President - Human February 24, 2003 Resources Kenneth A. Sparrow President - Invacare Europe April 1, 2000 Neal J. Curran Vice President - Engineering and April 1, 2000 Product Development Michael A. Perry Vice President - Distributed Products April 1, 2000 S-1 EX-10 5 indemnity.txt EXHIBIT 10 (W) Exhibit 10(w) INVACARE CORPORATION FORM OF INDEMNITY AGREEMENT THIS AGREEMENT is made as of the ___ day of __________, 20--, by and between INVACARE CORPORATION, an Ohio corporation (the "Corporation"), and _______________ ("Indemnitee"), a Director and an Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and/or Officers the most capable persons available, such as Indemnitee; and WHEREAS, the prevalence of corporate litigation subjects directors and officers to expensive litigation risks, and it is the policy of the Corporation to indemnify its Directors and/or Officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, in addition, because the statutory indemnification provisions of the Ohio Revised Code expressly provide that they are non-exclusive, it is the policy of the Corporation to indemnify Directors and Officers who, on behalf of the Corporation, have entered into settlements of derivative suits or have paid judgments, fines or penalties therefor, provided they have not breached the applicable statutory standard of conduct; and WHEREAS, Indemnitee does not regard the protection available under the Corporation's Code of Regulations and insurance, if any, as adequate in the present circumstances, and considers it necessary and desirable to his or her service as a Director and/or Officer to have maximum protection, and the Corporation desires to provide such protection to induce Indemnitee to serve in such capacity; and WHEREAS, the Ohio Revised Code Section 1701.13(E) and the Corporation's Code of Regulations Article V(a) provide that indemnification of Directors and Officers of the Corporation may be authorized by agreement, and thereby contemplates that contracts of this nature may be entered into between the Corporation and Indemnitee with respect to indemnification of Indemnitee as a Director or an Officer of the Corporation. NOW, THEREFORE, for good and valuable consideration, the sufficiency and adequacy of which is hereby acknowledged, the Corporation and Indemnitee do hereby agree as follows: 1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as a Director and/or Officer of the Corporation for so long as he or she is duly elected or appointed or until such time as he or she tenders his or her resignation in writing or is otherwise terminated or removed from office. The Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Corporation hereby in order to induce Indemnitee to continue to serve as a Director and/or Officer of the Corporation, and acknowledges that Indemnitee is relying upon this Agreement in continuing in such capacity. 2. Definitions. As used in this Agreement: The term "Proceeding" shall include any threatened, pending, or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation or any subsidiary of the Corporation, by reason of any action taken by Indemnitee or of any inaction on his or her part while acting as such a Director and/or Officer, or by reason of the fact that he or she is or was serving at the request of the Corporation as a director, officer, member or manager, partner, trustee, employee or agent of another corporation, domestic or foreign, non-profit or for-profit, a limited liability company or a partnership, joint venture, trust or other enterprise; in each case whether or not he or she is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. The term "Expenses" shall include, without limitation, expenses of investigations, judicial or administrative proceedings or appeals, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under Paragraph 9 of this Agreement, but shall not include the amount of judgments, fines or penalties against or settlements paid by Indemnitee. References to "other enterprise" shall include, without limitation, employee benefit plans; references to "fines" shall include, without limitation, any excise tax assessed with respect to any employee benefit plan; references to "serving at the request of the Corporation" shall include, without limitation, any service as a Director or Officer of the Corporation which imposes duties on, or involves services by, such Director or Officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. 3. Indemnity in Third-Party Proceedings. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 3 if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation or a subsidiary of the Corporation, or is or was serving at the request of the Corporation as a director, officer, member or manager, partner, trustee, employee or agent of another corporation, domestic or foreign, non-profit or for-profit, a limited liability company or a partnership, joint venture, trust or other enterprise, against all Expenses, judgments, settlements, fines and penalties, actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, but only if Indemnitee acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any such 2 Proceeding by judgment, order of court, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. 4. Indemnity for Expenses in Proceedings by or in the Right of the Corporation. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 4 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation or a subsidiary of the Corporation, or is or was serving at the request of the Corporation as a director, officer, member or manager, partner, trustee, employee or agent of another corporation, domestic or foreign, non-profit or for-profit, a limited liability company or a partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense of such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification for Expenses shall be made under this Paragraph 4 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged by a court order or judgment, by a court of competent jurisdiction, to be liable to the Corporation, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. 5. Indemnity for Amounts Paid in Settlement in Proceedings by or in the Right of the Corporation. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 5 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation or a subsidiary of the Corporation, or is or was serving at the request of the Corporation as a director, officer, member or manager, partner, trustee, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for-profit, a limited liability company or a partnership, joint venture, trust or other enterprise, against all amounts actually and reasonably paid in settlement by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 6. Indemnity for Amounts Paid for in Judgments in Proceedings by or in the Right of the Corporation. The Corporation shall indemnify Indemnitee in accordance with the provisions of this Paragraph 6 if Indemnitee is a party to or threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was a Director and/or Officer of the Corporation or a 3 subsidiary of the Corporation, or is or was serving at the request of the Corporation as a director, officer, member or manager, partner, trustee, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for-profit, a limited liability company or a partnership, joint venture, trust or other enterprise, against all judgments, fines and penalties actually and reasonably incurred by Indemnitee in connection with any such Proceeding, but only if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation. 7. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. 8. Advances of Expenses. Any Expenses incurred by or on behalf of Indemnitee pursuant to Paragraphs 3 or 4 in any Proceeding shall be paid by the Corporation in advance upon the written request of Indemnitee if Indemnitee shall undertake to (a) repay such amount to the extent that it is ultimately determined by clear and convincing evidence in a court that Indemnitee is not entitled to indemnification hereunder, and (b) reasonably cooperate with the Corporation concerning the action, suit or proceeding giving rise to the Expenses. Any advances to be made under this Paragraph 8 shall be paid by the Corporation to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Corporation. 9. Procedure. Any indemnification and advances provided for in Paragraph 3, 4, 5, 6, 7 and 8 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Corporation's Code of Regulations or Articles of Incorporation providing for indemnification, is not paid in full by the Corporation within twenty (20) days after a written request for payment thereof has been first received by the Corporation, Indemnitee may, but need not, at any time thereafter bring an action against the Corporation to recover the unpaid amount of the claim and, subject to the other provisions of this Agreement, Indemnitee also shall be entitled to be paid for the Expenses of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for Expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Corporation to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Corporation and Indemnitee shall be entitled to receive advance payments of expenses pursuant to Paragraph 8 hereof unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Corporation contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide. There shall exist in such action a rebuttable presumption that Indemnitee has met the applicable standard(s) of conduct and is therefore entitled to indemnification pursuant to this Agreement. Neither the failure of the Corporation (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct as may be required by applicable law, nor any actual determination by 4 the Corporation (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall (a) constitute a defense to such action, (b) create a presumption that Indemnitee has or has not met the applicable standard of conduct, or (c) otherwise alter the presumption in favor of Indemnitee referred to in the preceding sentence. 10. Allowance for Compliance with SEC Requirements. Indemnitee acknowledges that the Securities and Exchange Commission ("SEC") has expressed the opinion that indemnification of directors and officers from liabilities under the Securities Act of 1933, as amended (the "Act"), is against public policy as expressed in the Act and is, therefore, unenforceable. Indemnitee hereby acknowledges and agrees that it will not be a breach of this Agreement for the Corporation to undertake with the SEC in connection with the registration for sale of any capital stock or other securities of the Corporation from time to time that, in the event a claim for indemnification against such liabilities (other than the payment by the Corporation of expenses incurred or paid by a director or officer of the Corporation in the successful defense of any action, suit or proceeding) is asserted in connection with such capital stock or other securities being registered, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction on the question of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Indemnitee further agrees that such submission to a court of competent jurisdiction shall not be a breach of this Agreement. 11. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Articles of Incorporation or the Code of Regulations of the Corporation, any agreement, any vote of shareholders or disinterested directors, the Ohio General Corporation Laws, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement for any action taken or not taken while serving in an indemnified capacity shall continue as to Indemnitee even though he or she may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs, executors and personal representatives of Indemnitee. 12. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some claims, issues or matters, but not as to other claims, issues or matters, or for some or a portion of the Expenses, judgments, fines or penalties actually and reasonably incurred by Indemnitee or amounts actually and reasonably paid in settlement by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding, but not for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such claims, issues or matters or Expenses, judgments, fines, penalties or amounts paid in settlement to which Indemnitee is entitled. 13. No Rights of Continued Employment. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment with the Corporation. 5 14. Reimbursement to Corporation by Indemnitee; Limitation on Amounts Paid by Corporation. To the extent Indemnitee has been indemnified by the Corporation hereunder and later receives payments from any insurance carrier covering the same Expenses, judgments, fines, penalties or amounts paid in settlement so indemnified by the Corporation hereunder, Indemnitee shall immediately reimburse the Corporation hereunder for all such amounts received from the insurer. Notwithstanding anything contained herein to the contrary, Indemnitee shall not be entitled to recover amounts under this Agreement which, when added to the amount of indemnification payments made to, or on behalf of, Indemnitee, under the Articles of Incorporation or Code of Regulations of the Corporation, in the aggregate exceed the Expenses, judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by Indemnitee ("Excess Amounts"). To the extent the Corporation has paid Excess Amounts to Indemnitee, Indemnitee shall be obligated to immediately reimburse the Corporation for such Excess Amounts. Notwithstanding anything contained herein to the contrary, the Corporation shall not be obligated under the terms of this Agreement to indemnify Indemnitee: (a) or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise, but such indemnification or advancement of expenses may be provided by the Corporation in specific cases if the Board of Directors finds it appropriate; (b) if it is proved by final judgment in a court of law or other final adjudication to have been based upon or attributable to the Indemnitee's in fact having gained any personal profit or advantage to which he or she was not legally entitled; (c) for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (d) for a disgorgement of profits made from the purchase and sale by Indemnitee of securities pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any state statutory law or common law; or (e) for any Expenses, judgment, fine or penalty which the Corporation is prohibited by applicable law from paying as indemnity or for any other reason. 15. Scope. Notwithstanding any other provision of this Agreement, except Paragraph 14 hereof, the Corporation hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Corporation's Code of Regulations or Articles of Incorporation, or by statute. In the event of any change, after the date of this Agreement, in 6 any applicable law, statute or rule which expands the right of an Ohio corporation to indemnify a member of its board of directors or an officer, such change shall be deemed to be within the purview of the Indemnitee's rights and the Corporation's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of an Ohio corporation to indemnify a member of its board of directors or an officer, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. 16. Notice to Insurers. If, at the time of the receipt of a written request of Indemnitee pursuant to Paragraph 9 hereof, the Corporation has director and officer liability insurance in effect, the Corporation shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Corporation shall thereafter take all necessary or desirable action, using commercially reasonable efforts, to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. 17. Continuation of Rights and Obligations. All rights and obligations of the Corporation and Indemnitee hereunder shall continue in full force and effect despite the subsequent amendment or modification of the Corporation's Articles of Incorporation or Code of Regulations, as such are in effect on the date hereof, and such rights and obligations shall not be affected by any such amendment or modification, any resolution of directors or shareholders of the Corporation, or by any other corporate action which conflicts with or purports to amend, modify, limit or eliminate any of the rights or obligations of the Corporation and/or Indemnitee hereunder. 18. Amendment and Modification. This Agreement may only be amended, modified or supplemented by the written agreement of the Corporation and Indemnitee. 19. Assignment. This Agreement shall not be assigned by the Corporation or Indemnitee without the prior written consent of the other party thereto, except that the Corporation may freely assign its rights and obligations under this Agreement to any subsidiary for whom Indemnitee is serving as a director and/or officer thereof; provided, however, that no permitted assignment shall release the assignor from its obligations hereunder. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any successor to the Corporation by way of merger, consolidation and/or sale or disposition of all or substantially all of the capital stock of the Corporation. 20. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee as to Expenses, judgments, fines, penalties and amounts paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 21. Counterparts. This Agreement may be executed in two or more fully or partially executed counterparts each of which shall be deemed an original binding the signer thereof against the other signing parties, but all counterparts together shall constitute one and the same instrument. Executed 7 signature pages may be removed from counterpart agreements and attached to one or more fully executed copies of this Agreement. The parties may execute and deliver this Agreement by facsimile signature, which shall have the same binding effect as an original ink signature. 22. Notice. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Corporation notice in writing as soon as practicable of any claim made against him or her for which indemnity will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Corporation at its headquarters located at One Invacare Way, Elyria, Ohio 44035, Attention: Chairman (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received three days after the date postmarked if sent by prepaid mail, properly addressed. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require within Indemnitee's power. 23. Applicable Law. All matters with respect to this Agreement, including, without limitation, matters of validity, construction, effect and performance, shall be governed by and construed in accordance with the laws of the State of Ohio applicable to contracts made and to be performed therein between the residents thereof (regardless of the laws that might otherwise be applicable under principles of conflict of law). IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be duly executed and signed as of the day and year first above written. INVACARE CORPORATION THE "CORPORATION" By ------------------------- Its: "INDEMNITEE" 8 Schedule of Indemnity Agreements with Current Directors and Executive Officers Name Position Date of Agreement - ---- -------- ----------------- A. Malachi Mixon, III Chairman of the Board of Directors May 24, 2001 and Chief Executive Officer Gerald B. Blouch President, Chief Operating Officer May 24, 2001 and Director Gregory C. Thompson Senior Vice President and Chief November 12, 2002 Financial Officer Joseph B. Richey, II President - Invacare Technologies, May 24, 2001 Senior Vice President - Electronics and Design Engineering and Director Louis F.J. Slangen Senior Vice President - Sales & May 24, 2001 Marketing Diane J. Davie Senior Vice President - Human February 24, 2003 Resources Thomas Kroeger Vice President - Human Resources May 24, 2001 Neal J. Curran Vice President - Engineering and May 24, 2001 Product Development Michael A. Perry Vice President - Distributed Products May 24, 2001 James C. Boland Director May 24, 2001 Michael F. Delaney Director May 24, 2001 Whitney Evans Director May 24, 2001 Dr. C. Martin Harris Director January 24, 2003 Dr. Bernadine P.Healy Director May 24, 2001 John R. Kasich Director May 24, 2001 Dan T. Moore, III Director May 24, 2001 E.P. Nalley Director May 24, 2001 William M. Weber Director May 24, 2001 S-1 EX-10 6 cooagreement.txt EXHIBIT 10(Y) Exhibit 10(y) SEVERANCE PROTECTION AGREEMENT THIS SEVERANCE PROTECTION AGREEMENT is made and effective as of October 1, 2002, by and between Invacare Corporation, an Ohio corporation with its principal place of business at One Invacare Way, Elyria, Ohio 44036 ("Invacare" or the "Company"), and Gerald B. Blouch (the "Executive"). WITNESSETH: WHEREAS, Executive is considered a key employee of the Company; and WHEREAS, the Company desires to retain and motivate Executive consistent with the terms of this Agreement; and WHEREAS, the Company and Executive, in order to insure Executive's continued attention and dedication to his duties, desire to execute this Agreement in accordance with the terms hereof; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Company and Executive agree as follows: 1. Acknowledgement of Position. The Company currently employs Executive as President and Chief Operating Officer of the Company, having those duties and responsibilities, and the authority, customarily possessed by the President and Chief Operating Officer of a major corporation and such additional duties as have been and may be assigned to him from time to time by the Chief Executive Officer and/or the Board of Directors of the Company (the "Board") which are consistent with the positions of President and Chief Operating Officer of a major corporation. Service by Executive on the boards of other companies shall not be deemed to be a violation of this Agreement, provided such service does not significantly interfere with the confidentiality provisions or performance of his duties hereunder. 2. Termination of Employment. A. Termination Due to Death or Disability. In the event that Executive's employment with the Company is terminated due to his death or disability as defined in Section 3 hereof, respectively, his estate or his beneficiaries, as the case may be, shall be entitled to any payments or benefits (including salary, etc.) accrued but unpaid at the time of Executive's termination due to his death or disability, all as payable under Company plans in effect at the time of termination. If Executive dies or becomes disabled during the term of this Agreement, the duties of the Company and Executive, one to the other, under this Agreement shall terminate as of the date of Executive's death, except as provided above. B. Termination by the Company for Cause or Resignation by Executive other than for Good Reason. Upon Executive's resignation other than for "Good Reason" as defined in Section 3, or upon the termination of Executive's employment by the Company for "Cause" as defined in Section 3, Executive shall be entitled to any payments or benefits accrued but unpaid at the time of Executive's termination by the Company for Cause or resignation by Executive other than for Good Reason, all as payable under Company plans in effect at the time of termination. C. Termination by the Company other than for Cause or Resignation of Executive for Good Reason. Upon Executive's termination by the Company other than for "Cause" as defined in Section 3 of this Agreement, or by Executive for "Good Reason" as described in Section 3 of this Agreement, Executive shall be entitled to the following amounts and benefits: (i) Compensation payable to the extent of three times the amount of Executive's then applicable annual base salary to be paid in three (3) equal annual installments commencing 30 days after cessation of employment; (ii) 75% of Executive's target bonus for the year in which employment terminates to be paid in three (3) equal annual installments commencing 30 days after cessation of employment; (iii) Any then-outstanding stock option grant or award shall immediately vest in full as of the date of termination of employment (notwithstanding any provision therein contained); and (iv) The exercise period of any unexercised stock option shall be extended until the earlier of two (2) years after the date of termination of employment or expiration of the option (notwithstanding any provision therein contained). In addition, Executive shall be permitted to exercise any such option by means of a cashless exercise 2 program, so long as (a) such program is allowed under all applicable laws and regulations, and (b) the Company is not required to recognize additional compensation expense as a result thereof. In the event Executive violates any of the Restrictive Covenants, as defined in Section 11 of this Agreement, Executive shall no longer be entitled to receive any further cash severance amounts pursuant to subclauses (i) and (ii) above, and thereafter subclauses (iii) and (iv) shall terminate and instead, the treatment of Executive's options will be governed by the terms of the option plans and agreements thereunder. 3. Definitions. A. Disability. The term "disability" as used in this Agreement shall mean Executive's inability, due to a mental or physical condition, to continue to provide services to the Company substantially consistent with past practice for a period of at least ninety (90) consecutive days, as evidenced by a written certification as to such condition from a physician designated by Executive and reasonably acceptable to the Board. B. Good Reason. Executive shall have "Good Reason" to terminate his employment under this Agreement if one or more of the events listed in (a) through (f) of this Section occurs and, based upon that event, Executive gives notice of his intention to terminate his employment effective on a date that is within 90 days of the occurrence of that event: (i) Executive is subjected to Demotion or Removal; (ii) Executive's Annual Base Salary, which shall mean his salary for the most recent fiscal year of the Company, is reduced; (iii) Executive's opportunity for incentive compensation as an officer or employee of the Company is reduced from the level of his opportunity for such incentive compensation for the prior year, without his prior written consent; (iv) Executive is excluded from full participation in any benefit plan or arrangement maintained for senior executives of the Company generally; 3 (v) Executive determines in good faith that his responsibilities, duties, or authority as an officer or employee of the Company are at any time materially reduced from those then currently held by him and the shortfall or reduction has not been cured within 90 days after the Executive gives notice to the Board of Directors of the Company of his election to terminate his employment for Good Reason based upon that shortfall or reduction; or (vi) Executive's principal place of employment is relocated more than 35 miles from One Invacare Way, Elyria, Ohio without his prior written consent. C. Cause. The employment of Executive by the Company shall have been terminated for "Cause" if any of the following has occurred: (i) Executive shall have been convicted of a felony; (ii) Executive commits an act or series of acts of dishonesty in the course of Executive's employment which are materially inimical to the best interests of the Company and which constitutes the commission of a felony, all as determined by the vote of three-fourths of all of the members of the Board (exclusive of the Executive, if the Executive is a Director of the Company), which determination is confirmed by a panel of three arbitrators appointed and acting in accordance with the rules of the American Arbitration Association for the purpose of reviewing that determination; (iii) any federal or state regulatory agency with jurisdiction over the Company has issued a final order, with no 4 further right of appeal, that has the effect of suspending, removing, or barring Executive from continuing his service as an officer or Director of the Company; (iv) after being notified in writing by the Board to cease any particular Competitive Activity, Executive shall intentionally continue to engage in such Competitive Activity while Executive remains in the employ of the Company; or (v) Executive shall fail to devote his full business time to the business of the Company (excluding for these purposes any services performed for any charitable organizations, or organizations where he is participating as the Company's representative), which failure continues after 30 days following the Company's notice to Executive specifying such failure, during which time he will have the right to cure. E. Demotion or Removal. Executive shall be deemed to have been subjected to "Demotion or Removal" if (other than by voluntary resignation or with Executive's written consent) Executive ceases to hold the highest position as an employee/officer of Invacare held by him at any time during the effectiveness of this Agreement with all of the duties, authority, and responsibilities of that office as in effect at any time during the effectiveness of this Agreement. F. Competitive Activity. Executive shall be deemed to have engaged in "Competitive Activity" if Executive engages in any business or business activity (other than as a Director, officer, or employee of the Company) that violates Section 7 hereof. 4. Notice of Termination. Any termination of Executive's employment by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto, which shall set forth the effective date of such termination (not earlier than the date of mailing, or delivery by other means, of the notice). 5. Expenses. In the event either party to this Agreement shall be forced to enforce the terms of this Agreement, the party successfully enforcing such terms shall be entitled to reimbursement of its reasonable legal and accounting fees from the other party hereto. 6. Term; Change of Control. This Agreement's term shall begin on the effective date written above and shall terminate three (3) years thereafter or upon a Change of Control of the 5 Company as defined in the Change of Control Agreement between Executive and the Company dated as of April 1, 2000, as the same may be amended ("Change of Control Agreement"); provided, however, that if such Change in Control does not occur, then the term of this Agreement automatically shall extend for additional one (1) year terms unless terminated by either party upon ninety (90) days written notice. For purposes of this Agreement, "Change in Control" shall have the meaning ascribed to it in the above referenced Change of Control Agreement. The Company and Executive acknowledge that if a Change of Control occurs, Executive will thereafter be protected to the extent and on the terms provided in the Change of Control Agreement. 7. Noncompetition. Executive agrees that from the date hereof until the end of the two (2) year period commencing on the date of his cessation of employment with the Company or the two (2) year period after the last payment due to Executive hereunder, whichever occurs later (the "Noncompetition Period"), he will not, either directly or indirectly, in any capacity whatsoever, (a) compete with the Company by soliciting any customer of the Company by whatever method or (b) operate, control, advise, be employed and/or engaged by, perform any consulting services for, invest in (other than the purchase of no more than 5 percent of the publicly traded securities of a company whose securities are traded on a national stock exchange) or otherwise become associated with, any person, company or other entity who or which, at any time during the Noncompetition Period, competes with the Company. As used above, "compete" is defined as the marketing, distribution or sale of products substantially similar to or directly competitive with those sold by the Company in any geographical area in which the Company maintains offices, sales agents, has customers or otherwise conducts business, at the time of Executive's cessation of employment. Executive further expressly represents and understands that if Executive's employment is terminated, this Agreement will prohibit Executive from future employment with all major companies that compete with the Company, as defined in this Agreement, and as such, will constrain some of Executive's overall possibilities for future employment. By Executive's signature to this Agreement, Executive expressly represents that his training, education and background are such that his ability to earn a living shall not be impaired by the restriction in this Agreement. 6 8. Nondisclosure. Executive agrees at all times to hold as secret and confidential (unless disclosure is required pursuant to court order, subpoena, in a governmental proceeding, arbitration, or pursuant to other requirement of law) any and all proprietary knowledge, technical information, business information, developments, trade secrets and confidences of the Company or its business, including, without limitation, (a) information or business secrets relating to the products, customers, business, conduct or operations of the Company or any of its respective clients, customers, consultants or licensees; and (b) any of the Company's customer lists, pricing and purchasing information or policies (collectively, "Confidential Information"), of which he has acquired knowledge during or after his employment with the Company, to the extent that such matters (i) have not previously been made public or are not thereafter made public by or through the Executive, or (ii) do not otherwise become available to Executive, in either case, via a source not bound by any confidentiality obligations to the Company. The phrase "made public" as used in this Agreement shall apply to matters within the domain of the general public or the Company's industry. Executive agrees not to use, directly or indirectly, such knowledge for his own benefit or for the benefit of others and not to disclose any of such Confidential Information without the prior written consent of the Company. At the cessation of employment with the Company, Executive agrees to promptly return to the Company any and all written Confidential Information received from the Company which relates in any way to any of the foregoing items covered in this paragraph and to destroy any transcripts or copies Executive may have of such Confidential Information unless an alternative method of disposition is approved by the Company. 9. Nonsolicitation/Noninterference/Nondisparagement. Executive agrees that during the period that is coterminous with the Noncompetition Period (the "Nonsolicitation Period"), he will not at any time, without the prior written consent of the Company, directly or indirectly solicit, induce, or attempt to solicit or induce any employee, former employee (as herein defined), agent, consultant, or other significant representative of the Company for the purpose of providing employment opportunities or to terminate such individual's relationship with the Company. Executive further covenants and agrees that, during the Nonsolicitation Period, he will not, without the prior written consent of the Company, directly or indirectly, induce or attempt to induce any actual or prospective customers or suppliers of the Company to terminate, alter or change its relationship with the Company or 7 otherwise interfere with any relationship between the Company and any of its actual or prospective suppliers or customers. A "former employee" shall mean any person who was employed by the Company at any time during the one (1) year period prior to Executive's cessation of employment with the Company. Executive further covenants that at all times after cessation of his employment with the Company, Executive shall refrain from making any statements (whether oral, written or electronic) to any person or organization, including, but not limited to, members of the press and media, and other members of the public, which would disparage the Company or its officers, Directors or affiliates. 10. Intellectual Property Assignment. Executive agrees that all ideas, improvements, computer programs, code, or flowcharts, inventions, and discoveries that are directly related to the business of the Company either as previously conducted or as conducted at any time during Executive's employment, that Executive may have made or that Executive may make or conceive, alone or jointly with others, prior to or during Executive's employment with the Company shall be the sole property of the Company, and Executive agrees: (A) to promptly disclose any such ideas, improvements, inventions, and discoveries to the Company; and (B) to treat such ideas, improvements, inventions, and discoveries as the trade secrets of the Company; and (C) not to disclose such ideas, improvements, inventions, and discoveries to anyone, both during and after Executive's employment with the Company, without the Company's prior written approval. Executive hereby assigns all of Executive's right, title and interest, in and to any such ideas, improvements, inventions, or discoveries, including any potential patent rights and any additional rights conferred by law upon Executive as the author, designer, or inventor thereof, to (a) vest full title in the idea, improvement, invention, or discovery in the Company, and (b) to enable the Company to seek, maintain or enforce patent or other protection thereon anywhere in the world. Executive agrees that the Company is the author (owner) of any work of authorship or copyrightable work ("Work") created by Executive, in whole or in 8 part, during Executive's employment by the Company and directly relating to the business of the Company as previously conducted or as conducted at any time during Executive's employment. Executive acknowledges that each writing and other literary Work , each drawing and other pictorial and/or graphic Work and any audio-visual Work, created by Executive, in whole or in part, and directly relating to his position or responsibilities with the Company has been prepared by Executive for the Company as a Work for hire. Executive agrees that in the event that such Work is not considered Work for hire, Executive hereby assigns all copyright and any other rights conferred in law unto Executive in and to such Work to the Company. Executive agrees that at the request of the Company, Executive will execute any documents deemed necessary by the Company to (a) vest full title to the Work in the Company, and (b) enable the Company to register, maintain, or enforce copyrights in the Work anywhere in the world. Executive will treat any such Work as the trade secrets of the Company and will not disclose it to anyone both during and after Executive's employment by the Company, without the Company's prior written approval. 11. Severability. In the event that Sections 7, 8, 9 or 10 (the "Restrictive Covenants") hereof shall be found by a court of competent jurisdiction to be invalid or unenforceable as written as a matter of law, the parties hereto agree that such court(s) may exercise its discretion in reforming such provision(s) to the end that Executive shall be subject to noncompetition, nondisclosure, nonsolicitation/noninterference, nondisparagement and intellectual property assignment covenants that are reasonable under the circumstances and enforceable by the Company. 12. Acknowledgment. Executive specifically acknowledges that the Restrictive Covenants are reasonable, appropriate, and necessary as to duration, scope, and geographic area in view of the nature of the relationship between Executive and the Company and the investment by the Company of significant time and resources in the training, development, and employment of Executive. Executive warrants and represents that in the event that any of the Restrictive Covenants become operative, he will be able to engage in other activities for the purpose of earning a livelihood, and shall not be impaired by these restrictions. Executive further acknowledges that the remedy at law for any breach of these covenants, including monetary damages to which the Company may be entitled, will be inadequate and that the Company, its successors and/or 9 assigns, shall be entitled to injunctive relief against any breach without bond. Such injunctive relief shall not be exclusive, but shall be in addition to any other rights or remedies which the Company may have for any such breach. Executive further acknowledges that he is an "at will" employee of the Company and nothing expressed or implied in this Agreement shall create any right or duty on the part of the Company or Executive to have Executive continue as an officer of the Company or to remain in the employment of the Company. 14. Limitation of Payment. Notwithstanding anything in this Agreement to the contrary, if receipt of any of the benefits hereunder would subject Executive to tax under Section 4999 of the Internal Revenue Code of 1986, as amended (or similar successor statute) (hereafter "Section 4999"), the Company shall promptly pay to Executive a "gross up" amount that would allow the Executive to receive the net after-tax amount he would have received but for the application of said Section 4999 to any payments hereunder, including any payments made pursuant to this Section 14. 15. Successor to Invacare. The Company shall not consolidate with or merge into any other corporation, or transfer all or substantially all of its assets to another corporation, unless such other corporation shall assume this Agreement in a signed writing and deliver a copy thereof to Executive. Upon such assumption, the successor corporation shall become obligated to perform the obligations of the Company under this Agreement and the term "Company" as used in this Agreement shall be deemed to refer to such successor corporation. 16. Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or by confirmed facsimile transmission (Chairman of the Board of the Company in the case of notices to the Company and to Executive in the case of notices to the Executive) or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows (or to such other address as may be specified in accordance herewith): 10 If to Company: Invacare Corporation 899 Cleveland Street P.O. Box 4028 Elyria, OH 44036-2125 Attention: Chairman of the Board If to Executive: Gerald B. Blouch 30700 Lake Road Bay Village, Ohio 44140 17. Entire Agreement; Supercession. Except as otherwise specifically provided herein, this Agreement, including its attachments, contains the entire agreement between the parties concerning the subject matter hereof and incorporates and supersedes any and all prior discussions or agreements, written or oral, the parties may have had with respect to such subject matter; provided, however, that except as expressly provided otherwise herein, nothing in this Agreement shall affect any rights Executive or anyone claiming through Executive may have in respect of either (a) any employee benefit plan which provides benefits to or in respect of the Executive or (b) any other agreements the Executive may have with the Company or an Affiliate, including the Change of Control Agreement, except to the extent any such employee benefit plan or other agreement provides benefits which are duplicative of those provided under this Agreement. 18. Post-Mortem Payments; Designation of Beneficiary. In the event that, following the termination of Executive's employment with the Company, the Executive is entitled to receive any payments pursuant to this Agreement and Executive dies, such payments shall be made to the Executive's beneficiary designated hereunder. At any time after the execution of this Agreement, the Executive may prepare, execute, and file with the Secretary of the Company a copy of the Designation of Beneficiary form attached to this Agreement as Exhibit A. Executive shall thereafter be free to amend, alter or change such form; provided, however, that any such amendment, alteration or change shall be made by filing a new Designation of Beneficiary form with the Secretary of the Company. In the event Executive fails to designate a beneficiary, following the death of Executive all payments of the amounts specified by this Agreement which would have been paid to the Executive's designated beneficiary pursuant to this Agreement shall instead be paid to 11 Executive's spouse, if any, if she survives Executive or, if there is no spouse or she does not survive Executive, to Executive's estate. 19. Representations and Warranties of the Company. The Company represents and warrants to Executive that (i) the Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Ohio; (ii) the Company has the power and authority to enter into and carry out this Agreement, and there exists no contractual or other restriction upon its so doing; (iii) the Company has taken such corporate action as is necessary or appropriate to enable it to enter into and perform its obligations under this Agreement; and (iv) this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 20. Governing Law. All questions concerning the construction, validity and interpretation of this Agreement and the exhibits hereto will be governed by and construed in accordance with the internal laws of the State of Ohio, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Ohio or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Ohio. 21. Assignment. Neither the Company nor Executive shall assign this Agreement without the prior written consent of the other party hereto. 22. Entire Agreement; Amendments; Waivers. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and replaces or supersedes any previous agreements on such subject matter. It may not be changed orally, but only by agreement, in writing, signed by each of the parties hereto. The terms or covenants of this Agreement may be waived only by a written instrument specifically referring to this Agreement, executed by the party waiving compliance. Any such waiver, amendment or modification on behalf of the Company, unless otherwise specified herein, may be authorized either by a simple majority of the Board (excluding Executive for all purposes) or a majority of the Compensation Committee members. The failure of the Company at any time, or from time to time, to require performance of any of Executive's obligations under this Agreement shall in no manner affect the Company's right to enforce any 12 provision of this Agreement at a subsequent time; and the waiver by the Company of any right arising out of any breach shall not be construed as a waiver of any right arising out of any subsequent breach. 23. Headings. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 24. Counterparts. This Agreement may be executed in multiple counterparts each of which shall be deemed an original but all of which together shall constitute one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. INVACARE CORPORATION "Invacare" /s/A. Malachi Mixon,III --------------------- A. Malachi Mixon, III Chairman of the Board GERALD B. BLOUCH "Executive" /s/GERALD B. BLOUCH --------------------- 13 Exhibit A to Severance Protection Agreement DESIGNATION OF BENEFICIARY To: Invacare Corporation Attention: Secretary I, the undersigned Gerald B. Blouch, am a party to a certain Severance Protection Agreement with Invacare Corporation, an Ohio corporation, dated as of October 1, 2002 (the "Agreement"). Pursuant to the Agreement, I have the right to designate a person or persons to receive, in the event of my death, any amounts that might become payable to me under the Agreement. I hereby exercise this right and direct that, upon my death, any amounts payable to me under the Agreement shall be distributed in the proportions set forth below to the following person(s) if he, she or they survive me, namely: Beneficiary Relationship Percent Share - ------------------------- ------------------------- ------------- Gerald B. Blouch Revocable Trust If none of the above-designated person(s) survives me, any amounts payable under the Agreement shall be distributed to Gerald B. Blouch Revovable Trust. Any and all previous designations of beneficiary made by me are hereby revoked, and I hereby reserve the right to revoke this designation of beneficiary. Date: October 6, 2002 /s/ Gerald B. Blouch ---------------- Gerald B. Blouch 14 -----END PRIVACY-ENHANCED MESSAGE-----