10-K 1 form10k2003.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, 2003 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, without par value New York Stock Exchange 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 June 30, 2003, the aggregate market value of the 27,037,903 Common Shares of the Registrant held by non-affiliates was $892,250,799 and the aggregate market value of the 31,849 Class B Common Shares of the Registrant held by non-affiliates was $1,051,017. 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, 2003, which was $33.00. For purposes of this information, the 2,743,574 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. As of February 27, 2004, 30,101,146 Common Shares and 1,112,023 Class B Common Shares were outstanding. Documents Incorporated By Reference ----------------------------------- Portions of the Registrant's definitive Proxy Statement to be filed in connection with its 2004 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report. Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of December 31, 2003. I-1
INVACARE CORPORATION 2003 ANNUAL REPORT ON FORM 10-K CONTENTS Item Page ---- ---- PART I: 1. Business I-3 2. Properties I-13 3. Legal Proceedings I-16 4. Submission of Matters to a Vote of Security Holders I-16 Executive Officers of the Registrant I-16 PART II: 5. Market for the Registrant's Common Equity and Related Stockholder Matters I-17 6. Selected Financial Data I-18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations I-19 7A. Quantitative and Qualitative Disclosures About Market Risk I-25 8. Financial Statements and Supplementary Data I-26 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure I-26 9A. Controls and Procedures I-26 PART III: 10. Directors and Executive Officers of the Registrant I-26 11. Executive Compensation I-26 12. Security Ownership of Certain Beneficial Owners and Management I-26 13. Certain Relationships and Related Transactions I-26 14. Principal Accounting Fees and Services I-26 PART IV: 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K I-27 Signatures I-28
I-2 PART I Item 1. Business. ----------------- GENERAL ------- 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 will achieve this vision by: * designing and developing innovative and technologically superior products; * ensuring continued focus on our primary market - the non-acute health care market; * marketing our broad range of products under the "Total One Stop 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 and 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 current members of the Board of Directors, it had $19.5 million in net sales and a limited product line of standard wheelchairs and patient aids. In 2003, Invacare reached $1.247 billion 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 operates in a single industry, 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. The company's executive offices are located at One Invacare Way, Elyria, Ohio and its telephone number is (440) 329-6000. In this report, Invacare and the company refer to Invacare Corporation and, unless the context otherwise indicates, its consolidated subsidiaries. I-3 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 and beyond 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 home health care 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 an 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. Health care cost containment trends. In 2001, health care expenditures in the U.S. totaled $1.4 trillion dollars or approximately 14.1% 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 widespread 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 national 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-4 GEOGRAPHICAL SEGMENTS AND PRODUCT CATEGORIES -------------------------------------------- North America ------------- North American operations are aligned into five primary product groups, which manufacture and market products in all of the major home medical equipment categories. In Canada, the company 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. Personal Mobility. In 2003, Invacare introduced the HMV(TM) (Highly Maneuverable Vehicle) product, which in 2004 will replace the three and four-wheeled motorized scooters, including rear-wheel drive models for both outdoor and indoor use, marketed under the Invacare(R) brand name that include 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. 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-5 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(TM) 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 Australasian 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 electronic 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 also has expanded the company's range of premium designs. The company manufactures and/or assembles both manual and power wheelchair products at the following European facilities - Invacare (UK) Ltd. in the United Kingdom, Invacare Poirier S.A.S. in France, Invacare Deutschland GmbH in Germany. Manual wheelchair products are also manufactured and/or assembled at Invacare Lda. in Portugal, Invacare AG in Switzerland (the Kuschall Range), and Invacare Rea AB in Sweden. Beds and patient lifts are manufactured at Invacare Hong A/S in Denmark. A range of patient lifts is also assembled at Invacare (UK) Ltd. in the United Kingdom. Oxygen products are imported from Invacare U.S. operations. During the year, the company acquired the balance of shares it did not already own in the Italian company, Mecc San SrL. In addition to distributing the Invacare range of products, Invacare Mecc San SrL manufactures beds, patient lifts and commodes specifically for the Italian market. 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-6 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 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 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 domestic sales and marketing organization consists primarily of a homecare sales force, which markets and sells Invacare(R) branded products to HME providers. Each member of the Invacare 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. The Inside Sales Department was created in 2000 to increase sales coverage and to increase the efficiency of the field sales force. Inside Sales offers cost-effective sales coverage through a targeted telesales effort in coordination with TBMs. Inside Sales has delivered exceptional sales growth in each of its four years of existence. In 2003, the Invacare Service and Parts Division (ISP) consolidated its operations into a single distribution facility in North Ridgeville, OH. The consolidation will allow management to focus on streamlining the parts operations and eliminate the need for partial shipments from multiple locations. In addition, all of the technical support/repair functions also were consolidated, eliminating the need for redundant operations and enhancing overall service to providers. ISP's Technical Training department launched updated service schools designed to help improve repair technicians' productivity. Over 1,100 technicians attended forty-six schools, held at various locations throughout the country. The Service Referral Network grew to 643 providers. This network of servicing providers helps 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 the Invacare "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 the Invacare 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 2003, ISG launched an Invacare-branded line of products, including incontinence supplies; diabetic test strips, meters and lancets; home diagnostics; wound care; and personal protection products; in addition to expanding its offering in enterals with both products and programs. I-7 In 2003, Invacare continued to offer through its co-op advertising program direct response television commercials designed to generate demand for Invacare power chairs and scooters sold by the HME provider. These commercials feature Arnold Palmer, Invacare's worldwide spokesperson. Mr. Palmer has become an integral part of Invacare's "Yes, you can(TM)" promotional and marketing efforts encouraging consumers to achieve personal 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, is helping accomplish three objectives: (i) creating attention and awareness for the category of home health care products, (ii) accelerating the acceptance of these products as lifestyle enhancing so that consumers want these products and not just need them, and (iii) establishing the Invacare brand as the consumer category-brand of choice 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. The company also launched a direct-to-consumer marketing effort for the HomeFill(TM) Oxygen System in 2003. Print ads were developed and successfully tested in numerous markets throughout the U.S. A direct response television ad featuring Arnold Palmer also was developed and tested late in the year, with the expectation to roll it out nationwide in 2004. Invacare continues to grow its on-line marketing, customer services and product information capabilities through www.invacare.com, maintaining its position as the leader in e-commerce in the HME industry. New online offerings include self-service warranty registration and contact information updates. "Ask Invacare", a new knowledge database application, was launched in November 2003 and is a searchable centralized repository of information on Invacare products and services. 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, along with a complete product literature search of price lists, glossy sell sheets, and owners manuals. The product catalog also contains many interactive 3-D product and technical instruction demos. Invacare expanded e-commerce globally by creating versions of www.invacare.com specific to Canadian, Australia, and International customers. Email capabilities were expanded, so customers can now sign up for quote, order acknowledgement and advanced shipment notification emails. Email notifications about Invacare products, services, and specials also launched in 2003, enabling quick communication to customers. Invacare continued to increase the dollar volume of its online transactions in 2003. Also in 2003, Invacare continued its advertising campaign in key trade publications that reach the providers of home medical equipment. The company 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 2003 through sponsorships of a variety of wheelchair sporting events and support of various philanthropic causes that benefit the consumers of its products. For the tenth 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 for the eighth year in a row, of the Invacare World Team Cup Tennis Tournament, which took place in June in Sopot, Poland. The company also continued its support of disabled veterans through its sponsorship of the 23rd National Veterans Wheelchair Games, the largest annual wheelchair sports event in the world, which was held in Long Beach, California. 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 2003 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 2003 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 where appropriate, distribution centers, in the United Kingdom, France, Germany, Belgium, Portugal, Spain, Italy, 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. I-8 PRODUCT LIABILITY COSTS ----------------------- The company's wholly-owned captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures annual policy losses of $10 million per occurrence and $10 million in the aggregate of the company's North American product liability exposure. The company also has additional layers of external insurance 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. PRODUCT DEVELOPMENT AND ENGINEERING ----------------------------------- Invacare is committed to continuously improving, expanding and broadening its existing product lines. Continuing in 2003, 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 40 new products. The following are some of the most significant product introductions: North America ------------- The Invacare(R) HMV(TM) (Highly Maneuverable Vehicle) is a new concept in personal mobility. The HMV provides consumers with the aesthetics and ease of operation that they seek in scooters along with the maneuverability that previously could only be found on high-performance power wheelchairs. The result is an HMV that works as well indoors - in tight spaces and sharp corners - as it does outdoors - on paved or grassy surfaces. The Invacare(R) Pronto(TM) M91 Heavy Duty Power Wheelchair is the newest entry to the Pronto Series of consumer power wheelchairs. It is a heavy-duty model that provides the maneuverability and performance of the Pronto Series with an increased weight capacity of up to 500 pounds. It features the same center-wheel drive, six-wheel base, high-speed motors, and SureStep(TM) suspension that characterize the Invacare Pronto Series. The Invacare(R) Pronto(TM) M71 Jr. is a pediatric version of the adult Pronto(TM) M71(TM) power wheelchair offering the ultimate in maneuverability and performance for children in a compact, stylish design. It features true center-wheel drive to provide the tight turning radius that makes the chair more maneuverable in everyday environments and more intuitive to drive. The Invacare A4(TM) and A4(TM) Titanium with LSS (Lightweight Shock Stopper) Suspension are super-lightweight rigid wheelchairs for everyday or recreational use by demanding, active consumers. The range and simplicity of adjustment features enable consumers to be fitted for an A4 sooner than otherwise possible because the chair can be adjusted, as the consumer's needs change. The Invacare(R) IVC(TM) Home Care Bed is an innovative, patents-pending product line designed to create long-term savings over the lifecycle of the bed for providers. It is more durable, easy to clean, and is interchangeable with the previous Invacare(R) Bed Fleet. The many new features are designed to reduce cleaning and repair costs while making delivery and set-up easier. Australasia ----------- Dynamic Controls continued various range extensions and design improvements to products during 2003. Additionally, design work was started on a New Generation Scooter Controller and extending functionality in the "Shark" wheelchair controller, both of which are planned for release in late 2004 or early 2005. Europe ------ During 2003, European operations also introduced several new products and continued to update existing products as required by the market. Key introductions and updates in 2003 included: The Invacare(R) Typhoon is a center wheel drive power wheelchair designed and manufactured in Europe. It features the Invacare "sure step" technology and a gearless brushless (GB) motor with the "true track" option. It is a high speed and high torque chair that will ensure superior ability to overcome any road or path obstacle, while featuring exceptional maneuverability. The Invacare(R) Tornado is a center wheel drive power wheelchair designed and manufactured in Europe. It is an indoor/outdoor wheelchair that features the Invacare "sure step" technology. Its outstanding compact dimensions and low seat height make it highly maneuverable. The Invacare(R) Mirage is a rear wheel drive power wheelchair designed and manufactured in Europe for the UK and Southern European markets. It easily negotiates objects inside and outside the home, is foldable and features a sling seat. It is attractive to users who seek a reasonable driving range, speed and transportability. I-9 The Invacare(R) Focus is a manual wheelchair designed and manufactured in Europe for the medium active "permanent segment" of the Nordic and Benelux markets. It is a customized folding wheelchair for users requiring positioning, support and stable seating on a solid base, which also provides rigidity for smooth rolling and easy handling. The Invacare(R) Spirea 2 is a manual wheelchair designed and manufactured in Europe for the medium active "short term segment" of the Danish and Swedish markets. It is a lightweight, folding wheelchair for users who can position themselves easily. It is easy to transport and has light rolling characteristics. It has limited configuration and sizes and is designed for refurbishment and ease of adjustment. The Kuschall(R) Fusion is a manual wheelchair designed and manufactured in Europe for the "high active segment" of the European markets. Its rigid frame construction combined with its lightweight provides the highest degree of agility and driving performance. It provides an exceptional variety of seat height adjustment to ensure optimum positioning. Extremely easy to transport, this wheelchair will maximize the user's mobility without compromising on performance. MANUFACTURING AND SUPPLIERS --------------------------- The company's objective is to be the highest quality and lowest-cost manufacturer in its industry. The company believes that it will achieve this objective not only through improved product design, but also by taking a number of steps to lower manufacturing costs. During 2003, the company closed its respiratory plant in Florida and consolidated its operations into the company's existing beds plant in Florida. The company also moved an additional portion of its standard wheelchair production from Elyria, Ohio to the Reynosa plant in Mexico, with the remaining balance of standard wheelchair production to be moved in 2004. Invacare received a business license to start manufacturing in Suzhou Industrial Park near Shanghai and is pursuing other opportunities to add further Chinese manufacturing capability in 2004. With these actions, Invacare expects to regain its position as the lowest cost producer of standard products in the industry. Of the many opportunities to reduce overall costs, 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 for 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. The company continues to make investments 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 relationships 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 manufacturing operations have streamlined, allowing for the realization of significant synergies and additional cost reductions and improved efficiencies are planned going forward. I-10 ACQUISITIONS ------------ In 2003, Invacare acquired for cash the following four businesses at a total cost of $70,555,000: o The assets of Pinnacle Medsources Inc., a Georgia corporation and distributor of home medical equipment. o Mecc San SrL, an Italian corporation and manufacturer of home medical equipment. o Carroll Healthcare, Inc. ("Carroll"), a Canadian corporation and a leading manufacturer of beds and furniture for the long-term care industry in North America. o Motion Concepts, Inc. ("Motion"), a Canadian corporation and a leading manufacturer of seating and positioning products in North America. The total cost for 2003 acquisitions of $70,555,000 excludes certain contingent consideration, which has not yet been determined. As part of the Carroll purchase agreement, the company agreed to pay additional consideration based upon earnings before interest, taxes, depreciation and amortization from September 1, 2003 through August 31, 2004 calculated under Canadian generally accepted accounting principles with no defined maximum amount. Pursuant to the Motion purchase agreement, the Company agreed to pay contingent consideration based upon earnings before interest and taxes over the three years subsequent to the acquisition up to a maximum of approximately $16,000,000. When the contingencies related to both of the acquisitions are settled, any additional consideration paid will increase the respective purchase price and reported goodwill. As a result of the company's ongoing search for opportunities, coupled with the industry trend toward consolidation, other acquisitions were evaluated in 2003. 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 some countries, most notably 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. The company continues its 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. 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. Domestic and foreign manufacturers of medical devices distributed commercially in the U.S. 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. During the past year, the company was inspected by the FDA at several of its locations and is cooperating fully with the FDA in the resolution of the inspectional findings. 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 is presently strengthening its programs to better ensure compliance with applicable regulations for which the failure to comply would have a material adverse effect. I-11 Although there are a number of reimbursement related issues in most of the countries in which Invacare competes, the issues of primary importance are currently in the United States. There are two critical issues for Invacare: eligibility of power wheelchairs for elderly patients and the provisions of the legislation related to prescription drug coverage under Medicare. With regard to power wheelchairs, there is currently a regulatory push by the Centers for Medicare and Medicaid Services (CMS) towards limiting eligibility to patients who cannot take a single step on their own. This limitation would confine many elderly patients, who are now mobile in power wheelchairs, to their beds. Invacare and the home care industry will work hard to convince CMS and The Bush Administration that this change would not benefit the elderly and would likely lead to less active patients who could end up in costly nursing homes and hospitals, and thereby counteract any cost savings attributed to limiting the eligibility for power wheelchairs. In November of 2003, Congress passed legislation related to providing prescription drug coverage for the elderly under the Medicare program. As part of funding the costs of this new program, a number of changes to Medicare home care reimbursement rules will take effect over the next few years. First, the home care provider, who is Invacare's customer, will not receive a cost-of-living adjustment in 2004, 2005 and 2006. Second, in 2005, Medicare reimbursement for oxygen, along with certain types of home care beds, wheelchairs, nebulizers and supplies, will be lowered to the median reimbursement levels in the Federal Employee Health Benefit Plans. Third, starting in 2007, Congress has authorized competitive bidding in the largest 10 metropolitan regions of the U.S. for six or fewer items and services. In 2009, the program would be extended to 80 metropolitan regions. Although none of these changes are beneficial to the home care industry, Invacare believes it can still grow and thrive in this environment. The home care industry has not received any cost-of-living adjustments over the last few years and will try to respond with improved productivity to address the lack of support from Congress. In terms of the 2005 price reductions, although we do not yet know what price reduction will be applied to oxygen reimbursement, it is anticipated that the blended cut for all items will be around 8%. If we estimate the impact that the 2005 cuts could have on our revenue stream, they should be around 1% of consolidated net sales. However, Invacare's new products, for example the low cost oxygen delivery system of HomeFill(TM), can help address the cuts the home care provider has to endure. We will continue to focus on developing products that help the provider improve profitability. With such products, Invacare believes it can grow and offset the risks. Additionally, Invacare will accelerate its activities in China to make sure that we are one of the lowest cost manufacturers and distributors to the home care provider. In terms of competitive bidding, Invacare has strong positions with the likely consolidators who will probably gain share as we approach 2007 and enter the new reimbursement environment. We believe that we are well-positioned to combat pricing pressures with volume gains and productivity improvements. Despite our actions, there will be ongoing uncertainty in the industry over the extent and depth of these cuts to the home care industry. Invacare is concerned that, once implemented, competitive bidding will likely generate poorer service in the home care arena as providers look to remain profitable. Likewise, it will likely lead to further consolidation of the provider base as small entrepreneurs may look to exit a less profitable business model. Invacare will keep a close watch on its extension of credit in this environment and will work with the industry to pressure Congress to reconsider its actions. We believe that home care is the least costly and most preferred environment in which an individual can recover from an operation or illness and that government actions should encourage home care rather than lead to more expensive alternatives. 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, 2003, the company had approximately 5,300 employees. FOREIGN 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 operations, see Business Segments in the Notes to the Consolidated Financial Statements. AVAILABLE INFORMATION --------------------- The company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto, as well as 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. The SEC also I-12 maintains a website, www.sec.gov, that contains all reports, proxy statements and other information filed by the company with the SEC. Additionally, Invacare's filings with the SEC are available on or through the company's website, www.invacare.com, as soon as reasonably practicable after they are filed electronically with, or furnished to, the SEC. Copies of the company's filings also 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. 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, 2003 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 ------------------------- ----------- ------------- ------- --- Alexandria, Virginia 230 September 2004 None Office Apharetta, Georgia 9,000 June 2006 None Warehouse and Offices 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 208,720 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 - 101-151 Liberty Ct. 67,250 Month to Month - Warehouse Grand Prairie, Texas 43,754 February 2005 One (3 yr.) 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 Marlboro, New Jersey 2,050 April 2004 None Office Mississauga, Ontario 26,530 November 2011 Two (5 yr.) Warehouse and Offices North Ridgeville, Ohio 152,861 Own - Manufacturing, Warehouses and Offices Overland, Missouri 67,500 May 2007 Two (3 yr.) Manufacturing, Warehouses and Offices
I-13
Ownership Or Expiration Renewal North American Operations Square Feet Date of Lease Options Use ------------------------- ----------- ------------- ------- --- Pharr, Texas 2,672 Month to Month - Warehouse 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 Sacramento, California 26,900 May 2008 One (3 yr.) Manufacturing, Warehouse and Offices Sanford, Florida 117,108 Own - Manufacturing and Offices Sanford, Florida 100,000 Own - Manufacturing and Offices Santa Fe Springs, California 151,217 April 2004 One (5 yr.) Sublet Scarborough, Ontario 5,428 February 2005 None Manufacturing and Offices South Bend, Indiana 48,000 September 2008 Two (5 yr.) Warehouse Spicewood, Texas 6,500 Month to Month None Manufacturing and Offices Tonawanda, New York 7,515 March 2008 None Warehouse and Offices Traverse City, Michigan 15,850 April 2006 None Manufacturing and Offices Vaughan, Ontario 12,000 June 2008 None Manufacturing and Offices Australasian Operations ----------------------- Adelaide, Australia 21,668 June 2005 One (5 yr.) Manufacturing, Warehouse and Offices Auckland, New Zealand 27,000 September 2008 Two (3 yr.) Manufacturing, Warehouse and Offices Birmingham, United Kingdom 6,000 March 2004 None Warehouse and Offices Birmingham, United Kingdom 15,845 July 2013 None Warehouse and Offices Christchurch, New Zealand 57,682 December 2005 Two (3 yr.) Manufacturing and Offices Melbourne, Australia 19,629 July 2004 Two (2 yr.) Manufacturing, Warehouse and Offices Napier, New Zealand 15,490 Month to Month None Warehouse and Offices Napier, New Zealand 4,844 March 2009 Two (3 yr.) Warehouse and Offices North Olmsted, Ohio 2,280 October 2008 None Warehouse and Offices European Operations ------------------- Allschwil, Switzerland 36,000 Own - Manufacturing and Offices Bergen, Norway 1,000 May 2004 One (5 yr.) Warehouse and Offices
I-14
Ownership Or Expiration Renewal European Operations Square Feet Date of Lease Options Use ------------------- ----------- ------------- ------- --- Bridgend, Wales 131,522 Own - Manufacturing, Warehouse and Offices Brondy, Denmark 16,142 December 2004 One (1 yr.) Warehouse and Offices Dio, Sweden 107,600 Own - Manufacturing and Offices Ede, The Netherlands 16,000 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 One (5 yr.) Offices Gland, Switzerland 1,173 September 2007 One (4 yr.) Offices Goteberg, Sweden 7,500 June 2006 One (3 yr.) Warehouse and Offices Hong, Denmark 155,541 Own - Manufacturing, Warehouse and Offices Loppem, Belgium 6,000 December 2009 One (3 yr.) Warehouse and Offices Landskrona, Sweden 3,099 April 2005 One (3 yr.) Warehouse Oporto, Portugal 27,800 Own - Manufacturing, Warehouse and Offices Oskarshamn, Sweden 3,551 December 2004 None Warehouse Oslo, Norway 30,650 September 2006 None Warehouse and Offices Rehme, Germany 14,000 December 2005 None Warehouse Dehme, Germany 39,884 December 2004 None Manufacturing, Warehouse and Offices Porta Westfalica, Germany 134,563 October 2021 None Manufacturing, Warehouse and Offices Saeby, Denmark 15,422 December 2004 None Warehouse Spanga, Sweden 3,228 October 2004 One (3 yr.) Warehouse and Offices Spanga, Sweden 16,140 Own - Warehouse and Offices Thiene, Italy 21,500 Own - Warehouse and Offices Marano, Italy 21,500 May 2005 - Manufacturing Tours, France 86,000 November 2007 None Manufacturing Trondheim, Norway 3,000 December 2004 One (3 yr.) Services and Offices
I-15 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. ------------------------------------------------------------- During the fourth quarter of 2003, no matter was submitted to a vote of our security holders. Executive Officers of the Registrant.* ------------------------------------ The following table sets forth the names of the executive officers of Invacare, each of whom serves at the pleasure of the Board of Directors, as well as certain other information.
Name Age Position ---- --- -------- A. Malachi Mixon, III 63 Chairman of the Board of Directors and Chief Executive Officer Gerald B. Blouch 57 President, Chief Operating Officer and Director Gregory C. Thompson 48 Senior Vice President and Chief Financial Officer Joseph B. Richey, II 67 President - Invacare Technologies, Senior Vice President - Electronics and Design Engineering and Director Louis F.J. Slangen 56 Senior Vice President - Sales & Marketing Kenneth A. Sparrow 55 President - Invacare International
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. Kenneth A. Sparrow was named President - Invacare International with responsibility for the company's European and Asia-Pacific operations in September 2003. Previously, he was President of Invacare - Europe from September 2001 to September 2003 and 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. * The description of executive officers is included pursuant to Instruction 3 to Section (b) of Item 401 of Regulation S-K. I-16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. ------------------------------------------------------------------------------- Invacare Common Shares, without par value, trade on the New York Stock Exchange (NYSE) under the symbol IVC. 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, 2004 was 5,107 and 29, respectively. The closing sale price for the Common Shares on February 27, 2004 as reported by NYSE, was $44.68. 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 were as follows: 2003 2002 ---- ---- Quarter Ended: High Low High Low ------------- ----- ----- ----- ----- December 31 $43.74 $38.78 $34.85 $30.59 September 30 40.00 32.99 36.40 29.28 June 30 34.00 30.29 39.80 33.86 March 31 34.15 30.02 37.59 31.98 During 2003 and 2002, the Board of Directors declared dividends of $0.05 per Common Share and $0.045 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's definitive Proxy Statement for the 2004 Annual Meeting of Shareholders. I-17 Item 6. Selected Financial Data --------------------------------
2003 2002 2001* 2000 1999** ---- ---- ---- ---- ---- (In thousands, except per share and ratio data) Earnings Net Sales $1,247,176 $1,089,161 $1,053,639 $1,013,162 $882,774 Net Earnings *** 71,409 64,770 35,190 59,911 41,494 Net Earnings per Share - Basic 2.31 2.10 1.15 1.99 1.38 Net Earnings per Share - Assuming Dilution 2.25 2.05 1.11 1.95 1.36 Dividends per Common Share 0.05000 0.05000 0.05000 0.05000 0.05000 Dividends per Class B Common Share 0.04545 0.04545 0.04545 0.04545 0.04545 2003 2002 2001* 2000 1999** ---- ---- ----- ---- ---- Balance Sheet Current Assets $474,722 $398,812 $428,401 $432,408 $418,620 Total Assets 1,108,213 906,703 914,537 951,855 955,285 Current Liabilities 228,604 168,226 167,453 197,387 173,119 Working Capital 246,118 230,586 260,948 235,021 245,501 Long-Term Debt 232,038 234,134 342,724 384,316 440,795 Shareholders' Equity 613,188 480,312 381,550 349,773 318,872 Other Data Research and Development Expenditures $19,130 $17,934 $17,394 $16,231 $15,534 Capital Expenditures, net of Disposals 30,129 19,718 19,486 26,268 32,155 Depreciation and Amortization 27,235 26,638 33,448 31,469 25,978 Key Ratios Return on Sales 5.7% 5.9% 3.3% 5.9% 4.7% Return on Average Assets 7.1% 7.1% 3.8% 6.3% 4.9% Return on Beginning Shareholders' Equity 14.9% 17.0% 10.1% 18.8% 14.8% Current Ratio 2.1:1 2.4:1 2.6:1 2.2:1 2.4:1 Debt-to-Equity Ratio 0.4:1 0.5:1 0.9:1 1.1:1 1.4:1
* Reflects non-recurring and unusual charge of $31,950 ($25,250 after tax or $0.80 per share assuming dilution). ** Reflects non-recurring and unusual charge of $14,800 ($9,028 after tax or $0.29 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 and $7,258 in 1999. I-18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. -------------------------------------------------------------------------------- OUTLOOK ------- For 2004, the Company will continue to execute on its strategic plans. However, changing Medicare rules on the eligibility of power wheelchairs for the elderly and the recent passage of the Medicare prescription drug bill will temper an aggressive positioning for 2004 guidance. As the industry approaches 2005, when the cuts in reimbursement for nine durable medical equipment items will be implemented as provided in the Medicare prescription drug bill, purchases by providers for their rental fleets may be adversely affected (See "Business-Government Regulation" for more information on these governmental trends that are likely to impact the company's business). In light of this likely pressure, the Company believes that, in 2004, it will have a net sales increase of between 10% and 12% and earnings per share of between $2.45 and $2.55 for 2004. RESULTS OF OPERATIONS --------------------- 2003 Versus 2002 Net Sales. Consolidated net sales for 2003 increased 15% for the year, to $1,247,176,000 from $1,089,161,000, with net sales increasing in all business segments on a reported basis. Foreign currency translation accounted for 6% of the net sales increase, while acquisitions contributed an additional 3%. The overall growth was primarily driven by volume increases in North America and Australasia. North American Operations North American net sales, consisting of Rehab (power wheelchairs, custom manual wheelchairs, personal mobility and seating and positioning), Standard (manual wheelchairs, personal care, home care beds, 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 increased 13% over the prior year, with currency translation having less than a one percentage point impact and acquisitions accounting for 3%. For the year, the net sales increase was attributable to increases in Respiratory products (43%), Rehab products (30%), Distributed products (11%) and Continuing Care products (20%), which were partially offset by declines in Standard products (6%). Excluding acquisitions, Rehab product net sales increased by 26% and Continuing Care product net sales declined by 4%. The net sales improvements were led by strong sales growth in oxygen concentrators, the HomeFill(TM) product line and consumer power products. Declines were primarily attributable to continued pricing pressures in Standard products and weaker sales to nursing homes through Invacare Continuing Care Group as a result of the continued uncertainty surrounding government reimbursement programs. Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had an 8% net sales increase primarily as a result of volume increases. European Operations European net sales increased 11% over the prior year to $279,782,000 from $251,443,000. Adjusting for foreign currency and acquisition, European net sales decreased 8%. The decline was primarily due to slower than expected sales in the Nordic region and reimbursement pressures in Germany. Australasia Operations Australasian net sales increased 59% from the prior year to $70,186,000 from $44,254,000. Excluding the impact of foreign exchange, net sales increased 27% for the year. The increase was primarily the result of sales at Dynamic Controls due in part to a significant increase in sales to a non-healthcare customer. Gross Profit. Consolidated gross profit as a percentage of net sales was 30.0% in 2003 and 30.1% in 2002. Margins remained relatively flat, as the company was able to offset pricing pressures with improved manufacturing performance. North American gross profit as a percentage of net sales was 30.3% in 2003 versus 30.0% in 2002. The increase was primarily attributable to continued cost reduction efforts and improved product and customer mix. Gross profit in Europe as a percentage of net sales improved 1.0 percentage point from the prior year. The improvement is attributable to favorable sales mix towards higher margin products and cost reduction efforts. I-19 Gross profit in Australasia as a percentage of net sales decreased by 6.1 percentage points from last year. The decline was due in part to increased sales of lower margin products in the company's Dynamic Controls subsidiary and increased costs to support the growth in the business. Selling, General and Administrative. Consolidated selling, general and administrative expenses as a percentage of net sales were 21.0% in 2003 and 20.2% in 2002. The overall dollar increase was $41,719,000 or 19% with currency translation increasing selling, general and administrative costs by approximately $13,103,000 or 6% and acquisitions by $6,800,000 or 3%. Selling, general and administrative expenses also increased as a result of accruals for management bonuses as a result of improved profitability, increased distribution and commission costs related to increased volumes, continued investments in marketing and branding programs, and increased insurance costs. North American operations selling, general and administrative expenses increased 15% or $21,789,000 compared to 2002. The increase is primarily attributable to acquisitions, continued investments in marketing and branding programs, additional provisions for bad debt and increases in insurance costs. European operations selling, general and administrative expenses increased 30% or $15,721,000 from the prior year. European selling, general and administrative expenses were negatively impacted by foreign currency translation and acquisitions, which increased expenses, reported in dollars by $9,993,000 or 19% and $1,547,000 or 3%, respectively. The remaining increase was primarily attributable to additional programs to re-establish sales growth. Australasian operations selling, general and administrative expenses increased 40% or $2,264,000 with foreign currency increasing the expense by $1,522,000 or 27%. Australasian selling, general and administrative costs grew at a slower rate than sales principally as a result of aggressive expense control. Interest. Interest expense decreased to $11,710,000 in 2003 from $15,122,000 in 2002, representing a 23% decrease. This decrease was attributable to the continued favorable interest rate environment in 2003 and to a decrease in the company's average borrowings outstanding under the company's revolving credit facility. The company's debt-to-equity ratio decreased to 0.4:1 as of December 31, 2003 from 0.5:1 as of the end of the prior year. Interest income increased in 2003 to $5,473,000 from $4,550,000 in the prior year, primarily attributable to an increase in 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 both 2003 and 2002, which is lower than the United States federal statutory rate as a significant portion of the company earnings are outside of the United States and taxed at lower rates. Research and Development. The company continues to increase its research and development activities to maintain its competitive advantage. The company dedicates 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 $19,130,000 in 2003 from $17,934,000 in 2002. The expenditures, as a percentage of net sales, were 1.5% in 2003 and 1.6% in the prior year. 2002 Versus 2001 Net Sales. Consolidated net sales for 2002 increased 3%, to $1,089,161,000 from $1,053,639,000, 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 and positioning), Standard (manual wheelchairs, personal care, home care beds, 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% in 2002 over 2001, adjusting for the exit of two product lines with currency translation having no material impact. For 2002, 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 was primarily due to pricing pressure from low cost imports from the Far East, the company's exit from the lift out chair product I-20 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 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 2002, primarily as a result of volume increases. European Operations European net sales improved 7% in 2002 over 2001, which included 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. Australasia Operations Net sales for the Australasia group increased 1% in 2002 from 2001 levels. 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. Gross Profit. Consolidated gross profit as a percentage of net sales was 30.1% in 2002 and 30.2% in 2001. Margins remained flat in 2002, as the company was able to offset unfavorable product mix and pricing pressures with improved manufacturing performance. North American gross profit from operations as a percentage of net sales was 30.0% in 2002 compared with 30.7% 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 Europe as a percentage of net sales improved 2.2 percentage points in 2002 from 2001. The improvement was attributable to a shift in product mix towards higher margin products, outsourcing projects that improved the European cost position and favorable currency translation. Gross profit in Australasia was down by 4.3 percentage points in 2002 from 2001. 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. Selling, General and Administrative. Consolidated selling, general and administrative expenses, as a percentage of net sales, were 20.2% in 2002 compared with 21.6% in 2001. The overall dollar decrease was $7,228,000 or 3% with currency translation increasing selling, general and administrative costs by approximately $1,970,000 or 1%. The decrease was primarily in North America as current year results were favorable to prior year as a result of a charge taken in 2001. The impact was partially offset by 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. The non-recurring and unusual charge taken in 2001 was 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. North American operations selling, general and administrative expenses decreased 4% or $7,598,000, compared to 2001. As noted above, the overall decrease was due to the fact that a charge was taken in 2001, which was partially offset by an increase in marketing and branding programs, additional provision for bad debt, higher employee benefit costs and significant increases in insurance costs. European operations selling, general and administrative expenses increased $2,284,000 or 5% from 2001. 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. Australasia operations selling, general and administrative expenses decreased approximately 25% from 2001. 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. I-21 Interest. Interest expense decreased to $15,122,000 in 2002 from $22,764,000 in 2001, which represented 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 in 2002. The company's debt-to-equity ratio decreased to 0.5:1 as of December 31, 2002 from 0.9:1 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 was 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 with 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 was 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 continued to increase its research and development activities in 2002 in order to maintain its competitive advantage. While the competitive environment required that research and development expenditures be focused on the cost reduction of products while increasing functionality and reliability, the company continued to dedicate dollars to applied research activities to ensure that new and enhanced design concepts were available to its businesses in the future. Research and development expenditures, which were 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. 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 2003 and 2002, 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 2003, the company issued $100,000,000 in senior notes, which are due between 2007 and 2010. In 2001, the company completed a $325,000,000 multi-currency, long-term revolving credit agreement, which expires on October 17, 2006 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 $3,572,000 as of December 31, 2003. 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, 2003, the company had approximately $307,700,000 available under its various lines of credit, excluding debt covenant restrictions, compared to $307,604,000 at December 31, 2002. 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 $248,871,000 as of December 31, 2003, compared to $209,457,000 at December 31, 2002. While there is general concern about the potential for rising interest rates, exposure to interest rate fluctuations is manageable given that a portion of the debt is at fixed rates through 2010. 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, 2003, the weighted average floating interest rate on U.S. borrowings was 2.69%. I-22 CAPITAL EXPENDITURES -------------------- There are no individually material capital expenditure commitments outstanding as of December 31, 2003. The company estimates that capital investments for 2004 could approximate up to $35,000,000, compared to actual capital expenditures of $30,660,000 in 2003. 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 $109,526,000 in 2003, compared to $124,181,000 last year. The decrease is due primarily to increases in receivables and inventory resulting from increases in revenues, partially offset by increases in accounts payable and accrued expenses, compared to the same periods a year ago. Cash flows used for investing activities were $94,880,000 in 2003, compared to $9,398,000 in 2002. The increase was largely due to the acquisition of four companies in 2003. In addition, purchases of property and equipment activity in 2003 was higher 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 2003 were $13,955,000, compared to $120,157,000 in 2002. Financing activities for 2003 were impacted by acquisitions made during the year, for which the company borrowed funds. However, the amounts borrowed were more than offset by payments to reduce debt. 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. CONTRACTUAL OBLIGATIONS -----------------------
(In thousands) Payments due by period ---------------------------------------------------------------------------------------------- Total Less than 1 year 1-3 years 3-5 years More than 5 years -------- ---------------- --------- --------- ----------------- Long-term debt obligations Senior Notes $243,866 $7,587 $36,074 $145,964 $54,241 Revolving credit agreements 22,223 1,526 20,697 - - Other notes 1,752 548 324 324 556 Capital lease obligations 4,635 743 1,141 935 1,816 Operating lease obligations 30,014 12,235 14,077 3,542 160 Purchase obligations (computer systems contracts) 6,033 5,549 484 - - Other long-term obligations SERP 11,517 469 938 938 9,172 Product liability 11,909 2,245 6,808 897 1,959 Other, principally deferred compensation 14,095 424 848 848 11,975 -------- ------- ------- -------- -------- Total $346,044 $31,326 $81,391 $153,448 $79,879 ======== ======= ======= ======== =======
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 $0.05 per Common Share and $0.045 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 2003, dividends of $0.05 per Common Share and $0.045 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. I-23 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," as updated by SAB No. 104, 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, is 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 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 by the first-in, first-out (FIFO) method. Inventories 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 Statement of Financial Accounting Standard (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 tests in the fourth quarter of 2002 and 2003. 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 annual policy losses of $10 million per occurrence and $10 million in the aggregate of the company's North American product liability exposure. The company also has additional layers of external insurance 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. 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-24 Accounting for Stock-Based Compensation The company accounts for options under its stock-based compensation plans using the intrinsic value method proscribed in Accounting Principles Board Opinion (APBO) 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 $0.14 in 2003, $0.15 in 2002 and $0.14 in 2001. In December 2002, the Financial Accounting Standards Board (FASB) issued 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 January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was revised in December 2003 and, which among other things, deferred the implementation date of FIN 46 until periods after March 15, 2004. This interpretation requires consolidation of an entity if the company is subject to a majority of the risk of loss from the variable interest entity's (VIE) activities or entitled to receive a majority of the entity's residual returns, or both. A company that consolidates a VIE is known as the primary beneficiary of that entity. As of December 31, 2003, the company had an investment in a development stage company, which is currently pursuing FDA approval to market a product focused on the treatment of post-stroke shoulder pain in the United States. The amount of net advances and investment recorded on the company's books is approximately $3,100,000 at December 31, 2003. Based on the provisions of FIN 46 and the company's preliminary analysis, the company does not believe that its investment is a VIE. 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, 2003 debt levels, a 1% change in interest rates would impact interest expense by approximately $1,809,000. 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," "plan," "intend," "expect," "continue," "believe," "anticipate" and "seek," 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, the success of the Company's ongoing efforts to reduce cost, increasing raw material costs, the consolidations of health care customers and competitors, government reimbursement issues (including those that affect the sales of and margins on product, along with the viability of customers), the ability to design, manufacture, distribute and achieve market acceptance of new products with higher functionality and lower costs, the effect of offering customers competitive financing terms, Invacare's ability to successfully identify, acquire and integrate strategic acquisition candidates, the difficulties in managing and operating businesses in many different foreign jurisdictions, the timely 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 (including, the impact that acts of terrorism may have on such growth conditions), foreign currency and interest rate risks, 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. We undertake no obligation to review or update these forward-looking statements or other information contained herein. I-25 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-23 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. -------------------------------------------------------------------------------- None. Item 9A. Controls and Procedures. --------------------------------- As of December 31, 2003, 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, 2003 in ensuring that information required to be disclosed by the company in the reports it files and submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There have been no significant changes in the company's internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting. PART III -------- Item 10. Directors and Executive Officers of the Registrant. ------------------------------------------------------------ We have adopted a Code of Business Conduct and Ethics that applies to all Directors, officers and employees. We also have adopted a separate Financial Code of Ethics that applies to our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer and principal accounting officer). You can find both codes on our website no later than the date of our Annual Meeting of Shareholders scheduled to be held on May 26, 2004, at www.invacare.com by clicking on the link for Investor Relations. We will post any amendments to the codes, as well as any waivers that are required to be disclosed pursuant to the rules of either the Securities and Exchange Commission or the New York Stock Exchange, on our website. Our Board of Directors has adopted Corporate Governance Guidelines and new charters for the Audit Committee, Compensation, Management Development and Corporate Governance Committee, Nominating Committee and Investment Committee of the Board of Directors. We will post these documents on our website no later than the date of our Annual Meeting of Shareholders scheduled to be held on May 26, 2004, at www.invacare.com by clicking on the link for Investor Relations. You also can obtain printed copies of any of the materials referred to above, free of charge, by writing to: Shareholder Relations Department, Invacare Corporation, One Invacare Way, P.O. Box 4028, Elyria, OH 44036-2125. 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, the other 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 2004 Annual Meeting of Shareholders. 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 2004 Annual Meeting of Shareholders. 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 2004 Annual Meeting of Shareholders. 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 2004 Annual Meeting of Shareholders. Item 14. Principal Accounting Fees and Services. ------------------------------------------------ The information required by Item 14 is incorporated by reference to the information set forth under the caption Independent Auditors in the company's definitive Proxy Statement for the 2004 Annual Meeting of Shareholders. I-26 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, 2003, 2002 and 2001 Consolidated Balance Sheet - December 31, 2003 and 2002 Consolidated Statement of Cash Flows - years ended December 31, 2003, 2002, and 2001 Consolidated Statement of Shareholders' Equity - years ended December 31, 2003, 2002, and 2001 Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules ----------------------------- The following financial statement schedule of the company is included in Part II, Item 8: Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)(3) Exhibits. -------- See Exhibit Index at page number I-29 of this Report on Form 10-K. (b) Reports on Form 8-K. ------------------- A Form 8-K was filed on October 1, 2003 under Item 5, Other Events and Regulation FD Disclosure and Item 7, Financial Statements and Exhibits. The Form 8-K contained Invacare Corporation's press release announcing the sale of $100,000,000 in senior notes through a private placement to institutional investors. A Form 8-K was furnished on October 16, 2003 under Item 12, Results of Operations and Financial Condition. The Form 8-K contained Invacare Corporation's earnings release, dated October 16, 2003, which disclosed the company's 2003 third quarter results. 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 12, 2004. INVACARE CORPORATION By: /s/ A. Malachi Mixon, III --------------------- A. Malachi Mixon, III Chairman of the Board of Directors and Chief Executive Officer I-27 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 12, 2004. 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/ C. Martin Harris, M.D Director ------------------------------------ C. Martin Harris, M.D /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/ Joseph B. Richey, II Director ------------------------------------ Joseph B. Richey, II /s/ William M. Weber Director ------------------------------------ William M. Weber I-28 INVACARE CORPORATION Report on Form 10-K for the fiscal year ended December 31, 2003.
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) - Assignment of Patent Application and License of Know-how dated January 14, 1981, and an (E) amendment thereto dated October 12, 1981, with respect to certain royalty payments to be made to the former owners of the company's home care bed subsidiary 10(b) - 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (F) 10(c) - Deferred Compensation Plan for Non-Employee Directors, adopted in May 1992 (G) 10(d) - Invacare Corporation 1994 Performance Plan approved January 28, 1994 (H)* 10(e) - Loan Agreement by and among Invacare Corporation, the Banks, certain borrowing subsidiaries, the (I) Banks named therein, NBD Bank, as agent for the Banks and KeyBank National Association, as co-agent for the Banks 10(f) - Agreement and Plan of Merger, dated December 17, 1997, between Invacare Corporation, Inva (J) Acquisition Corp. and Invacare Supply Group, formerly Suburban Ostomy Supply Company, Inc. 10(g) - Note Purchase Agreement dated as of February 27, 1998 for $80,000,000 6.71% Series A Senior (K) Notes Due February 27, 2008 and $20,000,000 6.60% Series B Senior Notes Due February 27, 2005 10(h) - Amendment No. 1 to the Invacare Corporation 1994 Performance Plan approved May 28, 1998. (L)* 10(i) - Amendment No. 2 to the Invacare Corporation 1994 Performance Plan approved May 24, 2000. (M)* 10(j) - Five-Year Credit Agreement between Invacare Corporation and Subsidiaries, the banks named (N) therein, Bank One, as agent for the banks, dated October 17, 2001. 10(k) - Invacare Retirement Savings Plan, effective January 1, 2001 (O) 10(l) - Form of Change of Control Agreement entered into by and between the company and certain of its (Q)* executive officers and Schedule of all such agreements with current executive officers 10(m) - Form of Indemnity Agreement entered into by and between the company and certain of its Directors (Q)* and executive officers and Schedule of all such Agreements with current Directors and executive officers 10(n) - Employment Agreement entered into by and between the company and Chief Financial Officer (Q)* 10(o) - Employment Agreement entered into by and between the company and Chief Operating Officer (Q)* 10(p) - Amendment No. 3 to the Invacare Corporation 1994 Performance Plan (R)*
I-29
Official Sequential Exhibit No Description Page No. ---------- ----------- -------- 10(q) - Invacare Corporation 2003 Performance Plan (S)* 10(r) - Invacare Corporation Note Purchase Agreement dated as of October 1, 2003 for $50,000,000 3.97% (T) Series A Senior Notes Due October 1, 2007; $30,000,000 4.74% Series B Senior Notes Due October 1, 2009 and $20,000,000 5.05% Series C Senior Notes Due October 1, 2010. 10(s)** Modification, dated September 22, 2003, to Five-Year Credit Agreement, as amended, between Invacare Corporation and Subsidiaries, the banks named therein, Bank One, as agent for the banks, dated October 17, 2001. 10(t)** First Amendment, dated as of October 1, 2003, to 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 27, 2005 21 - Subsidiaries of the company 23 - Consent of Independent Auditors 31.1 ** - Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 ** - Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 ** - Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 ** - Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99(a) - Executive Liability and Defense Coverage Insurance Policy (C) 99(b) - Supplemental Executive Retirement Plan (P)
* 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 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. I-30 (F) 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. (G) 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. (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 23, 1994, which Exhibit is incorporated herein by reference. (I) 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. (J) 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. (K) 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. (L) 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. (M) 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. (N) 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. (O) 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. (P) 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. (Q) Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2002, which Exhibit is incorporated herein by reference. (R) Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the quarter ended March 31, 2003, which Exhibit is incorporated herein by reference. (S) Reference is made to Exhibit 4.5 of Invacare Corporation Form S-8 filed on October 17, 2003. (T) Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the quarter ended September 30, 2003, 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, 2003 and 2002, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, 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 February 20, 2004 FS-1 CONSOLIDATED STATEMENT OF EARNINGS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2003 2002 2001 ---- ---- ---- (In thousands, except per share data) Net sales $1,247,176 $1,089,161 $1,053,639 Cost of products sold 872,515 761,763 735,292 ------- ------- ------- Gross Profit 374,661 327,398 318,347 Selling, general and administrative expenses 262,015 220,296 195,574 Amortization of goodwill - - 8,972 Non-recurring and unusual items - - 31,950 Interest expense 11,710 15,122 22,764 Interest income (5,473) (4,550) (7,303) ------- ------- ------- Earnings before Income Taxes 106,409 96,530 66,390 Income taxes 35,000 31,760 31,200 ------- ------- ------- Net Earnings $71,409 $64,770 $35,190 ======= ======= ======= Net Earnings per Share - Basic $2.31 $2.10 $1.15 ======= ======= ======= Weighted Average Shares Outstanding - Basic 30,862 30,867 30,620 ======= ======= ======= Net Earnings per Share - Assuming Dilution $2.25 $2.05 $1.11 ======= ======= ======= Weighted Average Shares Outstanding - Assuming Dilution 31,729 31,664 31,683 ======= ======= =======
See notes to consolidated financial statements. FS-2 CONSOLIDATED BALANCE SHEET INVACARE CORPORATION AND SUBSIDIARIES
December 31, December 31, 2003 2002 --------- --------- (In thousands) Assets ------ Current Assets Cash and cash equivalents $16,074 $13,086 Marketable securities 214 1,350 Trade receivables, net 255,534 200,388 Installment receivables, net 7,755 20,953 Inventories, net 130,979 111,382 Deferred income taxes 24,573 26,053 Other current assets 39,593 25,600 --------- --------- Total Current Assets 474,722 398,812 Other Assets 53,263 51,031 Other Intangibles 14,678 4,779 Property and Equipment, net 150,051 130,963 Goodwill 415,499 321,118 --------- --------- Total Assets $1,108,213 $906,703 ========= ======== Liabilities and Shareholders' Equity ------------------------------------ Current Liabilities Accounts payable $110,178 $80,511 Accrued expenses 97,148 67,187 Accrued income taxes 19,107 16,049 Current maturities of long-term debt 2,171 4,479 --------- --------- Total Current Liabilities 228,604 168,226 Long-Term Debt 232,038 234,134 Other Long-Term Obligations 34,383 24,031 Shareholders' Equity Preferred Shares (Authorized 300 shares; none outstanding) - - Common Shares (Authorized 100,000 shares; 30,739 and 7,686 7,580 30,294 issued in 2003 and 2002, respectively) Class B Common Shares (Authorized 12,000 shares; 278 278 1,112, issued and outstanding) Additional paid-in-capital 109,015 98,995 Retained earnings 477,113 407,235 Accumulated other comprehensive earnings (loss) 45,941 (18,729) Unearned compensation on stock awards (1,458) (1,204) Treasury shares (770 and 387 shares in (25,387) (13,843) 2003 and 2002, respectively) --------- --------- Total Shareholders' Equity 613,188 480,312 --------- --------- Total Liabilities and Shareholders' Equity $1,108,213 $906,703 ========= =========
See notes to consolidated financial statements. FS-3 CONSOLIDATED STATEMENT OF CASH FLOWS INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31, 2003 2002 2001 ---- ---- ---- (In thousands) Operating Activities Net earnings $71,409 $64,770 $35,190 Adjustments to reconcile net earnings to net cash provided by operating activities: Non-recurring and unusual items - - 29,950 Depreciation and amortization 27,235 26,638 33,448 Provision for losses on trade and installment receivables 13,760 10,792 7,150 Provision for deferred income taxes 3,205 (3,050) 6,220 Provision for other deferred liabilities 2,587 3,342 2,600 Changes in operating assets and liabilities: Trade receivables (37,122) 19,740 (11,114) Inventories (4,607) 6,208 (7,010) Other current assets (3,447) (4,193) (6,165) Accounts payable 13,351 2,576 (6,835) Accrued expenses 17,943 (2,534) (25,898) Other long-term liabilities 5,212 (108) (3,314) ------- ------- ------- Net Cash Provided by Operating Activities 109,526 124,181 54,222 Investing Activities Purchases of property and equipment (30,660) (22,109) (20,182) Proceeds from sale of property and equipment 531 2,391 696 Installment sales contracts, net 6,678 11,435 25,946 Marketable securities 1,130 (43) (165) Business acquisitions, net of cash acquired (70,555) - - Increase in other investments (64) (317) (1,642) Increase in other long-term assets (1,898) (1,834) (13,817) Other (42) 1,079 (1,063) ------- ------- ------- Net Cash Required for Investing Activities (94,880) (9,398) (10,227) Financing Activities Proceeds from revolving lines of credit and long-term borrowings 474,583 254,512 305,956 Payments on revolving lines of credit and long-term borrowings (483,725) (377,582) (339,941) Proceeds from exercise of stock options 5,063 6,154 8,854 Payment of dividends (1,531) (1,567) (1,525) Purchase of treasury stock (8,345) (1,674) (7,471) ------- ------- ------- Net Cash Required for Financing Activities (13,955) (120,157) (34,127) Effect of exchange rate changes on cash 2,297 1,777 (5,542) ------- ------- ------- Increase (decrease) in cash and cash equivalents 2,988 (3,597) 4,326 Cash and cash equivalents at beginning of year 13,086 16,683 12,357 ------- ------- ------- Cash and cash equivalents at end of year $16,074 $13,086 $16,683 ======= ======= =======
See notes to consolidated financial statements. FS-4 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY INVACARE CORPORATION AND SUBSIDIARIES (In thousands)
Accumulated Additional Other Common Class B Paid-in- Retained Comprehensive Unearned Treasury Stock Stock Capital Earnings Earnings (Loss) Compensation Stock Total ---------- --------- ----------- ---------- --------------- --------------- ---------- ----------- January 1, 2001 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 Exercise of stock options, including tax benefit 99 9,130 (3,199) 6,030 Restricted stock awards 7 890 (897) - Restricted stock award expense 643 643 Net earnings 71,409 71,409 Foreign currency translation adjustments 61,069 61,069 Unrealized gains on cash flow hedges 3,506 3,506 Marketable securities holding gain 95 95 ------ Total comprehensive income 136,079 Dividends (1,531) (1,531) Purchase of treasury shares (8,345) (8,345) ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2003 Balance $7,686 $278 $109,015 $477,113 $45,941 $(1,458) $(25,387) $613,188 ====== ==== ======== ======== ======= ======= ======== ========
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. 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 method and for non-domestic inventories and domestic finished products purchased for resale ($99,607,000 and $81,180,000 at December 2003 and 2002, respectively) by the first-in, first-out 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, 2003 and 2002. 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. 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 generated 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. 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 tests in the fourth quarter of 2002 and 2003. The results of these tests indicated no impairment of goodwill. 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. FS-6 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ACCOUNTING POLICIES--Continued 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 annual policy losses of $10 million per occurrence and $10 million in the aggregate of the company's North American product liability exposure. The company also has additional layers of external insurance 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. 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 cost 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 $19,130,000, $17,934,000, and $17,394,000 for 2003, 2002, and 2001, respectively. Advertising: Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising expenses amounted to $22,806,000, $20,905,000 and $19,198,000 for 2003, 2002 and 2001, respectively. Stock-Based Compensation Plans: The company accounts for options under its stock-based compensation plans using the intrinsic value method proscribed in APBO 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. Invacare continues to utilize the disclosure-only provisions of SFAS No. 123, Accounting for Stock Based Compensation. If the company had applied the fair value recognition provisions of SFAS No. 123, the company's net earnings and earnings per share in 2003, 2002 and 2001 would have been reduced to the pro forma amounts indicated below:
2003 2002 2001 ---- ---- ---- (In thousands except per share data) Net earnings - as reported * $71,409 $64,770 $35,190 Less: compensation expense determined based on the fair-value method for all awards granted at market value, net of related tax effects 4,529 4,504 4,446 ------- ------- ------- Net earnings - pro forma $66,880 $60,266 $30,744 ======= ======= ======= Earnings per share as reported - basic $2.31 $2.10 $1.15 Earnings per share as reported - assuming dilution $2.25 $2.05 $1.11 Pro forma earnings per share - basic $2.17 $1.95 $1.00 Pro forma earnings per share - assuming dilution $2.11 $1.90 $.97 * Includes stock compensation expense, net of tax, on restricted awards granted without cost of: $418 $492 $116
Income Taxes: The company uses the liability method in measuring 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: The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. 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 $20,000,000 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 $180,000,000 of fixed-rate debt to floating-rate debt, so the company can avoid paying higher than market interest rates. The company recognized net gains of $2,872,000 and $773,000, respectively, related to its swap agreements in 2003 and 2002, 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 net gains in 2003 and 2002 of $1,410,000 and $1,252,000, respectively, 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 treatment, but do effectively limit the company's exposure to foreign currency fluctuations between the Mexican Peso and U.S. Dollar. During 2003 and 2002, the company recognized losses of $118,000 and $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: The functional currency of the company's subsidiaries outside the United States is the applicable local currency. 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 January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was revised in December 2003 and among other things deferred the implementation date of FIN 46 until periods ending after March 15, 2004. This interpretation requires consolidation of an entity if the company is subject to a majority of the risk of loss from the variable interest entity's (VIE) activities or entitled to receive a majority of the entity's residual returns, or both. A company that consolidates a VIE is known as the primary beneficiary of that entity. As of December 31, 2003, the company had an investment in a development stage company, which is currently pursuing FDA approval to market a product focused on the treatment of post-stroke shoulder pain in the United States. The net advances and investment recorded on the company's books is approximately $3,100,000 at December 31, 2003. Based on the provisions of FIN 46 and the company's preliminary analysis, the company does not believe that its investment is a VIE. FS-8 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ACCOUNTING POLICIES--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 ($16,775,000 in 2003 and $19,067,000 in 2002) is based primarily on management's evaluation of the financial condition of the customer. Installment receivables as of December 31, 2003 and 2002 consist of the following:
2003 2002 ----- ----- Long- Long- (In thousands) Current Term Total Current Term Total ------- ------- ------- ------- ------- ------- Installment receivables $18,930 $578 $19,508 $33,942 $2,648 $36,590 Less: Unearned interest (246) (54) (300) (451) (11) (462) Allowance for doubtful accounts (10,929) - (10,929) (12,538) (1,127) (13,665) ------- ------- ------- ------- ------- ------- $7,755 $524 $8,279 $20,953 $1,510 $22,463 ======= ======= ======= ======= ======= =======
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, 2003 and 2002 consist of the following: 2003 2002 ------ ------ (In thousands) Raw materials $41,573 $35,457 Work in process 18,711 12,789 Finished goods 70,695 63,136 ------ ------- $130,979 $111,382 ======= ======= PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2003 and 2002 consist of the following: 2003 2002 ------ ------ (In thousands) Machinery and equipment $216,459 $199,448 Land, buildings and improvements 67,364 55,232 Furniture and fixtures 20,737 15,641 Leasehold improvements 14,946 13,874 ------- ------- 319,506 284,195 Less allowance for depreciation (169,455) (153,232) ------- ------- $150,051 $130,963 ======= ======= FS-9 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ACQUISITIONS In 2003, Invacare Corporation acquired the following businesses at a total cost of $70,555,000, which was paid in cash: o The assets of Pinnacle Medsources Inc., a Georgia corporation, and distributor of home medical equipment. o Mecc San SrL, an Italian corporation, and manufacturer of home medical equipment. o Carroll Healthcare, Inc., a Canadian Corporation, and a leading manufacturer of beds and furniture for the long-term care industry in North America. o Motion Concepts, Inc., a Canadian Corporation, and leading manufacturer of seating and positioning products in North America. Goodwill recognized in these transactions amounted to approximately $53,100,000, the majority of which is not expected to be deductible for tax purposes. Goodwill of $49,700,000 was assigned to the North American segment and $3,400,000 was assigned to the European segment. As part of the Carroll purchase agreement, the Company agreed to pay additional consideration based upon earnings before interest, taxes, depreciation and amortization from September 1, 2003 through August 31, 2004 calculated under Canadian generally accepted accounting principles with no defined maximum amount. Pursuant to the Motion purchase agreement, the Company agreed to pay contingent consideration based upon earnings before interest and taxes over the three years subsequent to the acquisition up to a maximum of approximately $16,000,000. When the contingencies related to both of the acquisitions are settled, any additional consideration paid will increase the respective purchase price and reported goodwill. 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 as if SFAS No. 142 had been adopted as of the beginning of each year.
(In thousands, except per share data) 2003 2002 2001 -------------------------------------------------------------------------------------------------------------- Reported net income $71,409 $64,770 $35,190 Goodwill amortization - - 8,972 ------- ------- ------- Adjusted net income $71,409 $64,770 $44,162 ======= ======= ======= Basic earnings per share: Reported net income $2.31 $2.10 $1.15 Goodwill amortization - - 0.29 ------- ------- ------- Adjusted net income $2.31 $2.10 $1.44 ======= ======= ======= Diluted earnings per share: Reported net income $2.25 $2.05 $1.11 Goodwill amortization - - 0.28 ------- ------- ------- Adjusted net income $2.25 $2.05 $1.39 ======= ======= =======
The carrying amount of goodwill by operating segment is as follows:
2003 2002 -------------------------------------------------- ---------------------------------------------------- (In thousands) North North America Europe Australasia Consolidated America Europe Australasia Consolidated ------- ------ ----------- ------------ ------- ------ ----------- ------------ Balance as of January 1 $153,683 $157,325 $10,110 $321,118 $153,548 $141,566 $8,422 $303,536 Acquisitions 49,723 3,397 - 53,120 - - - - Foreign currency translation 6,641 31,786 2,834 41,261 135 15,759 1,688 17,582 ------- ------- ------- ------- ------- ------- ------- ------- Balance as of December 31 $210,047 $192,508 $12,944 $415,499 $153,683 $157,325 $10,110 $321,118 ======== ======== ======= ======== ======== ======== ======= ========
FS-10 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) OTHER INTANGIBLES All of the company's other intangible assets have definite lives and continue to be amortized over their useful lives, except for $4,268,000 related to trademarks, which have indefinite lives. The company's intangibles consist of the following:
December 31, 2003 December 31, 2002 ----------------- ----------------- (In thousands) Accumulated Accumulated Historical Cost Amortization Historical Cost Amortization --------------- ------------ --------------- ------------ License agreements $6,455 $4,464 $6,037 $3,875 Customer Lists 6,105 936 - - Trademarks 4,268 - - - Patents 2,180 1,109 2,396 880 Other 3,406 1,227 2,576 1,475 ------- ------ ------- ------ $22,414 $7,736 $11,009 $6,230 ======= ====== ======= ======
Amortization expense related to other intangibles was $1,506,000 and $1,288,000 for 2003 and 2002, respectively. Estimated amortization expense for each of the next five years is expected to be $2,150,000 for 2004, $1,793,000 in 2005, $1,291,000 in 2006, $1,224,000 in 2007 and $1,103,000 in 2008. CURRENT LIABILITIES Accrued expenses as of December 31, 2003 and 2002 consist of the following: 2003 2002 ------ ------ (In thousands) Accrued salaries and wages $31,960 $20,266 Accrued rebates 13,595 3,669 Accrued warranty cost 12,688 11,448 Accrued interest 9,114 3,504 Accrued freight 4,524 3,548 Accrued taxes other than income taxes 3,661 4,628 Accrued insurance 2,470 2,304 Accrued product liability, current portion 2,245 2,996 Accrued legal and professional 2,029 1,478 Other accrued items 14,862 13,346 ------ ------ $97,148 $67,187 ======= ======= Changes in accrued warranty costs were as follows: 2003 2002 ---- ---- (In thousands) Balance as of January 1 $11,448 $7,607 Warranties provided during the period 8,557 7,571 Settlements made during the period (8,288) (7,854) Changes in liability for pre-existing warranties during the period, including expirations 971 4,124 ------- -------- Balance as of December 31 $12,688 $11,448 ======= ======= FS-11 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) LONG-TERM DEBT Long-term debt as of December 31, 2003 and 2002 consist of the following:
2003 2002 ---- ---- (In thousands) $80,000,000 senior notes at 6.71%, due in February 2008 $85,462 $87,456 $20,000,000 senior notes at 6.60%, due in February 2005 20,000 20,000 $50,000,000 senior notes at 3.97%, due in October 2007 50,560 - $30,000,000 senior notes at 4.74%, due in October 2009 30,532 - $20,000,000 senior notes at 5.05%, due in October 2010 20,386 - $25,000,000 senior notes at 7.45%, matured in February 2003 - 3,571 Revolving credit agreement ($325,000,000 multi-currency), at 0.675% to 1.40% above local interbank offered rates, expires October 17, 2006 20,002 126,128 Other notes 7,267 1,458 ------- ------- 234,209 238,613 Less current maturities (2,171) (4,479) ------- ------- $232,038 $234,134 ======= =======
The carrying values of the senior notes have been increased by the gains on the interest rate swaps accounted for as fair value hedges. In October 2003, Invacare Corporation issued $100,000,000 in senior notes, maturing between 2007 and 2010. 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 expired in October 2003; the multi-currency revolving credit agreement does not expire until October 17, 2006 or such later date as mutually agreed upon by the company and the banks. Borrowings denominated in foreign currencies aggregated $872,000 at December 31, 2003 and $12,842,000 at December 31, 2002. The borrowing rates under the revolver agreement is determined based on the ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of the company as defined in the agreement and range from 0.675% to 1.40% above the various interbank offered rates. As of December 31, 2003 and 2002, the weighted average floating interest rate on U.S. borrowings was 2.69% and 3.66%, respectively. The revolver agreement, as amended, requires the company to maintain certain conditions with respect to net worth, funded debt to capitalization, and interest coverage as defined in the agreements. In addition, the 2003 note issuance agreements requires the company to maintain conditions with respect to net worth, consolidated debt and priority debt. At December 31, 2003, $229,578,000 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 $248,871,000 as of December 31, 2003. In October 2003, the company exchanged the fixed rates of 3.97%, 4.74% and 5.05% on the $50,000,000, $30,000,000 and $20,000,000 Senior Notes due in October 2007, October 2009 and October 2010 for variable rates based on LIBOR plus 0.01%, LIBOR plus 0.14% and LIBOR plus 0.26%, respectively. The effect of these swaps is to exchange fixed rates for the lower floating rates currently available. 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 exchanged 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 exchanged 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 the lower floating rates currently available. 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 five-year term on both agreements. The aggregate minimum maturities of long-term debt for each of the next five years are as follows: $2,171,000 in 2004, $20,746,000 in 2005, $20,728,000 in 2006, $50,668,000 in 2007, and $80,582,000 in 2008. Interest paid on borrowings was $9,450,000, $13,465,000 and $26,361,000 in 2003, 2002 and 2001, respectively. FS-12 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) OTHER LONG-TERM OBLIGATIONS Other long-term obligations as of December 31, 2003 and 2002 consist of the following: 2003 2002 ------- ------- (In thousands) Supplemental Executive Retirement Plan liability $11,048 $9,460 Product liability 9,664 5,276 Deferred federal income taxes 2,337 - Other, principally deferred compensation 11,334 9,295 ------- ------- Total long-term obligations $34,383 $24,031 ======= ======= 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 18 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, 2003, 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 2014. Lease expenses were approximately $15,803,000 in 2003, $12,575,000 in 2002, and $12,045,000 in 2001. Future minimum operating lease commitments as of December 31, 2003, are as follows: Year Amount ---- ------ (In thousands) 2004 $12,235 2005 8,957 2006 5,120 2007 2,756 2008 786 Thereafter 160 ------- Total Future Minimum Lease Payments $30,014 ======= The amount of buildings and equipment capitalized in connection with capital leases was $7,767,000 and $4,567,000 at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, accumulated amortization was $3,003,000 and $2,508,000, respectively. 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, quarterly contributions based upon 4% of qualified wages and may make discretionary contributions to the domestic plans based on an annual resolution by the Board of Directors. The company also sponsors a non-qualified 401(k) Plus Benefit Equalization Plan covering certain employees, which provides for employee elective deferrals and company retirement deferrals so that the total retirement deferrals equal amounts that would have been contributed to the company's principal retirement plans if it were not for limitations imposed by income tax regulations. Contribution expense for the plans in 2003, 2002 and 2001 was $5,619,000, $5,444,000, and $5,788,000, 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 $27,618,000 and $21,603,000 at December 31, 2003 and 2002, respectively, of which approximately $11,517,000 and $9,823,000, at December 31, 2003 and 2002, respectively, has been accrued. Expense for the plan in 2003, 2002, and 2001 was $2,108,000, $2,147,000, and $2,059,000, respectively. In conjunction with these non-qualified plans, the company has invested in life insurance policies related to certain employees to satisfy these future obligations. The current cash surrender value of the policies approximates the current benefit obligations. In addition, the projected policy benefits exceed the projected benefit obligations. FS-13 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 2003 Performance Plan (the "2003 Plan") allows the Compensation Committee of the Board of Directors (the "Committee") to grant up to 2,000,000 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 1994 Performance Plan (the "1994 Plan"), as amended, expires in 2004 and allowed the Compensation Committee of the Board of Directors (the "Committee") to grant up to 5,500,000 Common Shares. 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. During 2003, the Committee granted 351,350 and 353,267 non-qualified stock options for a term of ten years at the fair market value of the company's Common Shares on the date of grant under the 2003 Plan and the 1994 Plan, respectively. There were no stock appreciation rights outstanding at December 31, 2003, 2002 or 2001. Restricted stock awards for 28,894, 37,289 and 24,020 shares were granted in years 2003, 2002 and 2001 without cost to the recipients. Under the terms of the restricted stock awards, 83,703 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 $897,000 in 2003, $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 $643,000, $757,000 and $178,000 was recognized in 2003, 2002 and 2001, respectively, related to restricted stock awards granted in 2003, 2002 and 2001. The 1994 Plan and the 2003 Plan have provisions that allow employees to exchange mature shares to pay the exercise price and surrender shares for the options to cover the minimum tax withholding obligation. Under these provisions, the company acquired 85,704 treasury shares for $3,079,810 in 2003, 85,043 treasury shares for $2,868,514 in 2002 and 124,823 treasury shares for $4,781,114 in 2001. As of December 31, 2003, an aggregate of 11,028,556 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 2003 Price 2002 Price 2001 Price ---- ----- ---- ----- ---- ----- Options outstanding at January 1 4,257,422 $25.23 4,201,943 $23.27 4,289,763 $21.08 Granted 704,617 36.73 619,868 33.59 585,905 33.59 Exercised (340,665) 19.08 (418,432) 18.28 (636,933) 16.84 Canceled (102,484) 33.02 (145,957) 27.32 (36,792) 22.31 --------- ------ --------- ------ --------- ------ Options outstanding at December 31 4,518,890 $27.34 4,257,422 $25.23 4,201,943 $23.27 ========= ====== ========= ====== ========= ====== Options price range at December 31 $15.13 to $11.88 to $9.30 to $43.37 $36.84 $37.56 Options exercisable at December 31 2,796,100 2,347,721 2,101,706 Options available for grant at December 31* 1,670,600 296,860 917,530
* Options available for grant as of December 31, 2003 reduced by net restricted stock award activity of 88,203. The company utilizes the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the stock option plans, except the expense recorded related to the 90,203 restricted stock awards granted in years 2001 through 2003. The assumption regarding the stock options issued in 2003, 2002 and 2001 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. FS-14 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SHAREHOLDERS' EQUITY TRANSACTIONS--Continued 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: 2003 2002 2001 ---- ---- ---- Expected dividend yield .75% .80% .90% Expected stock price volatility 29.6% 31.4% 33.8% Risk-free interest rate 3.31% 3.26% 4.53% Expected life (years) 5.5 5.4 6.0 The weighted-average fair value of options granted during 2003, 2002 and 2001, based upon an expected exercise year of 2008, was $11.03, $10.71 and $12.24, respectively. The plans provide that shares granted come from the company's authorized but unissued Common Shares or treasury shares. Pursuant to the plans, the Committee has established that the 2003 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, 2003 is 6.9 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 $8.00 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 $0.005 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 2003, 2002 and 2001 consisted of the following (In thousands of shares):
Common Stock Class B Treasury Shares Shares Shares ----------------- ---------- ----------- January 1, 2001 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) Exercise of stock options 416 - (110) Stock awards 29 - - Repurchase of treasury shares - - (273) ------------------------------------------------------------------- ----------------- ---------- ------------ December 31, 2003 Balance 30,739 1,112 (770) ====== ===== =====
Stock option exercises include deferred share activity, which increased common shares by 75,000 shares and treasury shares by 5,000 shares. 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 Gain Unrealized Gain (Loss) on Currency (Loss) on Derivative Translation Available-for-Sale Financial Adjustments Securities Instruments Total ----------- ------------------ ---------------- --------- Balance at January 1, 2001 $ (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, net of reclassifications (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, net of reclassifications 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) Foreign currency translation adjustments 61,069 61,069 Unrealized gain on available for sale securities 146 146 Deferred tax liability relating to unrealized loss on available for sale securities (51) (51) Current period unrealized gain on cash flow hedges, net of reclassifications 5,394 5,394 Deferred tax expense relating to unrealized gain on derivative financial instruments (1,888) (1,888) ------- ----- ------ -------- Balance at December 31, 2003 $41,451 $675 $3,815 $45,941 ======= ===== ====== ========
A net gain of $500,000 and 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 2003, 2002 and 2001, respectively. INCOME TAXES Earnings before income taxes consist of the following: 2003 2002 2001 -------- ------- ------- (In thousands) Domestic $59,027 $51,512 $38,848 Foreign 47,382 45,018 27,542 -------- ------- ------- $106,409 $96,530 $66,390 ======== ======= ======= FS-16 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) INCOME TAXES --Continued The company has provided for income taxes as follows: 2003 2002 2001 ---- ---- ---- (In thousands) Current: Federal $16,635 $21,415 $11,985 State 3,200 2,200 3,800 Foreign 11,960 11,195 9,195 ------- ------- ------- 31,795 34,810 24,980 Deferred: Federal 1,625 (4,620) 5,170 Foreign 1,580 1,570 1,050 ------- ------- ------- 3,205 (3,050) 6,220 ------- ------- ------- Income Taxes $35,000 $31,760 $31,200 ======= ======= ======= A reconciliation to the effective income tax rate from the federal statutory rate follows: 2003 2002 2001 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax benefit 2.0 1.5 3.7 Tax credits (1.4) (2.3) (1.8) Goodwill - - 4.8 Valuation reserve for investments - - 7.5 Foreign taxes at less than the federal statutory rate, excluding goodwill (2.9) (2.6) (1.7) Other, net .2 1.3 (.5) ---- ---- ---- 32.9% 32.9% 47.0% ==== ==== ==== Significant components of deferred income tax assets and liabilities at December 31, 2003 and 2002 are as follows: 2003 2002 ------ ------ (In thousands) Current deferred income tax assets, net: Bad debt $7,773 $11,669 Warranty 3,094 2,378 Inventory 1,931 2,278 Other accrued expenses and reserves 2,118 2,600 State and local taxes 2,422 3,242 Litigation reserves 2,177 2,171 Compensation and benefits 968 674 Product liability 291 292 Loss carryforwards 1,162 860 Other, net 2,637 (111) ------ ------ $24,573 $26,053 ------ ------ FS-17 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) INCOME TAXES --Continued 2003 2002 ------ ------ (In thousands) Long-term deferred income tax assets (liabilities), net: Fixed assets (11,003) (11,012) Product liability 1,282 1,282 Loss carryforwards 1,001 768 Compensation and benefits 8,219 6,172 State and local taxes 2,400 2,400 Valuation reserve (1,001) (768) Other, net (3,235) 2,047 ------ ------ $ (2,337) $ 889 ------ ------ Net Deferred Income Taxes $22,236 $26,942 ====== ====== At December 31, 2003, the company had foreign tax loss carryforwards of approximately $6,130,000 of which $5,306,000 are non-expiring and $824,000 are expiring in 2010. The company made income tax payments of $25,173,000, $28,769,000 and $27,104,000 during the years ended December 31, 2003, 2002 and 2001, respectively. NET EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted net earnings per common share.
2003 2002 2001 ---- ---- ---- (In thousands except per share data) Basic Average common shares outstanding 30,862 30,867 30,620 Net earnings $71,409 $64,770 $35,190 Net earnings per common share $2.31 $2.10 $1.15 Diluted Average common shares outstanding 30,862 30,867 30,620 Stock options 867 797 1,063 ------ ------ ------ Average common shares assuming dilution 31,729 31,664 31,683 Net earnings $71,409 $64,770 $35,190 Net earnings per common share $2.25 $2.05 $1.11
At December 31, 2003, 501,067 shares were excluded from the average common shares assuming dilution, as they were anti-dilutive. The majority of the anti-dilutive shares were granted at an exercise price of $37.70, which was higher than the average fair market value price of $35.29 for 2003. 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 ($20,100,000 at December 31, 2003) to DLL for events of default under the contracts (total balance outstanding of $63,500,000 at December 31, 2003). Accordingly, the company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts. FS-18 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONCENTRATION OF CREDIT RISK--Continued 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, is 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. Credit losses are provided for in the financial statements. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the company in estimating its fair value disclosures for financial instruments: Cash, cash equivalents and marketable securities: The carrying amount reported in the balance sheet for cash, cash equivalents and marketable securities approximates its fair value. Installment receivables: The carrying amount reported in the balance sheet for installment receivables approximates its fair value. The majority of the portfolio contains receivables, 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: 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, adjusted for any estimated declines in value. These investments were acquired in private placements and there are no quoted market prices or stated rates of return. The carrying amounts and fair values of the company's financial instruments at December 31, 2003 and 2002 are as follows:
2003 2002 ---- ---- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- (In thousands) Cash and cash equivalents $16,074 $16,074 $13,086 $13,086 Marketable securities 214 214 1,350 1,350 Other investments 7,642 7,642 8,774 8,774 Installment receivables 8,279 8,279 22,463 22,463 Long-term debt (including current maturities) 234,209 237,584 238,613 241,146 Interest rate swaps 6,615 6,615 6,369 6,369 Forward contracts 6,196 6,196 1,561 1,561
FS-19 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued 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 forward contracts are entered into to hedge the following currencies: USD, NZD, CAD, EUR, SEK, DKK and MXP. 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 $1,292,000 in 2003, $1,184,000 in 2002 and $125,000 in 2001 on forward contracts, which were recognized in cost of products sold and selling, general and administrative expenses. 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. 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 $74,835,000, $61,178,000 and $66,565,000 for the years ended December 31, 2003, 2002 and 2001, respectively. FS-20 INVACARE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) BUSINESS SEGMENTS--Continued The information by segment is as follows (In thousands): 2003 2002 2001 ---------------------------------------------------------------------------- Revenues from external customers North America $897,208 $793,464 $773,713 Europe 279,782 251,443 236,093 Australasia 70,186 44,254 43,833 ----------- ----------- ----------- Consolidated $1,247,176 $1,089,161 $1,053,639 =========== =========== =========== Depreciation and amortization North America $18,551 $19,232 $23,365 Europe 6,315 5,699 7,974 Australasia 2,261 1,623 2,047 All Other (1) 108 84 62 ------- ------- ------- Consolidated $27,235 $26,638 $33,448 ======= ======= ======= Net interest expense (income) North America $7,780 $11,910 $16,154 Europe 4,220 5,256 6,459 Australasia (602) (282) 9 All Other (1) (5,161) (6,312) (7,161) ------- ------- ------- Consolidated $6,237 $10,572 $15,461 ======= ======= ======= Earnings (loss) before income taxes North America $88,299 $76,548 $84,208 Europe 19,132 19,020 8,444 Australasia 5,997 5,740 4,739 All Other (1) (7,019) (4,778) 949 Non-recurring and unusual item - - (31,950) ------- ------- ------- Consolidated $106,409 $96,530 $66,390 ======== ======= ======= Assets North America $616,352 $510,135 $575,238 Europe 348,063 295,085 254,970 Australasia 56,403 41,185 32,727 All Other (1) 87,395 60,298 51,602 ------- ------- ------- Consolidated $1,108,213 $906,703 $914,537 ========== ======== ======== Expenditures for assets North America $12,513 $11,172 $11,980 Europe 11,933 7,956 6,401 Australasia 6,203 2,381 1,734 All Other (1) 11 600 67 ------- ------- ------- Consolidated $30,660 $22,109 $20,182 ======= ======= ======= (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 2003 2002 2001 ------------- -------- -------- -------- Standard $274,959 $282,627 $293,889 Rehab 273,063 211,096 195,955 Distributed 162,645 146,573 127,975 Respiratory 118,115 82,528 88,915 Continuing Care 48,321 40,452 39,970 Other 20,105 30,188 27,009 -------- -------- -------- $897,208 $793,464 $773,713 ======== ======== ======== Europe 2003 2002 2001 ------ -------- -------- -------- Standard $142,777 $130,617 $125,685 Rehab 129,167 113,162 102,801 Respiratory 7,838 7,664 7,607 -------- -------- -------- $279,782 $251,443 $236,093 ======== ======== ======== Australasia 2003 2002 2001 ----------- -------- -------- -------- Rehab $46,832 $32,752 $33,154 Respiratory 6,584 4,207 5,440 Standard 6,427 4,680 4,276 Other 10,343 2,615 963 -------- -------- -------- $70,186 $44,254 $43,833 ======== ======== ======== Total Consolidated $1,247,176 $1,089,161 $1,053,639 ========== ========== ========== 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) 2003 March 31, June 30, September 30, December 31, ---- ------------ ------------ ------------ ----------- Net sales $276,673 $300,114 $327,366 $343,023 Gross profit 80,451 87,834 98,452 107,924 Earnings before income taxes 18,267 23,022 29,812 35,308 Net earnings 12,257 15,447 20,007 23,698 Net earnings per share - basic .40 .50 .65 .76 Net earnings per share - assuming dilution .39 .49 .63 .74 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
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, 2003 ---------------------------- Deducted from asset accounts - Allowance for doubtful accounts $32,732 $13,760 $(18,788)(A) $27,704 Inventory obsolescence reserve 5,337 6,623 (3,245)(B) 8,715 Investments and related notes 29,000 540 - 29,540 receivable Accrued warranty cost 11,448 9,528 (8,288)(B) 12,688 Accrued product liability 8,272 8,058 (4,421)(C) 11,909 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
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 (UK) Limited, 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. Invacare Poirier S.A.S., a French corporation and wholly owned subsidiary. 10. Dynamic Controls, a New Zealand corporation and wholly owned subsidiary. 11. Dynamic Europe Ltd., a U.K. corporation and wholly owned subsidiary. 12. Sci Des Hautes Roches, a French partnership and wholly owned subsidiary. 13. Sci Des Roches, a French partnership and wholly owned subsidiary. 14. Mobilite Building Corporation, a Florida corporation and wholly owned subsidiary. 15. Invacare Florida Corporation, a Delaware corporation and wholly owned subsidiary. 16. Invacare New Zealand, a New Zealand corporation and wholly owned subsidiary. 17. Invacare AG, a Swiss corporation and wholly owned subsidiary. 18. Invacare International Sarl, a Swiss corporation and wholly owned subsidiary. 19. Healthtech Products, Inc., a Missouri corporation and wholly owned subsidiary. 20. Invacare Lda., a Portugal company and wholly owned subsidiary. 21. Invacare Supply Group, Inc. (formerly Suburban Ostomy Supply Company, Inc.), a Massachusetts corporation and wholly owned subsidiary. 22. Roller Chair Pty. Ltd., an Australian corporation and wholly owned subsidiary. 23. Silcraft Corporation, a Michigan corporation and wholly owned subsidiary. 24. The Aftermarket Group, Inc., a Delaware corporation and wholly owned subsidiary. 25. Scandinavian Mobility International ApS, a Danish corporation and wholly owned subsidiary. 26. Invacare Hong A/S, a Danish corporation and wholly owned subsidiary. 27. Invacare A/S, a Danish corporation and wholly owned subsidiary. 28. Invacare AB, a Swedish corporation and wholly owned subsidiary. I-32 29. Invacare NV, a Belgium corporation and wholly owned subsidiary. 30. Invacare Holdings AS, a Norwegian corporation and wholly owned subsidiary. 31. Groas A/S, a Norwegian corporation and wholly owned subsidiary. 32. Invacare Rea AB, a Swedish corporation and wholly owned subsidiary. 33. Scandinavian Mobility GmbH, a German corporation and wholly owned subsidiary. 34. Invacare B.V., a Netherlands corporation and wholly owned subsidiary. 35. Samarite B.V., a Netherlands corporation and wholly owned subsidiary. 36. Invacare Australia Pty. Ltd., an Australian corporation and wholly owned subsidiary. 37. Adaptive Switch Laboratories, Inc., a Texas corporation and wholly owned subsidiary. 38. Garden City Medical Inc., a Delaware corporation and wholly owned subsidiary. 39. Hatfield Mobility Unlimited, a New Zealand corporation and wholly owned subsidiary. 40. Pro Med Equipment Pty. Ltd., an Australian corporation and wholly owned subsidiary. 41. Invacare AS, a Norwegian corporation and wholly owned subsidiary. 42. Pro Med Australia Pty. Ltd., an Australian corporation and wholly owned subsidiary. 43. Invacare, S.A., a Spanish corporation and wholly owned subsidiary. 44. Invacare Holdings Two AB, a Swedish corporation and wholly owned subsidiary. 45. Invacare Holdings AB, a Swedish corporation and wholly owned subsidiary. 46. Invacare Holdings CV, a Netherlands wholly owned partnership subsidiary. 47. Invacare Holdings BV, a Netherlands corporation and wholly owned subsidiary. 48. Invacare Verwaltungs GmbH, a German corporation and wholly owned subsidiary. 49. Invacare GmbH and Co. KG, a German corporation and wholly owned subsidiary. 50. Invacare Holdings Two BV, a Netherlands corporation and wholly owned subsidiary. 51. Invacare Holdings New Zealand, a New Zealand corporation and wholly owned subsidiary. 52. Invacare Bencraft Ltd., a U.K. corporation and wholly owned subsidiary. 53. Invacare Holdings LLC, an Ohio limited liability corporation and wholly owned subsidiary 54. 2030604 Ontario, Inc., an Ontario corporation and wholly owned subsidiary. 55. 3080359 Nova Scotia Company, a Nova Scotia corporation and wholly owned subsidiary. 56. 6123449 Canada, Inc., a Canadian corporation and wholly owned subsidiary. 57. Carroll Healthcare, a Canadian corporation and wholly owned subsidiary. I-33 58. Carroll Healthcare (USA) Inc., a Nevada corporation and wholly owned subsidiary. 59. Carroll Healthcare Inc. (Chile) Limitada, a Chilean corporation and wholly owned subsidiary. 60. Invacare Canadian Holdings, Inc., a Delaware corporation and wholly owned subsidiary. 61. Invacare Mauritius Holdings, a Republic of Mauritius Company and wholly owned subsidiary. 62. Invacare Mecc San SrL, an Italian corporation and wholly owned subsidiary. 63. Motion Concepts, L.P., an Ontario wholly owned partnership. 64. Perpetual Motion Enterprises, an Ontario corporation and wholly owned subsidiary. 65. Invacare Holdings LLC, an Ohio limited liability corporation and wholly owned subsidiary. 66. Medbloc, Inc., a Delaware corporation and wholly owned subsidiary. Note, "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, No. 33-57978 dated March 30, 2001 and No. 333-109794 dated October 17, 2003) pertaining to the Invacare Corporation stock option plans, of our report dated February 20, 2004, 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, 2003. ERNST & YOUNG LLP Cleveland, Ohio March 10, 2004 I-35