-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DM6gkO3oqomCCJhjbH+X68TdIX3eC1tEQA2fQoSK5vexz1MksjLJSyoZ9oFGEJsc ONEd+ZPOUMOclcwZkQ3Q4A== 0000742112-04-000038.txt : 20041124 0000742112-04-000038.hdr.sgml : 20041124 20041124163811 ACCESSION NUMBER: 0000742112-04-000038 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20040909 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041124 DATE AS OF CHANGE: 20041124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVACARE CORP CENTRAL INDEX KEY: 0000742112 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 952680965 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-15103 FILM NUMBER: 041167659 BUSINESS ADDRESS: STREET 1: ONE INVACARE WAY STREET 2: P O BOX 4028 CITY: ELYRIA STATE: OH ZIP: 44036 BUSINESS PHONE: 4403296000 8-K/A 1 nov04_8ka.txt NOV 2004 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A Amendment No. 1 to CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OR The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) September 9, 2004 ------------------------------- Invacare Corporation (Exact name of registrant as specified in its charter) Ohio 0-12938 95-2680965 - -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission (IRS Employer Identification) incorporation or organization) File Number No) 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 ------------------------------ ________________________________________________________________________________ (Former name, former address and former fiscal year, if change since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Invacare Corporation (the "Company") hereby amends Item 9.01 of its Current Report on Form 8-K filed with the Securities and Exchange Commission on September 9, 2004 (the "Current Report") to include required financial statements and pro forma financial information. In the Current Report disclosing the acquisition of WP Domus GmbH ("Domus") by the Company, the Company indicated that it would amend the Current Report to include such financial statements and pro forma financial information no later than 71 days after the date on which the Current Report was required to be filed. Item 9.01 of the Current Report is hereby amended and restated as follows: Item 9.01 Financial Statements and Exhibits (a) Financial Statements of Business Acquired (i) Report of Independent Auditors F-1 (ii) Audited Consolidated Balance Sheet as of December 31, 2003; F-2 (iii)Audited Consolidated Income Statement for the Year ended December 31, F-4 2003; (iv) Audited Consolidated Statement of Shareholder's Equity for the Year ended F-5 December 31, 2003; (v) Audited Consolidated Statement of Cash Flow for the Year ended December 31, F-6 2003; (vi) Notes to Audited Consolidated Financial Statements; F-7 (vii) Consolidated Balance Sheets as of June 30, 2004 and 2003 - Unaudited; F-22 (viii)Consolidated Income Statements for the Six-Months ended June 30, 2004 F-24 and 2003 - Unaudited; (ix) Consolidated Statements of Shareholder's Equity for the Six-Months ended F-25 June 30, 2004 and 2003 - Unaudited; (x) Consolidated Statements of Cash Flow for the Six-Months ended June 30, 2004 F-26 and 2003 - Unaudited; and (ix) Notes to the Consolidated Financial Statements - Unaudited F-27 (b) Pro Forma Condensed Combined Financial Information - Unaudited (i) Pro Forma Condensed Combined Financial Information; F-33 (ii) Pro Forma Condensed Combined Balance Sheet as of June 30, 2004; F-34 (iii)Pro Forma Condensed Combined Statement of Earnings for the Six Months F-35 Ended June 30, 2004; Item 9.01 Financial Statements and Exhibits (continued) (b) Pro Forma Condensed Combined Financial Information - Unaudited (continued) (iv) Pro Forma Condensed Combined Statement of Earnings for the Year Ended F-36 December 31, 2003; and (v) Notes to Pro Forma Condensed Combined Financial Statements - Unaudited F-37
(c) Exhibits Exhibit 2.1 Sale and Purchase Agreement Regarding the Sale and Purchase of All Shares in WP Domus GmbH by and among WP Domus LLC, Mr. Peter Schultz and Mr. Wilhelm Kaiser, Invacare GmbH & Co. KG and Invacare Corporation dated as of July 31, 2004.* Exhibit 2.2 Guarantee Letter Agreement of Warburg, Pincus Ventures, L.P. and Warburg, Pincus International, L.P. dated as of September 9, 2004.* Exhibit 10.1 Bridge Credit Agreement dated as of September 1, 2004 among the Banks named therein, Bank One NA, as Agent and Invacare Corporation.* Exhibit 23.1 Consent of Independent Auditors. Exhibit 99.1 Press release dated September 9, 2004.* * Previously filed as an exhibit to the Current Report on Form 8-K of Invacare Corporation filed on September 9, 2004. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. INVACARE CORPORATION By:/s/ Gregory C. Thompson ----------------------------------------- Gregory C. Thompson Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 24, 2004 Shareholder and Board of Directors WP Domus GmbH, Munich We have audited the accompanying consolidated balance sheet of WP Domus GmbH and subsidiaries as of December 31, 2003, and the related consolidated statement of income, shareholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WP Domus GmbH and subsidiaries as of December 31, 2003, and the consolidated result of their operations and their cash flow for the year then ended in conformity with accounting principles generally accepted in Germany. Accounting principles generally accepted in Germany vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature of such differences is presented in Note 10. Ernst & Young AG Wirtschaftsprufungsgesellschaft Munich, Germany November 22, 2004 F-1 WP Domus GmbH, Munich Consolidated Balance Sheet as of December 31, 2003 - --------------------------------------------------------------------------------------------------- ---------------------- ASSETS EUR ---------------------- A. FIXED ASSETS I. Intangible assets 1. Franchises, industrial rights and similar rights and assets and licenses in such rights and assets 572,938 2. Goodwill 173,135,238 ---------------------- 173,708,176 II. Property, plant and equipment 1. Land, land rights and buildings including buildings on third-party land 3,830,346 2. Technical equipment and machines 454,640 3. Other equipment,furniture and fixtures 3,852,238 4. Payments on account and assets under construction 178,807 ---------------------- 8,316,031 III. Financial assets 1. Investments 551 2. Long-term investments 4,976 ---------------------- 5,527 ---------------------- 182,029,734 ---------------------- B. CURRENT ASSETS I. Inventories 1. Raw materials, consumables and supplies 2,816,447 2. Unfinished goods, work in process 396,674 3. Finished goods and merchandise 1,919,099 ---------------------- 5,132,220 ---------------------- II. Receivables and other assets 1. Trade receivables 6,850,952 2. Other assets 1,076,822 ---------------------- 7,927,774 III. Cash on hand, bank balances and checks 7,617,852 ---------------------- 20,677,846 C. PREPAID EXPENSES 303,092 ---------------------- 203,010,672 ======================
F-2 WP Domus GmbH, Munich Consolidated Balance Sheet as of December 31, 2003 (continued) - --------------------------------------------------------------------------------------------------- ---------------------- EQUITY AND LIABILITIES EUR ---------------------- A. EQUITY I. Subscribed capital 100,000 II. Capital reserve 231,481,000 III. Currency translation adjustment -334,456 IV. Accumulated deficit -183,560,009 V. Minority interest -2,468,664 ---------------------- 45,217,871 B. ACCRUALS 1. Tax accruals 170,253 2. Other accruals 9,294,530 ---------------------- 9,464,783 C. LIABILITIES 1. Liabilities to banks 64,741,389 2. Trade payables 2,830,533 3. Liabilities to shareholders 77,301,772 4. Other liabilities: 3,454,324 thereof for taxes: EUR 718,538 thereof for social security: EUR 516,496 ---------------------- 148,328,018 ---------------------- 203,010,672 ======================
F-3 WP Domus GmbH, Munich Consolidated Income Statement for the Year ended December 31, 2003 - --------------------------------------------------------------------------------------------------- --------------------- EUR --------------------- 1. Sales 102,944,955 2. Increase in finished goods and work in process 176,657 3. Other operating income 1,312,041 --------------------- 104,433,653 4. Cost of materials a) Cost of raw materials, consumables and supplies and of purchased merchandise -40,141,197 b) Cost of purchased services -583,922 5. Personnel expenses a) Wages and salaries -17,866,562 b) Social security and other pension costs -3,652,081 6. Amortization and depreciation on intangible assets and property, plant and equipment -16,641,314 7. Other operating expenses -16,356,129 --------------------- -95,241,205 8. Other interest and similar income 363,884 9. Interest and similar expenses -11,727,730 thereof to affiliated companies: EUR 7,523,726 --------------------- -11,363,846 --------------------- 10. Result from ordinary activities -2,171,398 11. Extraordinary income 119,000 12. Extraordinary expenses -239,165 --------------------- 13. Extraordinary result -120,165 14. Income taxes 4,362,052 15. Other taxes 91,441 --------------------- 4,453,493 16. Consolidated net profit for the year 2,161,930 --------------------- 17. Accumulated losses brought forward -185,594,106 18. Minority interest share on net profit -127,833 --------------------- 19. Consolidated accumulated loss -183,560,009 =====================
F-4 WP Domus GmbH, Munich Consolidated Statement of Shareholder's Equity for the Year ended December 31, 2003 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Currency Subscribed Capital Translation Accumulated Minority Capital Reserve Adjustment Deficit Interest Total -------------------------------------------------------------------------------------------------- EUR EUR EUR EUR EUR EUR December 31, 2002 100,000 231,481,000 -252,350 -185,594,106 0 45,734,544 Net income 2,034,097 127,833 2,161,930 Currency translation adjustment -82,106 -82,106 Exercise of a call option by minority shareholder -2,596,497 -2,596,497 -------------------------------------------------------------------------------------------------- December 31, 2003 100,000 231,481,000 -334,456 -183,560,009 -2,468,664 45,217,871 ==================================================================================================
F-5 WP Domus GmbH, Munich Consolidated Statement of Cash Flow for the Year ended December 31, 2003 - ---------------------------------------------------------------------------------------------------------------------- 2003 EUR --------------------- Cash flow from operating activities Net income for the year including minorities 2,161,930 Amortization and depreciation of fixed assets 16,641,314 Change in provisions -3,995,736 Accrued interest expenses 7,523,726 Loss from the disposal of fixed assets 786,788 Changes in inventories, trade receivables and other assets that cannot be allocated to investing or financing activities 242,756 Changes in trade payables and other liabilities that cannot be allocated to investing or financing activities -1,646,682 --------------------- Cash provided by operating activities 21,714,096 Cash flow from investing activities Cash received from disposals of property, plant and equipment/intangible assets 68,544 Cash paid for investments in property, plant and equipment/intangible assets -3,215,120 Cash paid for investments in financial assets -953 --------------------- Cash used in investing activities -3,147,529 Cash flow from financing activities Cash paid for the redemption of loans -18,492,486 --------------------- Cash used in financing activities -18,492,486 Changes in cash and cash equivalents 74,081 Foreign currency exchange effect on cash and cash equivalents 7,720 Cash and cash equivalents at the beginning of the year 7,536,051 --------------------- Cash and cash equivalents at the end of the year 7,617,852 =====================
The cash provided by operating activities includes interest paid amounting to EUR 4,204,004. F-6 WP Domus GmbH, Munich Notes to the Consolidated Financial Statements Prepared in Accordance with German GAAP Year ended December 31, 2003 (in thousands of EUR) 1. Description of Business WP Domus GmbH, Munich (along with its subsidiaries, referred to herein as the "Company") is one of the leading European manufacturers of innovative, high-quality mobility aids and bathroom safety products for elderly and handicapped people. The Company consists primarily of three principal operating subsidiaries (Alber and Aquatec, both based in Germany - and Dolomite, based in Sweden). The Company operates a worldwide network of proprietary sales organizations (Canada, France, Austria and Switzerland) and has dedicated representatives in most other industrialized European countries as well as the United States of America ("USA"). The names of Domus' principal subsidiaries also serve as its key brands. 2. Significant Accounting Policies A summary of significant accounting policies utilized during the preparation of the accompanying German GAAP consolidated financial statements are as follows: Accounting Principles The Company maintains its accounting books and records in domestic currency based on domestic accounting regulations in the countries in which it operates. The consolidated financial statements have been prepared in order to present the Company's consolidated financial position, result of operations, and cash flow in accordance with accounting principles generally accepted in Germany ("German GAAP"). Presented in Note 10 is a reconciliation of the Company's net income and shareholder's equity from that reported under German GAAP to that which would be reported under accounting principles generally accepted in the United States of America ("U.S. GAAP"). F-7 Consolidation The consolidated financial statements include the following entities: 2003 Percentage Equity Net income ---------------------------------------------------- Direct ownership: Domus Homecare AG, Munich, Germany 98.2 93,223 18,360 Shares and Partnership interests held by Domus Homecare AG: Alber AG, Spreitenbach, Switzerland 100 101 5 Aquatec GmbH & Co. KG, Isny, Germany 100(1) 17,770 17,602 Dolomite Holding AB, Anderstorp, Sweden 100 3,119 2,076 Dolomite Home Care Products Inc., Markham, Canada 100 811 8 Mobitec Mobilitatshilfen Ges.m.b.H., Mondsee, Austria 100 186 49 Mobitec S.a.r.l, Venissieux, France 100 371 87 Ulrich Alber GmbH & Co. KG, Albstadt, Germany 100(1) 12,564 12,206 WP Gesundheits Verwaltungs GmbH, Munich, Germany 100 25 0 Dolomite AB, Anderstorp, Sweden 100(2) 73 12
(1) Shares held by WP Gesundheits Verwaltungs GmbH and Domus Homecare AG (2) Shares held by Dolomite Holding AB The German GAAP consolidation was performed in accordance with Section 301 (1) of HGB whereby the capital consolidation took place for the first time at the time of the initial inclusion in the consolidated financial statements. The differences from capital consolidation are shown under the caption "Goodwill" in the accompanying consolidated balance sheet. All significant intercompany balances and transactions have been eliminated during consolidation. Revenue Recognition The Company recognizes revenue when the product is shipped and provides an appropriate allowance for estimated returns and adjustments. F-8 Estimates The preparation of consolidated financial statements in conformity with German GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the allowance for uncollectible accounts receivable, the allowance for excess and obsolete inventory, warranty accruals, other provisions, valuation allowances related to deferred tax assets and the recoverability of long-lived assets. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents represent cash on hand and in the Company's bank accounts. Accounts Receivable Accounts receivable are valued at the lower of their nominal value or market value at balance sheet date. A specific allowance is established for receivables with recognizable collection risks. Uncollectible receivables are written off as identified. A lump-sum allowance was established as of December 31, 2003 to take into account general default risks and discounts. The due date for receivables and other assets is less than one year. Financial assets are recorded at acquisition costs or at lower value as of balance sheet date. Prepaid Expenses Prepaid expenses include deferred taxes of EUR 146. Inventories Inventories are capitalized based on acquisition cost or manufacturing cost in accordance with the rules of commercial law and tax law, considering the lower of cost or market principle. Costs included in inventories represent material unit costs, material overheads, manufacturing unit cost and manufacturing overhead expenses. For slow moving inventories, appropriate valuation adjustments are recorded. Obsolescence was taken into account on an individual basis by write-downs. Borrowing Costs Borrowing costs are expensed as incurred. F-9 Tangible Assets Tangible assets are capitalized at the acquisition cost or at manufacturing cost less regular depreciation. Depreciation is carried out using a linear method according to the expected useful life of the assets. Low value items as defined by German law are written off completely in the year of acquisition. Intangible Assets Intangible assets with determinable useful lives are amortized using the straight-line method over their estimated period of benefit. Goodwill arising from the first time consolidation is amortized over a period of fifteen years or valued at a lower value as appropriate at the balance sheet date. Accruals Other reserves and accrued liabilities are recorded in an amount which covers all potential losses and uncertain liabilities based upon customary business judgment. Liabilities Liabilities are recorded at their respective repayment amount. Lease Agreements All lease agreements are accounted for as operating in nature. Foreign Currencies Assets and liabilities of foreign operations are translated at the exchange rates prevailing on the balance sheet date. Realized gains and losses on transactions in foreign currencies are credited or charged to operations as realized. Unrealized losses on transactions in foreign currencies are also charged to operations, although unrealized gains are deferred until realized. F-10 3. Fixed Assets The development of fixed assets is shown as follows: At Cost ------------------------------------------------------------------------- Net Book Difference Value January 1, currency December 31, Accumulated Depreciation December 2003 translation Additions Disposals Transfers 2003 Depreciation 2003 31, 2003 EUR EUR EUR EUR EUR EUR EUR EUR EUR ------------------------------------------------------------------------- ----------------------------------- I. Intangible assets 1. Franchises, industrial and similar rights and assets and licenses in such rights and assets 2,644 0 165 65 0 2,744 2,171 408 573 2. Goodwill 382,019 0 0 3,420 0 378,599 205,464 13,445 173,135 ------------------------------------------------------------------------- ----------------------------------- 384,663 0 165 3,485 0 381,343 207,635 13,853 173,708 ------------------------------------------------------------------------- ----------------------------------- II. Property, plant & equipment 1. Land, land rights and buildings including buildings on third-party land 7,028 22 83 10 0 7,123 3,293 195 3,830 2. Technical equipment and machines 3,761 27 582 49 0 4,321 3,866 425 455 3. Other equipment, furniture and fixtures 12,779 3 1,919 2,366 751 13,086 9,234 2,167 3,852 4. Payments on account and assets under construction 479 0 466 14 -751 180 1 1 179 ------------------------------------------------------------------------------------------------------------- 24,047 52 3,050 2,439 0 24,710 16,394 2,788 8,316 ------------------------------------------------------------------------- ----------------------------------- III. Financial Assets 1. Investments 1 0 0 0 0 1 0 0 1 2. Long-term investments 5 0 1 0 0 6 1 0 5 ------------------------------------------------------------------------- ----------------------------------- ------------------------------------------------------------------------- ----------------------------------- 6 0 1 0 0 7 1 0 6 ------------------------------------------------------------------------- ----------------------------------- ------------------------------------------------------------------------- ----------------------------------- 408,716 52 3,216 5,924 0 406,060 224,030 16,641 182,030 ========================================================================= ===================================
F-11 4. Goodwill In 2002, Goodwill was written down to EUR 190,000 from EUR 382,019 in order to state it at a lower value as was considered appropriate at the balance sheet date. 5. Subscribed Capital The Company's subscribed capital has been fully paid in or has been contributed in kind. The shareholder as of December 31, 2003 was: EUR % ------------------------- -------------------- WP Domus LLC, U.S. 100,000 100 ========================= ==================== Subsequent to December 31, 2003, the shareholder entered into an agreement to sell its interest in the Company to Invacare Corporation, USA. This sale was finalized on September 9, 2004. 6. Other Provisions and Accrued Liabilities Other accruals comprise mainly accruals for management bonus as well as stock options programs (EUR 3,830), warranties (EUR 1,949), for customer bonuses (EUR 1,309) and for vacation not yet taken (EUR 628). 7. Liabilities The residual terms of the liabilities appear as follows: residual term residual term residual term less than from one to more than total one year five years five years ------------------------------------------------------------------------------------- EUR EUR EUR EUR Liabilities to banks 64,741 4,678 60,063 0 Trade payables 2,831 2,831 0 0 Liabilities to shareholders 77,302 0 0 77,302 Other liabilities 3,454 3,454 0 0 ------------------------------------------------------------------------------------- 148,328 10,963 60,063 77,302 =====================================================================================
F-12 Bank loans in the amount of EUR 64,741 are secured. Bank liabilities are guaranteed by the pledge of all fixed assets and part of the current assets. Moreover, the shares or investment in the following fully consolidated companies are pledged: Domus Homecare AG, Munich, WP Gesundheits Verwaltungs GmbH, Munich, Aquatec GmbH & Co. KG, Isny, Ulrich Alber GmbH & Co. KG, Albstadt, Dolomite Holding AB, Anderstorp/Sweden and Dolomite AB, Anderstorp/Sweden. 8. Consolidated Income Statement Data External Sales - Geographical Markets EUR ------------------ Germany 57,321 Asia 9,344 Sweden 6,676 Canada 5,382 USA 4,902 France 3,848 United Kingdom 3,406 Other 12,066 ------------------ 102,945 ================== External Sales - Product Lines EUR ------------------ Bath-lifts 30,679 Power kits for wheelchair drivers 18,500 Auxiliary power kits for care giver 16,822 Walkers 12,882 Shower and toilet aids 6,804 Other 17,258 ------------------ 102,945 ================== Personnel Expenses Personnel expenses included costs resulting from the stock option plans established by Domus Homecare AG, Munich (EUR 3,104). F-13 Income Taxes Income taxes include income tax refunds of the German subgroup related to the years 1999 through 2002 amounting to EUR 5,577. Due to the trustee structure which exists between general partner and limited partner of Aquatec GmbH & Co. KG as well as Ulrich Alber GmbH & Co. KG, the partnerships were not subject to trade tax on income. A similar structure has been reinforced with the legal restructuring of the German subgroup beginning in 2003. 9. Other Disclosures Litigation The Company is a defendant in some legal matters arising in the normal course of business. In the opinion of management, after consultation with legal counsel, the ultimate resolution of these matters is not expected to have a material effect on the accompanying consolidated financial statements. Other Financial Commitments Other financial commitments amount to EUR 10,844. They include rental expenses of EUR 9,600 and leasing liabilities of EUR 1,244. Employees The average number of employees was: production (206), distribution (113), administration (63) and technical (36). The total average number of employees was 418. Management The Company's management at December 31, 2003 was Timothy Curt. On September 9, 2004, James Lawson and Franz Krammer replaced Timothy Curt and were granted sole power of attorney. Munich, November 22, 2004 General Manager F-14 10. Reconciliation to U.S. GAAP The consolidated financial statements of the Company have been prepared in accordance with German GAAP, which differ in certain aspects from U.S. GAAP. The application of U.S. GAAP would have affected the consolidated result of operations for the year ended December 31, 2003 and the consolidated balance sheet as of December 31, 2003 to the extent described below. A reconciliation of net income from German GAAP to U.S. GAAP is as follows (in thousands of EUR): December 31, 2003 ------------------------ Net income as reported in the consolidated financial statements under German 2,162 GAAP U.S. GAAP reconciling adjustments: Goodwill (a) 13,445 Intangible assets (a) (2,394) Deferred financing costs (b) (758) Employee stock compensation (c) 1,149 Inventoried costs (d) (154) Allowance for doubtful accounts receivable (e) (9) Reserve for excess and obsolete inventories (f) 48 Call option - financing arrangement / minority interest (g) 683 Accrued expenses (h) (734) Warranty expense (h) 163 Building lease (i) (133) Property and equipment (fixed assets) (j) 11 Derivative instruments (k) 62 Deferred income taxes (l) (4,815) ------------------------ Subtotal of reconciling adjustments 6,564 ------------------------ Net income in accordance with U.S. GAAP 8,726 ========================
F-15 A reconciliation of shareholder's equity from German GAAP to U.S. GAAP is as follows (in thousands of EUR): December 31, 2003 -------------------------- Shareholder's equity as reported in the consolidated financial 45,218 statements under German GAAP U.S. GAAP reconciling adjustments Goodwill (a) (111,023) Intangible assets (a) 24,571 Deferred financing costs (b) 3,238 Employee stock compensation (c) 1,149 Inventoried costs (d) 145 Allowance for doubtful accounts receivable (e) 108 Reserve for excess and obsolete inventories (f) 456 Call option - financing arrangement / minority interest (g) 262 Accrued expenses (h) 100 Warranty expense (h) 163 Building lease (i) (133) Property and equipment (fixed assets) (j) 1,417 Derivative instruments (k) 62 Deferred income taxes (l) (4,181) -------------------------- Subtotal of reconciling adjustments (83,666) -------------------------- Shareholder's equity in accordance with U.S. GAAP (38,448) ==========================
Changes in shareholder's equity in accordance with U.S. GAAP (in thousands of EUR): 2003 --------------------- Shareholder's equity in accordance with U.S. GAAP, on January 1 (47,092) Net income in accordance with U.S. GAAP 8,726 Other comprehensive income: Foreign currency translation adjustment (82) --------------------- Shareholder's equity in accordance with U.S. GAAP, on (38,448) December 31 ===================== F-16 A description of the reconciling adjustments is as follows: (a) Goodwill and Intangible Assets In December 1997, 100% of the Company was acquired by certain Warburg, Pincus Ventures entities. The acquisition was financed through a combination of debt and equity. Under German GAAP, no amounts were allocated to intangible assets and the resulting goodwill was amortized over a fifteen year period. The reconciling adjustment in net income under goodwill of EUR 13,445 represents the amortization expense and was reversed for U.S. GAAP purposes. Under U.S. GAAP, the business combination would have been accounted for under the purchase method of accounting as defined in Accounting Principles Board Opinion ("APB") No. 16, Accounting for Business Combinations, the then authoritative literature for business combinations. The cost of acquired entities at the date of acquisition would have been allocated to identifiable tangible and intangible net assets and the excess of the total purchase price over the amounts assigned to identifiable net assets was recorded as goodwill. In 2001, the Company would have changed its accounting with respect to the resulting goodwill and intangible assets pursuant to the guidance of Statement of Financial Accounting Standards ("SFAS") No. 142, Accounting for Goodwill and Other Intangible Assets. Intangible assets for U.S. GAAP purposes consist primarily of business and product trademarks, trade names, developed technology and customer relationships. Intangible assets are amortized on a straight-line basis over their estimated useful lives which are summarized as follows (in thousands of EUR and years): Estimated Useful December 31, Life 2003 ----------------------------------- Business trademark and trade names Indefinite 7,429 Product trademark and trade names Indefinite 1,857 Developed technology 10 - 20 2,026 Customer relationships 10 - 15 13,259 Goodwill Indefinite 65,532 Goodwill represents the excess of consideration paid over the fair value of net assets acquired in purchase business combinations and, subsequent to the adoption of SFAS No. 142 in 2001, would not be amortized under U.S. GAAP. The reconciling adjustment of EUR (2,394) in net income represents the amortization of the intangibles with finite lives under U.S. GAAP. In accordance with SFAS No. 142, the Company evaluates the amortization period for intangible assets with finite lives to determine whether events or circumstances warranted revised amortization periods. Additionally, goodwill and indefinite-lived intangible assets are tested for impairment. Management has concluded that there is no need for changes in the finite lives assigned to the intangibles nor impairment in goodwill or the intangibles assets. F-17 (b) Deferred Financing Costs According to APB No. 21, Interest on Receivables and Payables, the direct costs incurred to secure a credit facility should be reported as deferred financing costs. Under U.S. GAAP, the Company capitalized the direct costs relating to the issuance of their senior credit facility and began amortizing these costs at the end of 2002 over the life of the debt instrument which is six years. Under German GAAP, the costs were expensed as incurred in 2002. (c) Employee Stock Compensation Under U.S. GAAP, the Company accounts for options under its stock-based compensation plans using the intrinsic value method provided by APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has two stock based compensation plans. For one of those plans, the grants made in 2003 were less than the estimated fair value at the date of the grant and accordingly compensation cost was recognized for the differences between the fair market value less the exercise price of the underlying shares that vested in 2003. The other stock based compensation plan is a variable plan and during 2003 the performance criterion under this plan was met for the first time. Compensation expense was recognized accordingly. Under German GAAP, the compensation expense recorded was based on a conservative calculation. The excess expense is reversed for U.S. GAAP purposes to reflect the appropriate compensation expense under APB No. 25. In connection with the purchase of the Company by the Invacare Corporation in September of 2004, the stock based compensation plans were terminated and vested options were repurchased from the respective employees. (d) Inventoried Costs Accounting Research Bulletin ("ARB") No. 43, Restatement and Revision of Accounting Research Bulletins provides that general and administrative costs should be included in inventories if they are clearly related to production. Under German GAAP, such expenses were not fully capitalized. F-18 (e) Allowance for Doubtful Accounts Receivable Under German GAAP, general reserves for accounts receivable are calculated as a percent of accounts receivable and specific reserves for known collection issues related to specific transactions or customer balances are also recorded. While the specific reserves recorded in the German GAAP financial statements do not reflect a difference in accounting between German GAAP and U.S. GAAP, the general reserves recorded by the Company were not supportable by historical bad debt write-offs, and thus do not meet the criteria for measurement and recording under U.S. GAAP. (f) Reserve for Excess and Obsolete Inventories Under German GAAP, obsolete and excess inventory reserves are recorded on a conservative basis. The reserves have been adjusted for U.S. GAAP reporting based on historical experience which resulted in a reduction of the reserve amounts recorded. (g) Call Option - Financing Arrangement / Minority Interest During 1999, the Company entered into a financing arrangement with Deutsche Bank Luxembourg S.A., Luxembourg ("Deutsche Bank"). In connection with that financing arrangement, a call option was provided to Deutsche Bank. The option provided Deutsche Bank the right to purchase 1.8% of the stated share capital of Domus Homecare (a Company subsidiary), upon certain events, one of which being the repayment of financing obligations. This option was exercised in 2003 and the Company thus sold 140,400 shares of Domus Homecare to Deutsche Bank at EUR 1 per share. Under U.S. GAAP, this derivative instrument would be considered an extension of the initial financing arrangement and the difference between the exercise price of the option and the estimated fair market value of the Domus Homecare per share value was recorded as a liability over the vesting period (the term of the borrowing). Because this cost was expensed entirely in the 2003 German GAAP financial statements, costs related primarily to years prior to 2003 have been reflected as a U.S. GAAP reconciling adjustment. When legal share transfer occurred in 2003, the aggregate amount paid by Deutsche Bank of EUR 140 plus the previously accrued amount of EUR 421 were reclassified to minority interest reflecting the amount paid for the minority ownership interest. The primary component of the reconciliation adjustment related to minority interest as of December 31, 2003 is due to the fact that German GAAP recognizes minority interest as a proportion of the net fair value of acquired assets and liabilities, while U.S. GAAP values minority interest at its historical book value (cost plus historical proportions of earnings). F-19 (h) Accrued Expenses (including Warranty Expense) Under German GAAP, accruals are normally recorded at the high-end of the possible loss range when no estimate within the range is more identifiable than any other amount. Under U.S. GAAP, the minimum amount within a range should be accrued when the liability is probable in nature, can be reasonably estimated and no specific amount within the range is more accurate than another. (i) Building Lease The Company entered into a lease agreement for building and land in February 2003, which was accounted for as an operating lease under German GAAP. This lease met the criteria of a capital lease in accordance with SFAS No. 13, Accounting for Leases, and therefore, the building and land were recorded as assets under U.S. GAAP. Since the land component at the inception date represented less than 25% of the total fair value of the real property subject to the lease, the lease was treated as a single unit with the estimated economic life being the life of the building (lease term 15 years). Interest expense has been calculated using an effective annual interest rate of 6% per annum. (j) Property and Equipment (Fixed Assets) Differences between German GAAP and U.S. GAAP relate to both the method of depreciating assets and also the related useful lives. Under German GAAP, the Company depreciated certain buildings under an accelerated method (in prior periods) over a useful life of 25 years. Under U.S. GAAP, the straight line method of depreciation would have been used and a useful life of 40 years applied. Other than buildings, the straight line method of depreciation was applied to all of the remaining property and equipment under German GAAP and U.S. GAAP. German GAAP useful lives approximate U.S. GAAP useful lives, except for buildings as mentioned above and also land improvements (German GAAP 20 years vs. U.S. GAAP 10 years). F-20 (k) Derivative Instruments Derivative financial instruments are utilized by the Company to manage its exposure to fluctuations in interest rates. Derivative instruments used by the Company are straightforward, non leveraged instruments. Such financial instruments are not bought and sold for trading purposes. The risk of credit loss is deemed to be remote, because the counterparties to these instruments are major international financial institutions with strong credit ratings and because of the limited positions entered into by the Company with any one institution. All derivatives, whether designated as qualifying for hedge accounting treatment or not, are recorded on the balance sheet at fair value. The Company entered into various interest rate derivatives with Deutsche Bank on September 2001 which expired on December 31, 2003 and an interest rate cap agreement with the Bank of Nova Scotia on June 27, 2003 which expires on December 31, 2005. The Deutsche Bank derivatives related to the previous borrowing that was replaced with a senior credit facility entered into in December 2002. The interest rate cap with the Bank of Nova Scotia covers a portion of the interest paid on the new credit facility. The primary reason for the reconciling adjustment for derivative instruments is because German GAAP does not require balance sheet fair value presentation for gain positions. (l) Deferred Income Taxes Under U.S. GAAP, the Company computes and records income tax in accordance with SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The reconciling adjustments related to deferred taxes are primarily due to the fact that deferred tax assets on loss carryforwards and deferred tax liabilities on goodwill and intangibles were not recorded or necessary according to German GAAP. F-21 WP Domus GmbH, Munich Consolidated Balance Sheets as of June 30, 2004 and 2003 Unaudited - ------------------------------------------------------------------------------------------------------------------------------------ A S S E T S 2004 2003 EUR EUR ----------------------------------------------- A. FIXED ASSETS I. Intangible assets 1. Franchises, industrial rights and similar rights and assets and licenses in such rights and assets 397,754 710,248 2. Goodwill 166,476,190 183,214,286 ----------------------------------------------- 166,873,944 183,924,534 II. Property, plant and equipment 1. Land, land rights and buildings including buildings on third-party land 3,725,261 3,651,867 2. Technical equipment and machines 319,976 456,583 3. Other equipment, furniture and fixtures 3,450,381 3,964,512 4. Payments on account and assets under construction 150,131 333,432 ----------------------------------------------- 7,645,749 8,406,394 III.Financial assets 1. Investments 1,859 545 2. Long-term investments 4,975 4,022 ----------------------------------------------- 6,834 4,567 ----------------------------------------------- 174,526,527 192,335,495 B. CURRENT ASSETS I. Inventories 1. Raw materials, consumables and supplies 2,482,341 3,244,974 2. Unfinished goods, work in process 401,076 408,177 3. Finished goods and merchandise 2,613,548 2,332,152 ----------------------------------------------- 5,496,965 5,985,303 ----------------------------------------------- II. Receivables and other assets 1. Trade receivables 9,526,784 8,803,570 2. Other assets 872,107 1,131,250 ----------------------------------------------- 10,398,891 9,934,820 III.Cash on hand, bank balances and checks 2,150,195 2,439,488 ----------------------------------------------- 18,046,051 18,359,611 C. PREPAID EXPENSES 393,972 378,416 192,966,550 211,073,522 ===============================================
F-22 WP Domus GmbH, Munich Consolidated Balance Sheets as of June 30, 2004 and 2003 Unaudited - ------------------------------------------------------------------------------------------------------------------------------------ 2004 2003 EUR EUR ------------------------ ---------------------- E Q U I T Y A N D L I A B I L I T I E S A. EQUITY I. Subscribed capital 100,000 100,000 II. Capital reserve 231,481,000 231,481,000 III. Currency translation adjustment -292,990 -227,244 IV. Retained earnings -183,486,359 -187,542,820 V. Minority interest -2,409,658 0 ------------------------ ---------------------- 45,391,993 43,810,936 B. ACCRUALS 1. Tax accruals 821,366 155,938 2. Other accruals 10,112,739 6,223,218 ------------------------ ---------------------- 10,934,105 6,379,156 C. LIABILITIES 1. Liabilities to banks 52,175,119 79,485,698 2. Trade payables 4,147,509 3,444,946 3. Liabilities to shareholders 77,301,772 73,576,940 4. Other liabilities 3,016,052 4,375,846 thereof for taxes: EUR 869,095 (prior year: EUR 1,003,893) thereof for social security: EUR 670,656 (prior year: EUR 671,789) ------------------------ ---------------------- 136,640,452 160,883,430 ------------------------ ---------------------- 192,966,550 211,073,522 ======================== ======================
F-23 WP Domus GmbH, Munich Consolidated Income Statements for Six-Months ended June 30, 2004 and 2003 Unaudited - ------------------------------------------------------------------------------------------------------------------------------------ 2004 2003 EUR EUR -------------------- --------------------- 1. Sales 45,828,049 50,431,615 2. Increase in finished goods and work in process 750,139 586,523 3. Other operating income 385,672 812,083 -------------------- --------------------- 46,963,860 51,830,221 4. Cost of materials a) Cost of raw materials, consumables and supplies and of purchased merchandise -18,669,295 -19,956,052 b) Cost of purchased services -241,049 -312,889 5. Personnel expenses a) Wages and salaries -9,391,229 -8,721,799 b) Social security and other pension costs -1,822,239 -1,764,324 6. Amortization and depreciation on intangible assets and property, plant and equipment -8,075,706 -8,451,959 7. Other operating expenses -6,557,623 -7,556,022 -------------------- --------------------- -44,757,141 -46,763,045 8. Other interest and similar income 19,431 33,408 9. Interest and similar expenses -1,355,456 -6,086,626 thereof to affiliated companies: EUR 0 (prior year: EUR -4,175,265) -------------------- --------------------- -1,336,025 -6,053,218 -------------------- --------------------- 10. Result from ordinary activities 870,694 -986,042 -------------------- --------------------- 11. Income taxes -711,981 -940,665 12. Other taxes -26,057 -22,007 -------------------- --------------------- -738,038 -962,672 13. Consolidated net profit/loss for the period 132,656 -1,948,714 -------------------- --------------------- 14. Accumulated losses brought forward -183,560,009 -185,594,106 15. Minority interest share on net profit -59,006 0 -------------------- --------------------- 16. Consolidated accumulated losses -183,486,359 -187,542,820 ==================== =====================
F-24 WP Domus GmbH, Munich Consolidated Statements of Shareholder's Equity for Six-Months ended June 30, 2004 and 2003 Unaudited - ------------------------------------------------------------------------------------------------------------------------------------ Currency Subscribed Capital Translation Accumulated Minority Capital Reserve Adjustment Deficit Interest Total - ------------------------------------------------------------------------------------------------------------------------------------ EUR EUR EUR EUR EUR EUR December 31, 2003 100,000 231,481,000 -334,456 -183,560,009 -2,468,664 45,217,871 Net income 73,650 59,006 132,656 Currency translation adjustments 41,466 41,466 ----------------------------------------------------------------------------------------------------- June 30, 2004 100,000 231,481,000 -292,990 -183,486,359 -2,409,658 45,391,993 ===================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Currency Subscribed Capital Translation Accumulated Minority Capital Reserve Adjustment Deficit Interest Total - ------------------------------------------------------------------------------------------------------------------------------------ EUR EUR EUR EUR EUR EUR December 31, 2002 100,000 231,481,000 -252,350 -185,594,106 0 45,734,544 Net income -1,948,714 -1,948,714 Currency translation adjustments 25,106 25,106 ----------------------------------------------------------------------------------------------------- June 30, 2003 100,000 231,481,000 -227,244 -187,542,820 0 43,810,936 =====================================================================================================
F-25 WP Domus GmbH, Munich Consolidated Cash Flow Statements for Six-Months ended June 30, 2004 and 2003 Unaudited - ------------------------------------------------------------------------------------------------------------------------------------ 2004 2003 EUR EUR ------------------ ------------------ Cash flow from operating activities Net income for the year including minorities 132,656 -1,948,714 Armotization and depreciation of fixed assets 8,075,706 8,451,959 Change in provisions 1,858,354 -7,079,833 Accrued interest expenses 0 4,175,265 Gain / loss from the disposal of fixed assets -4,712 51,842 Changes in inventories, trade receivables and other assets that cannot be allocated to investing or financing activities -3,369,192 -2,836,030 Changes in trade payables and other liabilities that cannot be allocated to investing or financing activities 886,091 -93,701 ------------------ -------------------- Cash provided by operating activities 7,578,903 720,788 Cash flow from investing activities Cash received from disposals of property, plant and equipment/intangible assets 58,086 84,275 Cash paid for investments in property, plant and equipment/intangible assets -640,684 -1,885,656 Cash paid for investments in financial assets -1,308 0 Cash received from the sale of shares in subsidiaries 40,000 0 ------------------ -------------------- Cash used in investing activities -543,906 -1,801,381 Cash flow from financing activities Cash paid for the redemption of loans -12,500,430 -4,016,469 ------------------ -------------------- Cash used in financing activities -12,500,430 -4,016,469 Changes in cash and cash equivalents -5,465,433 -5,097,062 Foreign currency exchange effect on cash and cash equivalents -2,224 499 Cash and cash equivalents at the beginning of the period 7,617,852 7,536,051 ------------------ -------------------- Cash and cash equivalents at the end of the period 2,150,195 2,439,488 ================== ====================
F-26 WP Domus GmbH, Munich Note to the Consolidated Financial Statements Unaudited 1. Reconciliation to U.S. GAAP The consolidated financial statements of WP Domus GmbH ("Domus" or the "Company") have been prepared in accordance with accounting principles generally accepted in Germany ("German GAAP"), which differ in certain aspects from accounting principles generally accepted in the United States of America ("U.S. GAAP"). The application of U.S. GAAP would have affected the consolidated results of operations for the six months ended June 30, 2004 and 2003 and the consolidated balance sheet as of June 30, 2004 and 2003 to the extent described below. A reconciliation of net income from German GAAP to U.S. GAAP is as follows (in thousands of EUR): June 30, June 30, 2004 2003 ---------------------------------- Net income / (net loss) as reported in the consolidated financial statements 133 (1,949) under German GAAP U.S. GAAP reconciling adjustments: Goodwill (a) 6,659 6,786 Intangible assets (a) (1,197) (1,197) Deferred financing costs (b) (379) (379) Employee stock compensation (c) (1,149) 0 Inventoried costs (d) 93 174 Allowance for doubtful accounts receivable (e) (14) 27 Reserve for excess and obsolete inventories (f) 366 43 Call option - financing arrangement / minority interest (g) 19 0 Accrued expenses (h) (100) (532) Warranty expense (h) (3) 222 Building lease (i) (74) (55) Property and equipment (fixed assets) (j) (10) 2 Derivative instruments (k) (47) 56 Deferred income taxes (l) (1,661) (2,431) ---------------------------------- Subtotal of reconciling adjustments 2,503 2,716 ---------------------------------- Net income in accordance with U.S. GAAP 2,636 767 ==================================
F-27 A reconciliation of shareholder's equity from German GAAP to U.S. GAAP is as follows (in thousands of EUR): June 30, June 30, 2004 2003 --------------------------------- Shareholder's equity as reported in the consolidated financial 45,392 43,811 statements under German GAAP U.S. GAAP reconciling adjustments Goodwill (a) (104,364) (117,682) Intangible assets (a) 23,374 25,768 Deferred financing costs (b) 2,859 3,617 Employee stock compensation (c) 0 0 Inventoried costs (d) 238 473 Allowance for doubtful accounts receivable (e) 95 144 Reserve for excess and obsolete inventories (f) 823 451 Call option - financing arrangement / minority interest (g) 262 (421) Accrued expenses (h) 0 302 Warranty expense (h) 160 222 Building lease (i) (208) (55) Property and equipment (fixed assets) (j) 1,407 1,408 Derivative instruments (k) 15 56 Deferred income taxes (l) (5,842) (1,797) --------------------------------- (81,181) (87,514) --------------------------------- Shareholder's equity in accordance with U.S. GAAP (35,789) (43,703) =================================
F-28 A description of the reconciling adjustments is as follows: (a) Goodwill and Intangible Assets In December 1997, 100% of the Company was acquired by certain Warburg, Pincus Ventures entities. The acquisition was financed through a combination of debt and equity. Under German GAAP, no amounts were allocated to intangible assets and the resulting goodwill was amortized over a fifteen year period. The reconciling adjustments in net income under goodwill of EUR 6,659 for the six-month period ended June 30, 2004 and EUR 6,786 for the six-month period ended June 30, 2003 represent the amortization expense and were reversed for U.S. GAAP purposes. Under U.S. GAAP, the business combination would have been accounted for under the purchase method of accounting as defined in Accounting Principles Board Opinion ("APB") No. 16, Accounting for Business Combinations, the then authoritative literature for business combinations. The cost of acquired entities at the date of acquisition would have been allocated to identifiable tangible and intangible net assets and the excess of the total purchase price over the amounts assigned to identifiable net assets would have been recorded as goodwill. In 2001, the Company would have changed its accounting with respect to the resulting goodwill and intangible assets pursuant to the guidance of Statement of Financial Accounting Standards ("SFAS") No. 142, Accounting for Goodwill and Other Intangible Assets. Intangible assets for U.S. GAAP purposes consist primarily of business and product trademarks, trade names, developed technology and customer relationships. Goodwill represents the excess of consideration paid over the fair value of net assets acquired in purchase business combinations and, subsequent to the adoption of SFAS No. 142 in 2001, would not be amortized under U.S. GAAP. The reconciling adjustments in net income of EUR (1,197) for the six-month period ended June 30, 2004 and EUR (1,197) for the six-month period ended June 30, 2003 represent the amortization of the intangibles with finite lives under U.S. GAAP. (b) Deferred Financing Costs According to APB No. 21, Interest on Receivables and Payables, the direct costs incurred to secure a credit facility should be reported as deferred financing costs. Under U.S. GAAP, the Company capitalized the direct costs relating to the issuance of its senior credit facility and began amortizing these costs at the end of 2002 over the life of the debt instrument, which is six years. Under German GAAP, the costs were expensed as incurred in 2002. F-29 (c) Employee Stock Compensation Under German GAAP, stock-based compensation costs are recorded on a conservative basis once the plans are in-the-money. Under U.S. GAAP, the Company accounts for options under its stock-based compensation plans using the intrinsic value method provided by APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. In connection with the purchase of the Company by the Invacare Corporation in September of 2004, the stock based compensation plans were terminated and vested options were repurchased from the respective employees. (d) Inventoried Costs Accounting Research Bulletin ("ARB") No. 43, Restatement and Revision of Accounting Research Bulletins provides that, under U.S. GAAP, general and administrative costs should be included in inventories if they are clearly related to production. Under German GAAP, such expenses were not fully capitalized. (e) Allowance for Doubtful Accounts Receivable Under German GAAP, general reserves for accounts receivable are calculated as a percent of accounts receivable and specific reserves for known collection issues related to specific transactions or customer balances are also recorded. While the specific reserves recorded in the German GAAP financial statements do not reflect a difference in accounting between German GAAP and U.S. GAAP, the general reserves recorded by the Company were not supportable by historical bad debt write-offs, and thus do not meet the criteria for measurement and recording under U.S. GAAP. (f) Reserve for Excess and Obsolete Inventories Under German GAAP, obsolete and excess inventory reserves are recorded on a conservative basis. The reserves have been adjusted for U.S. GAAP reporting based on historical experience which resulted in a reduction of the reserve amounts recorded. F-30 (g) Call Option - Financing Arrangement / Minority Interest During 1999, the Company entered into a financing arrangement with Deutsche Bank Luxembourg S.A., Luxembourg ("Deutsche Bank"). In connection with that financing arrangement, a call option was provided to Deutsche Bank. The option provided Deutsche Bank the right to purchase 1.8% of the stated share capital of Domus Homecare (a Company subsidiary), upon certain events, one of which being the repayment of financing obligations. This option was exercised in 2003 and the Company thus sold 140,400 shares of Domus Homecare to Deutsche Bank at EUR 1 per share. Under U.S. GAAP, this derivative instrument would be considered an extension of the initial financing arrangement and the difference between the exercise price of the option and the estimated fair market value of the Domus Homecare per share value would have been recorded as a liability over the vesting period (the term of the borrowing). Because this cost was expensed entirely in the 2003 German GAAP financial statements, costs related primarily to years prior to 2003 have been reflected as a U.S. GAAP reconciling adjustment. When legal share transfer occurred in 2003, the aggregate amount paid by Deutsche Bank of EUR 140 plus the previously accrued amount of EUR 421 were reclassified to minority interest reflecting the amount paid for the minority ownership interest. The reconciliation adjustments related to minority interest as of June 30, 2004 and 2003 are primarily due to the fact that German GAAP recognizes minority interest as a proportion of the net fair value of acquired assets and liabilities, while U.S. GAAP values minority interest at its historical book value (cost plus historical proportions of earnings). (h) Accrued Expenses (including Warranty Expense) Under German GAAP, accruals are normally recorded at the high-end of the possible loss range when no estimate within the range is more reasonably identifiable than any other estimate. Under U.S. GAAP, the minimum amount within a range should be accrued when the liability is probable in nature, can be reasonably estimated and no specific amount within the range is more accurate than another. (i) Building Lease The Company entered into a lease agreement for a building and land in February 2003, which was accounted for as an operating lease under German GAAP. This lease met the criteria of a capital lease in accordance with SFAS No. 13, Accounting for Leases, and therefore the building and land were recorded as assets under U.S. GAAP. Since the land component, at the inception date, represented less than 25% of the total fair value of the real property subject to the lease, the lease was treated as a single unit with the estimated economic life being the life of the building (lease term 15 years). Interest expense has been calculated using an effective annual interest rate of 6% per annum. F-31 (j) Property and Equipment (Fixed Assets) German GAAP and U.S. GAAP differ in both the method of depreciating assets and the related useful lives applied to such assets. Under German GAAP, the Company depreciated certain buildings under an accelerated method in prior periods over a useful life of 25 years. Under U.S. GAAP, the straight line method of depreciation would have been used and a useful life of 40 years applied. The straight line method of depreciation was applied to all of the remaining property and equipment under German GAAP and U.S. GAAP. German GAAP useful lives approximate U.S. GAAP useful lives, except as applied to buildings, as mentioned above, and also land improvements (German GAAP 20 years vs. U.S. GAAP 10 years). (k) Derivative Instruments Derivative financial instruments are utilized by the Company to manage its exposure to fluctuations in interest rates. Derivative instruments used by the Company are straightforward, non leveraged instruments. Such financial instruments are not bought and sold for trading purposes. The risk of credit loss is deemed to be remote, because the counterparties to these instruments are major international financial institutions with strong credit ratings and because of the limited positions entered into by the Company with any one institution. All derivatives, whether designated as qualifying for hedge accounting treatment or not, are recorded on the balance sheet at fair value. The Company entered into various interest rate derivatives with Deutsche Bank on September 2001 which expired on December 31, 2003 and an interest rate cap agreement with the Bank of Nova Scotia on June 27, 2003 which expires on December 31, 2005. The Deutsche Bank derivatives related to the previous borrowing that was replaced with a senior credit facility entered into in December 2002. The interest rate cap with the Bank of Nova Scotia covers a portion of the interest paid on the new credit facility. The primary reason for the reconciling adjustment for derivative instruments is because German GAAP does not require balance sheet fair value presentation for gain positions. (l) Deferred Income Taxes Under U.S. GAAP, the Company computes and records income tax in accordance with SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The reconciling adjustments related to deferred taxes are primarily due to the fact that deferred tax assets on loss carryforwards and deferred tax liabilities on goodwill and intangibles were not recorded or necessary under German GAAP. F-32 INVACARE CORPORATION AND SUBSIDIARIES Pro Forma Financial Information - (unaudited) The unaudited pro forma financial information of Invacare Corporation (the "Company") gives effect to the acquisition of WP Domus GmbH ("Domus"). The unaudited pro forma condensed combined balance sheet at June 30, 2004 presents adjustments for the Domus acquisition as if the transaction was completed on June 30, 2004. The unaudited pro forma condensed combined statements of earnings for the six-month period ended June 30, 2004 and the year ended December 31, 2003 present adjustments for the Domus acquisition as if the transaction had been completed on January 1, 2004 and January 1, 2003, respectively. The Domus historical amounts are presented according to accounting principles generally accepted in Germany (German GAAP). Euro balances in the related statements of earnings were translated to U.S. dollars at the average exchange rate for the six-month period ended June 30, 2004 and the year ended December 31, 2003. Balance sheet amounts were translated from Euros to U.S. dollars at the exchange rate at June 30, 2004. Separate pro forma adjustments are reflected for converting the Domus amounts from German GAAP to accounting principles generally accepted in the United States (U.S. GAAP) and for recording certain pro forma and purchase accounting adjustments. The purchase method of accounting has been used in the preparation of the unaudited pro forma financial information. Therefore, the estimated aggregate purchase price is allocated to assets acquired and liabilities assumed based on fair values. As the purchase price allocation is preliminary, the information presented herein will differ based upon the final purchase price allocation. Upon final determination of possible office closures, sales agency transfers and other consolidation efforts, the purchase price will be allocated to the assets and liabilities acquired based on fair values as of the date of the purchase. The pro forma statements are based on available information and certain assumptions that management believes are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the pro forma information. The unaudited pro forma financial statements do not purport to represent what the actual results of operations or financial position would have been if the acquisition of Domus as described above had occurred on the dates indicated or to project our results of operations or financial position for any future period. The following unaudited pro forma financial information should be read in conjunction with: (a) Invacare Corporation's consolidated financial statements and notes thereto and management's discussion and analysis for the year ended December 31, 2003 included in Invacare Corporation's Form 10-K for the fiscal year ended December 31, 2003; (b) Invacare Corporation's consolidated financial statements and notes thereto and management's discussion and analysis for the six and nine months ended June 30, 2004 and September 30, 2004 included in Invacare Corporation's Form 10-Q for the fiscal quarters ended June 30, 2004 and September 30, 2004; (c) WP Domus GmbH audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2003 and the unaudited consolidated financial statements as of and for the six months ended June 30, 2004 and 2003 included under Item 9.01 of this Form 8-K/A. F-33 INVACARE CORPORATION AND SUBSIDIARIES Pro Forma Condensed Combined Balance Sheet at June 30, 2004 Unaudited (U.S. dollars in thousands) (1) (2) (3) (4) Pro Forma and Purchase German to Accounting Invacare Domus U.S. GAAP Adjustments Pro Forma Historical Historical Adjustments Combined -------------- --------------- -------------- ---- -------------- --- --------------- -------------- --------------- -------------- ---- -------------- --- --------------- ASSETS CURRENT ASSETS Cash and cash equivalents $6,078 $2,623 $ - $ - $8,701 Marketable securities 1,155 - 1,155 Trade receivables, net 262,559 11,617 115 A 274,291 Installment receivables, net 6,703 - 6,703 Inventories, net 143,644 6,702 1,294 B 900 K 152,540 Deferred income taxes 25,499 - 500 C 25,999 Other current assets 27,743 1,544 3,486 D (3,487) L 29,286 -------- -------- -------- -------- -------- TOTAL CURRENT ASSETS 473,381 22,486 5,395 (2,587) 498,675 OTHER ASSETS 56,634 - 12,035 C 68,669 OTHER INTANGIBLES 19,988 494 28,502 E 40,257 M 89,241 PROPERTY AND EQUIPMENT, NET 156,863 9,324 9,054 F G 175,241 GOODWILL 436,924 203,001 (123,091) H 79,917 N 596,751 -------- -------- -------- -------- -------- TOTAL ASSETS $1,143,790 $235,305 $(68,105) $117,587 $1,428,577 ========= ======== ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $123,171 $5,058 $ - $ - $128,229 Accrued expenses 85,890 16,010 (617) I 7,130 O P 108,413 Accrued income taxes 19,284 1,001 1,280 C (2,569) Q 18,996 Current maturities of long-term obligations 1,863 - - - 1,863 -------- -------- -------- -------- ------- TOTAL CURRENT LIABILITIES 230,208 22,069 663 4,561 257,501 LONG-TERM DEBT 230,388 157,884 7,575 F 66,227 R 462,074 OTHER LONG-TERM OBLIGATIONS 39,113 - 18,008 C 7,800 Q 64,921 SHAREHOLDERS' EQUITY Preferred shares - - - - - Common shares 7,742 122 - (122) S 7,742 Class B common shares 278 - - - 278 Additional paid-in-capital 116,407 282,268 - (282,268) S 116,407 Retained earnings 508,559 (226,682) (94,351) J 321,033 S 508,559 Accumulated other comprehensive earnings 44,214 (356) - 356 S 44,214 Unearned compensation on stock awards (1,982) - - - (1,982) Treasury shares (31,137) - - - (31,137) -------- -------- -------- -------- ------- TOTAL SHAREHOLDERS' EQUITY 644,081 55,352 (94,351) 38,999 644,081 -------- -------- -------- -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,143,790 $235,305 $(68,105) $117,587 $1,428,577 ========= ======== ======== ======== ==========
F-34 INVACARE CORPORATION AND SUBSIDIARIES Pro Forma Condensed Combined Statement of Earnings Six Months Ended June 30, 2004 Unaudited (U.S. dollars in thousands,except per share data) (1) (2) (3) (4) Pro Forma and German to U.S. Purchase Invacare Domus GAAP Accounting Pro Forma Historical Historical Adjustments Adjustments Combined --------------------------------------------------------------------------------------- Net sales $660,631 $ 56,277 $ - $ - $716,908 Cost of products sold 465,128 30,682 (655) T 900 V 496,055 ------- ------- ------- ------- ------- Gross profit 195,503 25,595 655 (900) 220,853 Selling, general and administrative 144,984 22,989 (4,747) U 503 W 163,729 expense Interest expense 5,054 1,664 289 F 3,350 P 10,357 Interest income (2,274) (23) - - (2,297) ------- ------- ------- ------- ------- Earnings before Income Taxes 47,739 965 5,113 (4,753) 49,064 Income taxes 15,515 874 2,040 C (1,349) Q 17,080 ------- ------- ------- ------- ------- NET EARNINGS $ 32,224 $ 91 $ 3,073 $ (3,404) $ 31,984 ======= ======= ======= ======= ======= Net Earnings per Share - Basic $ 1.04 $ 1.03 ======= ======= Weighted Average Shares Outstanding - Basic 31,119 31,119 ======= ======= Net Earnings per Share - Assuming Dilution $ 1.00 $ .99 ======= ======= Weighted Average Shares Outstanding - Assuming Dilution 32,259 32,259 ======= =======
F-35 INVACARE CORPORATION AND SUBSIDIARIES Pro Forma Condensed Combined Statement of Earnings Year Ended December 31, 2003 Unaudited (U.S. dollars in thousands,except per share data) (1) (2) (3) (4) Pro Forma and German to U.S. Purchase Invacare Domus GAAP Accounting Pro Forma Historical Historical Adjustments Adjustments Combined ----------------------------------------------------------------------------------- Net sales $1,247,176 $ 116,587 $ - $ - $1,363,763 Cost of products sold 872,515 64,885 (243) T 668 V 937,825 ------- ------- ------- ------- ------- Gross profit 374,661 51,702 243 (668) 425,938 Selling, general and administrative 262,015 41,470 (12,938) U 929 W 291,476 expense Interest expense 11,710 13,281 367 F 6,178 P 31,536 Interest income (5,473) (412) (74) - (5,959) ------- ------- ------- ------- ------- Earnings before Income Taxes 106,409 (2,637) 12,888 (7,775) 108,885 Income taxes 35,000 (4,940) 5,453 C (2,487) Q 33,026 ------- ------- ------- ------- ------- NET EARNINGS $ 71,409 $ 2,303 $ 7,435 $ (5,288) $ 75,859 ======= ======= ======= ======= ======= Net Earnings per Share - Basic $ 2.31 $ 2.46 ======= ======= Weighted Average Shares Outstanding - Basic 30,862 30,862 ======= ======= Net Earnings per Share - Assuming Dilution $ 2.25 $ 2.39 ======= ======= Weighted Average Shares Outstanding - Assuming Dilution 31,729 31,729 ======= =======
F-36 INVACARE CORPORATION AND SUBSIDIARIES Notes to Pro Forma Condensed Combined Financial Statements Unaudited (U.S. dollars in thousands,except per share data) Note 1. Estimated Purchase Price The estimated purchase price is summarized below: Cash purchase price $230,000 Estimated transaction costs 3,780 -------- Aggregate purchase price $233,780 ======== Note 2. Preliminary Allocation of Purchase Price Cash $ 2,623 Trade receivables 11,732 Inventories 8,896 Deferred income taxes 500 Other current assets 1,543 Other assets 12,035 Other intangibles 69,253 Property and equipment 18,378 Accounts payable (5,058) Accrued expenses (19,256) Accrued income taxes (885) Other long-term obligations (25,808) ------------ 73,953 Goodwill 159,827 ------------ Aggregate purchase price $ 233,780 ========= F-37 Note 3. Pro Forma Statements The following are descriptions of the various columns of data, labeled, (1) through (4), which have been reflected in the accompanying Unaudited Pro Forma Condensed Combined Balance Sheet and Statements of Earnings: (1) Represents Invacare historical financial statements as reported. (2) Represents Domus' historical financial statements, reported in Euros as included in pages F-2 to F-32 of this Form 8-K/A for the year ended December 31, 2003 and the six months ended June 30, 2004 and converted to U.S. dollars and Invacare format for purposes of the pro forma financial statements. (3) Represents adjustments from German GAAP to U.S. GAAP. (4) Represents pro forma adjustments determined in accordance with Regulation S-X and preliminary estimated purchase price allocations. Note 4. Pro Forma Adjustments The following are descriptions for the German to U.S. GAAP adjustments and the pro forma purchase accounting and other acquisition related adjustments, labeled (A) through (W), which have been reflected in the accompanying Unaudited Pro Forma Condensed Combined Balance Sheet and Statements of Earnings: (A) Adjustment to decrease bad debt reserve for general reserve amounts that are in accordance with German GAAP, but not in accordance with U.S. GAAP based upon historical bad debt write-offs. (B) Adjustments to include in inventory costs, which are expensed under German GAAP, but capitalized as part of inventory under U.S. GAAP ($291) and to record excess and obsolete reserves to balances supportable in accordance with U.S. GAAP ($1,003). (C) Adjustment to record tax effect of German to U.S. GAAP adjustments. (D) Adjustment to properly reflect the capitalization of financing costs under U.S. GAAP as costs were expensed under German GAAP. (E) Adjustment to record intangible assets associated with the formation of Domus in December 1997 in accordance with U.S. GAAP. (F) Adjustment to record building lease accounted for as an operating lease under German GAAP but as a capital lease in accordance with U.S. GAAP. (G) Adjustment to accumulated depreciation to reflect useful lives and depreciation methodology in accordance with company policies and U.S. GAAP ($997). F-38 Note 4. Pro Forma Adjustments (continued) (H) Adjustment to record Domus historical goodwill in accordance with U.S. GAAP. (I) Adjustment to record accruals, including warranty costs, in accordance with U.S. GAAP. (J) Adjustment to record retained earnings impact related to German to U.S. GAAP adjustments. (K) Adjustment to record inventories at fair value at date of acquisition. (L) Adjustment to write off capitalized financing costs associated with debt extinguished upon acquisition. (M) Adjustment to reflect the estimated fair value of other acquired intangibles as follows: Amortization for Amortization for Useful Life year ended six months ended Fair Value (Years) December 31, 2003 June 30, 2004 ------------------ ----------------- ------------------- ------------------- ------------------ ----------------- ------------------- ------------------- Business Trademark / Trade $ 16,584 Indefinite $ - $ - Names Product Trademark / Trade 4,137 Indefinite - - Names Developed Technology 3,902 20 181 98 1,463 10 136 74 Customer Relationships 22,193 15 1,374 745 20,974 10 1,948 1,056 ------ ----- ----- $ 69,253 $3,639 $1,973 ====== ====== ======
(N) Adjustment to reflect purchase accounting allocations to specific assets and liabilities detailed in Note 2. (O) Adjustment to reflect estimated acquisition costs ($3,780). F-39 Note 4. Pro Forma Adjustments (continued) (P) Adjustment to reflect interest expense related to debt incurred to fund acquisition as follows: Six Months Year ended Ended June December 31, 30, 2004 2003 ---------- ---------- Revolving credit agreement 87,000,000 euro borrowing $1,576 $2,906 interest based on borrowing rate on date of acquisition (2.95%) and average EUR to USD conversion rate for the first six months of 2004 and full year 2003 Bridge credit agreement 103,000,000 euro borrowing - 1,774 3,272 interest based on borrowing rate on date of acquisition (2.81%) and average EUR to USD conversion rate for the first six months of 2004 and full year 2003 ---------- ---------- $3,350 $6,178 ========== ==========
(Q) Adjustment to record tax effect of pro forma adjustments. (R) Adjustment to reflect debt incurred to fund acquisition. (S) Adjustment to eliminate equity at time of acquisition. (T) Adjustment to reflect cost of sales in accordance with U.S. GAAP. (U) Adjustment to reflect amortization on intangibles and non-recurring stock option plan expense of $1,149 for the six months ended June 30, 2004 and income of $1,149 for the year ended December 31, 2003 in accordance with U.S. GAAP. (V) Adjustment reflects incremental cost of goods sold associated with the increase in inventories for the fair value write-up in inventories required under purchase accounting. (W) Adjustment reflects incremental amortization expense associated with the increase in intangibles for the fair value write-up in intangibles required under purchase accounting. F-40 EX-23 2 exhibit231.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-45993 dated February 24, 1992, Form S-8 No. 33-87052 dated December 5, 1994, Form S-8 No. 333-57978 dated March 30, 2001 and Form S-8 No. 333-109794 dated October 17, 2003) of Invacare Corporation of our report dated November 22, 2004 with respect to the consolidated financial statements of WP Domus GmbH and subsidiaries included in the Current Report on Form 8-K/A of Invacare Corporation dated November 24, 2004 filed with the Securities and Exchange Commission. Ernst & Young AG Wirtschaftsprufungsgesellschaft Munich, Germany November 24, 2004 -----END PRIVACY-ENHANCED MESSAGE-----