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 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to ________________
Commission file number 0-12938
INVACARE CORPORATION
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(Exact name of Registrant as specified in its charter)
Ohio 95-2680965
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Invacare Way, P. O. Box 4028, Elyria, Ohio 44036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (440) 329-6000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par valu
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(Title of Class)
Rights to purchase Common Shares of Invacare, without par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been subject
to the filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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As of February 26, 1999, 28,481,826 Common Shares and 1,433,007 Class B Common
Shares were outstanding. At that date, the aggregate market value of the
25,438,651 Common Shares of the Registrant held by non-affiliates was
$604,167,961 and the aggregate market value of the 93,447 Class B Common Shares
of the Registrant held by non-affiliates was $2,219,366. 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 NASDAQ National
Market System on February 26, 1999, which was $23.75. For purposes of this
information, the 3,043,175 Common Shares and 1,339,560 Class B Common Shares
which were held by Executive Officers and Directors were deemed to be the Common
Shares and Class B Common Shares held by affiliates.
Documents Incorporated By Reference
-----------------------------------
Part of Form 10-K Document Incorporated By Reference
Part III (Items 10, 11, Portions of the Registrant's
12 and 13) definitive Proxy Statement to
be used in connection with
its 1999 Annual Meeting of
Shareholders.
Except as otherwise stated, the information contained in this Annual Report on
Form 10-K is as of December 31, 1998.
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PART I
Item 1. Business.
(a) General Development of Business.
Invacare is the world's leading manufacturer and distributor of non-acute health
care products based upon its distribution channels, the breadth of its product
line and sales. The company designs, manufactures and distributes an extensive
line of health care products for the non-acute care environment including the
home health care, retail and extended care markets. Invacare continuously
revises and expands its product lines to meet changing market demands and
currently offers over two dozen product lines. The company's products are sold
principally to over 10,000 home health care and medical equipment provider
locations in the U.S., Australia, Canada, Europe and New Zealand, with the
remainder of its sales being primarily to government agencies and distributors.
Invacare's products are sold through its world-wide distribution network by its
sales force, telemarketing employees and various organizations of independent
manufacturer's representatives. The company also distributes medical equipment
and related supplies manufactured by others.
Invacare is committed to design, manufacture and distribute the best value in
mobility products and medical equipment for people with disabilities and those
requiring care in the non-acute environment. Invacare will achieve this vision
by:
* designing and developing innovative and technologically
superior products;
* ensuring continued focus on our primary market - the
non-acute health care market;
* marketing our broad range of products under the "One
Stop Shoppingsm" strategy;
* providing the industry's most professional and
cost-effective sales, customer service and distribution
organization;
* supplying superior and innovative provider support and
aggressive product line extensions;
* building a strong referral base among health care
professionals;
* building brand preference with consumers;
* handling the retail channel through a dedicated sales
and marketing structure;
* continuous advancement/recruitment of top management
candidates;
* empowering all employees;
* providing a performance based reward environment; and
* continually striving for total quality throughout the
organization.
When the company was acquired in December 1979 by a group of investors,
including certain members of management and the Board of Directors, it had $19.5
million in net sales and a limited product line of standard wheelchairs and
patient aids. In 1998, Invacare reached $798 million in net sales, representing
a 21.6% compound average sales growth rate since 1979, and currently is the
leading company in the industry which manufactures, distributes and markets
products in each of the following major non-acute medical equipment categories:
power and manual wheelchairs, patient aids, home care beds, home respiratory
products, low air loss therapy products, seating and positioning products and
bathing equipment.
The company's executive offices are located at One Invacare Way, Elyria, Ohio
and its telephone number is (440) 329-6000. In this report, "Invacare" and the
"company" refer to Invacare Corporation and, unless the context otherwise
indicates, its consolidated subsidiaries.
(b) Financial Information About Industry Segments.
The company operates predominantly in the home medical equipment industry
segment. For information relating to net sales, operating income, identifiable
assets and other information for this industry segment, see the Consolidated
Financial Statements of the company.
(c) Narrative Description of Business.
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THE HOME MEDICAL EQUIPMENT INDUSTRY
North America and Australasia
The home medical equipment market includes home health care products, physical
rehabilitation products and other non-disposable products used for the recovery
and long-term care of patients. The company believes that sales of domestic home
medical equipment products will continue to grow during the next decade as a
result of several factors, including:
Growth in population over age 65. The nation's overall life expectancy
increases with every passing year reaching its current all time high of
76.1 years. The over 65 age group represents the vast majority of home
health care patients and continues to grow. A significant percentage of
people using home and community-based health care services are 65 years of
age and older and it is estimated that this segment of the population will
double during the next ten years. Also, it has been widely reported that by
the year 2000, one American will turn 50 every nine seconds.
Treatment trends. Many medical professionals and patients prefer home
health care over institutional care because they believe that it results in
greater patient independence, increased patient responsibility and improved
responsiveness to treatment as familiar surroundings are believed to be
conducive to improved patient outcomes. Health care professionals, public
payors and private payors agree that home care is a cost effective,
clinically appropriate alternative to facility-based care. Recent surveys
show that approximately 70% of adults would rather recover from accident or
illness in their home, while approximately 90% of the older population
showed preference for home-based long-term care.
Technological trends. Technological advances have made medical equipment
increasingly adaptable for use in the home as current hospital procedures
often allow for earlier patient discharge, thereby lengthening recuperation
periods outside of the traditional institutional setting. In addition,
continuing medical advances prolong the life of adults and children, thus
increasing the demand for home medical care equipment.
Healthcare cost containment trends. In 1996, spending on health care in the
U.S. surpassed $1 trillion dollars, which is approximately 14.0% of Gross
Domestic Product (GDP). In 2007, the nation's health care spending is
projected to increase to $2.1 trillion, averaging annual increases of 7%.
Over this same period, spending on health care is expected to increase from
approximately 14% to 17% as a share of gross domestic product in the years
1996 through 2007. The rising cost of health care has caused many payors of
health care expenses to look for ways to contain costs. Home health care
has gained wide-spread acceptance among health care providers and public
policy makers as a cost effective, clinically appropriate and patient
preferred alternative to facility-based care for a variety of acute and
long-term illnesses and disabilities. Thus, the company believes that home
health care and home medical equipment will play a significant role in
reducing health care costs.
Society's mainstreaming of people with disabilities. People with
disabilities are part of the fabric of society, and this has increased, in
large part, due to the Americans with Disabilities Act which became law in
1991. This legislation provides mainstream opportunities to people with
disabilities. The Americans with Disabilities Act imposes requirements on
certain components of society to make "reasonable accommodations" to
integrate people with disabilities into the community and the workplace.
Distribution channels. The changing home health care market continues to
provide new ways of reaching the end user. The distribution network for
products has expanded to include not only specialized home health care
providers and extended care facilities but retail drug stores, surgical
supply houses, rental, hospital and HMO-based stores, home health agencies,
mass merchandisers and direct sales.
Europe
The company believes that, while many of the market factors influencing demand
in the U.S. are also present in Europe - aging of the population, technological
trends and society's acceptance of people with disabilities - each of the major
national markets within Europe has distinctive characteristics. The European
health care industry is more heavily socialized and is, therefore, more
influenced by government regulation and fiscal policy. Variations in product
specifications, regulatory approvals, distribution requirements and
reimbursement policies require the company to tailor its approach to each
market. Management believes that as the European markets become more homogeneous
and the company continues to refine its distribution channels, the company can
more effectively penetrate these markets.
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GEOGRAPHICAL SEGMENTS AND PRODUCT CATEGORIES
North America
North American operations, are aligned into five primary product groups, which
manufacture and market products in all of the major home medical equipment
categories. In Canada, the company principally sells Invacare products
manufactured in the U.S. The company also sells standard wheelchairs and seating
and positioning products manufactured in Canada and certain patient aids
manufactured in Europe.
REHAB PRODUCTS
Power wheelchairs. Invacare manufactures a complete line of power
wheelchairs for individuals who require independent powered mobility. The
range includes products that can be significantly customized to meet an
individual's specific needs, as well as products that are inherently
versatile to meet a broad range of individual requirements. Invacare's
power wheelchair lines are marketed under the "Action" trademarked brand
name and include, among others, the Storm SeriesTM, a technologically
advanced series of power wheelchairs. The Action Gearless Brushless GB(TM)
was introduced in 1998. This new power chair motor is quieter and more
powerful and efficient requiring less service than the standard mechanical
systems of gears and brushes.
Custom manual wheelchairs. Invacare manufactures and markets a range of
custom manual wheelchairs for everyday, sports and recreational uses. These
lightweight chairs are marketed under the Action brand and Action Top
End(R) product name. The chairs provide mobility for people with moderate
to severe disabilities in their everyday activities as well as for various
sports such as basketball, racing, skiing and tennis.
Scooters. Invacare manufactures three- and four-wheeled motorized scooters,
including rear wheel drive models for both outdoor and indoor use and
markets them under the Action brand name. This product line includes the
Action Cat(TM) and Action Flyer(TM) products.
Seating and positioning products. Invacare manufactures seat cushions, back
positioners and a variety of attachments used for comfort, support,
pressure relief and posture control and markets them under the Invacare(R)
brand. Seating products marketed under the Action brand, include the
Tarsys(TM) product of electronic and mechanical tilting and reclining
devices for use on power wheelchairs.
STANDARD PRODUCTS
Manual wheelchairs. Invacare's manual wheelchairs are sold for use in the
home, institutional setting or public places (e.g. airports, malls, etc.)
by people who are chronically or temporarily disabled but do not require or
qualify under medical reimbursement programs for customization in terms of
size, basic performance characteristics, or frame modification. Examples of
Invacare's standard wheelchair lines, which are marketed under the
Invacare(R) brand name, include the 9000 and TracerTM product lines. Both
standard and prescription manual wheelchairs are designed to accommodate
the diverse capabilities of the individual.
Personal care. Invacare manufactures and/or distributes a full line of
patient aids, including ambulatory aids such as crutches, canes, walkers
and wheeled walkers; bath safety aids such as tub transfer benches, shower
chairs and grab bars; and patient care products such as commodes, lift-out
chairs and foam products.
Home care beds. Invacare manufactures and distributes a wide variety of
manual, semi-electric and fully-electric beds for home use under the
Invacare(R) brand name. Home care bed accessories include bed side rails,
mattresses, overbed tables, trapeze bars and traction equipment.
Low air loss therapy products. Invacare manufactures and markets a complete
line of mattress overlays and replacement products, under the Invacare(R)
brand name, which use air flotation to redistribute weight and move
moisture away from patients who are immobile and spend a great deal of time
in bed.
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CONTINUING CARE / DISTRIBUTED PRODUCTS
Distributed products. Invacare distributes a line of personal medical care
products manufactured by others, including bedding and ostomy,
incontinence, diabetic and wound care supplies.
Patient transport. Invacare manufactures and markets products for use in
the home and institutional settings, including patient lifts and slings,
multi-position recliners and bathing equipment.
Health Care Furnishings. Invacare, operating as Invacare Continuing
Care Group, is a manufacturer and distributor of beds and furnishings for
the non-acute care markets.
RESPIRATORY PRODUCTS
Home respiratory products. Invacare manufactures and/or distributes home
respiratory products including oxygen concentrators, liquid oxygen systems,
nebulizer compressors, aspirators, portable compressed oxygen systems and
respiratory disposables. Invacare's home respiratory products are marketed
predominately under the Invacare(R) brand name.
OTHER PRODUCTS
Accessory Products. Invacare also manufactures, markets and distributes
many accessory products, including spare parts, wheelchair cushions, arm
rests, wheels and respiratory parts. In some cases, Invacare's accessory
items are built to be interchangeable so that they can be used to replace
parts on products manufactured by others.
Australasia
The company's Australasia operations consist of Invacare Australia, which
imports and distributes the Invacare range of products and manufactures and
distributes the Rollerchair range of custom power wheelchairs and Dynamic
Controls, a New Zealand manufacturer of operating components used in power
wheelchairs.
Europe
The company's European operations operate as a "common market" company with
sales throughout Western Europe. The European operation currently sells a
limited line of products providing significant room for growth as Invacare
continues to broaden its product line offerings to mirror that of the North
American operations.
Most wheelchair products sold in Europe are designed and manufactured locally to
meet specific market requirements. However, as a result of Invacare's worldwide
development efforts, the Action 2000, a manual lightweight design that
originated in the U.S., was the first wheelchair in Europe to meet the high
standards of quality required to receive the Community European (CE) mark. In
addition, certain power wheelchair products sold in the United States are
adaptations of products originally designed for the European markets.
The company manufactures and/or assembles both manual and power wheelchair
products at six of its European facilities - Bencraft Ltd. and Invacare (UK)
Ltd. in the U.K., Poirier Groupe Invacare S.A. in France, Invacare Deutschland
GmbH in Germany, Fabriorto Lda in Portugal and Kuschall Design AG, in
Switzerland. Motorized scooters are manufactured in Germany. Self care products
and patient lifts and slings are manufactured in the United Kingdom and France.
Oxygen products are imported from Invacare's U.S operations.
WARRANTY
Generally, the company's products are covered by warranties against defects in
material and workmanship for periods up to five years from the date of sale to
the customer. Certain components carry a lifetime warranty. A non-renewable
warranty also is offered on various products for a maximum period of five years.
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COMPETITION
In each of the company's major product lines, both domestically and
internationally, there are a limited number of significant national competitors
and a number of regional and local competitors. In some countries or in certain
product lines, the company may face competition from other manufacturers that
have larger market shares, greater resources or other competitive advantages.
Invacare believes that it is the leading home medical equipment manufacturer
based on its distribution channels, breadth of product line and sales.
North America and Australasia
The home medical equipment market is highly competitive, and Invacare's
products face significant competition from other well-established manufacturers.
The company believes that its success in increasing market share is dependent on
providing value to the customer based on the quality, performance and price of
the company's products, the range of products offered, the technical expertise
of the sales force, the effectiveness of the company's distribution system, the
strength of the dealer and distributor network and the availability of prompt
and reliable service for its products. The company believes that its "One Stop
Shoppingsm" approach provides the competitive advantage necessary for continuing
profitability and market share growth. Various manufacturers have, from time to
time, instituted price-cutting programs in an effort to gain market share. There
can be no assurance that other HME manufacturers will not attempt to implement
such aggressive pricing in the future.
Europe
As a result of the differences encountered in the European marketplace,
competition generally varies from one country to another. The company typically
encounters one or two strong competitors in each country, some of them becoming
regional leaders in specific product lines.
MARKETING AND DISTRIBUTION
North America and Australasia
Sales and Marketing. Invacare's products are marketed in the United States and
Australasia primarily to providers who in turn sell or rent these products
directly to consumers within the non-acute care setting. Invacare's primary
customer is the HME provider. The company also employs a "pull-through"
marketing strategy to medical professionals, including physical and occupational
therapists, who refer their patients to HME providers to obtain specific types
of home medical equipment.
Invacare's domestic sales and marketing organization consists primarily of a
home care sales force, which markets and sells Invacare(R) branded products to
HME providers. A combination of direct sales and manufacturers' representatives
market and sell Invacare products through the company's Invacare Continuing Care
Group (ICCG) to the non-acute care market; and a separate manufacturer's
representatives' sales force markets and sells the company's retail brand to the
mass retail channels of distribution, including home centers, mass merchants and
chain drug stores. Each member of Invacare's home care sales force functions as
a Territory Business Manager (TBM) and handles all product and service needs for
an account, thus saving customers valuable time. The TBM also provides training
and servicing information to providers, as well as product literature,
point-of-sales materials and other advertising and merchandising aids. In
Canada, products are sold by a direct sales force and distributed through
regional distribution centers in British Columbia, Ontario and Quebec to health
care providers throughout Canada.
The company sells distributed products through its Suburban Ostomy subsidiary.
The acquisition of Suburban, in 1998, was an important addition to Invacare's
"Total One Stop Shoppingsm" program, through which Invacare offers HME providers
of all sizes the broadest range of products and services at the total lowest
cost. Suburban's products include ostomy, incontinence, wound care and diabetic
supplies, as well as other soft goods and disposable products. These products
are complementary to Invacare's products and are purchased by many of the same
customers that buy Invacare's equipment products. Suburban markets its products
through an inside telesales and customer service department, in addition to
Invacare's 100+ HME field sales force. Suburban also markets a Home Delivery
program to HME providers through which Suburban drop-ships supplies in the
provider's name to the customer's address. Providers have no products to stock,
no minimum orders and delivery within 24-48 hours nationwide.
In 1998, Invacare introduced its EDLP(TM) Advantage Club for the independent
provider. In addition to all the benefits of the Invacare EDLP (Every Day Low
Pricing) program, Advantage Club members can qualify for a bonus by committing
to certain growth objectives in purchase volume over the prior year. In 1998,
the EDLP Advantage Club proved successful in growing Invacare's business with
the smaller independent provider.
In 1998, the company further refined its brand strategy to focus exclusively on
the Invacare brand. Action, which was the company's brand for rehab wheelchair
products, has been transitioned from a brand to a product series for all rehab
products, including power chairs, custom manual chairs and seating systems.
PinDot(R), which had served as the company's brand for seating and positioning
products, was discontinued as a brand and folded into the Action product series.
As part of the company's efforts to fully leverage the Invacare brand amongst
all of the company's various audiences, the Invacare logo was enhanced by
placing it on an elliptical medallion that signifies excellence and
accomplishment. The logo combines the equity of the name with a pair of arcs
that express vitality, energy and an encompassing embrace. Altogether, this logo
conveys the global vision and achievement appropriate for the world's leading
manufacturer and distributor of non-acute health care products.
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In 1998, Invacare continued refining its strategic advertising campaign in home
health care magazines and trade publications which complement the company's
focused brand strategy. A new "umbrella" HME campaign was developed and
introduced which features the company's chairman and CEO, A. Malachi Mixon, III,
a highly visible and recognized leader in the HME industry, as the company's
spokesperson. Mr. Mixon now is being featured in all of the company's trade
advertising. The company also contributed extensively to editorial coverage in
trade publications on articles concerning products it manufactures. Company
representatives attended numerous trade shows and conferences on a national and
regional basis in which Invacare products were displayed to providers, medical
professionals and consumers.
Invacare continues to enhance its sales and marketing programs to generate
greater consumer awareness of Invacare and its products, as witnessed by
enhancements made to its consumer marketing program in 1998 through sponsorship
of a variety of wheelchair activities and support of various charitable causes
which benefit the users of its products. Invacare continued for the fifth year
as a National Corporate Sponsor of Easter Seals, one of the most recognizable
charities in the United States that annually meets the needs of over 40 million
children and adults who have various types of disabilities. The company further
enhanced its sponsorship of over 75 individual wheelchair athletes and teams,
including the top-ranked wheelchair racer in the world, and several of the
top-ranked men's and women's wheelchair tennis players in the world.
The company's top ten customers accounted for approximately 18% of 1998 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 1998 net sales. Providers, who are
part of a buying group, generally make individual purchasing decisions and are
invoiced directly by the company.
The company devotes significant time and resources in training providers,
rehabilitation therapists and others in the sale, use, maintenance and repair of
its products. In 1998, Invacare enhanced its training and education program by
launching Invacare LEEP (Learning Enrichment and Education Program). LEEP
consists of two learning alternatives: nine Invacare Expos which combine
three-day training and education forums with a two-day product fair; and more
than 90 Invacare Satellite Training courses which consist of single day, shorter
sessions on specific topics.
Europe
The company's European operations consist primarily of manufacturing, marketing
and distribution operations in Western Europe and export sales activities
through local distributors elsewhere in the world. The company has a direct
sales force and distribution centers in the United Kingdom, France, Germany,
Portugal, Spain, Sweden, Switzerland, Norway and the Netherlands and sells
through distributors elsewhere in Europe. In markets where the company has its
own sales force, product sales are typically made through dealers of medical
equipment and, in certain markets, directly to government agencies. In most
markets, government health care and reimbursement policies play an important
role in determining the types of equipment sold and price levels for such
products. The company continues to focus on the implementation of the "One Stop
Shoppingsm" concept in Europe.
PRODUCT LIABILITY COSTS
Invacare supports its dealers by defending product liability claims in an effort
to hold down costs. The company's captive insurance company, formed in 1986,
insures the first $2 million per claim, up to annual aggregate policy losses of
$3 million, of the company's domestic product liability exposure. The company
also has additional layers of coverage insuring up to $70 million for a total of
$73 million in annual aggregate losses arising from individual losses that
exceed $2 million per claim or annual policy aggregate losses of $3 million.
There can be no assurance that Invacare's current insurance levels will continue
to be adequate or available at an affordable rate.
PRODUCT DEVELOPMENT AND ENGINEERING
Invacare is committed to continuously improving, expanding and broadening its
existing product lines. During the past three years, new product introductions
included: major improvements in the power wheelchair line in terms of
electronics, functionality and aesthetics; new models of power wheelchairs; new
additions/enhancements to the electronic controllers for power wheelchairs; new
models of aluminum frame ultralight wheelchairs; a comprehensive new line of
innovative seating and positioning products; a complete line of home respiratory
products, including nebulizer compressors, flowmeters, aspirators, oxygen
analyzer, and respiratory disposables; and an improved line of ambulatory and
safety products.
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New product development remains a key component of Invacare's strategy to grow
market share and maintain competitive advantage. To this end, Invacare's efforts
in 1998 continued to focus resources on innovative manufacturing concepts while
also investing significant resources in cost reduction and design improvement.
Important new technologies were added, as well as many line extensions and
refinements to existing categories. In 1998, over 30 new products were
introduced with the most significant being:
North America
Gearless Brushless GB(TM) Motor Option for Arrow(R) Storm Series(R)
Ranger(TM)X and Torque(TM) - This direct drive brushless motor option in
combination with the new MKIV GB controller is available for all Second
Generation Arrow Storm Series, X and Torque models. All applications have a
weight rating of 300 pounds and a speed of 7.25 mph. The Invacare(R) Action
Gearless-Brushless GB(TM) motor is a quantum leap in power chair motor
performance and reliability. Based on the principle of electro-magnetic
induction, the GB motor overcomes many of the limitations of conventional
motors. Instead of mechanical gears and brushes, which through contact wear,
grind and create noise, the GB motor features powerful magnets that rotate in an
electronically generated magnetic field, generated by a rotor using a
precision-wrapped coil of copper wire. No friction means that the GB motor
operates much more efficiently than a traditional motor. The GB motor has a
longer life and requires less service and repair than any previous motor, thus
enabling Invacare to offer a warranty that is double the industry standard.
Invacare(R) Action Excel(TM) FWD and Ranger II(TM) FWD Power Chairs -
Invacare's first front wheel drive power chairs in the K-11 and K-10 codes. Both
models are true front wheel drive units which provide the traction and
maneuverability of a mid wheel drive chair, the stability of a rear wheel drive
plus obstacle climbing capability that outperforms comparable mid and rear wheel
drive units.
Ranger II(TM) MWD Weight Shifting Tilt - The Ranger II product line has
been expanded to include the Weight Shifting Tilt model. The range of the power
tilt system is 0 to 50 degrees with a weight rating of 250 pounds. The weight
shift tilt system offers full tilt capability on a short wheel base chair. This
is accomplished by allowing minimal change in the location of the occupants
center of gravity as the seating system is tilted. The Weight Shift Tilt model
is equipped with full shrouds as standard.
The Invacare(R) MG manual wheelchair - A truly economical wheelchair
designed to meet the Rehabilitation Engineering Society of North America (RESNA)
requirements, it is ideal for both sale and rental, and features a durable,
low-maintenance, triple-chrome-plated, carbon-steel frame that is designed for
long-lasting performance.
The Invacare(R) 9000(TM)series manual wheelchairs - Wheelchairs designed
for premium performance and low maintenance for a low total lifecycle cost.
The Invacare(R) Tracer(R) EX and Tracer(R) DLX wheelchairs - These
wheelchairs are the value-added choice in manual wheelchairs because they offer
so many extra features, including more widths, higher performance tires and a
longer warranty.
Invacare(R) Transport Ready Option - Tiedown brackets that meet the Society
of Automotive Engineers (SAE) Standard for Wheelchair Occupant and Restraint
Systems designed for Invacare wheelchairs.
Invacare(R) Personal Seat Cushion - A seat designed as a lightweight,
contoured cushion created from a combination of foam and fluid for excellent
pelvic stability and pressure relief.
Invacare(R) Action Phoenix(TM) Powered Mobility Lift System - A lift system
that allows a consumer to take their scooter, power or manual wheelchair
wherever they go. It lifts up to 200 pounds without the need for disassembly and
is simple to operate, easy to install and fits most vehicles.
Invacare(R) Action Polaris(TM)CPAP - This Continuous Positive Airway
Pressure (CPAP) device has an innovative design and reliable performance which
provide almost effortless patient set-up and monitoring.
Invacare(R) Printing Pulse Oximeter - An ergonomically designed, low cost,
easy to use hand-held pulse oximeter with an integrated printer.
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Invacare(R) CheckO2 Plus(TM) - A convenient and cost-effective analyzer, it
checks oxygen concentration (%), flow rate (L/min), and patient outlet pressure
(psi/kPA) on any oxygen concentrator (Pending FDA 510(k) clearance). Invacare(R)
Rollators - A new line of walking aids - the four-wheel Stargazer, the Stingray
and the Spartan, and the three-wheel Sprint - offer convenient mobility for a
wide variety of individuals and are specifically designed to provide additional
stability and comfort.
Invacare(R) CareGuard(TM) 8000 Alternating Pressure Mattress system - A
powered mattress replacement system for the treatment of Stage I to Stage IV
pressure ulcers at lower than normal cost while still incorporating a U.S. made
mattress system composed of twenty nylon fabric cells.
Invacare(R) Adjustable Leisure Bed - A bed that allows, with the touch of a
button, a user to move into hundreds of relaxing positions. All without creating
pressure, stress or strain on the body.
Australasia
Invacare(R) Dynamic Battery Charger. The Dynamic battery charger, developed
for charging batteries used on power wheel chairs, utilizes solid state
circuitry coupled with "intelligent software." It is the first charger which
automatically adjusts the charging process to match various types of batteries
used throughout the industry including gel, sealed lead acid, and wet cell
batteries. The charger automatically senses when its connected to a battery and
when batteries are fully charged. It also features significantly reduced weight
and size, weighing approximately 60% less than typical chargers and is
approximately 50% smaller than existing chargers.
MKIV GB controller. The MKIV G/B controller was designed for use in power
wheelchairs equipped with the Invacare(R) Action Gearless-Brushless GB(TM)
motor. This controller was developed by Invacare and manufactured by Invacare
Dynamic Controls, New Zealand.
Europe
During 1998, European operations also introduced several new products and
continued to update existing products as required by the market. Key
introductions and updates in 1998 included:
Action MVP(TM), Allegro(TM), Orbit(TM), and Action Pro(TM) Series - This
series has been Community Europe (CE) marked to comply with the Medical Device
Directives for sales distribution in our European Markets.
Invacare(R)Top End(R)Terminator(TM) - This product has been CE-marked to
comply with the Medical Device Directives for sales distribution in our European
Markets.
MANUFACTURING AND SUPPLIERS
The company's objective is to maintain its commitment to be the total
lowest-cost manufacturer in its industry, as well as the highest-quality
producer. The company believes that it is achieving this objective not only
through improved product design, but also by taking a number of steps to lower
manufacturing costs. During 1997, the company initiated plans to close and
consolidate a number of manufacturing operations, the cost of which was included
in charges taken in the third and fourth quarters. These consolidations were
substantially complete in 1998 except for Europe. Also during 1998, the
worldwide consolidation of purchasing continued thereby taking advantage of
significant leverage opportunities available to the company for certain
commodity raw materials and allowed the company to achieve ongoing cost
reduction objectives. The company also makes substantial investments in its
facilities and equipment in order to increase productivity, improve quality and
delivery. Over the past three years, the company has invested $90.4 million in
capital improvements and acquisition of facilities.
North America / Australasia
The company has vertically integrated its manufacturing processes by
fabricating, coating, plating and assembling many of the components of each
product. The company designs and manufactures electronics for power wheelchairs,
from insertion of components into printed circuit boards to final assembly and
testing.
Invacare has focused on "value engineering" which reduces manufacturing costs by
eliminating product complexity and using common components. Value engineering
has been applied to all product introductions in the last three years, including
the latest generation of oxygen concentrators, electronic controls, wheelchairs,
patient lifts, beds and bath safety products.
10
<PAGE>
Investments continue to be made in manufacturing automation. The company has
initiated programs to reduce manufacturing lead times, shorten production
cycles, increase associate training, encourage employee involvement in
decision-making and improve manufacturing quality. Associate involvement teams
participate in engineering, production and processing strategies and associates
have been given responsibility for their own quality assurance. The
consolidation of facilities that was substantially completed in 1998 will also
enhance manufacturing efficiency.
The manufacturing operations for the company's wheelchairs and replacement
parts, patient aids and home care beds consist of a variety of metal fabricating
procedures, electronics production, coating, plating and assembly operations.
Manufacturing operations for the company's oxygen concentrators, nebulizer
compressors, and seating and positioning products consist primarily of assembly
operations. The company purchases raw materials, fabricated components and
services from a variety of suppliers. Where appropriate, Invacare does employ
long term contracts with its suppliers. In those situations in which long term
contracts are not advantageous, the company believes its relationship with those
suppliers to be satisfactory with alternative sources of supply readily
available.
Europe
As in other areas, manufacturing and operational issues faced in the U.S. are
also present in Europe. The European operation has challenged and rationalized
the mission of each manufacturing location allowing for the realization of
significant synergies and identified areas for further cost reductions and
improved efficiencies for 1999 including certain facilities' elimination and
consolidations.
ACQUISITIONS
During 1998, the company acquired Suburban Ostomy, a wholesaler of medical
supplies and related products to the home health care industry for approximately
$132 million. As a result of the company's ongoing search for opportunities,
coupled with the industry trend toward consolidation, other acquisition
opportunities were evaluated in 1998. 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
strength.
Geographic. Enable rapid entry into new foreign markets.
GOVERNMENT REGULATION
The company is directly affected by government regulation and reimbursement
policies in virtually every country in which it operates. Government regulations
and health care policy differ from country to country and, within the U.S. 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 moderated some in 1998;
however, overall costs have increased at rates in excess of the rate of
inflation and as a percentage of GDP for several decades. A number of efforts to
control the federal deficit have impacted reimbursement guidelines for
government sponsored health care programs and changes in federal programs are
often imitated by private insurance companies. Reimbursement guidelines in the
home health care industry have a substantial impact on the nature and type of
equipment an end user can obtain and thus affect the product mix, pricing and
payment patterns of the company's customers who are the HME providers.
Congress imposed no new cuts on Medicare payments for durable medical equipment
during 1998 electing instead to see the impact of reductions contained in the
Balanced Budget Act (BBA) of 1997. At the same time, the Health Care Financing
Administration (HCFA) and its agents the Durable Medical Equipment Regional
Carriers (DMERC) have been busy trying to implement some of the provisions
contained in the BBA which effect reimbursement in more specific ways. For
example, during the third quarter, the DMERC published a proposal to reduce fees
paid for seven items by as much as 15% using, for the first time, their inherent
reasonableness (IR) authority. HCFA is also attempting to get its first
competitive bidding demonstration project off the ground but has run into
several problems delaying start-up until well into 1999. As it happens, the U.S.
Small Business Administration has issued a stern criticism of HCFA's efforts on
both IR and competitive bidding for violating due process procedures and the
rights of providers effected by the proposals. HCFA is also under intense
scrutiny by the General Accounting Office and the Congress for its failure to
adequately address the systems issues arising from the so-called millennium bug
or Y2K conversion.
11
<PAGE>
The company continues its aggressive, pro-active efforts to shape public policy
which impacts home and community-based, non-acute health care. Invacare believes
these efforts give the company a competitive advantage in two ways. First is the
frequently expressed appreciation of our customers for our efforts on behalf of
the entire industry. The other is the ability to anticipate and plan for changes
in public policy unlike most other HME manufacturers who must react to change
after it occurs.
The Safe Medical Devices Act of 1990 and Medical Device Amendments of 1976 to
the Federal Food, Drug and Cosmetics Act of 1938 (the "Acts") provide for
regulation by the United States Food and Drug Administration (the "FDA") of the
manufacture and sale of medical devices. Under the Acts, medical devices are
classified as Class I, Class II or Class III devices. The company's principal
products are designated as Class I or Class II devices. In general, Class I
devices must comply with labeling and record keeping requirements and are
subject to other general controls. In addition to general controls, certain
Class II devices must comply with product design and manufacturing controls
established by the FDA. Manufacturers of all medical devices are subject to
periodic inspections by the FDA. Furthermore, state, local and foreign
governments have adopted regulations relating to the manufacture and marketing
of health care products. The company believes that it is presently in material
compliance with applicable regulations promulgated by FDA, for which the failure
to comply would have a material adverse effect.
BACKLOG
The company generally manufactures most of its products to meet near term
demands by shipping from stock or by building to order based on the specialty
nature of certain products. Therefore, the company does not have substantial
backlog of orders of any particular products nor does it believe that backlog is
a significant factor for its business.
EMPLOYEES
As of December 31, 1998, the company had approximately 4,889 employees.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales.
The company also markets its products for export to other foreign
countries. The company had product sales in over 80 countries
worldwide.
For information relating to net sales, operating income and identifiable assets
of the company's foreign and domestic operations, see Business Segments in the
Notes to the Consolidated Financial Statements.
12
<PAGE>
Item 2. Properties.
The company owns or leases its warehouses, offices and manufacturing
facilities and believes these facilities to be well-maintained, adequately
insured and suitable for their present and intended uses. Information concerning
certain of the leased facilities of the company as of December 31, 1998, is set
forth in Leases and Commitments in the Notes to the Consolidated Financial
Statements of the company and in the table below:
<TABLE>
<CAPTION>
Ownership
or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
- ------------------------- ----------- ------------- ------- ---
<S> <C> <C> <C> <C>
Ashland, Virginia 36,000 September 2000 none Warehouse and offices
Atlanta, Georgia 137,284 January 2000 one (3 yr.) Warehouse and offices
Atlanta, Georgia 48,000 August 2006 none Distribution
Aurora, Ontario 4,494 July 1999 none Manufacturing
Belle, Missouri 39,200 Own - Manufacturing and offices
Beltsville, Maryland 33,329 August 1999 one (2 yr.) Manufacturing, offices, and
Distribution
Chesterfield, Missouri 8,466 December 1999 one (1 yr.) Offices
Delta, British Columbia 6,900 January 2000 none Warehouse & offices
Edison, New Jersey 48,400 October 2001 one (3 yr.) Warehouse and sales office
Elyria, Ohio
- Taylor Street 240,744 Own - Manufacturing and offices
- Cleveland Street 226,998 September 1999 one (5 yr.) Manufacturing and offices
- One Invacare Way 50,000 Own - Headquarters
Grand Prairie, Texas 87,508 December 2001 one (3 yr.) Warehouse and offices
Grand Prairie, Texas 54,000 November 2000 none Distribution
(sublet)
Holliston, MA 59,500 August 2006 none Warehouse and offices
Kirkland, Quebec 13,241 November 2002 one (5 yr.) Manufacturing, warehouse
and offices
LaPalma, California 78,000 May 1999 one (3 yr.) Warehouse and offices
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Ownership Renewal
North American Operations Square Feet or Expiration Options Use
Date of Lease
- ------------------------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Mississauga, Ontario 81,004 January 2005 none Manufacturing, warehouse
and offices
North Olmsted, Ohio 2,280 October 2003 one (5 yr.) Warehouse and offices
North Ridgeville, Ohio 139,200 Own - Manufacturing, warehouses
and offices
Northbrook, Illinois 27,458 June 1999 two (3 yr. & 2 yr.) Manufacturing and offices
Pharr, Texas 2,500 December 1999 one (1 yr.) Warehouse
Pinellas Park, Florida 12,000 July 1999 none Manufacturing and offices
Rancho Cucamonga, CA 22,928 September 2000 none Warehouse
Reynosa, Mexico 135,200 Own - Manufacturing and offices
Sacramento, California 26,900 May 2003 none Manufacturing, warehouse
and offices
Sanford, Florida 19,913 January 1999 none Warehouse
Sanford, Florida 113,034 Own - Manufacturing and offices
Sanford, Florida 99,892 Own - Manufacturing and offices
Sarasota, Florida 15,450 February 2002 five (5 yr.) Manufacturing, warehouse
and offices
South Bend, Indiana 30,000 July 2003 none Warehouse
Traverse City, Michigan 15,000 April 2000 two (3 yr.) Manufacturing and offices
Wright City, Missouri 23,760 January 1999 one (6 mo.) Manufacturing and warehouse
Wright City, Missouri 11,880 July 1999 6 months Warehouse
Australasia Operations
- ----------------------
Auckland, New Zealand 33,154 March 2003 none Manufacturing, warehouse
and offices
Sydney, Australia 2,550 August, 2000 one (2 yr.) Warehouse and offices
Adelaide, Australia 11,500 June 2000 two (2 yr.) Manufacturing, warehouse
and offices
Christchurch, New Zealand 48,547 March 2000 one (5 yr.) Manufacturing and offices
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Ownership Renewal
European Operations Square Feet or Expiration Options Use
Date of Lease
- -------------------- ------------ -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Askersund, Sweden 10,000 Own - Warehouse
Bad Oeynhausen, Germany 76,600 June 2000 one (2 yr.) Manufacturing, warehouse
and offices
Basel, Switzerland 36,000 Own - Manufacturing and offices
Birmingham, England 6,000 December 2000 one (3 yr.) Warehouse and offices
Birmingham, England 13,000 Own - Warehouses and offices
Birmingham, England 19,378 Own - Manufacturing and offices
Bridgend, Wales 131,522 Own - Manufacturing and offices
Buskerudsveien, Norway 500 month notice - Offices
Buskerudsveien, Norway 2,800 month notice - Warehouse
Girona, Spain 13,600 November 2004 one (1 yr.) Warehouse and offices
Oporto, Portugal 27,800 November 2003 - Manufacturing and offices
Spanga, Sweden 8,300 October 2001 one (3 yr.) Warehouse and offices
Tours, France 86,000 November 2007 none Manufacturing
Tours, France 104,500 Own - Manufacturing, warehouse
and offices
Veenendaal, The Netherlands 6,790 November 2000 one (2 yr.) Warehouse and offices
</TABLE>
Item 3. Legal Proceedings.
Invacare is a defendant in a number of product liability actions in which
various plaintiffs seek damages for injuries allegedly caused by defective
products. All these actions have been referred to the company's insurance
carriers and are being vigorously contested. The primary carrier for the first
$2 million of insurance coverage per claim or annual policy aggregate losses of
$3 million is a subsidiary of the company which was established in September,
1986, to provide the first layer of product liability insurance for the company.
The company has additional layers of coverage insuring up to $70 million for a
total of $73 million in annual aggregate losses arising from individual losses
that exceed $2 million or annual policy aggregate losses of $3 million of the
company's domestic product liability exposure. Management does not believe that
the outcome of any of these actions will have a material adverse effect upon its
business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
15
<PAGE>
Executive Officers of the Registrant.*
The following table sets forth the names of the executive officers and certain
other key employees of Invacare, each of whom serves at the pleasure of the
Board of Directors, as well as certain other information.
<TABLE>
<CAPTION>
Name Age Position
- --------------------- ---- --------------------------------------
<S> <C> <C>
A. Malachi Mixon, III 58 Chairman of the Board of Directors and
Chief Executive Officer
Gerald B. Blouch 52 President, Chief Operating Officer and Director
Thomas R. Miklich 51 Chief Financial Officer, General Counsel, Treasurer and
Corporate Secretary
Joseph B. Richey, II 62 President - Invacare Technologies & Invacare Senior Vice
President - Total Quality Management and Director
Louis F.J. Slangen 51 Senior Vice President - Sales & Marketing
Larry E. Steward 46 Corporate Vice President - Human Resources
Thomas J. Buckley 50 Senior Vice President - Standard Products and The Aftermarket
Group
M. Louis Tabickman 54 President - Invacare Europe
Steven C. Clark 40 Vice President - Rehab Group
Neal J. Curran 41 Vice President - Respiratory Group
David A. Johnson 37 Vice President - Invacare Continuing Care Group and
Beds/Therapeutic Support Systems
David Pessel 51 Vice President and Chief Information Officer
Michael A. Perry 44 Vice President - Suburban Ostomy
Ken Sparrow 51 Managing Director - Australasia
</TABLE>
CORPORATE OFFICERS
A. Malachi Mixon, III has been Chief Executive Officer and a Director of the
company since December 1979 and Chairman of the Board since September 1983. Mr.
Mixon had been President of the company from December 1979 until November 1996.
Gerald B. Blouch was named President and a Director of the company in
November 1996. Mr. Blouch has been Chief Operating Officer since December 1994
and Chairman - Invacare International since December 1993. Previously, Mr.
Blouch was President - Home Care Division from March 1994 to December 1994 and
Senior Vice President - Home Care Division from September 1992 to March 1994.
Mr. Blouch served as Chief Financial Officer from May 1990 to May 1993 and
Treasurer from March 1991 to May 1993.
Thomas R. Miklich has been Chief Financial Officer, General Counsel and
Treasurer since May 1993 and in September 1993 was named Corporate Secretary.
Previously, Mr. Miklich was Executive Vice President and Chief Financial Officer
of Van Dorn Company from 1991 to 1993, and Chief Financial Officer of The
Sherwin-Williams Company from 1986 to 1991.
16
<PAGE>
Joseph B. Richey, II has been a Director since 1980 and in September 1992 was
named President-Invacare Technologies and Senior Vice President - Total Quality
Management. Previously, Mr. Richey was Senior Vice President of Product
Development from July 1984 to September 1992, Senior Vice President and General
Manager of North American Operations from September 1989 to September 1992.
Louis F. J. Slangen was named Senior Vice President - Sales & Marketing in
December 1994 and from September 1989 to December 1994 was Vice President -
Sales and Marketing. Mr. Slangen was previously President - Rehab Division from
March 1994 to December 1994 and Vice President and General Manager - Rehab
Division from September 1992 to March 1994.
Larry E. Steward was named Corporate Vice President of Human Resources in
April 1997. From April 1996 to April 1997, Mr. Steward was Director of Human
Resources for the Rehab Group. Previously, Mr. Steward was employed by LTV Steel
Company serving as Manager of Human Resources from November 1991 to April 1996.
OPERATING OFFICERS
Thomas J. Buckley was named Senior Vice President - Standard products Group
and The Aftermarket Group in November 1998. Previously, Mr. Buckley was Senior
Vice President of the Continuing Care Group from October 1997 to November 1998
and from August 1995 to October 1997 was Group Vice President Standard Products.
Mr. Buckley was previously General Manager of Manual Wheelchairs from December
1994 to August 1995. From November 1993 to December 1994, Mr. Buckley was the
Business Unit Leader of the Bed Products and Pressure Relief Business Units.
Before this period, Mr. Buckley served as Director of Distribution.
M. Louis Tabickman was named President, Invacare Europe in July 1998. Prior to
this, Mr. Tabickman held the positions of Senior Vice President - Respiratory
Products from October 1997 to July 1998 and, from August 1995 to October 1997,
was Group Vice President Rehab Products. Previously, Mr. Tabickman was Vice
President & General Manager - Power Business Unit from December 1994 to August
1995, President, Invacare Canada from March 1994 to December 1994 and Vice
President and General Manager - Invacare Canada from September 1992 to March
1994. Mr. Tabickman was also Vice President and General Manager of Service and
Distribution from July 1985 until September 1992. Mr. Tabickman has been an
officer since July 1985.
Steven C. Clark was named Vice President of Rehab Group in July of 1998. Mr.
Clark has been with the company since 1986 and was previously the Vice President
of Power Products from October 1997 to July 1998. Mr. Clark served as the
General Manager of the Manual Wheelchair Business Unit from October 1995 to
October 1997. Mr. Clark served as the Director of Operations at the Maquiladora
Plant in Mexico from January 1993 to October 1995 and Manufacturing Manager of
Invacare's Sanford, Florida manufacturing plant from October 1989 to January
1993.
Neal J. Curran was named Vice President of Respiratory Group in July of 1998.
Mr. Curran has been with the company since 1983 and has previously held
positions as Vice President - Seating and Custom Mobility Products in October
1997 and General Manager of the Custom Manual Business Unit since December 1994.
From September 1992 to December 1994, Mr. Curran served as the Power Business
Unit leader and Vice President of Rehab engineering from January 1991 to
September 1992.
David A. Johnson was named Vice President Invacare Continuing Care Group
and Beds/Therapeutic Support Systems in November 1998. Previously, Mr. Johnson
had been Director Business/Systems Integration for Herman Miller, Inc. from 1997
to November 1998. Mr. Johnson was also General Manager of The Chattanooga Group,
Inc. from 1994 to 1997. From 1990 to 1994, Mr. Johnson held various operations
positions for the Stryker Corporation-Medical Group.
David Pessel was named Vice President and Chief Information Officer in April
1998. Mr. Pessel has more than 20 years of experience in information technology
gained during tenures at The University of Rochester; British Petroleum in
London, England, where he served as director of information technology at BP
Research; and, most recently, at Roadway/Caliber/FDX, in Akron, Ohio.
Michael A. Perry was named Vice President of Suburban Ostomy in July of
1998. Previously, Mr. Perry was Vice President of Distributed Products, General
Manager of Account Services, Vice President of National Accounts, Vice President
of Retail Sales and Vice President of Clinical Application Consumer Marketing
since 1995. In 1994, Mr. Perry served as Area Vice president of Sales.
Kenneth A. Sparrow was named Managing Director of Australasia in January
1998. Previously, Mr. Sparrow has been the General Manager of Operations for the
Lyttelton Port Company from December 1995 to January 1998. Prior to this, Mr.
Sparrow was a Divisional General Manager for Skellerup Industries from July 1992
to November 1995.
* The description of executive officers is included pursuant to
Instruction 3 to Section (b) of Item 401 of Regulation S-K.
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Invacare's Common Shares, without par value, are traded over-the-counter in the
NASDAQ National Market System under the symbol IVCR. Ownership of the company's
Class B Common Shares (which are not listed on NASDAQ) cannot be transferred,
except, in general, to family members. Class B Common Shares may be converted
into Common Shares at any time on a share-for-share basis. The approximate
number of record holders of the company's Common Shares and Class B Common
Shares at February 26, 1999 was 7,063 and 35, respectively. The closing sale
price for the Common Shares on February 26, 1999 as reported by NASDAQ, was
$23.75. The prices set forth below do not include retail markups, markdowns or
commissions.
The range of high and low quarterly prices of the Common Shares in each of the
two most recent fiscal years are as follows:
1998 1997
---- ----
Quarter Ended: High Low High Low
December 31 $25.19 $20.50 $24.88 $20.75
September 30 26.88 20.13 24.88 20.13
June 30 28.63 24.25 24.00 18.13
March 31 26.00 19.88 29.00 23.00
During 1998, the Board of Directors for Invacare Corporation declared dividends
of $.05 per Common Share and $.045 per class B common share. For information
regarding limitations on the payment of dividends in the company's loan and note
agreements, see Long Term Obligations in the Notes to the Consolidated Financial
Statements. The Common Shares are entitled to receive cash dividends at a rate
of at least 110% of cash dividends paid on the Class B Common Shares.
18
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997* 1996 1995 1994 1993
---- ----- ---- ---- ---- ----
(In thousands except per share and ratio data)
<S> <C> <C> <C> <C> <C> <C>
Earnings
Net Sales $797,529 $653,414 $619,498 $504,032 $411,123 $365,457
Income from Operations 86,654 8,457 65,393 54,144 43,736 36,870
Net Earnings 45,792 1,563 38,918 32,165 26,377 22,110
Net Earnings per Share - Basic 1.53 .05 1.33 1.10** .91** .77**
Net Earnings per Share -
Assuming Dilution 1.50 .05 1.28 1.07** .89** .75**
Dividends per Common Share .05000 .05000 .05000 .03750** .01875** -
Dividends per Class B Common Share
.04545 .04545 .04545 .03409** .01705** -
As of December 31,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
Balance Sheet
Current Assets $336,742 $275,211 $258,720 $204,685 $180,435 $156,191
Total Assets 738,756 529,923 509,628 408,750 338,109 286,367
Current Liabilities 133,964 109,553 97,768 84,936 67,667 60,913
Working Capital 202,778 165,658 160,952 119,749 112,768 95,278
Long-Term Obligations 323,904 183,955 173,263 122,456 105,528 90,351
Shareholders' Equity 280,888 236,415 238,597 201,319 164,007 134,962
Other Data
Research and Development
Expenditures $12,980 $ 12,706 $ 11,060 $ 9,002 $ 7,651 $ 6,840
Capital Expenditures, net of
Disposals 28,527 37,962 22,465 11,027 12,217 11,961
Depreciation and Amortization 23,754 18,348 17,896 14,159 12,686 12,280
Key Ratios
Return on Sales 5.7% .2% 6.3% 6.4% 6.4% 6.0%
Return on Average Assets 7.2% .3% 8.5% 8.6% 8.4% 8.1%
Return on
Beginning 19.4% .7% 19.3% 19.6% 19.5% 19.4%
Shareholders' Equity
Current Ratio 2.5:1 2.5:1 2.6:1 2.4:1 2.7:1 2.6:1
Debt-to-Equity Ratio 1.2:1 .8:1 .7:1 .6:1 .6:1 .7:1
</TABLE>
* Reflects non-recurring and unusual charge of $61,039 ($38,839 or $1.28
per share assuming dilution after tax) taken in 1997.
** As adjusted for the 2-for-1 splits effected in the form of a 100% share
dividend in October 1995.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
1998 Versus 1997
Reclassifications. The following Management's Discussion and Analysis of
Financial Condition and Results of Operations reflect certain reclassifications
made to the prior years' consolidated financial statements to conform to the
presentation used for the year ended December 31, 1998.
Non-recurring and Unusual Charge. The review of results that follows excludes
the impact of the non-recurring and unusual charge ("the charge") taken in 1997.
The reasons for the charge and the impact on the company's current and future
performance, as well as the utilization thereof, is explained under the
heading "Non-recurring and Unusual Charge" later in this section and in the
Notes to the Financial Statements.
Net Sales. Consolidated net sales for 1998 increased 22% for the year despite a
2% negative impact from foreign currency translation. Acquisitions contributed
16% of the increase. The net sales increase of 8%, excluding acquisitions and
the impact of foreign currency translation, was due to an overall increase in
unit volume primarily relating to new products introduced in the prior year. The
volume increases were partially offset by the effects of a continuing
competitive pricing environment throughout existing product lines. Sales were
also negatively impacted by approximately 1% due to reduced purchases by the
company's largest customer. Power wheelchairs, products for the non-acute market
and personal care products posted the largest dollar increases primarily as a
result of increased unit volumes. The company believes that its sales grew
faster than the overall industry resulting in market share gains. This was due
in part to its cost-effective "Total One Stop Shoppingsm" distribution system
that is supported by the company's broad range of products and services. The
company's financial objective is to grow sales 10% to 13%, excluding
acquisitions and earnings per share 13% to 16% annually, although there can be
no assurance that it will be able to achieve this goal.
North American Operations
North American sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs, seating), Standard (manual wheelchairs, personal care, beds, low
air loss therapy, retail), Continuing Care (hospital and nursing home beds and
furniture, patient transport equipment), Respiratory (oxygen concentrators,
liquid oxygen, aerosol therapy and associated respiratory) and Distributed
(ostomy, incontinence, wound care, other medical supplies) products grew 28%
over the prior year. The gain was due principally to acquisitions, which
contributed $101,117,000 or 20% along with dollar and unit volume growth in
Rehab products. Sales increases for North American operations included Rehab up
32% and Continuing Care products up 19%, excluding acquisitions. The Respiratory
product line also recorded an increase of 5% over the prior year. Offsetting
these increases was a decrease in sales of Standard products of 4%, which is
primarily the result of decreased sales to a major customer.
The sales increase attributed to acquisitions relates primarily to Suburban
Ostomy Supply Company, a national direct marketing wholesaler of medical
supplies and related products to the home care industry, acquired in January
1998. Acquisitions made in 1997 which positively impacted 1998 sales growth
included Allied Medical Supply Corporation (acquired October 7, 1997), a
distributor of soft goods and disposable products and Silcraft Corporation
(acquired May 6, 1997), a manufacturer of bathing equipment and patient lifts.
Rehab product sales increases were primarily attributable to the significant
sales growth of the Power Mid-Wheel-Drive chairs and the Tarsys(R) Weight Shift
Tilt Seating Systems. The power wheelchair line achieved strong sales growth
over the prior year as sales increased 41%. Sales of custom manual wheelchairs
increased 11% due to new product introductions and the continued success of the
company's "Team Action" athletes, as many of the high-tech design features in
high-performance sport wheelchairs are incorporated in the everyday Action
chairs. The Action Orbit(TM) tilt-in-space, a pediatric product, was initially
introduced during 1997 and has gained widespread acceptance in the market. Unit
growth exceeded the dollar increase due to pricing pressure in this product
category.
The U.S. Food and Drug Administration (F.D.A.) has indicated that 510(k)
clearance is needed for the Invacare(R) Venture(TM) HomeFill(TM) product
released in the latter part of 1997. Invacare voluntarily suspended shipments of
this product during the third quarter, pending resolution of the F.D.A.'s
comments. Invacare is actively working with the F.D.A. in order to expedite the
resolution of this issue. The delay is not having a material impact on the
company's operating results.
20
<PAGE>
Other Products, consisting primarily of the company's Canadian and aftermarket
parts businesses, had a 2% sales increase for the year. Sales for the company's
Canadian operation increased 13% excluding an 8% negative impact from foreign
currency translation. The increase was a result of volume increases as prices
declined modestly for the year.
Australasia Operations
The Australasia products group consists of Invacare Australia, which imports and
distributes the Invacare range of products and manufactures and distributes the
Rollerchair range of custom power wheelchairs and Dynamic Controls, a New
Zealand manufacturer of operating components used in power wheelchairs. Sales
for the Australasia group increased $3,550,000 or 17% from the prior year,
excluding $4,733,000 or 22% negative impact from foreign currency translation.
European Operations
European sales increased 6%, excluding a negative impact of 2% from foreign
currency translation. Sales growth improved steadily throughout the second half
of 1998 despite continuing governmental budget trends, especially in Germany and
France, which resulted in reduced reimbursement levels and caused providers to
utilize more refurbished equipment.
Gross Profit. Consolidated gross profit as a percentage of net sales decreased
to 30% from 31% last year. The decline was a result of a shift in product sales
mix and continuing pricing pressures experienced across most major product
lines. The company is focused on redesigning products in order to lower
manufacturing costs while improving quality and reliability and implementing
other spending reductions necessary to remain competitive and improve
profitability.
North American gross profit from operations as a percentage of net sales
declined slightly principally due to the effect of businesses acquired,
particularly Suburban Ostomy Supply Company, which had margins lower than the
combined overall average of the company's existing business. Additionally, the
effects of the company's manufacturing productivity improvements and facilities
rationalization were somewhat offset by the impact of reduced purchases by a
major customer in 1998.
Gross profit in Australasia decreased $869,000 as the continued effects of a
strong U.S. dollar negatively impacted margins. Excluding the negative impact of
foreign currency translation, gross profit increased $367,000 or 6% from the
prior year.
Gross profit in Europe remained flat with the prior year. The continued effects
of a strong U.S. dollar and overall price declines negatively impacted margins.
Inventory turns improved for 1998, as the plan for realignment of manufacturing
facilities initiated in 1997 continued to prove effective. The company expects
turns will continue to show improvement in 1999 as strategic partnerships,
formed with major suppliers, begin to take effect and the facilities
consolidation in Europe is completed.
Selling, General and Administrative. Consolidated selling, general and
administrative expense as a percentage of net sales decreased to 19% in 1998
compared to 20% in 1997. The overall dollar increase was $19,586,000 or 15%,
with acquisitions increasing selling, general and administrative costs by
approximately $18,899,000 or 14%. Tight expense control throughout the company
resulted in a reduction in the overall expense as a percentage of sales for
1998. The company believes, with its proven ability to focus on improving
productivity and with successful completion of the acquisition integration plan,
it can continue to favorably impact selling, general and administrative expense
as a percentage of net sales.
North American operations' selling, general and administrative costs decreased
as a percentage of net sales by approximately 1% from the prior year, as the
focus on expense control continued during 1998. The dollar increase of
$18,491,000 was entirely due to acquisitions, which increased selling, general
and administrative costs by $18,899,000. The company continued its
implementation of activity-based budgeting aimed at allocating the expense
dollars to the programs that most effectively supported the company's business
strategy.
21
<PAGE>
Australasia operations' selling, general and administrative expenses, increased
approximately 6% from the prior year. The increase is primarily a result of
restructuring costs incurred as part of the company-wide manufacturing
rationalization initiative. The overall dollar increase between years was
$472,000.
European operations' selling, general and administrative expenses, as a
percentage of net sales, remained constant at 26% with the dollar increase
amounting to $623,000 or 2%. European selling, general and administrative
expenses were positively impacted by continued cost containment initiatives
implemented throughout 1998 and 1997 and the strong dollar, which reduced
selling, general and administrative expenses reported in dollars by 6%.
Interest. Interest income decreased in 1998 to $9,031,000 from $9,321,000 last
year, representing a 3% decrease. The decrease was a result of an overall
decrease in the volume of installment loans written during the year, coupled
with a slight decrease in the portfolio's effective rate. Interest expense
increased to $20,616,000 from $12,555,000, representing a 64% increase resulting
from additional borrowings incurred to fund the 1998 acquisition of Suburban
Ostomy Supply Company. As a result, the company's debt-to-equity ratio increased
to 1.2:1 from .8:1.
Income Taxes. The company had an effective tax rate of 39% in 1998 and 1997,
excluding the effects of the unusual and non-recurring charge taken in the prior
year. Including the effects of the charge, the effective tax rate in 1997 was
70% due to the impact of increased permanent differences applied against reduced
pretax earnings. See Income Taxes in the Notes to Consolidated Financial
Statements for further discussion.
Research and Development. The company continues to increase its research and
development activities to maintain its competitive advantage. While the
competitive environment requires that research and development expenditures be
focused on the cost reduction of products while increasing functionality and
reliability, the company continues to dedicate dollars to applied research
activities to ensure that new and enhanced design concepts are available to its
businesses. Research and development expenditures increased to $12,980,000 from
$12,706,000 in 1997. The expenditures, as a percentage of sales, decreased
slightly as a result of the acquisition of Suburban Ostomy Supply Company.
Suburban Ostomy, a national direct marketing wholesaler of medical supplies and
related products to the home care industry, by the nature of its business, does
not typically incur research and development costs.
1997 Versus 1996
Non-recurring and Unusual Charge. The review of results that follows excludes
the impact of the non-recurring and unusual charge ("the charge") taken in 1997.
The reasons for the charge and the impact on the company's current and future
performance is explained under the heading "Non-recurring and Unusual
Charge" later in this section.
Net Sales. Consolidated net sales for 1997 increased 6% for the year net of a 2%
impact from foreign currency translation. Acquisitions contributed 3% of the
increase. The net sales increase of 5%, excluding acquisitions and the impact of
foreign currency translation, was due to increased unit volumes as competitive
pressures caused prices to decline for most product lines for the second
consecutive year. Sales were also negatively impacted by 4% due to reduced
purchases by the company's largest customer. Despite the competitive pricing
environment, almost all product lines had sales gains for the year. Custom
wheelchairs (power and custom manual), personal care products and standard
wheelchairs posted the largest dollar increases. The company believes that its
sales growth was aided by its cost-effective "Total One Stop Shoppingsm"
distribution system that is supported by the company's broad range of products
and services. The company's goal is to increase sales by 24% to 30% per year
with 12% to 15% internal growth and 12% to 15% growth through acquisition,
although there can be no assurance that it will be able to achieve this goal.
North American Operations
North American sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs and seating), Standard (manual wheelchairs, personal care, beds, low
air loss therapy and retail), Continuing Care (hospital and nursing home beds
and furniture and patient transport equipment) and Respiratory (oxygen
concentrators, liquid oxygen, aerosol therapy and associated respiratory)
products grew 9% over the prior year. The gain was due principally to unit
volume growth in Rehab products (up 14%) and Continuing Care products (up 16%
excluding acquisitions) and acquisitions made during 1997. Standard products
also recorded a 5% increase over the prior year. Offsetting these increases was
a slight decrease in Respiratory product sales of .8% primarily as a result of
significant pricing pressures during the year and reduced sales to a major
customer.
Acquisitions made in 1997 which positively impacted sales growth included Allied
Medical Supply Corporation (acquired October 7, 1997), a distributor of soft
goods and disposable products and Silcraft Corporation (acquired May 6, 1997), a
manufacturer of bathing equipment and patient lifts. Acquisitions made in 1996
that positively impacted 1997 sales growth included Invacare Health Care
Furnishings, a manufacturer and distributor of beds and furnishings for the
non-acute care markets and Frohock-Stewart, a manufacturer of personal care
products with distribution through mass retailers.
22
<PAGE>
Sales of Rehab products were most significantly impacted by increases in
Power products (up 19%) resulting from continued strong volume growth in low-end
power chairs, scooter products and from the introduction of the new mid-wheel
drive power chairs. Sales of custom manual wheelchairs increased 8% due to new
product introductions and the continued success of the company's "Team Action"
athletes, as many of the high-tech design features in high performance sport
wheelchairs are incorporated in the everyday Action chairs. The new Action
Orbit(TM) tilt-in-space, a pediatric product, was introduced during 1997 and has
gained widespread acceptance in the market. Unit growth exceeded the dollar
increase due to pricing pressure in this product category.
Increased sales in Standard Products are attributed to sales of the personal
care product line, which posted a sales increase of over 18%, while standard
wheelchair sales increased modestly for the year. Sales of low air loss therapy
products increased 28% after showing significant decline in the prior year as
changes in governmental reimbursement policies caused the overall market for
those products to shrink dramatically from levels in 1995. The sales of this
group also were impacted by the aforementioned reduction in purchases by a major
customer in 1997.
The company's Canadian operation had another strong year with sales up 20%,
excluding a 2% negative impact from foreign currency translation.
Australasia Operations
The Australasia products group consists of Invacare Australia, which imports and
distributes the Invacare range of products and manufactures and distributes the
Rollerchair range of custom power wheelchairs and Dynamic Controls, a New
Zealand manufacturer of operating components used in power wheelchairs. Sales
for the Australasia group increased slightly by $210,000 or 1%. Acquisitions
made in the prior year positively impacted sales by 7%. Dynamic Controls was
adversely affected by the sluggish European market for power wheelchairs, as its
sales declined by 4% excluding a 2% negative impact for foreign currency
translation.
European Operations
European sales increased 3%, excluding a negative impact of 9% from foreign
currency translation. Acquisitions had a minimal impact on sales growth. Sales
were significantly impacted by European governmental budget trends, especially
in Germany and France, that resulted in reduced reimbursement levels and caused
providers to utilize more refurbished equipment.
Gross Profit. Consolidated gross profit as a percentage of net sales decreased
to 31% from 33% last year. The decline was a result of ongoing significant
pricing pressures and a product mix shift, offset by continued productivity
improvements and the cost reduction from strategic realignment of production
facilities. The company is committed to redesigning products to lower
manufacturing costs while improving quality and reliability and implementing
other spending reductions necessary to remain competitive and improve
profitability.
North American gross profit from operations declined slightly despite an
intensifying pricing environment. Continued manufacturing productivity
improvements were somewhat offset by the impact of reduced purchases by a major
customer in 1997. The facilities rationalization implemented during the year
also favorably impacted the company's gross profit.
Gross profit in Australasia increased 19% including an 8% increase from
acquisitions. Foreign currency translation negatively impacted sales by 3%.
Excluding acquisitions and the negative impact of foreign currency translation,
gross profit increased $696,000 or 14% from the prior year.
Gross profit in Europe declined to 26.5% from 30.0% in 1996. Continued effects
of a strong U.S. dollar, overall price declines and product mix changes each
negatively impacted margins. A significant reduction in gross profit
(approximately $2.0 million) was the result of a failure to hedge certain
transaction exposures early in 1997.
Inventory turns improved for 1997, as the plan for realignment of manufacturing
facilities was initiated and implemented. The company expects turns will
continue to show improvement in 1998 as facility consolidations continue and
strategic partnerships are formed with major suppliers.
23
<PAGE>
Selling, General and Administrative. Consolidated selling, general and
administrative expense as a percentage of net sales decreased to 20% in 1997
compared to 22% in 1996. The dollar decrease was $3,807,000 or 3%, despite
acquisitions which increased selling, general and administrative costs by
approximately $5,000,000 or 4%. The businesses acquired operate with a
significantly higher selling, general and administrative expense as a percentage
of net sales; however, tight expense control in the company's existing
businesses resulted in a reduction in the overall expense as a percentage of
sales for 1997. The company focuses on improved productivity and acquisition
integration, which it expects can continue to favorably impact the selling,
general and administrative expense as a percentage of net sales.
North American operations' selling, general and administrative costs decreased
as a percentage of net sales by approximately 2% from last year, as the focus on
expense control continued during 1997. The dollar change was minimal despite
acquisitions which increased costs by approximately $4,462,000. In an effort to
combat the competitive pricing environment, the company continued its
implementation of activity-based budgeting aimed at allocating the expense
dollars to the programs that most effectively supported the company's business
strategy. The company's bad debt expense and reserve for bad debt substantially
increased during the year due to expenses created by the Balanced Budget Act and
general competitive market. The increase was taken as part of the non-recurring
and unusual charge. There can be no assurance that future government actions or
business conditions will not cause this to recur in the future.
Australasia operations' selling, general and administrative expenses increased
approximately 12% from the prior year with acquisitions increasing selling,
general and administrative costs by approximately $294,000 or 4%. The overall
dollar increase between years was $809,000.
European operations' selling, general and administrative expenses, as a
percentage of net sales, decreased to 25% from 26% in 1996, with the dollar
decrease amounting to $3,190,000 (or 9%). Acquisitions had a minimal impact on
total costs. The overall decrease is a result of restructuring and cost
containment initiatives implemented throughout 1997 and the strong dollar, which
reduced selling, general and administrative expenses reported in dollars by 9%.
Interest. Interest income decreased in 1997 to $9,321,000 from $9,661,000 last
year, representing a 4% decrease. The change between years was due primarily to
the introduction of several new financing programs offered by the company's
finance subsidiary. These programs included a three and six month interest-free
financing period with rates at or below prime. Interest expense increased to
$12,555,000 from $11,286,000, representing a 11% increase resulting from
additional borrowings incurred to fund the 1997 acquisitions and other investing
activities, principally capital expenditures. As a result, the company's
debt-to-equity ratio increased to .8:1 from .7:1. It is anticipated that the
company's interest expense will increase in 1998 as a result of the acquisition
of Suburban Ostomy Supply Co., Inc. on January 28, 1998.
Income Taxes. The company had an effective tax rate of 39% in 1997, excluding
the effects of the unusual and non-recurring charge. Including the effects of
the charge, the effective tax rate was 70% compared to 39% in 1996 due to the
impact of increased permanent differences applied against reduced pretax
earnings. See Income Taxes in the Notes to Consolidated Financial Statements for
further discussion.
Research and Development. The company continues to increase its research and
development activities to maintain its competitive advantage. While the
competitive environment requires that research and development expenditures be
focused on the cost reduction of products while increasing functionality and
reliability, the company continues to dedicate dollars to applied research
activities to ensure that new and enhanced design concepts are available to its
businesses. Research and development expenditures increased to $12,706,000 from
$11,060,000 in 1996. The expenditures, as a percentage of sales, increased only
slightly because businesses acquired spent less on research and development as a
percent of sales than the company.
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 1998 and
1997, the company was able to offset the majority of the impact of price
increases from suppliers by productivity improvements and other cost reduction
activities.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The company continues to maintain an adequate liquidity position through its
unused bank lines of credit (see Long-Term Obligations in the Notes to
Consolidated Financial Statements) and working capital management. The company
maintains various bank lines of credit to finance its world-wide operations. In
1997, the company completed a $425,000,000 multi-currency, long-term revolving
credit agreement, which expires on October 31, 2002, or such later date as
mutually agreed upon by the company and the banks. Additionally, the company
maintains various other demand lines of credit totaling a U.S. dollar equivalent
of approximately $15,470,000 as of December 31, 1998. The lines of credit have
been and will continue to be used to fund the company's domestic and foreign
working capital, capital expenditures and acquisition requirements. As of
December 31, 1998, the company had approximately $246,042,000 available under
its various lines of credit.
In 1998, the company completed a private placement of $100,000,000 in senior
notes having a blended fixed coupon rate of 6.69% with $20,000,000 maturing in
the year 2005 and $80,000,000 maturing in 2008. The proceeds were used to
pay-down revolving credit debt incurred to fund the acquisition of Suburban
Ostomy Supply Co., Inc., which was consummated on January 28, 1998.
The company's borrowing arrangements contain covenants with respect to net
worth, dividend payments, working capital, funded debt to capitalization and
interest coverage, as defined in the company's bank agreements and agreement
with its note holders. The company is in compliance with all covenant
requirements. Under the most restrictive covenant of the company's borrowing
arrangements, the company may borrow up to an additional $210,389,000 as of
December 31, 1998.
CAPITAL EXPENDITURES
There are no individually material capital expenditure commitments outstanding
as of December 31, 1998. The company expects to invest in capital projects at a
rate that equals or slightly exceeds depreciation and amortization in order to
maintain and improve the company's competitive position. The company estimates
that capital investments for 1999 will approximate $32,000,000. The company
believes that its balances of cash and cash equivalents, together with funds
generated from operations and existing borrowing facilities will be sufficient
to meet its operating cash requirements and fund required capital expenditures
for the foreseeable future.
CASH FLOWS
Cash flows provided by operating activities were $49,950,000, compared to
$37,935,000 last year. The 32% increase is primarily the result of increased
profitability for the year. The increase in accounts payable and accrued
expenses was offset by an increase in trade receivables. The changes in
operating assets and liabilities are not apparent from the face of the balance
sheet as funds expensed for assets acquired through business acquisitions are
accounted for in the investment activities section of the Consolidated Statement
of Cash Flows.
Cash flows required for investing activities increased $134,734,000. The
increase was a result of the acquisition of Suburban Ostomy Supply Company and
the continued investment in computer systems and production machinery and
equipment. The purchase of Suburban Ostomy Supply Company resulted in increased
cash used for investing activities of $125,321,000.
Cash flows provided by financing activities were $140,835,000 compared to
$16,467,000 million in 1997. The increase in cash provided by financing
activities was a result of an increase in net proceeds from long-term borrowings
which were used to fund the acquisition. In February 1998, the company completed
the private placement of $100,000,000 in notes to fund the acquisition of
Suburban Ostomy Supply Company. In addition to acquisition activities, the
effect of foreign currency translation results in amounts being shown for cash
flows in the Consolidated Statement of Cash Flows that are different from the
changes reflected in the respective balance sheet captions.
DIVIDEND POLICY
It is the company's policy to pay a nominal dividend in order for its stock to
be more attractive to a broader range of investors. The current annual dividend
rate remains at $.05 per Common Share and $.045 per Class B Common Share. It is
not anticipated that this will change materially as the company continues to
have available significant growth opportunities through internal development and
acquisitions. For 1998, a dividend of $.05 per Common Share and $.045 per Class
B Common Share was declared and paid.
25
<PAGE>
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using the
last two digits rather than four to define the applicable year. Thus, many
programs are unable to properly distinguish between the year 1900 and the year
2000. This is frequently referred to as the "Year 2000 Problem."
The company has developed a plan to modify its existing information technology
in order to recognize the year 2000 and has begun converting its critical data
processing systems. The plan is designed to ensure that there is no adverse
effect on the company's core business operations and that transactions with
customers, suppliers and financial institutions are fully supported. The company
is well under way with these efforts and believes its planning and
implementation efforts will be adequate to address its year 2000 concerns. The
following table summarizes the company's progress on the resolution phases of
this project.
<TABLE>
<CAPTION>
Resolution Phases
Assessment Remediation Testing Implementation
---------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
Information 100% completed 80% completed 80% completed 80% completed
Technology June 1998 Expected Expected Expected
completion date completion date completion date
March 1999 April 1999 April 1999
- ----------------------------------------------------------------------------------------------------------
Operating 100% completed 75% completed 75% completed 75% completed
Equipment June 1998 Expected Expected Expected
completion date completion date completion date
March 1999 April 1999 April 1999
- ----------------------------------------------------------------------------------------------------------
Products 100% completed 100% completed 100% completed 100% completed
January 1998 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
3rd Party 70% completed N/A N/A N/A
Estimated
completion date
April 1999
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The total cost of the Year 2000 project is estimated at $4.0 million to $6.0
million and is being funded entirely through operating cash flows. This estimate
includes the cost of a combination of existing internal and external resources
and excludes the costs to upgrade and replace systems in the normal course of
business. The company does not expect this project to have a material effect on
the company's results of operations or financial position.
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. However, failure to do so could have a material
adverse impact on the company's ability to conduct business including but not
limited to order entry, manufacturing, shipping, invoicing and collections. In
addition to its in-house efforts, the company is currently employing the
services of several independent outside sources to evaluate its processes and
assure the reliability of its cost estimates and verify its assessment of risk.
The company is currently developing a contingency plan in the event it does not
complete all phases of the Year 2000 program. The company anticipates this plan
will be completed by May 1999.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union (the
"participating countries") established a fixed rate between their existing
sovereign currencies (the "legacy currencies") and the Euro. The legacy
currencies are scheduled to remain legal tender in the participating countries
between January 1, 1999 and July 1, 2002. Beginning January 1, 2002, the Euro
currency will be introduced and the legacy currencies withdrawn from circulation
six months later. The company believes with modifications to existing computer
software and conversion to new software, the Euro conversion issue will not pose
significant operational problems to its normal business activities. The company
does not expect costs associated with the Euro conversion project to have a
material effect on the company's results of operations or financial position.
26
<PAGE>
NON-RECURRING AND UNUSUAL CHARGE
In 1997, the company announced non-recurring and unusual charges of $61,039,000
($38,839,000 or $1.28 diluted per share after tax) for the acceleration of
certain strategic initiatives and other items. The components of the charge
included the acceleration of global manufacturing facility consolidations and
the elimination of certain non-strategic product lines, the acceleration of
certain global systems' initiatives, an increase in the company's bad debt
reserve and asset write-downs and an increase in reserves for litigation. The
portion of the charge identified for certain global systems initiatives related
to the write-off of assets that will not benefit future periods due to new
systems replacements or the change in scope of the original project. There were
no Year 2000 costs charged to the reserve as these costs are expensed as
incurred pursuant to the requirements of the Financial Accounting Standards
Board (FASB) Emerging Issues Task Force (EITF) 96-14. During 1998, the company
reviewed the charge and its related estimates and components. Based on this
review, reserves for accelerated facilities consolidations and product line
exits were reduced by $3,300,000 and $4,201,000 respectively. These changes were
substantially offset by additional reserves of $2,384,000 for litigation and
charges of $5,049,000 for additional asset write-downs. The net effect of these
changes had no material impact on reported net earnings for the year. The
remaining accrual balance at December 31, 1998, in the amount of $4,679,000
relates primarily to facility consolidations. The company expects substantially
all of the remaining charge to be utilized over the next six months. See
Non-Recurring and Unusual charge in the Notes to Consolidated Financial
Statements for further discussion.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The Company uses
interest swap agreements to mitigate its exposure to interest rate fluctuations.
Based on December 31, 1998 debt levels, a 1% change in interest rates would
impact interest expense by approximately $1,400,000. Additionally, the company
operates internationally and as a result is exposed to foreign currency
fluctuations. Specifically, the exposure includes intercompany loans, and third
party sales or payments. In an attempt to reduce this exposure, foreign currency
forward contracts are utilized. The company does not believe that any potential
loss related to these financial instruments will have a material adverse effect
on the company's financial condition or results of operations.
PRIVATE SECURITIES LITIGATION REFORM ACT
This management's discussion contains forward-looking statements based on
current expectations which are covered under the "safe harbor" provision within
the Private Securities Litigation Reform Act of 1995. Actual results and events,
including the acceleration of certain strategic initiatives for which a
non-recurring and unusual charge has been reported, may differ significantly
from those anticipated as a result of risks and uncertainties which include, but
are not limited to, pricing pressures, the consolidations of health care
customers and competitors, the availability of strategic acquisition candidates
successfully completing its project to resolve year 2000 issues, government
reimbursement issues that affect the viability of customers, Invacare's ability
to effectively integrate acquired companies, the timely completion of facility
consolidations and the overall economic, market and industry conditions, as well
as the risks described from time to time in Invacare's reports as filed with the
Securities and Exchange Commission.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Report of Independent Auditors, Consolidated Balance
Sheet, Consolidated Statement of Earnings, Consolidated Statement of Cash Flows,
Consolidated Statement of Shareholders' Equity, Notes to Consolidated Financial
Statements and Financial Statement Schedule which appear on pages FS -1 to FS -
23 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
27
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 as to the Directors of the company is
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the company's definitive Proxy Statement for the 1999
Annual Meeting of Shareholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the company's fiscal year pursuant to Regulation 14A. Information required by
Item 10 as to the Executive Officers of the company is included in Part I of
this Report on Form 10-K.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
information set forth under the caption "Compensation of Executive Officers and
Directors" in the company's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
company's fiscal year pursuant to Regulation 14A.
Item. 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to the
information set forth under the caption "Share Ownership of Principal Holders
and Management" in the company's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
company's fiscal year pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the
information set forth under the caption "Compensation Committee Interlocks and
Insider Participation" in the company's definitive Proxy Statement for the 1999
Annual Meeting of Shareholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the company's fiscal year pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
The following financial statements of the company are included in Part II,
Item 8:
Consolidated Statement of Earnings - years ended December 31, 1998, 1997
and 1996
Consolidated Balance Sheet - December 31, 1998 and 1997
Consolidated Statement of Cash Flows - years ended December 31, 1998,
1997 and 1996
Consolidated Statement of Shareholders' Equity - years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2)Financial Statement Schedules.
The following financial statement schedule of the company is included in
28
<PAGE>
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-30 of this Report on Form 10-K.
(b) Reports on Form 8-K.
None
29
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 31, 1999.
INVACARE CORPORATION
By: /S/ A. Malachi Mixon, III
-------------------------------------------
A. Malachi Mixon, III Chairman of the Board
of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 31, 1999.
Signature Title
/S/ A. Malachi Mison, III Chairman of the Board of Directors and
- -------------------------- Chief Executive Officer (Principal Executive
A. Malachi Mixon, III Officer)
/S/ Gerald B. Blouch President, Chief Operating Officer and Director
- ------------------------
Gerald B. Blouch
/S/ Thomas R. Miklich Chief Financial Officer, General Counsel,
- ----------------------- Treasurer and Corporate Secretary (Principal
Thomas R. Miklich Financial and Accounting Officer)
/S/ Francis J. Callahan
- -------------------------- Director
Francis J. Callahan
/S/ Frank B. Carr
- -------------------------- Director
Frank B. Carr
/S/ Michael F. Delaney
- -------------------------- Director
Michael F. Delaney
/S/ Whitney Evans
- --------------------------- Director
Whitney Evans
/S/ Dan T. Moore, III
- -------------------------- Director
Dan T. Moore, III
/S/ E.P. Nalley
- -------------------------- Director
E. P. Nalley
/S/ Joseph B. Richey
- ------------------------- Director
Joseph B. Richey, II
/S/ William M. Weber
- ------------------------- Director
William M. Weber
/S/ Dr. Bernadine P. Healy
- -------------------------- Director
Dr. Bernadine P. Healy
/S/ James C. Boland
- -------------------------- Director
James C. Boland
30
<PAGE>
<TABLE>
<CAPTION>
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended December 31, 1998.
Exhibit Index
Official
Exhibit No Description Sequential Page
- ---------- ------------ ---------------
<S> <C> <C> <C>
3(a) - Amended and Restated Articles of Incorporation, as amended through (A)
May 29, 1987
3(b) - Code of Regulations, as amended on May 22, 1996 (V)
3(c) - Amended and Restated Articles of Incorporation, as amended through February 2, 1996 (T)
4(a) - Specimen Share Certificate for Common Shares, as revised (H)
4(b) - Specimen Share Certificate for Class B Common Shares (H)
4(d) - Rights agreement between Invacare Corporation and Rights Agent dated as of (S)
July 7, 1995
10(a) - Stock Option Plan, adopted in February 1984 (B)*
10(b) - Amendment to Stock Option Plan, adopted in May 1987 (C)*
10(c) - Amendment to Stock Option Plan, adopted in May 1988 (D)*
10(d) - Amendment to Stock Option Plan, adopted in May 1991 (I)*
10(h) - Assignment of Patent Application and License of Know-how dated January 14, 1981, and an (E)
amendment thereto dated October 12, 1981, with respect to certain royalty payments to be
made to the former owners of the company's home care bed subsidiary
10(p) - Form of Indemnity Agreement entered into by and between the company and certain of its (H)
Directors and officers and Schedule of all such Agreements with current Directors and
officers
10(r) - Master Note, between Invacare Corporation and Sanwa Bank, Limited (J)
10(s) - Employees' Stock Bonus Trust and Plan as amended and restated effective (G) *
January 1, 1988 and as amended on April 13, 1988, April 3, 1990, and May 24, 1991
10(t) - Profit Sharing and Savings Trust and Plan effective as of January 1, 1988 and as amended (G) *
on November 28, 1988, September 12, 1990, October 9, 1990, and May 24, 1991
10(u) - Agreement between Invacare Corporation and Weber, Wood, Medinger, Inc. (J)
10(v) - Real Property Purchase Agreement by and between Invacare Corporation and Taylor Street (N)
limited partnership
10(z) - Note Agreement dated February 1, 1993 among Invacare Corporation and five purchasers of (P)
an aggregate of $25,000,000, 7.45% Senior Notes due February 1, 2003
10(aa) - Amendments to Stock Option Plan adopted in May 1992 (M) *
10(ab) - 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (K)
31
<PAGE>
10(ac) - Deferred Compensation Plan for Non-Employee Directors, adopted in May 1992 (L)
10(ad) - Shares Purchase and Contribution Agreement dated July 27, 1992 (O)
10(af) - Invacare Corporation 1994 Performance Plan approved January 28, 1994 (Q) *
10(ag) - Real Property Purchase Agreement between Mobilite Building Corporation (a newly formed (R)
subsidiary of Invacare Corporation as of February 15, 1994) and I-M Associates, LTD.
dated February 28, 1994
10(ar) - First Amendment to Note Agreement among Invacare Corporation and five purchasers of (U)
Senior Notes dated March 20, 1997
10(as) - Loan Agreement by and among Invacare Corporation, the Banks, certain borrowing (F)
subsidiaries, the Banks named therein, NBD Bank, as agent for the Banks and KeyBank
National Association, as co-agent for the Banks
10(at) - Agreement and Plan of Merger, dated December 17, 1997, between Invacare Corporation, (W)
Inva Acquisition Corp. and Suburban Ostomy Supply Co., Inc.
10(au) - Note Purchase Agreement dated as of February 27, 1998 for (X)
$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
27 - Financial data schedule
99(a) - Executive Liability and Defense Coverage Insurance Policy (H)
99(b) - Supplemental Executive Retirement Plan
</TABLE>
* Management contract, compensatory plan or arrangement
32
<PAGE>
(A) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 28, 1987, which Exhibit is incorporated herein by
reference.
(B) Reference is made to the appropriate Exhibit of the company's Report
on Form 10-K for the fiscal year ended December 31, 1984, which
Exhibit is incorporated herein by reference.
(C) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1987, which
Exhibit is incorporated herein by reference.
(D) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 25, 1988, which Exhibit is incorporated herein by
reference.
(E) Reference is made to the appropriate Exhibit of the company's Form 8
Amendment No. 1 (filed on September 23, 1987) to its Registration
Statement on Form 8-A (Reg. No. 0-12938, effective as of October 21,
1986), which Exhibit is incorporated herein by reference.
(F) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1997, as amended,
which is incorporated herein by reference.
(G) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1990, as amended,
which is incorporated herein by reference.
(H) Reference is made to the appropriate Exhibit of the company's
Registration Statement on Form S-3 (Reg. No. 33-40168), effective as
of April 26, 1991, which Exhibit is incorporated herein by reference.
(I) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 24, 1991, which Exhibit is incorporated herein by
reference.
(J) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1991, as amended,
which is incorporated herein by reference.
(K) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 27, 1992, which Exhibit is incorporated herein by
reference.
(L) Reference is made to Exhibit B of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 27, 1992, which Exhibit is incorporated herein by
reference.
(M) Reference is made to Exhibit C of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 27, 1992, which Exhibit is incorporated herein by
reference.
(N) Reference is made to the appropriate Exhibit of the company's report
on Form 10-Q for the quarter ended June 30, 1992, which Exhibit is
incorporated herein by reference.
(O) Reference is made to Exhibit 2 of the company's report on Form 8-K,
dated October 29, 1992, which Exhibit is incorporated herein by
reference.
(P) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1992, which
Exhibit is incorporated herein by reference.
(Q) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 23, 1994, which Exhibit is incorporated herein by
reference.
(R) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1993, which
Exhibit is incorporated herein by reference.
33
<PAGE>
(S) Reference is made to Exhibit 1 of the company's report on Form 8-A,
dated July 18, 1995, which Exhibit is incorporated herein by
reference.
(T) Reference is made to the appropriate Exhibit of the Company's
Definitive Proxy Statement used in connection with the Annual Meeting
of Shareholders held on May 22, 1996, which Exhibit is incorporated
herein by reference.
(U) Reference is made to the appropriate Exhibit of the company's report
on Form 10-Q for the quarter ended March 31, 1997, which Exhibit is
incorporated herein by reference.
(V) Reference is made to the appropriate Exhibit of the company's report
on Form 10-Q for the quarter ended September 30, 1996, which Exhibit
is incorporated herein by reference.
(W) Reference is made to the appropriate Exhibit to the company's report
on Form 8-K, dated January 23, 1998, which Exhibit is incorporated
herein by reference.
(X) Reference is made to the appropriate Exhibit of the company's report
on Form 10-Q for the quarter ended March 31, 1998, which Exhibit is
incorporated herein by reference.
34
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of earnings, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14 (a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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.
Cleveland, Ohio
January 26, 1999
35
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 199
-----------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $797,529 $653,414 $619,498
Cost of products sold 559,016 455,036 418,025
--------- --------- ---------
Gross Profit 238,513 198,378 201,473
Selling, general and administrative expense 157,595 160,060 136,080
Non-recurring and unusual items * (5,736)* 29,861** -
---------- ---------- -------
Income from Operations 86,654 8,457 65,393
Interest income 9,031 9,321 9,661
Interest expense (20,616) (12,555) (11,286)
-------- ----------- -------
Earnings before Income Taxes 75,069 5,223 63,768
Income taxes 29,277 3,660 24,850
--------- --------- -------
Net Earnings $ 45,792 $ 1,563 $ 38,918
========= ========== ========
Net Earnings per Share - Basic $ 1.53 $ .05 $ 1.33
========= ========== ========
Weighted Average Shares Outstanding - Basic 29,932 29,569 29,332
========= ========== ========
Net Earnings per Share - Assuming Dilution $ 1.50 $ .05 $ 1.28
========= ========== ========
Weighted Average Shares Outstanding -
Assuming Dilution 30,583 30,374 30,393
========= ========== ========
</TABLE>
* Represents changes in the components of the non-recurring and unusual
charges reported in 1997, to reflect current year activity. These changes
were offset by additional charges primarily for asset write-downs affecting
cost of sales and SG&A by $2,596 and $3,072, respectively. The net effect of
these changes had no material impact on earnings for the year.
** Excludes amounts included in cost of products sold and selling, general and
administrative expenses of $3,391 and $27,787, respectively, in 1997.
See notes to consolidated financial statements.
36
<PAGE>
CONSOLIDATED BALANCE SHEET
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
(In thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 9,460 $ 5,696
Marketable securities 2,634 3,501
Trade receivables, net 156,694 114,410
Installment receivables, net 60,330 49,298
Inventories 81,740 75,708
Deferred income taxes 17,331 18,855
Other current assets 8,553 7,743
---------- --------
Total Current Assets 336,742 275,211
Other Assets 62,388 56,567
Property and Equipment, net 112,944 90,577
Goodwill, net 226,682 107,568
---------- --------
Total Assets $738,756 $529,923
========== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $47,628 $39,431
Accrued expenses 65,505 59,998
Accrued income taxes 12,339 1,872
Current maturities of long-term obligations 8,492 8,252
---------- --------
Total Current Liabilities 133,964 109,553
Long-Term Debt 311,260 172,459
Other Long-Term Obligations 12,644 11,496
Shareholders' Equity
Preferred Shares (Authorized 300 shares; none outstanding) 0 0
Common Shares (Authorized 100,000 shares; 29,066 and
28,724 issued in 1998 and 1997, respectively)
Class B Common Shares (Authorized 12,000 shares; 7,267 7,182
1,434 and 1,438, issued and outstanding in
1998 and 1997, respectively) 358 359
Additional paid-in-capital 79,863 74,954
Retained earnings 211,954 167,649
Accumulated other comprehensive earnings (loss) (7,712) (6,506)
Treasury shares (607 and 438 shares in
1998 and 1997, respectively) (10,842) (7,223)
------------ ----------
Total Shareholders' Equity 280,888 236,415
------------ ----------
Total Liabilities and Shareholders' Equity $738,756 $529,923
============ ==========
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net earnings $ 45,792 $ 1,563 $ 38,918
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Non-recurring unusual charge, (non cash) 5,049 40,226 -
Depreciation and amortization 23,754 18,348 17,896
Provision for losses on trade and installment receivables 2,802 1,411 1,546
Provision for deferred income taxes 6,425 (18,867) (596)
Provision for other deferred liabilities 1,131 2,546 2,658
Changes in operating assets and liabilities:
Trade receivables (34,315) (13,265) (5,937)
Inventories (2,176) (1,817) (16,395)
Other current assets (2,518) (1,911) (714)
Accounts payable 2,857 1,001 2,487
Accrued expenses 1,149 8,700 (5,540)
------------------------------------------
Net Cash Provided by Operating Activities 49,950 37,935 34,323
Investing Activities
Purchases of property and equipment (29,331) (38,485) (22,553)
Capitalized consulting costs related to systems implementation (10,978) (1,011) -
Proceeds from sale of property and equipment 804 523 88
Installment contracts written (72,641) (74,104) (65,241)
Payments received on installment contracts 64,036 67,265 47,742
Marketable securities purchased (571) (4,018) (3,416)
Marketable securities sold 1,512 4,140 2,274
Business acquisitions, net of cash acquired (129,318) (3,997) (24,860)
(Increase)/decrease in other investments (3,212) 4,316 (6,986)
Increase in other long-term assets (13,123) (5,394) (3,945)
Other 5,051 (2,272) 519
------------------------------------------
Net Cash Required for Investing Activities (187,771) (53,037) (76,378)
Financing Activities
Proceeds from revolving lines of credit and
long-term borrowings 371,512 79,169 103,872
Principal payments on revolving lines of credit,
long-term debt and capital lease obligations (231,427) (64,993) (61,831)
Proceeds from exercise of stock options 4,754 3,766 4,222
Payment of dividends (1,487) (1,475) (1,457)
Purchase of treasury stock (2,517) 0 (2,250)
------------------------------------------
Net Cash Provided by Financing Activities 140,835 16,467 42,556
Effect of exchange rate changes on cash 750 (100) (202)
-------------------------------------------
Increase in cash and cash equivalents 3,764 1,265 299
Cash and cash equivalents at beginning of year 5,696 4,431 4,132
-------------------------------------------
Cash and cash equivalents at end of year $9,460 $ 5,696 $ 4,431
===========================================
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In thousands) Accumulated
Additional Other
Common Class B Paid-in Retained Comprehensive Treasury
Stock Shares Stock Shares Capital Earnings Earnings (Loss) Shares Shares Total
------- ------ ------ ------ ----------- --------- ------------ --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1996 Balance $6,148 24,589 $ 1,243 4,973 $66,890 $130,100 $993 $(4,055) (311) $201,319
Conversion of shares
from Class B to Common 883 3,531 (883) (3,531) -
Excercise of stock options 72 288 4,253 4,325
Net earnings 38,918 38,918
Foreign currency
translation adjustments (2,256) (2,256)
Marketable securities
holding gain/(loss), 430 430
net of tax
Total comprehensive
earnings - net of tax 37,092
Dividends - $.05 per (1,457) (1,457)
share
Repurchase of treasury shares (2,682) (107) (2,682)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 7,103 28,408 360 1,442 71,143 167,561 (833) (6,737) (418) 238,597
Balance
Conversion of shares
from Class B to Common 1 4 (1) (4) -
Excercise of stock options 78 312 3,811 3,889
Net earnings 1,563 1,563
Foreign currency
translation adjustments (6,074) (6,074)
Marketable securities
holding gain/(loss), 401 401
net of tax
Total comprehensive
earnings - net of tax (4,110)
Dividends - $.05 per share (1,475) (1,475)
Repurchase of treasury shares (486) (20) (486)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 7,182 28,724 359 1,438 74,954 167,649 (6,506) (7,223) (438) 236,415
Balance
Conversion of shares
from Class B to Common 1 4 (1) (4) -
Excercise of stock options 84 338 4,909 4,993
Net earnings 45,792 45,792
Foreign currency
translation adjustments (561) (561)
Marketable securities
holding gain/(loss), (645) (645)
net of tax
Total comprehensive
earnings - net of tax 44,586
Dividends - $.05 per share (1,487) (1,487)
Repurchase of treasury shares (3,619) (169) (3,619)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 Balance $7,267 $29,066 $358 $1,434 $79,863 $211,954 $(7,712) $(10,842) $(607) $280,888
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVACARE CORPORATION AND SUBSIDIARIES
ACCOUNTING POLICIES
Nature of Operations: Invacare Corporation and its subsidiaries (the "company")
is the leading home medical equipment manufacturer in the world based on its
distribution channels, the breadth of its product line and sales. The company
designs, manufactures and distributes an extensive line of medical equipment for
the home health care, retail and extended care markets. The company's products
include standard manual wheelchairs, motorized and lightweight prescription
wheelchairs, seating and positioning systems, motorized scooters, patient aids,
home care beds and low air loss therapy products.
Principles of Consolidation: The consolidated financial statements include the
accounts of the company and are prepared in conformity with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results may differ from these estimates. Certain foreign
subsidiaries are consolidated using a November, 30 fiscal year end. All
significant intercompany transactions are eliminated.
Reclassifications: Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the presentation used for the
year ended December 31, 1998.
Recently Issued Accounting Pronouncements: The company adopted Financial
Accounting Standards Board statement No. 130, Reporting Comprehensive Income in
the first quarter of 1998. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, as defined therein, in the consolidated
financial satements.
The Financial Accounting Standards Board also issued SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, which establishes
standards for reporting financial and descriptive information about operating
segments, and SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which does not change the recognition or measurement of
pension and postretirement benefit plans, but standardizes disclosure
requirements for pensions and other postretirement benefits. The company adopted
SFAS No. 131 and SFAS No. 132 in the fourth quarter of 1998.
In June, 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and for Hedging Activities. This statement requires all derivatives
to be recorded on the balance sheet at fair value and establishes "special
accounting" for certain types of hedges. The statement is effective for years
beginning after June 15, 1999. Management is currently studying the potential
effects of the adoption of this statement but does not anticipate a significant
impact on the company's financial position or results of operations.
Marketable Securities: Current marketable securities are stated at market value,
and 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.
Inventories: Inventories are stated at the lower of cost or market with cost
principally determined for domestic manufacturing inventories by the last-in,
first-out (LIFO) method and for non-domestic inventories and domestic finished
products purchased for resale ($50,106,000 and $46,255,000 at December 1998 and
1997, respectively) by the first-in, first-out (FIFO) method. Market costs are
based on the lower of replacement cost or estimated net realizable value.
Property and Equipment: Property and equipment are stated on the basis of cost.
The company principally uses the straight-line method of depreciation for
financial reporting purposes based on annual rates sufficient to amortize the
cost of the assets over their estimated useful lives. Accelerated methods of
depreciation are used for Federal income tax purposes. Expenditures for
maintenance and repairs are charged to expense as incurred.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
ACCOUNTING POLICIES--Continued
Estimated Liability for Future Warranty Cost: Generally, the company's products
are covered by warranties against defects in material and workmanship for
periods up to five years from the date of sale to the customer. Certain parts
and components carry a lifetime warranty. A non-renewable warranty is also
offered on various products for a maximum period of five years. A provision for
estimated warranty cost is recorded at the time of sale based upon actual
experience.
Research and Development: Research and development costs are expensed as
incurred. The company's annual expenditures for product development and
engineering were approximately $12,980,000, $12,706,000 and $11,060,000 for
1998, 1997 and 1996, respectively.
Revenue Recognition: The company recognizes revenue when the product is
shipped and provides an appropriate allowance for estimated returns and
adjustments.
Income Taxes: The company uses the liability method in measuring the provision
for income taxes and recognizing deferred tax assets and liabilities in the
balance sheet. The liability method requires that deferred income taxes reflect
the tax consequences of currently enacted rates for differences between the tax
and financial reporting bases of assets and liabilities.
Net Earnings Per Share: Effective December 31, 1997, the company adopted SFAS
No. 128, Earnings Per Share. Accordingly, basic earnings per share was computed
based on the weighted-average number of Common Shares and Class B Common Shares
outstanding during the year. Diluted earnings per share was computed based on
the weighted-average number of Common Shares and Class B Common Shares
outstanding plus the effects of dilutive stock options outstanding during the
year.
Foreign Currency Translation: Substantially all the assets and liabilities
of the company's foreign subsidiaries are translated into U.S. dollars at year
end exchange rates. Revenues and expenses are translated at weighted average
exchange rates. Gains and losses resulting from translation are included in
accumulated other comprehensive earnings (loss).
Goodwill: The excess of the aggregate purchase price over the fair value of net
assets acquired is amortized by use of the straight-line method for periods
ranging from 20 to 40 years. The accumulated amortization was $20,039,000 and
$13,707,000 at December 31, 1998 and 1997, respectively. The carrying value of
goodwill is reviewed at each balance sheet date to determine whether goodwill
has been impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the company's carrying value of
the goodwill would be reduced by the estimated shortfall of cash flows at such
time an impairment in value of goodwill has occurred. During 1997, $8,452,000 of
goodwill was written off as part of the non-recurring and unusual charge. Based
on the company's review as of December 31, 1998, no other impairment of goodwill
was evident.
Advertising: Advertising costs are expensed as incurred and included in
"selling, general and administrative expenses." Advertising expenses amounted to
$13,386,000, $10,419,000 and $12,049,000 for 1998, 1997 and 1996, respectively.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
RECEIVABLES
Trade receivables are net of allowances for doubtful accounts of $5,566,000
and $6,565,000 in 1998 and 1997, respectively.
Installment receivables as of December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
Long- Long-
(In thousands) Current Term* Total Current Term* Total
------- ------- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Installment receivables $67,876 $23,661 $91,537 $61,020 $25,777 $86,797
Less:
Unearned interest (3,663) (1,592) (5,255) (4,585) (2,264) (6,849)
Allowance for doubtful accounts (3,883) (1,536) (5,419) (7,137) (1,477) (8,614)
-------- ------- ------- ------- ------- -------
$60,330 $20,533 $80,863 $49,298 $22,036 $71,334
======= ======= ======= ======= ======= =======
</TABLE>
* Long - term installment receivables are included in "Other Assets" on the
consolidated balance sheet statement.
INVENTORIES
Inventories as of December 31, 1998 and 1997 consist of the following:
1998 1997
(In thousands)
---------------------------
Raw materials $21,019 $ 23,704
Work in process 14,928 11,676
Finished goods 45,793 40,328
---------------------------
$81,740 $ 75,708
===========================
Current cost exceeds the LIFO value of inventories by approximately $209,000 and
$482,000 at December 31, 1998 and 1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and 1997 consist of the
following:
1998 1997
---------------------------
(In thousands)
Land, buildings and improvements $ 44,797 $ 40,026
Machinery and equipment 140,577 111,959
Furniture and fixtures 11,950 9,649
Leasehold improvements 7,628 6,979
----------------------------
204,952 168,613
Less allowance for depreciation 92,008 78,036
----------------------------
$112,944 $ 90,577
============================
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
CURRENT LIABILITIES
Accrued expenses as of December 31, 1998 and 1997 consist of the following:
1998 1997
(In thousands)
---------------------------
Accrued salaries and $20,560 $17,387
Accrued warranty cost 6,619 6,385
Accrued product liability, current portion 1,434 1,389
Other accrued items 31,448 24,210
Litigation settlement - 4,500
Plant relocation 5,444 6,127
---------------------------
$65,505 $ 59,998
===========================
ACQUISITIONS
In January 1998, the company purchased substantially all of the outstanding
shares of Suburban Ostomy Supply Co. (Suburban), a direct marketing wholesaler
of medical supplies and related products to the home health care industry. The
purchase price of Suburban was $131,826,000 and was funded with cash on hand and
borrowings from existing credit agreements. Proceeds from a $100,000,000 private
placement of senior notes were used to pay down revolving credit debt incurred
to fund the acquisition. Severance and facility consolidation reserves of
approximately $4,000,000 were included in the purchase price allocation, of
which approximately $1,000,000 was expended during 1998. Goodwill generated as a
result of the acquisition is being amortized over 40 years on a straight-line
basis.
The following unaudited pro forma results of operations reflect the year ended
December 31, 1997, as though the acquisition of Suburban occurred at the
beginning of the year. The financial information has been prepared by Invacare
and all calculations have been made based upon assumptions deemed appropriate.
The pro forma adjustments give effect to the purchase method of accounting.
Year Ended
December 31, 1997
Net sales $ 753,381
Net loss $ (1,758)
Loss per share-basic $ ( .06)
Loss per share-diluted $ ( .06)
Pro forma net sales and net loss are not necessarily indicative of the net sales
and net loss that would have occurred had the acquisition been made in 1997 or
the results which may occur in the future.
In May, 1997 the company purchased all of the outstanding shares of Silcraft
Corporation. Silcraft manufactures and distributes bath tubs, barrier-free
showers and patient lifts for use primarily in extended-care facilities. In
October, 1997, the company purchased all of the outstanding shares of Allied
Medical Supply Corporation, a distributor of medical soft goods and disposables.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
ACQUISITIONS
In February, 1996, the company purchased all the outstanding shares of
Fabriorto, Lda, a Portuguese manufacturer and distributor of manual and power
wheelchairs, beds and walking aids and purchased all the outstanding shares of
Frohock-Stewart, Inc., a manufacturer of personal care products distributed
mainly through the retail channel. In March, 1996 the company purchased all the
outstanding shares of Healthtech Products, Inc., a manufacturer of extended care
beds and patient-room furniture for the institutional market. In June, 1996, the
company acquired all the outstanding shares of Production Research Corporation
(PRC), a distributor/supplier of after-market parts for the home medical
equipment market. In July, 1996, the company purchased all of the outstanding
shares of Roller Chair Pty. Ltd., an Australian manufacturer and distributor of
custom power wheelchairs.
The operating results of all acquisitions are included in the company's
consolidated results of operations from the respective dates of acquisition. The
above transactions have been accounted for by the purchase method of accounting.
The results of operations of the acquired businesses (except for Suburban) prior
to the date of acquisition were not material to the company.
LEASES AND COMMITMENTS
The company leases certain of its facilities, transportation equipment and data
processing equipment. These leases have terms of up to 10 years and provide for
renewal options. Generally, the company is required to pay taxes and normal
expenses of operating the facilities and equipment. As of December 31, 1998, the
company is committed under non-cancelable operating leases which have initial or
remaining terms in excess of one year and expire on various dates through 2006.
Lease expenses were approximately $7,975,000 in 1998, $6,978,000 in 1997 and
$6,071,000 in 1996. Future minimum operating lease commitments as of December
31, 1998, are as follows:
Year Amount
------ -------
(In thousands)
1999 $6,605
2000 3,941
2001 2,724
2002 1,694
2003 1,503
Thereafter 2,060
-------
Total Future Minimum Lease Payments $18,527
=======
The amount of buildings and equipment capitalized in connection with capital
leases was $4,403,000 and $4,301,000 at December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, accumulated amortization was
$2,257,000 and $1,851,000 respectively.
RETIREMENT AND BENEFIT PLANS
Substantially all full-time salaried and hourly domestic employees are included
in two profit sharing plans sponsored by the company. The company makes matching
contributions up to 66.7% of the first 3% of employees' contributions and may
make discretionary contributions to the domestic plans based on an annual
resolution of the Board of Directors. The company has no requirement to make the
discretionary contribution. The contributions can either be in the form of cash
or property to the Profit Sharing Plan or in the form of cash, Common Shares or
property to the Employee Stock Bonus Trust and Plan. Cash contributions to the
Employee Stock Bonus Trust and Plan are used to purchase the company's Common
Shares on the open market.
The company also has a 401(k) Benefit Equalization Plan covering certain
employees, which provides for retirement payments so that the total retirement
payments equal amounts that would have been payable from the company's principal
retirement plans if it were not for limitations imposed by income tax
regulations.
Contribution expense for the above plans in 1998, 1997 and 1996 was $4,308,000,
$3,925,000 and $3,703,000, respectively.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
In 1995, the company introduced a non-qualified defined benefit Supplemental
Executive Retirement Plan (SERP) effective May 1, 1995 for certain key
executives to recapture benefits lost due to governmental limitations on
qualified plan contributions. The projected benefit obligation related to this
unfunded plan was $23,976,000 at December 31, 1998. Pension expense for the plan
in 1998, 1997 and 1996 was $1,085,000, $923,000 and $748,000, respectively.
The company utilizes a Voluntary Employee Benefit Association (VEBA) to provide
for the payment of self-funded employee health benefits for current employees.
Contribution expense for each of 1998, 1997 and 1996 was $1,400,000.
SHAREHOLDERS' EQUITY TRANSACTIONS
At December 31, 1998, the company had 100,000,000 authorized Common Shares,
without par value, and 12,000,000 authorized Class B Common Shares, without par
value. In general, the Common Shares and the Class B Common Shares have
identical rights, terms and conditions and vote together as a single class on
most issues, except that the Class B Common Shares have ten votes per share,
carry a 10% lower cash dividend rate and, in general, can only be transferred to
family members. Holders of Class B Common Shares are entitled to convert their
shares into Common Shares at any time on a share-for-share basis.
At December 31, 1998, the company had 300,000 shares of Serial Preferred Shares
authorized, none of which were issued or outstanding. Serial Preferred Shares
are entitled to one vote per share.
During 1994, the Board of Directors adopted and the Shareholders approved the
1994 Performance Plan (the "1994 Plan"). The 1994 Plan provides for the issuance
of up to 3,500,000 Common Shares in connection with stock options and other
awards granted under the 1994 Plan. The 1994 Plan allows the Compensation
Committee of the Board of Directors (the "Committee") to grant incentive stock
options, non-qualified stock options, stock appreciation rights, and stock
awards (including the use of restricted stock). The Committee has the authority
to determine the employees that will receive awards, the amount of the awards
and the other terms and conditions of the awards. Payments of the stock
appreciation rights may be made in cash, Common Shares or a combination thereof.
There were no stock appreciation rights outstanding at December 31, 1998, 1997
or 1996. During 1998, the Committee, under the 1994 Plan, granted 511,040
non-qualified stock options for a term of ten years at 100% of the fair market
value of the underlying shares on the date of grant.
The company also has a Stock Option Plan for non-employee Directors. The plan
was approved May 27, 1992 and provides for the granting of up to a maximum of
100,000 options to eligible new Directors. Directors will receive grants with
exercise prices at 100% of the fair market value of the company's stock on the
date of grant. At December 31, 1998 there were 12,550 options outstanding under
this plan. During 1998, 6,667 options were granted under this plan.
The Plans have provisions for the cashless exercise of options. Under these
provisions, the company acquired 144,489 treasury shares for $3,120,476 in 1998,
19,951 treasury shares for $486,000 in 1997 and 16,430 treasury shares for
$432,000 in 1996.
As of December 31, 1998, an aggregate of 9,593,520 shares was reserved for
conversion of Class B Common Shares, future rights (as defined below) and the
exercise and future grant of options.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1998 Price 1997 Price 1996 Price
---------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1, 2,967,762 $15.05 2,758,587 $12.12 2,691,902 $ 9.81
Granted 517,707 23.68 582,250 25.13 401,908 24.77
Exercised (337,933) 9.29 (311,575) 6.22 (288,101) 7.27
Canceled (90,516) 23.67 (61,500) 23.01 (47,122) 17.53
--------- --------- --------- -------- --------- ---------
Options outstanding at December 31, 3,057,020 $16.90 2,967,762 $15.05 2,758,587 $12.12
========= ========= ========= ======== ========= =========
Options price range at December 31, $ 2.19 $ 2.13 $ 2.13
to to to
$ 27.50 $ 26.75 $ 26.75
Options exercisable at December 31, 1,906,538 1,872,552 1,793,289
Options available for grant at December 31, 1,644,148 572,839 1,095,239
</TABLE>
The company utilizes the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123). Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the company's stock option plans been
determined based on the fair value at the grant date for awards in 1998, 1997
and 1996 consistent with the provisions of SFAS 123, the company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
(In thousands except per share data) 1998 1997 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings - as reported $45,792 $1,563 $38,918
Net earnings/(loss) - pro forma $43,302 $ (234) $37,725
Earnings per share as reported - basic $ 1.53 $ .05 $ 1.33
Earnings per share as reported - assuming dilution $ 1.50 $ .05 $ 1.28
Pro forma earnings/(loss) per share - basic $ 1.45 $ (.01) $ 1.29
Pro forma earnings/(loss) per share - assuming dilution $ 1.42 $ (.01) $ 1.24
</TABLE>
The assumption regarding the stock options issued in 1998, 1997 and 1996 was
that 25% of such options vested in the year following issuance. The stock
options awarded during the year provided a four year vesting period whereby
options vest equally in each year. SFAS 123's pro forma disclosure was
prospective from 1995, as retroactive application was prohibited. Therefore,
since compensation expense associated with an award is recognized over the four
year vesting period, pro forma net income may not be representative of
compensation expense in future years, when the effect of the amortization of
multiple awards would be reflected in the income statement. Furthermore, current
and prior years pro forma disclosures may be adjusted for forfeitures of awards
that will not vest because service or employment requirements have not been met.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998: dividend yield of 1.48%; expected
volatility of 31.8%; risk-free interest rate of 5.7%; and an expected life of 7
years. The weighted-average present value of options granted during the year,
per the Black-Scholes model based on the expected exercise year of 2005, is
$9.15.
The plans provide that shares granted come from the company's authorized but
unissued common stock or treasury shares. Pursuant to the plan, the Committee
has established that the 1998 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, 1998 is 6.48 years.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
On July 7, 1995, the company adopted a Rights Plan whereby each holder of a
Common Share and Class B Common Share received one purchase right (the "Rights")
for each share owned. Under certain conditions, each Right may be exercised to
purchase one-tenth of one Common Share at a price of $8 per one-tenth of a
share. The Rights may only be exercised 10 days after a third party has acquired
30% or more of the company's outstanding voting power or 10 days after a third
party commences a tender offer for 30% or more of the voting power (an
"Acquiring Party"). In addition, if an Acquiring Party merges with the company
and the company's Common Shares are not changed or exchanged, or if an Acquiring
Party engages in one of a number of self-dealing transactions, each holder of a
Right (other than the Acquiring Party) will have the right to receive that
number of Common Shares or similar securities of the resulting entity having a
market value equal to two times the exercise price of the Right. The company may
redeem the Rights at a price of $.005 per Right at any time prior to 10 days
following a public announcement that an Acquiring Party has acquired beneficial
ownership of 30% or more of the company's outstanding voting power, and in
certain other circumstances as approved by the Board of Directors. The Rights
will expire on July 7, 2005. Coincident with adoption of the Plan, the company
redeemed Rights outstanding under a prior plan at the price of $.005 per Right.
NET EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net earnings
per common share.
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands except per share data)
-------------------------------------------------
<S> <C> <C> <C>
Basic
Average common shares outstanding 29,932 29,569 29,332
Net earnings $ 45,792 $ 1,563 $38,918
Net earnings per common share $ 1.53 $ .05 $ 1.33
Diluted
Average common shares outstanding 29,932 29,569 29,332
Stock options 651 805 1,061
--------------------------------------------------
Average common shares assuming dilution 30,583 30,374 30,393
Net earnings $ 45,792 $ 1,563 $38,918
Net earnings per common share $ 1.50 $ .05 $ 1.28
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
COMPREHENSIVE EARNINGS (LOSS)
The components of other comprehensive earnings (loss) were as follows:
<TABLE>
<CAPTION>
(In thousands) Unrealized
Gain (Loss) on
Currency Available-for-Sale
Translation Securities
Adjustments Total
----------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 755 $ 238 $ 993
Foreign currency translation adjustment (2,256) (2,256)
Unrealized gain (loss) on available for sale securities 705 705
Deferred tax (expense) benefit relating to unrealized gain
(loss) on available for sale securities (275) (275)
--------------- ---------------- --------------
Balance at December 31, 1996 (1,501) 668 (833)
Foreign currency translation adjustment (6,074) (6,074)
Unrealized gain (loss) on available for sale securities 1,341 1,341
Deferred tax (expense) benefit relating to unrealized gain
(loss) on available for sale securities (940) (940)
--------------- ---------------- --------------
Balance at December 31, 1997 (7,575) 1,069 (6,506)
Foreign currency translation adjustment (561) (561)
Unrealized gain (loss) on available for sale securities (1,057) (1,057)
Deferred tax (expense) benefit relating to unrealized gain
(loss) on available for sale securities 412 412
=============== ================ ==============
Balance at December 31, 1998 $ (8,136) $ 424 $ (7,712)
=============== ================ ==============
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
LONG-TERM OBLIGATIONS
Long-term obligations as of December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
(In thousands)
<S> <C> <C>
$25,000,000 senior notes at 7.45%, mature in February 2003 $17,856 $21,429
$80,000,000 senior notes at 6.71%, mature in February 2008 80,000 -
$20,000,000 senior notes at 6.60%, mature in February 2005 20,000 -
Revolving credit agreement ($425,000,000 multi-currency) at .185% to .375%
above local interbank offered rates, expires October 31, 2002 191,662 147,231
Notes payable to banks and other third parties 2,556 3,346
Notes and mortgages payable, secured by buildings and equipment 2,734 3,064
Capitalized lease obligations 2,177 2,466
Product liability 5,512 5,383
Other 9,899 9,288
--------------------------------
332,396 192,207
Less current maturities of long-term obligations 8,492 8,252
--------------------------------
$323,904 $183,955
================================
</TABLE>
In 1993, the company completed a private placement of $25,000,000 in senior
notes at 7.45% which contain covenants similar to the revolving credit agreement
described below. At December 31, 1998, $100,787,000 of retained earnings is
available for dividends. The notes are due in 2003 and require principal
payments of $3,571,429 per year beginning in 1997.
During 1998, the company completed a private placement of $20,000,000 in senior
notes at 6.60% and a private placement of $80,000,000 in senior notes at 6.71%.
The notes are due in 2005 and 2008 respectively and require a lump sum principal
payment on final maturity date.
In 1997, the company entered into a $425,000,000 multi-currency revolving credit
agreement with a group of commercial banks, which expires on October 31, 2002,
or such later date as mutually agreed upon by the company and the banks. The
borrowing rates under the agreement are determined based on the funded debt to
capitalization ratio of the company as defined in the agreement and range from
.185% to .375% above the various interbank offered rates. The agreement requires
the company to maintain certain conditions with respect to net worth, funded
debt to capitalization, and interest coverage as defined in the agreement.
In September 1997, the company fixed the interest rate on 7,500,000 of its New
Zealand dollar borrowings through an interest rate swap agreement. The effect of
the swap is to exchange a short-term floating interest rate for a fixed rate of
7.30% for a five year term. As of December 31, 1998 and 1997, the weighted
average floating interest rate on the New Zealand dollar debt was 8.90% and
8.10%, respectively.
In July 1997, the company fixed the interest rate on 50,000,000 of its French
franc borrowings through an interest rate swap agreement. The effect of the swap
is to exchange a short-term floating interest rate for a fixed rate of 4.14% for
a three year term. As of December 31, 1998 and 1997, the weighted average
floating interest rate on the French franc debt was 3.88% and 3.66%,
respectively.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
In May 1997, the company fixed the interest rate on $15,000,000 of its U.S.
dollar borrowings through two interest rate swap agreements. Each agreement is
for $7,500,000 U.S. dollars. The effect of the swaps is to exchange a short-term
floating interest rate for a fixed rate of 6.18% for a two year term, extendible
for an additional year at the counterparty's option in one agreement and 6.285%
for a three year term in the other agreement. As of December 31, 1998 and 1997,
the weighted average floating interest rate on the U.S. dollar debt was 5.32%
and 5.90%, respectively.
In May 1995, the company fixed the interest rate on $5,000,000 of its U.S.
dollar borrowings through an interest rate swap agreement. The effect of the
swap is to exchange a short-term floating interest rate for a fixed rate of
6.38% for a five year term.
Notes payable to banks and other third parties consists of borrowings by the
company and its subsidiaries under term lending arrangements for certain assets
or licensing or service contracts.
The notes and mortgages payable financed the purchase of certain buildings and
equipment which secure the obligations. The notes and mortgages payable bear
interest at rates from 4.3% to 10.4% and mature through 2003.
The capital leases at December 31, 1998 are principally for a manufacturing
facility and computer systems, with payments due through 2007.
The company is self-insured for a portion of its product liability and certain
other liability exposures. Product liability for domestically manufactured
products is insured through the company's captive insurance company, which
insures the first $2,000,000 per claim or annual policy aggregate losses of
$3,000,000. The company also has additional layers of coverage insuring up to
$70,000,000 for a total of $73,000,000 in annual aggregate losses arising from
individual losses that exceed $2,000,000 or annual policy aggregate losses of
$3,000,000 of the company's domestic product liability exposure.
The aggregate minimum combined maturities of long-term obligations are
approximately $8,492,000 in 1999, $5,404,000 in 2000, $5,685,000 in 2001,
$195,642,000 in 2002, $3,937,000 in 2003 and $100,592,000 thereafter. Interest
paid on borrowings was $18,995,000, $10,612,000 and $10,213,000 in 1998, 1997
and 1996, respectively.
INCOME TAXES
Earnings/(loss) before income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
(In thousands
<S> <C> <C> <C>
Domestic $ 69,037 $ 10,734 $58,182
Foreign 6,032 (5,511) 5,586
-----------------------------------------------
$ 75,069 $ 5,223 $63,768
==============================================
</TABLE>
The company has provided for income taxes as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 16,428 $18,030 $19,840
State 4,000 2,800 3,800
Foreign 4,642 1,250 2,370
----------------------------------------------
25,070 22,080 26,010
Deferred:
Federal 4,471 (13,320) (1,330)
State 0 (2,400) 0
Foreign (264) (2,700) 170
----------------------------------------------
4,207 (18,420) (1,160)
----------------------------------------------
Income Taxes $ 29,277 $3,660 $24,850
==============================================
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
At December 31, 1998, the company had foreign tax loss carryforwards of
approximately $3,100,000, of which $2,800,000 are non-expiring and $300,000
expire between 2000 and 2003.
The company made income tax payments of $13,731,000, $19,907,000 and
$26,686,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
A reconciliation to the effective income tax rate from the federal statutory
rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax benefit 3.5 5.0 3.9
Tax credits (2.3) (23.0) (1.9)
Goodwill 2.9 59.3 1.7
Other, net (.1) (6.2) 0.3
-----------------------------------------------
39.0% 70.1% 39.0%
===============================================
</TABLE>
Significant components of deferred income tax assets and liabilities at December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------
(In thousands)
<S> <C> <C>
Current deferred income tax assets, net:
Bad debt $ 4,242 $ 4,030
Warranty 1,397 1,656
Inventory 1,862 1,988
Other accrued expenses and reserves 3,840 4,442
State and local taxes 1,180 1,387
Litigation reserves 19 2,258
Compensation and benefits 3,519 3,347
Product liability 274 289
Loss carryforwards 167 36
Other, net 831 (578)
--------------------------
$ 17,331 $ 18,855
--------------------------
Long-term deferred income tax assets (liabilities), net:
Fixed assets $ 293 $ 1,653
Product liability 1,128 1,155
Loss carryforwards 818 726
Compensation and benefits 1,976 1,645
State and local taxes 2,400 2,400
Other, net (345) (417)
-------------------------
$ 6,270 $ 7,162
-------------------------
Net Deferred Income Taxes $ 23,601 $ 26,017
=========================
</TABLE>
RELATED PARTY TRANSACTIONS
The company purchased 90,000 shares of Invacare Common Stock at $25.00 per share
in 1996, which approximated the fair value at time of purchase, from a
charitable trust in which the Chairman and Chief Executive Officer of the
company has a reversionary interest. The total cost of the shares was $2,250,000
and was added to the treasury shares of the company.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
(In thousands, except per share data)
1998 March 31, June 30, September 30, December 31,
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $181,066 $202,779 $203,351 $210,333
Gross profit 51,453 60,688 62,365 64,007
Earnings before income taxes 12,365 18,066 21,302 23,336
Net earnings 7,542 11,021 12,994 14,235
Net earnings per share - basic .25 .37 .43 .48
Net earnings per share - assuming dilution .25 .36 .43 .47
<CAPTION>
1997 March 31, June 30, September 30, December 31,
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $151,524 $164,992 $166,144 $170,754
Gross profit 44,218 51,488 49,570 53,102
Earnings/(Loss) before income taxes 11,830 16,417 (28,620) 5,596
Net earnings 7,220 10,017 (19,060) 3,386
Net earnings (Loss) per share - basic .24 .34 (.64) .11
Net earnings per share - assuming dilution .24 .33 (.64) .11
</TABLE>
BUSINESS SEGMENTS
In accordance with SFAS No. 131, the company operates in three primary business
segments based on geographical area: North America, Europe and Australasia. All
reporting segments amounts shown for periods prior to adoption have been
restated to conform to the provisions of SFAS No. 131. The three reportable
segments represent operating groups which offer products to different geographic
regions.
The North America segment consists of five operating groups which sell the
following products: wheelchairs, scooters, seating products, self care products,
home care beds, low air loss therapy products, patient transport products,
distributed products, extended care and furniture products, respiratory and
other products. The Europe segment consists of one operating group that sells
primarily wheelchairs, scooters, self care products, patient lifts and slings
and oxygen products. The Australasia segment consists of two operating groups
which sell custom power wheelchairs, electronic wheelchair controllers and
patient aids. Each business segment sells to the home health care, retail and
extended care markets.
The company evaluates performance and allocates resources based on profit or
loss from operations before income taxes for each reportable segment. The
accounting policies of each segment are the same as those described in the
summary of significant accounting policies for the company's consolidated
financial statements. Intersegment sales and transfers are based on the costs to
manufacture plus a reasonable profit element. Therefore, intercompany profit or
loss on intersegment sales and transfers are not considered in evaluating
segment performance. Intersegment revenue for reportable segments are
$47,881,000, $39,250,000 and $41,842,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
The information by segment is as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
North Australia/ All
America Europe Asia Other* Consolidated
----------- ------------ ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $647,372 $130,075 $ 19,949 $ 133 $797,529
Depreciation and amortization 18,283 5,327 140 4 23,754
Net interest expense 11,729 1,765 1,398 (3,307) 11,585
Earnings (loss) before income taxes 122,730 (1,002) 2,862 (49,521) 75,069
Assets 507,397 134,143 25,010 72,206 738,756
Expenditures for assets 24,241 4,997 93 - 29,331
<CAPTION>
Year ended December 31, 1997
North Australia/ All
America Europe Asia Other* Consolidated
----------- ------------ ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $506,197 $125,677 $ 21,132 $ 408 $653,414
Depreciation and amortization 13,410 4,770 159 9 18,348
Net interest expense 2,459 2,171 1,797 (3,193) 3,234
Earnings (loss) before income taxes 52,797 (11,556) 118 (36,136) 5,223
Assets 318,757 119,939 28,068 63,159 529,923
Expenditures for assets 35,579 2,878 28 - 38,485
<CAPTION>
Year ended December 31, 1996
North Australia/ All
America Europe Asia Other* Consolidated
----------- ------------ ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $462,569 $134,770 $ 21,476 $ 683 $619,498
Depreciation and amortization 12,647 5,168 81 - 17,896
Net interest expense 1,353 1,991 2,340 (4,059) 1,625
Earnings (loss) before income taxes 103,595 3,896 939 (44,662) 63,768
Assets 301,531 135,117 32,725 40,255 509,628
Expenditures for assets 19,593 2,923 14 23 22,553
</TABLE>
* Consists of the Invacare captive insurance unit, domestic export unit and
corporate selling, general and administrative costs, which do not meet the
quantitative criteria for determining reportable segments.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
In accordance with SFAS No. 131, net sales by product, are as follows:
<TABLE>
<CAPTION>
North America 1998 1997 1996
-------------
-------------------------------------------
<S> <C> <C> <C>
Rehab $157,802 $126,563 $103,829
Standard Wheelchairs 102,326 101,170 98,619
Distributed 93,372 - -
Personal Care/Patient Transport 73,728 68,924 58,949
Respiratory 70,626 67,321 67,527
Beds 55,356 65,357 65,246
Institutional products 31,419 16,576 14,063
Parts 17,881 18,044 15,675
Other 44,862 42,242 38,661
-------------------------------------------
$647,372 $506,197 $462,569
===========================================
<CAPTION>
Europe 1998 1997 1996
------
-------------------------------------------
<S> <C> <C> <C>
Rehab $ 89,006 $ 85,087 $ 92,475
Personal Care/Patient Transport 21,341 21,318 21,432
Respiratory 4,633 3,273 3,284
Beds 625 1,384 2,436
Other 14,470 14,615 15,143
-------------------------------------------
$130,075 $125,677 $134,770
===========================================
<CAPTION>
Australasia 1998 1997 1996
-----------
-------------------------------------------
<S> <C> <C> <C>
Rehab $ 19,949 $ 21,132 $ 21,476
===========================================
Other $ 133 $ 408 $ 683
----- ===========================================
Total Consolidated $797,529 $ 653,414 $ 619,498
------------------ ===========================================
</TABLE>
No single customer accounted for more than 5% of the company's sales.
CONCENTRATION OF CREDIT RISK
The company manufactures and distributes durable medical equipment and supplies
to the home health care, retail and extended care markets. The company performs
credit evaluations of its customers' financial condition. To further assist
dealers in reducing their cash requirements for inventory and rental equipment,
the company provides various financing options for certain types of products
through Invacare Credit Corporation "ICC". In a typical financing arrangement,
the company sells the equipment on a financing contract to the dealer for
periods ranging from 6 to 39 months. The company also introduced a revolving
credit agreement, known as Invacard, which provides an additional financing
option to our dealer base. In addition, the majority of these transactions are
secured with a UCC-1 filing purchase money securities and/or personal
guarantees. At this time, all ICC note obligations are serviced and managed by
the company. The note obligations are not sold to third parties. Substantially
all of the company's receivables are due from health care and medical equipment
dealers located throughout the United States, Australia, Canada, New Zealand and
Europe. A significant portion of products sold to dealers, both foreign and
domestic, are ultimately funded through government reimbursement programs such
as Medicare and Medicaid. 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.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the company in estimating its
fair value disclosures for financial instruments:
Cash, cash equivalents and marketable securities: The carrying amount reported
in the balance sheet for cash, cash equivalents and marketable securities
approximates its fair value.
Installment receivables: The carrying amount reported in the balance sheet for
installment receivables approximates its fair value. The majority of the
portfolio contains receivables with terms less than three years, of which a
large concentration is due in less than one year. The interest rates associated
with these receivables have not varied significantly over the past three years.
Management believes that after consideration of the credit risk, the net book
value of the installment receivables approximates market value.
Long-term debt: The carrying amounts of the company's borrowings under its
long-term revolving credit agreements approximate their fair value. Fair values
for the company's senior notes are estimated using discounted cash flow
analyses, based on the company's current incremental borrowing rate for similar
borrowing arrangements.
Interest Rate Swaps: The company is a party to interest rate swap agreements
with off-balance sheet risk which are entered into in the normal course of
business to reduce exposure to fluctuations in interest rates. The agreements
are with major financial institutions which are expected to fully perform under
the terms of the agreements thereby mitigating the credit risk from the
transactions. The agreements are contracts to exchange floating rate payments
with fixed rate payments over the life of the agreements without the exchange of
the underlying notional amounts. The notional amounts of such agreements are
used to measure interest to be paid or received and do not represent the amount
of exposure to credit loss. The amounts to be paid or received under the
interest rate swap agreements are accrued consistent with the terms of the
agreements and market interest rates. Fair value for the company's interest rate
swaps are based on independent pricing models.
Other investments: The company has made other investments in limited
partnerships and non-marketable equity securities. These investments were
acquired in private placements and there are no quoted market prices or stated
rates of return. It is not practicable to estimate the fair value of these
investments because of the limited information available and because of the
significance of the cost to obtain an outside appraisal. The investments are
carried at their cost of $9,429,000 in 1998 and $9,178,000 in 1997 and are
accounted for using the cost method.
The carrying amounts and fair values of the company's financial instruments at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------------
( In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 9,460 $ 9,460 $ 5,696 $ 5,696
Marketable securities 4,749 4,749 4,518 4,518
Installment receivables 80,863 80,863 71,334 71,334
Long-term debt (including current 314,808 315,107 175,070 175,549
maturities)
Interest rate swaps (fair value liability) - 340 - 356
</TABLE>
Forward Contracts: The company operates internationally and as a result is
exposed to foreign currency fluctuations. Specifically, the exposure includes
intercompany loans, and third party sales or payments. In an attempt to reduce
this exposure, foreign currency forward contracts are utilized and accounted for
as hedging instruments. The company does not use derivative financial
instruments for speculative purposes.
The gains and losses that result from the forward contracts are deferred and
recognized when the offsetting gains and losses for the identified transactions
are recognized. At December 31, 1998 and 1997, the gain/(loss) resulting from
forward contracts was not material to the financial statements.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
The following table represents the fair value of all outstanding forward
contracts at December 31, 1998 and 1997. The valuations are based on market
rates. All forward contracts noted below mature before January, 2000 and May,
1998 respectively.
<TABLE>
<CAPTION>
December 31, 1998
Cost Market Value
U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell
---------------------------------------- --- ------------------ --------------------- ---------------------
<S> <C> <C> <C>
British pound $ (1,042) $ (64) $ (1,106)
New Zealand dollar (14,244) 74 (14,170)
German mark 3,987 (18) 3,969
Australian dollar 310 (2) 308
Canadian dollar 4,919 (4) 4,915
French franc 2,040 (64) 1,976
<CAPTION>
December 31, 1997
Cost Market Value
U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell
---------------------------------------- --- ------------------ --------------------- ---------------------
<S> <C> <C> <C>
British pound $ 525 $ (1) $ 524
New Zealand dollar 1,670 75 1,745
U.S. dollar (2,250) 45 (2,205)
</TABLE>
Non-Recurring and Unusual Charges: In 1997, the company recorded non-recurring
and unusual charges aggregating $61,039,000 ($38,839,000 or $1.28 diluted per
share after tax) for the acceleration of certain strategic initiatives and other
items. The charge was recorded in accordance with the Financial Accounting
Standards Board's (FASB's) and the Securities and Exchange Commission's (SEC's)
accounting pronouncements, including the Emerging Issues Task Force (EITF) 94-3.
The charge included global manufacturing facility consolidations, the
elimination of certain non-strategic product lines, asset write downs related to
global systems initiatives, principally as a result of changes in project scope,
an increase in the company's bad debt reserve, other asset write-downs and an
increase in reserves for litigation.
During 1998, the company reviewed the charges and updated the components to
reflect current year activity and estimates. Based on this review, reserves for
accelerated facilities consolidations and product line exits were reduced by
$3,300,000 and $4,201,000 respectively. These changes were substantially offset
by additional reserves of $2,384,000 for litigation and charges of $5,049,000
for additional asset write-downs. The net effect of these changes had no
material impact on reported net earnings for the year. The remaining accrual
balance at December 31, 1998, in the amount of $4,679,000, relates primarily to
facility consolidations. The company expects substantially all of the remaining
charge to be utilized over the next six months.
The following table summarizes the non-recurring and unusual charges activity
through December 31, 1998:
<TABLE>
<CAPTION>
Total Charge Amounts Balance Adjustments/ (Utilized) / Balance
1997 Utilized Dec. 31, 1997 Components Provided Dec. 31,
During 1997 Changes During 1998 1998
------------------------------------------------------------------------------------------
U.S. dollar (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Facility consolidations $12,589 $(3,420) $9,169 $(3,300) $(1,661) $4,208
Product line elimination 7,748 (5,060) 2,688 (4,201) 1,513 -
Systems initiatives 7,456 (7,456) - - - -
Provision for doubtful accounts 10,293 (4,423) 5,870 - (5,870) -
Asset write-downs 9,882 (9,371) 511 - (511) -
Litigation 13,071 (5,000) 8,071 2,384 (9,984) 471
------------------------------------------------------------------------------------------
Sub Total $61,039 $(34,730) $26,309 (5,117) (16,513) 4,679
============================================ --------------------------------------------
Additional Asset write-downs 5,049 (5,049) -
--------------------------------------------
Total $(68)* $(21,562) $4,679
============================================
</TABLE>
* Represents the income statement effect of adjustments, made to the charge, to
reflect current year activity and estimates.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL.E
--------- --------- ----------- --------- --------
ADDITIONS
-----------
Balance Charged Charged To Balance
At To Other At
Beginning Cost And Accounts Deductions- End Of
Description Of Period Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Deducted from asset accounts --
Allowance for doubtful accounts $15,179 $3,390 $ 860(C) $8,444(A) $10,985
Inventory obsolescence reserve 4,787 3,269 298(C) 2,058(B) 6,296
Accrued warranty cost 6,385 6,183 - 5,949(B) 6,619
Accrued product liability 6,772 2,742 - 2,568(D) 6,946
Year Ended December 31, 1997
Deducted from asset accounts --
Allowance for doubtful accounts $5,478 $15,942 $ 75(C) $6,316(A) $15,179
Inventory obsolescence reserve 4,963 1,650 - 1,826(B) 4,787
Accrued warranty cost 6,052 4,931 - 4,598(B) 6,385
Accrued product liability 6,128 3,218 - 2,574(D) 6,772
Year Ended December 31, 1996
Deducted from asset accounts --
Allowance for doubtful accounts $4,771 $2,397 $ 183(C) $1,873(A) $5,478
Inventory obsolescence reserve 5,274 2,883 689(C) 3,883(B) 4,963
Accrued warranty cost 5,745 5,154 363(C) 5,210(B) 6,052
Accrued product liability 4,165 5,251 - 3,288(D) 6,128
</TABLE>
NOTE (A)--Uncollectible accounts written off, net of recoveries.
NOTE (B)--Amounts written off or payments incurred.
NOTE (C)--Amounts recorded due to acquisition of subsidiaries.
NOTE (D)--Loss and loss adjustment expense.
Exhibit 21
1. Canyon Products Corporation,an Ohio corporation and wholly owned subsidiary.*
2. Invacare (UK) Ltd., an English corporation and wholly owned
subsidiary, except for one share registered in the name of Mr.
Kevin Crumpler as nominee for Invacare Holdings Corporation.
3. Invacare Canada Inc., an Ontario corporation and wholly owned subsidiary.
4. Invacare Deutschland GmbH, a German corporation and wholly owned subsidiary.
5. Invacare Holdings Corporation, an Ohio corporation and wholly owned
subsidiary.
6. Invacare International Corporation, an Ohio corporation and wholly owned
subsidiary.
7. Invacare Respiratory Corporation, an Ohio corporation and wholly owned
subsidiary.
8. Invacare Trading company, Inc., a United States Territory of the Virgin
Islands corporation and wholly Owned subsidiary.
9. Invamex, S.A. de C.V., a Mexican corporation and wholly owned subsidiary.
10.Invacare Credit Corporation, an Ohio corporation and wholly owned
subsidiary.
11.Invatection Insurance company, a Vermont corporation and wholly owned
subsidiary.
12.Mobilife Corporation, a Missouri corporation and wholly owned subsidiary.
13.Mobilite Corporation, a Florida corporation and wholly owned subsidiary.
14.Option 5 Inc., a Quebec corporation and wholly owned subsidiary.
15.Poirier Groupe Invacare, a French corporation and wholly owned subsidiary.
16.POK - Rollstuhle GmbH, a German corporation and wholly owned subsidiary.
17.Dynamic Controls Ltd., a New Zealand corporation and wholly owned
subsidiary.
18.Quantrix Consultants Ltd., a New Zealand corporation and wholly owned
subsidiary.
19.Controls Dynamic Ltd., an English corporation and wholly owned subsidiary.
20.Geomarine Systems Inc., a New York corporation and wholly owned subsidiary.
21.Sci Des Hautes Roches, a French partnership and wholly owned subsidiary.
22.Sci Des Roches, a French partnership and wholly owned subsidiary.
23.Mobilite Building Corporation, a Florida corporation and wholly owned
subsidiary.
24.Rehadap, S.A., a Spanish corporation and wholly owned subsidiary.
25.Genus Medical, Inc., a New York corporation and wholly owned subsidiary.
26.Beram, AB, a Swedish corporation and wholly owned subsidiary.
27.Invacare Florida, a Delaware corporation and wholly owned subsidiary.
28.Patient Solutions, Inc., a Delaware corporation and wholly owned subsidiary.
2
<PAGE>
29.Medical Equipment Repair Services, Inc., a Florida corporation and wholly
owned subsidiary.
30.Invacare New Zealand Limited, a New Zealand corporation and wholly owned
subsidiary.
31.Bencraft Limited, an English corporation and wholly owned subsidiary.
32.Kuschall Design AG, a Switzerland corporation and wholly owned subsidiary.
33.Healthtech, Inc., a Missouri corporation and wholly owned subsidiary.
34.Frohock Stewart, Inc., a Massachusetts corporation and wholly owned
subsidiary.
35.Fabriorto Lda, a Portugal company and wholly owned subsidiary.
36.Production Research Corporation, a Maryland corporation and wholly owned
subsidiary.
37.Inva Acquisition Corporation, re-named Suburban Ostomy Supply Company, Inc.
- ---------------------
* "Wholly owned subsidiary" refers to indirect, as well as direct,
wholly owned subsidiaries.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, No. 33-24619 dated October 10, 1988, No. 33-45993 dated February 24,
1992 and No. 33-87052 dated December 5, 1994) pertaining to the Invacare
Corporation stock option plans, of our report dated January 26, 1999, 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, 1998.
ERNST & YOUNG LLP
Cleveland, Ohio
March 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,460
<SECURITIES> 2,634
<RECEIVABLES> 162,260
<ALLOWANCES> (5,566)
<INVENTORY> 81,740
<CURRENT-ASSETS> 336,742
<PP&E> 204,952
<DEPRECIATION> (92,008)
<TOTAL-ASSETS> 738,756
<CURRENT-LIABILITIES> 133,964
<BONDS> 0
0
0
<COMMON> 7,625
<OTHER-SE> 273,263
<TOTAL-LIABILITY-AND-EQUITY> 738,756
<SALES> 797,529
<TOTAL-REVENUES> 797,529
<CGS> 559,016
<TOTAL-COSTS> 559,016
<OTHER-EXPENSES> 151,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,585
<INCOME-PRETAX> 75,069
<INCOME-TAX> 29,277
<INCOME-CONTINUING> 45,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,792
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.50
</TABLE>
