SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
---------------------------------------------------------
Commission File Number 0-12938
Invacare Corporation
-------------------------
(Exact name of registrant as specified in its charter)
Ohio 95-2680965
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)
One Invacare Way, P.O. Box 4028, Elyria, Ohio 44035
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(Address of principal executive offices)
(440) 329-6000
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(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------
(Former name, former address and former fiscal year, if change since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 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 such filing
requirements for the past 90 days. Yes X No____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
As of November 11, 1999, the company had 28,543,826 Common Shares and 1,432,599
Class B Common Shares outstanding.
2
<PAGE>
INVACARE CORPORATION
INDEX
Part I. FINANCIAL INFORMATION: Page No.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998....................3
Condensed Consolidated Statement of Earnings -
Three and Nine Months Ended September 30, 1999 and 1998.....4
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1999 and 1998...............5
Notes to Condensed Consolidated Financial
Statements - September 30, 1999.............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............9
Item 3. Quantitative and Qualitative Disclosure of Market Risk..............15
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K....................................15
SIGNATURES...................................................................15
3
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1... Financial Statements (Unaudited)
<TABLE>
<CAPTION>
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet - (unaudited)
September 30, December 31,
1999 1998
(In thousands)
-------------------------------------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS
.........Cash and cash equivalents $ 15,925 $ 9,460
.........Marketable securities 1,674 2,634
.........Trade receivables, net 180,713 156,694
.........Installment receivables, net 69,344 60,330
.........Inventories 114,656 81,740
.........Deferred income taxes 19,255 17,331
.........Other current assets 7,992 8,553
-------------------------------------
......... TOTAL CURRENT ASSETS 409,559 336,742
OTHER ASSETS 70,511 62,388
PROPERTY AND EQUIPMENT, NET 137,673 112,944
GOODWILL, NET 324,659 226,682
-------------------------------------
......... TOTAL ASSETS $942,402 $738,756
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
.........Accounts payable $55,488 $47,628
.........Accrued expenses 71,140 65,505
.........Accrued income taxes 23,441 12,339
.........Current maturities of long-term obligations 8,592 8,492
-------------------------------------
......... TOTAL CURRENT LIABILITIES 158,661 133,964
LONG-TERM DEBT 457,039 311,260
OTHER LONG-TERM OBLIGATIONS 17,041 12,644
SHAREHOLDERS' EQUITY
.........Preferred shares 0 0
.........Common shares 7,271 7,267
.........Class B common shares 370 358
.........Additional paid-in-capital 79,531 79,863
.........Retained earnings 245,317 211,954
.........Accumulated other comprehensive earnings (11,479) (7,712)
.........Treasury shares (11,349) (10,842)
---------------------------------------
......... TOTAL SHAREHOLDERS' EQUITY 309,661 280,888
---------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$942,402 $738,756
=======================================
</TABLE>
See notes to condensed consolidated financial statements.
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INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Earnings - (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $223,335 $203,351 $621,622 $587,196
Cost of products sold 152,828 140,986 432,293 412,690
----------------- ---------------- ----------------- -----------------
Gross profit 70,507 62,365 189,329 174,506
Selling, general and administrative expense 44,032 37,719 123,581 114,056
----------------- ---------------- ----------------- -----------------
Income from operations 26,475 24,646 65,748 60,450
Interest income 1,905 2,207 5,868 6,957
Interest expense (5,312) (5,551) (15,088) (15,674)
----------------- ---------------- ----------------- -----------------
Earnings before income taxes 23,068 21,302 56,528 51,733
Income taxes 8,991 8,308 22,045 20,176
----------------- ---------------- ----------------- -----------------
NET EARNINGS $ 14,077 $ 12,994 $ 34,483 $ 31,557
================= ================ ================= =================
DIVIDENDS DECLARED PER
COMMON SHARE .0125 .0125 .0375 .0375
================= ================ ================= =================
Net earnings per share - basic $ 0.46 $ 0.43 $ 1.14 $ 1.06
================= ================ ================= =================
Weighted average shares outstanding - basic 30,278 29,970 30,138 29,910
================= ================ ================= =================
Net earnings per share - assuming dilution $ 0.46 $ 0.43 $ 1.13 $ 1.03
================= ================ ================= =================
Weighted average shares outstanding -
assuming dilution 30,708 30,556 30,632 30,579
================= ================ ================= =================
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
INVACARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows - (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
(In thousands)
-----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $34,483 $31,557
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 18,114 17,844
Provision for losses on receivables 1,979 (2,411)
Provision for deferred income taxes (1,123) (1,648)
Provision for other deferred liabilities 262 255
Changes in operating assets and liabilities:
Trade receivables (13,077) (24,207)
Inventories (7,920) (5,742)
Other current assets 3,202 1,581
Accounts payable 112 52
Accrued expenses 7,167 (1,395)
-----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 43,199 15,886
INVESTING ACTIVITIES
Purchases of property and equipment (14,507) (16,234)
Capitalized consulting costs (9,836) (6,691)
Proceeds from sale of property and equipment 649 781
Installment sales contracts written (62,718) (51,215)
Payments received on installment sales contracts 55,023 46,891
Marketable securities purchased (523) (194)
Marketable securities sold 1,382 1,000
Increase in other investments (279) (3,181)
Increase in other long term assets (10,737) (7,616)
Business acquisitions, net of cash acquired (141,715) (129,318)
Other 2,077 (362)
------------------------
NET CASH REQUIRED BY INVESTING ACTIVITIES (181,184) (166,139)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term borrowings 252,269 350,635
Principal payments on revolving lines of credit, long-term debt
and capital lease obligations (106,783) (202,099)
Proceeds from exercise of stock options 2,985 4,540
Dividends paid (1,121) (1,114)
Purchase of treasury stock (2,517)
--------------------------
(2,662)
NET CASH PROVIDED/ BY FINANCING ACTIVITIES
144,688 149,445
Effect of exchange rate changes on cash (349)
-------------------------
(238)
Increase in cash and cash equivalents 6,465 (1,157)
Cash and cash equivalents at beginning of period 9,460 5,696
-------------------------
Cash and cash equivalents at end of period $15,925 $ 4,539
=========================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
September 30, 1999
Nature of Operations - Invacare Corporation and its subsidiaries (the "company")
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. The company's products include
standard manual wheelchairs, motorized and lightweight prescription wheelchairs,
motorized scooters, patient aids, home care and institutional beds, low air loss
therapy products, home respiratory products, seating and positioning products,
bathing equipment and distributed products.
Principles of Consolidation - In the opinion of the company, the accompanying
unaudited condensed consolidated financial statements are prepared in accordance
with generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results may differ from these estimates. The accompanying
financial statements include all adjustments, which were of a normal recurring
nature, necessary to present fairly the financial position of the company as of
September 30, 1999 and December 31, 1998, and the results of its operations for
the three and nine months ended September 30, 1999 and 1998 and changes in its
cash flows for the nine months ended September 30, 1999 and 1998. The results of
operations for the three and nine months ended September 30, 1999, are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements contained in the company's annual financial statements and
notes.
Business Segments - SFAS No. 131 establishes standards for reporting
financial and descriptive information about operating segments. In accordance
with SFAS No. 131, the company operates in three primary business segments based
on geographical area: North America, Europe and Australasia. The three
reportable segments represent operating groups which offer products to different
geographic regions.
The North America segment consists of five operating groups which sell the
following products: wheelchairs, scooters, seating products, self care patient
aids, 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 patient aids, patient lifts and
slings and oxygen products. The Australasia segment consists of two operating
groups which sell custom power wheelchairs, electronic wheelchair components and
patient aids. Each business segment sells to the home health care, retail and
extended care markets.
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<PAGE>
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 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 was $14,736,000 and $42,893,000 for the three and nine
months ended September 30, 1999 respectively compared to $11,561,000 and
$34,960,000 for the same periods a year ago.
The information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from external customers
North America $166,390 $163,750 $484,923 $480,360
Europe 48,457 34,689 115,671 92,635
Australia/Asia 7,062 4,916 19,004 14,223
All Other * 1,426 (4) 2,024 (22)
---------------------------- ---------------------------
Consolidated $223,335 $203,351 $621,622 $587,196
Earnings (loss) before income taxes
North America $27,803 $ 30,751 $ 77,177 $89,632
Europe 3,047 841 2,053 (2,439)
Australia/Asia 2,711 709 6,409 1,794
All Other * (10,493) (10,999) (29,111) (37,254)
---------------------------- --------------------------
Consolidated $ 23,068 $ 21,302 $ 56,528 $ 51,733
</TABLE>
* Consists of the domestic export unit, corporate selling, general and
administrative costs relating primarily to the North American operations, and
the Invacare captive insurance unit, which do not meet the quantitative
criteria for determining reportable segments.
Comprehensive Earnings - Total comprehensive earnings were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Net earnings $14,077 $12,994 $34,483 $31,557
Foreign currency translation (804) (1,511) (2,848) (3,110)
Unrealized gain or (loss) on available
for sale securities (341) (937) (919) (967)
---------------------------- --------------------------
Total comprehensive earnings $12,932 $10,546 $30,716 $27,480
============================ ===========================
</TABLE>
8
<PAGE>
Net Income Per Common Share - The following table sets forth the computation of
basic and diluted net earnings per common share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands except per share data)
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Basic
Weighted average common shares outstanding 30,278 29,970 30,138 29,910
Net income $14,077 $12,994 $34,483 $31,557
Net income per common share $ .46 $ .43 $ 1.14 $ 1.06
Diluted
Weighted average common shares outstanding 30,278 29,970 30,138 29,910
Stock options 430 586 494 669
---------------------------------------------------------
Weighted average common shares assuming dilution 30,708 30,556 30,632 30,579
Net income $14,077 $12,994 $34,483 $31,557
Net income per common share $ .46 $ .43 $ 1.13 $ 1.03
</TABLE>
Recently Issued Accounting Pronouncements - In June, 1998, the Financial
Accounting Standards Board (FASB) issued SFAS 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, 2000. 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.
Statement of Cash Flows - The company made payments (in thousands) of:
Nine Months Ended
September 30,
1999 1998
------- -------
Interest $17,244 $14,977
Income taxes 10,504 7,411
Inventories - Inventories consist of the following components (in thousands):
September 30, December 31,
1999 1998
Raw materials $31,236 $ 21,019
Work in process 16,553 14,928
Finished goods 66,867 45,793
------------ ----------
$114,656 $ 81,740
============ ===========
The inventory determination under the LIFO method can only be made at the end of
each fiscal year based on the inventory levels and costs at that point,
therefore, interim LIFO determinations are based on management's estimates of
expected year-end inventory levels and costs.
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<PAGE>
Property and Equipment - Property and equipment consist of the following (in
thousands):
September 30, December 31,
1999 1998
------------ -----------
Land, buildings and improvements $59,395 $44,797
Machinery and equipment 150,673 140,577
Furniture and fixtures 15,589 11,950
Leasehold improvements 8,447 7,628
-------------- -----------
234,104 204,952
Less allowance for depreciation (96,431) (92,008)
------------- -----------
$137,673 $112,944
============= ===========
Acquisitions - Effective July 31, 1999, IVC Holdings Denmark A/S ("Holdings"), a
wholly owned subsidiary of Invacare Corporation, acquired substantially all of
the outstanding shares of common stock of Scandinavian Mobility International
A/S, a Danish corporation ("SMI") for approximately $147 million. The
acquisition was accounted for under the purchase method of accounting; however,
the allocation of the purchase price is preliminary and will be adjusted as
further information becomes available. The excess of the purchase price over the
estimated fair value of the common stock acquired is being amortized over 40
years. The results of operations of SMI are included in the Company's
consolidated statement of earnings since the date of acquisition. SMI is a
producer and distributor of rehabilitation products, mobility aids and related
products in Europe.
The following unaudited pro forma consolidated results of operations give effect
to the SMI acquisition as though it had occurred on January 1, 1998 and include
certain adjustments, such as additional amortization expense as a result of
goodwill and increased interest expense related to debt incurred for the
acquisition.
Nine Months Ended
September 30,
1999 1998
-------------------------------
Net sales $722,748 $672,330
Net income 35,072 31,815
Income per share - basic 1.16 1.06
Income per share - diluted 1.14 1.03
Pro forma net sales and net income are not necessarily indicative of the net
sales and net income that would have occurred had the acquisition been made at
the beginning of the period or the results that may occur in the future.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
10
<PAGE>
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended September 30, 1999 were $223,335,000
compared to $203,351,000 for the same period a year ago, representing a 10%
increase. Excluding the net impact from acquisitions, divestitures and currency
translation, overall net sales increased 7%. Net sales for the quarter increased
in each of the three business segments with Australasia showing significant
improvement. Year to date net sales increased 6% with acquisitions, divestitures
and currency translation having a minimal net impact. The year to date increase
was driven primarily by a strong increase in sales in Europe and Australasia.
North American Operations
North American net sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs and seating), Standard (manual wheelchairs, personal care and
retail), Beds and Continuing Care (beds, low air loss therapy and furniture and
patient transport equipment), Respiratory (oxygen concentrators, liquid oxygen,
aerosol therapy and associated respiratory) and Distributed (ostomy,
incontinence, wound care and other medical supplies) products, increased 3% for
the quarter. The increase was due principally to unit volume increases in
Respiratory, Beds and Continuing Care. For the first nine months, net sales were
up slightly compared to the same period in the prior year. The increase was due
primarily to unit volume increases in Respiratory (up 9%) and Continuing Care
(up 14%) offset by decreases in Rehab, and Standard.
European Operations
European net sales increased 13% for the quarter, excluding the net impact from
acquisitions and foreign currency translation. In the first nine months net
sales increased 14%, excluding the net impact from acquisitions and foreign
currency translation. Europe continues to report strong sales and earning
performances, a trend established in 1998.
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. Net
sales for the Australasia group increased $2,146,000 or 44% for the quarter,
including a positive 5% impact from foreign currency translation. Year to date
net sales increased 34% including a 2% negative impact from foreign currency
translation.
GROSS PROFIT
Gross profit as a percentage of net sales for the three and nine month periods
ended September 30, 1999 was 31.6% and 30.5%, respectively, compared to 30.7%
and 29.7% in the same periods last year. Margins for North American operations
decreased slightly due to increased sales of lower margin items as a percentage
of total sales. Gross profit for Europe improved for the quarter and year to
date, while Australasia gross profit decreased for the quarter but increased for
the nine month period ended September 30, 1999, versus the same periods last
year. Overall, margins have increased as a percentage of net sales as a result
of the company's continued manufacturing productivity improvements and tight
expense control.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense as a percentage of net sales for the
three and nine months ending September 30, 1999 was 19.7% and 19.9%,
respectively, compared to 18.5% and 19.4% in the same periods a year ago. The
dollar increase was $6,313,000 (17%) for the quarter and $9,525,000 (8%) year to
date, with acquisitions contributing $2,919,000 (8%) and $4,149,000 (4%) of the
dollar increase respectively. Despite the impact from acquisitions, increased
selling and distribution expenses in the current year and sluggish domestic
sales growth resulted in an increase in the overall expense as a percentage of
net sales.
North American selling, general and administrative costs as a percent of sales
decreased slightly for the quarter and increased for the nine months ended
September 30, 1999 compared to the same periods a year ago. European selling,
general and administrative costs grew at a slightly faster rate than sales for
the quarter but at a slower rate for the nine months ended September 30, 1999
compared to the same periods a year ago despite the acquisition of Scandinavian
Mobility International A/S which increased expenses for the quarter and year to
date by $2,826,000. Australasia selling, general and administrative costs grew
at a slower rate than sales for the quarter and for the nine months ended
September 30, 1999 compared to the same periods a year ago.
NON-RECURRING 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). Of these charges,
$58,532,345 had been utilized through September 30, 1999, including $1,071,538
in the third quarter of 1999 for facility consolidations. The company expects
substantially all of the remaining charges to be utilized over the next few
months.
The company anticipates taking one time charges relating primarily to the
acquisition of Scandinavian Mobility International A/S ("SMI"), during the
fourth quarter of 1999. The charges will relate to the closing and consolidation
of certain European facilities in order to realize the synergies available from
the integration of SMI's operations with Invacare's European operations. The
charges are estimated to amount to $12,000,000 to $14,000,000 before tax or $.24
to $.28 per share after tax.
INTEREST
Interest income in the three months and nine months ended September 30, 1999
declined by approximately $302,000 and $1,089,000 respectively, when compared to
the same periods a year ago, as increased volume in installment loans were
offset by an overall decrease in the portfolio's effective rate. Interest
expense for the quarter and year to date decreased compared to the same periods
last year. The decrease was a result of principal debt payments made in the
current year offset to some extent by the effects of the incremental debt
associated with the acquisition of Scandinavian Mobility International A/S.
INCOME TAXES
The company had an effective tax rate of 39.0% for the three and nine months
ended September 30, 1999, compared to 39.0% in the same periods a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The company's reported overall level of long-term obligations increased $151.3
million to $457.0 million for the nine months ended September 30, 1999,
principally as a result of an increase in borrowings for the investment in
Scandinavian Mobility Inc. The company continues to maintain an adequate
12
<PAGE>
liquidity position to fund its working capital and capital requirements through
its cash flow from operations and its bank lines. As of September 30, 1999, the
company had approximately $95.0 million available under its lines of credit.
Pursuant to the most restrictive covenant of its debt arrangements, the company
could borrow up to the full amount available under its lines of credit.
The company's financing arrangements require it to maintain certain conditions
with respect to net worth, working capital, funded debt to capitalization and
interest coverage as defined. The company is in compliance with all of the
conditions.
CAPITAL EXPENDITURES
There were no material capital expenditure commitments outstanding as of
September 30, 1999. The company expects to invest in capital projects at a rate
that equals or 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 million. 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.
ACQUISITIONS
On July 1, 1999, IVC Holdings Denmark A/S ("Holdings"), a wholly owned
subsidiary of Invacare Corporation, commenced a tender offer to all of the
qualified shareholders of outstanding shares of common stock of Scandinavian
Mobility International A/S, a Danish corporation ("SMI") for DKK 105 per share
in cash which was subsequently revised to DKK 115. SMI is a producer and
distributor of rehabilitation products, mobility aids, and related products in
Europe. The acquisition was accounted for under the purchase method of
accounting. As of September 30, 1999, Invacare has obtained a 99.5% ownership in
SMI. With the acquisition of SMI, Invacare now has the number one market share
in Europe.
In January 1998, the company acquired for cash all outstanding shares of
Suburban Ostomy Supply Company, Incorporated a leading national direct marketing
wholesaler of medical supplies and related products to the home care industry.
The acquisition was accounted for under the purchase method of accounting.
Suburban complements Invacare's industry-leading "One Stop Shoppingsm" strategy
and significantly strengthens our industry-leading position by adding a complete
line of medical supplies and soft goods.
CASH FLOWS
Cash flows provided by operating activities were $43.2 million for the nine
months ended September 30, 1999 compared to $15.9 million in 1998. Operating
cash flow increased in 1999 primarily due to improved income from operations
and increased accrued expenses.
Cash flows required for investing activities increased by $15.0 million for the
first nine months of 1999 when compared to 1998. The increase was primarily a
result of the acquisition of Scandinavian Mobility International A/S in the
third quarter of 1999, compared to 1998 when the acquisition of Suburban Ostomy
Supply Company was completed.
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<PAGE>
Cash flows provided by financing activities were $144.7 million compared to cash
provided of $149.4 million in 1998. Financing activities for the first nine
months of 1999 were impacted by an increase in net proceeds from long term
borrowings primarily needed to fund the acquisition of Scandinavian Mobility.
The 1998 cash provided by financing activities was primarily a result of an
increase in net proceeds from long-term borrowings which were used to fund the
acquisition of Suburban Ostomy Supply Company.
The effect of foreign currency translation may result in amounts being shown for
cash flows in the Condensed Consolidated Statement of Cash Flows that are
different from the changes reflected in the respective balance sheet captions.
DIVIDEND POLICY
On August 30, 1999, the Board of Directors for Invacare Corporation declared a
quarterly cash dividend of $.0125 per Common Share to shareholders of record as
of October 1, 1999, to be paid on October 15, 1999. At the current rate, the
cash dividend will amount to $.05 per Common Share on an annualized basis.
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 nearing completion 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 100% completed 99% completed 99% completed
Technology Expected Expected
completion date completion date
October 1999 October 1999
- ----------------------------------------------------------------------------------------------------------
Operating 100% completed 100% completed 100% completed 100% completed
Equipment
Products 100% completed 100% completed 100% completed 100% completed
- -----------------------------------------------------------------------------------------------------------
3rd Party 100% completed N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------
</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 that 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
14
<PAGE>
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 100% complete in developing contingency plans for each location,
in the event that it does not complete all phases of the Year 2000 program or to
handle unforeseen circumstances.
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 rate swap agreements to mitigate its exposure to interest rate
fluctuations. Based on September 30, 1999 debt levels, a 1% change in interest
rates would impact interest expense by approximately $2,229,000 over the next
twelve months. 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.
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.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this form 10-Q, which are not historical
in nature, constitute forward-looking statements based on current expectations
which are covered under the "safe harbor" provisions within the Private
Securities Litigation Reform Act of 1995. Actual results and events, including
the acquisition of Scandinavian Mobility and 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 including those 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.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
The information called for by this item is provided under the same caption
under Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 6. Exhibits and Reports on Form 8-K
A Exhibits:
Official Exhibit No.
(27) Financial Data Schedule
B Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements 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.
INVACARE CORPORATION
By: /S/ Thomas R. Miklich
----------------------------
Thomas R. Miklich
Chief Financial Officer
Date: November 15, 1999
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