UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________
Commission file number 0-12938
INVACARE CORPORATION
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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 Number)
incorporation or organization)
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:
Title of Each Class Name of Exchange on which Registered
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Common Shares, without par value New York Stock Exchange
Rights to Purchase Commons Shares New York Stock Exchange
of Invacare, without par value
Securities registered pursuant to Section 12(g) of the Act: None
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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 25, 2000, 28,567,037 Common Shares and 1,432,599 Class B Common
Shares were outstanding. At that date, the aggregate market value of the
25,999,533 Common Shares of the Registrant held by non-affiliates was
$620,738,850 and the aggregate market value of the 89,757 Class B Common Shares
of the Registrant held by non-affiliates was $2,142,948. 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 New York Stock Exchange
on February 25, 2000, which was $23.88. For purposes of this information, the
2,567,504 Common Shares and 1,342,842 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 2000 Annual Meeting of
Shareholders.
Except as otherwise stated, the information contained in this Annual Report on
Form 10-K is as of December 31, 1999.
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PART I
Item 1. Business.
(a) General Development of Business.
Invacare Corporation is the world's leading manufacturer and distributor of
non-acute health care products based upon its distribution channels, the breadth
of its product line and 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 "Total 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 1999, Invacare reached $878 million in net sales, representing
a 21.0% 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
76.9 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 in
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 GDP 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 heavily socialized and is more influenced by government
regulation and fiscal policy. Variations in product specifications, regulatory
approvals, distribution requirements and reimbursement policies require the
company to tailor its approach to each market. Management believes that as the
European markets become more homogeneous and the company continues to refine its
distribution channels, the company can more effectively penetrate these markets.
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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. Power
wheelchair lines are marketed under the Invacare(R) brand name and include
a full range of powered mobility products. The Arrow(TM) front wheel drive
chair was introduced in 1999, is more maneuverable in tight spaces and
provides better seating and positioning capabilities.
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 and Action Top End(R)
product names. 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 distributes three- and four-wheeled motorized scooters,
including rear wheel drive models for both outdoor and indoor use and
markets them under the Invacare brand name. In 1999, a complete line of
scooters was introduced under the Lynx(TM) and Panther(TM) product names.
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 name. Additional seating products marketed under the Invacare brand,
include the Tarsys(TM) range of powered tilt and recline seating systems
for use on power wheelchairs. The Tarsys 2G(TM) was introduced in 1999 and
brings weight shift technology to both tilt and recline seating systems.
This technology allows the seat to be positioned further back on the chair
base and translates into a shorter, more maneuverable chair.
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, nebulizer compressors
and respiratory disposables, sleep therapy products, portable compressed
oxygen systems and liquid oxygen systems. Invacare's home respiratory
products are marketed predominantly 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, Dynamic Controls,
a New Zealand manufacturer of operating components used in power wheelchairs and
Invacare New Zealand, a distribution business.
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 nine of its European facilities - Invacare (UK) Ltd. and SMI UK Ltd.
in the U.K., Poirier Groupe Invacare S.A. in France, Invacare Deutschland GmbH
in Germany, Fabrioto Lda in Portugal, Kuschall Design AG in Switzerland, SM
Niltek A/S and SM Radius A/S in Denmark, and SM Reastolen AB in Sweden.
Motorized scooters are manufactured in Germany and in Denmark. Beds are
manufactured in Denmark and in Sweden. Self care products, bath tubs, patient
lifts and slings are also manufactured in the United Kingdom, France, and
Holland. 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 six 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.
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.
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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 (HME) 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 "Total 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
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. 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, primarily soft goods and disposable
medical supplies, 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 1999, the company further refined its brand strategy to focus exclusively on
the Invacare(R) brand name. Action, which was a product series for all rehab
products, including power chairs, custom manual chairs and seating systems was
folded into the Invacare(R) brand name. As part of the company's efforts to
fully leverage the Invacare(R) brand name amongst all of the company's various
audiences, a product relabeling initiative was advanced. A stronger emphasis was
placed on the Invacare brand by separating the placement of the Invacare
medallion logo from the placement of the product name label. All product lines
feature the medallion as the primary identity on each and every product, with
the medallion positioned at the most prominent visual point on the product. This
unified approach to product labeling will help strengthen the Invacare brand and
family of products through a clear and consistent application.
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In 1999, Invacare continued refining its strategic advertising campaign in home
health care magazines and trade publications which complement the company's
focused brand strategy. The "umbrella" HME campaign which was introduced in
1998, featuring the company's chairman and CEO, A. Malachi Mixon, III as its
spokesperson, was continued. Mr. Mixon continues to be 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, health care professionals and consumers.
Invacare continues to enhance its sales and marketing programs to generate
greater consumer awareness of Invacare and its products, as evidenced by
enhancements made to its consumer marketing program in 1999 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 sixth 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. Invacare
participated for the fourth year in a row as the title sponsor of the Invacare
World Team Cup tennis tournament, which took place during the summer in Flushing
Meadows, New York. Mr. Mixon participated in opening ceremonies with New York
City Mayor Rudolph Giuliani.
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 1999, Invacare enhanced its training and education program by
launching Invacare LEEP (Learning Enrichment and Education Program) which
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.
The company's top ten customers accounted for approximately 17% of 1999 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 1999 net sales. Providers, who are
part of a buying group, generally make individual purchasing decisions and are
invoiced directly by the company.
Europe
The company's European operations consist primarily of manufacturing, marketing
and distribution operations in Western Europe and export sales activities
through local distributors elsewhere in the world. The company has a direct
sales force and distribution centers in the United Kingdom, France, Germany,
Belgium, Portugal, Spain, Denmark, Sweden, Switzerland, Norway and the
Netherlands, and sells through distributors elsewhere in Europe. In markets
where the company has its own sales force, product sales are typically made
through dealers of medical equipment and, in certain markets, directly to
government agencies. In most markets, government health care and reimbursement
policies play an important role in determining the types of equipment sold and
price levels for such products. The company continues to focus on the
implementation of the "Total 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 $1 million per claim, up to annual aggregate policy losses of
$4 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
$74 million in annual aggregate losses arising from individual losses that
exceed $1 million per claim or annual policy aggregate losses of $4 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 1999 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 1999, over 30 new products were
introduced with the most significant being:
North America
The Invacare(R) R2(TM) Jr. FWD with integrated sling seat power chair is a
front-wheel drive chair designed for young adults. It is extremely
maneuverable with a front-turning radius as low as 13.5-inches and a
full-turning radius as low as 25-inches.
The Invacare(R) Arrow(R) FWD power chair is a front-wheel drive chair for
adults. It features a tight front-turning radius, a tight full-turning
radius, has independent front-wheel suspension and a new 90 degree
footboard.
The Invacare(R) MZM Multi Zone Mattress is for patients at greatest risk
for pressure ulcers. It features a firm base, polyurethane foam sides and
a comfortable foam top layer, supported by continuous three-zone variable
bladder inflation. Once inflated, the mattress can be used with or without
the power unit if silent operation is required.
A new line of motorized scooters, featuring five different models, is
available in both 3 and 4-wheel models, and offers superior looks,
performance and functionality.
The Invacare(R) Tracer(R) SX Full Recliner manual wheelchair, provides the
durability of a standard wheelchair frame with the versatility and comfort
of a full-reclining back. The wide range of recline and seat widths that
can be achieved with the Tracer(R) SX Recliner provides proper positioning
and pressure relief as well as proper back and head support for users.
The Invacare(R) Polaris(TM) LT Continuous Positive Airway Pressure (CPAP)
Flow Generator, provides reliability and convenience at an economical
cost. Lightweight and ultra quiet, its design incorporates a 20-minute
therapy-delayed time feature, and includes a built-in tubing holder to
provide convenient mask storage when the device is not in use.
New innovations in seating technology include the Invacare(R) Infinity(TM)
DualFlex Back, Invacare(R) Infinity(TM) UniBack and Invacare(R)
Infinity(TM) Cushions. The Infinity(TM) DualFlex Back and Infinity(TM)
UniBack are designed for those with simple to moderately complex seating
needs, providing custom adjustability in a modular back. Infinity(TM)
Cushions provide optimal pressure redistribution away from high-risk
areas. The structural design of the cushions also works to provide
postural stability and support.
Invacare developed the Venture(TM) HomeFill(TM) complete home oxygen
system that enables patients to refill their own oxygen cylinders with a
concentrator at home instead of remaining dependent on providers for
oxygen service. HomeFillTM provides a long-awaited sense of freedom and
convenience for patients.
A Heavy Duty Product Catalog has recently been published featuring a wide
array of new products for bariatric patients. Products featured include
power chairs, lifts and slings, beds, commodes and more.
Australasia
Invacare developed a wheelchair control that uses a finger touchpad. The
controller operates much like the "mouse" on a laptop computer, to make
operation even easier for those with limited use of their hands. The digital
technology gives new freedom to power chair users who have difficulty
manipulating the conventional joystick control.
Europe
During 1999, European operations also introduced several new products and
continued to update existing products as required by the market. Key
introductions and updates in 1999 included:
The Invacare(R) SMI Vortex Wheelchair incorporates removable motorized
wheels that provide propulsion when the user rotates the handrims forward.
This power assist feature allows users to go up ramps, cover long
distances and climb over small obstacles that otherwise they could not.
These motorized wheels, with the motor in the hub, can be added to most
manual wheelchairs.
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The Invacare(R) SMI Manual Wheelchair, designed and manufactured in
Europe, features a low seat to floor height for use by stroke patients who
can only use one leg for propulsion.
The Invacare(R) SMI Comfort Wheelchair is a new European manual wheelchair
that provides deluxe seating and body support features for unparalleled
comfort, such as required by long-term users.
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. In 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
completed in 1999. The company also makes substantial investments in its
facilities and equipment in order to increase productivity, and to improve
quality and delivery. Over the past three years, the company has invested $90.3
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.
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 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 2000, including the elimination and consolidation of
certain facilities.
ACQUISITIONS
During 1999, the company acquired Scandinavian Mobility International A/S (SMI),
a producer and distributor of rehabilitation products, mobility aids and related
products for approximately $142 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 1999. The company focuses on
acquisitions intended to fulfill the following objectives:
Tactical. Grow market share or extend current product lines.
Strategic. Enter new market segments that complement existing
businesses or utilize the company's distribution
strengths.
Geographic. Enable rapid entry into new foreign markets.
10
<PAGE>
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 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 expressed its displeasure with the way the Health Care Financing
Administration (HCFA) and its agents the Durable Medical Equipment Regional
Carriers (DMERC) were trying to implement some of the provisions contained in
the Balanced Budget Act of 1997. For example, during the third quarter, the
DMERC published a proposal to reduce fees paid for seven items by as much as 47%
using its national inherent reasonableness (IR) authority. Congress questioned
the data and methodology used and passed legislation requiring HCFA to use
statistically relevant and reliable data and a sound costing methodology.
Congress suspended HCFA's IR authority until such time as a final rule
reflecting this mandate is published in the Federal Register. This provision and
the requirement that HCFA must solicit input from the industry means that cuts
of the magnitude proposed last year are unlikely to materialize. Congress also
lifted the freeze on Medicare fees for durable medical equipment giving
providers modest increases in fiscal years 2001 and 2002. While HCFA was able to
get its first competitive bidding demonstration project off the ground in 1999,
the agency has run into several problems delaying start-up of a second
demonstration until well into 2000. HCFA had no problems with its "mission
critical" computer systems. All systems proved to be Y2K compliant and the
agency anticipates no problems in paying providers arising from the so-called
millennium bug or Y2K conversion.
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, 1999, the company had approximately 5,531 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.
11
<PAGE>
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.
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, 1999, 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
Belle, Missouri 39,200 Own - Manufacturing and offices
Beltsville, Maryland 33,329 August 2001 one (2 yr.) Manufacturing, offices, and
Distribution
Chesterfield, Missouri 8,466 December 2000 one (1 yr.) Offices
Cleveland, Tennessee 21,820 June 2000 two (1 yr.) Manufacturing
Delta, British Columbia 6,900 January 2000 none Warehouse and offices
Edison, New Jersey 42,362 March 2000 none Distribution
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 2004 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, Massachusetts 59,500 August 2006 none Warehouse and offices
Kirkland, Quebec 13,241 November 2002 one (5 yr.) Manufacturing, warehouse
and offices
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Ownership
or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
- -------------------------- ----------- ------------- ------- ---
<S> <C> <C> <C> <C>
Mississauga, Ontario 81,004 January 2005 none Manufacturing, warehouse
and offices
Mississauga, Ontario 10,881 July 2004 none Warehouse
North Olmsted, Ohio 2,280 October 2003 one (5 yr.) Warehouse and offices
North Ridgeville, Ohio 139,200 Own - Manufacturing, warehouses
and offices
Obetz, Ohio 274,698 April 2004 one (5 yr.) Warehouse
Pharr, Texas 2,500 December 2000 one (1 yr.) Warehouse
Pinellas Park, Florida 12,000 July 2000 two (1 yr.) Manufacturing and offices
Rancho Cucamonga, California 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 113,034 Own - Manufacturing and offices
Sanford, Florida 99,892 Own - Manufacturing and offices
Santa Fe Springs, California 150,754 May 2004 one (5yr.) Warehouse
Sarasota, Florida 15,450 February 2002 five (5 yr.) Manufacturing, warehouse
and offices
South Bend, Indiana 30,000 July 2003 none Warehouse
Spicewood, Texas 6,500 September 2002 one (3yr.) Manufacturing and offices
Traverse City, Michigan 15,000 April 2000 two (3 yr.) Manufacturing and offices
Wright City, Missouri 11,880 July 2000 one (1yr.) Warehouse
Australasia Operations
- --------------------------
Adelaide, Australia 11,500 June 2000 two (2 yr.) Manufacturing, warehouse
and offices
Auckland, New Zealand 33,154 March 2000 none Manufacturing, warehouse
and offices
Auckland, New Zealand 5,000 June 2001 none Warehouse
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Ownership
or Expiration Renewal
Australasia Operations Square Feet Date of Lease Options Use
- -------------------------- ----------- ------------- ------- ---
<S> <C> <C> <C> <C>
Christchurch, New Zealand 57,682 December 2005 three (3 yr.) Manufacturing and offices
Sydney, Australia 2,550 August 2000 one (2 yr.) Warehouse and offices
European Operations
- --------------------------
Aalborg, Denmark 9,000 June 2000 none Manufacturing, warehouse
and offices
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
Bergen, Norway 1,000 May 2004 one (5yr.) Warehouse and offices
Birmingham, England 19,378 Own - Manufacturing and offices
Bridgend, Wales 131,522 Own - Manufacturing and offices
Brondby, Denmark 3,500 April 2001 - Head Office
Brondby, Denmark 38,700 August 2000 - Manufacturing, warehouse
and offices
Buskerudsveien, Norway 500 Month notice - Offices
Buskerudsveien, Norway 2,800 Month notice - Warehouse
Corby, United Kingdom 19,460 April 2001 - Manufacturing and offices
Corby, United Kingdom 10,930 April 2000 - Warehouse and offices
Ede, The Netherlands 13,500 May 2009 one (5 yr.) Warehouse and offices
Girona, Spain 13,600 November 2004 one (1 yr.) Warehouse and offices
Goteborg, Sweden 6,470 September 2002 - Warehouse and offices
Hannover, Germany 15,050 August 2005 one (5 yr.) Warehouse and offices
Hong, Denmark 149,375 Own - Manufacturing, warehouse
and offices
LaRochelle, France 101,718 July 2002 - Manufacturing and warehouse
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Ownership
or Expiration Renewal
European Operations Square Feet Date of Lease Options Use
- -------------------------- ----------- ------------- ------- ---
<S> <C> <C> <C> <C>
LaRochelle, France 21,400 August 2002 - Warehouse
Landskrona, Sweden 2,880 April 2001 - Warehouse
Oisterwijk, The Netherlands 27,000 Own - Manufacturing, warehouse
and offices
Oporto, Portugal 27,800 November 2003 - Manufacturing and offices
Oskarshamn, Sweden 6,300 December 2000 - Warehouse
Oslo, Norway 30,650 September 2001 one (5 yr.) Manufacturing, warehouse
and offices
Sandviken, Sweden 48,000 December 2001 - Manufacturing, warehouse
and offices
Saeby, Denmark 31,108 October 2000 - Warehouse and offices
Spanga, Sweden 8,300 October 2001 one (3 yr.) Warehouse and offices
Spanga, Sweden 16,250 Own - Warehouse and offices
Tours, France 86,000 November 2007 none Manufacturing
Tours, France 104,500 Own - Manufacturing, warehouse
and offices
Trondheim, Norway 3,000 December 2001 one (5 yr.) Services and offices
Vaxjovagen, Sweden 92,400 Own - Manufacturing 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 of these actions have been referred to the company's insurance
carriers and are being vigorously contested. The primary carrier for the first
layer of insurance coverage per claim or annual policy aggregate losses of $ 1
million to $3 million or $1 million to $4 million, depending on the policy year,
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 currently has additional layers of coverage insuring up to $70 million
for a total of $74 million in annual aggregate losses arising from individual
losses that exceed the first layer 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 59 Chairman of the Board of Directors and
Chief Executive Officer
Gerald B. Blouch 53 President, Chief Operating Officer and Director
Thomas R. Miklich 52 Chief Financial Officer, General Counsel and Corporate Secretary
Joseph B. Richey, II 63 President - Invacare Technologies & Invacare Senior Vice
President - Total Quality Management and Director
Louis F.J. Slangen 52 Senior Vice President - Sales & Marketing
Larry E. Steward 47 Corporate Vice President - Human Resources
M. Louis Tabickman 55 President - Invacare Europe
Neal J. Curran 42 Vice President - Rehab Group
David A. Johnson 38 Vice President - Invacare Continuing Care Group and Home
Medical Equipment Group
Warren D. Lowery 42 Vice President - Respiratory Group
David Pessel 52 Vice President and Chief Information Officer
Michael A. Perry 45 Vice President - Distributed Products
Ken Sparrow 52 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 and General Counsel since May
1993 and in September 1993 was named Corporate Secretary. Previously, Mr.
Miklich was Treasurer from May 1993 until October 1999, 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 and Senior Vice President and
General Manager of North American Operations from September 1989 to September
1992.
Louis F. J. Slangen was named Senior Vice President - Sales & Marketing in
December 1994 and from September 1989 to December 1994 was Vice President -
Sales and Marketing. Mr. Slangen was previously President - Rehab Division from
March 1994 to December 1994 and Vice President and General Manager - Rehab
Division from September 1992 to March 1994.
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. Mr. Steward has more than 18 years of experience in labor
and employee relations, gained during tenures at LTV Steel Company and Mellon
Bank, where he held various human resource positions of increasing
responsibility.
OPERATING OFFICERS
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.
Neal J. Curran was named Vice President of the Rehab Group in July of 1999. Mr.
Curran has been with the company since 1983 and has previously held positions as
Vice President - Respiratory Group in July of 1998 until July 1999, 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
Home Medical Equipment Group 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.
Warren D. Lowery was named Vice President - Respiratory Group in August 1999.
Mr. Lowery has been with the company since 1988 and has previously held
positions as Director of Operations for Invacare's Respiratory facility from
January 1996 until August 1999, and Director of Operations for Invacare's
Florida manufacturing plant from January 1995 until January 1996. From March
1988 until January 1995, Mr. Lowery held various manufacturing and finance
positions of increasing responsibility at Invacare's Florida manufacturing
plant.
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 Distributed Products in July of
1998. Previously, Mr. Perry was General Manager of Account Services, Vice
President of National Accounts, Vice President of Retail Sales and Vice
President of Clinical Application Consumer Marketing since 1995. In 1994, Mr.
Perry served as Area Vice President of Sales.
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, began trading on the New York Stock
Exchange (NYSE) under the symbol IVC on June 25, 1999. Prior to listing the
Common Shares on the NYSE, the Common Shares were included for trading and
quotation on the NASDAQ National Market System under the symbol IVCR. Ownership
of the company's Class B Common Shares (which are not listed on NYSE) cannot be
transferred, except, in general, to family members. Class B Common Shares may be
converted into Common Shares at any time on a share-for-share basis. The
approximate number of record holders of the company's Common Shares and Class B
Common Shares at February 25, 2000 was 6,502 and 35, respectively. The closing
sale price for the Common Shares on February 25, 2000 as reported by NYSE, was
$23.88. 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:
1999 1998
---- ----
Quarter Ended: High Low High Low
December 31 $22.69 $17.75 $25.19 $20.50
September 30 26.69 18.25 26.88 20.13
June 30 26.75 22.56 28.63 24.25
March 31 25.25 21.69 26.00 19.88
During 1999, the Board of Directors of 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,
1999* 1998 1997** 1996 1995 1994
----- ---- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(In thousands except per share and ratio data)
Earnings
Net Sales $878,261 $797,529 $653,414 $619,498 $504,032 $411,123
Income from Operations 82,108 86,654 8,457 65,393 54,144 43,736
Net Earnings 41,494 45,792 1,563 38,918 32,165 26,377
Net Earnings per Share - Basic 1.38 1.53 .05 1.33 1.10*** .91***
Net Earnings per Share -
Assuming Dilution 1.36 1.50 .05 1.28 1.07*** .89***
Dividends per Common Share .05000 .05000 .05000 .05000 .03750*** .01875***
Dividends per Class B Common Share
.04545 .04545 .04545 .04545 .03409*** .01705***
As of December 31,
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Balance Sheet
Current Assets $418,620 $336,742 $275,211 $258,720 $204,685 $180,435
Total Assets 955,285 738,756 529,923 509,628 408,750 338,109
Current Liabilities 177,471 133,964 109,553 97,768 84,936 67,667
Working Capital 241,149 202,778 165,658 160,952 119,749 112,768
Long-Term Obligations 458,942 323,904 183,955 173,263 122,456 105,528
Shareholders' Equity 318,872 280,888 236,415 238,597 201,319 164,007
Other Data
Research and Development
Expenditures $ 15,534 $ 12,980 $ 12,706 $ 11,060 $9,002 $7,651
Capital Expenditures, net of
Disposals 21,954 28,527 37,962 22,465 11,027 12,217
Depreciation and Amortization 25,978 23,754 18,348 17,896 14,159 12,686
Key Ratios
Return on Sales 4.7% 5.7% .2% 6.3% 6.4% 6.4%
Return on Average Assets 4.9% 7.2% .3% 8.5% 8.6% 8.4%
Return on
Beginning 14.8% 19.4% .7% 19.3% 19.6% 19.5%
Shareholders' Equity
Current Ratio 2.4:1 2.5:1 2.5:1 2.6:1 2.4:1 2.7:1
Debt-to-Equity Ratio 1.4:1 1.2:1 .8:1 .7:1 .6:1 .6:1
</TABLE>
* Reflects non-recurring and unusual charge of $14,800 ($9,028 or $.29 per
share assuming dilution after tax) taken in 1999.
** 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
1999 Versus 1998
Non-recurring and Unusual Charges. The review of results that follows excludes
the impact of the non-recurring and unusual charges ("the charge") taken in
1999. The reasons for the charges and the impact on the company's current and
future performance, as well as the utilization thereof, are explained under the
heading "Non-recurring and Unusual Charges" later in this section and in the
Notes to the Financial Statements.
Net Sales. Consolidated net sales for 1999 increased 10% for the year despite a
1% negative impact from foreign currency translation. Acquisitions contributed
7% of the increase. Net sales increased in each of the three business segments
with Europe and Australasia reporting significant improvement. The increase was
principally due to an overall increase in unit volume, with the exception of
Rehab products, partially offset by the effects of a continuing competitive
pricing environment throughout most product lines. European and Respiratory
operations 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.
North American Operations
North American sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs, seating), Standard (manual wheelchairs, personal care, retail),
Beds and Continuing Care (beds, low air loss therapy, furniture, patient
transport equipment), Respiratory (oxygen concentrators, liquid oxygen, aerosol
therapy and associated respiratory) and Distributed (ostomy, incontinence, wound
care, other medical supplies) products net of acquisitions and divestitures grew
4% over the prior year. The gain was due primarily to Respiratory products up
13% as concentrators, sleep therapy and aerosol products had strong sales
increases. Sales of custom manual wheelchairs also increased 9% from the prior
year due in part to continued new product introductions and the 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. Sales for the Personal Care product line also increased 8% over the
prior year. Sales for the Distributed products group increased 9% net of
divestitures as Suburban Ostomy Supply Company, a national direct marketing
wholesaler of medical supplies and related products to the home care industry
acquired in January 1998, continued to capitalize on Invacare's strong sales
force. Rehab products sales were weak in 1999 due to the tightening by The
Health Care Financing Administration (HCFA) of the requirements for Medicare
beneficiaries to qualify for reimbursement for a power wheelchair.
In late 1999, Invacare received 510(k) clearance from the U.S. Food and Drug
Administration (F.D.A.) on the Invacare(R) Venture(TM) HomeFill(TM) Complete
Home Oxygen System, which was developed in response to Medicare oxygen
reimbursement cuts. The HomeFill system is a revolutionary oxygen-filling system
that allows a patient to fill his or her own high pressure oxygen cylinders,
thus eliminating time-consuming and costly service calls by the oxygen
providers, while at the same time improving the patient's quality of life. We
expect that the receipt of this approval will help augment North American sales
growth in 2000.
Other products, consisting primarily of the company's Canadian and aftermarket
parts businesses, had a 9% sales increase for the year. Sales for the company's
Canadian operation increased 12%, including a slight negative impact from
foreign currency translation. The increase was a result of volume increases as
prices remained relatively constant 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, Dynamic Controls, a New Zealand
manufacturer of operating components used in power wheelchairs and Invacare New
Zealand, a distribution business. Sales for the Australasia group increased
$5,933,000 or 30% from the prior year, excluding a slight negative impact from
foreign currency translation. The increase was due to new product introductions
by Dynamic Controls as well as increased focus on the Australasian market.
20
<PAGE>
European Operations
European sales increased 11%, excluding a net favorable impact of 34% from
acquisition and foreign currency translation. Sales growth improved in 1999
despite continuing governmental budget trends which resulted in pressure on
reimbursement levels.
The company acquired Scandinavian Mobility International A/S (SMI), a producer
and distributor of rehabilitation products, mobility aids and related products,
in the third quarter of 1999 for approximately $142 million in cash. Taking into
account the SMI acquisition, on a pro-forma basis, European sales advanced 11%,
excluding a 2% negative impact from foreign currency. The acquisition gives
Invacare's European operation strategic distribution capabilities in the Nordic
countries as well as an expanded product offering.
Gross Profit. Consolidated gross profit as a percentage of net sales increased
to 31% from 30% last year. The increase was a result of a company-wide
initiative focusing 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. The
increase in gross profit as a percentage of net sales was offset, to some
extent, by a shift in product mix and continued pricing pressure in the
industry.
North American gross profit from operations as a percentage of net sales
remained constant with the prior year as productivity improvements and
facilities rationalization were somewhat offset by price declines and a shift in
product mix as sales of Respiratory products increased while sales of higher
margin Rehab products decreased.
Gross profit in Australasia increased as a percentage of sales to 28% from 25%
in the prior year. The $2,001,000 increase includes the continued effects of a
strong U.S. dollar which negatively impacted margins. Excluding the negative
impact of foreign currency translation, gross profit increased $2,189,000 from
the prior year.
Gross profit in Europe as a percent to sales increased three percentage points
from the prior year. Excluding the impact from the acquisition of SMI, gross
profit from operations as a percentage of net sales increased to 28% from 26% in
the prior year despite the continued negative effects of a strong U.S. dollar.
The increase in European profitability is primarily a result of productivity
improvements and cost containment programs introduced by new European management
put in place during the third quarter of 1998. The management team has
simplified and improved accountability while reducing costs to be more in line
with its sales levels. In addition, greater emphasis is being placed on
leveraging U.S. research and development efforts to accelerate new product
development in a cost-effective manner.
Inventory turns decreased slightly for 1999, principally due to the effect of
businesses acquired, particularly SMI, which had inventory turns lower than the
combined overall average of the company's existing business. The company expects
turns will show improvement in 2000 as inventory control initiatives instituted
throughout the company's existing business are implemented at the SMI locations.
Selling, General and Administrative. Consolidated selling, general and
administrative expense as a percentage of net sales increased to 20% in 1999
compared to 19% in 1998. The overall dollar increase was $22,420,000 or 15%,
with acquisitions increasing selling, general and administrative costs by
approximately $14,002,000 or 9%. Higher distribution, selling and administrative
expenses in 1999 throughout the company and sluggish domestic sales growth
resulted in an increase in the overall expense as a percentage of net sales. The
company believes, with its proven ability to focus on improving productivity and
with the successful execution of the SMI acquisition integration plan, it can
favorably impact selling, general and administrative expense as a percentage of
net sales in 2000.
North American operations' selling, general and administrative costs increased
as a percentage of net sales by approximately 1% from the prior year. The
overall dollar increase was $10,456,000 or 9% with acquisitions accounting for
$1,572,000 or 1% of the increase from the prior year. The company utilized
activity-based budgeting aimed at allocating the expense dollars to the programs
that most effectively supported the company's business strategy. The company
also invested in additional sales and marketing programs to enhance North
American sales growth.
21
<PAGE>
Australasia operations' selling, general and administrative expenses decreased
approximately 16% from the prior year. The decrease is primarily a result of
cost control initiatives, which began in 1998 and continued throughout 1999. The
overall dollar decrease between years was $1,242,000. The strong dollar also had
a favorable effect on the reported line of selling, general and administrative
expense for Australasia operations.
European operations' selling, general and administrative expenses increased
$13,206,000 or 40% from the prior year. The increase was primarily a result of
the acquisition of SMI which increased selling, general and administrative costs
by $12,430,000 or 37%. European selling, general and administrative expenses
were positively impacted by continued cost containment initiatives implemented
throughout 1999 and the strong dollar, which reduced selling, general and
administrative expenses reported in dollars by $789,000.
Interest. Interest income decreased in 1999 to $7,929,000 from $9,031,000 in the
prior year, representing a 12% decrease. The decrease was due to a slightly
lower yield on new notes booked throughout 1999 combined with a slight decrease
in the average term of the new notes from 12.8 months in 1998 to 10.6 months in
1999. Interest expense increased to $22,093,000 from $20,616,000 representing a
7% increase resulting from additional borrowings incurred to fund the 1999
acquisition of Scandinavian Mobility, Inc. As a result of the increased
borrowing, the company's debt-to-equity ratio increased to 1.4:1 from 1.2:1in
the prior year.
Income Taxes. The company had an effective tax rate of 39% in both 1999 and
1998, including the effects of the unusual and non-recurring charge taken in the
current year. 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 $15,534,000 from
$12,980,000 in 1998. The expenditures, as a percentage of sales, increased to
1.8% from 1.6% in the prior year.
1998 Versus 1997
Non-recurring and Unusual Charges. The review of results that follows excludes
the impact of the non-recurring and unusual charges ("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 Charges" 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, retail),
Beds and Continuing Care (beds, low air loss therapy, 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 Beds and Continuing Care products
up 7%, 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 3%, which is primarily the result of decreased
sales to a major customer.
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<PAGE>
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.
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.
23
<PAGE>
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.
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.
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 1999 and
1998, 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 $15,476,000 as of December 31, 1999. 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, 1999, the company had approximately $108,464,000 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 $151,543,000 as of
December 31, 1999.
While there is general concern about the potential for rising interest rates,
exposure to interest fluctuations is manageable as the majority of debt is at
fixed rates through 2001. The fixed interest debt coupled with free cash flow
ensures Invacare's ability to absorb the expected modest rate increases in the
months ahead. However, there will be a need to refinance a portion of debt
sometime during the next three years as the existing revolving credit agreement
matures in 2002.
CAPITAL EXPENDITURES
There are no individually material capital expenditure commitments outstanding
as of December 31, 1999. 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 2000 will approximate $28,000,000. The company
believes that its balances of cash and cash equivalents, together with funds
generated from operations and existing borrowing facilities will be sufficient
to meet its operating cash requirements and fund required capital expenditures
for the foreseeable future.
CASH FLOWS
Cash flows provided by operating activities were $72,840,000, compared to
$49,950,000 last year. The increase is primarily the result of the net change in
accrued expenses and trades receivables versus the net change in the prior year.
The non-cash effects of the non-recurring charge also favorably impacted net
cash provided by operating activities. 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 $10,384,000. The increase
was primarily a result of the acquisition of Scandinavian Mobility International
AS in 1999, which required more cash than the Suburban Ostomy Supply acquisition
in 1998, and an increase in net installment receivables.
Cash flows provided by financing activities in 1999 were $134,162,000, slightly
less than in 1998. The decrease in cash provided by financing activities was
principally a result of a decrease in net borrowing activity during the year,
despite the acquisition of Scandinavian Mobility International AS. 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.
25
<PAGE>
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 1999, a dividend of $.05 per Common Share and $.045 per Class
B Common Share was declared and paid.
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
currently is not aware of any significant problems that have arisen for its
customers and suppliers.
The company completed a comprehensive project, which included the modification
of existing information technology in order to recognize the year 2000 and the
conversion of its critical data processing systems. The project consisted of an
iterative process of assessing, remediating, testing and implementing new
software as required. The company was also in contact with each of its major
customers and vendors to make sure that they were also year 2000 compliant. The
company spent approximately $6.3 million on the project and funded it entirely
through operating cash flows. The 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 project did not have a
material effect on the company's results of operations or financial position.
The company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the company does not expect any significant
impact on its ongoing business as a result of the Year 2000 Problem. However, it
is possible that the full impact of the Year 2000 Problem has not been fully
recognized.
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.
NON-RECURRING AND UNUSUAL CHARGE
In 1999, the company announced non-recurring and unusual charges of $14,800,000
($9,028,000 or $.29 diluted per share after-tax) primarily related to the
acquisition of Scandinavian Mobility International AS ("SMI"). The charges
included a provision for the shut down of facilities, personnel reductions,
write-off of assets that will no longer be used in the business and the
write-off of costs incurred in conjunction with acquisitions that were not
completed. The shut down of facilities and personnel reductions are related to
the integration of SMI and are required to obtain the expected synergies from
the acquisition. The company also increased its bad debt reserve impacting
selling, general and administrative expenses by approximately $3,300,000. During
1999, approximately $2,503,000 for asset write-downs and $146,000 in employee
severance costs were utilized. The company anticipates all initiatives for which
charges have been reported will be substantially completed in 2000. See
Non-Recurring and Unusual charges in the Notes to Consolidated Financial
Statements for further discussion.
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 charges
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
26
<PAGE>
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. The remaining accrual balance at December 31, 1999, is $690,000 and
relates primarily to litigation. The company expects substantially all of the
remaining charge to be utilized over the next few months. See Non-Recurring and
Unusual charges 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, 1999 debt levels, a 1% change in interest rates would
impact interest expense by approximately $1,635,000. 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 Annual Report on Form 10-K 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. Forward-looking statements
include information concerning our possible or assumed future results of
operations and statements in which we use words such as "expect," "will,"
"believe," "anticipate," "intend," "plan," "estimate," "project" or similar
expressions. Actual results and events, including the results from the
acquisition and integration of Scandinavian Mobility and the acceleration of
certain strategic initiatives for which a non-recurring 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, government reimbursement issues including
those that affect the viability of customers, the effect in offering customers
competitive financing terms, Invacare's ability to effectively integrate
acquired companies, the difficulties in managing and operating businesses in
many different foreign jurisdictions, the timely completion of facility
consolidations, the overall economic, market and industry growth conditions,
foreign currency and interest rate risk, 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 -
22 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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 2000
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.
27
<PAGE>
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
information set forth under the captions "Compensation of Executive Officers"
and "Compensation of Directors" in the company's definitive Proxy Statement for
the 2000 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 2000 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 2000
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, 1999, 1998
and 1997
Consolidated Balance Sheet - December 31, 1999 and 1998
Consolidated Statement of Cash Flows - years ended December 31, 1999, 1998
and 1997
Consolidated Statement of Shareholders' Equity - years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2)Financial Statement Schedules.
The following financial statement schedule of the company is included in
Part II, Item 8:
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or
not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits.
See Exhibit Index at page number I-29 of this Report on Form 10-K.
(b) Reports on Form 8-K.
None
28
<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 30, 2000.
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 30, 2000.
Signature Title
/S/ A. Malachi Mixon, 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 and
- ------------------------- Corporate Secretary (Principal Financial and
Thomas R. Miklich Accounting Officer)
/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, II 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
29
<PAGE>
<TABLE>
<CAPTION>
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended December 31, 1999.
Exhibit Index
Official
Exhibit No Description Sequential Page No.
- ---------- ----------- -------------------
<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)*
30
<PAGE>
10(ab) - 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (K)
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 $80,000,000 6.71% Series A (X)
Senior Notes Due February 27, 2008 and $20,000,000 6.60% Series B Senior Notes Due
February 27, 2005
10(av) - Amendment No. 1 to the Invacare Corporation 1994 Performance Plan approved May 28, 1998.
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 (Y)
</TABLE>
* Management contract, compensatory plan or arrangement
31
<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.
32
<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.
(Y) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1996, which
Exhibit is incorporated herein by reference.
33
<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, 1999 and 1998, and the related
consolidated statements of earnings, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Invacare Corporation and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Cleveland, Ohio
January 25, 2000
34
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $878,261 $797,529 $653,414
Cost of products sold 607,074 559,016 455,036
-------- -------- --------
Gross Profit 271,187 238,513 198,378
Selling, general and administrative expenses 177,579 157,595 160,060
Non-recurring and unusual items 11,500* (5,736)** 29,861***
-------- -------- --------
Income from Operations 82,108 86,654 8,457
Interest income 7,929 9,031 9,321
Interest expense (22,093) (20,616) (12,555)
-------- -------- --------
Earnings before Income Taxes 67,944 75,069 5,223
Income taxes 26,450 29,277 3,660
-------- -------- --------
Net Earnings $ 41,494 $ 45,792 $ 1,563
======== ======== ========
Net Earnings per Share - Basic $ 1.38 $ 1.53 $ .05
======== ======== ========
Weighted Average Shares Outstanding - Basic 30,138 29,932 29,569
======== ======== ========
Net Earnings per Share - Assuming Dilution $ 1.36 $ 1.50 $ .05
======== ======== ========
Weighted Average Shares Outstanding -
Assuming Dilution 30,619 30,583 30,374
======== ======== ========
</TABLE>
* The company recorded pre-tax charges aggregating $14,800 ($.29 diluted per
share after-tax) in the fourth quarter of 1999, principally related to the
acquisition of Scandinavian Mobility International AS ("SMI"). The charges
were recorded in selling, general and administrative expenses ($3,300) and
as non-recurring and unusual items ($11,500).
** Represents changes in the components of the non-recurring and unusual
charges reported in 1997, to reflect 1998 activity. These changes were
offset by additional charges primarily for asset write-downs affecting cost
of sales and selling, general and administrative expenses 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.
35
<PAGE>
CONSOLIDATED BALANCE SHEET
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 18,258 $9,460
Marketable securities 1,593 2,634
Trade receivables, net 181,550 156,694
Installment receivables, net 70,378 60,330
Inventories 108,535 81,740
Deferred income taxes 26,561 17,331
Other current assets 11,745 8,553
-------- --------
Total Current Assets 418,620 336,742
Other Assets 71,316 62,388
Property and Equipment, net 137,132 112,944
Goodwill, net 328,217 226,682
-------- --------
Total Assets $955,285 $738,756
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 58,367 $ 47,628
Accrued expenses 97,156 65,505
Accrued income taxes 15,547 12,339
Current maturities of long-term obligations 6,401 8,492
-------- --------
Total Current Liabilities 177,471 133,964
Long-Term Debt 440,795 311,260
Other Long-Term Obligations 18,147 12,644
Shareholders' Equity
Preferred Shares (Authorized 300 shares; none outstanding) 0 0
Common Shares (Authorized 100,000 shares; 29,125 and
29,066 issued in 1999 and 1998, respectively) 7,282 7,267
Class B Common Shares (Authorized 12,000 shares;
1,433 and 1,434, issued and outstanding in
1999 and 1998, respectively) 358 358
Additional paid-in-capital 79,470 79,863
Retained earnings 251,955 211,954
Accumulated other comprehensive earnings (loss) (8,976) (7,712)
Treasury shares (579 and 607 shares in
1999 and 1998, respectively) (11,217) (10,842)
-------- --------
Total Shareholders' Equity 318,872 280,888
-------- --------
Total Liabilities and Shareholders' Equity $955,285 $738,756
======== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
INVACARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Operating Activities
Net earnings $ 41,494 $ 45,792 $1,563
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Non-recurring unusual charge, (non cash) 9,360 5,049 40,226
Depreciation and amortization 25,978 23,754 18,348
Provision for losses on trade and installment receivables 6,783 2,802 1,411
Provision for deferred income taxes 4,608 6,425 (18,867)
Provision for other deferred liabilities 559 1,131 2,546
Changes in operating assets and liabilities:
Trade receivables (22,402) (34,315) (13,265)
Inventories (7,465) (2,176) (1,817)
Other current assets (729) (2,518) (1,911)
Accounts payable 3,345 2,857 1,001
Accrued expenses 11,309 1,149 8,700
--------- --------- ---------
Net Cash Provided by Operating Activities 72,840 49,950 37,935
Investing Activities
Purchases of property and equipment (22,607) (29,331) (38,485)
Capitalized consulting costs related to systems implementation (10,201) (10,978) (1,011)
Proceeds from sale of property and equipment 653 804 523
Installment contracts written (86,833) (72,641) (74,104)
Payments received on installment contracts 72,642 64,036 67,265
Marketable securities purchased (623) (571) (4,018)
Marketable securities sold 1,481 1,512 4,140
Business acquisitions, net of cash acquired (141,536) (129,318) (3,997)
(Increase)/decrease in other investments (3,609) (3,212) 4,316
Increase in other long-term assets (9,700) (13,123) (5,394)
Other 2,178 5,051 (2,272)
--------- --------- ---------
Net Cash Required for Investing Activities (198,155) (187,771) (53,037)
Financing Activities
Proceeds from revolving lines of credit and
long-term borrowings 344,908 371,512 79,169
Principal payments on revolving lines of credit,
long-term debt and capital lease obligations (208,033) (231,427) (64,993)
Proceeds from exercise of stock options 1,441 4,754 3,766
Payment of dividends (1,493) (1,487) (1,475)
Purchase of treasury stock (2,661) (2,517) 0
--------- --------- ---------
Net Cash Provided by Financing Activities 134,162 140,835 16,467
Effect of exchange rate changes on cash (49) 750 (100)
--------- --------- ---------
Increase in cash and cash equivalents 8,798 3,764 1,265
Cash and cash equivalents at beginning of year 9,460 5,696 4,431
--------- --------- ---------
Cash and cash equivalents at end of year $ 18,258 $ 9,460 $ 5,696
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
37
<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) Stock Shares Total
------- ------ ------- ------ ---------- -------- -------------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997 Balance $ 7,103 28,408 $360 1,442 $71,143 $167,561 $ (833) $ (6,737) (418) $238,597
Conversion of shares
from Class B to Common 1 4 (1) (4) -
Exercise 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),
net of tax 401 401
---
Total comprehensive
loss - net of tax (4,110)
Dividends - $.05 per
share (1,475) (1,475)
Repurchase of treasury
shares (486) (20) (486)
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1997 Balance 7,182 28,724 359 1,438 74,954 167,649 (6,506) (7,223) (438) 236,415
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),
net of tax (645) (645)
-----
Total comprehensive
income - 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
Conversion of shares
from Class B to Common 1 (1) -
Excercise of stock options 15 58 (393) 2,286 148 1,908
Net earnings 41,494 41,494
Foreign currency
translation adjustments (1,561) (1,561)
Marketable securities
holding gain/(loss),
net of tax 297 297
---
Total comprehensive
income - net of tax 40,230
Dividends - $.05 per
share (1,493) (1,493)
Repurchase of treasury
shares (2,661) (120) (2,661)
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1999 Balance $7,282 29,125 $358 1,433 $79,470 $251,955 $(8,976) $(11,217) (579) $318,872
</TABLE>
See notes to consolidated financial statements.
38
<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 accounting
principles generally accepted in the United States which require management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates. Certain foreign subsidiaries are consolidated using a November 30
fiscal year end. All significant intercompany transactions are eliminated.
Recently Issued Accounting Pronouncements: 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 company must adopt the statement no later than the first
quarter of 2001. 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 consist of short-term
investments in repurchase agreements, government and corporate securities,
certificates of deposit and equity securities. Marketable securities with
original maturities of less than three months are treated as cash equivalents.
The company has classified its marketable securities as available for sale. The
securities are carried at their fair value and net unrealized holding gains and
losses, net of tax, are carried as a component of accumulated other
comprehensive earnings (loss).
Inventories: Inventories are stated at the lower of cost or market with cost
principally determined for domestic manufacturing inventories by the last-in,
first-out (LIFO) method and for non-domestic inventories and domestic finished
products purchased for resale ($81,841,000 and $50,106,000 at December 1999 and
1998, 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.
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 $15,534,000, $12,980,000, and $12,706,000 for
1999, 1998, and 1997, 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.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
ACCOUNTING POLICIES--Continued
Net Earnings Per Share: Basic earnings per share are computed based on the
weighted-average number of Common Shares and Class B Common Shares outstanding
during the year. Diluted earnings per share are computed based on the
weighted-average number of Common Shares and Class B Common Shares outstanding
plus the effects of dilutive stock options outstanding during the year.
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 $27,298,000 and
$20,039,000 at December 31, 1999 and 1998, 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 discounted cash
flows. Based on the company's review as of December 31, 1999, no impairment of
goodwill was evident.
Advertising: Advertising costs are expensed as incurred and included in
"selling, general and administrative expenses." Advertising expenses amounted to
$17,391,000, $13,386,000 and $10,419,000 for 1999, 1998 and 1997, respectively.
RECEIVABLES
Trade receivables are net of allowances for doubtful accounts of $14,339,000 and
$5,566,000 in 1999 and 1998, respectively.
Installment receivables as of December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
Long- Long-
(In thousands) Current Term* Total Current Term* Total
------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Installment receivables $78,701 $26,817 $105,518 $67,876 $23,661 $91,537
Less:
Unearned interest (3,380) (1,653) (5,033) (3,663) (1,592) (5,255)
Allowance for doubtful accounts (4,943) (2,152) (7,095) (3,883) (1,536) (5,419)
------- ------- ------- ------- ------- -------
$70,378 $23,012 $93,390 $60,330 $20,533 $80,863
======= ======= ======= ======= ======= =======
</TABLE>
* Long - term installment receivables are included in "Other Assets" on the
consolidated balance sheet.
INVENTORIES
Inventories as of December 31, 1999 and 1998 consist of the following:
1999 1998
------- -------
(In thousands)
Raw materials $33,564 $21,019
Work in process 16,825 14,928
Finished goods 58,146 45,793
-------- -------
$108,535 $81,740
======== =======
The value of inventory on the LIFO method is approximately equal to its current
cost as of December 31, 1999. As of December 31, 1998, the current cost exceeds
the LIFO value of inventories by approximately $209,000.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 and 1998 consist of the
following:
1999 1998
---------- ----------
(In thousands)
Land, buildings and improvements $ 58,974 $ 44,797
Machinery and equipment 163,717 140,577
Furniture and fixtures 14,776 11,950
Leasehold improvements 9,985 7,628
---------- ----------
247,452 204,952
Less allowance for depreciation 110,320 92,008
---------- ----------
$ 137,132 $ 112,944
========== ==========
CURRENT LIABILITIES
Accrued expenses as of December 31, 1999 and 1998 consist of the following:
1999 1998
---------- ----------
(In thousands)
Accrued salaries and wages $ 24,991 $ 20,560
Acquisition reserves 15,267 6,283
Accrued insurance 8,259 7,591
Accrued warranty cost 7,758 6,619
Accrued rebates 5,001 3,663
Accrued interest 4,660 3,739
Accrued product liability, current portion 1,142 1,434
Other accrued items 30,078 15,616
---------- ----------
$ 97,156 $ 65,505
========== ==========
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
("SMI"), a Danish corporation for approximately $142 million in cash. The
acquisition was accounted for under the purchase method of accounting. The
excess of the purchase price over the estimated fair value of the common stock
acquired is being amortized over 40 years. SMI is a producer and distributor of
rehabilitation products, mobility aids and related products in Europe.
In connection with the acquisition, restructuring reserves of $13.2 million were
included in the preliminary purchase price allocation for Invacare's business
restructuring plan to consolidate and integrate the operations of SMI and
Invacare. The reserves consist of accruals for severance and other employee
related costs ($8.5 million) and costs associated with the closure of facilities
($4.7 million). Payments charged against the SMI restructuring reserve totaled
approximately $1 million for severance and other employee related costs as of
December 31, 1999.
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.
Twelve Months Ended
December 31,
1999 1998
-------- --------
Net sales $958,754 $906,493
Net income 42,017 45,833
Income per share - basic 1.39 1.53
Income per share - diluted 1.37 1.50
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
ACQUISITIONS--Continued
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.
In January 1998, the company acquired for approximately $132 million in 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. Suburban complements Invacare's industry-leading "Total
One Stop Shoppingsm" strategy and significantly strengthens our industry-leading
position by adding a complete line of medical supplies and soft goods.
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.
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 Scandinavian
Mobility International and Suburban) prior to the date of acquisition were not
material to the company.
LEASES AND COMMITMENTS
The company leases a substantial portion of its facilities, transportation
equipment, data processing equipment and certain other equipment. These leases
have terms of up to 10 years and provide for renewal options. Generally, the
company is required to pay taxes and normal expenses of operating the facilities
and equipment. As of December 31, 1999, 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 $9,178,000 in 1999, $7,975,000 in 1998 and $6,978,000 in 1997.
Future minimum operating lease commitments as of December 31, 1999, are as
follows:
Year Amount
---- ------
(In thousands)
2000 $ 7,397
2001 5,330
2002 3,577
2003 3,232
2004 1,926
Thereafter 1,373
-------
Total Future Minimum Lease Payments $22,835
=======
The amount of buildings and equipment capitalized in connection with capital
leases was $3,713,000 and $4,403,000 at December 31, 1999 and 1998,
respectively. At December 31, 1999 and 1998, accumulated amortization was
$2,172,000 and $2,257,000, 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.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
RETIREMENT AND BENEFIT PLANS--Continued
The company sponsors a 401(k) Benefit Equalization Plan covering certain
employees, which provides for retirement payments so that the total retirement
payments equal amounts that would have been payable from the company's principal
retirement plans if it were not for limitations imposed by income tax
regulations.
Contribution expense for the above plans in 1999, 1998 and 1997 was $5,328,000,
$4,308,000 and $3,925,000, respectively.
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 $23,294,000 at December 31, 1999. Pension expense for the plan
in 1999, 1998 and 1997 was $1,168,000, $1,085,000 and $923,000, 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 1999, 1998 and 1997 was $1,400,000.
SHAREHOLDERS' EQUITY TRANSACTIONS
At December 31, 1999, 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, 1999, 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, as amended, 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 and directors 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, 1999, 1998 or 1997. During 1999, the Committee, under the 1994
Plan, granted 1,397,080 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, 1999, there were 12,550 options outstanding under
this plan. During 1999, no options were granted under this plan.
The Plans have provisions for the net share settlement of options. Under these
provisions, the company acquired 78,433 treasury shares for $1,860,663 in 1999,
144,489 treasury shares for $3,120,476 in 1998 and 19,951 treasury shares for
$486,000 in 1997.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
SHAREHOLDERS' EQUITY TRANSACTIONS--Continued
As of December 31, 1999, an aggregate of 9,287,694 Common Shares were reserved
for conversion of Class B Common Shares, future rights (as defined below) and
the exercise and future grant of options.
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
---- ------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1, 3,057,020 $16.90 2,967,762 $15.05 2,758,587 $12.12
Granted 1,397,080 20.75 517,707 23.68 582,250 25.13
Exercised (285,575) 7.39 (337,933) 9.29 (311,575) 6.22
Canceled (109,392) 23.70 (90,516) 23.67 (61,500) 23.01
--------- ------ -------- ------ --------- ------
Options outstanding at December 31, 4,059,133 $18.70 3,057,020 $16.90 2,967,762 $15.05
========= ====== ========= ====== ========= ======
Options price range at December 31, $ 2.19 $ 2.19 $ 2.13
to to to
$ 27.50 $ 27.50 $ 26.75
Options exercisable at December 31, 2,018,674 1,906,538 1,872,552
Options available for grant at December 31, 356,460 1,644,148 572,839
</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 1999, 1998
and 1997 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) 1999 1998 1997
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings - as reported $41,494 $45,792 $ 1,563
Net earnings/(loss) - pro forma $38,639 $43,302 $ (234)
Earnings per share as reported - basic $ 1.38 $ 1.53 $ .05
Earnings per share as reported - assuming dilution $ 1.36 $ 1.50 $ .05
Pro forma earnings/(loss) per share - basic $ 1.28 $ 1.45 $ (.01)
Pro forma earnings/(loss) per share - assuming dilution $ 1.26 $ 1.42 $ (.01)
</TABLE>
The assumption regarding the stock options issued in 1999, 1998 and 1997 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 1999: dividend yield of 1.74%; expected
volatility of 29.2%; risk-free interest rate of 6.61%; and an expected life of
6.5 years. The weighted-average present value of options granted during the
year, per the Black-Scholes model based on the expected exercise year of 2006,
is $6.83.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
SHAREHOLDERS' EQUITY TRANSACTIONS--Continued
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 1999 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, 1999 is 7.2 years.
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>
1999 1998 1997
---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
Basic
Average common shares outstanding 30,138 29,932 29,569
Net earnings $41,494 $45,792 $ 1,563
Net earnings per common share $ 1.38 $ 1.53 $ .05
Diluted
Average common shares outstanding 30,138 29,932 29,569
Stock options 481 651 805
-------- -------- --------
Average common shares assuming dilution 30,619 30,583 30,374
Net earnings $ 41,494 $ 45,792 $ 1,563
Net earnings per common share $ 1.36 $ 1.50 $ .05
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
OTHER COMPREHENSIVE EARNINGS (LOSS)
The components of other comprehensive earnings (loss) are as follows:
<TABLE>
<CAPTION>
(In thousands) Unrealized
Gain (Loss)
Currency on Available-
Translation for-Sale
Adjustments Securities Total
----------- ------------- -----
<S> <C> <C> <C>
Balance at January 1, 1997 $(1,501) $ 668 $(833)
Foreign currency translation adjustments (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 adjustments (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)
Foreign currency translation adjustments (1,561) (1,561)
Unrealized gain (loss) on available for sale securities 487 487
Deferred tax (expense) benefit relating to unrealized gain
(loss) on available for sale securities (190) (190)
----------------------------------------
Balance at December 31, 1999 $(9,697) $ 721 $(8,976)
========================================
</TABLE>
LONG-TERM OBLIGATIONS
Long-term obligations as of December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
$25,000,000 senior notes at 7.45%, mature in February 2003 $14,285 $17,856
$80,000,000 senior notes at 6.71%, mature in February 2008 80,000 80,000
$20,000,000 senior notes at 6.60%, mature in February 2005 20,000 20,000
Revolving credit agreement ($425,000,000 multi-currency) at .185% to
.375% above local interbank offered rates, expires October 31, 2002 326,873 191,662
Notes payable to banks and other third parties - 2,556
Notes and mortgages payable, secured by buildings and equipment 2,374 2,734
Capitalized lease obligations 1,584 2,177
Product liability 5,683 5,512
Deferred federal income taxes 1,172 -
Other 13,372 9,899
---------- ----------
465,343 332,396
Less current maturities of long-term obligations 6,401 8,492
---------- ----------
$458,942 $323,904
========== ==========
</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, 1999, $120,041,835 of retained earnings is
available for dividends. The notes are due in 2003 and require principal
payments of $3,571,429 per year.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
LONG-TERM OBLIGATIONS--Continued
In November 1999, the company fixed the interest rate on $25,000,000 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
6.29% for a two year term.
In November 1999, the company fixed the interest rate on $26,000,000 of its EURO
borrowings through two interest rate swap agreements. Each agreement is for
$13,000,000 Euros. The effect of the swaps is to exchange a short-term floating
interest rate for a fixed rate of 4.67% for a three year term on both
agreements.
In November 1999, the company fixed the interest rate on $10,000,000 of its EURO
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 4.49% for a
three year term.
In September 1999, the company fixed the interest rate on $30,000,000 of its
EURO borrowings through two interest rate swap agreements. Each agreement is for
$15,000,000 Euros. The effect of the swaps is to exchange a short-term floating
interest rate for a fixed rate of 4.17% on one agreement and 4.14% on the other
agreement. Both interest rate swap agreements have been arranged for a three
year term. As of December 31, 1999 the weighted average floating interest rate
on Euro debt was 2.20%.
In September 1999, the company fixed the interest rate on $150,000,000 of its
DKK 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 4.87% for
a three year term. As of December 31, 1999, the weighted average floating
interest rate on Danish Kroner debt was 3.47%.
In May 1999, the company fixed the interest rate on $20,000,000 of its U.S.
dollar borrowings through two interest rate swap agreements. Each agreement is
for $10,000,000 U.S. dollars. The effect of the swaps is to exchange a
short-term floating interest rate for a fixed rate of 5.63% for a four year term
on both agreements.
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, 1999 and 1998, the weighted
average floating interest rate on the New Zealand dollar debt was 5.08% and
8.90%, 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, 1999 and 1998, the weighted average
floating interest rate on the French franc debt was 3.27% and 3.88%,
respectively.
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, 1999 and 1998,
the weighted average floating interest rate on the U.S. dollar debt was 5.68%
and 5.32%, 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.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
LONG-TERM OBLIGATIONS--Continued
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, 1999 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 $1,000,000 per claim or annual policy aggregate losses of
$4,000,000. The company also has additional layers of coverage insuring up to
$74,000,000 in aggregate losses arising from individual losses that exceed
$1,000,000 or annual policy aggregate losses that exceed $4,000,000.
The aggregate minimum combined maturities of long-term obligations are
approximately $6,401,000 in 2000, $5,640,000 in 2001, $330,825,000 in 2002,
$3,872,000 in 2003, $115,000 in 2004 and $100,346,000 thereafter. Interest paid
on borrowings was $21,646,000, $18,995,000 and $10,612,000 in 1999, 1998 and
1997, respectively.
INCOME TAXES
Earnings/(loss) before income taxes consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Domestic $ 52,924 $ 69,037 $ 10,734
Foreign 15,020 6,032 (5,511)
---------- ---------- ----------
$ 67,944 $ 75,069 $ 5,223
========== ========== ==========
</TABLE>
The company has provided for income taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 10,157 $ 16,428 $ 18,030
State 2,800 4,000 2,800
Foreign 8,755 4,642 1,250
---------- ---------- ----------
21,712 25,070 22,080
Deferred:
Federal 7,698 4,471 (13,320)
State - - (2,400)
Foreign (2,960) (264) (2,700)
---------- ---------- ----------
4,738 4,207 (18,420)
---------- ---------- ----------
Income Taxes $ 26,450 $ 29,277 $ 3,660
========== ========== ==========
</TABLE>
At December 31, 1999, the company had foreign tax loss carryforwards of
approximately $2,730,000 of which $2,480,000 are non-expiring and $250,000
expire between 2001 and 2004.
The company made income tax payments of $13,264,000, $13,731,000 and $19,907,000
during the years ended December 31, 1999, 1998 and 1997, respectively.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
INCOME TAXES--Continued
A reconciliation to the effective income tax rate from the federal statutory
rate follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<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 2.7 3.5 5.0
Tax credits (2.1) (2.3) (23.0)
Goodwill 3.8 2.9 59.3
Other, net (.5) (.1) (6.2)
------- ------- -------
38.9% 39.0% 70.1%
======= ======= =======
</TABLE>
Significant components of deferred income tax assets and liabilities at December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Current deferred income tax assets, net:
Bad debt $ 7,056 $ 4,242
Warranty 1,336 1,397
Inventory 3,313 1,862
Other accrued expenses and reserves 7,005 3,840
State and local taxes 2,019 1,180
Litigation reserves 2,367 19
Compensation and benefits 2,175 3,519
Product liability 274 274
Loss carryforwards 72 167
Other, net 944 831
---------- ----------
$ 26,561 $ 17,331
---------- ----------
Long-term deferred income tax assets (liabilities), net:
Fixed assets (7,303) $ 293
Product liability 1,144 1,128
Loss carryforwards (48) 818
Compensation and benefits 3,725 1,976
State and local taxes 2,400 2,400
Other, net (1,090) (345)
---------- ----------
$(1,172) $ 6,270
---------- ----------
Net Deferred Income Taxes $ 25,389 $ 23,601
======== ========
</TABLE>
RELATED PARTY TRANSACTIONS
The Company became an investor in Unique Mobility, Inc. in 1996 and J.B. Richey,
an executive and director of the Company serves on Unique Mobility's board of
directors. The Company purchased Gearless/Brushless motors from Unique Mobility
totaling approximately $2,000,000 and $155,000 in 1999 and 1998 respectively.
49
<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)
1999 March 31, June 30, September 30, December 31,
---- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $196,092 $202,195 $223,335 $256,639
Gross profit 56,737 62,085 70,507 81,858
Earnings before income taxes 13,922 19,538 23,068 11,416
Net earnings 8,492 11,914 14,077 7,011
Net earnings per share - basic .28 .39 .46 .23
Net earnings per share - assuming dilution .28 .39 .46 .23
<CAPTION>
1998 March 31, June 30, September 30, December 31,
---- ---------- ---------- -------------- -------------
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
</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
$57,027,000, $47,881,000 and $39,250,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
The information by segment is as follows (In thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1999
North Australia/ All
America Europe Asia Other* Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $661,855 $189,157 $ 25,590 $ 1,659 $878,261
Depreciation and amortization 18,115 6,230 1,633 - 25,978
Net interest expense 14,792 1,605 459 (2,692) 14,164
Earnings (loss) before income taxes 109,134 (541) 8,590 (49,239) 67,944
Assets 529,397 302,465 29,679 93,744 955,285
Expenditures for assets 16,881 3,586 2,140 - 22,607
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
BUSINESS SEGMENTS--Continued
<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
</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.
In accordance with SFAS No. 131, net sales by product, are as follows:
<TABLE>
<CAPTION>
North America 1999 1998 1997
------------- -------------------------------------------
<S> <C> <C> <C>
Rehab $175,247 $175,812 $145,012
Standard Wheelchairs 96,598 102,326 101,170
Distributed 100,980 93,372 -
Personal Care/Patient Transport/Beds 138,076 129,084 134,281
Respiratory 79,693 70,626 67,321
Institutional products 32,100 31,419 16,576
Parts 18,601 17,881 18,044
Other 20,560 26,852 23,793
---------- ---------- ----------
$661,855 $647,372 $506,197
========== ========== ==========
<CAPTION>
Europe 1999 1998 1997
------ -------------------------------------------
<S> <C> <C> <C>
Rehab $127,140 $ 89,006 $ 85,087
Personal Care/Patient Transport/Beds 39,140 21,966 22,702
Respiratory 6,314 4,633 3,273
Other 16,563 14,470 14,615
---------- ---------- ----------
$189,157 $130,075 $125,677
========== ========== ==========
<CAPTION>
Australasia 1999 1998 1997
----------- -------------------------------------------
<S> <C> <C> <C>
Rehab $ 20,378 $ 19,949 $ 21,132
Respiratory 4,779 - -
Beds 255 - -
Standard Wheelchairs 178 - -
---------- ---------- ----------
$ 25,590 $ 19,949 $ 21,132
========== ========== ==========
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
BUSINESS SEGMENTS--Continued
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Other $ 1,659 $ 133 $ 408
----- ========== ========== ==========
Total Consolidated $878,261 $797,529 $653,414
------------------ ========== ========== ==========
</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, medical equipment
dealers and long term care facilities located throughout the United States,
Australia, Canada, New Zealand and Europe. A significant portion of products
sold to dealers, both foreign and domestic, are ultimately funded through
government reimbursement programs such as Medicare and Medicaid. In addition,
the company has seen significant shift in reimbursement to customers from
managed care entities. As a consequence, changes in these programs can have an
adverse impact on dealer liquidity and profitability. Credit losses are provided
for in the financial statements.
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.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
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 $13,651,000 in 1999 and $10,041,000 in 1998 and are
accounted for using the cost method.
The carrying amounts and fair values of the company's financial instruments at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $18,258 $18,258 $ 9,460 $ 9,460
Marketable securities 2,188 2,188 4,749 4,749
Installment receivables 93,390 93,390 80,863 80,863
Long-term debt (including current 443,532 430,936 314,808 315,107
maturities)
Interest rate swaps (fair value liability) - 1,105 - 340
</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, 1999 and 1998, the gain/(loss) resulting from
forward contracts was not material to the financial statements.
The following table represents the fair value of all outstanding forward
contracts at December 31, 1999 and 1998. The valuations are based on market
rates. All forward contracts noted below mature before January, 2001 and
January, 2000 respectively.
<TABLE>
<CAPTION>
December 31, 1999
Cost Market Value
U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
British pound $ (331) $ (67) $ (398)
New Zealand dollar (12,054) (421) (12,475)
German mark 3,742 208 3,950
Australian dollar 144 3 147
Canadian dollar 5,049 (109) 4,940
French franc 2,857 157 3,014
Danish Kroner (275) 16 (259)
<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
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
NON-RECURRING AND UNUSUAL CHARGES
In 1999, the company announced non-recurring and unusual charges of $14,800,000
($9,028,000 or $.29 diluted per share after-tax) primarily related to the
acquisition of Scandinavian Mobility International AS ("SMI"). The charges
included a provision for the shut down of facilities, personnel reductions,
write-off of assets that will no longer be used in the business and the
write-off of costs incurred in conjunction with acquisitions that were not
completed. The shut down of facilities and personnel reductions are related to
Invacare's integration of SMI and are required to obtain the expected synergies
from the acquisition. The company anticipates all initiatives for which charges
have been reported will be substantially completed in 2000. The company also
increased its bad debt reserve impacting selling, general and administrative
expenses by approximately $3,300,000.
The following table summarizes the non-recurring and unusual charges through
December 31, 1999:
<TABLE>
<CAPTION>
Amounts Balance
Total Charges Utilized as of December 31,
1999 Dec. 31, 1999 1999
---- ------------- ----
(In thousands)
<S> <C> <C> <C>
Exit costs primarily for employee severance
and lease terminations $ 8,528 $ 146 $ 8,382
Asset write downs and other non-recurring
items 2,972 2,503 469
Provision for doubtful accounts 3,300 3,300 -
------- ------- -------
Total $14,800 $ 5,949 $ 8,851
======= ======= =======
</TABLE>
Included in the exit costs and the asset write downs and other non-recurring
items categories above are $4,079,000 of employee severance costs. These costs
consist of cash compensation and related expenses to 162 people.
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
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.
In 1999, $2,585,000 was utilized relating to the consolidation of European
facilities. The company also reviewed the charges and updated the components to
reflect current year estimates. As a result, accelerated facilities
consolidations were reduced by $1,404,000. This change was offset by additional
reserves primarily for asset write-downs. The remaining accrual balance at
December 31, 1999, in the amount of $690,000, relates primarily to litigation.
The company expects substantially all of the remaining charges to be utilized
over the next six months.
54
<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, 1999
- ----------------------------
Deducted from asset accounts --
Allowance for doubtful accounts $10,985 $10,139 $1,550(C) $1,240(A) $21,434
Inventory obsolescence reserve 6,296 4,606 3,875(C) 4,095(B) 10,682
Accrued warranty cost 6,619 8,056 - 6,917(B) 7,758
Accrued product liability 6,946 3,247 - 3,368(D) 6,825
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
</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.
55
<PAGE>
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 Products USA, 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.
1
<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. Invacare Portugual 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.
38. Roller Chair Pty. Ltd., an Australian corporation and wholly owned
subsidiary.
39. Special Health Systems, a Canadian corporation and wholly owned subsidiary.
40. Group Pharmaceutical Limited, a New Zealand corporation and wholly owned
subsidiary.
41. Thompson Rehab, a New Zealand corporation and wholly owned subsidiary.
42. Silcraft Corporation, a Michigan corporation and wholly owned subsidiary.
43. Suburban Ostomy Supply Company, Inc., a Massachusetts corporation and
wholly owned subsidiary.
44. St. Louis Ostomy Distributors, Inc. ., a Massachusetts corporation and
wholly owned subsidiary.
45. Patient-Care Medical Sales., a Massachusetts corporation and wholly owned
subsidiary.
46. Peiser's, Inc., a Massachusetts corporation and wholly owned subsidiary.
47. Care Management Enterprises, Inc., a Massachusetts corporation and wholly
owned subsidiary.
48. The Aftermarket Group, Inc., a Delaware corporation and wholly owned
subsidiary.
49. Invacare Holdings Denmark A/S, a Danish corporation and wholly owned
subsidiary.
50. Scandinavian Mobility International A/S, a Danish corporation and wholly
owned subsidiary.
51. SM EC-Hong A/S, a Danish corporation and wholly owned subsidiary.
52. SM A/S, a Danish corporation and wholly owned subsidiary.
53. SM Niltek A/S, a Danish corporation and wholly owned subsidiary.
54. SM Radius A/S, a Danish corporation and wholly owned subsidiary.
55. EC-Invest A/S, a Danish corporation and wholly owned subsidiary.
56. Scandinavian Mobility A/S, a Norwegian corporation and wholly owned
subsidiary.
57. Groas A/S, a Norwegian corporation and wholly owned subsidiary.
2
<PAGE>
58. SM Holding AB, a Swedish corporation and wholly owned subsidiary.
59. SM Mobility AB, a Swedish corporation and wholly owned subsidiary.
60. SM Reastolen AB, a Swedish corporation and wholly owned subsidiary.
61. France Reval SA, a French corporation and wholly owned subsidiary.
62. Matia SA, a French corporation and wholly owned subsidiary.
63. R2P S.a.r.l., a French corporation and wholly owned subsidiary.
64. SM GmbH, a German corporation and wholly owned subsidiary.
65. SM IMAB N.V., a Belgiun corporation and wholly owned subsidiary.
66. SM France S.a.r.l., a French corporation and wholly owned subsidiary.
67. SM UK Ltd., an English corporation and wholly owned subsidiary.
68. Reval Holding B.V., a Netherlands corporation and wholly owned subsidiary.
69. SM B.V. a Netherlands corporation and wholly owned subsidiary.
70. Lopital B.V. a Netherlands corporation and wholly owned subsidiary.
71. Samarite B.V. a Netherlands corporation and wholly owned subsidiary.
72. Revato B.V. a Netherlands corporation and wholly owned subsidiary.
73. SM Medical Services B.V. a Netherlands corporation and wholly owned
subsidiary.
74. Invacare Norge, a Norwegain corporation and wholly owned subsidiary.
75. Invacare Australia PTY, Ltd., an Australian corporation and wholly owned
subsidiary.
76. Adaptive Switch Laboratories, Inc., a Texas corporation and wholly owned
subsidiary.
77. Adaptive Research Laboratories, Inc., a Texas corporation and wholly owned
subsidiary.
78. Garden City Medical, a Delaware corporation and wholly owned subsidiary.
---------------------
* "Wholly owned subsidiary" refers to indirect, as well as direct, wholly
owned subsidiaries.
3
<PAGE>
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 25, 2000, 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, 1999.
ERNST & YOUNG LLP
Cleveland, Ohio
March 29, 2000.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,258
<SECURITIES> 1,593
<RECEIVABLES> 195,889
<ALLOWANCES> (14,339)
<INVENTORY> 108,535
<CURRENT-ASSETS> 418,620
<PP&E> 247,452
<DEPRECIATION> (110,320)
<TOTAL-ASSETS> 955,285
<CURRENT-LIABILITIES> 177,471
<BONDS> 0
0
0
<COMMON> 7,640
<OTHER-SE> 311,232
<TOTAL-LIABILITY-AND-EQUITY> 955,285
<SALES> 878,261
<TOTAL-REVENUES> 878,261
<CGS> 607,074
<TOTAL-COSTS> 607,074
<OTHER-EXPENSES> 189,079
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,164
<INCOME-PRETAX> 67,944
<INCOME-TAX> 26,450
<INCOME-CONTINUING> 41,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,494
<EPS-BASIC> 1.38
<EPS-DILUTED> 1.36
</TABLE>
AMENDMENT NO. 1
to the
INVACARE CORPORATION 1994
PERFORMANCE PLAN
Invacare Corporation hereby adopts Amendment No. 1 to the
Invacare Corporation 1994 Performance Plan (the "Plan") pursuant to
the following terms and provisions:
1. Section 2(i) of the Plan is hereby deleted and restated in its
entirety to read as follows:
"(i) "Committee" - means the Compensation Committee of the
Board of Directors, or any other committee of the Board of
Directors that the Board of Directors or the Compensation
Committee authorizes to administer all or any aspect of this
Plan."
2. Section 2 of the Plan is hereby amended by adding thereto the
following additional paragraph as subsection (s) and by re-designating
Section 2(s) through Section 2(y) as Section 2(t) through Section 2(z)
respectively:
"(s) "Performance Objectives" - means the achievement of
performance objectives established pursuant to this Plan.
Performance Objectives may be described in terms of
Company-wide objectives or objectives that are related to the
performance of the individual Participant or the subsidiary,
division, department or function within the Company in respect
of which the Participant performs services. Any Performance
Objectives applicable to Awards intended to qualify as
"performance-based compensation" under Section 162(m) of the
Code (the "Performance-Based Exception") shall be limited to
specified levels of or increases in the Company's, or
subsidiary's, or division's, or department's, or function's
return on equity, earnings per Common Share, total earnings,
earnings growth, return on capital, operating measures
(including, but not limited to, operating margin and operating
costs) return on assets, or increase in the Fair Market Value
of the Common Shares. Except in the case of such an Award
intended to qualify under Section 162(m) of the Code, if the
Committee determines that a change in the business,
operations, corporate structure or capital structure of the
Company, or the manner in which it conducts its business, or
other events or circumstances render the Performance
Objectives unsuitable, the Committee may modify such
Performance Objectives or the related minimum acceptable level
of achievement, in whole or in part, as the Committee deems
appropriate and equitable.
The Committee shall have the discretion to adjust the
determinations of the degree of attainment of the
pre-established Performance Objectives; provided, however,
that Awards which are designed to qualify for the
Performance-Based Exception, may not be adjusted upward (the
Committee shall retain the discretion to adjust such Awards
downward).
In the event that applicable tax and/or securities
laws change to permit Committee discretion to alter the
governing performance measures without obtaining shareholder
approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder
approval. In addition, in the event that the Committee
determines that it is advisable to grant Awards which shall
not qualify for the Performance-Based Exception, the Committee
may make such grants without satisfying the requirements of
Code Section 162(m)."
3. Section 3 of the Plan is hereby deleted and restated in its
entirety to read as follows: "All Directors and employees of the
Company and its Affiliates are eligible for the grant of Awards. The
selection of any such persons to receive Awards will be within the
discretion of the Committee. More than one Award may be granted to the
same person.
Notwithstanding the foregoing, any individual who
renounces in writing any right that he or she may have to
receive Awards under the Plan shall not be eligible to receive
any Awards hereunder."
4. Section 4(a) of the Plan is hereby deleted and restated in its
entirety to read as follows, subject to shareholder approval at the
1998 Annual Meeting of Shareholders:
1
<PAGE>
"(a) Number of Common Shares. The aggregate number of Common
Shares that may be subject to Awards, including Stock Options,
granted under this Plan during the term of this Plan will be
equal to Three Million, Five Hundred Thousand (3,500,000)
Common Shares, subject to any adjustments made in accordance
with the terms of this Section 4.
The assumption of obligations in respect of awards
granted by an organization acquired by the Company, or the
grant of Awards under this Plan in substitution for any such
awards, will not reduce the number of Common Shares available
in any fiscal year for the grant of Awards under this Plan.
Common Shares subject to an Award that is forfeited,
terminated, or canceled without having been exercised (other
than Common Shares subject to a Stock Option that is canceled
upon the exercise of a related Stock Appreciation Right) will
again be available for grant under this Plan, without reducing
the number of Common Shares available in any fiscal year for
grant of Awards under this Plan, except to the extent that the
availability of those Common Shares would cause this Plan or
any Awards granted under this Plan to fail to qualify for the
exemption provided by Rule 16b-3. In addition, any Common
Shares which are retained to satisfy a Participant's
withholding tax obligations or which are transferred to the
Company by a Participant to satisfy such obligations or to pay
all or any portion of the exercise price of the Award in
accordance with the terms of the Plan, the Award Agreement or
the Notice of Award, may be made available for reoffering
under the Plan to any Participant, except to the extent that
the availability of those Common Shares would cause this Plan
or any Awards granted under this Plan to fail to qualify for
the exemption provided by Rule 16b-3."
5. Section 5(b) of the Plan is hereby deleted and restated in its
entirety to read as follows:
"(b) Delegation. The Committee may delegate any of its
authority to any other person or persons that it deems
appropriate."
6. Section 6(b)(iii) of the Plan is hereby deleted and restated in its
entirety to read as follows:
"(iii) Stock Option - means a right to purchase a specified
number of Common Shares, during a specified period, and at a
specified exercise price, all as determined by the Committee.
A Stock Option may be an Incentive Stock Option or a Stock
Option that does not qualify as an Incentive Stock Option. In
addition to the terms, conditions, vesting periods, and
restrictions established by the Committee, Incentive Stock
Options must comply with the requirements of Section 422 of
the Code and regulations promulgated thereunder, including the
requirement that the aggregate Fair Market Value of the Common
Shares with respect to which the Incentive Stock Option first
becomes exercisable in any calendar year shall not exceed
$100,000 (measured as of the effective date of the award of an
Incentive Stock Option). The exercise price of a Stock Option
that does not qualify as an Incentive Stock Option may be more
or less than the Fair Market Value of the Common Shares on the
date the Stock Option is granted."
7. Section 6(b)(iv) of the Plan is hereby deleted and restated in its
entirety to read as follows:
"(iv) Cash Award - An award denominated in cash. All or part
of any Cash Award may be subject to conditions established by
the Committee, including but not limited to future service
with the Company or the achievement of the Performance
Objectives."
8. Section 6(c) of the Plan is hereby deleted and restated in its
entirety to read as follows:
"(c) Limits on Awards. The maximum aggregate number of Common
Shares (i) for which Stock Options may be granted, and (ii)
with respect to which Stock Appreciation Rights may be
granted, to any particular employee during any calendar year
during the term of this Plan is 200,000 Common Shares, subject
to adjustment in accordance with Section 4(c) hereof. The
maximum aggregate amount of cash which may be granted or
awarded to any particular employee during any calendar year
during the term of this Plan is $500,000."
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9. Section 12 of the Plan is hereby deleted and restated in its
entirety to read as follows:
"In the event of a Change in Control of the Company,
unless and to the extent otherwise determined by the Board of
Directors, (i) all Stock Appreciation Rights and Stock Options
then outstanding will become fully exercisable as of the date
of the Change in Control; (ii) all restrictions and conditions
applicable to Restricted Stock and other Stock Awards will be
deemed to have been satisfied as of the date of the Change in
Control, and (iii) all Cash Awards shall be released and/or
deemed to have been fully earned as of the date of the Change
in Control. Any such determination by the Board of Directors
that is made after the occurrence of a Change in Control will
not be effective unless a majority of the Directors then in
office are Continuing Directors and the determination is
approved by a majority of the Continuing Directors."
10. Section 15 of the Plan is hereby deleted and restated in its
entirety to read as follows:
"Unless otherwise determined by the Committee, (i) no Award
granted under the Plan may be transferred or assigned by the
Participant to whom it is granted other than by will, pursuant
to the laws of descent and distribution, and (ii) an Award
granted under this Plan may be exercised, during the
Participant's lifetime, only by the Participant."
IN WITNESS WHEREOF, Invacare Corporation, by its appropriate officers
duly authorized, has executed this instrument as of the 30th day of
January, 1998.
INVACARE CORPORATION
By: /S/ A. Malachi Mixon, III
-----------------------------------------------------
A. Malachi Mixon, III, Chairman of the Board, President and
Chief Executive Officer
By: /S/ Thomas R. Miklich
------------------------------------------------------
Thomas R. Miklich, Chief Financial Officer, General Counsel,
Treasurer and Corporate Secretary
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