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, 2005
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
Ohio 95-2680965
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on which Registered ------------------- ------------------------------------ Common Shares, without par value New York Stock Exchange Rights to Purchase Preferred Shares, New York Stock Exchange without par value |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of June 30, 2005, the aggregate market value of the 27,957,693 Common Shares of the Registrant held by non-affiliates was $1,240,203,261 and the aggregate market value of the 31,791 Class B Common Shares of the Registrant held by non-affiliates was $1,410,249. While the Class B Common Shares are not listed for public trading on any exchange or market system, shares of that class are convertible into Common Shares at any time on a share-for-share basis. The market values indicated were calculated based upon the last sale price of the Common Shares as reported by The New York Stock Exchange on June 30, 2005, which was $44.36. For purposes of this information, the 2,623,460 Common Shares and 1,080,174 Class B Common Shares which were held by Executive Officers and Directors of the Registrant were deemed to be the Common Shares and Class B Common Shares held by affiliates.
As of February 24, 2006, 30,683,389 Common Shares and 1,111,965 Class B Common Shares were outstanding.
Portions of the Registrant's definitive Proxy Statement to be filed in connection with its 2006 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.
Except as otherwise stated, the information contained in this Annual Report on Form 10-K is as of December 31, 2005.
INVACARE CORPORATION
2005 ANNUAL REPORT ON FORM 10-K CONTENTS
Page
Item
PART I:
1. Business I-3
1A. Risk Factors I-14
1B. Unresolved Staff Comments I-17
2. Properties I-17
3. Legal Proceedings I-20
4. Submission of Matters to a Vote of Security Holders I-20
Executive Officers of the Registrant I-21
PART II:
5. Market for the Registrant's Common Equity, Related Stockholder I-22
Matters and Issuer Purchases of Equity Securities
6. Selected Financial Data I-23
7. Management's Discussion and Analysis of Financial Condition and I-24
Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk I-33
8. Financial Statements and Supplementary Data I-33
9. Changes in and Disagreements with Accountants on Accounting and I-33
Financial Disclosure
9A. Controls and Procedures I-33
9B. Other Information I-34
PART III:
10. Directors and Executive Officers of the Registrant I-34
11. Executive Compensation I-34
12. Security Ownership of Certain Beneficial Owners and Management I-35
and Related Shareholder Matters
13. Certain Relationships and Related Transactions I-35
14. Principal Accounting Fees and Services I-35
PART IV:
15. Exhibits and Financial Statement Schedules I-35
Signatures I-36
I-2
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PART I
Item 1. Business.
Invacare is committed to design, manufacture and deliver the best value in medical products, which promote recovery and active lifestyles for people requiring home and other non-acute health care. Invacare pursues 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;
* 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;
* continuous advancement and recruitment of top management candidates;
* empowering all employees;
* providing a performance-based reward environment; and
* continually striving for total quality throughout the organization.
When the company was acquired in December 1979 by a group of investors, including certain of our current officers and Directors, it had $19.5 million in net sales and a limited product line of standard wheelchairs and patient aids. In 2005, Invacare reached $1.530 billion in net sales, representing an 18% compound average sales growth rate since 1979, and currently is the leading company in the industry that manufactures, distributes and markets products in each of the following major, non-acute, medical equipment categories: power and manual wheelchairs, patient aids, home care beds, home respiratory products, low air loss therapy products, seating and positioning products, bathing equipment and distributed products.
The company operates in a single industry, the home medical equipment (HME) industry segment. For information relating to net sales, operating income, identifiable assets and other information for this industry segment, see the Consolidated Financial Statements of the company included in this report.
The company's executive offices are located at One Invacare Way, Elyria, Ohio, 44036 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.
THE HOME MEDICAL EQUIPMENT INDUSTRY
Growth in population over age 65. Overall life expectancy in the United States continues to increase. A recent report from the U.S. Department of Health and Human Services (DHHS) states that the average life expectancy for men and women who reach the age of 65 is now 82 and 85, respectively, and life expectancy at birth is now 75 for men and 80 for women. The DHHS also reports that people age 65 or older represent the vast majority of home health care patients and will increase from 12% of the population in 2004 to 21% of the population by the year 2050. A significant percentage of people using home and community-based health care services are 65 years of age and older.
Treatment trends. Many medical professionals and patients prefer home health care over institutional care because they believe that home health care results in greater patient independence, increased patient responsibility and improved responsiveness to treatment because familiar surroundings are conducive to improved patient outcomes. Health care professionals, public payers and private payers agree that home care is a cost effective, clinically appropriate alternative to facility-based care. Recent surveys show that approximately 70% of adults would rather recover from an accident or illness in their home, while approximately 90% of the older population showed preference for home-based, long-term care.
Technological trends. Technological advances have made medical equipment increasingly adaptable for use in the home. Current hospital procedures often allow for earlier patient discharge, thereby lengthening recuperation periods outside of the traditional institutional setting. In addition, continuing medical advances prolong the lives of adults and children, thus increasing the demand for home medical care equipment.
Health care cost containment trends. In 2003, health care expenditures in the U.S. totaled $1.7 trillion dollars or approximately 15.3% of the Gross Domestic Product (GDP), the highest among industrialized countries. In 2014, the nation's health care spending is projected to increase to $3.6 trillion, growing at an average annual rate of 7.1%. Over this same period, spending on health care is expected to increase to approximately 18.7% as a share of GDP. The rising cost of health care has caused many payers of health care expenses to look for ways to contain costs. Home health care has gained widespread acceptance among health care providers and public policy makers as a cost effective, clinically appropriate and patient preferred alternative to facility-based care for a variety of acute and long-term illnesses and disabilities. Thus, the company believes that home health care and home medical equipment will play a significant role in reducing health care costs.
Society's mainstreaming of people with disabilities. People with disabilities are increasingly a part of the fabric of society, in part due to the 1991 Americans with Disabilities Act (ADA). This legislation provides mainstream opportunities to people with disabilities. The ADA imposes requirements on certain components of society to make reasonable accommodations to integrate people with disabilities into the community and the workplace.
Distribution channels. The changing home health care market continues to provide new ways of reaching the end user. The distribution network for products has expanded to include not only specialized home health care providers and extended care facilities but retail drug stores, surgical supply houses, rental, hospital and HMO-based stores, home health agencies, mass merchandisers, direct sales and the Internet.
GEOGRAPHICAL SEGMENTS AND PRODUCT CATEGORIES
REHAB PRODUCTS
Power wheelchairs. Invacare manufactures a complete line of power wheelchairs for individuals who require independent powered mobility. The range includes products that can be significantly customized to meet an individual's specific needs, as well as products that are inherently versatile and meet a broad range of individual requirements. Power wheelchair lines are marketed under the Invacare(R) Storm Series(R) and Xterra(TM) brand names and include a full range of powered mobility products. The Storm Series(R) was expanded in 2004 with the introduction of the TDX(TM) line of power wheelchairs which offer an unprecedented combination of power, stability and maneuverability. The Pronto(TM) Series Power Wheelchairs with SureStep(TM) feature center-wheel drive performance for exceptional maneuverability and intuitive driving. The power tilt and recline systems are offered as well.
Custom manual wheelchairs. Invacare manufactures and markets a range of custom manual wheelchairs for everyday, sports and recreational uses. These lightweight chairs are marketed under the Invacare(R) and Invacare Top End(R) brand names. The chairs provide mobility for people with moderate to severe disabilities in their everyday activities as well as for use in various sports such as basketball, racing, skiing and tennis.
Personal Mobility. In 2005, Invacare introduced the At'm Quick Transport, an upgrade to the Invacare At'm Take Along Chair, which is the next evolution in portable mobility and has an improved and quicker disassembly feature. In addition, during 2005, the company acquired Altimate Medical, Inc., which manufactures standing frames and mobility products.
Seating and positioning products. Invacare markets seat cushions, back supports and accessories under three series. Invacare(R) Essential(TM) Series provides simple seating solutions for comfort, fit and function. Invacare Infinity(TM) Series includes versatile modular seating, providing optimal rehab solutions. Invacare PinDot(R) Series offers custom seating solutions personalized for the most challenged clients. The company has also expanded its product line of seating products and wheelchairs for the pediatric market.
STANDARD PRODUCTS
Manual wheelchairs. Invacare's manual wheelchairs are sold for use inside and outside the home, institutional settings, or public places (e.g., airports, malls, etc.). Our clients include people who are chronically or temporarily disabled and require basic mobility performance with little or no frame modification. Examples of Invacare manual wheelchair lines, which are marketed under the Invacare(R) brand name, include the 9000 and Tracer(R) product lines. These lines offer wheelchairs that are designed to accommodate the diverse capabilities and unique needs of the individual from petite to bariatric sizes.
Personal care. Invacare manufactures and/or distributes a full line of personal care products, including ambulatory aids such as crutches, canes, walkers and wheeled walkers. This line also features one of Invacare's latest product innovations, the Rollite(TM) Rollator, a truly unique solution in patient mobility. Also available are safety aids such as tub transfer benches, shower chairs and grab bars, and patient care products such as commodes and other toilet assist aids.
Home care beds. Invacare manufactures and distributes a wide variety of manual, semi-electric and fully electric beds for home use under the Invacare(R) brand name. Home care bed accessories include bedside rails, mattresses, overbed tables, trapeze bars and traction equipment. Also available are the new bariatric beds and accompanying accessories to serve the special needs of bariatric patients.
Low air loss therapy products. Invacare manufactures and markets a complete line of mattress overlays and replacement products, under the Invacare(R) brand name. These products, which use air flotation to redistribute weight and move moisture away from patients, assist in the total care of those who are immobile and spend a great deal of time in bed.
Patient Transport. Invacare manufactures and markets products needed to assist in transferring individuals from surface to surface (bed to chair) or transporting from room to room. Designed for use in the home and institutional settings, these products include patient lifts and slings, and a new series of mobile, multi-functional recliners.
RESPIRATORY PRODUCTS
Home respiratory products. Invacare manufactures and/or distributes home respiratory products, including oxygen concentrators, nebulizer compressors and respiratory disposables, sleep therapy products and portable compressed oxygen systems. Invacare home respiratory products are marketed predominantly under the Invacare(R) brand name. The Invacare Venture HomeFill(TM) II Oxygen Compressor enables people to safely and easily make compressed oxygen in their home and store it in cylinders for future use.
DISTRIBUTED PRODUCTS
Distributed products. Invacare distributes numerous lines of branded medical supplies including ostomy, incontinence, diabetic, wound care and miscellaneous home medical products, as well as HME aids for daily living. In 2004, Invacare introduced its own private label brand of certain medical supplies.
CONTINUING CARE
Health Care Furnishings. Invacare, operating as Invacare Continuing Care Group, is a manufacturer and distributor of beds and furnishings for the long-term care markets. In addition, certain home medical equipment also is sold through this channel.
OTHER PRODUCTS
Accessory Products. Invacare also manufactures, markets and distributes many accessory products, including spare parts, wheelchair cushions, arm rests, wheels and respiratory parts. In some cases, Invacare's accessory items are built to be interchangeable so that they can be used to replace parts on products manufactured by others.
Most wheelchair products sold in Europe are designed locally to meet specific market requirements. The company manufactures and/or assembles both manual and power wheelchair products at the following European facilities: Invacare UK Ltd. in the United Kingdom, Invacare Poirier S.A.S. in France, Invacare (Deutschland) GmbH in Germany, and Ulrich Alber Gmgh in Germany. Manual wheelchair products are also manufactured and/or assembled at Invacare Portugal, Invacare AG in Switzerland (the Kuschall Range), and Invacare Rea AB in Sweden. Beds and patient lifts are manufactured at EC-Hong A/S in Denmark. Personal care products are manufactured at Aquatec GmbH in Germany, Dolomite AB in Sweden and imported. A range of patient lifts is also assembled at Invacare UK Ltd. in the United Kingdom. Oxygen products are imported from Invacare U.S. operations.
With the acquisition in September 2004 of WP Domus GmbH (Domus), the European product range has now been enhanced and market share increased. The acquired companies within the group manufacture several complementary product lines to Invacare's product lines, including power add-on products, bath lifts and walking aids.
In April 2005, Medical Support Systems Ltd. in the United Kingdom was acquired, enabling Invacare to fill an important gap in the seating and anti-decubitus markets.
For information relating to net sales by product group, see Business Segments in the Notes to the Consolidated Financial Statements included in this report.
COMPETITION
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. 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-sale materials and other advertising and merchandising aids. In Canada, products are sold by a sales force and distributed through regional distribution centers in British Columbia, Ontario and Quebec to health care providers throughout Canada. Manufacturers' representatives market and sell Invacare products through the company's Invacare Continuing Care Group to the non-acute care market.
The Inside Sales Department provides increased sales coverage of smaller accounts and complements the efforts of the field sales force. Inside Sales offers cost-effective sales coverage through a targeted telesales effort, and has delivered solid sales growth in each of its five years of existence.
The Invacare Service and Parts Division (ISP) focuses on improving operations and enhancing overall service to its customers. ISP's Technical Education department offers education programs that continue to place emphasis on improving the productivity of repair technicians. The Service Referral Network includes over 600 providers who honor Invacare's product warranties regardless of where the product was purchased. This network of servicing providers helps ensure that all consumers using Invacare products receive quality service and support that is consistent with the Invacare brand promise.
The company sells distributed products, primarily soft goods and disposable medical supplies, through the Invacare Supply Group (ISG). ISG is an important component of Invacare's "Total One Stop Shopping" program, through which Invacare offers HME providers of all sizes a broader range of products and services at a lower total cost. ISG products include ostomy, incontinence, wound care and diabetic supplies, as well as other soft goods and disposables which complement other Invacare products that are purchased by many of the same customers who buy Invacare equipment. These products are also sold in the retail market. ISG markets its products through an inside telesales and customer service department and the Internet. Additionally, ISG entered the long term care market on a regional basis and markets to those nursing homes utilizing a direct outside sales force. ISG also markets a Home Delivery Program to HME providers through which ISG drop-ships supplies in the provider's name to the customer's address. Thus, providers have no products to stock, no minimum order requirements and delivery is made within 24 to 48 hours nationwide.
In 2005, Invacare, through its co-op advertising program, continued to offer direct response television commercials designed to generate demand for Invacare Power Chairs and the HomeFill Oxygen System sold by the HME provider. These commercials feature Arnold Palmer, Invacare's worldwide spokesperson, who has become an integral part of Invacare's "Yes, you can(TM)" promotional and marketing efforts. This program encourages consumers to achieve personal independence and participate in the activities of life, facilitated by the home health care products that Invacare manufactures, distributes and/or markets throughout the world. The company has an agreement with Mr. Palmer through the end of 2007. Mr. Palmer, in serving as Invacare's spokesperson, is helping accomplish three objectives: (i) creating attention and awareness for the category of home health care products, (ii) accelerating acceptance of these products as lifestyle enhancing so that consumers actually want these products rather than simply needing them, and (iii) establishing the Invacare brand as the consumer category-brand for home health care products. Mr. Palmer is featured throughout Invacare's marketing communications, including Invacare direct-response television commercials, print advertising, point-of-purchase displays, and other merchandising and marketing materials.
Invacare continues to enhance www.invacare.com, maintaining its position as the leader in e-commerce in the HME industry. New on-line offerings in 2005 have included a new product configurator, and contract pricing in the customer's secured view of the product catalog. Both features are the result of the Oracle ERP implementation. Upgrades to web channels include new marketing features for Invacare Canada, performance increases for The Aftermarket Group and Invacare Service Centers, search enhancements in the Invacare Service Parts on-line catalog and easier to find Price List updates. These upgrades increase the flexibility and accuracy of the information available through those web properties. In 2005, Invacare's website utilization continued to increase, resulting in thirty-five-percent of all standard domestic orders placed via the web, and approximately twelve percent through EDI, resulting in significant cost savings. Increased web transactions such as quotes, orders, pricing inquiries, as well as document searches and downloads reduced the number of calls to the customer service call center, also resulting in significant cost savings. The integration of a new web server platform and networking hardware upgrades in 2006 is expected to further improve the on-line customer experience by adding additional website speed and performance.
In 2005, Invacare continued its strategic advertising campaign in key trade publications that reach the providers of home medical equipment. The company also contributed extensively to editorial coverage in trade publications concerning the products it manufactures and company representatives attended numerous trade shows and conferences on a national and regional basis in which Invacare products were displayed to providers, health care professionals and consumers.
Invacare continues to generate greater consumer awareness of the company and its products. This was evidenced by sponsorships of a variety of wheelchair sporting events and support of various philanthropic causes benefiting the consumers of its products. For the twelfth consecutive year, Invacare continued as a National Corporate Partner with Easter Seals, one of the most recognized charities in the United States that meets the needs of both children and adults with various types of disabilities. The company continued its sponsorships of 75 individual wheelchair athletes and teams, including several of the top-ranked male and female racers, hand cyclists, and wheelchair tennis players in the world. Invacare was the title sponsor for the seventh year in a row of the Invacare World Team Cup of Wheelchair Tennis Tournament, which took place in January in the Netherlands. The company also continued its support of disabled veterans through its sponsorship of the 25th National Veterans Wheelchair Games, the largest annual wheelchair sports event in the world. The games bring a competitive and recreational sports experience to military service veterans who use wheelchairs for their mobility needs due to spinal cord injury, neurological conditions or amputation.
The company's top 10 customers accounted for approximately 12% of 2005 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 2005 net sales. Providers who are part of a buying group generally make individual purchasing decisions and are invoiced directly by the company.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and indications from the third-party actuary. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss award settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company accepts responsibility for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.
MK Series Electronics, MK6i electronics are expected to take Invacare's market leading position in high-end rehab powered wheelchair electronics to the next level. MK6i is a "plug and play" system that reduces set-up time and service complexity for the provider while providing a simplified, intuitive and easier to use system for the consumer.
The InTouch(TM) TargIT(TM) Seat Cushion, is designed for today's reimbursement environment. This product features industry-exclusive features such as InTouch Zone(TM) and Blend2(TM) foam molding technology and is an excellent solution for customers with moderate skin protection and positioning needs.
The HomeFill(TM) II Patient Convenience Pack ML4, is an all-new portable oxygen supply system that is lightweight - 3 1/2 pounds - and easy to transport for oxygen patients. The HomeFill Oxygen System offers HME providers 3-to-1 cost savings in servicing their ambulatory oxygen patients since patients can fill cylinders themselves in their own home, which gives them freedom and independence - they no longer have to wait for cylinder deliveries.
The Invacare Polaris(TM)EX(TM) CPAP features SoftX(TM) Technology, which tracks the patient's breathing pattern and reduces the patient's work of breathing during exhalation, providing effortless exhalation for the patient. Additionally, integrated heated humidification can be provided by the Polaris(TM) EX(TM) Heated Humidifier. Together, these products offer unparalleled comfort, convenience and proven superior patient compliance.
BAR1000 is a new 1,000-pound capacity Homecare Bed that is a 48" wide, split spring bed designed to meet the needs of bariatric patients and yet still provide easy home delivery and storage for providers. In addition, the company offers the BAR3500 which is a combination Low Air Loss and Alternating Pressure mattress replacement system, which will likely prevent and treat pressure ulcers in bariatric patients.
The WalkLite(TM) line of walkers was expanded in 2005 to reach a wider range of heights and features including: a flip up seat, spring-loaded rear glide brakes to provide additional security, nylon backrest for comfort and the ability to easily fold into a compact unit for transport or storage.
Pronto M91(TM) and TDX(TM) Total Driving eXperience power wheelchairs were each enhanced in 2005 with the M91 receiving patented stability lock, TCD(TM) traction control, adjustable ASBA seat and the Mk5(TM) NX-75 Controller, while TCD(TM), MK5(TM) 3.60 Version Software, and adjustable ASBA seat was added to the TDX(TM).
The new Kuschall K-Series is an ensemble of active manual wheelchairs with improved user functionality. In particular, adjustable backrest angle, foldable backrest for compact volume when transporting the wheelchair, simplified adjustments, mud-guards in carbon fiber and ultra light weight.
The Invacare(R) Dragon Verticalizer is a cost effective rear wheel driven power wheelchair designed and manufactured in Europe. It is a solid power wheelchair that provides excellent indoor and outdoor mobility in the suburban environment. In addition, the Dragon Verticalizer is unique in its verticalizing function. The user can automatically move in a standing position, while continuing to drive the wheelchair.
The Invacare(R) G50 Power wheelchair is an improved version of the G40 Power wheelchair for outdoor use. An entirely new design, improved maintenance accessibility, improved motor power to allow steeper slope tracks, improved driving acceleration and much better battery autonomy.
The Invacare(R) Spectra Blitz, is a new power wheelchair for use by children. The power wheelchair is designed for indoor and outdoor use. The seat can be adjusted in height and in angle.
Invacare(R) Legrest for Storm 3 is a side-mounted leg-rest that allows automatic adjustment by electrical control. It improves the user ergonomics of the Strom 3 Power wheelchair.
Invacare(R) Taurus mini scooter is an easy "take apart" power scooter. This scooter shows good range and performance for outdoor use.
Invacare(R) Solar micro scooter is an easy "take apart" micro power scooter. This scooter has been developed to best suit the maneuverability needs of indoor use.
The Supply Chain is focused on providing custom, configured, made-to-order products from facilities close to the customers in each of its major markets. As strategic choices are made on locations globally, those facilities that remain in higher cost regions of North America and Europe will be very focused factories that provide these specific competitive advantages to the marketing and sales teams.
The company has refined its multi-year cost reduction plans initiated in the first half of 2005 for its global manufacturing and distribution strategy. Once completed in 2008, these actions are anticipated to generate approximately $30,000,000 of annual pre-tax savings and to result in pre-tax restructuring charges totaling $42,000,000. The company expects global reductions of at least 600 additional positions and to exit a number of its manufacturing operations worldwide.
The company continues to place specific emphasis on shifting 40% to 50% of its products over the next three to five years to Asian sourcing opportunities, including China and India which is a component of our multi-year manufacturing and distribution strategy. Access to sourcing opportunities has been facilitated by the company's establishment of a full test and design engineering facility in its location in Suzhou. In Asia, Invacare controls products with intellectual property, high value add margins, and that serve local market opportunities through its wholly owned factories in Suzhou, China and Kunshan, Jiangsu Province, China. The facilities, which were opened in 2004, supply products to the major regions of the world served by Invacare: North America, Europe, and Asia/Pacific.
World class best practices in lean manufacturing and six sigma are used throughout the operations to eliminate waste, shorten lead-times, optimize inventory, improve productivity, drive quality, and engage supply chain associates in the definition and implementation of needed change.
The company purchases raw materials, components, sub-assemblies, and finished goods from a variety of suppliers globally. The company's Hong Kong-based Asian Sourcing and Purchasing Office has proven to be a significant asset to our supply chain through its development and management of suppliers across Asia. Where appropriate, Invacare utilizes contracts with suppliers in all regions to increase the guarantees of delivery, cost, quality, and responsiveness. In those situations where contracts are not advantageous, Invacare works to manage multiple sources of supply and relationships that provide increased flexibility to the supply chain.
o Australian Healthcare Equipment Pty Ltd, an Australian based company,
and manufacturer of beds, related furniture and pressure care products
for home care and non-acute institutional care.
o Altimate Medical, Inc., a U.S. company, and manufacturer of standing
frames and mobility aids for the rehabilitation market.
o Medical Support Systems Holdings Limited, a U.K. company, and
manufacturer of high quality, foam pressure-reducing products for the
healthcare market.
On September 9, 2004, the company acquired 100% of the shares of WP Domus GmbH (Domus), a European-based holding company that manufactures several complementary product lines to Invacare's product lines, including power add-on products, bath lifts and walking aids, from WP Domus LLC. Domus has three divisions: Alber, Aquatec and Dolomite. The acquisition has allowed the company to expand its product line and reach new markets. The final purchase price was $226,806,000, including acquisition costs of $4,116,000, all of which was paid in cash.
Motion Concepts, Inc. ("Motion") was purchased in 2003 and, pursuant to the Motion purchase agreement, the company agreed to pay contingent consideration based upon earnings before interest and taxes over the three years subsequent to the acquisition up to a maximum of approximately $16,000,000. Based upon 2004 and 2005 results, no additional consideration was paid. When the contingency related to the acquisitions is settled, any additional consideration paid will increase the purchase price and reported goodwill related to the acquisition.
As a result of the company's ongoing search for acquisition opportunities, coupled with the industry trend toward consolidation, other potential acquisitions were evaluated in 2005. The company focuses on acquisitions that are 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.
In the U.S., the growth of health care costs has increased at rates in excess of the rate of inflation and as a percentage of GDP for several decades. A number of efforts to control the federal deficit have impacted reimbursement levels for government sponsored health care programs and private insurance companies often imitate changes made in federal programs. Reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain and, thus, affect the product mix, pricing and payment patterns of the company's customers who are the HME providers.
The company continues its pro-active efforts to shape public policy that impacts home and community-based, non-acute health care. We are currently very active with federal legislation and regulatory policy makers. Invacare believes that these efforts give the company a competitive advantage in two ways. First, customers frequently express appreciation for our efforts on behalf of the entire industry. Second, sometimes we have the ability to anticipate and plan for changes in public policy, unlike most other HME manufacturers who must react to change after it occurs.
The Safe Medical Devices Act of 1990 and Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetics Act of 1938 (the "Acts") provide for regulation by the United States Food and Drug Administration (the "FDA") of the manufacture and sale of medical devices. Under the Acts, medical devices are classified as Class I, Class II or Class III devices. The company'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. Domestic and foreign manufacturers of medical devices distributed commercially in the U.S. are subject to periodic inspections by the FDA. Furthermore, state, local and foreign governments have adopted regulations relating to the design, manufacture and marketing of health care products. During the past year, the company was inspected by the FDA or Health Canada at several locations and found to be acceptable, with none or only minor inspectional findings needing attention. From time to time, the company may undertake voluntary recalls of its products to maintain ongoing customer relationships and to enhance its reputation for adhering to high standards of quality and safety. The company continues to strengthen its programs to better ensure compliance with applicable regulations particularly those which could have a material adverse effect on the company.
Although there are a number of reimbursement related issues in most of the
countries in which Invacare competes, the issues of primary importance are
currently in the United States. There are two critical issues for Invacare:
eligibility for reimbursement of power wheelchairs for elderly patients and the
provisions of the legislation related to prescription drug coverage under
Medicare. With regard to power wheelchairs, the Centers for Medicare and
Medicaid Services ("CMS") has started to implement a series of changes to the
eligibility, documentation, codes and other rules that impact the predictability
and access to this benefit, but the transition will not be complete until later
in 2006. Invacare and the home care industry are working hard to convince CMS
and the Bush administration to make pragmatic changes, that are consistent with
industry practices, to afford seniors appropriate access to their home medical
equipment.
In November of 2003, Congress passed legislation related to providing prescription drug coverage for the elderly under the Medicare program. As part of funding the costs of this new program, a number of changes to Medicare home care reimbursement rules will take effect over the next few years. First, the home care provider, who is Invacare's customer, did not receive a cost-of-living adjustment in 2004 or 2005, and will not receive an update in 2006. Second, in 2005, Medicare reimbursement for oxygen, along with certain types of home care beds, wheelchairs, nebulizers and supplies, was lowered to the median reimbursement levels in the Federal Employee Health Benefit Plans. Third, in early 2006, Congress passed the Deficit Reduction Act which includes payment cuts to home oxygen that will take effect in January 2009, as well as reductions for certain durable home medical equipment spending that will take effect in 2007. Fourth, starting in 2007, competitive bidding for home medical items and services will be authorized in ten of the largest metropolitan regions of the U.S. In 2009, the competitive bidding program will be extended to eighty of the largest metropolitan regions.
Although none of these changes are beneficial to the home care industry, Invacare believes that it can still grow and thrive in this environment. The home care industry has not received any cost-of-living adjustments over the last few years and will try to respond with improved productivity to address the lack of support from Congress. In addition, Invacare's new products (for example, the HomeFill(TM) low cost oxygen delivery system), can help address the cuts the home care provider has to endure. We will continue to focus on developing products that help the provider improve profitability. With such products, Invacare believes that it can grow and offset the reimbursement pressures.
Additionally, Invacare plans to accelerate its activities in China to make sure that we are one of the lowest cost manufacturers and distributors to the home care provider.
In terms of competitive bidding, Invacare has strong positions with the likely provider consolidators who will probably gain share as we approach 2007 and enter the new reimbursement environment. We believe that we are well positioned to combat pricing pressures with volume gains and productivity improvements. Nevertheless, there will be ongoing uncertainty in the industry over the extent and depth of these cuts to the home care industry. Invacare is concerned that, once implemented, competitive bidding will likely cause poorer service in the home care arena as providers look to remain profitable. Likewise, it will likely lead to further consolidation of the provider base as small entrepreneurs may look to exit a less profitable business model. Invacare will monitor these developments and will work with the industry to pressure Congress to reconsider its actions. We believe that home care is the least costly and most preferred environment in which an individual can recover from an operation or illness and that government actions should encourage home care rather than lead to more expensive alternatives.
Additionally, Invacare's filings with the SEC are available on or through the
company's website, www.invacare.com, as soon as reasonably practicable after
they are filed electronically with, or furnished to, the SEC. Copies of the
company's filings also can be requested, free of charge, by writing to:
Shareholder Relations Department, Invacare Corporation, One Invacare Way, P.O.
Box 4028, Elyria, OH 44036-2125.
The consolidation of health care customers and the company's competitors could
result in a loss of customers or in competitive pricing pressures.
Numerous initiatives and reforms initiated by legislators, regulators and
third-party payors to reduce HME costs have resulted in a consolidation trend in
the home medical equipment industry as well as among the company's customers,
including home health care providers. Some of the company's competitors have
been able to reduce production costs and have lowered the purchase prices of
their products in an effort to attract customers. This in turn has resulted in
greater pricing pressures, including pressure to offer customers more
competitive pricing terms, and the exclusion of certain suppliers from important
market segments as group purchasing organizations, independent delivery networks
and large single accounts continue to consolidate purchasing decisions for some
of the company's customers. Further consolidation could result in a loss of
customers, including increased collectibility risks, or in increased competitive
pricing pressures.
If the company's cost reduction efforts are ineffective, the revenues and
profitability of the company could be negatively impacted.
The company may not be successful in achieving expected operating
efficiencies and operating cost reductions, and may experience business
disruptions, associated with its previously announced restructuring and cost
reduction activities, including the restructuring activities announced in July
2005 and, in particular, the company's facility consolidations initiated in
connection with these activities. These efforts may not produce the full
efficiency and cost reduction benefits that the company expects. Further, such
benefits may be realized later than expected, and the costs of implementing
these measures may be greater than anticipated. If these measures are not
successful, the company may undertake additional cost reduction efforts, which
could result in future charges. Moreover, the company's ability to achieve its
other strategic goals and business plans may be adversely affected and the
company could experience business disruptions with customers and elsewhere if
its cost reduction and restructuring efforts prove ineffective.
Decreased availability or increased costs of raw materials could increase the
company's costs of producing its products.
The company purchases raw materials, fabricated components and services
from a variety of suppliers. Raw materials such as plastics, steel, and aluminum
are considered key raw materials. Where appropriate, the company employs
contracts with its suppliers, both domestically and from the Far East. In those
situations in which contracts are not advantageous, the company believes that
its relationships with its suppliers are satisfactory and that alternative
sources of supply are readily available. From time to time, however, the prices
and availability of these raw materials fluctuate due to global market demands,
which could impair the company's ability to procure necessary materials, or
increase the cost of such materials. Inflationary and other increases in costs
of these raw materials have occurred in the past and may recur from time to
time. In addition, freight costs associated with shipping and receiving product
and sales are impacted by fluctuations in the cost of oil and gas. A reduction
in the supply or increase in the cost of those raw materials could impact the
company's ability to manufacture its products and could increase the cost of
production.
Changes in government and other third-party payor reimbursement levels could
negatively impact the company's revenues and profitability.
The company's products are sold through a network of specialized home
health care providers, extended care facilities, hospital and HMO-based stores,
and other providers. Many of those providers (the company's customers) are
reimbursed for the healthcare services provided to their patients by third-party
payors, such as government programs, including Medicare and Medicaid, private
insurance plans and managed care programs. Many of these programs set maximum
reimbursement levels for certain of the products sold by the company in the
United States. If third-party payors deny coverage, make the reimbursement
process or documentation requirements more uncertain or reduce their current
levels of reimbursement, or if the company's costs of production increase faster
than increases in reimbursement levels, the company may be unable to sell its
products through its distribution channels on a profitable basis.
In particular, reduced government reimbursement levels and changes in
reimbursement policies could add pressure to the company's revenues and
profitability. Uncertainty related to Medicare's reimbursement policies for
power wheelchairs in particular, and equipment in general, is expected to
continue into 2006. The Centers for Medicare and Medicaid Services are scheduled
to issue a new rule on face-to-face exams and documentation requirements for
power wheelchairs and other mobility devices by April 1, 2006, as well as new
reimbursement codes, possibly later in the year. Additionally, the U.S. Congress
recently passed the Deficit Reduction Act, which includes payment cuts to home
oxygen that will take effect in January 2009 and reductions for certain durable
home medical equipment spending that will take effect in 2007. Finally, while it
is unclear whether Congress will enact the proposed provisions into law, the
Medicare cuts included in President Bush's fiscal year 2007 budget proposal
include approximately $7.4 billion in cuts to home oxygen therapy and power
wheelchair reimbursements. Similar trends and concerns are occurring in the
states' Medicaid programs. If unfavorable reimbursement policies or budgetary
cuts are adopted, they could adversely affect the demand for the company's
products by customers who depend on reimbursement by the government-funded
programs. The percentage of the company's sales dependent on Medicare or other
insurance programs may increase as the portion of the United States population
over age 65 continues to grow, making the company more vulnerable to
reimbursement level reductions by these organizations. Reduced government
reimbursement levels also could result in reduced private payor reimbursement
levels because certain third-party payors may index their reimbursement
schedules to Medicare fee schedules. Reductions in reimbursement levels also may
affect the profitability of the company's customers and ultimately force some
customers without strong financial resources to go out of business.
Outside the United States, reimbursement systems vary significantly by
country. Many foreign markets have government-managed health care systems that
govern reimbursement for new home health care products. The ability of hospitals
and other providers supported by such systems to purchase the company's products
is dependent, in part, upon public budgetary constraints. Canada and some
European countries, for example, have tightened reimbursement rates. If adequate
levels of reimbursement from third-party payors outside of the United States are
not obtained, international sales of the company's products may decline, which
could adversely affect the company's net sales and could have a material adverse
effect on the company's business, financial condition and results of operations.
Difficulties in implementing a new Enterprise Resource Planning system have
disrupted the company's business.
During the fourth quarter of 2005, the company implemented the second phase
of its Enterprise Resource Planning, or ERP, system. Due to complexities and
business process changes associated with this implementation, the company
encountered a number of issues related to the start-up of the system, including
difficulties in processing orders, customer disruptions and the loss of some
business. While the company believes that the difficulties associated with
implementing and stabilizing its ERP system were temporary and have been
addressed, there can be no assurance that the company will not experience
additional ongoing disruptions or inefficiencies in its business operations as a
result of this new system implementation. In addition, the final phase
addressing the company's manufacturing system is planned to be implemented
during 2006.
The company's success depends on its ability to design, manufacture, distribute,
and achieve market acceptance of new products with higher functionality and
lower costs.
The company sells its products to customers primarily in markets that are
characterized by technological change, product innovation and evolving industry
standards and in which product price is increasingly the primary consideration
in customers' purchasing decisions. The company is continually engaged in
product development and improvement programs. The company must continue to
design and improve innovative products, effectively distribute and achieve
market acceptance of those products, and reduce the costs of producing its
products, in order to compete successfully with the company's competitors. If
competitors' product development capabilities become more effective than those
of the company, if competitors' new or improved products are accepted by the
market before the company's products, or if competitors are able to produce
products at a lower cost and thus offer products for sale at a lower price, the
company's business, financial condition, and results of operation could be
adversely affected.
The company may be unable to successfully identify, acquire, and integrate
strategic acquisition candidates.
The company's plans include identifying, acquiring, and integrating other
strategic businesses. There are various reasons for the company to acquire
businesses or product lines, including providing new products or new
manufacturing and service capabilities, to add new customers, to increase
penetration with existing customers, and to expand into new geographic markets.
The company's ability to successfully grow through acquisitions depends upon its
ability to identify, negotiate, complete and integrate suitable acquisitions and
to obtain any necessary financing. The costs of acquiring other businesses could
increase if competition for acquisition candidates increases. Additionally, the
success of the company's acquisition strategy is subject to other risks and
costs, including the following:
o the company's ability to realize operating efficiencies, synergies, or
other benefits expected from an acquisition, and possible delays in
realizing the benefits of the acquired company or products;
o diversion of management's time and attention from other business concerns;
o difficulties in retaining key employees of the acquired businesses who are
necessary to manage these businesses;
o difficulties in maintaining uniform standards, controls, procedures and
policies throughout acquired companies;
o adverse effects on existing business relationships with suppliers or
customers;
o the risks associated with the assumption of contingent or undisclosed
liabilities of acquisition targets; and
o ability to generate future cash flows or the availability of financing.
In addition, an acquisition could materially impair the company's operating
results by causing the company to incur debt or requiring the amortization of
acquisition expenses and acquired assets. I-15
The company is subject to certain risks inherent in managing and operating businesses in many different foreign jurisdictions.
The company has significant international operations, including operations
in Australia, New Zealand, Asia, and Europe. Certain risks are inherent in
operating and selling products internationally, including:
o difficulties in enforcing agreements and collecting receivables
through certain foreign legal systems;
o foreign customers who may have longer payment cycles than customers in
the United States;
o tax rates in certain foreign countries that may exceed those in the
United States and foreign earnings that may be subject to withholding
requirements;
o the imposition of tariffs, exchange controls or other trade
restrictions including transfer pricing restrictions when products
produced in one country are sold to an affiliated entity in another
country;
o general economic and political conditions in countries where the
company operates or where end users of the company's products reside;
o difficulties associated with managing a large organization spread
throughout various countries;
o difficulties in enforcing intellectual property rights and weaker
intellectual property rights protection in some countries; and
o required compliance with a variety of foreign laws and regulations.
The company's revenues are subject to exchange rate fluctuations that could
adversely affect the company's results of operations or financial position.
Currency exchange rates are subject to fluctuation due to, among other
things, changes in local, regional, or global economic conditions, the
imposition of currency exchange restrictions, and unexpected changes in
regulatory or taxation environments. The functional currency of the company's
subsidiaries outside the United States is the predominant currency used by the
subsidiaries to transact business. Through its international operations, the
company is exposed to foreign currency fluctuations, and changes in exchange
rates can have a significant impact on net sales and elements of cost.
The company uses forward contracts to help reduce its exposure to exchange
rate variation risk. Despite the company's efforts to mitigate these risks,
however, the company's revenues may be adversely affected by exchange rate
fluctuations. The company also 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, but those efforts may not adequately protect the company from
significant interest rate risks.
The company may be adversely affected by legal actions or regulatory
proceedings.
The company may be subject to claims, litigation or other liabilities as a
result of injuries caused by allegedly defective products, acquisitions it has
completed or in the intellectual property area. For example, the company may be
exposed to future litigation by third parties based on intellectual property
infringement claims similar to the ongoing and previously disclosed Respironics
litigation. Any such claims or litigation against the company, regardless of the
merits, could result in substantial costs and could harm the company's business.
Intellectual property litigation or claims also could require the company:
o to cease manufacturing and selling any of its products that
incorporate the challenged intellectual property;
o to obtain a license from the holder of the infringed intellectual
property right alleged to have been infringed, which license may not
be available on commercially reasonable terms, if at all; or
o to redesign or rename its products, which may not be possible and
could be costly and time consuming.
The results of legal proceedings are difficult to predict and the company
cannot provide you with any assurance that an action or proceeding will not be
commenced against it, or that the company will prevail in any such action or
proceeding. An unfavorable resolution of any legal action or proceeding could
materially and adversely affect the company's business, results of operations,
liquidity or financial condition.
The company's business and financial condition could be adversely affected by
the difficulties in acquiring and maintaining a proprietary intellectual
property ownership position.
The company's ability to compete effectively with other companies depends
in part on the company's ability to maintain and enforce its patents and other
proprietary rights, which are essential to the company's business. The company
relies on a combination of patents, trade secrets, know-how and confidentiality
agreements to protect the proprietary aspects of its technology. These measures
afford only limited protection, and competitors may gain access to the company's
intellectual property and proprietary information. The law of patents and trade
secrets is constantly evolving and often involves complex legal and factual
questions. Litigation has been and may continue to be necessary to enforce the
company's intellectual property rights, to protect the company's trade secrets,
and to determine the validity and scope of the company's proprietary rights.
Such litigation can be costly and can divert management's attention from the
growth of the business. The company cannot assure you that its patents and other
proprietary rights will not be successfully challenged or that others will not
independently develop substantially equivalent information and technology or
otherwise gain access to the company's proprietary technology.
Ownership
Or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
------------------------- ----------- ------------- ------- ---
Alexandria, Virginia 230 September 2006 None Office
Apharetta, Georgia 9,000 June 2006 None Warehouse and Offices
Arlington, Texas 63,626 April 2008 None Warehouse
Atlanta, Georgia 137,284 February 2008 One (3 yr.) Warehouse and Offices
Atlanta, Georgia 48,000 August 2006 None Sublet
Delta, British Columbia 12,000 January 2008 One (3 yr.) Warehouse and Offices
Edison, New Jersey 75,291 March 2010 None Warehouse and Offices
Elkhart, Indiana 27,600 October 2009 Two (5 yr.) Manufacturing, Warehouses and
Offices
Elyria, Ohio
- Taylor Street 251,656 Own - Manufacturing and Offices
- Cleveland Street 150,457 November 2007 One (3 yr.) Warehouse
- One Invacare Way 50,000 Own - Headquarters
- 1320 Taylor Street 30,000 January 2010 One (5 yr.) Offices
- 1160 Taylor Street 4,800 Own - Warehouse and Offices
Grand Prairie, Texas 43,754 April 2008 One (3 yr.) Warehouse and Offices
Holliston, Massachusetts 57,420 December 2007 None Warehouse and Offices
Kirkland, Quebec 26,196 November 2010 One (5 yr.) Manufacturing, Warehouse and
Offices
Jamesburg, New Jersey 83,200 November 2009 One (5 yr.) Warehouse and Offices
Kunshan City, China 52,700 May 2006 One (2 yr.) Manufacturing and Offices
Longmont, Colorado 2,400 December 2006 None Offices
London, Ontario 103,200 Own - Manufacturing and Offices
Marlboro, New Jersey 2,100 April 2006 None Office
Mississauga, Ontario 26,530 November 2011 Two (5 yr.) Warehouse and Offices
Morton, Minnesota 26,900 June 2009 Two (4 yr.) Manufacturing, Warehouse and
Offices
|
Ownership
Or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
------------------------- ----------- ------------- ------- ---
North Ridgeville, Ohio 152,861 Own - Manufacturing, Warehouses and
Offices
North Ridgeville, Ohio 66,724 September 2007 Two (3 yr.) Office
Overland, Missouri 67,500 May 2007 Two (3 yr.) Manufacturing, Warehouses and
Offices
Pharr, Texas 2,672 Month to Month - Warehouse
Pinellas Park, Florida 11,400 July 2006 None Manufacturing and Offices
Rancho Cucamonga, California 55,890 June 2009 One (60 day) Warehouse
Reynosa, Mexico 129,690 Own - Manufacturing and Offices
Sacramento, California 26,900 May 2008 One (3 yr.) Manufacturing, Warehouse
and Offices
Sanford, Florida 117,108 Own - Manufacturing and Offices
Scarborough, Ontario 5,428 February 2008 None Manufacturing and Offices
Simi Valley, California 38,501 February 2009 Two (5 yr.) Manufacturing, Warehouse and
Offices
South Bend, Indiana 48,000 September 2008 Two (5 yr.) Warehouse
Spicewood, Texas 6,500 Month to Month None Manufacturing and Offices
Suzhou, China 45,208 May 2006 None Manufacturing and Offices
Tonawanda, New York 7,515 March 2008 None Warehouse and Offices
Traverse City, Michigan 15,850 June 2006 None Manufacturing and Offices
Vaughan, Ontario 26,637 June 2008 None Manufacturing and Offices
Asia/Pacific Operations
-----------------------
Adelaide, Australia 21,668 April 2006 One (5 yr.) Manufacturing, Warehouse and
Offices
Adelaide, Australia 24,000 August 2007 One (5 yr.) Manufacturing, Warehouse and
Offices
Auckland, New Zealand 30,518 September 2008 Two (3 yr.) Manufacturing, Warehouse and
Offices
Brisbane, Australia 2,400 December 2008 One (3 yr.) Warehouse and Offices
Birmingham, United Kingdom 15,845 July 2013 None Warehouse and Offices
Christchurch, New Zealand 57,682 January 2009 One (3 yr.) Manufacturing and Offices
Hong Kong, China 600 February 2007 None Offices
|
Ownership
Or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
------------------------- ----------- ------------- ------- ---
Hong Kong, China 600 April 2007 None Offices
Melbourne, Australia 19,629 July 2006 One (2 yr.) Manufacturing, Warehouse and
Offices
Melbourne, Australia 20,000 August 2006 None Manufacturing, Warehouse and
Offices
Napier, New Zealand 4,844 March 2009 Two (3 yr.) Warehouse and Offices
North Olmsted, Ohio 2,280 October 2008 None Warehouse and Offices
Sydney, Australia 16,000 February 2009 Two (3 yr.) Warehouse and Offices
Sydney, Australia 25,000 August 2006 Two (2 yr.) Manufacturing, Warehouse and
Offices
European Operations
-------------------
Albstadt-Tailfi, Germany 78,495 January 2018 Two (5 yr.) Manufacturing, Warehouse and
Offices
Allschwil, Switzerland 36,000 Own - Manufacturing, Warehouse and
Offices
Anderstorp, Sweden 47,527 Own - Manufacturing, Warehouse and
Offices
Bergen, Norway 1,000 May 2009 One (5 yr.) Warehouse and Offices
Bridgend, Wales 131,522 Own - Manufacturing, Warehouse and
Offices
Brondby, Denmark 1,650 July 2007 Two (1 yr.) Offices
Brondby, Denmark 16,142 December 2006 One (1 yr.) Warehouse and Offices
Dio, Sweden 107,600 Own - Manufacturing and Offices
Dublin, Ireland 5,000 December 2009 Three (5 yr.) Warehouse and Offices
Ede, The Netherlands 16,000 May 2009 One (5 yr.) Warehouse and Offices
Fondettes, France 106,412 November 2007 None Manufacturing, Warehouse, and
Offices
Girona, Spain 13,600 November 2006 One (1 yr.) Warehouse and Offices
Gland, Switzerland 4,306 September 2007 One (5 yr.) Offices
Gland, Switzerland 1,173 September 2007 One (4 yr.) Offices
Goteberg, Sweden 7,500 June 2006 One (3 yr.) Warehouse and Offices
Hong, Denmark 155,541 Own - Manufacturing, Warehouse and
Offices
|
Ownership
Or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
------------------------- ----------- ------------- ------- ---
Isny, Germany 197,581 Own - Manufacturing, Warehouse and
Offices
Loppem, Belgium 6,000 December 2009 One (3 yr.) Warehouse and Offices
Landskrona, Sweden 3,099 April 2008 One (3 yr.) Warehouse
Mondsee, Austria 1,505 November 2007 One (3 yr.) Warehouse and Offices
Ontario, Canada 14,394 May 2007 None Offices
Oporto, Portugal 27,800 Own - Manufacturing, Warehouse and
Offices
Oskarshamn, Sweden 3,551 November 2006 One (1 yr.) Warehouse
Oslo, Norway 30,650 September 2006 None Warehouse and Offices
Porta Westfalica, Germany 134,563 October 2021 None Manufacturing, Warehouse and
Offices
Spanga, Sweden 3,228 June 2007 One (3 yr.) Warehouse and Offices
Spanga, Sweden 16,140 Own - Warehouse and Offices
Thiene, Italy 21,520 Own - Warehouse and Offices
Trondheim, Norway 3,000 December 2007 One (3 yr.) Services and Offices
Venissieux, France 1,409 October 2006 None Offices
Witterswil, Switzerland 40,301 March 2015 Various (5 year) Manufacturing, Warehouse, and
Offices
Wurenlos, Switzerland 3,935 June 2009 One (to be determined) Offices
|
Name Age Position
---- --- --------
A. Malachi Mixon, III 65 Chairman of the Board of Directors and Chief Executive Officer
Gerald B. Blouch 59 President, Chief Operating Officer and Director
Gregory C. Thompson 50 Chief Financial Officer
Dale C. LaPorte 64 Senior Vice President - Business Development and General Counsel
Joseph B. Richey, II 69 President - Invacare Technologies, Senior Vice
President - Electronics and Design Engineering and Director
Louis F.J. Slangen 58 Senior Vice President - Global Market Development
Joseph S. Usaj 54 Senior Vice President - Human Resources
|
A. Malachi Mixon, III has been a Director since 1979. Mr. Mixon has been Chief Executive Officer since 1979 and Chairman of the Board since 1983 and also served as President until 1996, when Gerald B. Blouch, Chief Operating Officer, was elected President.
Gerald B. Blouch has been President and a Director of Invacare since November 1996. Mr. Blouch has been Chief Operating Officer since December 1994 and Chairman-Invacare International since December 1993. Previously, Mr. Blouch was President-Homecare Division from March 1994 to December 1994 and Senior Vice President-Homecare Division from September 1992 to March 1994. Mr. Blouch served as Chief Financial Officer of Invacare from May 1990 to May 1993 and Treasurer of Invacare from March 1991 to May 1993. Mr. Blouch is also a director of NeuroControl Corporation, North Ridgeville, Ohio, a privately held company, which develops and markets electromedical stimulation systems for stroke patients.
Gregory C. Thompson was named Senior Vice President and Chief Financial Officer in November 2002. Before coming to Invacare, Mr. Thompson served as Senior Vice President and Chief Financial Officer of Sensormatic Electronics Corporation, a global manufacturer of electronic security products, from October 2000 to January 2002 and was Vice President and Controller from February 1997 to October 2000. Previously, Mr. Thompson was Vice President and Corporate Controller for Wang Laboratories from August 1994 to February 1997 and Assistant Corporate Controller from October 1990 to August 1994.
Dale C. LaPorte has been Senior Vice President for Business Development and General Counsel since January 1, 2006. Previously, Mr. LaPorte was a partner in the law firm of Calfee, Halter & Griswold LLP from 1974 to 2005. He served as Chairman of that firm from 2000 through 2004.
Joseph B. Richey, II has been a Director since 1980 and in September 1992 was named President - Invacare Technologies and Senior Vice President - Electronics and Design Engineering. Previously, Mr. Richey was Senior Vice President of Product Development from July 1984 to September 1992 and Senior Vice President and General Manager of North American Operations from September 1989 to September 1992. Mr. Richey is also a director of NeuroControl Corporation, North Ridgeville, Ohio, a privately held company, which develops and markets electromedical stimulation systems for stroke patients.
Louis F. J. Slangen was named Senior Vice President - Global Market Development in June 2004. Previously, Mr. Slangen was Senior Vice President - Sales & Marketing from December 1994 to June 2004 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.
Joseph S. Usaj has been the Senior Vice President - Human Resources since May 2004. Before coming to Invacare, Mr. Usaj served as Vice President - Human Resources for Ferro Corporation, a global manufacturer of performance materials in the electronics, automotive, consumer products and pharmaceutical industries, from August 2002 to December 2003. Previously, Mr. Usaj was Vice President - Human Resources for Phillips Medical Systems from 1998 to 2002.
* The description of executive officers is included pursuant to Instruction 3 to
Section (b) of Item 401 of Regulation S-K.
PART II
The range of high and low quarterly prices of the Common Shares and dividends in each of the two most recent fiscal years were as follows:
2005 2004
---- ----
Cash Cash
Dividends Dividends
Quarter Ended: High Low Declared High Low Declared
-------------- ---- --- --------- ---- --- --------
December 31 $41.50 $30.70 $0.0125 $52.00 $43.72 $0.0125
September 30 44.87 37.35 0.0125 47.16 39.74 0.0125
June 30 45.93 40.96 0.0125 46.50 39.34 0.0125
March 31 48.08 43.67 0.0125 46.50 39.63 0.0125
|
During 2005 and 2004, the Board of Directors also declared dividends of $0.045 per Class B Common Share. For information regarding limitations on the payment of dividends in the company loan and note agreements, see Long Term Debt in the Notes to the Consolidated Financial Statements included in this report. 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.
The following table presents information with respect to repurchases of common shares made by the company during the three months ended December 31, 2005. All of the repurchased shares were surrendered to the company by employees for tax withholding purposes in conjunction with the vesting of restricted shares held by the employees under the company's 2003 Performance Plan.
Total Number of Shares
Total Number Average Purchased as Part of
of Price Publicly Announced Maximum Number
Shares Paid Plans or Programs of Shares That May Yet
Period Purchased Per Share the Plans or Programs Be Purchased Under
------ --------- --------- --------------------- -----------------
10/1/2005-10/31/05 - $ - - $ -
1/1/2005-11/30/05 364 34.95 - -
12/1/2005-12/31/05 - - - -
--------- --------- --------- ---------
--------- --------- --------- ---------
Total 364 $ 34.95 - $ -
========= ========= ========= =========
|
2005* 2004 2003 2002 2001**
----- ---- ---- ---- ----
(In thousands, except per share and ratio data)
Earnings
--------
Net Sales $1,529,732 $1,403,327 $1,247,176 $1,089,161 $1,053,639
Net Earnings *** 48,852 75,197 71,409 64,770 35,190
Net Earnings per Share - Basic 1.55 2.41 2.31 2.10 1.15
Net Earnings per Share -
Assuming Dilution 1.51 2.33 2.25 2.05 1.11
Dividends per Common Share 0.05 0.05 0.05 0.05 0.05
Dividends per Class B Common Share 0.04545 0.04545 0.04545 0.04545 0.04545
Balance Sheet
-------------
Current Assets $570,647 $565,151 $474,722 $398,812 $ 428,401
Total Assets 1,622,953 1,628,124 1,108,213 906,703 914,537
Current Liabilities 332,888 258,141 223,488 168,226 167,453
Working Capital 237,759 307,010 251,234 230,586 260,948
Long-Term Debt 457,753 547,974 232,038 234,134 342,724
Other Long-Term Obligations 79,624 68,571 34,383 24,031 22,810
Shareholders' Equity 752,688 753,438 618,304 480,312 381,550
Other Data
----------
Research and Development
Expenditures $23,247 $21,638 $19,130 $17,934 $17,394
Capital Expenditures 31,517 41,403 30,660 22,109 20,182
Depreciation and Amortization 40,524 32,316 27,235 26,638 33,448
Key Ratios
----------
Return on Sales 3.2% 5.4% 5.7% 5.9% 3.3%
Return on Average Assets 3.0% 5.5% 7.1% 7.1% 3.8%
Return on Beginning
Shareholders' Equity 6.5% 12.2% 14.9% 17.0% 10.1%
Current Ratio 1.7:1 2.2:1 2.1:1 2.4:1 2.6:1
Debt-to-Equity Ratio 0.6:1 0.7:1 0.4:1 0.5:1 0.9:1
|
* Reflects restructuring charge of $7,533 ($5,160 after tax or $0.15 per share assuming dilution). ** Reflects non-recurring and unusual charge of $31,950 ($25,250 after tax or $0.80 per share assuming dilution). *** Amortization of goodwill ceased in 2002, net earnings in 2001 includes amortization expense of $8,972.
The comparability of the Selected Financial Data provided in the above table is limited as acquisitions made, in particular the Domus acquisition in 2004, materially impacted the company's reported results. See Acquisitions in the Notes to the Consolidated Financial Statements as provided in the company's Form 10-K for the year ended December 31, 2004.
As a result of these reimbursement uncertainties and continuing pricing pressures, the company continues to reduce its cost structure. The company has further refined its multi-year plans initiated in the second half of 2005 for its global manufacturing and distribution strategy. Execution of these cost reduction actions has begun. Once complete in 2008, these actions are anticipated to generate approximately $30 million of annual pre-tax savings and to result in pre-tax restructuring charges totaling $42 million. The company expects a global reduction of at least 600 additional positions and to exit a number of its manufacturing operations worldwide. During 2006, the company will reduce approximately 300 positions with a pre-tax restructuring charge estimated at approximately $7 million. Annualized savings anticipated from these actions is approximately $8 million.
The company estimates that it will have a net sales increase of between 4% and 6% and earnings per share of between $2.00 and $2.10 in 2006, excluding the impact of any new acquisitions in 2006. The 2006 net sales estimate is expected to be minimally impacted by foreign currency and the full year inclusion of 2005 acquisitions. This earnings per share range includes the impact from the stock option accounting standard, Statement of Financial Accounting Standard No. 123 (Revised 2004), Share Based Payment ("SFAS 123R") issued by the Financial Accounting Standards Board (FASB). The impact of SFAS 123R on earnings per share for 2006 is estimated to be approximately $0.05.
Charge Related to Restructuring Activities. On July 28, 2005, the company
announced cost reduction and profit improvement actions, which included:
reducing global headcount by 230 personnel, outsourcing improvements utilizing
the company's China manufacturing capability and third parties, shifting
substantial resources from product development to manufacturing cost reduction
activities and product rationalization, reducing freight exposure through
freight auctions and changing the freight policy, general expense reductions,
and exiting four facilities.
The restructuring was necessitated by the continued decline in reimbursement for medical equipment by U.S. government programs as well as similar reimbursement pressures abroad and continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations. The company has already realized a decrease in costs as a result of its restructuring initiatives since most of the restructuring costs recognized to date have been comprised of severance for terminated employees.
To date, the company has made substantial progress on its restructuring activities, including exiting four facilities and eliminating approximately 300 positions through December 31, 2005, which resulted in restructuring charges of $7,533,000, principally for severance, of which $4,181,000 has been paid as of December 31, 2005. There have been no material changes in accrued balances related to the charge, either as a result of revisions in the plan or changes in estimates, and the company expects to utilize the accruals recorded as of December 31, 2005 during 2006.
With additional actions planned in 2006, including the elimination of approximately 300 additional positions, the company anticipates recognizing an additional charge of $7,000,000 pre-tax. The actions in 2006 are expected to result in annualized pre-tax savings of at least $8 million.
In addition, the company continues to further refine its global manufacturing and distribution strategy. Execution of these cost reduction actions has begun. Once complete in 2008, these actions are anticipated to generate approximately $30 million of annual pre-tax savings and to result in pre-tax restructuring charges totaling $42 million. The company expects a global reduction of at least 600 additional positions and to exit a number of its manufacturing operations worldwide.
Net Sales. Consolidated net sales for 2005 increased 9% for the year, to $1,529,732,000 from $1,403,327,000. Acquisitions accounted for nine percentage points of the net sales increase while foreign currency translation had less than a one percentage point impact. The overall growth was primarily driven by growth in Europe resulting from the Domus acquisition in 2004 as well as the impact of other acquisitions worldwide.
For the year, net sales growth was impacted by the disruption caused by the implementation of the ERP system in the fourth quarter. The company estimates that this resulted in lost fourth quarter sales of approximately $30,000,000 in the company's North American home care division, primarily due to start up difficulties in processing orders and the inability to ship products to customers within required lead times.
The net sales increase was attributable to volume increases in Distributed products (7%), in line with ISG's recent growth pattern; Continuing Care products (12%) attributable to acquisitions; and other products (16%), consisting primarily of the company's Canadian and aftermarket parts business. These increases were partially offset by declines in Respiratory products (2%) due to reduced purchases from national accounts for the Homefill(TM) II oxygen system and oxygen concentrators and the disruptions arising out of the ERP system implementation, Standard products (5%) as a result of reduced pricing and ERP issues and Rehab products (2%) primarily due to continued Medicare power wheelchair eligibility pressures and Medicaid related reimbursement pressures.
Gross Profit. Consolidated gross profit as a percentage of net sales was 29.3% in 2005 versus 29.8% in 2004. The margin decline was primarily attributable to continued reimbursement issues and competitive pricing pressures as well as increased freight costs and lower manufacturing volumes, and inefficiencies resulting from the North American ERP implementation in the fourth quarter. The factors attributable to the decline were partially offset by the cost reduction initiatives.
North American gross profit as a percentage of net sales was 28.0% in 2005 versus 30.0% in 2004. The decline was primarily attributable to unfavorable mix as a result of reduced Rehab and Respiratory volumes, pricing pressures in Standard products and higher freight costs as a result of the high price of oil, which were partially offset by continued cost reduction efforts.
Gross profit in Europe as a percentage of net sales increased 2.6 percentage points from the prior year. The increase was primarily attributable to acquisitions, in particular the full year impact of the Domus acquisition and manufacturing cost reductions.
Gross profit in Asia/Pacific as a percentage of net sales increased 1.2 percentage points from the prior year. The increase was largely due to increased volumes and cost reduction activities.
Selling, General and Administrative. Consolidated selling, general and administrative expenses as a percentage of net sales were 22.3% in 2005 and 21.2% in 2004. The overall dollar increase was $44,658,000 or 15%, with acquisitions increasing selling, general and administrative costs by approximately $37,455,000 or thirteen percentage points and currency translation adding $3,245,000 or one percentage point. Excluding acquisitions and currency translation impact, SG&A increased $3,958,000 or 1% as a result of increased distribution and commission related costs related to increased volumes, continuous investment in marketing and higher bad debt and legal costs.
Selling, general and administrative expenses for North American operations increased 10% or $17,233,000 compared to 2004 with acquisitions accounting for two percentage points of the increase. The remaining increase is primarily attributable to continued investments in marketing and branding programs, increased distribution and commission costs related to increased volume and higher bad debt and legal costs.
European operations' selling, general and administrative expenses increased 29% or $24,336,000 from the prior year. European selling, general and administrative expenses increased due to acquisitions, which caused an increase of $30,978,000 or 36% and foreign currency translation, which increased expenses by $1,556,000 or 2%. The remaining decrease was primarily attributable to a reduced cost structure.
Asia/Pacific operations' selling, general and administrative expenses increased 85% or $7,777,000 compared to 2004 with acquisitions accounting for 22% and foreign currency increasing the expense by $599,000 or 7%. The remaining increase was primarily attributable to cost increases related to increased depreciation and sales and marketing costs.
Interest. Interest expense increased to $29,809,000 in 2005 from $16,282,000 in 2004, representing an 83% increase. This increase was attributable to increased borrowings under the company's revolving credit facility, resulting primarily from 2004 acquisitions, and to increased borrowing rates. The company's debt-to-equity ratio decreased to 0.6:1 as of December 31, 2005 from 0.7:1 as of the end of the prior year. Interest income in 2005 was $1,683,000, which was lower than the prior year amount of $5,186,000 primarily due to reduced interest rate financing given to customers through De Lage Landen Inc. (DLL). Since December 2000, Invacare customers primarily utilize the third-party financing arrangement with DLL, a subsidiary of Rabo Bank of the Netherlands, to provide financing.
Income Taxes. The company had an effective tax rate of 31.5% in 2005 and 31.9% in 2004. The effective tax rate declined due to a change in the mix of earnings and permanent deductions. The company's effective tax rate is lower than the federal statutory rate primarily due to tax credits and earnings abroad being taxed at rates lower than the federal statutory rate.
Research and Development. The company continues to invest in research and development activities to maintain its competitive advantage. The company dedicates dollars to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures, which are included in costs of products sold, increased to $23,247,000 in 2005 from $21,638,000 in 2004. The expenditures, as a percentage of net sales, were 1.5% in 2005 and in the prior year.
2004 Versus 2003
Net Sales. Consolidated net sales for 2004 increased 13% for the year, to $1,403,327,000 from $1,247,176,000. Acquisitions accounted for eight percentage points of the net sales increase while foreign currency translation contributed an additional three percentage points. The overall growth was primarily driven by volume increases in North America.
For the year, the net sales increase was attributable to volume increases in:
Respiratory products (37%), largely due to continued strong performance in the
Homefill(TM) oxygen system product line; Distributed products (26%), with
acquisitions contributing fifteen percentage points of the improvement; and
Continuing Care products (59%) with acquisitions contributing fifty two
percentage points of the improvement. These were partially offset by declines in
Standard products (6%) as a result of reduced pricing and flat Rehab product
sales. Sales of Rehab products were negatively impacted by Medicare and Medicaid
related reimbursement pressures. In particular, although CMS was expected to
release new guidelines for power chairs in the fourth quarter of 2004, it
instead circulated proposed criteria that required public comment before
implementation. While the proposed criteria are favorable and are based on CMS'
own medical study, the ambiguity that is impacting the power wheelchair market
has resulted in significant declines in this market segment.
Other products, consisting primarily of the company's Canadian and aftermarket parts businesses, had a 10% net sales increase principally as a result of volume increases.
Gross Profit. Consolidated gross profit as a percentage of net sales was 29.8% in 2004 and 30.0% in 2003. The 2004 year margin was impacted by continued competitive pricing pressures and increased freight costs partially offset by continued cost reduction initiatives.
North American gross profit as a percentage of net sales was 30.2% in 2004 versus 30.3% in 2003. The decline was primarily attributable to reduced pricing in Standard products partially offset by continued cost reduction efforts.
Gross profit in Europe as a percentage of net sales in 2004 declined .7 of a percentage point from the prior year. The decline is attributable to unfavorable sales mix toward lower margin products and additional costs related to new product introductions.
Gross profit in Asia/Pacific as a percentage of net sales in 2004 decreased by 3.5 percentage points from the prior year. The decline was due in part to increased sales of lower margin products in the company's Dynamic Controls subsidiary, reduced volumes and unfavorable foreign currency associated with normal operating transactions.
Selling, General and Administrative. Consolidated selling, general and administrative expenses as a percentage of net sales were 21.2% in 2004 and 21.0% in 2003. The overall dollar increase was $35,109,000 or 13%, with acquisitions increasing selling, general and administrative costs by approximately $20,263,000 or 8% and currency translation by $9,409,000 or 4%. Selling, general and administrative expenses also increased as a result of increased distribution and commission costs related to increased volumes, continued investments in marketing and branding programs, and increased legal costs. These were partially offset by reduced bad debt expense and management bonuses as a result of reduced profitability from plan.
Selling, general and administrative expenses for North American operations in 2004 increased 9% or $16,562,000 compared to 2003 with acquisitions accounting for seven percentage points of the increase. The remaining increase is primarily attributable to continued investments in marketing and branding programs, increased distribution and commission costs related to increased volume and higher legal costs. These increases were partially offset by reduced bad debt expense and management bonuses.
European operations' selling, general and administrative expenses increased 26% or $17,290,000 from the prior year. European selling, general and administrative expenses increased due to acquisitions and foreign currency translation. Increases, primarily for acquisitions, were $7,791,000 or 12% and for currency translation totaled $7,305,000 or 11%. The remaining increase was primarily attributable to additional programs to re-establish sales growth.
Asia/Pacific operations' selling, general and administrative expenses increased 16% or $1,257,000 with foreign currency increasing the expense by $961,000 or 12%. The remaining increase was primarily attributable to additional systems costs related to the company's ERP implementation and sales and marketing costs associated with the development of the Asia market.
Interest. Interest expense increased to $16,282,000 in 2004 from $11,710,000 in 2003, representing a 39% increase. This increase was attributable to increased borrowings under the company's revolving credit facility, and to new borrowings under an interim bridge loan financing facility. The company's debt-to-equity ratio increased to 0.7:1 as of December 31, 2004 from 0.4:1 as of the end of the prior year. Interest income in 2004 was $5,186,000, which was comparable to $5,473,000 in the prior year. Since December 2000, Invacare customers primarily utilize the third-party financing arrangement with DLL, a subsidiary of Rabo Bank of the Netherlands, to provide financing.
Income Taxes. The company had an effective tax rate of 31.9% in 2004 and 32.9% in 2003. The effective tax rate declined due to a change in the mix of earnings and permanent deductions. The company's effective tax rate is lower than the federal statutory rate primarily due to tax credits and earnings abroad being taxed at rates lower than the federal statutory rate.
Research and Development. The company continues to increase its research and development activities to maintain its competitive advantage. The company dedicates dollars to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures, which are included in costs of products sold, increased to $21,638,000 in 2004 from $19,130,000 in 2003, representing approximately 1.5% of net sales in these years.
In 2005, the company entered into a $450,000,000 multi-currency, long-term revolving credit agreement which was increased during the year by $50,000,000 to an aggregate amount of $500,000,000. The new agreement replaced the $325,000,000 multi-currency, long-term revolving credit agreement entered into in 2001 and a $100,000,000 bridge loan agreement entered into in 2004. In 2003, the company issued $100,000,000 in senior notes, which are due between 2007 and 2010.
On September 30, 2005, the company entered into a 364-day $100 million accounts receivable securitization facility. The Receivables Purchase Agreement (the "Receivables Agreement"), provides for, among other things, the transfer from time to time by Invacare and certain of its subsidiaries of ownership interests of certain domestic accounts receivable on a revolving basis to the bank conduit, an asset-backed issuer of commercial paper, and/or the financial institutions named in the Receivables Agreement. Pursuant to the Receivables Agreement, the company and certain of its subsidiaries from time to time may transfer accounts receivable to Invacare Receivables Corporation (IRC), a special purpose entity and subsidiary of Invacare. IRC then transfers interests in the receivables to the Conduit and/or the financial institutions named in the Receivables Agreement and receives funds from the conduit and/or the financial institutions raised through the issuance of commercial paper (in its own name) by the conduit and/or the financial institutions. In accordance with U.S. Generally Accepted Accounting Principles (GAAP), Invacare accounts for the transaction as a secured borrowing. Borrowings under the facility are effectively repaid as receivables are collected, with new borrowings created as additional receivables are sold. As of December 31, 2005, Invacare had $79,351,000 in borrowings pursuant to the securitization facility at a borrowing rate of approximately 4.3%. The initial borrowings were used to reduce balances outstanding on Invacare's revolving credit facility. The debt is reflected in the short-term debt and current maturities of long-term obligations line of the condensed consolidated balance sheet at December 31, 2005.
Additionally, the company maintains various other demand lines of credit totaling a U.S. dollar equivalent of approximately $4,931,000 as of December 31, 2005. The lines of credit along with cash generated from operations have been and will continue to be used to fund the company's domestic and foreign working capital, capital expenditures and acquisition requirements. As of December 31, 2005, the company had approximately $237,801,000 available under its various lines of credit, excluding debt covenant restrictions.
The company's borrowing arrangements contain covenants with respect to, among other items, interest coverage, net worth, dividend payments, working capital, and funded debt to capitalization, as defined in the company's bank agreements and agreement with its note holders. The company is in compliance with all covenant requirements. Under the most restrictive covenant of the company's borrowing arrangements, the company has the capacity to borrow up to an additional $72,134,000 as of December 31, 2005 pursuant to the covenants of the company's $500,000,000 multi-currency, long-term revolving credit agreement.
While there is general concern about the potential for rising interest rates, exposure to interest rate fluctuations is manageable given that a portion of the debt is at fixed rates through 2010. In addition, the ability to terminate existing swaps that exchange fixed rate debt to variable and to utilize interest rate swaps to fix a higher percentage of the company's debt coupled with free cash flow should allow Invacare to absorb the expected modest rate increases in the months ahead without any material impact on our liquidity or capital resources. As of December 31, 2005, the weighted average floating interest rate on borrowings was 4.53%.
Cash flows used for investing activities were $86,437,000 in 2005, compared to $389,022,000 in 2004. The decrease in cash used was primarily attributable to lower acquisition costs compared to 2004 when the company acquired Domus, which was a material acquisition. In addition, purchases of property and equipment activity in 2005 was lower compared to the prior year as the company invested more in 2004 on implementing ERP Systems in North America, Europe and Asia/Pacific.
Cash flows provided by financing activities in 2005 were $2,497,000, compared to cash flows provided of $307,051,000 in 2004. Cash borrowed for financing activities in 2005 was much lower than in 2004 as the company borrowed less for acquisitions. In addition to acquisition activities, the effect of foreign currency translation results in amounts being shown in the Consolidated Statement of Cash Flows that are different from the changes reflected in the respective balance sheet captions.
During 2005, the company generated free cash flow of $50,795,000 compared to free cash flow of $56,924,000 in 2004. The decrease was primarily attributable to lower earnings, which were impacted by restructuring charges, and lower accounts payable levels. Free cash flow is a non-GAAP financial measure that is comprised of net cash provided by operating activities less purchases of property and equipment net of proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.). The non-GAAP financial measure is reconciled to the GAAP measure as follows (in thousands):
Twelve Months Ended
December 31,
2005 2004
--------- ---------
Net cash provided by operating activities $76,947 $98,324
Adjusted for:
Purchases of property and equipment - net (26,152) (41,400)
--------- ---------
Free Cash Flow $50,795 $56,924
========= =========
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CONTRACTUAL OBLIGATIONS
-----------------------
(In thousands) Payments due by period
----------------------
Total Less than 1 year 1-3 years 3-5 years More than 5 years
--------------- ---------------- ------------ ------------- -----------------
--------------- ---------------- ------------ ------------- -----------------
Long-term debt obligations
Senior Notes $199,576 $9,836 $137,025 $52,715 -
Revolving credit agreements 309,634 11,086 22,172 276,376 -
Other notes 80,731 79,437 172 172 950
Operating lease obligations 37,744 13,828 15,365 4,549 4,002
Capital lease obligations 16,835 1,607 2,799 2,584 9,845
Purchase obligations
(primarily computer systems 5,035 4,493 542 - -
contracts)
Other long-term obligations
Product liability 20,949 2,657 9,683 3,792 4,817
SERP 15,386 424 1,752 1,752 11,458
Other, principally deferred
compensation 12,937 372 907 591 11,067
--------------- ---------------- ------------ ------------- -----------------
--------------- ---------------- ------------ ------------- -----------------
Total $698,827 $123,740 $190,417 $342,531 $42,139
======== ======== ======== ======== ========
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Revenue Recognition
Invacare's revenues are recognized when products are shipped to unaffiliated
customers. The SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition," as updated by SAB No. 104, provides guidance on the application of
generally accepted accounting principles (GAAP) to selected revenue recognition
issues. The company has concluded that its revenue recognition policy is
appropriate and in accordance with GAAP and SAB No. 101.
Sales are only made to customers with whom the company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.
The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The company does not sell any goods on consignment.
Distributed products sold by the company are accounted for in accordance with EITF 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns.
Product sales that give rise to installment receivables are recorded at the time of sale when the risks and rewards of ownership are transferred. In December 2000, the company entered into an agreement with DLL, a third party financing company, to provide the majority of future lease financing to Invacare customers. As such, interest income is recognized based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for using the same methodology, regardless of duration of the installment agreements.
Allowance for Uncollectible Accounts Receivable Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all of the company's receivables are due from health care, medical equipment dealers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. In addition, the company has seen a significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of the customer. In addition, as a result of the third party financing arrangement with DLL, management monitors the collection status of these contracts in accordance with the company's limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts.
Inventories and Related Allowance for Obsolete and Excess Inventory Inventories are stated at the lower of cost or market with cost determined for manufacturing inventories by the first-in, first-out (FIFO) method.
Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management's review of inventories on hand compared to estimated future usage and sales. A provision for excess and obsolete inventory is recorded as needed based upon the discontinuation of products, redesigning of existing products, new product introductions, market changes and safety issues. Both raw materials and finished goods are reserved for on the balance sheet.
In general, we review inventory turns as an indicator of obsolescence or slow moving product as well as the impact of new product introductions. Depending on the situation, the individual item may be partially or fully reserved for. No inventory that was reserved for has been sold at prices above their new cost basis. The company continued to increase its overseas sourcing efforts, increase its emphasis on the development and introduction of new products, and decrease the cycle time to bring new product offerings to market. These initiatives are sources of inventory obsolescence for both raw material and finished goods.
Goodwill, Intangible and Other Long-Lived Assets Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. As a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets in 2002, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests in accordance with the Statement. Furthermore, goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The company completed the required initial analysis of goodwill as of January 1, 2002 as well as the annual impairment tests in the fourth quarter of each subsequent year, including 2005. The results of these analyses indicated no impairment of goodwill. Interest rates have a significant impact upon the discounted cash flow methodology utilized in our annual impairment testing. Increasing interest rates decrease the fair value estimates used in our testing.
Product Liability
The company's captive insurance company, Invatection Insurance Co., currently
has a policy year that runs from September 1 to August 31 and insures annual
policy losses of $10,000,000 per occurrence and $11,000,000 in the aggregate of
the company's North American product liability exposure. The company also has
additional layers of external insurance coverage insuring up to $100,000,000 in
annual aggregate losses arising from individual claims anywhere in the world
that exceed the captive insurance company policy limits or the limits of the
company's per country foreign liability limits as applicable. There can be no
assurance that Invacare's current insurance levels will continue to be adequate
or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and indications from a third-party actuary. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss awards or settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.
Warranty
Generally, the company's products are covered from the date of sale to the
customer by warranties against defects in material and workmanship for various
periods depending on the product. Certain components carry a lifetime warranty.
A provision for estimated warranty cost is recorded at the time of sale based
upon actual experience. The company continuously assesses the adequacy of its
product warranty accrual and makes adjustments as needed. Historical analysis is
primarily used to determine the company's warranty reserves. Claims history is
reviewed and provisions are adjusted as needed. However, the company does
consider other events, such as a product recall, which could warrant additional
warranty reserve provision. No material adjustments to warranty reserves were
necessary in the current year. See Warranty Costs in the Notes to the
Consolidated Financial Statements included in this report for a reconciliation
of the changes in the warranty accrual.
Accounting for Stock-Based Compensation
The company accounts for options under its stock-based compensation plans using
the intrinsic value method proscribed in Accounting Principles Board Opinion
(APBO) No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The majority of the options awarded have been granted at
exercise prices equal to the market value of the underlying stock on the date of
grant; thus, no compensation cost has been reflected in the Consolidated
Statement of Earnings for these options. In addition, restricted stock awards
have been granted without cost to the recipients and are being expensed on a
straight-line basis over the vesting periods. If the company had applied the
fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, for all stock options granted, net earnings per share assuming
dilution would have been reduced by $0.44 in 2005, $0.14 in 2004 and $0.14 in
2003. The pro forma earnings per share assuming dilution amount of $0.44 in 2005
is due primarily to the acceleration of vesting of "underwater" options (below
fair market value of $30.75) approved by the Board of Directors on December 21,
2005. See Shareholders' Equity Transactions in the Notes to the Consolidated
Financial Statements included in this report. Effective January 1, 2006, the
company adopted FAS 123R.
Income Taxes
As part of the process of preparing its financial statements, the company is
required to estimate income taxes in various jurisdictions. The process requires
estimating the company's current tax exposure, including assessing the risks
associated with tax audits, as well as estimating temporary differences due to
the different treatment of items for tax and accounting policies. The temporary
differences are reported as deferred tax assets and or liabilities. The company
also must estimate the likelihood that its deferred tax assets will be recovered
from future taxable income and whether or not valuation allowances should be
established. In the event that actual results differ from its estimates, the
company's provision for income taxes could be materially impacted.
The company does not believe that there is a substantial likelihood that materially different amounts would be reported related to its critical accounting policies.
The change from LIFO to FIFO did not result in any change to the company's reported Consolidated Balance Sheets because the inventory valued under LIFO was at current cost. As a result, there is no impact for the change from LIFO to FIFO on the company's Consolidated Statement of Earnings and Consolidated Statement of Shareholders' Equity for all periods presented.
Reference is made to the Report of Independent Registered Public Accounting Firm, 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-29 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. None.
Management's assessment of the effectiveness of the company's internal control over financial reporting is based on the Internal Control -Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission.
In management's opinion, internal control over financial reporting is effective as of December 31, 2005.
The company's independent registered public accounting firm, Ernst & Young LLP, audited management's assessment of internal control over financial reporting and, based on that audit, issued an attestation report regarding management's assessment, which is included in this Annual Report on Form 10-K.
The changes in the company's internal control over financial reporting that occurred during our last fiscal quarter are not deemed to have materially affected, or reasonably likely to materially affect, the company's internal control over financial reporting, except for the implementation of the ERP system in North America. Various controls were modified due to the new system and because various issues were encountered with the system implementation and the fact that certain controls were not functioning as intended during the quarter, management took additional actions to ensure the company's financial statements present fairly, in all material respects, the company's financial condition and results of operations in accordance with generally accepted accounting principles. The additional actions included: performing physical inventory counts at year end in North America, additional substantitive procedures to validate ending balances as well as additional key control verifications for financial statement accounts affected by the implementation. As a result of these additional procedures, the company's management concluded that the internal control over financial reporting was effective as of December 31, 2005. The company will continue to monitor internal control over financial reporting and will modify and or implement any controls and procedures that are needed to ensure the integrity of the company's financial statements.
PART III
Our Board of Directors has adopted Corporate Governance Guidelines and charters for the Audit Committee, Compensation, Management Development and Corporate Governance Committee, Nominating Committee and Investment Committee of the Board of Directors. These documents can be found on our website at www.invacare.com by clicking on the link for Investor Relations.
You also can obtain printed copies of any of the materials referred to above, free of charge, by writing to: Shareholder Relations Department, Invacare Corporation, One Invacare Way, P.O. Box 4028, Elyria, OH 44036-2125.
We submitted the New York Stock Exchange ('NYSE') Section 12(a) Annual CEO Certification as to our compliance with the NYSE corporate governance listing standards to the NYSE in July 2005. In addition, we have filed the certifications of our Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 regarding the quality of our public disclosures as exhibits to this Annual Report on Form 10-K.
Information required by Item 10 as to the executive officers of the company is included in Part I of this Annual Report on Form 10-K. The other information required by Item 10 as to the directors of the company, the Audit Committee, the audit committee financial expert, the procedures for recommending nominees to the Board of Directors, and compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the information set forth under the captions "Election of Directors," "Corporate Governance," and "Section 16(a) Beneficial Ownership Compliance" in the company's definitive Proxy Statement for the 2006 Annual Meeting of Shareholders.
Information regarding the securities authorized for issuance under the company's equity compensation plans is incorporated by reference to the information set forth under the captions "Compensation of Executive Officers" and "Compensation of Directors" in the company's definitive Proxy Statement for the 2006 Annual Meeting of Shareholders.
PART IV
The following financial statements of the company are included in Part II, Item 8:
Consolidated Statement of Earnings - years ended December 31, 2005, 2004 and 2003
Consolidated Balance Sheet - December 31, 2005 and 2004
Consolidated Statement of Cash Flows - years ended December 31, 2005, 2004, and 2003
Consolidated Statement of Shareholders' Equity - years ended December 31, 2005, 2004, and 2003
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-37 of this Report on Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 13, 2006.
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 as of March 13, 2006.
Signature Title
--------- -----
/s/ A. Malachi Mixon, III Chairman of the Board of Directors and
------------------------------ Chief Executive Officer
A. Malachi Mixon, III (Principal Executive Officer)
/s/ Gerald B. Blouch President, Chief Operating Officer and
------------------------------ Director
Gerald B. Blouch
/s/ Gregory C. Thompson Chief Financial Officer
------------------------------ (Principal Financial and Accounting Officer)
Gregory C. Thompson
/s/ James C. Boland Director
------------------------------
James C. Boland
/s/ Michael F. Delaney Director
------------------------------
Michael F. Delaney
/s/ Whitney Evans Director
------------------------------
Whitney Evans
/s/ C. Martin Harris, M.D. Director
------------------------------
C. Martin Harris, M.D.
/s/ Bernadine P. Healy, M.D. Director
------------------------------
Bernadine P. Healy, M.D.
/s/ John R. Kasich Director
------------------------------
John R. Kasich
/s/ Dan T. Moore, III Director
------------------------------
Dan T. Moore, III
/s/ Joseph B. Richey, II Director
------------------------------
Joseph B. Richey, II
/s/ William M. Weber Director
------------------------------
William M. Weber
|
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended December 31, 2005.
Exhibit Index
Official Sequential
Exhibit No Description Page No.
--------- ----------- ----------
2.1 Sale and Purchase Agreement Regarding the Sale and Purchase of All Shares in WP Domus GmbH by (A)
and among WP Domus LLC, Mr. Peter Schultz and Mr. Wilhelm Kaiser, Invacare GmbH & Co. KG and
Invacare Corporation dated as of July 31, 2004
2.2 Guarantee Letter Agreement of Warburg, Pincus Ventures, L.P. and Warburg, Pincus International, (A)
L.P. dated as of September 9, 2004
3(a) Amended and Restated Articles of Incorporation, as last amended February 2, 1996 (K)
3(b) Code of Regulations, as amended on May 22, 1996 (K)
3(c) Certificate of Amendment to Amended and Restated Articles of Incorporation, as amended on July (L)
8, 2005
4(a)** Specimen Share Certificate for Common Shares
4(b)** Specimen Share Certificate for Class B Common Shares
4(c) Rights agreement between Invacare Corporation and National City Bank dated as of July 8, 2005 (L)
10(b) 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (K)
10(c) Deferred Compensation Plan for Non-Employee Directors, adopted in May 1992 (K)
10(d) Invacare Corporation 1994 Performance Plan approved January 28, 1994 (K)
10(e) Amendment No. 1 to the Invacare Corporation 1994 Performance Plan approved May 28, 1998 (K)*
10(f) Amendment No. 2 to the Invacare Corporation 1994 Performance Plan approved May 24, 2000 (B)*
10(g) Amendment No. 3 to the Invacare Corporation 1994 Performance Plan (E)*
10(h) Note Purchase Agreement dated as of February 27, 1998 for $80,000,000 6.71% Series A Senior (K)
Notes Due February 27, 2008 and $20,000,000 6.60% Series B Senior Notes Due February 27, 2005
10(i) Invacare Retirement Savings Plan, effective January 1, 2001 (C)
10(j) Agreement entered into by and between the company and Chief Operating Officer (D)*
10(k) Amendment No. 1 to Invacare Corporation 401(K) Plus Benefit Equalization Plan (I)
10(l) Invacare Corporation 401(K) Plus Benefit Equalization Plan (As amended and restated effective (I)
January 1, 2003)
10(m) Invacare Corporation Note Purchase Agreement dated as of October 1, 2003 for $50,000,000 3.97% (G)
Series A Senior Notes Due October 1, 2007; $30,000,000 4.74% Series B Senior Notes Due October
1, 2009 and $20,000,000 5.05% Series C Senior Notes Due October 1, 2010
10(n) First Amendment, dated as of October 1, 2003, to Note Purchase Agreement dated as of February (H)
27, 1998 for $80,000,000 6.71% Series A Senior Notes Due February 27, 2008 and $20,000,000 6.60%
Series B Senior Notes Due February 27, 2005
|
Official Sequential
Exhibit No Description Page No.
--------- ----------- ----------
10(o) Invacare Corporation 2003 Performance Plan (F)*
10(p)** Form of Change of Control Agreement entered into by and between the company and certain of its
executive officers and Schedule of all such agreements with current executive officers
10(q) Form of Indemnity Agreement entered into by and between the company and certain of its Directors (D)*
and executive officers and Schedule of all such Agreements with Directors and executive officers
10(r) Employment Agreement entered into by and between the company and Chief Financial Officer (D)*
10(s) Credit Agreement dated as of January 14, 2005 among Invacare Corporation and Certain Borrowing (J)
Subsidiaries, the Banks named therein, and JPMorgan Chase Bank, N.A. as Agent, Keybank National
Association as Syndication Agent, J.P. Morgan Securities, Inc. and Keybank National Association,
as Co-Lead Arrangers
10(t) Invacare Corporation Deferred Compensation Plus Plan, effective January 1, 2005 (K)*
10(u) Invacare Corporation Death Benefit Only Plan, effective January 1, 2005 (K)*
10(v) A. Malachi Mixon, III 10b5-1 Plan, effective February 14, 2005 (K)*
10(w) Gerald B. Blouch 10b5-1 Plan, effective February 22, 2005 (K)*
10(x) Gregory C. Thompson 10b5-1 Plan, effective February 21, 2005 (K)*
10(y) Supplemental Executive Retirement Plan (As amended and restated effective February 1, 2000) (K)*
10(z) Form of Director Stock Option Award under Invacare Corporation 1994 Performance Plan (K)*
10(aa) Form of Director Stock Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ab) Form of Director Deferred Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ac) Form of Restricted Stock Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ad) Form of Stock Option Award under Invacare Corporation 2003 Performance Plan (K)*
10(ae)** Director Compensation Schedule
10(af) Invacare Corporation Executive Incentive Bonus Plan, effective as of January 1, 2005 (M)*
10(ag) Letter agreement regarding increase, effective April 4, 2005, of the Aggregate Commitment (N)
under the Credit Agreement dated as of January 14, 2005 among Invacare Corporation and Certain
Borrowing Subsidiaries, the Banks Named Therein, and JPMorgan Chase Bank, N.A. as Agent,
Keybank National Association as Syndication Agent, J.P. Morgan Securities, Inc. and Keybank
National Association, as Co-Lead Arrangers
10(ah) First Amendment, dated as of August 12, 2005, to the Credit Agreement dated as of January 14, (O)
2005 among Invacare Corporation and Certain Borrowing Subsidiaries, the Banks named therein, and
JPMorgan Chase Bank, N.A. as Agent, Keybank National Association as Syndication Agent, J.P.
Morgan Securities, Inc. and Keybank National Association, as Co-Lead Arrangers
10(ai) Receivables Purchase Agreement, dated as of September 30, 2005, among Invacare Receivables (P)
Corporation, as Seller, Invacare Corporation, as Servicer, Park Avenue Receivables company, LLC
and JPMorgan Chase Bank, N.A., as Agent
|
Official Sequential
Exhibit No Description Page No.
--------- ----------- ----------
10(aj) Second Amendment, dated as of September 29, 2005, to Note Purchase Agreement dated as of (Q)
February 27, 1998 relating to $80,000,000
10(ak) First Amendment, dated as of September 29, 2005, to Note Purchase Agreement dated as of October (P)
1, 2003 for $50,000,000 3.97% Series A Senior Notes Due October 1, 2007; $30,000,000 4.74%
Series B Senior Notes Due October 1, 2009 and $20,000,000 5.05% Series C Senior Notes Due
October 1, 2010
18** Letter re: Change in Accounting Principles
21** Subsidiaries of the company
23** Consent of Independent Registered Public Accounting Firm
31.1** Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2** Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1** Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
* Management contract, compensatory plan or arrangement ** Filed herewith.
(A) Reference is made to the appropriate Exhibit to the company report on Form 8-K, dated September 9, 2004, which Exhibit is incorporated herein by reference.
(B) Reference is made to the appropriate Exhibit of the company report on Form S-8, dated March 30, 2001, which Exhibit is incorporated herein by reference.
(C) Reference is made to Exhibit 10.1 of the company report on Form 10-Q, for the quarter ended September 30, 2002, which Exhibit is incorporated herein by reference.
(D) Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2002, which Exhibit is incorporated herein by reference.
(E) Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the quarter ended March 31, 2003, which Exhibit is incorporated herein by reference.
(F) Reference is made to Exhibit 4.5 of Invacare Corporation Form S-8 filed on October 17, 2003, which is incorporated herein by reference, which is incorporated herein by reference.
(G) Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the quarter ended September 30, 2003, which Exhibit is incorporated herein by reference.
(H) Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2003, which Exhibit is incorporated herein by reference.
(I) Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the quarter ended June 30, 2004, which Exhibit is incorporated herein by reference.
(J) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated January 14, 2005, which is incorporated herein by reference.
(K) Reference is made to the appropriate Exhibit of the company report on Form 10-K for the fiscal year ended December 31, 2004, which Exhibit is incorporated herein by reference.
(L) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated July 8, 2005, which is incorporated herein by reference.
(M) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated April 4, 2005, which is incorporated herein by reference.
(N) Reference is made to the appropriate Exhibit of the company report on Form 10-Q for the quarter ended June 30, 2005, which Exhibit is incorporated herein by reference.
(O) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated August 12, 2005, which is incorporated herein by reference.
(P) Reference is made to the appropriate Exhibit of the company report on Form 8-K, dated September 29, 2005, which is incorporated herein by reference.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Invacare Corporation
We have audited the accompanying consolidated balance sheets of Invacare Corporation and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15 (a)(2). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As described in Accounting Policies in the notes to the consolidated financial statements, in 2005 the company changed its method of accounting for inventories.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Invacare Corporation's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2006 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 8, 2006
|
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Invacare Corporation
We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Invacare Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Invacare Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Invacare Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Invacare Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Invacare Corporation as of December 31, 2005 and 2004, the related consolidated statements of earnings, cash flows and shareholders' equity for each of the three years in the period ended December 31, 2005, and the financial statement schedule for the three years in the period ended December 31, 2005, and our report dated March 8, 2006 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 8, 2006
FS-2
|
CONSOLIDATED STATEMENT OF EARNINGS
INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31,
2005 2004 2003
--------- --------- ---------
(In thousands, except per share data)
Net sales $1,529,732 $1,403,327 $1,247,176
Cost of products sold 1,081,227 984,735 872,515
--------- --------- ---------
Gross Profit 448,505 418,592 374,661
Selling, general and administrative expenses 341,782 297,124 262,015
Charge related to restructuring activities 7,295 - -
Interest expense 29,809 16,282 11,710
Interest income (1,683) (5,186) (5,473)
--------- --------- ---------
Earnings before Income Taxes 71,302 110,372 106,409
Income taxes 22,450 35,175 35,000
--------- --------- ---------
Net Earnings $48,852 $75,197 $71,409
======= ======= =======
Net Earnings per Share - Basic $1.55 $2.41 $2.31
======= ======= =======
Weighted Average Shares Outstanding - Basic 31,555 31,153 30,862
======= ======= =======
Net Earnings per Share - Assuming Dilution $1.51 $2.33 $2.25
======= ======= =======
Weighted Average Shares Outstanding -
Assuming Dilution 32,452 32,347 31,729
======= ======= =======
|
See notes to consolidated financial statements.
FS-3
CONSOLIDATED BALANCE SHEETS
INVACARE CORPORATION AND SUBSIDIARIES
December 31, December 31,
2005 2004
---- ----
(In thousands)
Assets
Current Assets
Cash and cash equivalents $25,624 $32,567
Marketable securities 252 199
Trade receivables, net 287,955 287,950
Installment receivables, net 12,935 13,422
Inventories, net 176,925 175,883
Deferred income taxes 27,446 21,730
Other current assets 39,510 33,400
------- -------
Total Current Assets 570,647 565,151
Other Assets 47,110 55,634
Other Intangibles 108,117 98,212
Property and Equipment, net 176,206 191,163
Goodwill 720,873 717,964
------- -------
Total Assets $1,622,953 $1,628,124
========== ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $133,106 $149,413
Accrued expenses 106,214 98,850
Accrued income taxes 13,340 7,816
Short-term debt and current maturities of long-term debt 80,228 2,062
------- -------
Total Current Liabilities 332,888 258,141
Long-Term Debt 457,753 547,974
Other Long-Term Obligations 79,624 68,571
Shareholders' Equity
Preferred Shares (Authorized 300 shares; none outstanding) - -
Common Shares (Authorized 100,000 shares; 31,695 and
31,209 issued in 2005 and 2004, respectively) - no par 7,925 7,803
Class B Common Shares (Authorized 12,000 shares;
1,112, issued and outstanding) - no par 278 278
Additional paid-in-capital 138,937 123,793
Retained earnings 598,025 550,753
Accumulated other comprehensive earnings 47,480 104,629
Unearned compensation on stock awards (1,692) (1,557)
Treasury shares (1,058 and 934 shares in
2005 and 2004, respectively) (38,265) (32,261)
Total Shareholders' Equity 752,688 753,438
------- -------
Total Liabilities and Shareholders' Equity $1,622,953 $1,628,124
========== ==========
|
See notes to consolidated financial statements.
FS-4
CONSOLIDATED STATEMENT OF CASH FLOWS
INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31,
2005 2004 2003
- ---- ---- ----
(In thousands)
Operating Activities
Net earnings $48,852 $75,197 $71,409
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 40,524 32,316 27,235
Provision for losses on trade and installment receivables 14,168 11,222 13,760
Provision for deferred income taxes (100) 4,250 3,205
Provision for other deferred liabilities 3,571 4,091 2,587
Changes in operating assets and liabilities:
Trade receivables (10,075) (19,978) (37,122)
Installment sales contracts, net (4,402) (2,911) 6,678
Inventories (12,919) (15,781) (4,607)
Other current assets (7,046) (516) (3,447)
Accounts payable (6,923) 19,718 13,351
Accrued expenses 9,185 (11,281) 17,943
Other long-term liabilities 2,112 1,997 5,212
------ ------ ------
Net Cash Provided by Operating Activities 76,947 98,324 116,204
Investing Activities
Purchases of property and equipment (31,517) (41,403) (30,660)
Proceeds from sale of property and equipment 5,365 3 531
Marketable securities - - 1,130
Business acquisitions, net of cash acquired (58,216) (343,554) (70,555)
Increase in other investments (44) (603) (64)
Increase in other long-term assets (1,013) (3,133) (1,898)
Other (1,012) (332) (42)
------ ------ ------
Net Cash Required for Investing Activities (86,437) (389,022) (101,558)
Financing Activities
Proceeds from revolving lines of credit, securitization facility and
long-term borrowings 796,073 844,432 474,583
Payments on revolving lines of credit, securitization facility and
long-term borrowings (796,619) (541,244) (483,725)
Proceeds from exercise of stock options 4,623 9,850 5,063
Payment of dividends (1,580) (1,557) (1,531)
Purchase of treasury stock - (4,430) (8,345)
------ ------ ------
Net Cash Provided (Required) by Financing Activities 2,497 307,051 (13,955)
Effect of exchange rate changes on cash 50 140 2,297
------ ------ ------
Increase (decrease) in cash and cash equivalents (6,943) 16,493 2,988
Cash and cash equivalents at beginning of year 32,567 16,074 13,086
------ ------ ------
Cash and cash equivalents at end of year $25,624 $32,567 $16,074
======= ======= =======
|
See notes to consolidated financial statements.
FS-5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
INVACARE CORPORATION AND SUBSIDIARIES
(In thousands)
Accumulated
Additional Other
Common Class B Paid-in- Retained Comprehensive Unearned Treasury
Stock Stock Capital Earnings Earnings(Loss) Compensation Stock Total
------ ------- ---------- -------- -------------- ------------ --------- ---------
January 1, 2003 Balance $7,580 $278 $98,995 $407,235 $(18,729) $(1,204) $(13,843) $480,312
Exercise of stock options, including
tax benefit 99 9,130 (3,199) 6,030
Restricted stock awards 7 890 (897) -
Restricted stock award expense 643 643
Net earnings 71,409 71,409
Foreign currency translation
adjustments 66,185 66,185
Unrealized gains on cash flow hedges 3,506 3,506
Marketable securities holding gain 95 95
-----
Total comprehensive income 141,195
Dividends (1,531) (1,531)
Purchase of treasury shares (8,345) (8,345)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2003 Balance 7,686 278 109,015 477,113 51,057 (1,458) (25,387) 618,304
Exercise of stock options, including
tax benefit 112 13,872 (2,444) 11,540
Restricted stock awards 5 906 (911) -
Restricted stock award expense 812 812
Net earnings 75,197 75,197
Foreign currency translation
adjustments 57,903 57,903
Unrealized losses on cash flow hedges (4,322) (4,322)
Marketable securities holding loss (9) (9)
-----
Total comprehensive income 128,769
Dividends (1,557) (1,557)
Purchase of treasury shares (4,430) (4,430)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2004 Balance 7,803 278 123,793 550,753 104,629 (1,557) (32,261) 753,438
Exercise of stock options, including
tax benefit 117 14,133 (6,004) 8,246
Restricted stock awards 5 1,011 (1,016) -
Restricted stock award expense 881 881
Net earnings 48,852 48,852
Foreign currency translation
adjustments (56,176) (56,176)
Unrealized losses on cash flow hedges (1,008) (1,008)
Marketable securities holding gain 35 35
-----
Total comprehensive loss (8,297)
Dividends (1,580) (1,580)
------------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 Balance $7,925 $278 $138,937 $598,025 $47,480 $(1,692) $(38,265) $752,688
===== === ======= ======= ====== ====== ======= =======
|
See notes to consolidated financial statements.
FS-6
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
Nature of Operations: Invacare Corporation and its subsidiaries ("Invacare" or the "company") is the leading home medical equipment manufacturer in the world based on its distribution channels, the breadth of its product line and net sales. The company designs, manufactures and distributes an extensive line of medical equipment for the home health care, retail and extended care markets. The company's products include standard manual wheelchairs, motorized and lightweight prescription wheelchairs, seating and positioning systems, motorized scooters, patient aids, home care beds, low air loss therapy products, respiratory products and distributed products.
Principles of Consolidation: The consolidated financial statements include the accounts of the company, its majority owned subsidiaries and a variable interest entity for which the company is the primary beneficiary. Certain foreign subsidiaries, represented by the European segment, are consolidated using a November 30 fiscal year end in order to meet filing deadlines. No material subsequent events have occurred related to the European segment, which would require disclosure or adjustment to the company's financial statements. All significant intercompany transactions are eliminated.
Use of Estimates: The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from these estimates.
Marketable Securities: Marketable securities consist of short-term investments in repurchase agreements, government and corporate securities, certificates of deposit and equity securities. Marketable securities with original maturities of less than three months are treated as cash equivalents. The company has classified its marketable securities as available for sale. The securities are carried at their fair value and net unrealized holding gains and losses, net of tax, are carried as a component of accumulated other comprehensive earnings (loss).
Inventories: Inventories are stated at the lower of cost or market with cost determined by the first-in, first-out method. Market costs are based on the lower of replacement cost or estimated net realizable value. Inventories have been reduced by an allowance for excess and obsolete inventories. The estimated allowance is based on management's review of inventories on hand compared to estimated future usage and sales.
In the fourth quarter of 2005, the company changed its method of accounting for
domestic manufactured inventories from the lower of cost, as determined by the
last-in, first-out (LIFO) method of accounting, or market to the lower of cost,
as determined by the first-in, first-out (FIFO) method of accounting, or market.
The company believes that this change is preferable because: 1) the change
conforms to a single method of accounting for all of the company's inventories,
2) LIFO inventory values have not been materially different than FIFO inventory
values, and 3) the majority of the company's competitors use FIFO.
The change from LIFO to FIFO did not result in any change to the company's reported Consolidated Balance Sheets because the inventory valued under LIFO was at current cost. As a result, there is no impact for the change from LIFO to FIFO on the company's Consolidated Statement of Earnings and Consolidated Statement of Shareholders' Equity for all periods presented.
Property and Equipment: Property and equipment are stated on the basis of cost. The company principally uses the straight-line method of depreciation for financial reporting purposes based on annual rates sufficient to amortize the cost of the assets over their estimated useful lives. Accelerated methods of depreciation are used for federal income tax purposes. Expenditures for maintenance and repairs are charged to expense as incurred.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value.
FS-7
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Goodwill and Other Intangibles: In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is subject to annual impairment testing. For purposes of the impairment test, the fair value of each reporting unit is estimated by forecasting cash flows and discounting those cash flows using appropriate discount rates. The fair values are then compared to the carrying value of the net assets of each reporting unit. The company completed the required initial analysis of goodwill as of January 1, 2002 as well as the annual impairment tests in the fourth quarter of each subsequent year, including 2005. The results of these tests indicated no impairment of goodwill.
Accrued Warranty Cost: Generally, the company's products are covered by warranties against defects in material and workmanship for periods up to six years from the date of sale to the customer. Certain components carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could warrant additional warranty reserve provision. No material adjustments to warranty reserves were necessary in the current year. See Current Liabilities in the Notes to the Consolidated Financial Statements for a reconciliation of the changes in the warranty accrual.
Product Liability Cost: The company's captive insurance company, Invatection Insurance Co., currently has a policy year that runs from September 1 to August 31 and insures annual policy losses of $10,000,000 per occurrence and $11,000,000 in the aggregate of the company's North American product liability exposure. The company also has additional layers of external insurance coverage insuring up to $100,000,000 in annual aggregate losses arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the company's per country foreign liability limits as applicable.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and indications from the third-party actuary. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon third-party actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the third-party actuary to estimate the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss award settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company accepts responsibility for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.
Revenue Recognition: Invacare's revenues are recognized when products are shipped to unaffiliated customers. The SEC's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," as updated by SAB No. 104, provides guidance on the application of GAAP to selected revenue recognition issues. The company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP and SAB No. 101.
Sales are only made to customers with whom the company believes collection is reasonably assured based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.
The company offers discounts and rebates, which are accounted for as reductions to revenue in the period in which the sale is recognized. Discounts offered include: cash discounts for prompt payment, base and trade discounts based on contract level for specific classes of customers. Volume discounts and rebates are given based on large purchases and the achievement of certain sales volumes. Product returns are accounted for as a reduction to reported sales with estimates recorded for anticipated returns at the time of sale. The company does not sell any goods on consignment.
FS-8
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
Distributed products sold by the company are accounted for in accordance with EITF 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. The company records Distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns.
Product sales that give rise to installment receivables are recorded at the time of sale when the risks and rewards of ownership are transferred. In December 2000, the company entered into an agreement with DLL, a third party financing company, to provide the majority of future lease financing to Invacare customers. As such, interest income is recognized based on the terms of the installment agreements. Installment accounts are monitored and if a customer defaults on payments, interest income is no longer recognized. All installment accounts are accounted for using the same methodology, regardless of duration of the installment agreements.
Research and Development: Research and development costs are expensed as incurred and included in cost of products sold. The company's annual expenditures for product development and engineering were approximately $23,247,000, $21,638,000, and $19,130,000 for 2005, 2004, and 2003, respectively.
Advertising: Advertising costs are expensed as incurred and included in selling, general and administrative expenses. The company has a co-op advertising program in which the company reimburses customers up to 50% of their costs of qualifying advertising expenditures. Invacare product, brand logos and corporate spokesperson, Arnold Palmer, must appear in all advertising. Invacare requires customers to submit proof of advertising with their claims for reimbursement. The company's cost of the program is included in SG&A expense in the consolidated statement of earnings at the time the liability is estimated. Reimbursement is made on an annual basis and within 3 months of submission and approval of the documentation. The company receives monthly reporting from those in the program of their qualified advertising dollars spent and accrues based upon information received. Advertising expenses amounted to $26,621,000, $24,999,000 and $22,806,000 for 2005, 2004 and 2003, respectively.
Stock-Based Compensation Plans: The company accounts for options under its stock-based compensation plans using the intrinsic value method proscribed in APBO No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The majority of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant, thus no compensation cost has been reflected in the consolidated statement of earnings for these options. In addition, restricted stock awards have been granted without cost to the recipients and are being expensed on a straight-line basis over the vesting periods. Invacare continues to utilize the disclosure-only provisions of SFAS No. 123, Accounting for Stock Based Compensation. If the company had applied the fair value recognition provisions of SFAS No. 123, the company's net earnings and earnings per share in 2005, 2004 and 2003 would have been reduced to the pro forma amounts indicated below (in thousands except per share data):
2005 2004 2003
---- ---- ----
Net earnings - as reported * $48,852 $75,197 $71,409
Less: compensation expense determined based on the
fair-value method for all awards granted at
market value, net of related tax effects 14,272 4,226 4,529
------ ------ ------
Net earnings - pro forma $34,580 $70,971 $66,880
======= ======= =======
Earnings per share as reported - basic $1.55 $2.41 $2.31
Earnings per share as reported - assuming dilution $1.51 $2.33 $2.25
Pro forma earnings per share - basic $1.10 $2.28 $2.17
Pro forma earnings per share - assuming dilution $1.07 $2.19 $2.11
* Includes stock compensation expense, net of tax, on
restricted awards granted without cost of: $573 $528 $418
|
Pro forma net earnings in 2005 were affected by the acceleration of vesting for substantially all of the company's previously unvested stock options which were underwater (below fair market value of $30.75) as of December 21, 2005. The Board of Directors approved the acceleration of the vesting of the company's stock options primarily to partially offset the recent reductions in other benefits made by the company and to provide additional incentive to those critical to the company's current cost reduction efforts. The decision accelerated the vesting for a total of 1,368,307 of the company's common shares; including 646,100 shares underlying options held by the company's named
FS-9
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACCOUNTING POLICIES--Continued
executive officers. As a result of the acceleration, the company will avoid compensation cost of approximately $12,000,000 that would have otherwise been recognized in earnings between 2006 and 2009. Also, see Shareholders' Equity Transactions in Notes to the Consolidated Financial Statements.
Income Taxes: The company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. The liability method requires that deferred income taxes reflect the tax consequences of currently enacted rates for differences between the tax and financial reporting bases of assets and liabilities. Undistributed earnings of the company's foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for United States federal income taxes has been provided.
Derivative Instruments: The company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. A majority of the company's derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change. The derivatives designated as fair value hedges are perfectly effective; thus, the entire gain or loss associated with the derivative instrument directly affects the value of the debt by increasing or decreasing its carrying value.
The company has entered into interest rate swap agreements that qualify as fair value hedges and effectively convert $130,000,000 of fixed-rate debt to floating-rate debt, so the company can avoid paying higher than market interest rates. The company also had interest rate swap agreements, which expired in 2004, that qualified as cash flow hedges and effectively converted $20,000,000 of its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense. The company recognized net gains of $1,230,000, $4,577,000 and $2,872,000, respectively, related to its swap agreements in 2005, 2004 and 2003, which is reflected in interest expense on the consolidated statement of earnings.
To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the company utilizes cash flow hedges to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The company recognized a net loss in 2005 of $280,000 and net gains in 2004 and 2003 of $6,961,000 and $1,410,000, respectively on foreign currency cash flow hedges. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of earnings.
The company is a party to $150,000,000 in treasury lock agreements to protect the forecasted receipt of proceeds resulting from the issuance of ten year, fixed rate debt in March 2006, which are subject to fluctuations in the benchmark U.S. Treasury rate. The treasury lock agreements are accounted for as cash flow hedges and changes in the value of the treasury lock are expected to be effective in offsetting the changes in the proceeds to be received upon issuance (i.e. changes in principal and interest payments) attributable to fluctuations in the benchmark U.S. Treasury interest rate. The cumulative unrealized loss of $2,348,000 at December 31, 2005 associated with the derivative instruments directly affects the value of the forecasted debt issuance and is included in accumulated other comprehensive income on the consolidated balance sheet until the forecasted issuance occurs. In March 2006, the company exited the treasury locks while they were at break even.
The company has used forward contracts that do not qualify for special hedging treatment, but do effectively limit the company's exposure to foreign currency fluctuations between the Mexican Peso and U.S. Dollar. During 2003, the company recognized a loss of $118,000 related to these forward contracts, which was included in costs of products sold on the consolidated statement of earnings. No Mexican Peso forward contracts were entered into in 2005 or 2004.
The company recognized no gain or loss related to hedge ineffectiveness or discontinued cash flow hedges. If it is later determined that a hedged forecasted transaction is unlikely to occur, any gains or losses on the forward contracts would be reclassified from other comprehensive income into earnings. The company does not expect this to occur during the next twelve months.
Foreign Currency Translation: The functional currency of the company's subsidiaries outside the United States is the applicable local currency. The assets and liabilities of the company's foreign subsidiaries are translated into U.S. dollars at year-end exchange rates. Revenues and expenses are translated at weighted average exchange rates. Gains and losses resulting from translation are included in accumulated other comprehensive earnings (loss).
FS-10
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Recently Issued Accounting Pronouncements: In December 2004, FASB issued SFAS 123R, which requires companies to expense stock options and other share-based payments. SFAS 123R supersedes SFAS No. 123, which permitted either expensing stock options or providing pro forma disclosure. The provisions of this Statement, which is effective January 1, 2006, apply to all awards granted, modified, cancelled or repurchased after January 1, 2006 as well as the unvested portion of prior awards.
The company adopted the standard effective January 1, 2006 and estimates that the impact to the company's reported results will be less than the pro forma results shown in the company's Accounting Policy Note to the Consolidated Financial Statements because on December 21, 2005, the Board of Directors of Invacare Corporation based on the recommendation of the Compensation, Management Development and Corporate Governance Committee (the "Committee"), approved the acceleration of the vesting for substantially all of the company's unvested stock options which were granted under the 1994 Plan, as amended, and the 2003 Plan, which were then underwater. The Board of Directors decided to approve the acceleration of the vesting of the company's stock options primarily to partially offset the recent reductions in other benefits made by the company and to provide additional incentive to those critical to the company's current cost reduction efforts. The decision, which was effective as of December 21, 2005, resulted in the acceleration of nearly all of the then unvested stock options.
RECEIVABLES
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. Substantially all of the company's receivables are due from health care, medical equipment dealers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. In addition, the company has seen a significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. The estimated allowance for uncollectible amounts ($12,470,000 in 2005 and $9,857,000 in 2004) is based primarily on management's evaluation of the financial condition of the customer. The increase in the allowance for uncollectible accounts in 2005 compared to 2004 is primarily attributable to higher bad debt expense and less write-offs of accounts compared to 2004.
On September 30, 2005, the company entered into a 364-day $100 million accounts receivable securitization facility. The Receivables Purchase Agreement (the "Receivables Agreement"), provides for, among other things, the transfer from time to time by Invacare and certain of its subsidiaries of ownership interests of certain domestic accounts receivable on a revolving basis to the bank conduit, an asset-backed issuer of commercial paper, and/or the financial institutions named in the Receivables Agreement. Pursuant to the Receivables Agreement, the company and certain of its subsidiaries from time to time may transfer accounts receivable to Invacare Receivables Corporation (IRC), a special purpose entity and subsidiary of Invacare. IRC then transfers interests in the receivables to the Conduit and/or the financial institutions named in the Receivables Agreement and receives funds from the conduit and/or the financial institutions raised through the issuance of commercial paper (in its own name) by the conduit and/or the financial institutions. In accordance with U.S. Generally Accepted Accounting Principles (GAAP), Invacare accounts for the transaction as a secured borrowing. Borrowings under the facility are effectively repaid as receivables are collected, with new borrowings created as additional receivables are sold. As of December 31, 2005, Invacare had $79,351,000 in borrowings pursuant to the securitization facility at a borrowing rate of approximately 4.3%. The initial borrowings were used to reduce balances outstanding on Invacare's revolving credit facility. The debt is reflected on the short-term debt and current maturities of long-term obligations line of the condensed consolidated balance sheet at December 31, 2005.
Installment receivables as of December 31, 2005 and 2004 consist of the following (in thousands):
2005 2004
Current Long-Term Total Current Long-Term Total
------- --------- ------- ------- --------- -------
Installment receivables $23,630 $162 $23,792 $19,576 $1,324 $20,900
Less: Unearned interest (71) (16) (87) (435) - (435)
Allowance for doubtful accounts (10,624) - (10,624) (5,719) - (5,719)
------- ------- ------- ------- ------- -------
$12,935 $146 $13,081 $13,422 $1,324 $14,746
|
FS-11
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
RECEIVABLES--Continued
In addition, as a result of the third party financing arrangement with DLL, management monitors the collection status of these contracts in accordance with the company's limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts. See the "Concentration of Credit Risk" footnote for a description of the financing arrangement. Long-term installment receivables are included in "Other Assets" on the consolidated balance sheet.
INVENTORIES
Inventories as of December 31, 2005 and 2004 consist of the following (in thousands):
2005 2004
------ ------
Raw materials $59,888 $60,548
Work in process 13,544 16,156
Finished goods 103,493 99,179
------ ------
$176,925 $175,883
======= ========
|
PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2005 and 2004 consist of the following
(in thousands):
2005 2004
------ ------
Machinery and equipment $252,545 $243,335
Land, buildings and improvements 84,031 95,041
Furniture and fixtures 28,788 27,494
Leasehold improvements 15,194 14,275
------ ------
380,558 380,145
Less allowance for depreciation (204,352) (188,982)
------ ------
$176,206 $191,163
|
ACQUISITIONS
In 2005, Invacare Corporation acquired the following businesses, which were individually immaterial and in the aggregate, at a total cost of $58,216,000, which was paid in cash:
o Australian Healthcare Equipment Pty Ltd, an Australian based company,
and manufacturer of beds, related furniture and pressure care products
for home care and non-acute institutional care.
o Altimate Medical, Inc., a U.S. company, and manufacturer of standing
frames and mobility aids for the rehabilitation market.
o Medical Support Systems Holdings Limited, a U.K. company, and
manufacturer of high quality, foam pressure-reducing products for the
healthcare market.
On September 9, 2004 the company acquired 100% of the shares of WP Domus GmbH (Domus), a European-based holding company that manufactures several complementary product lines to Invacare's product lines, including power add-on products, bath lifts and walking aids, from WP Domus LLC. Domus has three divisions: Alber, Aquatec and Dolomite. The acquisition allows the company to expand its product line and reach new markets. The final purchase price was $226,806,000, including acquisition costs of $4,116,000, which was paid in cash.
Motion Concepts, Inc. ("Motion") was purchased in 2003 and pursuant to the Motion purchase agreement, the company agreed to pay contingent consideration based upon earnings before interest and taxes over the three years subsequent to the acquisition up to a maximum of approximately $16,000,000. Based upon 2004 and 2005 results, no additional consideration was paid. When the contingency related to the acquisition is settled, any additional consideration paid will increase the purchase price and reported goodwill.
FS-12
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACQUISITIONS--Continued
During the third quarter of 2005, the company finalized the purchase price allocation related to the Domus acquisition and as a result recorded additional severance and exit accruals ($5,954,000) and certain pre-acquisition liabilities for warranty and product liability ($945,000), legal and professional fees associated with the transaction ($1,303,000), and other valuation adjustments ($502,000) totaling $8,704,000, which increased goodwill by the same amount.
In accordance with EITF Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," the company recorded accruals for severance and exit costs for facility closures and contract terminations. A progression of the accruals recorded in the purchase price allocation is as follows (in thousands):
Balance at Additional Balance at
12/31/04 Accruals Payments 12/31/05
------- ------- ------- -------
Severance $ 561 $ 4,445 $ 1,957 $ 3,049
Sales agency terminations - 612 612 -
Exit of product lines - 897 - 897
------- ------- ------- -------
Total $ 561 $ 5,954 $ 2,569 $ 3,946
======= ======= ======= =======
|
The company anticipates all of the remaining reserves to be utilized in 2006.
GOODWILL
The carrying amount of goodwill by operating segment is as follows (in
thousands):
2005 2004
-------------------------------------------------- ----------------------------------------------------
North Asia/ North Asia/
America Europe Pacific Consolidated America Europe Pacific Consolidated
------- ------ ------- ------------ ------- ------ ------- ------------
Balance as of
January 1 $313,327 $390,611 $14,026 $717,964 $210,047 $192,508 $12,944 $415,499
Acquisitions 14,293 22,481 8,984 45,758 95,344 161,486 71 256,901
Foreign
currency
translation 4,318 (45,941) (1,226) (42,849) 7,936 36,617 1,011 45,564
-------- -------- -------- -------- -------- -------- -------- --------
Balance as of
December 31 $331,938 $367,151 $21,784 $720,873 $313,327 $390,611 $14,026 $717,964
======== ======== ======= ======== ======== ======== ======= ========
|
Of the $45,758,000 in goodwill recorded due to acquisitions, $13,363,000 is expected to be deductible for tax purposes.
OTHER INTANGIBLES
All of the company's other intangible assets have definite lives and continue to
be amortized over their useful lives, except for $30,246,000 related to
trademarks, which have indefinite lives. The company's intangibles consist of
the following (in thousands):
December 31, 2005 December 31, 2004
----------------- -----------------
Accumulated Accumulated
Historical Cost Amortization Historical Cost Amortization
--------------- ------------ --------------- ------------
Customer Lists $64,218 $8,270 $57,788 $2,737
Trademarks 30,246 - 27,732 -
License agreements 7,564 5,821 6,518 5,051
Developed Technology 6,260 487 5,842 80
Patents 12,414 2,690 4,137 1,443
Other 7,876 3,193 7,348 1,842
------- ------- ------- ------
$128,578 $20,461 $109,365 $11,153
======= ======= ======= ======
|
FS-13
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
OTHER INTANGIBLES
Intangibles recorded as the result of acquisitions during 2005 were as follows
(in thousands):
Weighted Average Amortization
Fair Value Period
---------- ----------
Customer relationships $ 11,700 10 years
Trademarks - Indefinite lives 5,330 Indefinite
Developed Technology 1,040 10 years
Patents 1,400 10 years
Trademarks 320 7 years
-------- -------
Total $ 19,790 10 years
=========
|
Amortization expense related to other intangibles was $9,307,000 and $3,417,000 for 2005 and 2004, respectively. Estimated amortization expense for each of the next five years is expected to be $8,896,000 for 2006, $8,674,000 in 2007, $8,308,000 in 2008, $8,045,000 in 2009 and $7,734,000 in 2010.
INVESTMENT IN AFFILIATED COMPANY
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was revised in December 2003 and, which among other things, deferred the implementation date of FIN 46 until periods after March 15, 2004. This interpretation requires consolidation of an entity if the company is subject to a majority of the risk of loss from the variable interest entity's (VIE) activities or entitled to receive a majority of the entity's residual returns, or both. A company that consolidates a VIE is known as the primary beneficiary of that entity.
The company consolidates NeuroControl, a development stage company, which is currently pursuing FDA approval to market a product focused on the treatment of post-stroke shoulder pain in the United States. Certain of the company's officers and directors (or their affiliates) have small minority equity ownership positions in NeuroControl. Based on the provisions of FIN 46 and the company's analysis, the company determined that it was the primary beneficiary of this VIE as of January 1, 2005 due to the company board of directors' approval of additional funding in 2005. Accordingly, the company consolidated this investment on a prospective basis since January 1, 2005 and recorded an intangible asset for patented technology of $7,003,000. The other beneficial interest holders have no recourse against the company.
CURRENT LIABILITIES
Accrued expenses as of December 31, 2005 and 2004 consist of the following (in
thousands):
2005 2004
---- ----
Accrued salaries and wages $35,834 $35,280
Accrued warranty cost 15,583 13,998
Accrued rebates 9,434 7,427
Accrued taxes other than income taxes 7,136 6,419
Accrued severance 6,153 561
Accrued legal and professional 6,077 4,761
Accrued interest 5,180 5,274
Accrued freight 4,144 2,894
Accrued product liability, current portion 2,657 2,595
Accrued insurance 2,519 2,656
Accrued derivative liability 2,330 780
Other accrued items 9,167 16,205
------ ------
$106,214 $98,850
======= =======
|
Accrued rebates relate to several volume incentive programs the company offers
its customers. The company accounts for these rebates as a reduction of revenue
when the products are sold in accordance with the guidance in EITF 01-09:
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products). The company has experienced significant
pricing pressure in the U.S. market for standard products in recent years and
has partially reduced prices to our customers in the form of a volume rebate
such that the rebates would typically apply only if customers increased their
standard product purchases from the company.
FS-14
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CURRENT LIABILITIES--Continued
Changes in accrued warranty costs were as follows (in thousands):
2005 2004
---- ----
Balance as of January 1 $13,998 $12,688
Warranties provided during the period 9,811 8,665
Settlements made during the period (8,931) (7,977)
Changes in liability for pre-existing warranties
during the period, including expirations 705 622
------- -------
Balance as of December 31 $15,583 $13,998
======= =======
|
LONG-TERM DEBT
Debt as of December 31, 2005 and 2004 consist of the following (in thousands):
2005 2004
---- ----
Revolving credit agreement ($500,000,000 multi-currency), at 0.675% to
1.40% above local interbank offered rates, expires January 14, 2010 $264,828 $230,382
$80,000,000 senior notes at 6.71%, due in February 2008 80,553 83,304
$50,000,000 senior notes at 3.97%, due in October 2007 49,244 50,081
$30,000,000 senior notes at 4.74%, due in October 2009 30,339 30,485
$20,000,000 senior notes at 5.05%, due in October 2010 20,134 20,433
$20,000,000 senior notes at 6.60%, due in February 2005 - 20,000
Short-term borrowings secured by accounts receivable 79,351 -
Bridge credit agreement - 100,000
Other notes 13,532 15,351
------- -------
537,981 550,036
Less short-term borrowings secured by accounts receivable (79,351) -
Less current maturities of long-term debt (877) (2,062)
------- -------
$457,753 $547,974
|
The carrying values of the senior notes have been adjusted by the gains and losses on the interest rate swaps accounted for as fair value hedges.
On January 14, 2005, the company entered into a $450,000,000 multi-currency, long-term revolving credit agreement which was increased on April 4, 2005 by $50,000,000 to an aggregate amount of $500,000,000 and expires on January 14, 2010. The facility provides that Invacare, may, upon consent of its lenders, increase the amount of the facility by an additional $50,000,000. The new agreement replaced the $325,000,000 multi-currency, long-term revolving credit agreement entered into in 2001 and a $100,000,000 bridge agreement entered into in 2004. In 2003, the company issued $100,000,000 in senior notes, which are due between 2007 and 2010.
Borrowings denominated in foreign currencies aggregated $131,464,000 at December 31, 2005 and $179,084,000 at December 31, 2004. The borrowing rates under the revolving credit agreement are determined based on the ratio of debt to EBITDA of the company as defined in the agreement and range from 0.35% to .675% above the various interbank offered rates. As of December 31, 2005 and 2004, the weighted average floating interest rate on borrowings was 4.53% and 3.36%, respectively.
The revolving credit agreement and senior notes all require the company to maintain certain conditions with respect to net worth, funded debt to capitalization, and interest coverage as defined in the agreements. Under the most restrictive covenants of the company's borrowing arrangements, the company has the capacity to borrow up to an additional $72,134,000 as of December 31, 2005.
FS-15
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LONG-TERM DEBT--Continued
In October 2003, the company exchanged the fixed rates of 3.97%, 4.74% and 5.05% on the $50,000,000, $30,000,000 and $20,000,000 Senior Notes due in October 2007, October 2009 and October 2010 for variable rates based on LIBOR plus 0.01%, LIBOR plus 0.14% and LIBOR plus 0.26%, respectively. The effect of these swaps is to exchange fixed rates for the lower floating rates currently available. In November 2005, the $30,000,000 and $20,000,000 swaps, exchanging fixed rates of 4.74% and 5.05% for variable rates, were terminated.
In December 2001, the company exchanged the fixed rate of 6.71% on $50,000,000 of the $80,000,000 in Senior Notes due in February 2008. The three agreements for $25,000,000, $15,000,000 and $10,000,000 exchanged the fixed rate for variable rates equal to LIBOR plus 1.9%, 1.71% and 1.62%, respectively. In January 2002, the company exchanged the fixed rate of 6.71% on the remaining $30,000,000 of the $80,000,000 in Senior Notes due in February 2008. The two agreements for $10,000,000 and $20,000,000 exchanged the fixed rate for variable rates equal to LIBOR plus 1.05% and 1.08%, respectively. The effect of these swaps is to exchange a fixed rate of 6.71% for the lower floating rates currently available.
The aggregate minimum maturities of long-term debt for each of the next five years are as follows: $877,000 in 2006, $50,838,000 in 2007, $80,687,000 in 2008, $30,714,000 in 2009, and $285,688,000 in 2010. Interest paid on borrowings was $29,017,000, $15,348,000 and $9,450,000 in 2005, 2004 and 2003, respectively.
OTHER LONG-TERM OBLIGATIONS
Other long-term obligations as of December 31, 2005 and 2004 consist of the
following (in thousands):
2005 2004
---- ----
Supplemental Executive Retirement Plan liability $14,962 $12,947
Product liability 18,292 14,450
Deferred federal income taxes 27,792 24,833
Other, principally deferred compensation 18,578 16,341
------- -------
Total long-term obligations $79,624 $68,571
======= =======
|
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 19 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, 2005, 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 2024. Lease expenses were approximately $18,718,000 in 2005, $18,663,000 in 2004, and $15,803,000 in 2003.
The amount of buildings and equipment capitalized in connection with capital leases was $15,592,000 and $16,545,000 at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, accumulated amortization was $4,505,000 and $3,590,000, respectively.
Future minimum operating and capital lease commitments as of December 31, 2005, are as follow (in thousands):
Year Capital Leases Operating Leases
---- -------------- ----------------
2006 $1,607 $13,828
2007 1,496 9,691
2008 1,303 5,674
2009 1,292 2,910
2010 1,292 1,639
Thereafter 9,845 4,002
------ ------
Total future minimum lease payments 16,835 $37,744
=======
Amounts representing interest (5,753)
Present value of minimum lease payments $11,082
=======
|
FS-16
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
RETIREMENT AND BENEFIT PLANS
Substantially all full-time salaried and hourly domestic employees are included in the Invacare Retirement Savings Plan sponsored by the company. The company makes matching cash contributions up to 66.7% of employees' contributions up to 3% of compensation, quarterly contributions based upon 4% of qualified wages and may make discretionary contributions to the domestic plans based on an annual resolution of the Board of Directors.
The company sponsors a Deferred Compensation Plus Plan covering certain employees, which provides for elective deferrals and the company retirement deferrals so that the total retirement deferrals equal amounts that would have contributed to the company's principal retirement plans if it were not for limitation imposed by income tax regulations. Contribution expense for the above plans in 2005, 2004 and 2003 was $5,811,000, $5,860,000, and $5,619,000, respectively.
The company also sponsors a non-qualified defined benefit Supplemental Executive Retirement Plan for certain key executives. The projected benefit obligation related to this unfunded plan was $31,071,000 and $30,631,000 at December 31, 2005 and 2004, respectively, of which approximately $15,386,000 and $13,371,000 at December 31, 2005 and 2004, respectively, has been accrued. Expense for the plan in 2005, 2004 and 2003 was $2,439,000, $2,278,000, and $2,108,000, respectively.
In conjunction with these non-qualified plans, the company has invested in life insurance policies related to certain employees to satisfy these future obligations. The current cash surrender value of these policies approximates the current benefit obligations. In addition, the projected policy benefits exceed the projected benefit obligations.
SHAREHOLDERS' EQUITY TRANSACTIONS
The company's Common Shares have a $.25 stated value. The Common Shares and the Class B Common Shares generally have identical rights, terms and conditions and vote together as a single class on most issues, except that the Class B Common Shares have ten votes per share, carry a 10% lower cash dividend rate and, in general, can only be transferred to family members. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis.
The 2003 Performance Plan (the "2003 Plan") allows the Compensation Committee of the Board of Directors (the "Committee") to grant up to 2,000,000 Common Shares in connection with incentive stock options, non-qualified stock options, stock appreciation rights and stock awards (including the use of restricted stock). The 1994 Performance Plan (the "1994 Plan"), as amended, expired in 2004 and allowed the Compensation Committee of the Board of Directors (the "Committee") to grant up to 5,500,000 Common Shares. The Committee has the authority to determine which employees and directors will receive awards, the amount of the awards and the other terms and conditions of the awards. During 2005, the Committee granted 614,962 non-qualified stock options for a term of ten years at the fair market value of the company's Common Shares on the date of grant under the 2003 Plan. There were no stock appreciation rights outstanding at December 31, 2005, 2004 or 2003.
Restricted stock awards for 21,304, 20,510 and 28,894 shares were granted in years 2005, 2004 and 2003 without cost to the recipients. Under the terms of the restricted stock awards, which were initially granted in 2001, 125,517 of the shares granted vest ratably over the four years after the award date and 6,500 of the shares granted vest ratably over the 2 years after the award date. Unearned restricted stock compensation of $1,016,000 in 2005, $911,000 in 2004 and $897,000 in 2003, determined as the market value of the shares at the date of grant, is being amortized on a straight-line basis over the vesting period. Compensation expense of $881,000, $812,000 and $643,000 was recognized in 2005, 2004 and 2003, respectively, related to restricted stock awards granted since 2001.
The 1994 Plan and the 2003 Plan have provisions that allow employees to exchange mature shares to pay the exercise price and surrender shares for the options to cover the minimum tax withholding obligation. Under these provisions, the company acquired approximately 124,000 treasury shares for $6,004,000 in 2005, 53,000 treasury shares for $2,444,000 in 2004 and 110,000 treasury shares for $3,199,000 in 2003.
FS-17
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SHAREHOLDERS' EQUITY TRANSACTIONS--Continued
On December 21, 2005, the Board of Directors of Invacare Corporation based on the recommendation of the Compensation, Management Development and Corporate Governance Committee (the "Committee"), approved the acceleration of the vesting for substantially all of the company's unvested stock options which were granted under the 1994 Plan, as amended, and the 2003 Plan, which were then underwater. The Board of Directors decided to approve the acceleration of the vesting of the company's stock options primarily to partially offset the recent reductions in other benefits made by the company and to provide additional incentive to those critical to the company's current cost reduction efforts.
The decision, which was effective as of December 21, 2005, accelerated the vesting for a total of 1,368,307 of the company's common shares; including 646,100 shares underlying options held by the company's named executive officers. The stock options accelerated equate to 29% of the company's total outstanding stock options. Vesting was not accelerated for the restricted awards granted under the Plans and no other modifications were made to the awards that were accelerated. The exercise prices of the accelerated options, all of which were underwater, were unchanged by the acceleration of the vesting schedules.
All of the company's outstanding unvested options under the Plans, which were accelerated, had exercise prices ranging from $30.91 to $47.80 which were greater than the company's stock market price of $30.75 as of the effective date of the acceleration.
As of December 31, 2005, an aggregate of 10,035,066 Common Shares were reserved for conversion of Class B Common Shares, future rights (as defined below) and the exercise and future grant of options.
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
2005 Price 2004 Price 2003 Price
---- ----- ---- ----- ---- -----
Options outstanding at January 1 4,638,405 $29.81 4,518,890 $27.34 4,257,422 $25.23
Granted 614,962 41.59 626,450 43.89 704,617 36.73
Exercised (356,676) 23.39 (449,374) 24.13 (340,665) 19.08
Canceled (120,529) 37.17 (57,561) 34.75 (102,484) 33.02
-------- ------ -------- ------ -------- ------
Options outstanding at December 31 4,776,162 $31.57 4,638,405 $29.81 4,518,890 $27.34
========= ====== ========= ====== ========= ======
Options price range at December 31 $16.03 to $16.03 to $15.13 to
$47.80 $47.35 $43.37
Options exercisable at December 31 4,745,435 2,963,385 2,796,100
Options available for grant at December 31* 454,142 1,033,858 1,670,600
|
* Options available for grant as of December 31, 2005 reduced by net restricted stock award activity of 130,017.
The following table summarizes information about stock options outstanding at December 31, 2005:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Average Number
Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices At 12/31/05 Contractual Life Exercise Price At 12/31/05 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$16.03 - $19.50 401,505 3.7 years $18.53 401,505 $18.53
$20.06 - $24.75 1,151,996 3.0 $23.71 1,128,009 $23.71
$25.13 - $29.85 683,421 3.3 $25.31 683,421 $25.31
$30.02 - $34.54 595,610 6.3 $32.75 593,472 $32.76
$36.10 - $39.67 772,167 7.3 $37.26 772,167 $37.26
$40.07 - $47.80 1,171,463 9.1 $43.23 1,166,861 $43.23
--------- --- ------ --------- ------
Total 4,776,162 5.7 $31.60 4,745,435 $31.64
|
FS-18
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SHAREHOLDERS' EQUITY TRANSACTIONS--Continued
The company has utilized the disclosure-only provisions of SFAS No. 123 through December 31, 2005. Accordingly, no compensation cost has been recognized for the stock option plans, except the expense recorded related to the 132,017 restricted stock awards granted in years 2001 through 2005.
The assumption regarding the stock options issued in 2005, 2004 and 2003 was that 25% of such options vested in the year following issuance. The stock options awarded during such years provided a four-year vesting period whereby options vest equally in each year. Current and prior years' pro forma disclosures may be adjusted for forfeitures of awards that will not vest because service or employment requirements have not been met.
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:
2005 2004 2003
---- ---- ----
Expected dividend yield .67% .63% .75%
Expected stock price volatility 26.7% 28.8% 29.6%
Risk-free interest rate 4.38% 3.67% 3.31%
Expected life (years) 5.6 5.6 5.5
|
The weighted-average fair value of options granted during 2005, 2004 and 2003, based upon an expected exercise year of 2010, was $12.41, $13.58 and $11.03, respectively.
The plans provide that shares granted come from the company's authorized but unissued Common Shares or treasury shares. Pursuant to the plans and the acceleration of all unvested shares underwater as of December 21, 2005, the Committee has established that the majority of the 2005 grants are currently exercisable and must be exercised within ten years from the date granted. The weighted-average remaining contractual life of options outstanding at December 31, 2005 is 5.7 years.
Effective July 8, 2005, the company adopted a new Rights Agreement to replace the company's previous shareholder rights plan, which expired on July 7, 2005. In order to implement the new Rights Agreement, the Board of Directors declared a dividend of one Right for each outstanding share of the company's Common Shares and Class B Common Shares to shareholders of record at the close of business on July 19, 2005. Each Right entitles the registered holder to purchase from the company one one-thousandth of a Series A Participating Serial Preferred Share, without par value, at a Purchase Price of $180.00 in cash, subject to adjustment. The Rights will not become exercisable until after a person (an "Acquiring Party") has acquired, or obtained the right to acquire, or commences a tender offer to acquire, shares representing 30% or more of the company's outstanding voting power, subject to deferral by the Board of Directors. After the Rights become exercisable, under certain circumstances, the Rights may be exercisable to purchase Common Shares of the company, or common shares of an acquiring company, at a price equal to the exercise price of the Right divided by 50% of the then current market price per Common Share or acquiring company common share, as the case may be. The Rights will expire on July 18, 2015 unless previously redeemed or exchanged by the company. The company may redeem and terminate the Rights in whole, but not in part, at a price of $0.001 per Right at any time prior to 10 days following a public announcement that an Acquiring Party has acquired beneficial ownership of shares representing 30% or more of the company's outstanding voting power, and in certain other circumstances described in the Rights Agreement.
FS-19
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CAPITAL STOCK
Capital stock activity for 2005, 2004 and 2003 consisted of the following (in thousands of shares):
Common Stock Class B Treasury
Shares Shares Shares
-----------------------------------------------------------------------------
January 1, 2003 Balance 30,294 1,112 (387)
Exercise of stock options 416 - (110)
Stock awards 29 - -
Repurchase of treasury shares - - (273)
-----------------------------------------------------------------------------
December 31, 2003 Balance 30,739 1,112 (770)
Exercise of stock options 449 - (53)
Stock awards 21 - -
Repurchase of treasury shares - - (111)
-----------------------------------------------------------------------------
December 31, 2004 Balance 31,209 1,112 (934)
Exercise of stock options 465 - (124)
Stock awards 21 - -
-----------------------------------------------------------------------------
December 31, 2005 Balance 31,695 1,112 (1,058)
====== ====== ======
|
Stock option exercises in 2005 include deferred share activity, which increased common shares by 108,000 shares and treasury shares by 14,000 shares. Stock option exercises in 2003 include deferred share activity, which increased common shares by 75,000 shares and treasury shares by 5,000 shares.
FS-20
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
OTHER COMPREHENSIVE EARNINGS (LOSS)
The components of other comprehensive earnings (loss) are as follows (in
thousands):
Unrealized Gain
Unrealized Gain (Loss) on
Currency (Loss) on Derivative
Translation Available-for-Sale Financial
Adjustments Securities Instruments Total
---------------------------------------------------------------
Balance at January 1, 2003 $(19,618) $580 $309 $(18,729)
Foreign currency translation adjustments 66,185 66,185
Unrealized gain on available for sale securities 146 146
Deferred tax liability relating to unrealized gain on available
for sale securities (51) (51)
Current period unrealized gain on cash flow hedges, net of
reclassifications 5,394 5,394
Deferred tax expense relating to unrealized gain on derivative
financial instruments (1,888) (1,888)
---------------------------------------------------------------
Balance at December 31, 2003 46,567 675 3,815 51,057
Foreign currency translation adjustments 57,903 57,903
Unrealized loss on available for sale securities (14) (14)
Deferred tax benefit relating to unrealized loss on available
for sale securities 5 5
Current period unrealized loss on cash flow hedges, net of
reclassifications (6,649) (6,649)
Deferred tax benefit relating to unrealized loss on derivative
financial instruments 2,327 2,327
---------------------------------------------------------------
Balance at December 31, 2004 104,470 666 (507) 104,629
Foreign currency translation adjustments (56,176) (56,176)
Unrealized gain on available for sale securities 54 54
Deferred tax liability relating to unrealized gain on available
for sale securities (19) (19)
Current period unrealized loss on cash flow hedges, net of
reclassifications (1,551) (1,551)
Deferred tax benefit relating to unrealized loss on derivative
financial instruments 543 543
---------------------------------------------------------------
Balance at December 31, 2005 $48,294 $701 $(1,515) $47,480
================================================================
|
A net loss of $283,000 and net gains of $6,650,000 and $500,000 were reclassified into earnings related to derivative instruments designated and qualifying as cash flow hedges in 2005, 2004 and 2003, respectively.
FS-21
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CHARGE RELATED TO RESTRUCTURING ACTIVITIES
On July 28, 2005, the company announced cost reductions and profit improvement actions, which included: reducing global headcount by 230 personnel, outsourcing improvements utilizing the company's China manufacturing capability and third parties, shifting substantial resources from product development to manufacturing cost reduction activities and product rationalization, reducing freight exposure through freight auctions and changing the freight policy, general expense reductions, and exiting four facilities.
The restructuring was necessitated by the continued decline in reimbursement by the U.S. government as well as similar reimbursement pressures abroad and continued pricing pressures faced by the company as a result of outsourcing by competitors to lower cost locations.
To date, the company has made substantial progress on its restructuring activities, including exiting four facilities and eliminating approximately 300 positions through December 31, 2005, which resulted in restructuring charges of $7,533,000, of which $238,000 is recorded in cost of products sold as it relates to inventory markdowns. The restructuring charge included charges of $3,981,000 in North America, $2,718,000 in Europe and $834,000 in Asia/Pacific of which $2,407,000; $799,000 and $146,000 remains unpaid as of December 31, 2005 for each of the segments respectively. There have been no material changes in accrued balances related to the charge, either as a result of revisions in the plan or changes in estimates, and the company expects to utilize the accruals recorded as of December 31, 2005 during 2006. A progression of the accruals recorded as a result of the restructuring is as follows (in thousands):
Balance at Balance at
12/31/04 Accruals Payments 12/31/05
-------- -------- -------- --------
Severance $ - $ 6,667 $ 3,563 $ 3,104
Contract terminations - 292 127 165
Product line discontinuance - 238 238 -
Other - 336 253 83
-------- -------- -------- --------
Total $ - $ 7,533 $ 4,181 $ 3,352
======== ======== ======== ========
|
The severance incurred was the result the reduction in 300 positions, which was originally estimated to be 230 positions. Additional severance will be incurred for the planned reduction of 300 positions in 2006 and another 300 positions thereafter.
With additional actions in 2006, including the elimination of approximately 300 positions, the company anticipates recognizing an additional charge of $7,000,000. In addition, the company continues to further refine its global manufacturing and distribution strategy. Execution of these cost reduction actions has begun. The company expects a global reduction of at least 600 additional positions and to exit a number of its manufacturing operations worldwide.
INCOME TAXES
Earnings before income taxes consist of the following (in thousands):
2005 2004 2003
---- ---- ----
Domestic $18,605 $57,557 $59,027
Foreign 52,697 52,815 47,382
------- ------- -------
$71,302 $110,372 $106,409
======= ======= =======
|
The company has provided for income taxes (benefits) as follows (in thousands):
2005 2004 2003
---- ---- ----
Current:
Federal $9,475 $14,075 $16,635
State 600 2,800 3,200
Foreign 12,475 14,050 11,960
------- ------- -------
22,550 30,925 31,795
Deferred:
Federal (2,225) 2,225 1,625
Foreign 2,125 2,025 1,580
------- ------- -------
(100) 4,250 3,205
------- ------- -------
Income Taxes $22,450 $35,175 $35,000
======= ======= =======
|
FS-22
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INCOME TAXES--Continued
A reconciliation to the effective income tax rate from the federal statutory rate follows:
2005 2004 2003
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax benefit 0.5 1.6 2.0
Tax credits (0.8) (1.6) (1.4)
Foreign taxes at less than the federal
statutory rate (5.2) (2.1) (2.9)
Other, net - - -
2.0 (1.0) .2
---- ---- ----
31.5% 31.9% 32.9%
==== ==== ====
|
Significant components of deferred income tax assets and liabilities at December 31, 2005 and 2004 are as follows (in thousands):
2005 2004
---- ----
Current deferred income tax assets (liabilities), net:
Loss carryforwards $6,246 $7,620
Bad debt 7,386 4,366
Warranty 4,036 3,157
State and local taxes 2,764 3,048
Other accrued expenses and reserves 2,754 2,219
Inventory 1,361 1,816
Compensation and benefits 2,061 1,240
Product liability 292 292
Other, net 546 (2,028)
------ ------
$27,446 $21,730
Long-term deferred income tax assets (liabilities), net:
Goodwill & intangibles (36,252) (35,431)
Fixed assets (20,030) (15,169)
Compensation and benefits 10,344 9,642
Loss and credit carryforwards 5,674 6,429
Product liability 3,812 3,391
State and local taxes 2,428 2,400
Valuation allowance (900) -
Other, net 7,132 3,905
------ ------
$(27,792) $ (24,833)
------ ------
Net Deferred Income Taxes $(346) $(3,103)
====== ======
|
At December 31, 2005, the company had $900,000 of foreign tax credit carryforwards and had federal foreign tax loss carryforwards of approximately $45,200,000 of which $33,100,000 are non-expiring, $350,000 expire in 2009, $550,000 expire in 2010, $3,800,000 expire in 2011 and $7,400,000 expire in 2012. At December 31, 2005 the company also has $8,250,000 of local foreign tax loss carryforwards, which are non-expiring. The loss carryforward amounts include $32,000,000 of federal and $8,250,000 of local loss carryforwards acquired in 2004 acquisitions. The company made income tax payments of $10,435,000, $30,180,000 and $25,173,000 during the years ended December 31, 2005, 2004 and 2003, respectively.
FS-23
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NET EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net earnings per common share.
2005 2004 2003
---- ---- ----
(In thousands except per
share data)
Basic
Average common shares outstanding 31,555 31,153 30,862
Net earnings $48,852 $75,197 $71,409
Net earnings per common share $1.55 $2.41 $2.31
Diluted
Average common shares outstanding 31,555 31,153 30,862
Stock options 897 1,194 867
---- ---- ----
Average common shares assuming dilution 32,452 32,347 31,729
Net earnings $48,852 $75,197 $71,409
Net earnings per common share $1.51 $2.33 $2.25
|
At December 31, 2005, 2004, and 2003, 813,191, 21,167, and 501,067 shares, respectively were excluded from the average common shares assuming dilution, as they were anti-dilutive. In 2005, the majority of the anti-dilutive shares were granted at an exercise price of $41.87, which was higher than the average fair market value price of $41.46 for 2005. In 2004, the majority of the anti-dilutive shares were granted at an exercise price of $47.35, which was higher than the average fair market value price of $44.39 for 2004. In 2003, the majority of the anti-dilutive shares were granted at an exercise price of $37.70, which was higher than the average fair market value price of $35.29 for 2003.
CONCENTRATION OF CREDIT RISK
The company manufactures and distributes durable medical equipment and supplies to the home health care, retail and extended care markets. The company performs credit evaluations of its customers' financial condition. Prior to December 2000, the company financed equipment to certain customers for periods ranging from 6 to 39 months. In December 2000, Invacare entered into an agreement with DLL, a third party financing company, to provide the majority of future lease financing to Invacare's customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a limited recourse obligation ($41,170,000 at December 31, 2005) to DLL for events of default under the contracts (total balance outstanding of $101,977,000 at December 31, 2005). FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires the company to record a guarantee liability as it relates to the limited recourse obligation. As such, the company has recorded a liability for this guarantee obligation. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts in accordance with SFAS No. 5, Accounting for Contingencies. Credit losses are provided for in the financial statements.
Substantially all of the company's receivables are due from health care, medical equipment dealers and long term care facilities located throughout the United States, Australia, Canada, New Zealand and Europe. A significant portion of products sold to dealers, both foreign and domestic, is ultimately funded through government reimbursement programs such as Medicare and Medicaid. In addition, the company has also seen a significant shift in reimbursement to customers from managed care entities. As a consequence, changes in these programs can have an adverse impact on dealer liquidity and profitability. In addition, reimbursement guidelines in the home health care industry have a substantial impact on the nature and type of equipment an end user can obtain as well as the timing of reimbursement and, thus, affect the product mix, pricing and payment patterns of the company's customers.
FS-24
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The company in estimating its fair value disclosures for financial instruments used the following methods and assumptions:
Cash, cash equivalents and marketable securities: The carrying amount reported in the balance sheet for cash, cash equivalents and marketable securities approximates its fair value.
Installment receivables: The carrying amount reported in the balance sheet for installment receivables approximates its fair value. The majority of the portfolio contains receivables, which are due in less than one year. The interest rates associated with these receivables have not varied significantly since inception. Management believes that after consideration of the credit risk, the net book value of the installment receivables approximates market value.
Long-term debt: Fair values for the company's senior notes are estimated using discounted cash flow analyses, based on the company's current incremental borrowing rate for similar borrowing arrangements.
Interest Rate Swaps: The company is a party to interest rate swap agreements, which are entered into, in the normal course of business to reduce exposure to fluctuations in interest rates. The agreements are with major financial institutions, which are expected to fully perform under the terms of the agreements thereby mitigating the credit risk from the transactions. The agreements are contracts to exchange fixed rate payments for floating rate payments over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of such agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The amounts to be paid or received under the interest rate swap agreements are accrued consistent with the terms of the agreements and market interest rates. Fair value for the company's interest rate swaps are based on independent pricing models.
Treasury Locks: The company was a party to treasury lock agreements to protect the forecasted receipt of proceeds resulting from the issuance of ten year, fixed rate debt, subject to fluctuations in the benchmark U.S. Treasury rate. Fair value for the company's interest rate swaps are based on independent pricing models.
Other investments: The company has made other investments in limited partnerships and non-marketable equity securities, which are accounted for using the cost method, adjusted for any estimated declines in value. These investments were acquired in private placements and there are no quoted market prices or stated rates of return.
The carrying amounts and fair values of the company's financial instruments at December 31, 2005 and 2004 are as follows (in thousands):
2005 2004
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Cash and cash equivalents $25,624 $25,624 $32,567 $32,567
Marketable securities 252 252 199 199
Other investments 8,342 8,342 8,213 8,213
Installment receivables 13,081 13,081 14,746 14,746
Long-term debt (including short-term
borrowings secured by accounts receivable
and current maturities of long-term debt) 537,981 538,053 550,036 551,431
Interest rate swaps (202) (202) 4,302 4,302
Forward contracts (2,330) (2,330) (780) (780)
|
FS-25
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
Forward Contracts: The company operates internationally and as a result is exposed to foreign currency fluctuations. Specifically, the exposure includes intercompany loans and third party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized and accounted for as hedging instruments. The forward contracts in 2005 and 2004 were entered into to as hedges of the following currencies: USD, NZD, CAD, GBP, EUR, SEK, DKK and AUD. The company does not use derivative financial instruments for speculative purposes.
The gains and losses that result from the majority of the forward contracts are deferred and recognized when the offsetting gains and losses for the identified transactions are recognized. The company recognized a loss of $280,000 in 2005 and gains of $6,961,000 in 2004 and $1,292,000 in 2003, respectively, which were recognized in cost of products sold and selling, general and administrative expenses.
BUSINESS SEGMENTS
The company operates in three primary business segments based on geographical area: North America, Europe and Asia/Pacific. The three reportable segments represent operating groups, which offer products to different geographic regions.
The North America segment sells each of five primary product lines, which includes: standard, rehab, distributed, respiratory, and continuing care products. Europe and Asia/Pacific sell the same product lines with the exception of distributed products. Each business segment sells to the home health care, retail and extended care markets.
The company evaluates performance and allocates resources based on profit or loss from operations before income taxes for each reportable segment. The accounting policies of each segment are the same as those described in the summary of significant accounting policies for the company's consolidated financial statements. Intersegment sales and transfers are based on the costs to manufacture plus a reasonable profit element. Therefore, intercompany profit or loss on intersegment sales and transfers is not considered in evaluating segment performance.
The information by segment is as follows (in thousands):
2005 2004 2003
-----------------------------------------------------------------------------
Revenues from external customers
North America $1,016,212 $1,002,273 $897,208
Europe 432,142 336,792 279,782
Asia/Pacific 81,378 64,262 70,186
-------- -------- --------
Consolidated $1,529,732 $1,403,327 $1,247,176
========= ========= =========
Intersegment revenues
North America $48,379 $44,517 $38,385
Europe 12,019 2,825 1,179
Asia/Pacific 36,576 35,793 35,271
-------- -------- --------
Consolidated $96,974 $83,135 $74,835
========= ========= =========
Depreciation and amortization
North America $20,527 $20,644 $18,551
Europe 15,100 8,687 6,315
Asia/Pacific 4,829 2,911 2,261
All Other (1) 68 74 108
-------- -------- --------
Consolidated $40,524 $32,316 $27,235
======== ======== ========
|
FS-26
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BUSINESS SEGMENTS --Continued
2005 2004 2003
-----------------------------------------------------------------------------
Net interest expense (income)
North America $20,873 $8,940 $7,780
Europe 8,628 4,924 4,220
Asia/Pacific (432) (664) (602)
All Other (1) (943) (2,104) (5,161)
--------- --------- ---------
Consolidated $28,126 $11,096 $6,237
========= ========= =========
Earnings (loss) before income taxes
North America $58,621 $95,883 $88,299
Europe 29,254 18,705 19,132
Asia/Pacific (3,818) 1,430 5,997
All Other (1) (12,755) (5,646) (7,019)
--------- --------- ---------
Consolidated $71,302 $110,372 $106,409
========= ========= =========
Assets
North America $803,759 $778,820 $616,352
Europe 647,823 710,510 348,063
Asia/Pacific 74,101 69,685 56,403
All Other (1) 97,270 69,109 87,395
--------- --------- ---------
Consolidated $1,622,953 $1,628,124 $1,108,213
========= ========= =========
Long-lived assets
North America $427,428 $428,308 $307,736
Europe 508,196 548,843 236,591
Asia/Pacific 38,866 31,797 24,492
All Other (1) 77,816 53,905 64,672
--------- --------- ---------
Consolidated $1,052,306 $1,062,853 $633,491
========= ========= =========
Expenditures for assets
North America $20,600 $14,897 $12,513
Europe 5,470 20,064 11,933
Asia/Pacific 5,438 6,441 6,203
All Other (1) 9 1 11
--------- --------- ---------
Consolidated $31,517 $41,403 $30,660
========= ========= =========
|
(1) Consists of the domestic export unit, un-allocated corporate selling, general and administrative costs, the Invacare captive insurance unit and inter-company profits, which do not meet the quantitative criteria for determining reportable segments.
Net sales by product, are as follows (in thousands):
North America 2005 2004 2003
------------- ---- ---- ----
Standard $251,331 $257,668 $274,959
Rehab 274,417 280,339 273,063
Distributed 220,004 205,130 162,645
Respiratory 159,300 161,247 118,115
Continuing Care 85,487 76,578 48,321
Other 25,673 21,311 20,105
--------- --------- ---------
$1,016,212 $1,002,273 $897,208
========= ========= =========
|
FS-27
INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BUSINESS SEGMENTS--Continued
Europe 2005 2004 2003
------ ---- ---- ----
Standard $263,121 $200,064 $142,777
Rehab 161,082 128,316 129,167
Respiratory 7,939 8,412 7,838
--------- --------- ---------
$432,142 $336,792 $279,782
========= ========= =========
Asia/Pacific 2005 2004 2003
------------ ---- ---- ----
Rehab $45,852 $34,273 $46,832
Respiratory 9,726 8,162 6,584
Standard 7,977 7,721 6,427
Other 17,823 14,106 10,343
--------- --------- ---------
$81,378 $64,262 $70,186
========= ========= =========
Total Consolidated $1,529,732 $1,403,327 $1,247,176
========= ========= =========
|
No single customer accounted for more than 5% of the company's sales.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-------------
(In thousands, except per share data)
2005 March 31, June 30, September 30, December 31,
---- --------- --------- --------- ---------
Net sales $370,944 $396,267 $395,270 $367,251
Gross profit 109,844 113,284 118,687 106,690
Earnings before income taxes 19,890 18,958 22,492 9,962
Net earnings 13,545 12,908 15,317 7,082
Net earnings per share - basic .43 .41 .48 .22
Net earnings per share - assuming
dilution .42 .40 .47 .22
2004 March 31, June 30, September 30, December 31,
---- --------- --------- --------- ---------
Net sales $321,343 $339,288 $349,507 $393,189
Gross profit 93,379 102,124 106,076 117,013
Earnings before income taxes 21,041 26,698 32,614 30,019
Net earnings 14,201 18,023 22,529 20,444
Net earnings per share - basic .46 .58 .72 .65
Net earnings per share - assuming
dilution .44 .56 .70 .63
|
FS-28
INVACARE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands) COL A. COL B. COL C. COL D.
------ ------ ------ ------
Balance Charged To Balance
At Beginning Cost And Deductions At End
Of Period Expenses Describe Of Period
----------- ----------- ----------- -----------
Year Ended December 31, 2005
----------------------------
Deducted from asset accounts -
Allowance for doubtful accounts $15,576 $14,168 $(6,650)(A) $23,094
Inventory obsolescence reserve 9,532 4,378 (5,319)(B) 8,591
Investments and related notes 29,540 - (21,201)(D) 8,339
Accrued warranty cost 13,998 10,516 (8,931)(B) 15,583
Accrued product liability 17,045 8,780 (4,876)(C) 20,949
Year Ended December 31, 2004
----------------------------
Deducted from asset accounts -
Allowance for doubtful accounts $27,704 $11,222 $(23,350)(A) $15,576
Inventory obsolescence reserve 8,715 2,609 (1,792)(B) 9,532
Investments and related notes 29,540 - - 29,540
receivable
Accrued warranty cost 12,688 9,287 (7,977)(B) 13,998
Accrued product liability 11,909 8,202 (3,066)(C) 17,045
Year Ended December 31, 2003
----------------------------
Deducted from asset accounts -
Allowance for doubtful accounts $32,732 $13,760 $(18,788)(A) $27,704
Inventory obsolescence reserve 5,337 6,623 (3,245)(B) 8,715
Investments and related notes 29,000 540 - 29,540
receivable
Accrued warranty cost 11,448 9,528 (8,288)(B) 12,688
Accrued product liability 8,272 8,058 (4,421)(C) 11,909
|
Note (A) - Uncollectible accounts written off, net of recoveries.
Note (B) - Amounts written off or payments incurred.
Note (C) - Loss and loss adjustment.
Note (D) - Elimination of allowance for investment following consolidation
of variable interest entity.
FS-29
Exhibit 4(a)
COMMON SHARES CUSIP 461203 10 1
WITHOUT PAR VALUE SEE REVERSE FOR CERTAIN DEFINITIONS
(INVACARE LOGO)
NUMBER SHARES
IVC1480
INVACARE CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF OHIO
THIS CERTIFICATE IS TRANSFERABLE IN CLEVELAND, OHIO AND NEW YORK, NEW YORK
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE COMMON SHARES, WITHOUT PAR VALUE, OF INVACARE CORPORATION, INCORPORATED UNDER THE LAWS OF THE STATE OF OHIO, TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND REGISTRAR.
WITNESS THE FACSIMILE SIGNATURES OF THE DULY AUTHORIZED OFFICERS OF THE
CORPORATION
DATED:
COUNTERSIGNED AND REGISTERED: /s/ A. Malachi Mixon III
NATIONAL CITY BANK CHAIRMAN OF THE BOARD
(CLEVELAND, OHIO) AND CHIEF EXECUTIVE OFFICER
TRANSFER AGENT
AND REGISTRAR (STATUE OF LIBERTY GRAPHIC)
BY /s/ Dale C. LaPorte
AUTHORIZED SIGNATURE SECRETARY
|
THE CORPORATION WILL MAIL TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT OF WRITTEN REQUEST THEREFOR, A COPY OF THE EXPRESS TERMS OF THE SHARES REPRESENTED BY THIS CERTIFICATE.
This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between Invacare Corporation (the "Company") and National City Bank (the "Rights Agent") dated July 8, 2005, as the same may be amended, restated or renewed from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge within five business days after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void.
The following abbreviations, when used in the inscription on the face of this insturment, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UGMA -- _____________ Custodian ___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act __________________
in common (State)
UTMA -- _____________ Custodian ___________
(Cust) (Minor)
under Uniform Transfers to Minors
Act __________________
(State)
|
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED, __________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]-----------------------------------------
_________________________________________________________________ OF THE SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND DOES HEREBY IRREVOCABLY CONSTITUTE AND APPOINT
_______________________________________________________________________ATTORNEY TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED_______________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
SIGNATURE(S) GUARANTEED:
Exhibit 4(b)
CUSIP 461203 20 0
(INVACARE WHEELCHAIR LOGO)
CORPORATION
NUMBER SHARES
B- 1122
INCORPORATED UNDER THE LAWS OF THE STATE OF OHIO
CLASS B COMMON SHARES
WITHOUT PAR VALUE THE SHARES REPRESENTED BY
THIS CERTIFICATE ARE
SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER.
|
SEE REVERSE SIDE.
SEE LEGEND ON REVERSE SIDE
CONCERNING RIGHTS
AND RIGHTS AGREEMENT
THIS CERTIFIES THAT
IS THE OWNER OF
Class B Common Shares fully paid and non-assessable of INVACARE CORPORATION transferable only on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned by the Transfer Agent and Registrar.
WITNESS the facsimile signatures of the duly authorized officers of the Corporation.
Countersigned and Registered at Cleveland, Ohio
NATIONAL CITY BANK
(Transfer Agent and Registrar)
By
Authorized Signature
Dated:
/s/ Dale C. LaPorte /s/ A. Malachi Mixon III
SECRETARY PRESIDENT
|
INVACARE CORPORATION
As required by Ohio law, the Corporation will mail to the record holder of this certificate, without charge, within five (5) days after receipt of written request therefor addressed to the Secretary of the Corporation at its principal place of business, a copy of the express terms of the shares represented by this certificate and of all other classes and series of shares which the Corporation is authorized to issue.
Transfer and registration of transfer of the shares represented by this certificate are subject to the provisions of Article IV of the Corporation's Amended and Restated Articles of Incorporation (the "Articles of Incorporation") as the same may be in effect from time to time. Upon written request delivered to the Secretary of the Corporation at its principal place of business, the Corporation will mail to the holder of this certificate a copy of such provisions without charge within five (5) days after receipt of written request therefor. By accepting this certificate, the holder hereof acknowledges that it is accepting the same subject to the provisions of said Article IV as the same may be in effect from time to time and covenants with the Corporation and each shareholder from time to time to comply with the provisions of said Article IV as the same may be in effect from time to time.
As set forth in and subject to Article IV, Subdivision B, Section 6 of the Corporation's Articles of Incorporation as the same may be in effect from time to time, no person holding Class B Common Shares represented by this certificate may transfer, and the Corporation shall not register the transfer of, such Class B Common Shares or any interest therein, whether by sale, assignment, gift, bequest, appointment or otherwise, except as permitted by Article IV, Subdivision B, Paragraph 6.1 of the Corporation's Articles of Incorporation as the same may be in effect from time to time. Any purported transfer of Class B Common Shares other than as permitted by Article IV, Subdivision B, Paragraph 6.1 shall automatically result in the conversion of such shares into Common Shares on a share for share basis, effective on the date of such purported transfer.
As set forth in and subject to Article IV, Subdivision B, Section 4 (the "Conversion Rights"), of the Corporation's Articles of Incorporation as the same may be in effect from time to time, the Class B Common Shares represented by this certificate are convertible at any time or from time to time, at the option of the holder thereof, into an equal number of Common Shares, without par value, of the Corporation without cost to the holder thereof.
The shares represented hereby may be converted pursuant to the terms of the Conversion Rights by (1) endorsing this certificate for transfer to the Corporation, (2) executing the form set forth below and (3) delivering this certificate to the Corporation's Transfer Agent. NOTWITHSTANDING THE RESTRICTIONS ON TRANSFER CONTAINED IN ARTICLE IV AND DESCRIBED ABOVE, A SHAREHOLDER WISHING TO CONVERT THE CLASS B COMMON SHARES REPRESENTED HEREBY INTO THE SAME NUMBER OF COMMON SHARES OF THE CORPORATION FOR THE PURPOSE OF IMMEDIATELY SELLING OR OTHERWISE TRANSFERRING SUCH COMMON SHARES MAY DELIVER THIS CERTIFICATE TO THE TRANSFER AGENT IN CONNECTION WITH SUCH SALE OR TRANSFER AND THIS CERTIFICATE SHALL BE ACCEPTED BY THE TRANSFER AGENT IN SATISFACTION OF SUCH SHAREHOLDER'S OBLIGATION TO DELIVER CERTIFICATES REPRESENTING COMMON SHARES IN CONNECTION WITH SUCH SALE OR TRANSFER. IN SUCH EVENT, THE SHAREHOLDER SHALL EXECUTE BOTH THE NOTICE OF ELECTION TO CONVERT AND THE ASSIGNMENT SET FORTH BELOW.
NOTICE OF ELECTION TO CONVERT
The undersigned hereby irrevocably to elects to convert___________ Class B Common Shares represented by this certificate into Common Shares of Invacare Corporation in accordance with the terms of the Conversion Rights.
SIGNATURE GUARANTEE SIGNATURE____________________________________
NOTICE: PLEASE SIGN AS NAME APPEARS
_____________________________ UPON THE FACE OF THE CERTIFICATE.
(Firm -- Please Print)
----------------------------- DATED _______________________________________
(Authorized Signature)
-----------------------------
(Dated)
|
The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act __________________
in common (State)
|
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED, __________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]-----------------------------------------
_______________________________________________________________________ATTORNEY TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED_______________________ 19 ___________
This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between Invacare Corporation (the "Company") and National City Bank (the "Rights Agent") dated July 8, 2005, as the same may be amended, restated or renewed from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge within five business days after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void.
Exhibit 10(p)
FORM OF AGREEMENT
This AGREEMENT ("Agreement"), is made as of the ____ day of ____________, 20--, between INVACARE CORPORATION, an Ohio corporation ("Invacare"), and ____________ (the "Executive").
Invacare is entering into this Agreement in recognition of the importance of the Executive's services to the continuity of management of Invacare and based upon its determination that it will be in the best interests of Invacare to encourage the Executive's continued attention and dedication to the Executive's duties in the potentially disruptive circumstances of a possible Change of Control of Invacare. (As used in this Agreement, the term "Change of Control" and certain other capitalized terms have the meanings ascribed to them in Section 9 hereof.)
Invacare and the Executive agree, effective as of the date first set forth above (the "Effective Date"), as follows:
1. Retention Bonus if Executive is Employed by Invacare on First Anniversary of the Date of a Change of Control. If, following the occurrence of a Change of Control, the Executive continues to be employed by Invacare on the first anniversary of the date of the Change of Control, Invacare shall pay to the Executive, within ten business days after such first anniversary, a lump-sum amount equal to the sum of (a) the Executive's Annual Base Salary plus (b) the Executive's Target Bonus.
2. Severance Benefits if Employment is Terminated in Certain Circumstances Within Three Years of a Change of Control. If, within three years following the occurrence of a Change of Control, the Executive's employment with Invacare is terminated by Invacare for any reason other than Cause, Disability, or death, or by the Executive for Good Reason, this Section 2 shall become applicable and Invacare shall pay to the Executive the amounts specified in Sections 2.1, 2.2, and 2.3 on the dates indicated therein and shall provide to the Executive the benefits specified in Sections 2.4, 2.5, 2.6, and 2.7 for the respective periods specified therein, and shall cause certain rights of the Executive to vest as provided in Sections 2.7 and 2.8.
2.1 Lump Sum Severance Benefit. Invacare shall pay to the Executive, within ten business days after the Termination Date, a lump sum severance benefit equal to (a) minus (b) below where:
(a) equals three times the sum of (i) the Executive's Annual Base Salary plus (ii) the Executive's Target Bonus; and
(b) equals the amount, if any, paid to the Executive pursuant to
Section 1 above.
2.2 401(k) Profit Sharing. Invacare shall pay to the Executive, within 60 days after the Termination Date, a lump sum amount equal to three times the highest amount of total contributions (including both matching contributions and Profit Sharing Contributions) made by Invacare to the Invacare 401(k) Profit Sharing Plan with respect to the Executive for any single plan year ending on or after the date that is three years before the date of the Change of Control.
2.3 SERP. Invacare shall pay to the Executive, within 60 days after the Termination Date, a lump sum amount equal to the amount by which (a) the actuarial equivalent of the annual SERP Benefit that would have been payable
under Section 6.7 of the Invacare Supplemental Executive Retirement Plan, as in effect on the Termination Date, calculated as though the Executive had continued in the employ of Invacare through the third anniversary of the Termination Date with annual compensation for each of those three years equal to the highest annual compensation received by the Executive from Invacare during any year ending on or after the date that is three years before the date of the Change of Control, exceeds (b) the actuarial equivalent of the annual SERP Benefit that is payable under that Section 6.7 taking into account only Executive's employment with Invacare through the Termination Date.
2.4 Insurance Benefits. Invacare shall provide to the Executive, from the Termination Date through the third anniversary of the Termination Date, continuing coverage under health, life, and disability insurance programs at least equal in all respects to the highest level of such coverage provided by Invacare to the Executive at any time during the period beginning one year before the Change in Control and ending on the Termination Date.
2.5 Club Dues. During the period from the Termination Date through the third anniversary of the Termination Date, Invacare shall continue to reimburse the Executive for club dues on at least as favorable basis as the most favorable basis in effect at any time during the period beginning one year before the Change of Control and ending on the Termination Date.
2.6 Automobile. During the period from the Termination Date through the third anniversary of the Termination Date, Invacare shall continue to provide to the Executive an automobile (and reimbursement for mileage, maintenance, insurance, repairs, and similar items) on at least as favorable basis as the most favorable basis in effect at any time during the period beginning one year before the Change of Control and ending on the Termination Date.
2.7 Stock Options. In respect of all options to purchase Invacare stock that have been previously granted to the Executive pursuant to any stock option plan or arrangement sponsored by Invacare, and notwithstanding any other provision to the contrary contained in any stock option plan or arrangement, Invacare shall cause such options:
(a) to become exercisable in full as of the Termination Date; and
(b) to continue to be exercisable until the earlier to occur of the second anniversary of the Termination Date or the expiration date of the option; and
(c) to be exercisable (and/or to satisfy any tax withholding requirements in connection with the exercise of the options) using shares
of Invacare common stock previously owned by the Executive and/or shares subject to the options being exercised as consideration in lieu of a cash payment or other arrangement, but only if any such exercise of the option would not result in Invacare being required to take a charge in respect of such exercise in determining its net income for financial accounting purposes.
2.8 Vesting of Certain Rights. Invacare shall cause the Executive's rights under (a) the Invacare 401(k) Profit Sharing Plan, and (b) the Invacare Supplemental Executive Retirement Plan, to become, as of the Termination Date, immediately vested.
2.9 Death of the Executive. In the event of the Executive's death at any time from the Termination Date through the third anniversary of the Termination Date, then, assuming any applicable conditions precedent set forth above are satisfied:
(a) the amount described in Section 1, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death;
(b) the amount described in Section 2.1, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death;
(c) the amount described in Section 2.2, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death;
(d) the amount described in Section 2.3, to the extent not paid to the Executive, shall be paid to the Beneficiary as soon as practicable following the Executive's death;
(e) any person who would have been entitled to coverage as the
Executive's dependent (or otherwise because of the Executive's coverage)
under any health insurance program maintained by Invacare (as described in
Section 2.4) shall continue to be provided with such coverage as though the
Executive had survived through the third anniversary of the Termination
Date;
(f) the benefits described in Sections 2.5 and 2.6 shall cease to be provided on the first to occur of either (i) the 60th day following the Executive's death or (ii) the third anniversary of the Termination Date;
(g) such persons as may be entitled thereto shall receive such benefits as may be provided under any Employee Benefit Plans in accordance with the terms of such Employee Benefit Plans;
(h) such persons as may be entitled thereto shall receive such benefits as may be provided under any other agreement the Executive may have with Invacare or an Affiliate including, without limitation, any agreement relating to options to purchase Invacare stock.
2.10 Alternate Form of Benefit. Notwithstanding the preceding provisions of this Section 2, to the extent the Executive cannot, as a matter of law, or pursuant to the customs or policies of any insurance underwriter, realize any benefit or advantage described above in this Section 2, or if Invacare reasonably believes that providing the Executive with any such benefit or advantage would be economically disadvantageous because doing so would cause Invacare to lose tax or other benefits, Invacare shall notify the Executive and shall pay to the Executive an additional amount which shall, taking account of any federal, state and local income taxes incurred by the Executive in respect of such payments, place the Executive in the same position, on an after-tax basis, as though he had realized such benefit or advantage; provided, further, that the amount of any payment to the Executive pursuant to the preceding clause shall be calculated at the Company's cost and expense by the Accounting Firm, and its determination of such amount shall be final and binding upon both the Executive and Invacare, and the Executive and Invacare shall each provide the Accounting Firm with such information as it may reasonably request in order to calculate any such amount.
3. Excess Parachute Payment Gross-Up.
3.1 Potential for Excess Parachute Payments. Invacare and the Executive acknowledge that, following a Change of Control, one or more payments or distributions to be made by Invacare to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, under some other plan, agreement, or arrangement, or otherwise) (a "Payment") may be determined to be an "excess parachute payment" that is not deductible by Invacare for Federal income tax purposes and with respect to which the Executive will be subject to an excise tax because of Sections 28OG and 4999, respectively, of the Internal Revenue Code. If benefits become payable to the Executive under Sections 1 or 2 of this Agreement, the Accounting Firm, which shall make all determinations required to be made under this Section 3, shall determine whether any Payment would be an excess parachute payment and shall communicate its determination, together with detailed supporting calculations, to Invacare and to the Executive within 30 days after the Termination Date or such earlier time as is requested by Invacare. Invacare and the Executive shall cooperate with each other and the Accounting Firm and shall provide necessary information so that the Accounting Firm may make all such determinations. Invacare shall pay all of the fees of the Accounting Firm for services performed by the Accounting Firm as contemplated in this Section 3.
3.2 Gross-Up of Payments. If any Payment gives rise, directly or
indirectly, to liability on the part of the Executive for excise tax under
Section 4999 of the Internal Revenue Code, Invacare shall make additional cash
payments to the Executive, from time to time and at the same time, as any
Payment constituting an excess parachute payment is paid or provided to the
Executive (or as soon thereafter as is practicable and, in any event, no later
than March 15 of the calendar year which follows the calendar year in which the
excess parachute payment was made or provided to the Executive), in such amounts
as are necessary to put the Executive in the same position, after payment of all
federal, state, and local taxes (whether income taxes, excise taxes under
Section 4999 of the Code or otherwise, or other taxes), as the Executive would
have been in after payment of all federal, state, and local income taxes if the
Payments had not given rise to an excise tax under Section 4999 of the Internal
Revenue Code.
4. Other Benefits.
4.1 Reimbursement of Certain Expenses After a Change of Control. Invacare shall pay, as incurred, all expenses incurred by the Executive, including the reasonable fees of counsel engaged by the Executive, in respect of enforcing the Executive's rights hereunder and/or defending any action brought to have this Agreement declared invalid or unenforceable.
4.2 Incapacity of Executive. If, after a Change of Control and prior to the Termination Date, the Executive is unable to perform services for Invacare for any period by reason of accidental bodily injury or sickness, Invacare will pay and provide to the Executive all compensation and benefits to which the Executive would have been entitled had the Executive continued to be actively employed by Invacare through the earliest of the following dates: (a) the first date on which the Executive is again capable of performing services for Invacare consistent with past practice, or (b) the date on which the Executive's employment is terminated by Invacare by reason of Disability, or (c) the date on which Invacare has paid and provided 36 months of compensation and benefits to the Executive during the period of the Executive's incapacity, or (d) the date of the Executive's death.
5. No Set-Off; No Obligation to Seek Other Employment or to Otherwise Mitigate Damages; No Effect Upon Other Plans. Invacare's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim whatsoever which Invacare may have against the Executive. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise. The amount of any payment provided for under this Agreement shall not be reduced by any compensation or benefits earned by the Executive as the result of employment by another employer or otherwise after the termination of the Executive's employment.
6. Taxes; Withholding of Taxes. Without limiting the right of Invacare to withhold taxes pursuant to this Section 6, the Executive shall be responsible (after taking into account all payments to be made by Invacare to or on behalf of the Executive under Sections 1 or 2 hereof) for all income, excise, and other taxes (federal, state, city, or other) imposed on or incurred by the Executive as a result of receiving the payments provided in this Agreement, including, without limitation, the payments provided under Sections 1 or 2 of this Agreement. Subject to Section 3.1 hereof, Invacare may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as Invacare shall determine to be required pursuant to any law or government regulation or ruling. Without limiting the generality of the foregoing, Invacare may withhold from any amount payable under any of Section 1 and/or Sections 2.1 through 2.3 of this Agreement amounts sufficient to satisfy any withholding requirements that may arise out of any benefit provided to or in respect of the Executive by Invacare under Section 2 of this Agreement.
7. Term of this Agreement. This Agreement shall be effective as of the date first above written and shall thereafter apply to any Change of Control occurring on or before December 31, 2000 or during any succeeding applicable term, and on December 31, 2000 and on December 31 of each succeeding year thereafter (a "Renewal Date"), the term of this Agreement, if not previously terminated, shall be automatically extended for an additional year unless either party has given notice to the other, at least one year in advance of that Renewal Date, that the Agreement shall not apply to any Change of Control occurring after that Renewal Date.
7.1 Termination of Agreement Upon Termination of Employment Before a Change of Control. This Agreement shall automatically terminate on the first date occurring before a Change of Control on which the Executive is no longer employed by Invacare, except that, for purposes of this Agreement, any termination of employment of the Executive that is effected before and primarily in contemplation of a Change of Control that actually occurs after the date of the termination shall be deemed to be a termination of the Executive's employment as of the date immediately after that Change of Control.
7.2 No Termination of Agreement During Three Year Period Beginning on Date of a Change of Control. After a Change of Control, this Agreement may not be terminated. However, if the Executive's employment with Invacare continues for more than three years following the occurrence of a Change of Control, then, for all purposes of this Agreement other than Sections 1 and 3.1, that particular Change of Control shall thereafter be treated as if it never occurred.
8. Miscellaneous.
8.1 Successor to Invacare. Invacare shall not consolidate with or merge into any other corporation, or transfer all or substantially all of its assets to another corporation, unless such other corporation shall assume this Agreement in a signed writing and deliver a copy thereof to the Executive. Upon such assumption, the successor corporation shall become obligated to perform the obligations of Invacare under this Agreement and the term "Invacare" as used in this Agreement shall be deemed to refer to such successor corporation.
8.2 Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or by confirmed facsimile transmission (to the General Counsel of Invacare in the case of notices to Invacare and to the Executive in the case of notices to the Executive) or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows:
If to Invacare:
Invacare Corporation
One Invacare Way
Elyria, OH 44035
Attention: General Counsel
If to the Executive:
or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.
8.3 Employment Rights. Nothing expressed or implied in this Agreement shall create any right or duty on the part of Invacare or the Executive to have the Executive continue as an officer of Invacare or to remain in the employment of Invacare.
8.4 Administration. Invacare shall be responsible for the general administration of this Agreement and for making payments under this Agreement. All fees and expenses billed by the Accounting Firm for services contemplated under this Agreement shall be the responsibility of Invacare.
8.5 Source of Payments. Any payment specified in this Agreement to be made by Invacare may be made directly by Invacare solely from its general assets, and the Executive shall have the rights of an unsecured general creditor of Invacare with respect thereto.
8.6 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect.
8.7 Modification; Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in a writing signed by the Executive and Invacare. No waiver by either party hereto at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time.
8.8 Entire Agreement; Supercession. Except as otherwise specifically provided herein, this Agreement, including its attachments, contains the entire agreement between the parties concerning the subject matter hereof and
incorporates and supersedes any and all prior discussions or agreements, written or oral, the parties may have had with respect to such subject matter; provided, however, that except as expressly provided otherwise herein nothing in this Agreement shall affect any rights the Executive or anyone claiming through the Executive may have in respect of either (a) any Employee Benefit Plan which provides benefits to or in respect of the Executive or (b) any other agreements the Executive may have with Invacare or an Affiliate, except to the extent any such Employee Benefit Plan or other agreement provides benefits which are duplicative of those provided under this Agreement.
8.9 Post-Mortem Payments; Designation of Beneficiary. In the event that, following the termination of the Executive's employment with Invacare, the Executive is entitled to receive any payments pursuant to this Agreement and the Executive dies, such payments shall be made to the Executive's Beneficiary designated hereunder. At any time after the execution of this Agreement, the Executive may prepare, execute, and file with the Secretary of the Company a copy of the Designation of Beneficiary form attached to this Agreement as Exhibit A. The Executive shall thereafter be free to amend, alter or change such form; provided, however, that any such amendment, alteration or change shall be made by filing a new Designation of Beneficiary form with the Secretary of the Company. In the event the Executive fails to designate a beneficiary, following the death of the Executive all payments of the amounts specified by this Agreement which would have been paid to the Executive's designated beneficiary pursuant to this Agreement shall instead be paid to the Executive's spouse, if any, if she survives the Executive or, if there is no spouse or she does not survive the Executive, to the Executive's estate.
8.10 Service with Affiliates. Any services the Executive performs for an Affiliate shall be deemed performed for Invacare. Any transfer of the Executive's employment from Invacare to an Affiliate, or from an Affiliate to Invacare, or from an Affiliate to another Affiliate shall be deemed not to constitute a termination of the Executive's employment with Invacare.
8.11 Time Periods. Any action required to be taken under this Agreement within a certain number of days shall be taken within that number of calendar days; provided, however, that if the last day for taking such action falls on a weekend or a holiday, the period during which such action may be taken shall be automatically extended to the next business day. If the day for taking any action under this Agreement falls on a weekend or a holiday, such action may be taken on the next business day.
8.12 Incorporation by Reference. The incorporation herein of any terms by reference to another document shall not be affected by the termination of any agreement set forth in such other document or the invalidity of any provisions thereof.
8.13 Binding Effect; Construction of Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal representatives, executors, administrators, successors, heirs, and designees (including, without limitation, the Beneficiary). Upon the Executive's death, for purposes of this Agreement, the term "Executive" shall be deemed to include,
as applicable, any person (including, without limitation, the Beneficiary) who is entitled to benefits under this Agreement following the Executive's death.
8.14 Governing Law. All questions concerning the construction, validity and interpretation of this Agreement and the exhibits hereto will be governed by and construed in accordance with the internal laws of the State of Ohio, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Ohio or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Ohio.
8.15 Representations and Warranties of Invacare. Invacare represents and
warrants to the Executive that (i) Invacare is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Ohio; (ii)
Invacare has the power and authority to enter into and carry out this Agreement,
and there exists no contractual or other restriction upon its so doing; (iii)
Invacare has taken such corporate action as is necessary or appropriate to
enable it to enter into and perform its obligations under this Agreement; and
(iv) this Agreement constitutes the legal, valid and binding obligation of
Invacare, enforceable against Invacare in accordance with its terms.
9. Definitions.
9.1 Accounting Firm. The term "Accounting Firm" means the independent auditors of Invacare for the fiscal year preceding the year in which the Change of Control occurred and such firm's successor or successors; provided, however, if such firm is unable or unwilling to serve and perform in the capacity contemplated by this Agreement, Invacare shall select another national accounting firm of recognized standing to serve and perform in that capacity under this Agreement, except that such other accounting firm shall not be the then independent auditors for Invacare or any of its Affiliates.
9.2 Affiliate. The term "Affiliate" shall mean, with respect to any person or entity, any other person or entity which controls, is controlled by, or is under common control with such person or entity.
9.3 Annual Base Salary. "Annual Base Salary" means the highest annual rate of base salary payable by Invacare to the Executive at any time between the Effective Date and the Termination Date.
9.4 Beneficiary. "Beneficiary" means the person designated by the Executive as his beneficiary pursuant to Section 8.9 or such other person as determined pursuant to Section 8.9 hereof.
9.5 Cause. The employment of the Executive by Invacare shall have been terminated for "Cause" if, after a Change of Control and prior to the termination of employment, any of the following has occurred:
(a) the Executive shall have been convicted of a felony,
(b) the Executive commits an act or series of acts of dishonesty in the course of the Executive's employment which are materially inimical to the best interests of Invacare and which constitutes the commission of a felony, all as determined by the vote of three-fourths of all of the members of the Board of Directors of Invacare (other than the Executive, if the Executive is a Director of Invacare), which determination is confirmed by a panel of three arbitrators appointed and acting in accordance with the rules of the American Arbitration Association for the purpose of reviewing that determination,
(c) any federal or state regulatory agency with jurisdiction over Invacare has issued a final order, with no further right of appeal, that has the effect of suspending, removing, or barring the Executive from continuing his service as an officer or director of Invacare, or
(d) after being notified in writing by the Board of Directors of Invacare to cease any particular Competitive Activity, the Executive shall intentionally continue to engage in such Competitive Activity while the Executive remains in the employ of Invacare.
9.6 Change of Control. A "Change of Control" shall be deemed to have occurred at the first time on which, after the Effective Date:
(a) (1) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report), each as adopted under the Securities Exchange Act of 1934, as amended, disclosing the acquisition, in a transaction or series of transactions by any person (as the term "person" is used in Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than A. Malachi Mixon and/or any Affiliate of A. Malachi Mixon, of such number of shares of Invacare as entitles that person to exercise 20% or more of the voting power of Invacare in the election of Directors and (2) a majority of those members of the Board of Directors who are not individually a party to an agreement which is, mutatis mutandis, substantially similar to this Agreement (the "Disinterested Directors") determine that the acquisition (the "Reported Acquisition") is likely to result in a change in the effective control of Invacare; or
(b) During any period of 24 consecutive calendar months, individuals who at the beginning of such period constitute the Directors of Invacare cease for any reason to constitute at least a majority of the Directors of Invacare unless the election of each new Director of Invacare was approved or recommended by the vote of at least two-thirds of the Directors of Invacare then still in office who were Directors of Invacare at the beginning of the period; or
(c) There is a merger, consolidation, combination (as defined in
Section 1701.01(Q), Ohio Revised Code), majority share acquisition (as
defined in Section 1701.01(R), Ohio Revised Code), or control share
acquisition (as defined in Section 1701.01(Z)(1), Ohio Revised Code,
or in Invacare's Articles of Incorporation) involving Invacare and as
a result of which the holders of shares of Invacare prior to the transaction become, by reason of the transaction, the holders of such number of shares of the surviving or acquiring corporation as entitles them to exercise less than fifty percent (50 %) of the voting power of the surviving or acquiring corporation in the election of Directors; or
(d) There is a sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Invacare, but only if the transferee of the assets in such transaction is not an Affiliate of Invacare; or
(e) The shareholders of Invacare approve any plan or proposal for the liquidation or dissolution of Invacare, but only if the transferee of the assets of Invacare in such liquidation or dissolution is not an Affiliate of Invacare.
If an event described in any of Clauses (b), (c), (d), and (e) occurs, a Change in Control shall be deemed to have occurred for all purposes of this Agreement and, except as provided in the last sentence of Section 7.2, that Change in Control shall be irrevocable. If an event described in Clause (a) occurs, a Change of Control (hereinafter, sometimes referred to as a "Clause (a) Change of Control") shall be deemed to have occurred; but a Clause (a) Change of Control shall be subject to reversal, and shall be deemed to have been reversed if, on a subsequent date, a two thirds majority of the Disinterested Directors determine that the Reported Acquisition is no longer likely to result in a change in the effective control of Invacare; provided, that any such subsequent determination may not be made after the Termination Date or after the occurrence of any event described in any of Clauses (b), (c), (d), and (e). If a Clause (a) Change of Control is deemed to have been reversed as a result of the two-thirds majority determination described above, then, from and after the date of the reversal, that Clause (a) Change of Control shall be treated for purposes of this Agreement as if it had never occurred.
9.7 Competitive Activity. The Executive shall be deemed to have engaged in "Competitive Activity" if the Executive engages in any business or business activity (other than as a director, officer, or employee of Invacare) in which Invacare engages as of the time of the notice provided in Section 9.5(d).
9.8 Demotion or Removal. The Executive shall be deemed to have been subjected to "Demotion or Removal" if, during the three year period commencing on the date of a Change of Control, other than by Voluntary Resignation or with the Executive's written consent, the Executive ceases to hold the highest position held by him at any time during the one year period ending on the date of the Change of Control with all of the duties, authority, and responsibilities of that office as in effect at any time during the one year period ending on the date of the Change of Control.
9.9 Disability. For purposes of this Agreement, the Executive's employment will have been terminated by Invacare by reason of "Disability" of the Executive only if (a) as a result of accidental bodily injury or sickness, the Executive has been unable to perform his normal duties for Invacare for a period of 180 consecutive days, and (b) the Executive begins to receive payments under the
executive long term disability plan sponsored by Invacare not later than 30 days after the Termination Date.
9.10 Employee Benefit Plan. "Employee Benefit Plan" means any plan or arrangement defined as such in 29 U.S.C.ss.1002 which provides benefits to the employees of Invacare or its Affiliates.
9.11 Good Reason. The Executive shall have "Good Reason" to terminate his employment under this Agreement if, at any time after a Change of Control has occurred and before the third anniversary of that Change of Control, one or more of the events listed in (a) through (f) of this Section 9.11 occurs and, based on that event, the Executive gives notice of his intention to terminate his employment effective on a date that is both (i) within 90 days of the occurrence of that event and (ii) not later than the third anniversary of that Change of Control:
(a) The Executive is subjected to Demotion or Removal; or
(b) The Executive's Annual Base Salary is reduced; or
(c) The Executive's opportunity for incentive compensation is reduced from the level of his opportunity for incentive compensation as in effect immediately before the date of the Change of Control or from time to time thereafter; or
(d) The Executive is excluded from full participation in any benefit plan or arrangement maintained for senior executives of Invacare generally; or
(e) The Executive determines in good faith that his responsibilities, duties, or authority with Invacare are at any time materially less than or reduced from those held by him immediately before the Change of Control and the shortfall or reduction has not been cured within 90 days after the Executive gives notice to the Board of Directors of Invacare of his election to terminate his employment for Good Reason based upon that shortfall or reduction; or
(f) The Executive's principal place of employment for Invacare is relocated more than 35 miles from One Invacare Way, Elyria, Ohio.
9.12 Internal Revenue Code. A reference to any provision of the Internal Revenue Code means that provision of the Internal Revenue Code of 1986, as amended, and any successor provision, and any applicable regulations promulgated thereunder.
9.13 Target Bonus. "Target Bonus" means the Executive's Annual Base Salary multiplied by the higher of (a) the target bonus percentage in effect for the Executive under Invacare's bonus plan during the fiscal year immediately preceding the fiscal year in which the Change of Control occurs, or (b) the target bonus percentage in effect for the Executive under Invacare's bonus plan during the fiscal year in which the Change of Control occurs.
9.14 Termination Date. "Termination Date" means the date on which the Executive's employment with Invacare terminates.
9.15 Voluntary Resignation. A "Voluntary Resignation" shall have occurred if the Executive terminates his employment with Invacare by voluntarily resigning at his own instance without having been requested to so resign by Invacare, except that any resignation by the Executive will not be deemed to be a Voluntary Resignation if, at the time of that resignation, the Executive had Good Reason to resign.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
INVACARE CORPORATION
("Invacare")
Schedule of Agreements with Current Executive Officers
Name Position Date of Agreement
---- -------- -----------------
A. Malachi Mixon, III Chairman of the Board of Directors April 1, 2000
and Chief Executive Officer
Gerald B. Blouch President, Chief Operating Officer April 1, 2000
Gregory C. Thompson Senior Vice President and Chief November 12, 2002
Financial Officer
Joseph B. Richey, II President - Invacare Technologies, April 1, 2000
Senior Vice President - Electronics
and Design Engineering
Louis F.J. Slangen Senior Vice President - Sales & April 1, 2000
Marketing
Michael A. Perry Vice President-Distributed Products April 1, 2000
Joseph S. Usaj Senior Vice President - Human May 17, 2004
Resources
Dale C. LaPorte Senior Vice President - Business January 3, 2006
Development and General Counsel
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Exhbit 10(ae)
INVACARE CORPORATION
BOARD OF DIRECTORS COMPENSATION
Retainer Fee $35,000
Regular Meeting Fees $2,000
Committee Meeting Fees Member - $1,500
Chair - $2,000
Telephonic Meetings 50% for interim conference calls that are conducted
between scheduled meetings
Stock Components Option grant of 4,000 shares
Non-Employee Director Elective Stock Option Program Non-employee directors may elect to defer all or a
portion of their director fees into discounted stock
options.
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Exhibit 18
Board of Directors
Invacare Corporation
One Invacare Way
Elyria, Ohio 44036
The note titled Accounting Policies in the notes to the Consolidation Financial Statements of Invacare Corporation included in its Form 10-K for the year ended December 31, 2005 describes a change in the method of accounting for the valuation of certain inventories from the lower of cost, as determined by the last-in, first-out (LIFO) method, or market, to the lower of cost, as determined by the first-in, first-out (FIFO) method, or market. There are no authoritative criteria for determining a "preferable" inventory accounting method based on the particular circumstances; however, we conclude that such change in the method of accounting is to an acceptable alternative method which, based on your business judgment to make this change and for the stated reasons, is preferable in your circumstances.
Very truly yours,
/s/Ernst & Young LLP
Cleveland, Ohio
March 8, 2006
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Exhibit 21
Invacare Corporation Subsidiaries
1. 1207273 Alberta ULC, an Alberta, Canada corporation and wholly owned subsidiary.
2. 2083806 Ontario Inc., an Ontario corporation and wholly owned subsidiary.
3. 6123449 Canada, Inc., a Canadian corporation and wholly owned subsidiary.
4. Adaptive Switch Laboratories, Inc., a Texas corporation and wholly owned subsidiary.
5. Alber GmbH, Wurenlos, a Swiss corporation and wholly owned subsidiary.
6. Altimate Medical, Inc., a Minnesota corporation and wholly owned subsidiary.
7. Aquatec GmbH, Isny, a German limited liability company.
8. Aust Healthcare Equipment PTY, an Australian corporation and wholly owned subsidiary.
9. Carroll Healthcare (USA) Inc., a Nevada corporation and wholly owned subsidiary.
10. Carroll Healthcare, Inc., an Ontario corporation and wholly owned subsidiary.
11. Champion Manufacturing Inc., a Delaware corporation and wholly owned subsidiary.
12. Dolomite AB, Gislaved, a Swedish corporation and wholly owned subsidiary.
13. Dolomite Holding AB, Gislaved, a Swedish corporation and wholly owned subsidiary.
14. Dynamic Controls, a New Zealand corporation and wholly owned subsidiary.
15. Dynamic Europe Ltd, a U.K. corporation and wholly owned subsidiary.
16. EC-Hong A/S, a Danish corporation and wholly owned subsidiary.
17. Freedom Designs, Inc., a California corporation and wholly owned subsidiary
18. Garden City Medical Inc., a Delaware corporation and wholly owned subsidiary.
19. Healthtec Products, Inc., a Missouri corporation and wholly owned subsidiary.
20. Invacare AB, a Swedish corporation and wholly owned subsidiary.
21. Invacare A/S, a Danish corporation and wholly owned subsidiary.
22. Invacare AS, a Norwegian corporation and wholly owned subsidiary.
23. INVCR Australia Pty Limited, an Australian corporation and wholly owned subsidiary.
24. Invacare Bencraft, a U.K. corporation and wholly owned subsidiary.
25. Invacare BV, a Netherlands corporation and wholly owned subsidiary.
26. Invacare Canada General Partner Inc., a Canadian corporation and wholly owned subsidiary.
27. Invacare Canada LP, an Ontario, Canada partnership and wholly owned subsidiary.
28. Invacare Canada Holdings, Inc., a Canadian corporation and wholly owned subsidiary.
Invacare Corporation Subsidiaries--Continued
29. Invacare Canadian Holdings, Inc., a Delaware corporation and wholly owned subsidiary.
30. Invacare Credit Corporation, an Ohio corporation and wholly owned subsidiary.
31. Invacare (Deutschland) GmbH, a German corporation and wholly owned subsidiary.
32. Invacare Florida Corporation, a Delaware corporation and wholly owned subsidiary.
33. Invacare Florida Holdings, LLC, a Florida limited liability company and wholly owned subsidiary.
34. Invacare France Operations SAS, A French corporation and wholly owned subsidiary.
35. Invacare Germany Holding GmbH, a German corporation and wholly owned subsidiary
36. Invacare GmbH and Co. KG, a German corporation and wholly owned subsidiary.
37. Invacare Holding AB, a Swedish corporation and wholly owned subsidiary.
38. Invacare Holding BV, a Netherlands corporation and wholly owned subsidiary.
39. Invacare Holding Two AB, a Swedish corporation and wholly owned subsidiary.
40. Invacare Holdings AS, a Norwegian corporation and wholly owned subsidiary.
41. Invacare Holdings CV, a Netherlands wholly owned partnership subsidiary.
42. Invacare Holdings LLC, an Ohio limited liability corporation and wholly owned subsidiary.
43. INVCR Holdings NZ, a New Zealand corporation and wholly owned subsidiary.
44. Invacare Holdings Two BV, a Netherlands corporation and wholly owned subsidiary.
45. Invacare International Corporation, an Ohio corporation and wholly owned subsidiary.
46. Invacare International SARL, a Swiss corporation and wholly owned subsidiary.
47. Invacare UK Ltd., a U.K. corporation and wholly owned subsidiary.
48. Invacare Mauritius Holdings, a Republic of Mauritius company and wholly owned subsidiary.
49. Invacare MeccSan SrL, an Italian corporation and wholly owned subsidiary.
50. Invacare Medical Equipment (Kunshan) company, Ltd., a Chinese company and wholly owned subsidiary.
51. Invacare Medical Equipment (Suzhou) company, Ltd., a Chinese company and wholly owned subsidiary.
52. INVCR NZ, a New Zealand corporation and wholly owned subsidiary.
53. Invacare NV, a Belgium corporation and wholly owned subsidiary.
54. Invacare Poirier SAS, a French corporation and wholly owned subsidiary.
55. Invacare Rea AB, a Swedish corporation and wholly owned subsidiary.
56. Invacare Receivables Corporation, a Delaware corporation and wholly owned subsidiary.
Invacare Corporation Subsidiaries--Continued
57. Invacare Supply Group, Inc. (formerly Suburban Ostomy Supply company, Inc.), a Massachusetts corporation and wholly owned subsidiary.
58. Invacare Trading company, Inc., a United States Territory of the Virgin Islands corporation and wholly owned subsidiary.
59. Invacare Verwaltungs GmbH, a German corporation and wholly owned subsidiary.
60. Invacare (Portugual) - Sociedade Industrial e Comercial de Ortopedia., Lda., a Portugal company and wholly owned subsidiary.
61. Invacare(Portugual) II - Material Ortopedico, Lda., a Portugal company and wholly owned subsidiary.
62. Invacare, S.A., a Spanish corporation and wholly owned subsidiary.
63. Invamex S.A. de R.L. de C.V., a Mexican corporation and wholly owned subsidiary.
64. Invatection Insurance company, a Vermont corporation and wholly owned subsidiary.
65. INVCR Asia Ltd., a Hong Kong company and wholly owned subsidiary.
66. Medbloc, Inc., a Delaware corporation and wholly owned subsidiary.
67. Medical Support Systems Holdings Limited, a U.K. corporation and wholly owned subsidiary.
68. Medical Support Systems Limited, a U.K. corporation and wholly owned subsidiary
69. Mobitec Mobilitatshilfen Ges.m.b.H., Tiefgraben, an Austrian corporation and wholly owned subsidiary.
70. Mobitec Rehab AG, Wurenlos, a Swiss corporation and wholly owned subsidiary.
71. Mobitec S.a.r.l., Venissieux, a French corporation and wholly owned subsidiary.
72. Motion Concepts, Inc., an Ontario corporation and wholly owned limited subsidiary.
73. Motion Concepts, L.P., an Ontario wholly owned limited partnership.
74. MSS (Europe) Limited, a U.K. corporation and wholly owned subsidiary.
75. MSS Care Direct Limited, a U.K. corporation and wholly owned subsidiary.
76. Perpetual Motion Enterprises Inc., an Ontario corporation and wholly owned subsidiary.
77. Roller Chair Pty. Limited, an Australian corporation and wholly owned subsidiary.
78. Scandinavian Mobility GmbH, a German corporation and wholly owned subsidiary.
79. Scandinavian Mobility International AS, a Danish corporation and wholly owned subsidiary.
80. Sci Des Hautes Roches, a French partnership and wholly owned subsidiary.
81. The Aftermarket Group, Inc., a Delaware corporation and wholly owned subsidiary.
82. Ulrich Alber GmbH, Albstadt, a German limited liability company.
Note, "Wholly owned subsidiary" refers to indirect, as well as direct, wholly owned subsidiaries.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Forms S-8, No. 33-45993 dated February 24, 1992, No. 33-87052 dated December 5, 1994, No. 333-57978 dated March 30, 2001 and No. 333-109794 dated October 17, 2003) pertaining to the Invacare Corporation stock option plans of our reports dated March 8, 2006, with respect to the consolidated financial statements and schedule of Invacare Corporation and subsidiaries, Invacare Corporation management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Invacare Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2005.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
March 10, 2006
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Exhibit 31.1
CERTIFICATIONS
I, A. Malachi Mixon, III, certify that:
1. I have reviewed this annual report on Form 10-K of Invacare Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
INVACARE CORPORATION
By:/s/ A. Malachi Mixon, III
-------------------------
A. Malachi Mixon, III
Chief Executive Officer
(Principal Executive Officer)
Date: March 13, 2006
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Exhibit 31.2
CERTIFICATIONS
I, Gregory C. Thompson, certify that:
1. I have reviewed this annual report on Form 10-K of Invacare Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
INVACARE CORPORATION
By:/s/ Gregory C. Thompson
-------------------------
Gregory C. Thompson
Chief Financial Officer
(Principal Financial Officer)
Date: March 13, 2006
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Exhibit 32.1
Certification
Pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Invacare Corporation (the "company") on
Form 10-K for the period ending December 31, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, A. Malachi Mixon,
III, Chief Executive Officer of the company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
Dated: March 13, 2006
/s/ A. Malachi Mixon, III
---------------------
A. Malachi Mixon, III
Chief Executive Officer
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A signed original of this written statement required by Section 906 has been provided to Invacare Corporation and will be retained by Invacare Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification
Pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Invacare Corporation (the "company") on
Form 10-K for the period ending December 31, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Gregory C.
Thompson, Chief Financial Officer of the company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
Dated: March 13, 2006
/s/ Gregory C. Thompson
-------------------
Gregory C. Thompson
Chief Financial Officer
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A signed original of this written statement required by Section 906 has been provided to Invacare Corporation and will be retained by Invacare Corporation and furnished to the Securities and Exchange Commission or its staff upon request.