INVACARE CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended March 31, 2004
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Commission File Number 0-12938
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Invacare Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Ohio 95-2680965
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(State or other jurisdiction of (IRS Employer Identification No)
incorporation or organization)

One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
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(Address of principal executive offices)

(440)329-6000
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(Registrant's telephone number, including area code)

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(Former name, former address and former fiscal year, if change since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12 or 15 (d) of the Securities Exchange Act of 1934 (the
"Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----

Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes X No
----- -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:

As of May 4, 2004, the company had 30,151,851 Common Shares and 1,112,023 Class
B Common Shares outstanding.

INVACARE CORPORATION

INDEX

Part I. FINANCIAL INFORMATION: Page No.
- ------------------------------ --------

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheet -

March 31, 2004 and December 31, 2003.........................3

Condensed Consolidated Statement of Earnings -

Three Months Ended March 31, 2004 and 2003...................4

Condensed Consolidated Statement of Cash Flows -

Three Months Ended March 31, 2004 and 2003...................5

Notes to Condensed Consolidated Financial

Statements - March 31, 2004..................................6

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations...............10

Item 3. Quantitative and Qualitative Disclosure of Market Risk...............15

Item 4. Controls and Procedures..............................................16

Part II. OTHER INFORMATION:
- ---------------------------

Item 1. Legal Proceedings....................................................16

Item 2. Change in Securities and Use of Proceeds.............................16

Item 6. Exhibits and Reports on Form 8-K.....................................16

SIGNATURES....................................................................17

2

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

See notes to condensed consolidated financial statements.

3

INVACARE CORPORATION AND SUBSIDIARIES Condensed
Consolidated Statement of Earnings - (unaudited)

Three Months Ended
(In thousands except per share data) March 31,
2004 2003
-------- --------
Net sales $321,343 $276,673
Cost of products sold 227,964 196,222
-------- --------
Gross Profit 93,379 80,451
Selling, general and administrative expense 71,238 60,520
Interest expense 2,759 2,700
Interest income (1,659) (1,036)
-------- --------
Earnings before Income Taxes 21,041 18,267
Income taxes 6,840 6,010
-------- --------
NET EARNINGS $ 14,201 $ 12,257
======== ========
DIVIDENDS DECLARED PER
COMMON SHARE .0125 .0125
======== ========

Net Earnings per Share - Basic $ 0.46 $ 0.40
======== ========
Weighted Average Shares Outstanding - Basic 31,094 30,830
======== ========
Net Earnings per Share - Assuming Dilution $ 0.44 $ 0.39
======== ========
Weighted Average Shares Outstanding -
Assuming Dilution 32,272 31,431
======== ========

See notes to condensed consolidated financial statements.

4

See notes to condensed consolidated financial statements.

5

INVACARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated
Financial Statements
(Unaudited)
March 31, 2004

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 and its majority owned subsidiaries and include all
adjustments, which were of a normal recurring nature, necessary to present
fairly the financial position of the company as of March 31, 2004 and the
results of its operations for the three months ended March 31, 2004 and 2003,
respectively, and changes in its cash flows for the three months ended March 31,
2004 and 2003, respectively. Certain foreign subsidiaries are consolidated using
a February 29 quarter end. The results of operations for the three months ended
March 31, 2004, are not necessarily indicative of the results to be expected for
the full year. 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.

Business Segments - The company reports its results of operations through three
primary business segments based on geographical area: North America, Europe and
Australasia. The three reportable segments represent operating groups that sell
products in different geographic regions.

The North America segment includes net sales from the following five primary
product lines: standard, rehab, distributed, respiratory, and continuing care
products. The Europe and Australasia segments include net sales from the same
product lines with the exception of distributed products. Each business also
includes net sales from 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 for the company's
consolidated financial statements. Intersegment net sales and transfers are
based on the costs to manufacture plus a reasonable profit element. Therefore,
intercompany profit or loss on intersegment net sales and transfers are not
considered in evaluating segment performance. Intersegment net sales for
reportable segments was $19,343,000 for the three months ended March 31, 2004,
and $15,729,000 for the same period in the preceding year.

6

The information by segment is as follows (in thousands):

Three Months Ended
March 31,
2004 2003
---- ----
Revenues
North America $237,283 $200,383
Europe 69,338 62,439
Australasia 14,722 13,851
------- -------
Consolidated $321,343 $276,673
======= =======

Earnings (loss) before income taxes
North America $21,871 $16,108
Europe 1,140 2,320
Australasia 437 1,266
All Other * (2,407) (1,427)
------- -------
Consolidated $21,041 $18,267
======= =======

* Consists of the domestic export unit, unallocated corporate selling,
general and administrative costs, the Invacare captive insurance unit, and
intercompany profits which do not meet the quantitative criteria for
determining reportable segments.

Net Earnings Per Common Share - The following table sets forth the computation
of basic and diluted net earnings per common share for the periods indicated.

Three Months Ended
March 31,
2004 2003
---- ----
(In thousands, except per share
data)
Basic
Average common shares outstanding 31,094 30,830

Net earnings $14,201 $12,257

Net earnings per common share $ 0.46 $ 0.40

Diluted
Average common shares outstanding 31,094 30,830
Stock options and awards 1,178 601
------ ------
Average common shares assuming dilution 32,272 31,431

Net earnings $14,201 $12,257

Net earnings per common share $ 0.44 $ 0.39

7

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 leased 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
all 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 ($30,243,000 at March 31, 2004) to DLL for events of
default under the contracts (total balance outstanding of $76,919,000 at March
31, 2004). Accordingly, the company monitors the collections status of these
contracts and has provided amounts for estimated losses in its allowances for
doubtful accounts.

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. Credit losses are
provided for in the financial statements.

Goodwill and Other Intangibles - The change in goodwill reflected on the balance
sheet from December 31, 2003 to March 31, 2004 was the result of two strategic
acquisitions with an increase in goodwill of $17,929,000 in North America with
the balance attributable to currency translation.

The total cost for two of the 2003 acquisitions excludes certain contingent
consideration that has not yet been determined. As part of the Carroll
Healthcare, Inc. purchase agreement, the company agreed to pay additional
consideration based upon earnings before interest, taxes, depreciation and
amortization from September 1, 2003 through August 31, 2004 calculated under
Canadian generally accepted accounting principles with no defined maximum
amount. Pursuant to the Motion Concepts, Inc. 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. When the contingencies related to both of the
acquisitions are settled, any additional consideration paid will increase the
respective purchase price and reported goodwill.

All of the company's other intangible assets have definite lives and are
amortized over their useful lives, except for $4,767,000 related to trademarks,
which have indefinite lives. As of March 31, 2004 and December 31, 2003, other
intangibles consisted of the following (in thousands):

March 31, 2004 December 31, 2003
--------------------------- ---------------------------

Historical Accumulated Historical Accumulated
Cost Amortization Cost Amortization
------ ------------ ------ ------------
License agreements $6,464 $4,616 $6,455 $4,464
Customer lists 9,865 1,110 6,105 936
Trademarks 4,767 - 4,268 -
Patents 2,357 1,173 2,180 1,109
Other 4,445 1,374 3,406 1,227
------ ----- ----- -----
$27,898 $8,273 $22,414 $7,736
====== ====== ======= ======

Amortization expense related to other intangibles was $537,000 in the first
quarter of 2004 and is estimated to be $2,147,000 in 2005, $1,631,000 in 2006,
$1,323,000 in 2007, $1,230,000 in 2008 and $1,444,000 in 2009.

8

Accounting for Stock-Based Compensation - The company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. Accordingly, the company has
not recognized compensation cost for non-qualified stock options. The company
does record, however, compensation cost on restricted common shares based on the
vesting periods. Had compensation cost for the company's stock option plans been
determined based on the fair value at the grant date for awards in 2004 and 2003
consistent with the provisions of SFAS No. 123, the company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):

Three Months Ended
March 31,
2004 2003
---- ----
Net earnings - as reported * $14,201 $12,257
Less: compensation expense determined based on the
fair-value method for all awards granted at
market value, net of related tax effects 953 1,141
------ ------
Net earnings - pro forma $13,248 $11,116
======= =======

Earnings per share as reported - basic $0.46 $0.40
Earnings per share as reported - assuming dilution $0.44 $0.39

Pro forma earnings per share - basic $0.43 $0.36
Pro forma earnings per share - assuming dilution $0.41 $0.35

* Includes stock compensation expense, net of tax, on
restricted awards granted without cost to recipients of: $114 $77

Warranty Costs - 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.

The following is a reconciliation of the changes in accrued warranty costs for
the reporting period (in thousands):

Balance as of January 1, 2004 $ 12,688
Warranties provided during the period 1,762
Settlements made during the period (3,037)
Changes in liability for pre-existing warranties during
the period, including expirations 126
------
Balance as of March 31, 2004 $11,539
======

9

Comprehensive Earnings - Total comprehensive earnings were as follows (in
thousands):

Three Months Ended
March 31,
2004 2003
---- ----
Net earnings $14,201 $12,257
Foreign currency translation gain 10,324 21,559
Unrealized gain (loss) on available for sale securities 10 (21)
Current period unrealized loss on cash flow hedges (1,055) (852)
------ ------
Total comprehensive earnings $23,480 $32,943
====== ======

Inventories - Inventories consist of the following components (in thousands):

March 31, December 31,
2004 2003
---- ----
Raw materials $ 45,533 $ 41,573
Work in process 15,187 18,711
Finished goods 70,802 70,695
------- -------
$131,522 $130,979
======= =======

The final inventory determination under the LIFO method is made at the end of
each fiscal year based on the inventory levels and cost at that point;
therefore, interim LIFO determinations are based on management's estimates of
expected year-end inventory levels and costs.

Property and Equipment - Property and equipment consist of the following (in
thousands):

March 31, December 31,
2004 2003
---- ----
Land, buildings and improvements $ 68,824 $ 67,364
Machinery and equipment 225,598 216,459
Furniture and fixtures 21,771 20,737
Leasehold improvements 15,587 14,946
------- -------
331,780 319,506
Less allowance for depreciation (177,139) (169,455)
------- -------
$ 154,641 $ 150,051
======= =======

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q and our Current Report on Form
8-K filed on April 15, 2004.

10

OUTLOOK

The company is continuing to execute its strategic plans and consistent with
prior guidance for 2004, the company expects net sales to increase between 12%
and 14% and earnings per share between $2.45 and $2.55. Excluding foreign
currency and acquisitions, the net sales increase is expected to be between 8%
and 10%. For the second quarter, the company expects net sales to increase
between 15% and 17% and earnings per share between $0.53 and $0.57. In late
March 2004, the Centers for Medicare and Medicaid Services (CMS) retracted its
December 2003 bulletin restricting Medicare coverage of power wheelchairs for
seniors and people with disabilities. Although we are hopeful that this change
in the rules will lead to more stability and predictability in the power
wheelchair market and should return reimbursement levels to be consistent with
those of previous years, much uncertainty remains. CMS continues to scrutinize
this area and Congressional inquiries regarding the eligibility and pricing for
power wheelchairs are being conducted. The company has taken a leadership role
in cooperating with the various agencies to help eliminate Medicare fraud and
abuse, while also defending the rights of Americans to have appropriate access
to medically necessary items, including power wheelchairs.

RESULTS OF OPERATIONS

NET SALES

Net sales for the three months ended March 31, 2004 were $321,343,000, compared
to $276,673,000 for the same period a year ago, representing a 16% increase.
Foreign currency translation and acquisitions accounted for 6% and 8% of the net
sales increase for the quarter, respectively. Excluding the impact of currency
and acquisitions, net sales growth was driven primarily by volume increases in
North America.

North American Operations

North American net sales, consisting of Rehab (power wheelchairs, custom manual
wheelchairs, personal mobility and seating and positioning), Standard (manual
wheelchairs, personal care, home care beds, low air loss therapy and patient
transport), Continuing Care (beds and furniture), Respiratory (oxygen
concentrators, aerosol therapy, sleep, homefill and associated respiratory) and
Distributed (ostomy, incontinence, diabetic, wound care and other medical
supplies) products, increased 18% for the quarter. The increase for the quarter
was principally due to net sales increases in Respiratory products (38%), Rehab
products (22%), Continuing Care products (93%) and Distributed products (33%),
which were partially offset by declines in Standard products (11%). Excluding
acquisitions, Rehab product net sales increased by 10%, Continuing Care product
net sales increased by 5% and Distributed products increased by 19% for the
quarter. Respiratory growth was largely due to strong performance in the
HomeFill(TM) oxygen system product line and oxygen concentrators. Rehab growth
was driven by increased sales of custom power products led by the Storm
Series(R) TDX(TM) power wheelchair which offset slower sales of power products,
resulting from the tightening by the Centers for Medicare and Medicaid Services
of power wheelchair eligibility rules for seniors and people with disabilities.
Net sales of Standard products continued to decline primarily due to continued
pricing pressures.

11

European Operations

European net sales increased 11% to $69,338,000 for the three months ended March
31, 2004 from $62,439,000 for the three months ended March 31, 2003. Adjusting
for the impact of foreign currency translation, European net sales decreased 5%
for the quarter, when compared to the same period a year ago, primarily due to
continued pricing pressure in Germany and reduced funding in other key markets.
Adjusting for foreign currency and acquisitions, net sales declined 9% for the
quarter.

Australasia Operations

The Australasia operations consists of Invacare Australia, which imports and
distributes the entire line of Invacare products and manufactures and
distributes the Rollerchair line of custom power wheelchairs and Pro Med lifts;
Dynamic Controls, a New Zealand manufacturer of electronic operating components
used in power wheelchairs and scooters; and Invacare New Zealand, a manufacturer
of wheelchairs and beds and a distributor of a wide range of home medical
equipment. Australasian net sales increased 6% to $14,722,000 from $13,851,000
in the first quarter. Adjusting for the impact of foreign currency translation,
Australasian net sales decreased 14% for the quarter, when compared to the same
period a year ago. This sales decline was primarily due to lower sales of
microprocessor controllers, resulting from a global slowdown in the production
of power wheelchairs.

GROSS PROFIT

Gross profit as a percentage of net sales for the three month period ended March
31, 2004 was 29.1%, unchanged from the same period a year ago. The positive
impact of continuing cost reduction initiatives on gross margin was offset
primarily by ongoing competitive pricing pressures and by an increase in sales
mix towards lower margin products. North American margins improved by .4 of a
percentage point for the first three months of the year to 29.5% compared with
29.1% in the same period in the prior year principally as a result of an
increase in higher margin continuing care and rehab products and continued cost
reductions. Gross margin in Europe improved year to date by .7 of a percentage
point primarily due to favorable sales mix towards higher margin products, cost
reductions and favorable foreign currency translation. Gross margin in
Australasia declined by 10.0 percentage points largely due to unfavorable sales
mix towards 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

Selling, general and administrative expense as a percentage of net sales for the
three months ended March 31, 2004 was 22.2% compared to 21.9% in the same period
a year ago. The dollar increase was $10,718,000 or 17.7% for the quarter. The
increase largely was due to acquisitions, foreign currency translation and
higher distribution and commission costs due to higher sales volumes. Excluding
the impact of foreign currency translation and acquisitions, selling, general
and administrative expense increased 4.8% for the quarter compared to the same
period a year ago.

North American selling, general and administrative cost increased $7,113,000 or
16.6% for the quarter compared to the same period a year ago, with foreign
currency translation accounting for approximately 1% of the increase. The
overall dollar increase for the quarter primarily resulted from acquisitions as
well as higher distribution and commission costs. European selling, general and
administrative cost increased $4,027,000 or 25.9% for the quarter compared to
the same period a year ago, with foreign currency accounting for 69.4% of the

12

overall dollar increase. The remaining increase was primarily attributable to
additional programs to re-establish sales growth. Australasian selling, general
and administrative cost declined $422,000 or 19.4% for the quarter compared to
the first quarter of 2003, principally as a result of continued expense control.

INTEREST

For the quarter, interest expense was comparable to the same period a year ago.
Interest income for the quarter increased by $623,000 compared to the same
period a year ago due to an increase in loan origination fees received from De
Lage Landen Inc.

INCOME TAXES

The company had an effective tax rate of 32.5% for the three month period ended
March 31, 2004, compared with 32.9% for the same period a year ago.

LIQUIDITY AND CAPITAL RESOURCES

The company's reported level of long-term debt increased $360,000 to
$232,398,000 for the three months ended March 31, 2004. The company continues to
maintain an adequate liquidity position to fund its working capital and capital
requirements through its bank lines of credit and working capital management. As
of March 31, 2004, the company had approximately $312,665,000 available under
its lines of credit. Under the most restrictive covenant of the company's
borrowing arrangements, the company has the capacity to borrow up to an
additional $265,517,000 as of March 31, 2004.

The company's borrowing arrangements contain covenants with respect to 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. As of March 31, 2004, the company was in compliance with all
covenant requirements.

CAPITAL EXPENDITURES

The company had no material capital expenditure commitments outstanding as of
March 31, 2004. The company expects to continue to invest in capital projects at
a rate that equals or exceeds depreciation and amortization in order to maintain
and improve the company's competitive position. The company estimates that
capital investments for 2004 will be approximately $35,000,000. The company
believes that its balances of cash and cash equivalents, together with funds
generated from operations and existing borrowing facilities will be sufficient
to meet its operating cash requirements and to fund required capital
expenditures for the foreseeable future.

CASH FLOWS

Cash flows provided by operating activities were $30,325,000 for the first three
months of 2004 compared to $19,244,000 in the first quarter of 2003. The
increase in operating cash flows for the first three months of the year was
largely due to improved profits, decreased inventory resulting from increased
revenues and increased accounts payable resulting from extended payment
schedules to suppliers, partially offset by decreased accrued expenses, whereas
accounts receivable and inventory increased and accounts payable declined in the
first quarter of last year.

13

Cash used for investing activities was $41,026,000 for the first three months of
2004 compared to $5,112,000 in 2003. The increase was primarily due to the
acquisition of two companies during the first quarter of 2004 and increased
capital expenditures.

Cash used for financing activities was $608,000 for the first three months of
2004 compared to cash used of $22,610,000 in 2003. Financing activities for the
first three months of 2004 were impacted by a decrease in the company's net
long-term borrowings of $3,883,000 as a result of continued debt payments that
was principally offset by the acquisition of two companies during the first
quarter of 2004.

The effect of foreign currency translation and acquisitions may result in
amounts being shown for cash flows in the Condensed Consolidated Statement of
Cash Flows that are different from the changes reflected in the respective
balance sheet captions.

DIVIDEND POLICY

On March 11, 2004, the company's Board of Directors declared a quarterly cash
dividend of $0.0125 per Common Share to shareholders of record as of April 1,
2004, to be paid on April 5, 2004. At the current rate, the cash dividend will
amount to $0.05 per Common Share on an annual basis.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements include accounts of the company and all
majority-owned subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements and related footnotes. In preparing these financial statements,
management has made its best estimates and judgments of certain amounts included
in the financial statements, giving due consideration to materiality. There has
been no change in the company's critical accounting policies as disclosed in its
Form 10-K filed for the year ended December 31, 2003. In addition, no new
critical accounting policies have been adopted in the first three months of
2004. The company does not believe that there is a substantial likelihood that
materially different amounts would be reported related to its critical
accounting policies. However, application of these accounting policies involves
the exercise of judgment and use of assumptions as to future uncertainties and,
as a result, actual results could differ from these estimates.

RECENTLY ADOPTED ACCOUNTING POLICIES

Accounting for Variable Interest Entities
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.

14

As of March 31, 2004, the company had an investment in 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. The net
advances and investment recorded on the company's books is approximately $3.3
million at March 31, 2004. Based on the provisions of FIN 46 and the company's
analysis, it has determined that it is not currently the primary beneficiary of
this development stage company. The company will re-evaluate whether or not it
is the primary beneficiary if and when changes occur with the VIE or the
company's association with the VIE as outlined by FIN 46.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The company is exposed to market risk through various financial instruments,
including fixed rate and floating rate debt instruments. The company uses
interest rate swap agreements to mitigate its exposure to interest rate
fluctuations. Based on March 31, 2004 debt levels, a 1% change in interest rates
would impact interest expense by approximately $1,774,000 over the next twelve
months. Additionally, the company operates internationally and as a result is
exposed to foreign currency fluctuations. Specifically, the exposure includes
intercompany loans and third party sales or payments. In an attempt to reduce
this exposure, foreign currency forward contracts are utilized. The company does
not believe that any potential loss related to these financial instruments would
have a material adverse effect on the company's financial condition or results
of operations.

FORWARD-LOOKING STATEMENTS

The statements contained in this Form 10-Q constitute forward-looking statements
within the meaning of the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Terms such as "will," "should," "plan," "intend,"
"expect," "continue," "believe," "anticipate" and "seek," as well as similar
comments, are forward-looking in nature. Actual results and events may differ
significantly from those expressed or anticipated as a result of risks and
uncertainties which include, but are not limited to, the following: pricing
pressures, the success of the Company's ongoing efforts to reduce costs,
increasing raw material costs, the consolidations of health care customers and
competitors, government reimbursement issues (including those that affect the
sales of and margins on product, along with the viability of customers), the
ability to design, manufacture, distribute and achieve market acceptance of new
products with higher functionality and lower costs, the effect of offering
customers competitive financing terms, Invacare's ability to successfully
identify, acquire and integrate acquisition candidates, the difficulties in
managing and operating businesses in many different foreign jurisdictions, the
timely completion of facility consolidations, the vagaries of any litigation or
regulatory investigations that the Company may be or become involved in at any
time, the difficulties in acquiring and maintaining a proprietary intellectual
property ownership position, the overall economic, market and industry growth
conditions (including, the impact that acts of terrorism may have on such growth
conditions), foreign currency and interest rate risks, Invacare's ability to
improve financing terms and reduce working capital, as well as the risks
described from time to time in Invacare's reports as filed with the Securities
and Exchange Commission. We undertake no obligation to review or update these
forward-looking statements or other information contained herein.

Item 3. Quantitative and Qualitative Disclosure of Market Risk.

The information called for by this item is provided under the same caption under
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.

15

Item 4. Controls and Procedures.

As of March 31, 2004, an evaluation was performed, under the supervision and
with the participation of the company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the company's disclosure
controls and procedures. Based on that evaluation, the company's management,
including the CEO and CFO, concluded that the company's disclosure controls and
procedures were effective as of March 31, 2004 in ensuring that information
required to be disclosed by the company in the reports it files and submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. There were no
changes in the company's internal control over financial reporting that occurred
during the company's most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the company's internal control
over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

On March 5, 2004, Respironics, Inc. and its subsidiary, RIC Investments, Inc.
(collectively, "Respironics"), filed a patent infringement lawsuit against the
company in the United States District Court, Western District of Pennsylvania.
The complaint alleges that Invacare's Polaris(TM) EX(TM) CPAP (Continuous
Positive Airway Pressure) device, which features Invacare's own patent-pending
SoftX(TM) technology, infringes on 11 patents held by Respironics. Respironics
is seeking unspecified monetary damages and injunctive relief. The company does
not believe the Invacare(R) Polaris(TM) EX(TM) CPAP infringes on any of the
Respironics' patents and we have filed an answer to Respironics' complaint and
denied all claims. While the company is unable at the present time to predict
the timing or impact of the ultimate outcome of this litigation, the company
will vigorously defend its position.

Item 2. Change in Securities and Use of Proceeds

On August 17, 2001, the Board of Directors authorized the company to purchase up
to 2,000,000 common shares. To date, the company has purchased 526,300 shares
with authorization remaining to purchase 1,473,700 more shares. The company did
not repurchase any common shares in the first quarter of 2004.

Item 6. Exhibits

A Exhibits:
Official Exhibit No.
31.1 Certification of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed
herewith).
31.2 Certification of the Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed
herewith).
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
(furnished herewith).
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
(furnished herewith).

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B Reports on Form 8-K:

A Form 8-K was furnished on January 22, 2004 under Item
12, Results of Operations and Financial Condition. The Form
8-K contained Invacare's earnings release, dated January 22,
2004, which disclosed the company's results for the fourth
quarter and year ended December 31, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

INVACARE CORPORATION

By:/s/ Gregory C. Thompson
-----------------------------------------
Gregory C. Thompson
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: May 7, 2004

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