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 June 30, 2004
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Commission File Number 0-12938
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Invacare Corporation
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(Exact name of registrant as specified in its charter)

Ohio 95-2680965
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(State or other jurisdiction of (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)
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(440)329-6000

(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 August 3, 2004, the company had 30,058,906 Common Shares and 1,111,977
Class B Common Shares outstanding.

INVACARE CORPORATION

INDEX

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

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheet -

June 30, 2004 and December 31, 2003.........................3

Condensed Consolidated Statement of Earnings -

Three and Six Months Ended June 30, 2004 and 2003...........4

Condensed Consolidated Statement of Cash Flows -

Six Months Ended June 30, 2004 and 2003.....................5

Notes to Condensed Consolidated Financial

Statements - June 30, 2004..................................6

Item 2. Management's Discussion and Analysis of

Financial Condition and Results of Operations...............11

Item 3. Quantitative and Qualitative Disclosure of Market Risk...............20

Item 4. Controls and Procedures..............................................20

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

Item 2. Change in Securities and Use of Proceeds.............................21

Item 4. Result of Votes of Security Holders..................................21

Item 6. Exhibits and Reports on Form 8-K.....................................21

SIGNATURES....................................................................22

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)

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)
June 30, 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 June 30, 2004 and the results
of its operations for the three and six months ended June 30, 2004 and 2003,
respectively, and changes in its cash flows for the six months ended June 30,
2004 and 2003, respectively. Certain foreign subsidiaries, represented by the
European segment, are consolidated using a May 31 quarter end. The results of
operations for the three and six months ended June 30, 2004, respectively, 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 $21,036,000 and $40,379,000 for the three and six months
ended June 30, 2004, respectively, and $18,863,000 and $34,592,000 for the same
periods in the preceding year.

6

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

* 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.

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 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 ($37,833,000 at June 30, 2004) to
DLL for events of default under the contracts (total balance outstanding of
$84,674,000 at June 30, 2004). Financial Accounting Standards Board (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 FASB Interpretation No. 5, Accounting for
Contingencies.

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 June 30, 2004 was the result of current year
acquisitions representing an increase in goodwill of $18,921,000 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. This amount will be determined in the fourth quarter of 2004 and is
currently estimated to be between $45,000,000 and $50,000,000. 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.
Based on the current and projected results for the first year, no contingent
consideration is expected to be paid for the first year portion of the earn-out.
The contingent consideration related to both acquisitions is not deemed to be
compensation expense as the consideration was a product of the negotiation
process, represents a dollar amount in excess of typical compensation agreements
in place prior to the acquisition, is payable in direct proportion to their
ownership interest and is not dependent upon future employment by the seller
during the contingency period. When the contingencies related to both of the
acquisitions are settled, any additional consideration paid will increase the
respective purchase price and reported goodwill.

8

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 June 30, 2004 and December 31, 2003, other
intangibles consisted of the following (in thousands):

June 30, 2004 December 31, 2003
------------- -----------------
Historical Accumulated Historical Accumulated
Cost Amortization Cost Amortization
---------- ------------ ---------- ------------
License agreements $6,450 $4,755 $6,455 $4,464
Customer lists 9,741 1,314 6,105 936
Trademarks 4,767 - 4,268 -
Patents 3,432 1,230 2,180 1,109
Other 4,361 1,464 3,406 1,227
----- ----- ----- -----
$28,751 $8,763 $22,414 $7,736
======= ====== ======= ======

Amortization expense related to other intangibles was $490,000 in the second
quarter of 2004, $1,027,000 for the six months ended June 30, 2004 and is
estimated to be $2,305,000 in 2005, $1,789,000 in 2006, $1,481,000 in 2007,
$1,388,000 in 2008 and $1,602,000 in 2009.

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):

9

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. 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.

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 4,053
Settlements made during the period (5,208)
Changes in liability for pre-existing warranties during
the period, including expirations 291
------
Balance as of June 30, 2004 $ 11,824
======

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

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

June 30, December 31,
2004 2003
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Raw materials $ 49,760 $ 41,573
Work in process 14,242 18,711
Finished goods 79,642 70,695
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$143,644 $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.

10

Property and Equipment - Property and equipment consist of the following (in
thousands):
June 30, December 31,
2004 2003
------ ------
Land, buildings and improvements $ 67,922 $ 67,364
Machinery and equipment 229,851 216,459
Furniture and fixtures 23,322 20,737
Leasehold improvements 15,744 14,946
------ ------
336,839 319,506
Less allowance for depreciation (179,976) (169,455)
------ ------
$156,863 $150,051
======= =======

Subsequent Event - On August 2, 2004, the company signed a definitive agreement
to purchase WP Domus GmbH ("Domus") for 190,000,000 Euros or approximately
$230,000,000 at recent exchange rates. A European-based holding company, Domus
designs and manufactures several complementary product lines to the company's
existing product lines, including power add-on products, bath lifts and walking
aids. Domus currently has three divisions, Alber, Aquatec and Dolomite, which
are operated on an independent basis and are branded separately. The definitive
agreement is subject to German and Norwegian regulatory approvals, which are
expected to be received no later than the fourth quarter of 2004, and other
customary conditions. Domus is forecast to have sales in 2004 of approximately
96,000,000 Euros or $116,000,000 at recent exchange rates.

The three Domus companies are expected to be operated as independently run units
of Invacare under each of the units' current management teams. In markets where
Alber, Aquatec or Dolomite does not have their own direct sales forces, the
company's sales forces are expected to provide opportunities to expand sales for
such units.

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 July 15, 2004.

OUTLOOK

The company reached the top end of its guidance on earnings growth in the first
half of this year primarily due to the benefits from ongoing cost reduction
programs and accretive acquisitions along with increased volumes in North
America. Although in March, Centers for Medicare and Medicaid Services (CMS)
retracted the December 2003 bulletins restricting Medicare coverage of power
wheelchairs for seniors and people with disabilities, this change in the rules
has not led to more stability and predictability in the power wheelchair market.
Additionally, although European sales in the second quarter improved from the
first quarter, it was not to the degree expected. Despite slower than expected
sales growth excluding foreign currency and acquisitions, gross margin was
stronger than expected as a result of the continuing cost reduction programs and
should continue to remain strong for the year.

11

As a result of these factors, the company believes that for the second half of
2004, it will have a net sales increase of between 9% and 11% compared to the
prior year. Excluding foreign currency and acquisitions, the net sales increase
is expected to be between 3% and 5%. The improvement in margins as forecasted
should result in the company achieving net earnings per share of between $2.48
and $2.55 for the year, which is toward the top end of its previous guidance.
For the third quarter, the company expects a net sales increase of between 8%
and 10% and net earnings per share of between $0.68 and $0.72. We expect minimal
addition to EPS in 2004 related to the recent WP Domus acquisition due to the
timing of regulatory approval. See Subsequent Event footnote.

RESULTS OF OPERATIONS

NET SALES

Net sales for the three months ended June 30, 2004 were $339,288,000, compared
to $300,114,000 for the same period a year ago, representing a 13% increase. For
the six months ended June 30, 2004, net sales increased 15% to $660,631,000,
compared to $576,787,000 for the same period a year ago. For the quarter,
foreign currency translation and acquisitions accounted for 3% and 7% of the net
sales increase, respectively. For the first six months, foreign currency
translation and acquisitions accounted for 4% and 8% of the net sales increase,
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 17% for the quarter and 18% for the first six
months. For the quarter, acquisitions accounted for 10% of the net sales
increase with currency translation having a less than 1% impact on net sales.
For the first six months, foreign currency translation and acquisitions
accounted for 1% and 10% of the net sales increase, respectively.

The increase for the quarter was principally due to net sales increases in
Respiratory products (16%), Rehab products (19%), Continuing Care products (76%)
and Distributed products (31%), which were partially offset by declines in
Standard products (1%). Excluding acquisitions, Rehab product net sales
increased by 5%, Continuing Care product net sales increased by 1% and
Distributed products increased by 13% for the quarter.

The increase for the first six months was principally due to net sales increases
in Respiratory products (26%), Rehab products (21%), Continuing Care products
(85%) and Distributed products (32%), which were partially offset by declines in
Standard products (6%). Excluding acquisitions, Rehab product net sales
increased by 7%, Continuing Care product net sales increased by 3% and
Distributed products increased by 16%.

Respiratory growth in the quarter and first six months was largely due to strong
performance in the HomeFill(TM) oxygen system product line. Rehab growth in the
quarter and first six months was driven by increased sales of custom power
products led by the Storm Series(R) TDX(TM) power wheelchair, which were offset

12

by slower sales of consumer power products, resulting from continuing challenges
with our customers obtaining Medicare reimbursement from CMS. Net sales of
Standard products rebounded in the second quarter due to increased unit volumes,
which were more than offset by continued pricing reductions.

European Operations

European net sales increased 10% for the quarter to $75,406,000 as compared to
$68,742,000 for the same period a year ago. For the quarter, foreign currency
translation and acquisitions accounted for 9% and 1% of the net sales increase,
respectively. European net sales for the first six months increased 10% to
$144,744,000 as compared to $131,181,000 for the same period a year ago. For the
first six months, foreign currency translation and acquisitions accounted for
12% and 3% of the net sales increase, respectively. The slower growth in the
quarter and the first six months is attributable to continued pricing pressures
in Germany and reduced funding in other key markets.

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 decreased 19% to $14,842,000 from $18,382,000 in the
second quarter and 8% to $29,564,000 from $32,233,000 year to date. Adjusting
for the impact of foreign currency translation, Australasian net sales decreased
28% for the quarter and 22% for the first half of the year, when compared to the
same periods 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 principally due to Medicare reimbursement challenges in the
United States. The Australasia segment transacts a substantial amount of its
business with customers outside of their region in various currencies other than
their functional currency, the New Zealand Dollar. As such, changes in exchange
rates particularly with the Euro and U.S. Dollar can have a significant impact
on sales and cost of sales.

GROSS PROFIT

Gross profit as a percentage of net sales for the three and six-month periods
ended June 30, 2004 were 30.1% and 29.6%, respectively, compared to 29.3% and
29.2%, respectively, in the same periods last year. The improvement in margins
for both periods was due to continuing cost reduction initiatives and improved
sales of higher margin products, particularly Rehab products, driven by custom
power, continuing care and HomeFill(TM) product lines. Margin improvements were
partially offset by ongoing competitive pricing pressures, especially in
Standard products.

For the first six months, North American margins as a percentage of net sales
improved to 30.3% compared with 29.1% in the same period last year principally
as a result of an increase in higher margin Rehab products and continued cost
reductions. While pricing pressures are expected to continue due to foreign
sourcing, especially in the Standard products category, the company expects to
offset these price declines by lowering costs to produce with our own wholly
owned foreign entities based in Asia.

13

Gross margin in Europe declined year to date by 0.8 of a percentage point
primarily due to unfavorable sales mix towards lower margin products and
additional costs related to new product introductions. Margins are expected to
improve as new product sales increase.

Gross margin in Australasia declined year to date by 8.6 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 and six months ended June 30, 2004 was 21.9% in both periods, compared to
21.2% and 21.5% in the same periods a year ago. The dollar increase was
$10,612,000 and $20,875,000, or 16.7% and 16.8%, respectively for the quarter
and first half of the year. Acquisitions increased expenses by $4,340,000 in the
quarter and $8,642,000 in the first half while foreign currency translation
increased expenses by $1,766,000 in the quarter and $5,498,000 in the first half
compared to the same periods a year ago. Commissions, bonus and distribution
costs, which are largely variable expenses dependent on results, combined to
increase costs by $1,748,000 and $4,867,000. Sales and marketing expenses, which
are a result of higher revenues and program spending, increased by $1,039,000
and $1,934,000 for the second quarter and the full year, respectively. Excluding
the impact of foreign currency translation and acquisitions, selling, general
and administrative expense increased 7.1% for the quarter and 5.4% compared to
the same period a year ago.

North American selling, general and administrative cost increased $8,790,000 or
19.8% for the quarter and $15,448,000 or 17.7% in the first half compared to the
same periods a year ago. Acquisitions accounting for approximately 9.0% of the
increase in each period, while the additional costs incurred on a consolidated
basis, described above, were primarily related to North America.

European selling, general and administrative cost increased $1,890,000 or 10.9%
for the quarter and $5,917,000 or 18.0% for the first half compared to the same
periods a year ago. Excluding the impact of foreign currency translation,
selling, general and administrative cost increased 2.6% for the quarter and 4.8%
in the first half compared to the same periods a year ago. The remaining
increase was primarily attributable to additional programs to re-establish sales
growth.

Australasian selling, general and administrative cost declined $68,000 or 3.6%
for the quarter and $490,000 or 12.0% in the first half compared to the same
periods a year ago. Excluding the impact of foreign currency translation,
selling, general and administrative cost declined by 13.1% for the quarter and
25.3% in the first half compared to the same periods a year ago. The decline is
principally as a result of continued expense control.

INTEREST

For the quarter and first half of the year, interest expense and interest income
were comparable to the same periods a year ago.

14

INCOME TAXES

The company had an effective tax rate of 32.5% for the three and six-month month
periods ended June 30, 2004, compared with 32.9% for the same periods a year
ago.

LIQUIDITY AND CAPITAL RESOURCES

The company's reported level of long-term debt decreased $1,650,000 to
$230,388,000 for the six months ended June 30, 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 June 30, 2004, the company had approximately $306,313,000 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
$272,152,000 as of June 30, 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 June 30, 2004, the company was in compliance with all
covenant requirements.

CAPITAL EXPENDITURES

The company had no material capital expenditure commitments outstanding as of
June 30, 2004. The company expects to invest in capital projects in 2004 at a
rate that 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 $45,789,000 for the first half
of 2004 compared to $45,276,000 in the first half of 2003. The increase in
operating cash flows for the first six months of the year was largely due to
improved profits and a lower increase in accounts receivable principally offset
by decreased accrued expenses and higher inventory levels resulting from
increased revenues compared to the first six months of 2003.

Cash used for investing activities was $56,564,000 for the first half of 2004
compared to $14,854,000 in the first half of 2003. The increase was primarily
due to acquisitions during the first half of 2004 and increased capital
expenditures. The company is in the process of implementing Enterprise Resource
Planning Systems in North America, Europe and Australasia, which has contributed
to the increase in capital investments over the prior year levels.

Cash provided by financing activities was $1,247,000 in for the first half of
2004 compared to cash used of $38,925,000 for the first half of 2003. Financing
activities for the first six months of 2004 were impacted by a decrease in the
company's net long-term borrowings of $2,089,000 as a result of continued debt
payments that were lower than the first half of 2003 as a result of acquisitions
made in the first half of 2004.

15

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 May 26, 2004, the company's Board of Directors declared a quarterly cash
dividend of $0.0125 per Common Share to shareholders of record as of July 1,
2004, which was paid on July 19, 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.

Revenue Recognition
- -------------------
Revenues are recognized when products are shipped to unaffiliated customers. The
Securities and Exchange Commission'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 to selected revenue
recognition issues. The company has concluded that its revenue recognition
policy is appropriate and in accordance with generally accepted accounting
principles 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 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 collection, delivery
and returns.

16

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 the same, 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 principally
determined for domestic manufacturing inventories by the last-in, first-out
(LIFO) method and for non-domestic inventories and domestic finished products
purchased for resale 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. Inventory
turns are monitored as a possible indicator of obsolescence or slow moving
product. 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.

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 Statement of Financial Accounting Standard (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 the annual impairment tests in the fourth quarter of 2002 and 2003. The
results of these analyses indicated no impairment of goodwill.

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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 $10,000,000 in the aggregate of
the company's North American product liability exposure. The company also has
additional layers of external insurance coverage insuring $90,000,000 in annual
aggregate losses arising from individual claims that exceed the captive
insurance company policy limits.

Product liability reserves are recorded for individual claims based upon
historical experience, industry expertise and indications from the independent
actuary. Additional reserves in excess of the specific individual case reserves
for incurred but not reported claims are recorded based upon independent
actuarial valuations at the time such valuations are conducted. Historical claim
experience and other assumptions are taken into consideration by the independent
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. There can be no
assurance that Invacare's current insurance levels will continue to be adequate
or available at affordable rates.

Warranty
- --------
Generally, the company's products are covered by warranties against defects in
material and workmanship for periods up to six years from the date of sale to
the customer. Certain components carry a lifetime warranty. A provision for
estimated warranty cost is recorded at the time of sale. Historical analysis of
claims history is primarily used to determine the company's warranty reserves
with consideration given to any recent events, which could affect the provision
required. The company continuously assesses the adequacy of its product warranty
accrual and makes adjustments as needed. See Warranty Costs in the Notes to the
Consolidated Financial Statements 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 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. See Accounting for Stock-Based Compensation in the
Notes to the Consolidated Financial Statements.

Income Taxes
- ------------
As part of the process of preparing our financial statements, we are required to
estimate income taxes in various jurisdictions. The process requires estimating
our 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
our reported as deferred tax assets and or liabilities. The company also must
estimate the likelihood that its deferred tax assets will be recovered from

18

future taxable income and whether or not valuation allowances should be
established. In the event that actual results differ from our 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. 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.

As of June 30, 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
$3,000,000 at June 30, 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 June 30, 2004 debt levels, a 1.0% change in interest
rates would impact interest expense by approximately $2,030,000 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

19

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 company's ability to
successfully implement major enterprise resource planning systems, 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.

Item 4. Controls and Procedures.

As of June 30, 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 June 30, 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.

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Part II. OTHER INFORMATION

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 637,100 shares,
including 110,800 shares in the second quarter of 2004, with authorization
remaining to purchase 1,362,900 more shares.

Item 4. Results of Votes of Security Holders

On May 26, 2004, the company held its 2004 Annual Meeting of Shareholders to act
on proposals to: 1) elect four directors to the class whose three-year term will
expire in 2007 and 2) ratify the appointment of Ernst & Young LLP as our
independent auditors for our 2004 fiscal year.

Gerald B. Blouch, John R. Kasich, Dan T. Moore, III and Joseph B. Richey, II
were each re-elected for a three-year term of office expiring in 2007 with
39,117,906, 39,229,533, 38,075,991 and 38,901,750 affirmative votes and 335,565,
223,938, 1,377,480 and 551,721 votes withheld, respectively.

James C. Boland, Whitney Evans, William M. Weber, Michael F. Delaney, C. Martin
Harris, M.D., Bernadine P. Healy, M.D., and A. Malachi Mixon, III are directors
with continuing terms.

The proposal to ratify the appointment of Ernst & Young LLP as our independent
auditors for our 2004 fiscal year received 37,683,539 affirmative votes,
1,730,467 negative votes and 39,465 abstained votes.

Item 6. Exhibits

A Exhibits:
Official Exhibit No.
--------------------
10.1 Invacare Corporation 401(K) Plus Benefit Equalization Plan
(As amended and restated effective January 1, 2003)
10.2 Amendment No. 1 to Invacare Corporation 401(K) Plus Benefit
Equalization Plan
31.1 Certification of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed
herewith).

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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).

B Reports on Form 8-K:
A Form 8-K was furnished on April 15, 2004 under Item 12, Results
of Operations and Financial Condition. The Form 8-K contained
Invacare's earnings release, dated April 15, 2004, which disclosed the
company's 2004 first quarter results.

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: August 5, 2004

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