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1
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 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to ________________
Commission file number 0-12938
INVACARE CORPORATION
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(Exact name of Registrant as specified in its charter)
Ohio 95-2680965
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Invacare Way, P. O. Box 4028, Elyria, Ohio 44036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 329-6000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
--------------------------------
(Title of Class)
Rights to purchase Common Shares of Invacare, without par value
---------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to the
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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As of February 27, 1998, 28,746,162 Common Shares and 1,433,107 Class B
Common Shares were outstanding. At that date, the aggregate market value of the
25,587,028 Common Shares of the Registrant held by non-affiliates was
$586,966,422 and the aggregate market value of the 91,187 Class B Common Shares
of the Registrant held by non-affiliates was $2,091,830. 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 NASDAQ National
Market System on February 27, 1998, which was $22.94. For purposes of this
information, the 3,159,134 Common Shares and 1,341,920 Class B Common Shares
which were held by Executive Officers and Directors were deemed to be the Common
Shares and Class B Common Shares held by affiliates.
Documents Incorporated By Reference
-----------------------------------
Part of Form 10-K Document Incorporated By Reference
- ------------------ ----------------------------------
Part III (Items 10, 11, Portions of the Registrant's
12 and 13) definitive Proxy Statement to
be used in connection with
its 1998 Annual Meeting of
Shareholders.
Except as otherwise stated, the information contained in this Annual Report on
Form 10-K is as of December 31, 1997.
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PART I
Item 1. Business.
(a) General Development of Business.
Invacare is the leading home medical equipment (HME) manufacturer in the world
based upon its distribution channels, the breadth of its product line and sales.
The company designs, manufactures and distributes an extensive line of medical
equipment for the home health care, retail and extended care markets. Invacare
continuously revises and expands its product lines to meet changing market
demands and currently offers over two dozen product lines. The company's
products are sold principally to over 10,000 home health care and medical
equipment provider locations in the U.S., Australia, Canada, Europe and New
Zealand, with the remainder of its sales being primarily to government agencies
and distributors. Invacare's products are sold through its world-wide
distribution network by its sales force, telemarketing employees and various
organizations of independent manufacturer's representatives. The company also
uses its extensive dealer network to distribute medical equipment and related
supplies manufactured by others.
Invacare is committed to design, manufacture and distribute the best value in
mobility products and medical equipment for people with disabilities and those
requiring home health care. Invacare will achieve this vision by:
* designing and developing innovative and technologically superior
products; * ensuring continued focus on our primary market - the home
health care market; * marketing our broad range of products under the
"One Stop Shoppingsm" strategy * providing the industry's most
professional and cost-effective sales, customer service
and distribution organization;
* providing superior and innovative dealer support and aggressive
product line extensions; * building a strong referral base among
health care professionals; * building brand preference with
consumers; * handling the retail channel through a dedicated sales
and marketing structure; * managing the extended and acute care
market with separate sales and distribution; * continuous
advancement/recruitment of top management candidates; * empowering
all employees; * providing a performance based reward environment;
and * continually striving for total quality throughout the
organization.
When the company was acquired in December 1979 by a group of investors,
including certain members of management and the Board of Directors, it had $19.5
million in net sales and a limited product line of standard wheelchairs and
patient aids. In 1997, Invacare reached $653 million in net sales, representing
a 21.5% compound average sales growth rate since 1979, and currently is one of
the only companies in the industry which manufactures, distributes and markets
products in each of the following major home medical equipment categories: power
and manual wheelchairs, patient aids, home care beds, home respiratory products,
low air loss therapy products, seating and positioning products and bathing
equipment.
The company's executive offices are located at One Invacare Way, Elyria, Ohio
and its telephone number is (216) 329-6000. In this report, "Invacare" and the
"company" refer to Invacare Corporation and, unless the context otherwise
indicates, its consolidated subsidiaries.
(b) Financial Information About Industry Segments.
The company operates predominantly in the home medical equipment industry
segment. For information relating to net sales, operating income, identifiable
assets and other information for this industry segment, see the Consolidated
Financial Statements of the company.
(c) Narrative Description of Business.
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THE HOME MEDICAL EQUIPMENT INDUSTRY
North America
The home medical equipment market includes home health care products, physical
rehabilitation products and other non-disposable products used for the recovery
and long-term care of patients. The company believes that sales of domestic home
medical equipment products will continue to grow during the next decade as a
result of several factors, including:
Growth in population over age 65. The over 65 age group represents the vast
majority of home health care patients and continues to grow. A significant
percentage of people using home and community-based health care services
are 65 years of age and older and it is estimated that this segment of the
population will double during the next ten years. It also has been widely
reported that by the year 2000, one American will turn 50 every nine
seconds.
Treatment trends. Many medical professionals and patients prefer home
health care over institutional care because they believe that it results in
greater patient independence, increased patient responsibility and improved
responsiveness to treatment as familiar surroundings are believed to be
conducive to improved patient outcomes. Health care professionals, public
payors and private payors agree that home care is a cost effective,
clinically appropriate alternative to facility-based care. Recent surveys
show that approximately 70% of adults would rather recover from accident or
illness in their home, while approximately 90% of the older population
showed preference for home based long-term care.
Technological trends. Technological advances have made medical equipment
increasingly adaptable for use in the home as current hospital procedures
often allow for earlier patient discharge, thereby lengthening recuperation
periods outside of the traditional institutional setting. In addition,
continuing medical advances prolong the life of adults and children, thus
increasing the demand for home medical care equipment.
Healthcare cost containment trends. In 1996, it was estimated that spending
on health care in the U.S. surpassed $1 trillion dollars, which is
approximately 14.0% of Gross Domestic Product (GDP). Spending on health
care was estimated to reach 15.9% and 17.9% of GDP in the years 2000 and
2005, respectively. The rising cost of health care has caused many payors
of health care expenses to look for ways to contain costs. Home health care
has gained wide-spread acceptance among health care providers and public
policy makers as a cost effective, clinically appropriate and patient
preferred alternative to facility-based care for a variety of acute and
long-term illnesses and disabilities. Thus, the company believes that home
health care and home medical equipment will play a significant role in
reducing health care costs.
Society's mainstreaming of people with disabilities. People with
disabilities are part of the fabric of society, and this has increased, in
large part, due to the Americans with Disabilities Act which became law in
1991. This legislation provides mainstream opportunities to people with
disabilities. The Americans with Disabilities Act imposes requirements on
certain components of society to make "reasonable accommodations" to
integrate people with disabilities into the community and the workplace.
Distribution channels. The changing home health care market continues to
provide new ways of reaching the end user. The distribution network for
products has expanded to include not only specialized home health care
providers and extended care facilities but retail drug stores, surgical
supply houses, rental, hospital and HMO-based stores, home health agencies,
mass merchandisers and direct sales.
Europe
The company believes that, while many of the market factors influencing demand
in the U.S. are also present in Europe - aging of the population, technological
trends and society's acceptance of people with disabilities - each of the major
national markets within Europe has distinctive characteristics. The European
health care industry is more heavily socialized and is, therefore, more
influenced by government regulation and fiscal policy. Variations in product
specifications, regulatory approvals, distribution requirements and
reimbursement policies require the company to tailor its approach to each
market. Management believes that as the European markets become more homogeneous
and the company continues to refine its distribution channels, the company can
more effectively penetrate these markets.
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OPERATING UNITS
North America
North American operations, which includes Australia and New Zealand operations,
are aligned into three primary operating groups, which manufacture and market
products in all of the major home medical equipment categories. In Australia,
the company manufactures and markets custom power wheelchairs for Australasia.
In Canada, the company principally sells Invacare products manufactured in the
U.S. In New Zealand, the company principally produces components used in other
Invacare products, as well as manufactures and distributes products for the New
Zealand market. The company also sells standard wheelchairs and seating and
positioning products manufactured in Canada and certain patient aids
manufactured in Europe.
REHAB PRODUCTS GROUP
Power wheelchairs. Invacare manufactures a complete line of power
wheelchairs for individuals who require independent powered mobility. The
range includes products that can be significantly customized to meet an
individual's specific needs, as well as products that are inherently
versatile to meet a broad range of individual requirements. Invacare's
power wheelchair lines are marketed under the "Action" trademarked brand
name and include, among others, the Storm SeriesTM, a technologically
advanced series of power wheelchairs. Action Virtual ServiceSM technology
was introduced in 1996 on the Power MK IV series controllers. This
innovative technology allows technicians to access power chair controllers
via modem so that in-depth diagnostics and performance adjustments can be
done from any location where a phone line is available.
Custom manual wheelchairs. Invacare manufactures and markets a range of
custom manual wheelchairs for everyday, sports and recreational uses. These
lightweight chairs are marketed under the Action brand and Action Top
End(R) product name. The chairs provide mobility for people with moderate
to severe disabilities in their everyday activities as well as for various
sports such as basketball, racing, skiing and tennis.
Scooters. Invacare manufactures three- and four-wheeled motorized scooters,
including rear wheel drive models for both outdoor and indoor use and
markets them under the Action brand name. This product line includes the
Action Cat(TM) and Action Flyer(TM) products.
Seating and positioning products. Invacare manufactures seat cushions, back
positioners and a variety of attachments used for comfort, support,
pressure relief and posture control and markets them under the PinDot(R)
brand. Seating products marketed under the Action brand, include the
Tarsys(TM) product of electronic and mechanical tilting and reclining
devices for use on power wheelchairs.
STANDARD PRODUCTS GROUP
Manual wheelchairs. Invacare's manual wheelchairs are sold for use in the
home, institutional setting or public places (e.g. airports, malls, etc.)
by people who are chronically or temporarily disabled but do not require or
qualify under medical reimbursement programs for customization in terms of
size, basic performance characteristics, or frame modification. Examples of
Invacare's standard wheelchair lines, which are marketed under the
Invacare(R) brand name, include the 9000 and TracerTM product lines. Both
standard and prescription manual wheelchairs are designed to accommodate
the diverse capabilities of the individual.
Self care. Invacare manufactures and/or distributes a full line of patient
aids, including ambulatory aids such as crutches, canes, walkers and
wheeled walkers; bath safety aids such as tub transfer benches, shower
chairs and grab bars; and patient care products such as commodes, lift-out
chairs and foam products.
Home care beds. Invacare manufactures and distributes a wide variety of
manual, semi-electric and fully-electric beds for home use under the
Invacare(R) brand name. Home care bed accessories include bed side rails,
mattresses, overbed tables, trapeze bars and traction equipment.
Low air loss therapy products. Invacare manufactures and markets a complete
line of mattress overlays and replacement products, under the Invacare(R)
brand name, which use air flotation to redistribute weight and move
moisture away from patients who are immobile and spend a great deal of time
in bed.
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Patient transport. Invacare manufactures and markets products for use in
the home and institutional settings, including patient lifts and slings,
multi-position recliners and bathing equipment.
Distributed products. Invacare distributes a line of personal medical care
products manufactured by others, including bedding and ostomy,
incontinence, diabetic and wound care supplies. Effective January 28, 1998,
Suburban Ostomy Supply Co., Inc., a direct marketing wholesaler of ostomy,
incontinence, diabetic and wound care products to the home health care
market, was merged with a wholly owned subsidiary of the company.
Extended care bed and furniture products. Invacare, operating as Invacare
Continuing Care Group (ICCG), manufactures and distributes beds,
furnishings, bathing equipment and patient lifts for facility based care
focusing on the extended and acute care markets.
RESPIRATORY PRODUCTS GROUP
Home respiratory products. Invacare manufactures and/or distributes home
respiratory products including oxygen concentrators, liquid oxygen systems,
nebulizer compressors, aspirators, portable compressed oxygen systems and
respiratory disposables. Invacare's home respiratory products are marketed
predominately under the Invacare(R) brand name.
OTHER PRODUCTS
Microprocessor electronic control systems. Invacare manufactures and
markets electronic control systems for power wheelchairs, scooters,
respiratory and 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.
Europe
The company's European operations operate as a "common market" company with
sales throughout western Europe. The European operation currently sells a
limited line of products providing significant room for growth as Invacare
continues to broaden its product line offerings to mirror that of the North
American operations.
Most wheelchair products sold in Europe are designed and manufactured locally to
meet specific market requirements. However, as a result of Invacare's worldwide
development efforts, the Action 2000, a manual lightweight design that
originated in the U.S., was the first wheelchair in Europe to meet the high
standards of quality required to receive the Community European (CE) mark. In
addition, certain power wheelchair products sold in the United States are
adaptations of products originally designed for the European markets.
The company manufactures and/or assembles both manual and power wheelchair
products at six of its European facilities - Bencraft Ltd. and Invacare (UK)
Ltd. in the U.K., Poirier Groupe Invacare S.A. in France, Invacare Deutschland
GmbH in Germany, Fabriorto Lda in Portugal and Kuschall Design AG, in
Switzerland. Motorized scooters are manufactured in Germany. Self care products
and patient lifts and slings are manufactured in the United Kingdom and France.
Oxygen products are imported from Invacare's U.S operations.
WARRANTY
Generally, the company's products are covered by warranties against defects in
material and workmanship for periods up to five years from the date of sale to
the customer. Certain components carry a lifetime warranty. A non-renewable
warranty also is offered on various products for a maximum period of five years.
COMPETITION
In each of the company's major product lines, both domestically and
internationally, there are a limited number of significant national competitors
and a number of regional and local competitors. In some countries or in certain
product lines, the company may face competition from other manufacturers that
have larger market shares, greater resources or other competitive advantages.
Invacare believes that it is the leading home medical equipment manufacturer
based on its distribution channels, breadth of product line and sales.
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North America
The home medical equipment market is highly competitive, and Invacare's products
face significant competition from other well-established manufacturers. The
company believes that its success in increasing market share is dependent on
providing value to the customer based on the quality, performance and price of
the company's products, the range of products offered, the technical expertise
of the sales force, the effectiveness of the company's distribution system, the
strength of the dealer and distributor network and the availability of prompt
and reliable service for its products. The company believes that its "One Stop
Shoppingsm" approach provides the competitive advantage necessary for continuing
profitability and market share growth. Various manufacturers have from time to
time instituted price-cutting programs in an effort to gain market share. There
can be no assurance that other HME manufacturers will not attempt to implement
such aggressive pricing in the future.
Europe
As a result of the differences encountered in the European marketplace,
competition generally varies from one country to another. The company typically
encounters one or two strong competitors in each country, some of them becoming
regional leaders in specific product lines.
MARKETING AND DISTRIBUTION
North America
Sales and Marketing. Invacare's products are marketed in the United States
primarily to HME providers that in turn sell or rent these products directly to
the end user or to health care institutions, including hospital and post acute
care facilities. Although the company's primary customer in the past has been
the HME provider, the company also markets its home health products using a
"pull-through" marketing method to medical professionals, including physical and
occupational therapists, who refer their patients to HME providers to obtain
specific types of home medical equipment.
As a result of the superior service provided by the company's "One Stop
Shoppingsm" program, the company has been able to increase its large national
account business as well as business with small-to-medium size providers. "One
Stop Shoppingsm" offers the HME provider the broadest range of products and
services at the total lowest cost. The products of "One Stop Shoppingsm" include
a full HME product line, including HME retail merchandising; a dedicated
territory business manager with specialist support; account services; InvatelTM
Electronic Data Interchange (EDI) Systems; Invacare Credit Corporation;
distribution; and technical training. In some cases, Invacare sells directly to
government agencies such as the Department of Veterans Affairs (V.A.) or the
Department of Defense.
The company continues to make improvements to existing sales and marketing
programs to generate greater consumer awareness of Invacare and its products, as
witnessed by enhancements made to its consumer marketing program in 1997 through
its sponsorship of a variety of wheelchair activities and support of various
charitable causes which benefit users of its products. Invacare continued as a
National Corporate Sponsor of the National Easter Seal Society, one of the most
recognizable charities in the United States that annually meets the needs of
over 40 million children and adults who have various types of disabilities.
In 1997, the company continued the implementation of its brand strategy in order
to effectively communicate to home health care providers and consumers the wide
variety of products which Invacare manufactures. The Invacare(R) brand is the
company's primary brand for home health care and respiratory equipment, or
"stock" products, and is the preferred brand of HME professional providers. The
Action brand is the primary brand for high-tech mobility and sports equipment,
or "custom" products preferred by health care professionals and consumers. The
PinDot(R) brand represents the company's various seating and positioning
products preferred by providers and health care professionals. Launched in 1996,
the AuroraTM brand was developed to serve the newly emerging mass-retail
channels of distribution for home medical equipment which is considered to be
"off-the-shelf" as it does not require the expertise of a medical professional
in the purchasing process.
Invacare's domestic sales and marketing organization consists primarily of a
home care sales force which markets and sells Invacare(R), Pindot(R) and Action
branded products to the HME providers. A combination of direct sales and
manufacturers representatives market and sell the Invacare brand through the
company's Invacare Continuing Care Group (ICCG) to the extended care market; and
a separate manufacturer's representatives' sales force markets and sells the
Aurora(TM) brand to the mass retail channels of distribution, including home
centers, mass merchants and chain drug stores. 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, saving the customer valuable time. The
TBM also provides training and servicing information to providers, as well as
product catalogs, point-of-sale display materials and advertising and
merchandising aids. In Canada products are sold through a direct sales force and
distributed through regional distribution centers in British Columbia, Ontario
and Quebec and health care dealers throughout Canada.
The North American sales and marketing group receives additional support in
order to provide focus on clinical applications for Invacare(R), PinDot(R), and
Action brand products. Eleven physical and occupational therapists provide
valuable services to medical professionals in the facility-based rehab setting.
These specialists assist peer professionals with in-service education on
relevant topics of seating and positioning; provide a broad spectrum of product
education on the products' clinical applications; assist in clinical evaluations
for mobility; provide assistance on documentation for reimbursement entities;
offer continuing education programs; and furnish selected products for patient
evaluation purposes.
In 1997, Invacare continued refining its strategic advertising campaign in home
health care magazines and trade publications which complements the company's
brand strategy. The company also contributed extensively to editorial coverage
in trade publications on articles concerning products it manufactures, and its
representatives attended trade shows and similar conventions to display its
products to providers, medical professionals and consumers.
The company's top ten customers and buying groups accounted for approximately
30% of 1997 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 1997 net sales. Dealers
that are part of a buying group generally make individual purchasing decisions
and are invoiced directly by the company.
Customer Service. As part of "One Stop Shoppingsm", the company views its
customer service activities as strategically important in its efforts to achieve
market leadership. The company's customer service strategy is directed at
meeting the needs of medical equipment dealers and is specifically designed to
focus on the dealer's inventory management, equipment financing, training and
administrative needs.
Invacare has made a significant investment in assisting dealers in minimizing
inventory requirements. For stock items, dealers can either pick up orders at
the nearest distribution center or receive freight-free delivery (with minimum
order levels) generally within 24 hours of the company's receipt of an order for
any standard or stock product. This distribution system permits dealers to
minimize their inventory levels. As an additional service, Invacare manufactures
accessories, such as upholstery and arm rests for wheelchairs, that are
interchangeable with products of other manufacturers, thereby allowing dealers
to stock only one line of accessories.
The company also maintains a network of ten regional repair centers where
Invacare products can be repaired promptly by factory technicians. Invacare also
has a network of 15 independent dealers that can provide factory authorized
service. Factory training is provided throughout the United States This service
network, when combined with the company's distribution centers, enables dealers
to minimize spare parts inventory.
To further assist dealers in reducing their cash requirements for inventory and
rental equipment, the company provides various financing options for certain
types of its products. In a typical financing arrangement, the company sells the
equipment on a financing contract to the dealer for periods ranging from 6 to 51
months. The majority of these transactions are secured with a UCC-1 filing, a
purchase money security and/or a personal guarantee. The company also introduced
a revolving credit agreement, known as Invacard, which provides an additional
financing option to HME dealers. Currently, all note obligations are serviced
and managed by the company and are not sold to third parties.
The company devotes significant time and resources in training dealers,
rehabilitation therapists and others in the sale, use, maintenance and repair of
its products. Expenditures for training are expected to increase as the
company's product lines continue to expand and as certain products, such as
power wheelchairs, become more complex.
Invacare is continuing to develop programs to assist dealers in reducing
administrative costs. One such effort is to provide customers with direct
computer-to-computer links with the company in order to provide on-line order
entry and order tracking to further expedite delivery, thereby reducing the
dealer's paperwork and inventory. During 1997, additional customers and customer
locations began utilizing EDI, which resulted in an increase in related EDI
sales.
8
Europe
The company's European operations consist primarily of manufacturing, marketing
and distribution operations in Western Europe and export sales activities
through local distributors elsewhere in the world. The company has a direct
sales force and distribution centers in the United Kingdom, France, Germany,
Portugal, Spain, Sweden and Switzerland, and sells through distributors
elsewhere in Europe. In markets where the company has its own sales force,
product sales are typically made through dealers of medical equipment and, in
certain markets, directly to government agencies. In most markets, government
health care and reimbursement policies play an important role in determining the
types of equipment sold and price levels for such products. The company
continues to focus on the implementation of the "One Stop Shoppingsm" concept in
Europe.
PRODUCT LIABILITY COSTS
Invacare supports its dealers by defending product liability claims in an effort
to hold down costs. The company's captive insurance company, formed in 1986,
insures the first $2 million per claim, up to annual aggregate policy losses of
$3 million, of the company's domestic product liability exposure. The company
also has additional layers of coverage insuring up to $78 million in annual
aggregate losses arising from individual losses that exceed $2 million per claim
or annual policy aggregate losses of $3 million. There can be no assurance that
Invacare's current insurance levels will continue to be adequate or available at
an affordable rate.
PRODUCT DEVELOPMENT AND ENGINEERING
Invacare is committed to continuously improving, expanding and broadening its
existing product lines. During the past three years, new product introductions
included: major improvements in the power wheelchair line in terms of
electronics, functionality and aesthetics; new models of power wheelchairs; new
additions/enhancements to the electronic controllers for power wheelchairs; new
models of aluminum frame ultralight wheelchairs; a comprehensive new line of
innovative seating and positioning products; a complete line of home respiratory
products, including an oxygen home fill system, nebulizers compressors,
flowmeters, aspirators, oxygen analyzer, and respiratory disposables; a new
version of the Invacare(R) microAir(R) Turn-Q(TM) automatic turning mattress
system; and an improved line of ambulatory and safety products.
New product development remains a key component of Invacare's strategy to grow
market share and maintain competitive advantage. To this end, Invacare's efforts
in 1997 continued to focus resources on innovative manufacturing concepts while
also investing significant resources in cost reduction and design improvement.
Important new technologies were added, as well as many line extensions and
refinements to existing categories. In 1997, 32 new products were introduced
with the most significant being:
North America
Invacare(R) Venture(TM) HomeFill(TM) Complete Home Oxygen System- Allows
patients to fill oxygen cylinders from an oxygen concentrator. The company
is so encouraged by the initial response to this product that the second
generation of this product is now being developed.
Action Arrow(R) and Action Ranger(TM) X Storm Series(R) Power Wheelchairs
- A mid-wheel drive offering exceptionally tight turning ability and
maneuverability, which is ideal for use in tight spaces and over firm
surfaces.
Action Orbit(TM) Pediatric Tilt-In-Space Chair - A lightweight chair which
offers significant adjustability and numerous design features.
Action Scooter line - A new, more affordable line that offers seven
different models with a wide range of standard features and three new seat
options.
Invacare(R) Reliant Stand-Up Lift - Designed to be more compact with
increased maneuverability to serve a range of dependency levels, from
fully dependent to those who just need assistance during rehabilitation.
Invacare(R) ConnectO2(TM) Telemetry System - Innovatively designed to
monitor and report information on equipment performance and patient
compliance, a product designed for improved efficiency and proactive
preventive maintenance.
Invacare(R) microAir(R) Turn-Q(TM) LTM - A powered lateral turning
mattress which is based on the accepted technology of the Invacare
Turn-Q(TM) Plus. The LTM is designed for the treatment of Stage I - Stage
IV pressure ulcers.
Invacare(R) Tracer(R) SX Wheelchair - A lightweight economy wheelchair
designed for either rental or purchase featuring a chrome-plated carbon
steel frame that is durable and easy to clean.
9
Europe
During 1997, European operations also introduced several new products and
continued to update existing products as required by the market. Key
introductions and updates in 1997 included the Kuschall K3, a three wheel
wheelchair and the Kuschall K4 rigid chair, the Zipper, a lightweight standard
steel wheelchair made by Bencraft Ltd. in the United Kingdom, the Storm seat
lifter, which improves the user's access to the environment and the Action 2000
Echo lightweight wheelchair aimed at providing the geriatric user with an easily
transportable chair at a very competitive price.
MANUFACTURING AND SUPPLIERS
The company's objective is to maintain its commitment to be the total
lowest-cost manufacturer in its industry, as well as the highest-quality
producer. The company believes that it is achieving this objective not only
through improved product design, but also by taking a number of steps to lower
manufacturing costs. During 1997, the company initiated plans to close and
consolidate a number of manufacturing operations, the cost of which was included
in charges in the third and fourth quarters. Also during 1997, the worldwide
consolidation of purchasing continued thereby taking advantage of significant
leverage opportunities available to the company for certain commodity raw
materials and allowed the company to achieve ongoing cost reduction objectives.
The company also makes substantial investments in its facilities and equipment
in order to increase productivity, lower costs and improve quality. Over the
past three years, the company has invested $72.2 million in capital improvements
and acquisition of facilities.
North America
The company has vertically integrated its manufacturing processes by
fabricating, coating, plating and assembling many of the components of each
product. The company designs and manufactures electronics for power wheelchairs,
from insertion of components into printed circuit boards to final assembly and
testing.
Invacare has focused on "value engineering" which reduces manufacturing costs by
eliminating product complexity and using common components. Value engineering
has been applied to all product introductions in the last three years, including
the latest generation of oxygen concentrators, electronic controls, wheelchairs,
patient lifts, beds and bath safety products.
Investments continue to be made in manufacturing automation. The company
has initiated programs to reduce manufacturing lead times, shorten production
cycles, increase employee training, encourage employee involvement in
decision-making and improve manufacturing quality. Employee involvement teams
participate in engineering, production and processing strategies and employees
have been given responsibility for their own quality assurance. The
consolidation of facilities that will be sustantially completed in 1998 will
also enhance manufacturing efficiency.
The manufacturing operations for the company's wheelchairs and replacement
parts, patient aids and home care beds consist of a variety of metal fabricating
procedures, electronics production, coating, plating and assembly operations.
Manufacturing operations for the company's oxygen concentrators, nebulizer
compressors, and seating and positioning products consist primarily of assembly
operations. The company purchases raw materials, fabricated components and
services from a variety of suppliers. Where appropriate, Invacare does employ
long term contracts with its suppliers. In those situations in which long term
contracts are not advantageous, the company believes its relationship with those
suppliers to be satisfactory with alternative sources of supply readily
available.
Europe
As in other areas, manufacturing and operational issues faced in the U.S.
are also present in Europe. The European operation has challenged and
rationalized the mission of each manufacturing location allowing for the
realization of significant synergies and identified areas for further cost
reductions and improved efficiencies for 1998 including certain facilities
eliminations and consolidations.
ACQUISITIONS
During 1997, the company made two acquisitions for $4.1 million in cash which
extended or added new product lines as well as expanded distribution
capabilities. As a result of the company's ongoing search for opportunities,
coupled with the industry trend toward consolidation, numerous acquisition
opportunities were evaluated in 1997. The company focuses on acquisitions
intended to fulfill the following objectives:
Tactical. Grow market share or extend current product lines.
Strategic. Enter new market segments that complement existing
businesses or utilize the company's distribution
strength.
Geographic. Enables rapid entry into new foreign markets.
In addition, in January 1998, the company acquired Suburban Ostomy, a wholesaler
of medical supplies and related products to the home health care industry for
approximately $132 million.(See MD&A and Notes for further information)
10
GOVERNMENT REGULATION
The company is directly affected by government regulation and reimbursement
policies in virtually every country in which it operates. Government regulations
and health care policy differ from country to country and, within the U.S. and
Canada, from state to state or province to province. Changes in regulations and
health care policy take place frequently and can impact the size, growth
potential and profitability of products sold in each market.
In the U.S., the growth of health care costs has increased at rates in excess of
the rate of inflation and as a percentage of GDP for more than four decades. A
number of efforts to control the federal deficit have impacted reimbursement
guidelines for government sponsored health care programs and changes in federal
programs are often imitated by private insurance companies. Reimbursement
guidelines in the home health care industry have a substantial impact on the
nature and type of equipment an end user can obtain and thus affect the product
mix, pricing and payment patterns of the company's dealers.
Congress, in its effort to balance the federal budget, has continued to propose
Medicare and Medicaid cuts during 1997 to accomplish this task. Cuts in Medicare
are projected at $100.7 billion over a five year period. The proposed cuts
include a significant reduction in oxygen reimbursement and the elimination of
cost of living increases in reimbursement levels for all home medical equipment.
However, Congress is serious about reducing health care costs and is interested
in cost effective alternatives such as home care. Therefore, the company
believes that home health care is a viable solution to reducing health care
costs and also believes that home medical equipment and supplies are markets
with significant growth potential.
The company will continue its pro-active efforts to improve public policy
affecting home health care and believes that these efforts can give the company
a competitive advantage over other HME manufacturers who are forced to react to
change instead of helping to direct change.
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 may have to comply with performance standards when established
by the FDA. Manufacturers of all medical devices are subject to periodic
inspections by the FDA. Furthermore, state, local and foreign governments have
adopted regulations relating to the manufacture and marketing of health care
products. The company believes that it is presently in material compliance with
all applicable regulations promulgated by FDA, for which the failure to comply
would have a material adverse effect.
BACKLOG
The company generally manufactures most of its products to meet near term
demands by shipping from stock or by building to order based on the specialty
nature of certain products. Therefore, the company does not have substantial
backlog of orders of any particular products nor does it believe that backlog is
a significant factor for its business.
EMPLOYEES
As of December 31, 1997, the company had approximately 4,550 employees.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales.
The company also markets its products for export to other foreign countries. The
company had product sales in approximately 80 countries worldwide.
For information relating to net sales, operating income and identifiable assets
of the company's foreign and domestic operations, see Business Segments in the
Notes to the Consolidated Financial Statements.
11
Item 2. Properties.
The company owns or leases its warehouses, offices and manufacturing
facilities and believes these facilities to be well-maintained, adequately
insured and suitable for their present and intended uses. Information concerning
certain of the leased facilities of the company as of December 31, 1997, is set
forth in Leases and Commitments in the Notes to the Consolidated Financial
Statements of the company and in the table below:
Ownership
or Expiration Renewal
North American Operations Square Feet Date of Lease Options Use
- ------------------------- ----------- ------------- ------- ---
Adelaide, Australia 11,500 June 1998 none Manufacturing, warehouse
and offices
Ashland, Virginia 36,000 September 2000 none Warehouse and offices
Atlanta, Georgia 91,418 January 2000 one (3 yr.) Warehouse
Auckland, New Zealand 11,959 March 1998 none Distribution
Auckland, New Zealand 33,154 March 2003 none Manufacturing, warehouse
and offices
Auckland, New Zealand 12,000 Month to Month - Distribution
Belle, Missouri 39,200 Own - Manufacturing and offices
Beltsville, Maryland 33,329 August 1999 two (2 yr.) Manufacturing and offices
Carol Stream, Illinois 38,400 July 1998 one (5 yrs.) Warehouse (Subleased now)
Chesterfield, Missouri 8,466 December 1998 two (1 yr.) Offices
Christchurch, New Zealand 48,787 April 1998 one (2 yr.) Manufacturing and offices
Delta, British Columbia 6,900 January 2000 none Warehouse & offices
Edison, New Jersey 48,400 October 2001 one (5 yr.) Warehouse and sales office
Elyria, Ohio
- Taylor Street 240,744 Own - Manufacturing and offices
- Cleveland Street 226,998 September 1999 one (5 yr.) Manufacturing and offices
- One Invacare Way 50,000 Own - Headquarters
- Sugar Lane 20,000 February 1998 none Manufacturing
Grand Prairie, Texas 43,754 December 1998 one (3 yr.) Warehouse
Kirkland, Quebec 13,241 November 2000 one (5 yr.) Manufacturing, warehouse
and offices
12
North American Operations Square Feet Renewal Use
Ownership Options
or Expiration
Date of Lease
- ------------------------ ----------- ------------- ------------ -------------------
LaPalma, California 78,000 June 1999 one (3 yr.) Warehouse
McAllen, Texas 11,587 March 1998 none Warehouse
Mississauga, Ontario 81,004 January 2005 none Manufacturing, warehouse
and offices
North Ridgeville, Ohio 139,200 Own - Manufacturing, warehouses
and offices
Northboro, MA 22,000 June 2002 none Manufacturing
(sublet as of 1/98)
Northbrook, Illinois 27,458 June 1999 two (3 yr. & 2 yr.) Manufacturing and offices
Pharr, Texas 2,500 December 1998 one (1 yr.) Warehouse
Pinellas Park, Florida 12,000 June 1998 four (1 yr.) Manufacturing and offices
Reynosa, Mexico 135,200 Own - Manufacturing and offices
Sacramento, California 26,900 May 2003 one (3 yr.) Manufacturing, warehouse
and offices
San Diego, California 5,940 May 1998 one (2 yr.) Manufacturing and offices
Sanford, Florida 19,913 August 1998 one (1 yr.) Warehouse
Sanford, Florida 113,034 Own - Manufacturing and offices
Sanford, Florida 99,892 Own Manufacturing and offices
Sanford, Florida 23,000 February 1998 three months Warehouse
Sarasota, Florida 15,450 month to month none Manufacturing, warehouse
and offices
Traverse City, Michigan 15,000 April 2000 two (3 yr.) Manufacturing and offices
Tonawanda, New York 4,668 April 1998 none Sublet for remainder of term
13
Ownership Renewal
European Operations Square Feet or Expiration Options Use
Date of Lease
- ------------------ -------------- -------------- -------- -----
Askersund, Sweden 10,000 November 1998 - Warehouse
Bad Oeynhausen, Germany 76,600 June 2000 one (2 yr.) Manufacturing, warehouse and
offices
Basel, Switzerland 36,000 Own - Manufacturing and offices
Birmingham, England 13,000 Own - Warehouses and offices
Birmingham, England 19,378 Own - Manufacturing and offices
Bridgend, Wales 131,522 Own - Manufacturing and offices
Girona, Spain 13,600 November 2004 one (1 yr.) Warehouse and offices
Oporto, Portugal 27,800 November 2003 - Manufacturing and offices
Spanga, Sweden 2,000 March 1999 one (3 yr.) Offices
Tours, France 86,000 November 2007 none Manufacturing
Tours, France 104,500 Own - Manufacturing, warehouse
and offices
Item 3. Legal Proceedings.
Invacare is a defendant in a number of product liability actions in which
various plaintiffs seek damages for injuries allegedly caused by defective
products. All these actions have been referred to the company's insurance
carriers and are being vigorously contested. The primary carrier for the first
$2 million of insurance coverage per claim or annual policy aggregate losses of
$3 million is a subsidiary of the company which was established in September
1986 to provide the first layer of product liability insurance for the company.
The company has additional layers of coverage insuring up to $78 million in
annual aggregate losses arising from individual losses that exceed $2 million or
annual policy aggregate losses of $3 million of the company's domestic product
liability exposure. Management does not believe that the outcome of any of these
actions will have a material adverse effect upon its business or financial
condition.
In 1997, the company provided for potential settlements of several intellectual
property lawsuits that were diverting management's time and attention. While the
company believes it would eventually have been successful in defending itself
against these suits, the legal fees and distraction to management led to the
decision to settle these suits. At the date of this filing , the company has
settled three cases for a total of $8.4 million.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
14
Executive Officers of the Registrant.*
The following table sets forth the names of the executive officers and certain
other key employees of Invacare, each of whom serves at the pleasure of the
Board of Directors, as well as certain other information.
Name Age Position
- --------------------- ----- ----------------------
A. Malachi Mixon, III 57 Chairman of the Board of Directors and
Chief Executive Officer
Gerald B. Blouch 51 President, Chief Operating Officer and Director
Thomas R. Miklich 50 Chief Financial Officer, General Counsel, Treasurer and
Corporate Secretary
Joseph B. Richey, II 61 President - Invacare Technologies & Invacare Senior Vice
President - Total Quality Management and Director
Louis F.J. Slangen 50 Senior Vice President - Sales & Marketing
Larry E. Steward 45 Corporate Vice President - Human Resources
Thomas J. Buckley 49 Senior Vice President - Continuing Care Products
M. Louis Tabickman 53 Senior Vice President - Respiratory Products
Donald D. Campopiano 46 Vice President - Account Services, Parts and Distribution
Steven C. Clark 39 Vice President - Power Products
Neal J. Curran 40 Vice President - Seating and Custom Mobility Products
A. Malachi Mixon, III has been Chief Executive Officer and a Director of the
company since December 1979 and Chairman of the Board since September 1983. Mr.
Mixon had been President of the company from December 1979 until November 1996.
Gerald B. Blouch was named President and a Director of the company in
November 1996. Mr. Blouch has been Chief Operating Officer since December 1994
and Chairman - Invacare International since December 1993. Previously, Mr.
Blouch was President - Home Care Division from March 1994 to December 1994 and
Senior Vice President - Home Care Division from September 1992 to March 1994.
Mr. Blouch served as Chief Financial Officer from May 1990 to May 1993 and
Treasurer from March 1991 to May 1993.
Thomas R. Miklich has been Chief Financial Officer, General Counsel and
Treasurer since May 1993 and in September 1993 was named Secretary. Previously,
Mr. Miklich was Executive Vice President and Chief Financial Officer of Van Dorn
Company from 1991 to 1993, and Chief Financial Officer of The Sherwin-Williams
Company from 1986 to 1991.
Joseph B. Richey, II has been a Director since 1980 and in September 1992 was
named President-Invacare Technologies and Senior Vice President - Total Quality
Management. Previously, Mr. Richey was Senior Vice President of Product
Development from July 1984 to September 1992, Senior Vice President and General
Manager of North American Operations from September 1989 to September 1992.
Louis F. J. Slangen was named Senior Vice President - Sales & Marketing in
December 1994 and from September 1989 to December 1994 was Vice President -
Sales and Marketing. Mr. Slangen was previously President - Rehab Division from
March 1994 to December 1994 and Vice President and General Manager - Rehab
Division from September 1992 to March 1994.
15
Larry E. Steward was named Corporate Vice President of Human Resources in
April 1997. From April 1996 to April 1997, Mr. Steward was Director of Human
Resources for the Rehab Group. Previously, Mr. Steward was employed by LTV Steel
Company serving as Manager of Human Resources from November 1991 to April 1996.
Thomas J. Buckley was named Senior Vice President - Continuing Care Group
in October 1997 and from August 1995 to October 1997 was Group Vice President
Standard Products. Mr. Buckley was previously General Manager of Manual
Wheelchairs from December 1994 to August 1995. From November 1993 to December
1994, Mr. Buckley was the Business Unit Leader of the Bed Products and Pressure
Relief Business Units. Before this period, Mr. Buckley served as Director of
Distribution.
M. Louis Tabickman was named Senior Vice President - Respiratory Products in
October 1997 and, from August 1995 to October 1997, was Group Vice President
Rehab Products . Mr. Tabickman has been an officer since July 1985 and was named
President - Invacare Canada in March, 1994. Previously, Mr. Tabickman was Vice
President & General Manager - Power Business Unit from December 1994 to August
1995, Vice President and General Manager - Invacare Canada from September 1992
to March 1994 and Vice President and General Manager of Service and Distribution
from July 1985 until September 1992.
Donald D. Campopiano was named Vice President of Account Services, Parts
and Distribution in October 1997. Mr. Campopiano joined Invacare in 1993 as
Director of Distribution. Since then, he also has served as the General Manager
of the Beds Business Unit and as Vice President and General Manager of Invacare
Canada. Previously, Mr. Campopiano was employed by General Electric Lighting
Group most recently as Manager of Logistics.
Steven C. Clark was named Vice President of Power Products in October 1997. Mr.
Clark has been with the company since 1986 and was previously the General
Manager of the Manual Wheelchair Business Unit from October 1995 to October
1997. Mr. Clark served as the Director of Operations at the Maquiladora Plant in
Mexico from January 1993 to October 1995 and Manufacturing Manager of Invacare's
Sanford, Florida manufacturing plant from October 1989 to January 1993.
Neal J. Curran was named Vice President - Seating and Custom Mobility Products
in October 1997. Mr. Curran has been with the company since 1983 and was
previously the General Manager of the Custom Manual Business Unit since December
1994. From September 1992 to December 1994, Mr. Curran served as the Power
Business Unit leader and Vice President of Rehab engineering from January 1991
to September 1992.
* The description of executive officers is included pursuant to
Instruction 3 to Section (b) of Item 401 of Regulation S-K.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Invacare's Common Shares, without par value, are traded over-the-counter in the
NASDAQ National Market System under the symbol IVCR. Ownership of the company's
Class B Common Shares (which are not listed on NASDAQ) cannot be transferred,
except, in general, to family members. Class B Common Shares may be converted
into Common Shares at any time on a share-for-share basis. The approximate
number of record holders of the company's Common Shares and Class B Common
Shares at February 27, 1998 was 6,212 and 38, respectively. The closing sale
price for the Common Shares on February 27, 1997 as reported by NASDAQ, was
$22.94 . The prices set forth below do not include retail markups, markdowns or
commissions.
The range of high and low quarterly prices of the Common Shares in each of the
two most recent fiscal years are as follows:
1997 1996
---- ----
Quarter Ended: High Low High Low
---------------- ------------------------------------------------
December 31 $24.88 $20.75 $29.25 $25.00
September 30 24.88 20.13 32.00 23.13
June 30 24.00 18.13 28.75 23.50
March 31 29.00 23.00 29.50 24.50
During 1997, the Board of Directors for Invacare Corporation declared dividends
of $.05 per Common Share and $.045 per class B common share. For information
regarding limitations on the payment of dividends in the company's loan and note
agreements, see Long Term Obligations in the Notes to the Consolidated Financial
Statements. The Common Shares are entitled to receive cash dividends at a rate
of at least 110% of cash dividends paid on the Class B Common Shares.
17
Item 6. Selected Financial Data
For the Year Ended December 31,
1997* 1996 1995 1994 1993 1992
- ----- ---- ---- ---- ---- ----
(In thousands except per share and ratio data)
Earnings
Net Sales $653,414 $619,498 $504,032 $411,123 $365,457 $305,171
Income from Operations 8,457 65,393 54,144 43,736 36,870 27,567
Net Earnings 1,563 38,918 32,165 26,377 22,110 17,739
Net Earnings per Share - Basic .05 1.33 1.10** .91 .77 .65
Net Earnings per Share -
Assuming Dilution .05 1.28 1.07** .89 .75 .63
Dividends per Common Share .05000 .05000 .03750** .01875 - -
Dividends per Class B Common
Share .04545 .04545 .03409** .01705 - -
As of December 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Balance Sheet
Current Assets $275,211 $258,720 $204,685 $180,435 $156,191 $151,934
Total Assets 529,923 509,628 408,750 338,109 286,367 262,412
Current Liabilities 109,553 97,768 84,936 67,667 60,913 68,226
Working Capital 165,658 160,952 119,749 112,768 95,278 83,708
Long-Term Obligations 183,955 173,263 122,456 105,528 90,351 78,648
Shareholders' Equity 236,415 238,597 201,319 164,007 134,962 114,000
Other Data
Research and Development
Expenditures $ 12,706 $ 11,060 $ 9,002 $ 7,651 $ 6,840 $ 5,251
Capital Expenditures, net of
Disposals 38,485 22,465 11,027 12,217 11,961 17,301
Depreciation and Amortization 18,348 17,896 14,159 12,686 12,280 10,008
Key Ratios
Return on Sales .2% 6.3% 6.4% 6.4% 6.0% 5.8%
Return on Average Assets .3% 8.5% 8.6% 8.4% 8.1% 8.4%
Return on
Beginning .7% 19.3% 19.6% 19.5% 19.4% 20.5%
Shareholders' Equity
Current Ratio 2.5:1 2.6:1 2.4:1 2.7:1 2.6:1 2.2:1
Debt-to-Equity Ratio .8:1 .7:1 .6:1 .6:1 .7:1 .7:1
* Reflects non-recurring and unusual charge of $61,039 (38,839 or $1.28
per share assuming dilution after tax) taken in 1997.
** As adjusted for the 2-for-1 splits effected in the form of a 100%
share dividend in October 1995.
18
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
1997 Versus 1996
Non-recurring and Unusual Charge. The review of results that follows excludes
the impact of the non-recurring and unusual charge ("the charge") taken in1997.
The reasons for the charge and the impact on the company's current and future
performance is explained below under the heading "Non-recurring and Unusual
Charge" later in this section.
Net Sales. Net sales for 1997 increased 5.5% for the year net of a 2.1%
impact from foreign currency translation. Acquisitions contributed 2.9% of the
increase. The net sales increase of 4.7%, excluding acquisitions and the impact
of foreign currency translation, was due to increased unit volumes as
competitive pressures caused prices to decline for most product lines for the
second consecutive year. Sales were also negatively impacted by 4.3% due to
reduced purchases by the company's largest customer. Despite the competitive
pricing environment, almost all product lines had sales gains for the year.
Custom wheelchairs (power and custom manual), personal care products and
standard wheelchairs posted the largest dollar increases. The company believes
that its sales growth was aided by its cost effective "One Stop Shoppingsm"
distribution system that is supported by the company's broad range of products
and services. The company's goal is to increase sales by 24% to 30% per year
with 12% to 15% internal growth and 12% to 15% growth through acquisition,
although there can be no assurance that it will be able to achieve this goal.
North American Operations
Rehab Products Group. Sales of the Rehab Products Group, which consists of the
power wheelchairs, custom manual wheelchairs and seating and positioning
business units, increased 13.8% for the year. The gain was due principally to
unit volume growth. Power wheelchairs continued to lead the way as sales for the
power business unit increased 18.5% resulting from continued strong volume
growth in low end power chairs, scooter products and from the introduction of
the new mid-wheel drive power chairs.
Sales of custom manual wheelchairs increased 7.1% due to new product
introductions and the continued success of the company's "Team Action" athletes,
as many of the high-tech design features in high performance sport wheelchairs
are incorporated in the everyday Action chairs. The new Action orbit(TM)
tilt-in-space, a pediatric product, was introduced during 1997 and has gained
widespread acceptance in the market. Unit growth exceeded the dollar increase
due to pricing pressure in this product category.
Standard Products Group. Sales of the Standard Products Group, which consists of
the manual wheelchairs/patient transport, personal care, beds, low air loss
therapy, Invacare Health Care Furnishings and retail business units, increased
9.0%. Acquisitions contributed 5.4% of the sales increase including two
strategic acquisitions made during 1997. Allied Medical Supply Corporation
(acquired October 7), a distributor of soft goods and disposable products and
Silcraft Corporation (acquired May 6), a manufacturer of bathing equipment and
patient lifts, contributed .8% and 1.7% respectively. Acquisitions made in 1996
that positively impacted 1997 sales growth include Frohock-Stewart, a
manufacturer of personal care products with distribution through mass retailers
and Invacare Health Care Furnishings, a manufacturer and distributor of beds and
furnishings for the non-acute care markets. The personal care product line
posted a sales increase of over 18.0%, while standard wheelchair sales increased
modestly for the year. Sales of low air loss therapy products increased 28.3%
after showing significant decline in the prior year as changes in governmental
reimbursements policies caused the overall market for those products to shrink
dramatically from levels in 1995. The sales of this group also were impacted by
the aforementioned reduction in purchases by a major customer in 1997.
Respiratory Products Group. Sales of the Respiratory Products Group, which
consists of the oxygen concentrator, liquid oxygen, aerosol therapy and
associated respiratory products business units, decreased .8% for the year.
Volume increases were offset as significant pricing pressure continued in 1997.
The products within this group, primarily oxygen concentrators, continue to
experience the largest price decline of any of the company's product categories.
This product category was the area most effected by the reduction in
purchases by the company's major customer.
Other. Other Products, consisting primarily of the company's Canadian,
Australian and New Zealand operations, aftermarket parts and ambulatory infusion
pumps businesses, had a 10.5% sales increase for the year, with 7.4% due to
acquisitions made in the prior year. The company's Canadian operation had
another strong year with sales up 19.9%, excluding a 1.9% negative impact from
foreign currency translation. The company's New Zealand operations, principally
Dynamic Controls, was adversely affected by the sluggish European market for
power wheelchairs, as their sales declined by 5.9% excluding a 2.0% negative
impact for foreign currency translation.
19
European Operations
European sales increased 2.7%, excluding a negative impact of 9.4% from foreign
currency translation. Acquisitions had a minimal impact on sales growth (.4%).
Sales were significantly impacted by European governmental budget trends,
especially in Germany and France, that resulted in reduced reimbursement levels
and caused providers to utilize more refurbished equipment.
Gross Profit. Gross profit as a percentage of net sales decreased to 30.8% from
32.5% last year. The decline was a result of ongoing significant pricing
pressures and a product mix shift, offset by continued productivity improvements
and the cost reduction from strategic realignment of production facilities. The
company is committed to redesigning products to lower manufacturing costs while
improving quality and reliability and implementing other spending reductions
necessary to remain competitive and improve profitability.
North American Gross profit from Operations declined slightly despite an
intensifying pricing environment. Continued manufacturing productivity
improvements were somewhat offset by the impact of reduced purchases by a major
customer in 1997. The facilities rationalization implemented during the year
also favorably impacted the company's gross profit.
Gross profit in Europe declined to 26.5% from 30.0% in 1996. Continued effects
of a strong U.S. dollar, overall price declines and product mix changes each
negatively impacted margins. A significant reduction in gross profit
(approximately $2.0 million) was the result of a failure to hedge certain
transaction exposures early in 1997.
Inventory turns improved for 1997 in both the North American and European
operations, as the plan for realignment of manufacturing facilities was
initiated and implemented. The company expects turns will continue to show
improvement in 1998 as facility consolidations continue and strategic
partnerships are formed with major suppliers.
Selling, General and Administrative. Selling, general and administrative expense
as a percentage of net sales decreased to 20.2% in 1997 compared to 22.0% in
1996. The dollar decrease was $3,807,000 or 2.8%, despite acquisitions which
increased selling, general and administrative costs by approximately $5,000,000
or 4.0%. The businesses acquired operate with a significantly higher selling,
general and administrative expense as a percentage of net sales however, tight
expense control in the company's existing businesses resulted in a reduction in
the overall expense as a percentage of sales for 1997. The company focuses on
improved productivity and acquisition integration, which it expects can continue
to favorably impact the selling, general and administrative expense as a
percentage of net sales.
North American operations' selling, general and administrative costs decreased
as a percentage of net sales by approximately 1.8% from last year, as the focus
on expense control continued during 1997. The dollar change was minimal despite
acquisitions which increased costs by approximately $4,756,000. In an effort to
combat the competitive pricing environment, the company continued its
implementation of activity-based budgeting aimed at allocating the expense
dollars to the programs that most effectively supported the company's business
strategy. The company's bad debt expense and reserve for bad debt substantially
increased during the year due to expenses created by the balanced budget act and
general competitive market. The increase was taken as part of the non-recurring
and unusual charge. There can be no assurance that future government actions or
business conditions will not cause this to recur in the future.
European operations' selling, general and administrative expenses, as a
percentage of net sales, decreased to 24.9% from 25.6% in 1996, with the dollar
decrease amounting to $3,190,000 or 9.2%. Acquisitions had a minimal impact on
total costs. The overall decrease is a result of restructuring and cost
containment initiatives implemented throughout 1997 and the strong dollar which
reduced selling, general and administrative expenses reported in dollars by
9.2%.
Interest. Interest income decreased in 1997 to $9,321,000 from $9,661,000 last
year, representing a 3.5% decrease. The change between years was due primarily
to the introduction of several new financing programs offered by the company's
finance subsidiary. These programs included a three and six month interest free
financing period with rates at or below prime. Interest expense increased to
$12,555,000 from $11,286,000, representing a 11.2% increase resulting from
additional borrowings incurred to fund the 1997 acquisitions and other investing
activities, principally capital expenditures. As a result, the company's
debt-to-equity ratio increased to .8:1 from .7:1. It is anticipated that the
company's interest expense will increase in 1998 as a result of the acquisition
of Suburban Ostomy Supply Co., Inc. on January 28, 1998.
Income Taxes. The company had an effective tax rate of 39.0% in 1997,
excluding the effects of the unusual and non-recurring charge. Including the
effects of the charge, the effective tax rate was 70.1% compared to 39.0% in
1996 as the impact of permanent differences increase or earnings decline. See
Income Taxes in the Notes to Consolidated Financial Statements for further
discussion.
20
Research and Development. The company continues to increase its research and
development activities to maintain its competitive advantage. While the
competitive environment requires that research and development expenditures be
focused on the cost reduction of products while increasing functionality and
reliability, the company continues to dedicate dollars to applied research
activities to ensure that new and enhanced design concepts are available to its
businesses. Research and development expenditures increased to $12,706,000 from
$11,060,000 in 1996. The expenditures, as a percentage of sales, increased only
slightly because businesses acquired spent less on research and development as a
percent of sales than the company.
1996 Versus 1995
Net Sales. Net sales for 1996 increased 22.9% for the year with the net effect
of acquisitions and currency translation accounting for 10.9% of the increase.
The sales increase of 12.0%, excluding acquisitions and the impact of foreign
currency translation, was due to increased unit volumes as competitive pressures
caused prices to decline for most product lines again in 1996. All product
lines, with the exception of therapeutic support surfaces, liquid and Dynamic
Control had sales gains for the year with personal care products, custom
wheelchairs (power and custom manual), standard wheelchairs and concentrators
posting the largest dollar and percentage increases. The company believes its
sales growth was aided by its cost effective "One Stop Shoppingsm" distribution
system that is supported by the company's broad range of products and services.
The company sales goals are to increase sales at a level that is 50% greater
than the overall market growth rate and to reach $1 billion in sales by the year
2000.
North American Operations
Rehab Products Group. Sales of the Rehab Products Group, which consists of the
power wheelchairs, custom manual wheelchairs and seating and positioning
business units, increased 20.0% for the year, with 4.5% of the increase due to
the acquisitions of PinDot Products in mid 1995 and Special Health Systems in
late 1995. The gain was due principally to unit volume growth although prices
for certain product lines were increased slightly during the year. Power
wheelchairs continued to lead the way as sales for the power business unit
increased 17.0% with over 90.0% of the improvement coming from increased unit
sales.
Sales of custom manual wheelchairs also showed double digit growth as the
success of the company's "Team Action" athletes in the 1996 Atlanta Paralympic
Games helped to enhance sales of our everyday Action chairs that incorporate
many of the high-tech design features and materials used in the high performance
sports wheelchairs. Seating and positioning sales increased 81.6% principally as
a result of the acquisitions made to complete this product line in 1995.
Excluding acquisitions, sales of seating and positioning products achieved
double-digit levels in units, however the increase in dollars was limited to
9.0% due to the pricing pressures experienced during the year.
Standard Products Group. Sales of the Standard Products Group, which consists of
the manual wheelchairs/patient transport, personal care, beds, low air loss
therapy and Invacare Continuing Care Group business units, increased 23.2%. The
acquisition of Invacare Continuing Care Group, a manufacturer and distributor of
beds and furnishings for the extended and acute care markets, contributed
approximately 9.0% to the increase. The group's unit volume increase was greater
than the reported dollar increase, as again in 1996 the product lines within
this group experienced significant competitive pricing pressure. The personal
care product line posted a sales increase of over 45.0%, while standard
wheelchairs sales increased 15.0% for the year. Sales of low air loss therapy
products declined significantly for the year as changes in governmental
reimbursements policies caused the overall market for those products to shrink
dramatically from 1995.
Respiratory Products Group. Sales of the Respiratory Products Group, which
consists of the oxygen concentrator, liquid oxygen, aerosol therapy and
associated respiratory products business units, increased 14.2% for the year.
Volume increases were significantly greater than the overall sales dollar
increase as significant pricing pressure continued in 1996. The products within
the group, primarily oxygen concentrators, experienced the largest price decline
of any of the company's product categories. The company still managed to
increase its market share position to become the leader in oxygen concentrators
during 1996, as sales to both national accounts and independent providers
increased at a rate greater than the overall market growth rate.
Other. Other, consisting primarily of the company's Canadian, New Zealand and
Australian operations, retail, aftermarket parts business and ambulatory
infusion pumps, had a 59.7% sales increase for the year, with almost all of the
increase due to acquisitions. The company's Canadian operation had another
strong year with sales up 10.8%, including a .7% positive impact from foreign
currency translation. This gain was offset by a down year in sales at Dynamic
Controls, the company's electronic wheelchair controller business, due primarily
to the loss of a large customer during 1995 who is also a major competitor to
the company. The acquisitions made in 1996 that positively impacted sales growth
include Frohock-Stewart, a manufacturer of personal care products with
distribution through mass retailers, Production Research Company, a supplier of
aftermarket parts for the home medical equipment market and Rollerchair Pty.
Ltd., a manufacturer and distributor of custom power wheelchairs in Australia.
21
European Operations
European sales increased 15.6%, with acquisitions accounting for 9.6% of the
increase. Foreign currency translation had a negative effect on the reported
sales of 1.9%. Sales increased in almost all product lines, with power
wheelchairs and patient aid sales posting the largest dollar increases.
Competitive pricing pressure intensified in Europe in 1996, resulting in higher
unit volume growth than the reported increase in dollars. The European sales
growth was enhanced by a significant percentage increase in the sales of beds
and respiratory products. The absolute level of sales for these products is
still relatively small as they represent new product categories in the European
market. The introduction of these product lines support the company's goal of
mirroring the product lines of our North American operations in Europe.
Gross Profit. Gross profit as a percentage of net sales decreased to 32.5% from
33.0% last year, due primarily to businesses acquired which had lower gross
margins than the company's existing businesses. Despite ongoing intense price
competition, excluding businesses acquired, gross margins were basically flat
with last year. The company's continued focus on cost reductions in all of its
business processes was the principal reason margins were held level in the
ongoing competitive environment. The company intends to continue to focus on
improving productivity, redesigning products to lower manufacturing costs while
improving quality and reliability and implement other spending reductions to
remain competitive. The company is continuing its initiative of realigning
production among locations and consolidating certain facilities in order to
achieve improved productivity, efficiency and reduction of costs.
North American operations' gross profit, excluding businesses acquired,
increased from last year as a result of improved manufacturing productivity,
reduced distribution costs and improved purchasing synergies which were only
partially affected by the negative effects of the competitive pricing
environment and a shift in product mix.
Gross profit in Europe declined significantly to 30.0% from 33.2% in 1995. The
decline was due in part to increased pricing competition in Europe but was
primarily the result of internal operating difficulties. Poor implementation of
the manufacturing and purchasing improvement plans for the year as well as a
lack of control over freight and distribution costs were the major factors
contributing to the decline. The company believes that it has plans in place so
that these problems do not reoccur in 1997.
Inventory turns declined in 1996 in both the North American and European
Operations, negatively impacting gross margins for the year. The company expects
that turns will improve in 1997 as the realignment of manufacturing facilities
is implemented. As stated above, the company believes its focus on reducing
costs in all of its business processes and improving productivity will enhance
for future competitiveness and profitability.
Selling, General and Administrative. Selling, general and administrative expense
as a percentage of net sales was 22.0% in 1996 compared to 22.3% in 1995. The
dollar increase was $23,911,000 or 21.3%. Acquisitions increased selling,
general and administrative costs by approximately $16,000,000 for the year,
representing approximately 14.0% of the percentage increase. The businesses
acquired operate with a significantly higher selling, general and administrative
expense as a percent of sales ratio, however, tight expense control in the
company's existing businesses resulted in a reduction in the overall percentage
of sales ratio in 1996. It is expected that the ratio for the company as well as
the acquired businesses will decline in the future as the company focuses on
improved productivity and activity-based management.
North American operations' selling, general and administrative costs increased
as a percent of sales by approximately 1.0% from last year. Excluding
acquisitions, these costs were lower than last year as the focus on continued
expense control intensified during 1996 as a result of the competitive pricing
environment. The company also refocused its efforts on activity based budgeting
during the year to ensure that the expense dollars spent were allocated to the
programs that most effectively supported the company's business strategy. The
company made substantial investments in 1996, primarily related to brand
strategy and clinical application specialists, that it believes had a positive
impact on growth in 1996 and will also favorably impact growth opportunities in
the future.
22
European operations' selling, general and administrative expenses, as a
percentage of sales, increased to 25.6% from 24.3% in 1995, with the dollar
increase amounting to $6,173,000 or 21.8%. Acquisitions accounted for over
one-half of the dollar increase. The balance of the increase was a result of
spending required to build the infrastructure needed to implement a full-line
product strategy in Europe which began during 1995, resulting in increased
spending of 10% for the year, excluding acquisition impact. The company believes
the infrastructure investments in Europe will provide the organizational
structure required to support future growth as well as a full-line product
strategy.
Interest. Interest income in 1996 increased to $9,661,000 from $7,276,000 last
year, a 32.8% increase, due primarily to increased financing activity by the
company's finance subsidiary that resulted in higher average outstanding
installment loans. Interest expense increased to $11,286,000 or 17.9%, primarily
as a result of the additional borrowings incurred to fund the 1996 acquisition
and other investing activity. The company's debt-to-equity ratio increased
marginally to .7:1 from .6:1. It is anticipated that the company's interest
expense, in the absence of additional acquisitions or significant increases in
borrowing rates, will decline due to the company's strong cash flows from
operations offset to some extent by additional capital expenditures planned for
1997.
Income Taxes. The company had an effective tax rate of 39.0% in 1996
compared to 38.0% in 1995. See Income Taxes in the Notes to Consolidated
Financial Statements for further discussion.
Research and Development. The company continues to increase its research and
development activities to maintain its competitive advantage. While the
competitive environment requires that research and development expenditures be
focused on the cost reduction of products while increasing functionality and
reliability, the company continues to dedicate dollars to applied research
activities to ensure that new and enhanced design concepts are available to its
businesses. Research and development expenditures increased to $11,060,000 from
$9,002,000 in 1995. The expenditures, as a percent of sales, remained at 1.8% as
businesses acquired spent less on research and development as a percent of sales
than the company. For certain of the acquired businesses, future spending is
anticipated to be more in line with the company's overall spending levels.
INFLATION
Although the company cannot determine the precise effects of inflation,
management believes that inflation does continue to have an influence on the
cost of materials, salaries and benefits, utilities and outside services. The
company attempts to minimize or offset the effects through increased sales
volume, capital expenditure programs designed to improve productivity,
alternative sourcing of material and other cost control measures. In 1997 and
1996, the company was able to offset the majority of the impact of price
increases from suppliers by productivity improvements and other cost reduction
activities.
LIQUIDITY AND CAPITAL RESOURCES
The company continues to maintain an adequate liquidity position through its
unused bank lines of credit (see Long-Term Obligations in the Notes to
Consolidated Financial Statements) and working capital management. The company
maintains various bank lines of credit to finance its worldwide operations. In
1997, the company completed a $425,000,000 multi-currency, long-term revolving
credit agreement which expires on October 31, 2002, or such later date as
mutually agreed upon by the company and the banks. Additionally, the company
maintains various other demand lines of credit totaling a U.S. dollar equivalent
of approximately $16,000,000 as of December 31, 1997. The lines of credit have
been and will continue to be used to fund the company's domestic and foreign
working capital, capital expenditures and acquisition requirements. As of
December 31, 1997, the company had approximately $291,000,000 available under
its various lines of credit.
Subsequent to year end, the company completed a private placement of
$100,000,000 in senior notes having a blended fixed coupon rate of 6.69% with
$20,000,000 maturing in seven years and $80,000,000 maturing in ten years. The
proceeds were used to pay-down revolving credit debt incurred to fund the
acquisition of Suburban Ostomy Supply Co., Inc., which was consummated on
January 28, 1998.
The company's borrowing arrangements contain covenants with respect to net
worth, dividend payments, working capital, funded debt to capitalization and
interest coverage, as defined in the company's bank agreements and agreement
with its note holders. The company is in compliance with all covenant
requirements. Under the most restrictive covenant of the company's borrowing
arrangements, the company may borrow up to an additional $267,000,000 as of
December 31, 1997.
23
CAPITAL EXPENDITURES
There are no individually material capital expenditure commitments outstanding
as of December 31, 1997. However, the company expects to invest approximately
$26,000,000 in capital projects in 1998. The decrease in capital spending in
1998 is due principally to the expansion of three manufacturing facilities, the
completion of a new respiratory manufacturing plant and the completion of a new
corporate headquarters building in 1997. The company believes that its balances
of cash and cash equivalents, together with funds generated from operations and
existing borrowing capabilities, will be sufficient to meets its operating cash
requirements and fund required capital expenditures in the foreseeable future.
CASH FLOWS
Cash flows provided by operating activities were $37,935,000, compared to
$34,323,000 last year. The 10.5% increase is primarily the result of decreased
inventory levels from the prior year, as continued focus on inventory management
initiatives have proven effective, and an increase in accrued expenses relating
to the unpaid portion of the unusual charge taken in 1997. The improved cash
flow was offset to some extent by an increase in trade receivables. The changes
in operating assets and liabilities are not apparent from the face of the
balance sheet as funds expensed for assets acquired through business
acquisitions are accounted for in the investment activities section of the
Consolidated Statement of Cash Flows.
Cash flows required for investing activities decreased by $23,341,000 or 30.6%.
The decrease was a result of reduced acquisition activity in 1997 and the sale
of the company's investment in Healthdyne Technologies, Inc.. The decrease was
offset by an increase in capital expenditures primarily relating to investments
in computer systems, production machinery and equipment and facility expansions
associated with the continuing implementation of a worldwide facilities plan.
Cash flows provided by financing activities were $16,467,000 in 1997 compared to
$42,556,000 in 1996. The 61.3% decrease in cash provided by financing activities
was primarily a result of a reduction in net proceeds from long-term borrowings
which were used to fund acquisitions in the prior year and increased payments on
revolving lines of credit when compared to the prior year.
In addition to acquisition activities, the effect of foreign currency
translation results in amounts being shown for cash flows in the Consolidated
Statement of Cash Flows that are different from the changes reflected in the
respective balance sheet captions.
DIVIDEND POLICY
It is the company's policy to pay a nominal dividend in order for its stock to
be more attractive to a broader range of investors. The current annual dividend
rate remains at $.05 per Common Share and $.045 per Class B Common Share. It is
not anticipated that this will change materially as the company continues to
have available significant growth opportunities through internal development and
acquisitions. For 1997, a dividend of $.05 per Common Share and $.045 per Class
B Common Share were declared and paid.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using the
last two digits rather than four to define the applicable year. Thus, many
programs are unable to properly distinguish between the year 1900 and the year
2000. This is frequently referred to as the "Year 2000 Problem."
The company has developed a plan to modify its existing information technology
in order to recognize the year 2000 and has begun converting its critical data
processing systems. The plan is designed to ensure that there is no adverse
effect on the company's core business operations and that transactions with
customers, suppliers and financial institutions are fully supported. The company
is well under way with these efforts and believes its planning and
implementation efforts will be adequate to address its year 2000 concerns.
Currently, the project is expected to be substantially completed by early 1999
and to cost between $4.0 and $6.0 million. This estimate includes internal costs
and excludes the costs to upgrade and replace systems in the normal course of
business. The company does not expect this project to have a significant effect
on the company's results of operations or financial position.
For the year ended December 31, 1997, approximately $600,000 was incurred
and expensed related to this activity. The company will continue to implement
systems with strategic long term value as it has undertaken a long-term systems
improvement program that will result in a global Enterprise Resource Planning
(ERP) system utilizing certain of the Oracle ERP product modules. While the
review of the project has been revised from the original plan, the company still
plans to spend significant funds over the next several years implementing its
new systems plan. This program is expected to cost approximately $40.0 million
over the next four years including internal costs.
24
NON-RECURRING AND UNUSUAL CHARGE
In 1997, the company recorded a non-recurring and unusual charge of
$61,039,000 ($38,839,000 or $1.28 diluted per share after tax) for the
acceleration of certain strategic initiatives and other items. The charge
impacted cost of products sold by approximately $3,391,000 and selling, general
and administrative expenses by approximately $27,787,000. During the fourth
quarter, the company reviewed the charge and its related estimates and
components. The review resulted in certain changes to the components of the
charge. In addition, while reviewing the technical requirements of Financial
Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) 94-3 and all
relevant accounting pronouncements, it was determined that part of the charge
related to the fourth quarter rather than the third quarter and the company
restated the quarters to reflect this change. There was no significant impact on
results recorded for the year. The charge includes $20,337,000 for the
acceleration of global manufacturing facility consolidations and the elimination
of certain non-strategic product lines, $7,456,000 for certain accelerated
global systems' initiatives, $10,293,000 for an increase in the company's bad
debt reserve and $22,953,000 for asset write-downs and an increase in reserves
for litigation. The portion of the charge identified for certain global systems
initiatives relates to the write-off of assets that will not benefit future
periods due to new systems replacements or the change in scope of the original
project. There were no year 2000 costs charged to the reserve as these costs are
expensed as incurred pursuant to the requirements of the Financial Accounting
Standards Board (FASB) Emerging Issues Task Force (EITF) 96-14. The company
initiatives included in the charge are anticipated to be substantially completed
in 1998. During 1997, approximately $8,480,000 of the reserve amount was
utilized for facility consolidations and business exits, $7,456,000 for systems
related costs, $4,423,000 for the write-off of specifically identified accounts
receivable and an increase in the general reserve for bad debts and $14,371,000
for asset write-downs and litigation. The remaining accrual balance at December
31, 1997 in the amount of $26,309,000 relates primarily to facility
consolidations, business exits, litigation and bad debt.
PRIVATE SECURITIES LITIGATION REFORM ACT
This management's discussion contains forward-looking statements based on
current expectations which are covered under the "safe harbor" provision within
the Private Securities Litigation Reform Act of 1995. Actual results and events,
including the acceleration of certain strategic initiatives for which a
non-recurring and unusual charge has been reported, may differ significantly
from those anticipated as a result of risks and uncertainties which include, but
are not limited to, pricing pressures, the consolidations of health care
customers and competitors, the availability of strategic acquisition candidates
successfully completing its project to resolve its year 2000 issues and
Invacare's ability to effectively integrate acquired companies, the timely
completion of facility consolidations and other strategic initiatives provided
for, the completion of year 2000 compliance programs and the overall economic,
market and industry conditions, as well as the risks described from time to time
in Invacare's reports as filed with the Securities and Exchange Commission.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Report of Independent Auditors, Consolidated Balance
Sheet, Consolidated Statement of Earnings, Consolidated Statement of Cash Flows,
Consolidated Statement of Shareholders' Equity, Notes to Consolidated Financial
Statements and Financial Statement Schedule which appear on pages FS -1 to FS -
21 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 as to the Directors of the company is
incorporated herein by reference to the information set forth under the caption
"Election of Directors" in the company's definitive Proxy Statement for the 1998
Annual Meeting of Shareholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the company's fiscal year pursuant to Regulation 14A. Information required by
Item 10 as to the Executive Officers of the company is included in Part I of
this Report on Form 10-K.
25
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
information set forth under the caption "Compensation of Executive Officers and
Directors" in the company's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
company's fiscal year pursuant to Regulation 14A.
Item. 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to the
information set forth under the caption "Share Ownership of Principal Holders
and Management" in the company's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders, since such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
company's fiscal year pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the
information set forth under the caption "Certain Transactions" in the company's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders, since
such Proxy Statement will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the company's fiscal year pursuant to
Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Financial Statements
The following financial statements of the company are included in Part II, Item
8:
(a)(1) Financial Statements.
Consolidated Statement of Earnings - years ended December 31, 1997, 1996
and 1995
Consolidated Balance Sheet - December 31, 1997 and 1996
Consolidated Statement of Cash Flows - years ended December 31, 1997,
1996 and 1995
Consolidated Statement of Shareholders' Equity - years ended December 31,
1997, 1996 and 1995
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:
Schedules
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-27 of this Report on Form 10-K.
(b) Reports on Form 8-K.
None
26
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 31, 1998.
INVACARE CORPORATION
By: /S/ A. Malachi Mixon, III
-----------------------------
A. Malachi Mixon, III Chairman of the Board
of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 31, 1998.
Signature Title
/S/ A. Malachi Mison, III Chairman of the Board of Directors and
- -------------------------- Chief Executive Officer (Principal Executive
A. Malachi Mixon, III Officer)
/S/ Gerald B. Blouch President, Chief Operating Officer and Director
- ------------------------
Gerald B. Blouch
/S/ Thomas R. Miklich Chief Financial Officer, General Counsel,
- ----------------------- Treasurer and Corporate Secretary (Principal
Thomas R. Miklich Financial and Accounting Officer)
/S/ Francis J. Callahan
- -------------------------- Director
Francis J. Callahan
/S/ Frank B. Carr
- -------------------------- Director
Frank B. Carr
/S/ Michael F. Delaney
- -------------------------- Director
Michael F. Delaney
/S/ Whitney Evans
- --------------------------- Director
Whitney Evans
/S/ Dan T. Moore, III
- -------------------------- Director
Dan T. Moore, III
/S/ E.P. Nalley
- -------------------------- Director
E. P. Nalley
/S/ Joseph B. Richey
- ------------------------- Director
Joseph B. Richey, II
/S/ William M. Weber
- ------------------------- Director
William M. Weber
/S/ Dr. Bernadine P. Healy
- -------------------------- Director
Dr. Bernadine P. Healy
27
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended
December 31, 1997.
Exhibit Index
-------------
Official
Exhibit No Description Sequential Page No.
- ---------- -------------- -------------------
3(a) - Amended and Restated Articles of Incorporation, as amended through (A)
May 29, 1987.
3(b) - Code of Regulations, as amended on May 22, 1996. (V)
3(c) - Amended and Restated Articles of Incorporation, as amended through February 2, 1996. (T)
4(a) - Specimen Share Certificate for Common Shares, as revised (H)
4(b) - Specimen Share Certificate for Class B Common Shares (H)
4(d) - Rights agreement between Invacare Corporation and Rights Agent dated as of (S)
July 7, 1995
10(a) - Stock Option Plan, adopted in February 1984 (B)*
10(b) - Amendment to Stock Option Plan, adopted in May 1987 (C)*
10(c) - Amendment to Stock Option Plan, adopted in May 1988 (D)*
10(d) - Amendment to Stock Option Plan, adopted in May 1991 (I)*
10(h) - Assignment of Patent Application and License of Know-how dated January 14, 1981, and an (E)
amendment thereto dated October 12, 1981, with respect to certain royalty payments to be
made to the former owners of the company's home care bed subsidiary
10(p) - Form of Indemnity Agreement entered into by and between the company and certain of its (H)
Directors and officers and Schedule of all such Agreements with current Directors and
officers
10(r) - Master Note, between Invacare Corporation and Sanwa Bank, Limited (J)
10(s) - Employees' Stock Bonus Trust and Plan as amended and restated effective (G) *
January 1, 1988 and as amended on April 13, 1988, April 3, 1990, and May 24, 1991
10(t) - Profit Sharing and Savings Trust and Plan effective as of January 1, 1988 and as amended (G) *
on November 28, 1988, September 12, 1990, October 9, 1990, and
May 24, 1991
10(u) - Agreement between Invacare Corporation and Weber, Wood, Medinger, Inc. (J)
10(v) - Real Property Purchase Agreement by and between Invacare Corporation and Taylor Street (N)
limited partnership
10(z) - Note Agreement dated February 1, 1993 among Invacare
Corporation and five purchasers of (P) an aggregate of
$25,000,000, 7.45% Senior Notes due February 1, 2003.
10(aa) - Amendments to Stock Option Plan adopted in May 1992 (M) *
10(ab) - 1992 Non-Employee Directors Stock Option Plan adopted in May 1992 (K)
28
10(ac) - Deferred Compensation Plan for Non-Employee Directors, adopted in May 1992 (L)
10(ad) - Shares Purchase and Contribution Agreement dated July 27, 1992 (O)
10(af) - Invacare Corporation 1994 Performance Plan approved January 28, 1994 (Q) *
10(ag) - Real Property Purchase Agreement between Mobilite Building Corporation (a newly formed (R)
subsidiary of Invacare Corporation as of February 15, 1994) and I-M Associates, LTD.
dated February 28, 1994
10(ar) - First Amendment to Note Agreement among Invacare Corporation and five purchasers of (U)
Senior Notes dated March 20, 1997
10(as) - Loan Agreement by and among Invacare Corporation, the Banks, certain borrowing (F)
subsidiaries, the Banks named therein, NBD Bank, as agent for the Banks and KeyBank
National Association, as co-agent for the Banks
10(at) Agreement and Plan of Merger, dated December 17, 1997, between Invacare Corporation, (W)
- Inva Acquisition Corp. and Suburban Ostomy Supply Co., Inc..
21 - Subsidiaries of the company
23 - Consent of Independent Auditors
27 - Financial data schedule
99(a) - Executive Liability and Defense Coverage Insurance Policy (H)
99(b) - Supplemental Executive Retirement Plan
* Management contract, compensatory plan or arrangement
29
(A) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 28, 1987, which Exhibit is incorporated herein by
reference.
(B) Reference is made to the appropriate Exhibit of the company's Report
on Form 10-K for the fiscal year ended December 31, 1984, which
Exhibit is incorporated herein by reference.
(C) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1987, which
Exhibit is incorporated herein by reference.
(D) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 25, 1988, which Exhibit is incorporated herein by
reference.
(E) Reference is made to the appropriate Exhibit of the company's Form 8
Amendment No. 1 (filed on September 23, 1987) to its Registration
Statement on Form 8-A (Reg. No. 0-12938, effective as of October 21,
1986), which Exhibit is incorporated herein by reference.
(F) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1997, as amended,
which is incorporated herein by reference.
(G) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1990, as amended,
which is incorporated herein by reference.
(H) Reference is made to the appropriate Exhibit of the company's
Registration Statement on Form S-3 (Reg. No. 33-40168), effective as
of April 26, 1991, which Exhibit is incorporated herein by reference.
(I) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 24, 1991, which Exhibit is incorporated herein by
reference.
(J) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1991, as amended,
which is incorporated herein by reference.
(K) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 27, 1992, which exhibit is incorporated herein by
reference.
(L) Reference is made to Exhibit B of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 27, 1992, which Exhibit is incorporated herein by
reference.
(M) Reference is made to Exhibit C of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 27, 1992, which Exhibit is incorporated herein by
reference.
(N) Reference is made to the appropriate Exhibit of the company's report
on Form 10-Q for the quarter ended June 30, 1992, which Exhibit is
incorporated herein by reference.
(O) Reference is made to Exhibit 2 of the company's report on Form 8-K,
dated October 29, 1992, which Exhibit is incorporated herein by
reference.
(P) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1992, which
Exhibit is incorporated herein by reference.
(Q) Reference is made to Exhibit A of the company's Definitive Proxy
Statement used in connection with the Annual Meeting of Shareholders
held on May 23, 1994, which Exhibit is incorporated herein by
reference.
(R) Reference is made to the appropriate Exhibit of the company's report
on Form 10-K for the fiscal year ended December 31, 1993, which
Exhibit is incorporated herein by reference.
30
(S) Reference is made to Exhibit 1 of the company's report on Form 8-A,
dated July 18, 1995, which Exhibit is incorporated herein by
reference.
(T) Reference is made to the appropriate Exhibit of the Company's
Definitive Proxy Statement used in connection with the Annual Meeting
of Shareholders held on May 22, 1996, which Exhibit is incorporated
herein by reference.
(U) Reference is made to the appropriate Exhibit of the company's report
on Form 10-Q for the quarter ended March 31, 1997, which Exhibit is
incorporated herein by reference
(V) Reference is made to the appropriate Exhibit of the company's report
on Form 10-Q for the quarter ended September 30, 1996, which Exhibit
is incorporated herein by reference
(W) Reference is made to the appropriate Exhibit to the company's report
on Form 8-K, dated January 23, 1998, which Exhibit is incorporated
herein by reference.
31
Report of Independent Auditors
Shareholders and Board of Directors
Invacare Corporation
We have audited the accompanying consolidated balance sheet of Invacare
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14 (a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with 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.
ERNST & YOUNG LLP
Cleveland, Ohio
March 27, 1998
32
CONSOLIDATED STATEMENT OF EARNINGS
INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31,
1997 1996 1995
------------------------------------
(In thousands, except per share data)
Net sales $653,414 $619,498 $504,032
Cost of products sold 455,036 418,025 337,719
--------- --------- --------
Gross Profit 198,378 201,473 166,313
Selling, general and administrative expense 160,060 136,080 112,169
Non-recurring and unusual items * 29,861 - -
--------- -------- --------
Income from Operations 8,457 65,393 54,144
Net interest income (expense) (3,234) (1,625) (2,299)
--------- -------- --------
Earnings before Income Taxes 5,223 63,768 51,845
Income taxes 3,660 24,850 19,680
--------- -------- --------
Net Earnings $ 1,563 $ 38,918 $ 32,165
========= ======== ========
Net Earnings per Share - Basic $ .05 $ 1.33 $ 1.10
========= ========= ========
Weighted Average Shares Outstanding - Basic 29,569 29,332 29,128
========= ========= ========
Net Earnings per Share - Assuming Dilution $ .05 $ 1.28 $ 1.07
========= ========== ========
Weighted Average Shares Outstanding -
Assuming Dilution 30,374 30,393 30,077
========= ========== ========
* Excludes amounts included in cost of products sold and selling, general and
administrative expenses of $3,391 and $27,787 respectively.
See notes to consolidated financial statements.
33
CONSOLIDATED BALANCE SHEET
INVACARE CORPORATION AND SUBSIDIARIES
December 31, December 31,
1997 1996
------------- --------------
(In thousands)
Assets
Current Assets
Cash and cash equivalents $ 5,696 $ 4,431
Marketable securities 3,501 3,569
Trade receivables, net 114,410 105,432
Installment receivables, net 49,298 51,995
Inventories 75,708 78,934
Deferred income taxes 18,855 7,181
Other current assets 7,743 7,178
------------ ----------
Total Current Assets 275,211 258,720
Other Assets 56,567 49,459
Property and Equipment, net 90,577 77,830
Goodwill, net 107,568 123,619
------------ ----------
Total Assets $529,923 $509,628
============ ==========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 42,497 $ 40,723
Accrued expenses 59,998 50,900
Accrued income taxes 1,872 1,563
Current maturities of long-term obligations 5,186 4,582
------------ ---------
Total Current Liabilities 109,553 97,768
Long-Term Obligations 183,955 173,263
Shareholders' Equity
Preferred Shares (Authorized 300 shares; none outstanding) 0 0
Common Shares (Authorized 100,000 shares; 28,724 and
28,408 issued in 1997 and 1996, respectively) 7,182 7,103
Class B Common Shares (Authorized 12,000 shares;
1,438 and 1,442, issued and outstanding in
1997 and 1996, respectively) 359 360
Additional paid-in-capital 74,954 71,143
Retained earnings 167,649 167,561
Adjustments to shareholders' equity (6,506) (833)
Treasury shares (438 and 418 shares in
1997 and 1996, respectively) (7,223) (6,737)
------------ ----------
Total Shareholders' Equity 236,415 238,597
------------ ----------
Total Liabilities and Shareholders' Equity $529,923 $509,628
============ ===========
See notes to consolidated financial statements.
34
CONSOLIDATED STATEMENT OF CASH FLOWS
INVACARE CORPORATION AND SUBSIDIARIES
Years Ended December 31,
1997 1996 1995
-----------------------------------------
(In thousands)
Operating Activities
Net earnings $ 1,563 $ 38,918 $ 32,165
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Non-recurring unusual charge, (non cash) 40,226 - -
Depreciation and amortization 18,348 17,896 14,159
Provision for losses on trade and installment receivables 1,411 1,546 1,379
Provision for deferred income taxes (18,867) (596) (3,321)
Provision for other deferred liabilities 2,546 2,658 728
Changes in operating assets and liabilities:
Increase in trade receivables (13,265) (5,937) (10,028)
(Increase)/decrease in inventories (1,817) (16,395) 3,102
Increase in other current assets (1,911) (714) (2,681)
Increase/(decrease) in accounts payable 1,001 2,487 (1,427)
Increase/(decrease) in accrued expenses 8,700 (5,540) 10,373
------------------------------------------------
Net Cash Provided by Operating Activities 37,935 34,323 44,449
Investing Activities
Purchases of property and equipment (38,485) (22,553) (11,173)
Proceeds from sale of property and equipment 523 88 146
Installment contracts written (74,104) (65,241) (50,908)
Payments received on installment contracts 67,265 47,742 40,705
Marketable securities purchased (4,018) (3,416) (4,307)
Marketable securities sold 4,140 2,274 4,927
Business acquisitions, net of cash acquired (3,997) (24,860) (31,019)
(Increase)/decrease in other investments 4,316 (6,986) (2,246)
Increase in other long-term assets (5,394) (3,945) (3,865)
Other (3,283) 519 961
-------------------------------------------------
Net Cash Required for Investing Activities (53,037) (76,378) (56,779)
Financing Activities
Proceeds from revolving lines of credit and
long-term borrowings 79,169 103,872 67,057
Principal payments on revolving lines of credit,
long-term debt and capital lease obligations (64,993) (61,831) (58,942)
Proceeds from exercise of stock options 3,766 4,222 1,447
Payment of dividends and rights plan redemption (1,475) (1,457) (968)
Purchase of treasury stock 0 (2,250) 0
-------------------------------------------------
Net Cash Provided by Financing Activities 16,467 42,556 8,594
Effect of exchange rate changes on cash (100) (202) 509
-------------------------------------------------
Increase/(decrease) in cash and cash equivalents 1,265 299 (3,227)
Cash and cash equivalents at beginning of year 4,431 4,132 7,359
-------------------------------------------------
Cash and cash equivalents at end of year $ 5,696 $ 4,431 $ 4,132
=================================================
See notes to consolidated financial statements.
35
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
INVACARE CORPORATION AND SUBSIDIARIES
(In thousands) 1997 1996 1995
---- ---- ----
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------
Common Shares:
Balance at beginning of year 28,408 $ 7,103 24,589 $ 6,148 22,289 $ 5,573
Conversion of Class B Common Shares
to Common Shares 4 1 3,531 883 2,095 524
Issuance of Common Shares for acquisition 0 0 0 0 77 19
Exercise of stock options 312 78 288 72 128 32
-------------------------------------------------------------------------
Balance at end of year 28,724 $ 7,182 28,408 $ 7,103 24,589 $ 6,148
=========================================================================
Class B Common Shares:
Balance at beginning of year 1,442 $ 360 4,973 $ 1,243 7,068 $ 1,767
Conversion of Class B Common Shares
to Common Shares (4) (1) (3,531) (883) (2,095) (524)
-------------------- ----------------------------------------------------
Balance at end of year 1,438 $ 359 1,442 $ 360 4,973 $ 1,243
=========================================================================
Additional Paid-In-Capital:
Balance at beginning of year $ 71,143 $ 66,890 $ 63,671
Issuance of Common Shares for acquisition 0 0 1,804
Exercise of stock options 3,811 4,253 1,415
-------------------------------------------------------------------------
Balance at end of year $ 74,954 $ 71,143 $ 66,890
=========================================================================
Retained Earnings:
Balance at beginning of year $167,561 $130,100 $ 99,086
Net earnings 1,563 38,918 32,165
Dividend of $.05000, $.05000 and $.03750 per Common
Share in 1997, 1996 and 1995, respectively (1,475) (1,457) (1,078)
Redemption of 1991 rights plan 0 0 (73)
-------------------------------------------------------------------------
Balance at end of year $167,649 $167,561 $ 130,100
=========================================================================
Adjustments to Shareholders' Equity:
Balance at beginning of year $ (833) $ 993 $ (2,196)
Foreign currency translation adjustment (6,074) (2,256) 2,965
Marketable securities holding gain/(loss), net of tax 401 430 224
-------------------------------------------------------------------------
Balance at end of year $ (6,506) $ (833) $ 993
=========================================================================
Treasury Shares:
Balance at beginning of year (418) $ (6,737) (311) $ (4,055) (303) $(3,894)
Repurchase of treasury shares (20) (486) (107) (2,682) (8) (161)
-------------------------------------------------------------------------
Balance at end of year (438) $ (7,223) (418) $ (6,737) (311) $(4,055)
=========================================================================
See notes to consolidated financial statements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVACARE CORPORATION AND SUBSIDIARIES
ACCOUNTING POLICIES
Nature of Operations: Invacare Corporation and its subsidiaries (the
"company") is the leading home medical equipment manufacturer in the world based
on its distribution channels, the breadth of its product line and sales. The
company designs, manufactures and distributes an extensive line of medical
equipment for the home health care, retail and extended care markets. The
company's products include standard manual wheelchairs, motorized and
lightweight prescription wheelchairs, seating and positioning systems, motorized
scooters, patient aids, home care beds, low air loss therapy products, home
respiratory and ambulatory infusion pumps.
Principles of Consolidation: The consolidated financial statements include the
accounts of the company and are prepared in conformity with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results may differ from these estimates. Certain foreign
subsidiaries are consolidated using a November 30 fiscal year end. All
significant intercompany transactions are eliminated.
Reclassifications: Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to the presentation used for
the year ended December 31, 1997.
Recently Issued Accounting Pronouncements: In June 1997, the Financial
Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income,
which requires that an enterprise classify items of other comprehensive income,
as defined therein, by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. The company intends to comply with the provisions of this statement upon
its required adoption in the first quarter of 1998, and does not anticipate a
significant impact to the financial statements.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. This
statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information pertaining
to the company's operating segments will be reported on the basis that is used
internally for evaluating segment performance and making resource allocation
determinations. Management is currently studying the potential effects of
adoption of this statement, which is required in 1998.
Marketable Securities: Current marketable securities are stated at market value,
and 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
shareholders' equity.
Inventories: Inventories are stated at the lower of cost or market with cost
principally determined for domestic manufacturing inventories by the last-in,
first-out (LIFO) method. Market costs are based on the lower of replacement cost
or estimated net realizable value. Non-domestic inventories and domestic
finished products purchased for resale ($46,255,000 and $52,188,000 at December
1997 and 1996, respectively) are stated at the lower of cost or market with cost
determined by the first-in, first-out (FIFO) method.
Property and Equipment: Property and equipment are stated on the basis of cost.
The company principally uses the straight-line method of depreciation for
financial reporting purposes based on annual rates sufficient to amortize the
cost of the assets over their estimated useful lives. Accelerated methods of
depreciation are used for federal income tax purposes. Expenditures for
maintenance and repairs are charged to expense as incurred.
Estimated Liability for Future Warranty Cost: Generally, the company's products
are covered by warranties against defects in material and workmanship for
periods up to five years from the date of sale to the customer. Certain
components carry a lifetime warranty. A non-renewable warranty is also offered
on various products for a maximum period of five years. A provision for
estimated warranty cost is recorded at the time of sale. The provision is an
estimation based upon actual experience.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
ACCOUNTING POLICIES--Continued
Research and Development: Research and development costs are expensed as
incurred. The company's annual expenditures for product development and
engineering were approximately $12,706,000, $11,060,000 and $9,002,000 for 1997,
1996 and 1995, respectively.
Revenue Recognition: The company recognizes revenue when the product is
shipped and provides an appropriate allowance for estimated returns and
adjustments.
Income Taxes: The company uses the liability method in measuring the provision
for income taxes and recognizing deferred tax assets and liabilities in the
balance sheet. The liability method requires that deferred income taxes reflect
the tax consequences of currently enacted rates for differences between the tax
and financial reporting bases of assets and liabilities.
Net Earnings Per Share: Effective December 31, 1997, the Company adopted
SFAS No. 128, "Earnings Per Share". Accordingly, basic earnings per share was
computed based on the weighted-average number of Common Shares and Class B
Common Shares outstanding during the year. Diluted earnings per share was
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. All earnings per share amounts shown for periods prior to
adoption have been restated to conform to the provisions of SFAS No. 128.
Foreign Currency Translation: Substantially all the assets and liabilities
of the company's foreign subsidiaries are translated into U.S. dollars at year
end exchange rates. Revenues and expenses are translated at weighted average
exchange rates. Gains and losses resulting from translation are included in the
balance sheet caption "Adjustments to shareholders' equity".
Goodwill: The excess of the aggregate purchase price over the fair value of net
assets acquired is amortized by use of the straight line method for periods
ranging from 20 to 40 years. The accumulated amortization was $13,707,000 and
$10,743,000 at December 31, 1997 and 1996, respectively. The carrying value of
goodwill is reviewed at each balance sheet date to determine whether goodwill
has been impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the company's carrying value of
the goodwill would be reduced by the estimated shortfall of cash flows at such
time an impairment in value of goodwill has occurred. During 1997, $8,452,000 of
goodwill was written off as part of the non-recurring and unusual charge. Based
on the company's review as of December 31, 1997, no other impairment of goodwill
was evident.
Advertising: Advertising costs are expensed as incurred and included in
"Selling, general and administrative expenses". Advertising expenses amounted to
$10,419,000, $12,049,000 and $8,972,000 for 1997, 1996 and 1995, respectively.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
RECEIVABLES
Trade receivables are net of allowances for doubtful accounts of $6,565,000
and $4,405,000 in 1997 and 1996, respectively.
Installment receivables as of December 31, 1997 and 1996 consist of the
following:
1997 1996
Long- Long-
(In thousands) Current Term Total Current Term Total
--------------------------------------------------------------------------
Installment receivables $61,020 $25,777 $86,797 $57,547 $24,598 $82,145
Less:
Unearned interest (4,585) (2,264) (6,849) (4,828) (2,877) (7,705)
Allowance for doubtful accounts (7,137) (1,477) (8,614) (724) (349) (1,073)
--------------------------------------------------------------------------
$49,298 $22,036 $71,334 $51,995 $21,372 $73,367
==========================================================================
INVENTORIES
Inventories as of December 31, 1997 and 1996 consist of the following:
1997 1996
--------------------------------
(In thousands)
Raw materials $ 23,704 $ 25,137
Work in process 11,676 12,022
Finished goods 40,328 41,775
--------------------------------
$ 75,708 $ 78,934
================================
Current cost exceeds the LIFO value of inventories by approximately
$482,000 and $431,000 at December 31, 1997 and 1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1996 consist of the
following:
1997 1996
---------------------------------
(In thousands)
Land, buildings and improvements $ 40,026 $ 35,779
Machinery and equipment 111,959 104,297
Furniture and fixtures 9,649 10,693
Leasehold improvements 6,979 7,330
--------------------------------
168,613 158,099
Less allowance for depreciation 78,036 80,269
--------------------------------
$ 90,577 $ 77,830
================================
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
CURRENT LIABILITIES
Accrued expenses as of December 31, 1997 and 1996 consist of the following:
1997 1996
---------------------------------
(In thousands)
Accrued salaries and wages $17,387 $ 19,715
Accrued warranty cost 6,385 6,052
Accrued product liability, current portion 1,389 1,354
Other accrued items 24,210 21,594
Litigation settlement 4,500 -
Plant relocation 6,127 2,185
--------------------------------
$ 59,998 $ 50,900
================================
ACQUISITIONS
In May, 1997 the company purchased all of the outstanding shares of Silcraft
Corporation. Silcraft manufactures and distributes bath tubs, barrier-free
showers and patient lifts for use primarily in extended-care facilities. In
October, 1997 the company purchased all of the outstanding shares of Allied
Medical Supply Corporation, a distributor of medical soft goods and disposables.
In February, 1996 the company purchased all the outstanding shares of Fabriorto,
Lda, a Portuguese manufacturer and distributor of manual and power wheelchairs,
beds and walking aids and purchased all the outstanding shares of
Frohock-Stewart, Inc., a manufacturer of personal care products distributed
mainly through the retail channel. In March, 1996 the company purchased all the
outstanding shares of Healthtech Products, Inc., a manufacturer of extended care
beds and patient-room furniture for the institutional market. In June, 1996 the
company acquired all the outstanding shares of Production Research Corporation
(PRC). PRC is a distributor/supplier of after-market parts for the home medical
equipment market. In July, 1996 the company purchased all of the outstanding
shares of Roller Chair Pty. Ltd., an Australian manufacturer and distributor of
custom power wheelchairs.
In December, 1994 the company purchased the remaining outstanding shares of
Beram AB, a Swedish marketer and distributor of prescription wheelchairs and
rehab products. The company previously held a minority interest in Beram. In
May, 1995 the company purchased the assets of PinDot Products, a manufacturer
and distributor of custom seating systems, and purchased all the outstanding
shares of Patient Solutions, Inc., a manufacturer and distributor of an
ambulatory infusion pump that accommodates intravascular feeding, intermittent
antibiotic therapy, patient-controlled analgesia and chemotherapy. In June, 1995
the company purchased the outstanding shares of Bencraft Limited, a United
Kingdom manufacturer of manual and power wheelchairs and supplier of specialty
seating systems and purchased the assets and business of Thompson Rehab from
Salmond Smith Biolab Limited. Thompson Rehab is New Zealand's leading
manufacturer of manual and power wheelchairs. In September, 1995 the company
purchased the outstanding shares of Group Pharmaceutical Limited, a New Zealand
marketer and distributor of prescription wheelchairs and other products for
people with disabilities and purchased the outstanding shares of Medical
Equipment Repair Service, Inc., a supplier of aftermarket parts and repair
services for the respiratory equipment market. In September, 1995 for cash and
company stock, the company also acquired the outstanding shares of Paratec AG, a
Swiss company that manufactures manual wheelchairs which are sold under the
Kuschall trademark. In November, 1995 the company purchased the outstanding
shares of Special Health Systems Ltd., a Canadian designer and manufacturer of
seating and positioning systems for wheelchairs.
The operating results of all acquisitions are included in the company's
consolidated results of operations from the respective dates of acquisition. The
above transactions have been accounted for by the purchase method of accounting
and the pro forma effects are not material.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
LEASES AND COMMITMENTS
The company leases a substantial portion of its facilities, transportation
equipment, data processing equipment and certain other equipment. These leases
have terms of up to 10 years and provide for renewal options. Generally, the
company is required to pay taxes and normal expenses of operating the facilities
and equipment. As of December 31, 1997, 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 2005. Lease expenses were
approximately $6,978,000 in 1997, $6,071,000 in 1996 and $4,725,000 in 1995.
Future minimum operating lease commitments as of December 31, 1997, are as
follows:
Year Amount
--------------------------------
(In thousands)
1998 $ 5,604
1999 4,143
2000 2,515
2001 1,354
2002 1,141
Thereafter 902
---------------------------------
Total Future Minimum Lease Payments $ 15,659
=================================
The amount of buildings and equipment capitalized in connection with capital
leases was $4,301,000 and $4,680,000 at December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, accumulated amortization was
$1,851,000 and $1,545,000, respectively.
RETIREMENT AND BENEFIT PLANS
Substantially all full-time salaried and hourly domestic employees are included
in two profit sharing plans sponsored by the company. The company makes matching
contributions up to 66.7% of the first 3% of employees contributions and may
make discretionary contributions to the domestic plans based on an annual
resolution of the Board of Directors. The company has no requirement to make the
discretionary contribution. The contributions can either be in the form of cash
or property to the Profit Sharing Plan or in the form of cash, Common Shares or
property to the Employee Stock Bonus Trust and Plan. Cash contributions to the
Employee Stock Bonus Trust and Plan are used to purchase the company's Common
Shares on the open market.
The company introduced a 401(k) Benefit Equalization Plan effective March 1,
1994 covering certain employees, which provides for retirement payments so that
the total retirement payments equal amounts that would have been payable from
the company's principal retirement plans if it were not for limitations imposed
by income tax regulations.
Contribution expense for the above plans in 1997, 1996 and 1995 was
$3,925,000, $3,703,000 and $2,406,000, respectively.
In 1995, the company introduced a non-qualified defined benefit Supplemental
Executive Retirement Plan (SERP) effective May 1, 1995 for certain key
executives to recapture benefits lost due to governmental limitations on
qualified plan contributions. The projected benefit obligation related to this
unfunded plan was $20,016,000 at December 31, 1997.
Pension expense for the plan was $923,000 in 1997 and $748,000 in 1996.
The company utilizes a Voluntary Employee Benefit Association (VEBA) to provide
for the payment of self-funded employee health benefits for current employees.
Contribution expense for each of 1997, 1996, and 1995 was $1,400,000.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
SHAREHOLDERS' EQUITY TRANSACTIONS
At December 31, 1997, the company had 100,000,000 authorized Common Shares,
without par value, and 12,000,000 authorized Class B Common Shares, without par
value. In general, the Common Shares and the Class B Common Shares have
identical rights, terms and conditions and vote together as a single class on
most issues, except that the Class B Common Shares have ten votes per share,
carry a 10% lower cash dividend rate and, in general, can only be transferred to
family members. Holders of Class B Common Shares are entitled to convert their
shares into Common Shares at any time on a share-for-share basis.
At December 31, 1997, the company had 300,000 shares of Serial Preferred Shares
authorized, none of which were issued or outstanding. Serial Preferred Shares
are entitled to one vote per share.
During 1994, the Board of Directors adopted and the Shareholders approved the
1994 Performance Plan (the "1994 Plan"). The 1994 Plan provides for the issuance
of up to 2,000,000 Common Shares in connection with stock options and other
awards granted under the Plan. The 1994 Plan allows the Compensation Committee
(the "Committee") to grant incentive stock options, non-qualified stock options,
stock appreciation rights, and stock awards (including the use of restricted
stock). The Committee has the authority to determine the employees that will
receive awards, the amount of the awards and the other terms and conditions of
the awards. Payments of the stock appreciation rights may be made in cash,
Common Shares or a combination thereof. There were no stock appreciation rights
outstanding at December 31, 1997, 1996 or 1995. During 1997, the Committee,
under the 1994 Plan, granted 582,250 non-qualified stock options for a term of
ten years at 100% of the fair market value of the underlying shares on the date
of grant.
The company also has a Stock Option Plan for non-employee Directors. The plan
was approved May 27, 1992 and provides for the granting of up to a maximum of
100,000 options to eligible Directors. Directors will receive grants with
exercise prices at 100% of the fair market value of the company's stock on the
date of grant. At December 31, 1997 there were 5,883 options outstanding under
this plan. During 1997, no options were granted under this plan.
The Plans have provisions for the cashless exercise of options. Under these
provisions the company acquired 19,951 treasury shares for $486,000 in 1997,
16,430 treasury shares for $432,000 in 1996 and 8,350 treasury shares for
$161,000 in 1995.
As of December 31, 1997, an aggregate of 8,304,512 shares was reserved for
conversion of Class B Common Shares, future rights (as defined below) and the
exercise and future grant of options.
The following summarizes the stock option transactions and related information
under the company's stock option plans:
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1997 Price 1996 Price 1995 Price
---------------------------------------------------------------------------
Options outstanding at January 1, 2,758,587 $12.12 2,691,902 $9.81 2,357,304 $7.95
Granted 582,250 25.13 401,908 24.77 487,600 18.47
Exercised (311,575) 6.22 (288,101) 7.27 (127,973) 6.78
Canceled (61,500) 23.01 (47,122) 17.53 (25,029) 12.48
------------------------------------------------------------------------------
Options outstanding at December 31, 2,967,762 $15.05 2,758,587 $12.12 2,691,902 $9.81
==============================================================================
Options price range at December 31, $ 2.13 $ 2.13 $ 1.56
to to to
$ 26.75 $ 26.75 $ 25.25
Options exercisable at December 31, 1,872,552 1,793,289 1,651,406
Options available for grant at
December 31, 572,839 1,095,239 1,462,897
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
The company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the company's stock option plans been
determined based on the fair value at the grant date for awards in 1997 and
1996, consistent with the provisions of SFAS 123, the company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(In thousands except per share data) 1997 1996 1995
-----------------------------------------------------------------------------------------------------------
Net earnings - as reported $ 1,563 $ 38,918 $ 32,165
Net earnings/(loss) - pro forma (234) $ 37,725 $ 31,617
Earnings per share as reported - basic $ .05 $ 1.33 $ 1.10
Earnings per share as reported - assuming dilution $ .05 $ 1.28 $ 1.07
Pro forma earnings per share - basic $ (.01) $ 1.29 $ 1.09
Pro forma earnings per share - assuming dilution $ (.01) $ 1.24 $ 1.05
The assumption regarding the stock options issued in 1997 and 1996 was that 25%
of such options vested in the year following issuance. The stock options awarded
during the year provided a four year vesting period whereby options vest equally
in each year. SFAS 123's pro forma disclosure is prospective, as retroactive
application is prohibited. Therefore, since compensation expense associated with
an award is recognized over the vesting period, pro forma net income may not be
representative of compensation expense in future years, when the effect of the
amortization of multiple awards would be reflected in the income statement.
Furthermore, current and prior years pro forma disclosures may be adjusted for
forfeitures of awards that will not vest because service or employment
requirements have not been met.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 1.48%; expected
volatility of 33.9%; risk-free interest rate of 6.2%; and an expected life of
6.5 years. The weighted-average present value of options granted during the
year, per the Black-Scholes model based on the expected exercise year of 2004,
is $9.69.
The plans provide that shares granted come from the company's authorized but
unissued or reacquired common stock. Pursuant to the plan, the Committee has
established that the 1997 grants may not be exercised within one year from the
date of grant and options must be exercised within ten years from the date
granted. The weighted-average remaining contractual life of options outstanding
at December 31, 1996 is 6.54 years.
On July 7, 1995, the company adopted a Rights Plan whereby each holder of a
Common Share and Class B Common Share received one purchase right (the "Rights")
for each share owned. Under certain conditions, each Right may be exercised to
purchase one-tenth of one Common Share at a price of $8 per one-tenth of a
share. The Rights may only be exercised 10 days after a third party has acquired
30% or more of the company's outstanding voting power or 10 days after a third
party commences a tender offer for 30% or more of the voting power (an
"Acquiring Party"). In addition, if an Acquiring Party merges with the company
and the company's Common Shares are not changed or exchanged, or if an Acquiring
Party engages in one of a number of self-dealing transactions, each holder of a
Right (other than the Acquiring Party) will have the right to receive that
number of Common Shares or similar securities of the resulting entity having a
market value equal to two times the exercise price of the Right. The company may
redeem the Rights at a price of $.005 per right at any time prior to 10 days
following a public announcement that an Acquiring Party has acquired beneficial
ownership of 30% or more of the company's outstanding voting power, and in
certain other circumstances as approved by the Board of Directors. The Rights
will expire on July 7, 2005. Coincident with adoption of the Plan, the company
redeemed Rights outstanding under a prior plan at the price of $.005 per Right.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
NET INCOME PER COMMON SHARE
Net income per common share has been computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128 adopted for the quarter ended
December 31, 1997. All net income per share amounts shown for periods prior to
adoption have been restated to conform to the provisions of SFAS No. 128. For
the period ended December 31, 1997, there was no effect on net income per share
from SFAS No. 128. Net income per share-basic increased by $.05 and $.03 for the
periods ended December 31, 1996 and 1995 respectively, over the previous method
of computing net income per share.
1997 1996 1995
--------------------------------------------------------
(In thousands except per share data)
Basic
Average common shares outstanding 29,569 29,332 29,128
Net income $ 1,563 $ 38,918 $ 32,165
Net income per common share $ .05 $ 1.33 $ 1.10
Diluted
Average common shares outstanding 29,569 29,332 29,128
Stock options 805 1,061 949
---------------------------------------------------------
Average common shares assuming dilution 30,374 30,393 30,077
Net income $ 1,563 $ 38,918 $ 32,165
Net income per common share $ .05 $ 1.28 $ 1.07
LONG-TERM OBLIGATIONS
Long-term obligations as of December 31, 1997 and 1996 consist of the following:
1997 1996
-------------------------------
(In thousands)
$25,000,000 senior notes at 7.45%, mature in February 2003 $ 21,429 $ 25,000
Revolving credit agreement ($200,000,000 multi-currency) at .14% to
.32% above local interbank offered rates 0 135,723
Revolving credit agreement ($425,000,000 multi-currency) at .185% to .375%
above local interbank offered rates, expires October 31, 2002 147,231 0
Notes payable to banks and other third parties 3,346 1,474
Notes and mortgages payable, secured by buildings and equipment 3,064 3,432
Capitalized lease obligations 2,466 3,150
Product liability 5,383 4,774
Other 6,222 4,292
--------------------------------
189,141 177,845
Less current maturities of long-term obligations 5,186 4,582
--------------------------------
$183,955 $173,263
================================
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
In 1993, the company completed a private placement of $25,000,000 in senior
notes at 7.45% which contain covenants similar to the revolving credit agreement
described below. At December 31, 1997, $79,378,000 of retained earnings is
available for dividends. The notes are due in 2003 and require principal
payments of $3,571,429 per year beginning in 1997.
During 1997, the company terminated the $200,000,000 multi-currency revolving
credit agreement and entered into a $425,000,000 multi-currency revolving credit
agreement with a group of commercial banks, which expires on October 31, 2002,
or such later date as mutually agreed upon by the company and the banks. The
borrowing rates under the agreement are determined based on the funded debt to
capitalization ratio of the company as defined in the agreement and range from
.185% to .375% above the various interbank offered rates. The agreement requires
the company to maintain certain conditions with respect to net worth, funded
debt to capitalization, and interest coverage as defined in the agreement.
In September 1997, the company fixed the interest rate on 7,500,000 of its New
Zealand dollar borrowings through an interest rate swap agreement. The effect of
the swap is to exchange a short-term floating interest rate for a fixed rate of
7.30% for a five year term. As of December 31, 1997 and 1996, the weighted
average floating interest rate on the New Zealand dollar debt was 8.10% and
9.97%, respectively.
In July 1997, the company fixed the interest rate on 50,000,000 of its French
franc borrowings through an interest rate swap agreement. The effect of the swap
is to exchange a short-term floating interest rate for a fixed rate of 4.14% for
a three year term. As of December 31, 1997 and 1996, the weighted average
floating interest rate on the French franc debt was 3.66% and 4.43%,
respectively.
In May 1997, the company fixed the interest rate on $15,000,000 of its U.S.
dollar borrowings through two interest rate swap agreements. Each agreement is
for $7,500,000 U.S. dollars. The effect of the swaps is to exchange a short-term
floating interest rate for a fixed rate of 6.18% for a two year term, extendible
for an additional year at the counterparty's option in one agreement and 6.285%
for a three year term in the other agreement. As of December 31, 1997 and 1996,
the weighted average floating interest rate on the U.S. dollar debt was 5.90%
and 5.82%, respectively.
In August 1996, the company fixed the interest rate on 7,500,000 of its New
Zealand dollar borrowings through an interest rate swap agreement. The effect of
the swap is to exchange a short-term floating interest rate for a fixed rate of
8.75% for a two year term.
In May 1995, the company fixed the interest rate on $10,000,000 of its U.S.
dollar borrowings through two interest rate swap agreements. Each agreement is
for $5,000,000 U.S. dollars. The effect of the swaps is to exchange a short-term
floating interest rate for a fixed rate of 6.1725% for a three year term in one
agreement and 6.38% for a five year term in the other agreement.
Also in May 1995, the company fixed the interest rate on 7,500,000 of its
Canadian dollar borrowings through an interest rate swap agreement. The effect
of the swap is to exchange a short-term floating interest rate for a fixed rate
of 7.245% for a three year term. As of December 31, 1997 and 1996, the weighted
average floating interest rate on the Canadian dollar debt was 3.76% and 5.29%
respectively.
In March 1993, the company fixed the interest rate on 50,000,000 of its French
franc borrowings through an interest rate swap agreements. The effect of the
swap is to exchange a short-term floating interest rate for a fixed rate of
7.48% for a five-year term.
Notes payable to banks and other third parties consists of borrowings by the
company and its subsidiaries under term lending arrangements for certain assets
or licensing or service contracts.
The notes and mortgages payable financed the purchase of certain buildings and
equipment which secure the obligations. The notes and mortgages payable bear
interest at rates from 4.3% to 10.4 % and mature through 2003.
The capital leases at December 31, 1997 are principally for a manufacturing
facility and computer systems, with payments due through 2007.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
The company is self-insured for a portion of its product liability and
certain other liability exposures. Product liability for domestically
manufactured products is insured through the company's captive insurance
company, which insures the first $2,000,000 per claim or annual policy aggregate
losses of $3 million. The company also has additional layers of coverage
insuring up to $78,000,000 in annual aggregate losses arising from individual
losses that exceed $2,000,000 or annual policy aggregate losses of $3 million of
the company's domestic product liability exposure.
The aggregate minimum combined maturities of long-term obligations are
approximately $5,186,000 in 1998, $5,452,000 in 1999, $5,688,000 in 2000,
$5,781,000 in 2001, $162,612,000 in 2002 and $4,421,000 thereafter. Interest
paid on borrowings was $10,612,000, $10,213,000 and $8,982,000 in 1997, 1996 and
1995, respectively.
INCOME TAXES
Earnings/(loss)before income taxes consist of the following:
1997 1996 1995
----------------------------------------------
(In thousands)
Domestic $ 10,734 $58,182 $46,062
Foreign (5,511) 5,586 5,783
-----------------------------------------------
$ 5,223 $63,768 $51,845
===============================================
The company has provided for income taxes as follows:
1997 1996 1995
----------------------------------------------
(In thousands)
Current:
Federal $18,030 $19,840 $16,340
State 2,800 3,800 3,490
Foreign 1,250 2,370 2,980
-----------------------------------------------
22,080 26,010 22,810
Deferred:
Federal (13,320) (1,330) (1,300)
State (2,400) 0 0
Foreign (2,700) 170 (1,830)
------------------------------------------------
(18,420) (1,160) (3,130)
------------------------------------------------
Income Taxes $ 3,660 $24,850 $19,680
================================================
At December 31, 1997, the company had foreign tax loss carryforwards of
approximately $2,100,000 of which $1,900,000 are non-expiring and $200,000
expire between 2000 and 2003.
The company made income tax payments of $19,907,000, $26,686,000 and
$19,528,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
A reconciliation to the effective income tax rate from the federal statutory
rate follows:
1997 1996 1995
------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of
federal income tax benefit 5.0 3.9 4.4
Tax credits (23.0) (1.9) (1.9)
Goodwill 59.3 1.7 1.6
Other, net (6.2) 0.3 (1.1)
-------------------------------------------------
70.1% 39.0% 38.0%
=================================================
Significant components of deferred income tax assets and liabilities at December
31, 1997 and 1996 are as follows:
1997 1996
--------------------------
(In thousands)
Current deferred income tax assets, net:
Bad debt $ 4,030 $ 1,520
Warranty 1,656 1,369
Inventory 1,988 684
Other accrued expenses and reserves 4,442 451
State and local taxes 1,387 1,305
Litigation reserves 2,258 0
Compensation and benefits 3,347 1,703
Product liability 289 191
Loss carryforwards 36 408
Other, net (578) (450)
---------------------------
$ 18,855 $ 7,181
---------------------------
Long-term deferred income tax assets (liabilities), net:
Fixed assets $ 1,653 $(1,877)
Product liability 1,155 717
Loss carryforwards 726 1,051
Compensation and benefits 1,645 868
State and local taxes 2,400 0
Other, net (417) (447)
$ 7,162 $ 312
---------------------------
Net Deferred Income Taxes $ 26,017 $ 7,493
===========================
RELATED PARTY TRANSACTIONS
The company purchased 90,000 shares of Invacare Common Stock at $25.00 per share
in 1996, which approximated the fair value at time of purchase, from a
charitable trust in which the Chairman and Chief Executive Officer of the
company has a reversionary interest. The total cost of the shares was $2,250,000
and was added to the treasury shares of the company.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
INTERIM FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
(In thousands, except per share data)
1997 March 31, June 30, September 30,* December 31,
----------------------------------------------------------------------------------------------------------------
Net sales $151,524 $ 164,992 $ 166,144 $ 170,754
Gross profit 44,218 51,488 49,570 53,102
Earnings before income taxes 11,830 16,417 (28,620) 5,596
Net earnings/(loss) 7,220 10,017 (19,060) 3,386
Net earnings per share - basic .24 .34 (.64) .11
Net earnings per share - assuming dilution .24 .33 (.64) .11
1996 March 31, June 30, September 30, December 31,
----------------------------------------------------------------------------------------------------------------
Net sales $ 134,461 $ 159,169 $ 158,146 $ 167,722
Gross profit 41,627 51,355 53,204 55,287
Earnings before income taxes 9,937 15,898 17,446 20,487
Net earnings 6,062 9,698 10,646 12,512
Net earnings per share - basic .21 .33 .36 .43
Net earnings per share - assuming dilution .20 .32 .35 .41
* The company has restated the previously issued third quarter 1997
financial statements. The restatement was issued to reflect a reduction in the
non-recurring and unusual charge taken in the third quarter, to reallocate a
portion of the charge to the fourth quarter, and to reflect changes in estimates
.
BUSINESS SEGMENTS
The company operates in one business segment, durable medical equipment.
Geographic information for each of the three years ended December 31, is as
follows
Other Total
North North
Domestic American American European Total
------------------------------------------------------------------
( In thousands)
1997
Net sales $ 478,040 $ 49,697 $ 527,737 $ 125,677 $ 653,414
Earnings/(loss)before income taxes (a) 12,038 2,098 14,136 (8,913) 5,223
Assets 368,424 55,876 424,300 105,623 529,923
Liabilities 195,017 43,077 238,094 55,414 293,508
1996
Net sales $ 435,171 $ 49,557 $ 484,728 $ 134,770 $ 619,498
Earnings before income taxes 56,603 3,507 60,110 3,658 63,768
Assets 325,978 60,759 386,737 122,891 509,628
Liabilities 155,507 47,864 203,371 67,660 271,031
1995
Net sales $ 353,340 $ 34,154 $ 387,494 $ 116,538 $ 504,032
Earnings before income taxes 46,930 (2,842) 44,008 7,757 51,845
Assets 227,003 56,974 283,977 124,773 408,750
Liabilities 96,129 43,718 139,847 67,584 207,431
(a) Earnings before income taxes in 1997 include a non-recurring and unusual
charge which reduced Domestic, Other North American and European
earnings by $49,648, $1,217 and $10,174, respectively.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
The operations of the company's Mexican facility are treated as domestic for
segment reporting purposes. Substantially all of the products manufactured at
the Mexican facility are sold to customers located in the United States.
The results of the company's Canadian, New Zealand and Australian operations are
included in Other North American operations for segment reporting purposes. A
significant portion of the New Zealand operations represent components used in
products manufactured by the company's North American facilities.
Eliminated from above net sales for 1997, 1996 and 1995 were $11,490,000,
$13,122,000 and $11,296,000, respectively, of sales by North American
subsidiaries to European subsidiaries and $747,000, $883,000 and $1,005,000,
respectively, of sales by European subsidiaries to North American subsidiaries.
Sales between geographic areas are based on the costs to manufacture plus a
reasonable profit element.
CONCENTRATION OF CREDIT RISK
The company manufactures and distributes durable medical equipment and
supplies to the home health care, retail and extended care markets. The company
performs credit evaluations of its customers' financial condition. To further
assist dealers in reducing their cash requirements for inventory and rental
equipment, the company provides various financing options for certain types of
products through Invacare Credit Corporation "ICC". In a typical financing
arrangement, the company sells the equipment on a financing contract to the
dealer for periods ranging from 6 to 51 months. The company also introduced a
revolving credit agreement, known as Invacard, which provides an additional
financing option to our dealer base. In addition, the majority of these
transactions are secured with a UCC-1 filing purchase money securities and/or
personal guarantees. At this time, all ICC note obligations are serviced and
managed by the company. The note obligations are not sold to third parties.
Substantially all of the company's receivables are due from health care and
medical equipment dealers located throughout the United States, Australia,
Canada, New Zealand and Europe. A significant portion of products sold to
dealers, both foreign and domestic, are ultimately funded through government
reimbursement programs such as Medicare and Medicaid. 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.
During 1997, due primarily to the effects of the Balanced Budget Act on Medicare
Reimbursements, a bad debt provision of $10,793,000 was recorded as part of the
non-recurring and unusual charge. There can be no assurance that further changes
in reimbursement programs will not lead to additional future losses.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the company in estimating its
fair value disclosures for financial instruments:
Cash, cash equivalents and marketable securities: The carrying amount reported
in the balance sheet for cash, cash equivalents and marketable securities
approximates its fair value.
Installment receivables: The carrying amount reported in the balance sheet for
installment receivables approximates its fair value. The majority of the
portfolio contains receivables with terms less than three years, of which a
large concentration is due in less than one year. The interest rates associated
with these receivables have not varied significantly over the past three years.
Management believes that after consideration of the credit risk, the net book
value of the installment receivables approximates market value.
Long-term debt: The carrying amounts of the company's borrowings under its
long-term revolving credit agreements approximate their fair value. Fair values
for the company's senior notes are estimated using discounted cash flow
analyses, based on the company's current incremental borrowing rate for similar
borrowing arrangements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
Interest Rate Swaps: The company is a party to interest rate swap agreements
with off-balance sheet risk which are entered into in the normal course of
business to reduce exposure to fluctuations in interest rates. The agreements
are with major financial institutions which are expected to fully perform under
the terms of the agreements thereby mitigating the credit risk from the
transactions. The agreements are contracts to exchange floating rate payments
with fixed rate payments over the life of the agreements without the exchange of
the underlying notional amounts. The notional amounts of such agreements are
used to measure interest to be paid or received and do not represent the amount
of exposure to credit loss. The amounts to be paid or received under the
interest rate swap agreements are accrued consistent with the terms of the
agreements and market interest rates. Fair value for the company's interest rate
swaps are based on pricing models or formulas using current assumptions.
Other investments: The company has made other investments in limited
partnerships and non-marketable equity securities. These investments were
acquired in private placements and there are no quoted market prices or stated
rates of return. It is not practicable to estimate the fair value of these
investments because of the limited information available and because of the
significance of the cost to obtain an outside appraisal. The investments are
carried at their cost of $9,178,000 in 1997 and $10,384,000 in 1996 and are
accounted for using the cost method.
The carrying amounts and fair values of the company's financial instruments at
December 31, 1997 and 1996 are as follows:
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------------
( In thousands)
Cash and cash equivalents $ 5,696 $ 5,696 $ 4,431 $ 4,431
Marketable securities 4,518 4,518 9,642 9,642
Installment receivables 71,334 71,334 73,367 73,367
Long-term debt (including current 175,070 175,549 165,629 165,622
maturities)
Interest rate swaps (fair value liability) - 356 - 768
Forward Contracts: The company operates internationally and as a result is
exposed to foreign currency fluctuations. Specifically, the exposure includes
intercompany loans, and third party sales or payments. In an attempt to reduce
this exposure, foreign currency forward contracts are utilized and accounted for
as hedging instruments. The company does not use derivative financial
instruments for speculative purposes.
The gains and losses that result from the forward contracts are deferred and
recognized when the offsetting gains and losses for the identified transactions
are recognized. At December 31, 1997 and 1996, the gain resulting from forward
contracts was not material to the financial statements.
The following table represents the fair value of all outstanding forward
contracts at December 31, 1997 and 1996. The valuations are based on market
rates. All forward contracts noted below mature before May, 1998 and March, 1997
respectively.
December 31, 1997
Cost Market Value
U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell
-------------------------------------- --- ------------------ --------------------- ---------------------
British pound $525 $ (1) $524
New Zealand dollar 1,670 75 1,745
U.S. dollar (2,250) 45 (2,205)
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
December 31, 1996
Cost Market Value
U.S. dollar (In thousands) (Buy)/Sell Gain/(Loss) (Buy)/Sell
-------------------------------------- --- ------------------ --------------------- ---------------------
Australian dollar $ 36 $ - $ 36
British pound 86 4 90
New Zealand dollar 1,000 12 1,012
New Zealand dollar (1,881) 2 (1,879)
Non-Recurring and Unusual Charge: In 1997, the company announced a
non-recurring and unusual charge of 61,039,000 ($38,839,000 or $1.28 diluted per
share after tax) for the acceleration of certain strategic initiatives and other
items. The charge was recorded in accordance with the Financial Accounting
Standards Board's (FASB's) and the Securities and Exchange Commission's (SEC's)
accounting pronouncements, including the Emerging Issues Task Force (EITF) 94-3.
The charge included global manufacturing facility consolidations including the
termination of approximately 440 employees, the elimination of certain
non-strategic product lines, asset write downs related to global systems
initiatives, principally as a result of changes in project scope, an increase in
the company's bad debt reserve, other asset write-downs and an increase in
reserves for litigation.
The charge increased cost of products sold by approximately $3,391,000 and
selling, general and administrative expenses by approximately $27,787,000.
Management believes that this program will allow the company to more quickly
lower its operating cost structure in light of the current and projected
competitive environment. The program is anticipated to be substantially
completed in 1998.
The following table summarizes the non-recurring and unusual charge activity
through December 31, 1997:
Amounts Balance
Charge Q3 1997 Charge Q4 1997 Total Charge Utilized as of December 31,
1997 Dec. 31, 1997 1997
------------- -------------- ------------ -------------- -------------
Facility consolidations and elimination of
product lines 13,104,000 7,233,000 20,337,000 8,480,000 11,857,000
Systems initiatives 6,335,000 1,121,000 7,456,000 7,456,000 0
Provision for doubtful accounts 6,887,000 3,406,000 10,293,000 4,423,000 5,870,000
Asset write downs and litigation reserve 19,756,000 3,197,000 22,953,000 14,371,000 8,582,000
---------- --------- ---------- ------------ -----------
Total 46,082,000 14,957,000 61,039,000 34,730,000 26,309,000
========== ========== ========== ========== ==========
SUBSEQUENT EVENT (UNAUDITED)
On December 17, 1997, Invacare Corporation entered into an Agreement and Plan of
Merger with Inva Acquisition Corp., a Massachusetts corporation and a
wholly-owned subsidiary of Invacare, and Suburban Ostomy Supply Co., Inc., a
Massachusetts corporation, providing for the acquisition by Invacare of all of
the stock of Suburban. Suburban was a NASDAQ-listed direct marketing wholesaler
of medical supplies and related products to the home health care industry.
Pursuant to the Merger Agreement, Inva Acquisition Corp. commenced a tender
offer on December 22, 1997 for all of the outstanding shares of common stock of
Suburban for $11.75 per share in cash. On January 23, 1998, Inva Acquisition
Corp. acquired approximately 99.5% of Suburban's outstanding shares pursuant to
the tender offer. Subsequently, on January 28, 1998, Suburban was merged with
and into Inva Acquisition Corp. with Inva Acquisition Corp. as the surviving
corporation. Inva Acquisition Corp. then changed its name to "Suburban Ostomy
Supply Co., Inc.". Effective upon consummation of the Merger, each remaining
share of Suburban common stock that was not tendered now represents the right to
receive $11.75 in cash. The shares of Suburban common stock have been de-listed
and de-registered and may no longer be transferred. The purchase price paid for
all of the equity of Suburban acquired pursuant to the Merger Agreement was
$131,826,000.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
Funds were obtained from cash on hand and from existing credit agreements.
Invacare and certain of its subsidiaries are parties to a five year Loan
Agreement dated November 18, 1997, with a group of lenders represented by NBD
Bank, as Agent and KeyBank National Association, as Co-Agent (the "Loan
Agreement"). The Loan Agreement established a revolving credit facility
providing Invacare with a maximum availability (including letters of credit) of
$360,000,000. The Loan Agreement was subsequently amended as of December 23,
1997 to increase the maximum availability to $425,000,000. Subsequent to year
end, the company completed a private placement of $100,000,000 in senior notes.
The proceeds were used to pay down revolving credit debt incurred to fund the
acquisition.
Suburban uses its equipment and other assets to direct market a wide range of
medical supplies and related products to the home health care industry. Invacare
intends to continue to utilize the assets acquired in this transaction in
substantially the same manner as they were employed prior to the acquisition.
Contingencies
In 1997, the company provided for potential settlements of several
intellectual property lawsuits that were diverting management's time and
attention. While the company believes it would eventually have been successful
in defending itself against these suits, the legal fees and distractions to
management lead to the decision to settle these suits. At the date of this
filing, the company settled three cases for a total of $8.4million.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL.E
---------- -------- ------- ------- ------
ADDITIONS
Balance Charged Charged To Balance
At To Other At
Beginning Cost And Accounts Deductions- End Of
Description Of Period Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Year Ended December 31, 1997
Deducted from asset accounts --
Allowance for doubtful accounts $5,478 $15,942 $ 75(C) $6,316(A) $15,179
Inventory obsolescence reserve 4,963 1,650 - 1,826(B) 4,787
Accrued warranty cost 6,052 4,931 - 4,598(B) 6,385
Accrued product liability 6,128 3,218 - 2,574(D) 6,772
Year Ended December 31, 1996
Deducted from asset accounts --
Allowance for doubtful accounts $4,771 $2,397 $ 183(C) $1,873(A) $5,478
Inventory obsolescence reserve 5,274 2,883 689(C) 3,883(B) 4,963
Accrued warranty cost 5,745 5,154 363(C) 5,210(B) 6,052
Accrued product liability 4,165 5,251 - 3,288(D) 6,128
Year Ended December 31, 1995
Deducted from asset accounts --
Allowance for doubtful accounts $4,540 $3,419 $ 163(C) $3,351(A) $4,771
Inventory obsolescence reserve 3,491 4,158 510(C) 2,885(B) 5,274
Accrued warranty cost 4,554 4,689 64(C) 3,562(B) 5,745
Accrued product liability 3,604 2,080 - 1,519(D) 4,165
NOTE (A)--Uncollectible accounts written off, net of recoveries.
NOTE (B)--Amounts written off or payments incurred.
NOTE (C)--Amounts recorded due to acquisition of subsidiaries.
NOTE (D)--Loss and loss adjustment expense.