Annual Report (Form 10-K), fiscal year 1994

Item 1. Business.
(a) General Development of Business.
Invacare is the leading home medical equipment 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 and extended care markets. The Company's products include standard manual wheelchairs, motorized and lightweight prescription wheelchairs, motorized scooters, patient aids, home care beds, low air loss therapy products, home respiratory products and seating and positioning products. Invacare continuously revises and expands its product lines to meet changing market demands. The Company's products are sold principally to over 10,000 home health care and medical equipment dealer locations in the U.S., Canada and Europe, with the remainder of its sales being primarily to government agencies and distributors. Invacare's products are sold world-wide through its distribution network by its sales force, telemarketing employees and the organizations of independent manufacturer's representatives. During the past five years, the Company also has used its extensive dealer network to distribute medical equipment and related supplies manufactured by others.
The Company's objectives are:
* to lead the home medical equipment industry in product and marketing innovations * to offer the industry's broadest product line and continually expand it * to be the industry's lowest-cost manufacturer * to provide the highest levels of customer service in the industry * to pursue world-class quality in every aspect of its business.
When the Company was acquired in December 1979 by a group of investors, including certain members of management and of the Board of Directors, it had $19.5 million in net sales and a limited product line of standard wheelchairs and patient aids. In 1994, Invacare had $411.1 million in net sales and currently is one of the only companies in the industry which manufactures 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 and seating and positioning products.
The Company's executive offices are located at 899 Cleveland Street, 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
THE HOME MEDICAL EQUIPMENT INDUSTRY
DOMESTIC
The home medical equipment market includes home health care products, physical rehabilitation products and other non-disposable products used for recovery and long-term care of patients. The Company believes that the 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. In 1993, the U.S. Census Bureau estimated that by the year 2000 approximately 35 million people, 13% of the population in the U.S., will be over age 65. The growth of this segment is expected to continue until the year 2010, when over 40 million people in this group will still represent nearly 13% of the population.
Treatment trends. Many medical professionals and patients prefer home health care over institutional care because, in many cases, greater patient independence, increased patient responsibility and familiar surroundings are conducive to improved treatment outcomes. Healthcare professionals and public 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 while hospital procedures often allow for earlier patient discharge. 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 1993, it was estimated that spending on health care in the U.S. surpassed $900 billion dollars, which represented almost 14.5% of GNP. The rising cost of health care has caused many payors of health care expenses to look for ways to contain costs. Home health care continues to gain acceptance due to the technological and treatment trends described above, as well as many health care payors altering their reimbursement patterns to encourage home health care whenever appropriate, as studies have shown that home health care is generally less costly than hospital or other institutional treatment.
Society's acceptance of people with disabilities. People with disabilities have increasingly been accepted into the mainstream of society. This acceptance was further accelerated by the Americans with Disabilities Act which became law in 1991, with the legislative intent of providing 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 has opened up new ways of reaching the end user. The distribution network for products has expanded to include not only specialized home health care dealers and nursing homes but also retail drug stores, surgical supply houses, rental dealers, hospital and HMO-based stores, home health agencies, mass merchandisers and direct sales to the home.
INTERNATIONAL
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. Variations in product specifications, regulatory approvals, distribution requirements and reimbursement policies require the Company to tailor its approach to each market. Moreover, as a result of those differences, competition generally varies from one market to another. The Company typically encounters one or two strong competitors in each country, but no single competitor is dominant outside the country in which its sales are concentrated. Management believes that as the European markets become more homogeneous and the Company continues to formalize its distribution channels, the Company can effectively penetrate these markets.
PRODUCTS DOMESTIC
Invacare manufactures and markets products in each of the following major home medical equipment categories: power and manual wheelchairs, patient aids, home care beds, low air loss therapy products, home respiratory products and seating and positioning products.
Wheelchairs and other mobility products. Invacare manufacturers and markets a complete line of standard and prescription wheelchairs for people with chronic and temporary disabilities, older persons and people who are convalescing. Both standard and prescription wheelchairs are designed to accommodate the capabilities of the individual.
* Standard wheelchair lines - for use in the home or public places (e.g. hospitals, nursing homes, airports) 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 generally marketed under the Invacare brand name, include its 4000 and Tracer(TM) lines.
* Prescription wheelchair lines - custom built for long-term use by one individual based on specifications prescribed by a medical professional. Prescription chairs can be either manual or power. Invacare's prescription wheelchair model lines marketed under the Action(TM) brand include the Action Storm Series(TM), Arrow(TM), 2000, 9000, Ranger(TM), Jaguar(TM), Action(TM) Superlites, Top End by Action(TM), Rolls(TM) and Storm Series(TM). The Storm Series is a new line comprised of versatile power chairs with advanced microprocessor controls capable of accommodating a wide range of user capabilities.
In addition, the Storm Series has incorporated a spring and shock suspension with a smaller footprint to allow for increased performance and maneuverability. Invacare manufactures a complete line of ultralight, performance manual chairs in a wide range of aesthetic designs intended for use by people with active lifestyles. The Action Power Tiger(TM) is a power wheelchair for children, with tilt-in-space features to improve posture, provide pressure relief, and enhance seating and positioning. The Company's Jaguar models include power pediatric wheelchairs. Top End by Action is a range of lightweight sports and recreation manual products for use in activities such as basketball, racing, skiing and tennis.
Retail prices of Invacare's chairs generally range from approximately $350 for standard, manually operated chairs to approximately $8,220 for advanced, power-driven, prescription chairs. In addition, the Company markets wheelchair accessories, batteries and replacement parts.
Scooters. Invacare also manufactures and markets three- and four-wheeled motorized scooters, including rear wheel drive models for outdoor use and a front-wheel drive model for indoor use.
Patient aids. Invacare manufactures and distributes a full line of patient aids. Principal product categories include 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, traction equipment, trapeze bars and foam products.
Home care beds. Invacare manufactures and distributes a wide variety of manual, semi-electric and fully-electric hospital-type beds for home use under the Mobilite(TM) brand name. Home care bed accessories include bed side rails and mattresses.
Home respiratory products. Invacare manufactures and 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 Mobilaire(TM) brand name .
Seating and positioning products. Invacare manufactures and markets seat cushions, back positioners and a variety of attachments used for comfort, support, pressure relief and posture control. Seating products include the Tarsys brand of electronic and mechanical tilting and reclining devices for use on power wheelchairs.
Low air loss therapy products. Invacare manufactures and markets a complete line of overlays and mattress replacement products, which use air flotation to redistribute weight and move moisture away from patients who spend a great deal of time in bed.
Institutional products. Invacare manufactures and markets a broad line of products for use in nursing homes and other institutions, including overbed tables, multi-position recliners, geriatric seating, patient lifts and slings.
Distributed products. Invacare distributes a line of personal medical care products manufactured by others, including incontinence products, sequential compression devices, bedding and support stockings.
Accessory Products. Invacare also manufactures and markets many accessory products, including spare parts, wheelchair cushions, arm rests and wheels. In some cases, Invacare's accessory items are built to be interchangeable and can be used to replace parts on products manufactured by others.
INTERNATIONAL
The Company's international operations consist primarily of manufacturing, marketing and distribution operations in Western Europe, Canada, and export sales activities through local distributors elsewhere in the world. The Company had product sales in approximately 80 countries worldwide.
In both Europe and Canada, the Company manufactures a broad range of homecare and rehabilitation equipment. Oxygen equipment and home care beds also are sold in these markets.
Most wheelchair products sold in Europe are designed and manufactured locally as market requirements are generally different from those in the United States. A significant portion of wheelchair products sold in Canada is manufactured in the United States.
Certain power wheelchair products sold in the United States are adaptations of products originally designed for Europe.
The Company manufactures both manual and power wheelchair products at all three of its European facilities - Carters (J&A) Ltd. in the U.K., Poirier S.A. in France, and Invacare Deutschland GmbH in Germany. Patient aids are manufactured in the U.K. and France. Oxygen products are imported from Invacare in the U.S.
In Canada, the Company sells from the full Invacare product line manufactured in the U.S. The Company also sells standard wheelchairs and seating and positioning products manufactured in Canada and certain patient aids manufactured in Europe.
The Company has direct sales forces and distribution centers in the U.K., France, Germany, Spain and Canada, and sells through distributors elsewhere in Europe and around the world. 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 authorities. 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.
WARRANTY
In general, Invacare's products are sold with limited warranties of up to five years. Customers may also purchase extended warranties on certain products. Electrical components are warranted for one year with patient lift electronics carrying a two year warranty. Certain components of the Company's prescription wheelchairs carry a lifetime warranty.
COMPETITION
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. In the past, various manufacturers have from time to time instituted severe price-cutting programs in an effort to gain market share. There can be no assurance that any of the home medical equipment manufacturers will not attempt to implement such aggressive pricing again.
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 providers. 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 its product line and sales.
MARKETING AND DISTRIBUTION
DOMESTIC
Sales and Marketing. Invacare's products are marketed in the United States primarily to home health care and medical equipment dealers that in turn sell or rent these products directly to the end user or to health care institutions. Although the Company's primary customer is the dealer, the Company also markets its products to medical professionals, including physical, occupational and respiratory therapists, who refer their patients to dealers to purchase specific types of home medical equipment. In some cases, Invacare sells directly to government agencies such as the Department of Veterans Affairs or the Department of Defense. The Company continues programs to generate greater consumer awareness of Invacare and its products. The Company advertises in magazines targeted to people with disabilities, sponsors a variety of wheelchair activities for these consumers and supports charitable causes which benefit users of its products.
Invacare's domestic sales and marketing organization consists of in-house salespersons and telemarketing employees. Each of the Company's domestic sales territory is coordinated by an area vice president. Product managers and respiratory specialists are assigned to each region to assist in the Company's sales and support of its respiratory product line. Each member of the sales force is specially trained to sell Invacare's entire range of products so that a dealer can order any Invacare product from one person. The salespersons also provide training and servicing information to the dealers, as well as brochures, point-of-sale display materials and similar advertising and merchandising aids. In addition, Invacare advertises in home health care journals and trade publications, and its representatives attend trade shows and similar conventions to display its products to dealers, medical professionals and others.
Many of the dealers who purchase products from Invacare are affiliated with national firms or are part of large buying groups. Dealers that are part of such groups make individual purchasing decisions and are invoiced directly by the Company.
Larger dealers and national accounts are able to qualify for volume discounts under Invacare's Dealer Incentive Purchase Plan. No single customer accounted for more than 6% of the Company's 1994 net sales. The Company's top ten customers and buying groups accounted for approximately 27% of 1994 net sales. The loss of business of one or more of these customers or buying groups may have a significant impact on the Company.
Customer Service. 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 need 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 center or receive freight-free delivery (with minimum order levels), generally within 48 hours of the Company's receipt of an order for any standard 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 four regional technical centers where Invacare products can be repaired promptly by factory technicians. Invacare has a network of 22 independent dealers that can provide factory authorized service by training the service technicians of selected dealers. 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 term financing arrangement, the Company sells the equipment on a financing contract to the dealer for periods ranging from 6 months to four years. The Company also introduced a revolving credit agreement to further aid dealer financing.
The Company devotes significant time and resources to train 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 1994, additional programming enhancements were made which resulted in an increase in the number of customers utilizing Electronic Data Interchange (EDI) and an increase in related EDI sales.
INTERNATIONAL
The Company has direct sales forces and distribution centers in wholly-owned subsidiaries in France, Germany, Spain, Sweden and the U.K. and sells through distributors in the other countries in western Europe. Sales are made either to government health agencies or to home health care dealers, who in turn sell to government agencies or directly to end users, depending on local market requirements.
In Canada, products are sold by the direct sales force of the Company's wholly owned subsidiaries and are distributed through regional distribution centers in British Columbia, Ontario and Quebec and health care dealers.
The Company also markets its products for export to other foreign countries.
PRODUCT LIABILITY COSTS
Invacare and the home health care industry have experienced significant increases in product liability insurance costs. Invacare supports its dealers in 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 of the Company's product liability exposure. The Company also has additional layers of coverage insuring up to $38 million in annual aggregate losses arising from individual losses that exceed $2 million. There can be no assurance that Invacare's insurance will continue to be available at affordable rates or will be adequate.
PRODUCT DEVELOPMENT AND ENGINEERING
Invacare is engaged in continuous efforts to improve, expand and broaden 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 electronic controllers for power wheelchairs; new models of both composite and aluminum frame ultralight wheelchairs; a comprehensive new line of innovative seating and positioning products; a complete line of home respiratory products, including nebulizers, compressors, flowmeters, aspirators, liquid oxygen, oxygen analyzer, and respiratory disposables; The microAir(TM) low air loss therapy mattress; Comfort + Plus(TM) Pressure Relief Foam products; and an improved line of ambulatory and safety products.
In an effort to integrate sophisticated electronics into its product lines, the Company's engineers work closely with university researchers, rehabilitation centers and government agencies in the development of improved specialized equipment for people with disabilities. Improvements in power wheelchairs have included the Action Power's Easy Remote Programmer(TM) (ERP), which is a palm-sized, hand-held remote control keypad designed to adjust chair performance at the touch of a button. Requiring only limited dexterity to operate and with very light finger pressure, an individual can scroll through the menu of up to 11 pre-set control programs, make adjustments to more than two dozen aspects of chair performance, or read and respond to one of 30 self-diagnostic codes. The ERP is the industry's first of its kind remote control device for power wheelchairs and is available for every member of the Action Power family of products. Additional improvements include the introduction of the Action Mark IV Electronics, a power wheelchair controller which is more intelligent, smoother, and easier to operate, yet as much as 60% smaller than competitive controllers.
The Company's patient aids line was substantially improved with the development of a new award winning walker that folds easily yet has a positive lock-in when in the unfolded position.
In 1994, the European and Canadian operations introduced several new products and continued to update existing products as necessary. Key introductions and updates in 1994 included a new model of power wheelchair and controls, electronic seating systems, patient aids and lifting equipment, as well as new lines of manual wheelchairs. New product introductions continue to play an important role in sustaining the Company's growth.
EMPLOYEES
As of December 31, 1994, the Company had approximately 3,300 employees.
MANUFACTURING AND SUPPLIERS
The Company's objective is to maintain its commitment to be the 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.
The Company has vertically integrated much of its manufacturing process 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 cost 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 Company also has made substantial investments in its facilities in order to increase productivity, lower costs and improve quality. Over the past three years, Invacare has invested $41 million in capital improvements and acquisitions of facilities. During 1994, the Company made two acquisitions which have improved the Company's existing product lines as well as expanded European distribution capabilities. Also in December, 1994 the Company acquired Beram AB, a Swedish distributor. During 1993, the Company made three acquisitions which complimented and enhanced the Company's existing product lines. During 1992, the
Company purchased a manufacturing facility and its distribution center, both of which were previously leased and also acquired the Cofipar/Poirier Group, which is the largest manufacturer and distributor of wheelchairs and home medical equipment in France.
The manufacturing operations for the Company's wheelchairs and replacement parts, patient aids and home care hospital 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 electronic seating and positioning products consist of both finishing and assembly. The Company purchases raw materials, fabricated components and services from a variety of suppliers. Invacare does not have any continuing contracts with its suppliers, but considers its relationships with suppliers to be satisfactory and believes that adequate alternative sources of supply are available.
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 GNP 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 often changes in federal programs are 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 our dealers.
The changes brought on by the mid-term congressional elections provide the Home Medical Equipment (HME) industry with many new challenges and opportunities. Unlike a few years ago, most members of the new Congress now believe that home health care is a clinically appropriate, cost effective alternative to traditional facility-based health care. In 1994, changes were made to the biggest domestic program affecting our industry, Medicare, where the number of carriers was consolidated from 34 to 4. Cuts in Medicare are projected at $250 to $400 billion over seven years. However, the new majority is serious about reducing health care costs and is interested in cost effective alternatives such as home care. The Company believes that the industry will soon be in a position to take advantage of the inevitable changes to come for publicly funded health care programs.
The Safe Medical Devices Act of 1990 and Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetics Act of 1938 (the "Act") provide for regulation by the United States Food and Drug Administration (the "FDA") of the manufacture and sale of medical devices. Under the Act, all 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 recordkeeping 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. Class III devices must receive pre-market approval from the FDA before they can be commercially distributed in the United States. 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 product 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.
(d) Financial Information About Foreign and Domestic Operations and Export Sales.
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 of the Company.
Item 2.



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 is set forth in Leases and Commitments in the Notes to the Consolidated Financial Statements of the Company and in the table below:
Item 3.

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 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 $38 million in annual aggregate losses arising from individual losses that exceed $2 million. Management does not believe that the outcome of any of these actions will have a material adverse effect upon its business or financial condition.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant.*
The following table sets forth the names of the executive officers of Invacare, each of whom serves at the pleasure of the Board of Directors, as well as certain other information.
A. Malachi Mixon, III has been President and Chief Executive Officer and a Director of the Company since December 1979 and Chairman of the Board since September 1983.
Gerald B. Blouch was named Chief Operating Officer in December 1994. Previously, he was named President - Home Care Division in March, 1994 and has been Chairman - Invacare International since December 1993. Mr. Blouch was Senior Vice President - Homecare Division from September 1992 to March 1994. Mr. Blouch was Chief Financial Officer from May 1990 to May 1993 and Treasurer from March 1991 to May 1993. From 1985 through May 1990, Mr. Blouch was Chief Financial Officer and Executive Vice President for Inacomp Computer Centers Inc.
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 since July 1984, Senior Vice President and General Manager of North American Operations since September 1989.
Thomas R. Miklich has been Chief Financial Officer 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 Sherwin-Williams Company from 1986 to 1991.
Benoit Juranville has been President - Invacare Europe since December 1993. Previously, Mr. Juranville was President of Poirier S.A. which was purchased by Invacare in 1992. He was added to the company's Executive Committee in December of 1994. From 1983 through 1992, Mr. Juranville was Chairman of the Board and Managing Director of Poirier, S.A.
Richard A. Sayers II has been Vice President - Human Resources since July 1991 and Vice President and General Manager - Aftermarkets Parts Division since September 1992. From 1989 to July 1991, Mr. Sayers was Vice President of Human Resources for the Steering Systems group of TRW Inc., a manufacturer of automotive electronics and aerospace products and services.
Louis F. J. Slangen was named Senior Vice President - Sales & Marketing in December 1994. Mr. Slangen was previously President - Rehab Division from March 1994 to December 1994 and Vice President - Sales and Marketing since September 1989. From September, 1992 to March, 1994, Mr. Slangen was also Vice President and General Manager - Rehab Division.
M. Louis Tabickman was named Vice President & General Manager - Power Business Unit in December 1994. Mr. Tabickman has been an officer since July 1985 and was named President - Invacare Canada in March, 1994. Previously, Mr. Tabickman was Vice President and General Manager - Invacare Canada from September 1992 to March 1994. Mr. Tabickman was Vice President and General
Manager of Service and Distribution from July 1985 until September 1992. - ---------------- * The description of executive officers is included pursuant to Instruction 3 to section (b) of Item 401 of Regulation S-K.
PART II
Item 5.

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 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 21, 1995 was 1,416 and 96, respectively. The closing sale price for the Common Shares on February 21, 1995 as reported by NASDAQ, was $33.50. 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:
During 1994, the Board of Directors for Invacare Corporation declared a quarterly cash dividend of $.0125 per Common Share. For the year, $.0375 dividends were declared. 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 of the Company. 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.
Item 6.

Item 6. Selected Financial Data.
* As adjusted for the 2-for-1 split effected in the form of a 100% share dividend in September 1991.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations 1994 vs. 1993
Net Sales. Net sales for 1994 increased 12.5% over 1993 principally based on increased unit volumes of the Company's major product lines, particularly respiratory products, beds and superlite wheelchairs. 1994 sales also reflect a full year of sales for the power wheelchair control system business unit which was acquired in June, 1993. Domestic increases of 14.9% for the year resulted primarily from increased unit volumes, including expanded product offerings, as the pricing environment for most product lines remains extremely competitive making it difficult to increase prices. Domestic net sales include the products which are manufactured at the Company's facility in Mexico, substantially all of which are sold to customers in the United States. International sales for 1994 increased by 6.2% over 1993 principally as a result of increased unit volumes and expanded product offerings. International sales are generally transacted in the foreign currencies of the countries in which they occur. The Company's 1994 international sales, as reported in dollars, were reduced by 1.6% due to the relative strength of the dollar as compared to those currencies.
Domestic
Rehab Products - Sales of Rehab products, which represent the Company's prescription wheelchairs, seating and positioning products and superlite and sports wheelchairs, increased 9.4% over 1993 levels. The successful introduction during 1994 of the Storm series of power wheelchairs greatly contributed to increased Rehab sales and helped to mitigate the effects of lower sales in the manual wheelchair unit as a result of an aggressive competitive pricing environment and to a lesser extent, tightening Medicare reimbursement guidelines. Sales volume for the superlite product line remained strong in 1994 as a result of the 1993 introduction of the Action Patriot which is a prescription manual wheelchair configured for both domestic and foreign applications and the 1994 introduction of the Action Power Tiger, a pediatric power wheelchair with tilt-in-space features.
Home Care Products - Home care sales increased 19.4% over 1993 levels due to significant increases in the respiratory and bed product lines. Volume increases for the respiratory lines were a result of the continuing success of new products, such as the SensO2TM oxygen concentrator, and expanded product offerings including the introduction of liquid oxygen systems. Respiratory product sales increased 53.3% for the year. Bed unit volume showed favorable trends during the year, with a shift in product mix to semi-electric beds from manual beds, while improvements were also realized as a result of the Company's first full year in the low air loss market.
International
Canadian Division - Sales in U.S. dollars in Canada were down approximately 4.8% mainly due to continuing strict government reimbursement policies as a result of cost cutting measures necessitated by the ongoing sluggish economy. The weak Canadian dollar reduced reported sales by 5.8%.
European Division - European sales increased approximately 8.6% over 1993, as a result of increased market focus, new and expanded product offerings and the improving economy. The success of the Action 2000LT manual wheelchair, the European version of the Action Patriot, and increased volume in patient aids marketed under the OPALE name contributed significantly to the sales increase. Significant competition, especially in power wheelchairs, played an important role in limiting price increases. European currencies, when compared to the dollar, negatively impacted European sales by less than 1%.
Gross Profit. Gross profit as a percentage of net sales was 32.4% in 1994 and 1993. The principal factor contributing to maintaining gross profit was inflationary cost increases offset by increased manufacturing efficiencies resulting from productivity improvements and capital expenditures to modernize equipment and processes. Increasing volumes and the effect of style and design changes made to major product groups contributed to margin to a lesser extent. Pricing was not a factor as market conditions continue to be extremely competitive.
Domestically, gross profit declined slightly in 1994 to 31.7% compared to 32.5% in 1993. Improved inventory management and increased manufacturing efficiency and productivity were offset by a shift in product mix and the continued competitive pricing environment for most of our product categories.
The gross profit in Europe improved from 29.3% in 1993 to 30.3% in 1994. A focus on manufacturing process improvements coupled with the production of the Action 2000LT in our European operations contributed to the increase. The Canadian gross profit declined as a result of declining sales and the weak Canadian dollar, however the consolidation of Canadian operations during the later part of 1994 is expected to have a positive impact on gross margin in the future
Selling , General and Administrative. Selling, general and administrative expense as a percentage of net sales was 21.7% for 1994 compared to 22.3% for 1993 as a result of a continuous focus on productivity and cost containment. The 9.4% dollar increase was a result of spending required to support increased sales volume and expanded operations, which relates principally to increased wages, benefits and administrative costs associated with a larger workforce.
Domestically, selling, general and administrative costs decreased as a percent of sales from 22.0% in 1993 to 21.0% in 1994 due to cost containment efforts. Actual spending increased, in part due to a full year effect of prior year acquisitions which occurred mid year during 1993, and additional costs incurred to complete the realignment of several operating units during 1994.
Canada's selling, general and administrative expense both in dollars and as a percentage of sales declined as a result of ongoing cost containment efforts and, to a smaller extent, due to the effects of foreign currency. European selling, general and administrative expense increased slightly as a percentage of sales mainly as a result of increased sales activity.
Interest. Interest income in 1994 increased 21.3% over 1993 primarily as a result of increased financing income from the Company's financing subsidiary as a result of greater installment loan volumes. Interest expense decreased from 1993 as a result of lower borrowing costs offset somewhat by increased borrowing levels. The increased borrowings was a result of the above mentioned financing activity and the funding of acquisitions during 1994.
Income Taxes. The Company had an effective tax rate of 37.0% in 1994 compared to an effective rate of 34.0% in 1993 primarily because of the aggregate impact of adoption of the liability method in 1993. See Income Taxes in the Notes to Consolidated Financial Statements.
Research and Development. Research and development expenditures increased 11.9% to $7.7 million in 1994 compared to $6.8 million in 1993. The funding levels are a result of the Company's commitment to support aggressive product development efforts in order to stay abreast of market requirements and to deliver quality products to our customers. This continuing research and development focus will enable the Company to maintain its product leadership position thereby enhancing timely product launches while realizing greater operating efficiencies.
1993 Vs. 1992
Net Sales. Net sales for 1993 increased by 19.8% over 1992 principally based on increased unit volumes of the Company's major product lines, particularly respiratory products, prescription manual and standard wheelchairs. Domestic increases of 18.3% for the year resulted primarily from increased unit volumes, including expanded product offerings. The pricing impact on increased sales was minimal during 1993 as a result of increasing competition in most of the Company's product lines. Domestic net sales include the products which are manufactured at the Company's facility in Mexico, substantially all of which are sold to customers in the United States. International sales for 1993 increased by 23.7% over 1992 principally as a result of increased unit volumes and expanded product offerings coupled with the increase due to acquisitions and, to a lesser extent, due to higher average selling prices. International sales are generally transacted in the foreign currencies of the countries in which they occur. The company's international sales, as reported in dollars, were reduced by 10.1% due to the relative strength of the dollar as compared to those currencies.
Domestic
Rehab Division - Sales of Rehab products, which represent the Company's prescription wheelchairs, seating and positioning products and superlite and sports wheelchairs, increased 24% over 1992 levels. Rehab unit volumes were higher than 1992 levels for most base models, with acquisitions representing 26% of the division's increase. Sales volume for major product lines remained strong in 1993 and was enhanced by the introduction of the Action Patriot which is a prescription manual superlite wheelchair configured for both domestic and foreign applications.
Home Care Division - Home Care sales increased 13% over 1992 levels due to significant increases in the respiratory line. Volume increases of 43% for concentrators and 125% for Associated Respiratory Products along with the introduction of new products, such as the Sens02, liquid oxygen, and side stream nebulizer, contributed an increase of 27% to domestic net sales. The introduction of the Tracer series and the increased volumes for standard wheelchairs constituted 10% of the domestic net sales improvement. The acquisition of Geomarine Systems, Inc. (low air loss therapy systems), also contributed to the division's net sales growth. Improved pricing impacted the growth in net sales to a lesser degree.
International
Canadian Division - Sales in U.S. dollars in Canada was down approximately 5% mainly due to stricter government reimbursement policies as a result of sweeping cost cutting policies and a recessionary economy. The weak Canadian dollar reduced reported sales by 6% versus the U.S. dollar.
European Division - European sales increased approximately 44% over 1992, primarily as a result of the acquisition of Poirier at the end of 1992 and, to a lesser extent, the introduction of several new products. Tighter reimbursement policies in Europe and a continuing weak European economy, especially in Germany, caused overall demand to decline for many product lines, mostly in manual wheelchairs, dampening anticipated sales growth. Significant competition, especially in power wheelchairs, played an important role in preventing price increases. In addition, weakening European currencies when compared to the dollar negatively impacted European sales by 12%.
Gross Profit. Gross profit as a percentage of net sales was 32.4% in 1993 compared to 33.1% in 1992. The principal factors leading to the change in 1993 were higher average selling prices which were offset by increased manufacturing costs, in part, resulting from style and functionality design changes made to major product groups and a shift in product mix.
Domestically, gross profit declined slightly to 32.5% in 1993 from 32.9% in 1992. A slight increase was realized from higher average selling prices, mainly in standard wheelchair, prescription manual wheelchair and bed product lines, but was offset by higher fixed spending and the effect of product mix. Fixed spending levels increased mainly due to the combining of certain product line operations into a single facility during 1993. This resulted in duplicate costs during the transition of moving these product lines to the new facilities.
The gross profit in Europe remained relatively constant while Canadian gross profit rose from 26.8% of net sales in 1992 to 31.4% of net sales in 1993. This was due, in part, to reduced purchased material costs.
Selling, General and Administrative. Selling, general and administrative expense as a percentage of net sales was 22.3% for 1993 compared to 24.1% for 1992. The 11.0% dollar increase was a result of expanded operations and increased wages, benefits and administrative costs associated with a larger workforce and greater net sales.
Domestically, selling, general and administrative costs decreased as a percent of net sales (22.0% in 1993 compared to 23.9% in 1992). Actual spending increased 9.1%, attributable, in part, to acquisitions. Also, additional sales and marketing expenses were incurred to support new product introductions and to provide continued focus on innovative consumer marketing programs.
Selling, general and administrative expense in Canada decreased both in dollars and as a percentage of net sales in 1993 versus 1992 due to stricter cost containment policies and, to a smaller extent, from the effect of foreign currency exchange. European selling, general and administrative expense improved from 23.9% of sales in 1992 to 22.9% in 1993. However, improvements were dampened by additional goodwill amortization of $1.2 million as a result of the Poirier acquisition.
Interest. Interest income in 1993 increased 14.2% over 1992 as a result of increased financing income from the Company's financing subsidiary, primarily from greater installment loan volumes. Interest expense increased from 1992, principally due to higher outstanding borrowings, mainly as a result of the purchase of Poirier. Additional interest expense of $3.5 million affected European earnings before income tax, which declined from 2.9% of net sales in 1992 to .9% of net sales in 1993.
Income Taxes. The Company had an effective tax rate of 34.0% in 1993 compared to an effective rate of 35.6% in 1992 primarily because the increase of 1% in the federal statutory rate was reduced by increased tax credits and the aggregate impact of the liability method. See Income Taxes in the Notes to Consolidated Financial Statements.
The Company adopted Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" effective January 1, 1993. Under the new rules, deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes.
Research and Development. Research and development expenditures increased 30.3% to $6.8 million in 1993 compared to $5.3 million in 1992. The higher funding level is a result of the formalization of the research and development function in order to maintain the Company's philosophy in delivering quality products to our customers and will result in timely product launches and greater efficiencies.
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 1994 and 1993, the Company was able to offset most 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 to finance its world-wide operations. In December of 1994, the Company completed a new $200 million multi-currency long-term financing agreement which expires in December, 1999. The agreement replaced a $40 million revolving credit agreement, a 160 million French franc revolving credit agreement, and the multi-currency revolving credit agreements of 2.5 million pounds sterling, 9 million deutschmarks, 20 million French francs and 18 million New Zealand dollars. Additionally, the Company maintains various other lines of credit including a $10 million demand line, a 10 million Canadian dollar demand line, 12 million of deutschmark lines, 25 million of French franc demand lines and 60 million peseta demand lines. The facilities 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, 1994, the Company has approximately $170 million available under its lines of credit.
The Company's borrowing arrangements contain covenants with respect to net worth, dividend payments, working capital, funded debt to capitalization, interest coverage and leverage, as defined in the Company's bank agreements and agreements with its note holders. The company is in compliance with all covenant requirements.
Capital Expenditures
Although there are no material capital expenditure commitments outstanding as of December, 31, 1994, the Company expects to invest in capital projects at a rate equal to depreciation and amortization of capital. 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 meet its operating cash requirements and fund required capital expenditures in the foreseeable future.
Cash Flows
Cash flows provided by operating activities were $31.5 million in 1994 compared to $30.6 million in 1993. The improved 1994 operating cash flow was provided principally by increased profitability and the increase in account payables. The increase was offset by higher accounts receivable and inventory required to support the increased sales volume. These factors resulted in the slight increase in operating cash flows in 1994 when compared to 1993.
Cash flows required for investing activities decreased by 15.0% in 1994 when compared to 1993 mainly as a result of lower spending for property, plant and equipment and acquisitions. The Company also purchased a manufacturing facility which included the assumption of $1.4 million of indebtedness, that is not reflected in cash flow activity. This decrease was partially offset by increased activity in customers financing of sales by the Company's financing unit as a result of increased bookings, which in part is due to increased sales activity.
Cash provided by financing activities decreased to $4.2 million in 1994 compared to $16.2 million in 1993. This decrease resulted primarily from the Company's having completed a $25 million private placement of senior notes in February, 1993, the proceeds of which were used to pay down the revolving credit facility and demand lines. The decrease was also a result of the decrease of our foreign outstanding borrowings as a result of improved operations.
Dividend Policy
On May 23, 1994 the Board of Directors for Invacare Corporation declared a quarterly cash dividend of $.0125 per Common Share, representing the first dividend to be paid in Invacare's history and amounts to $.05 per common share on an annual basis. For the year, $.0375 dividends were declared.
Item 8.


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, Notes to Consolidated Financial Statements and Financial Statement Schedules which appear on pages FS-1 to FS-17 of this Annual Report on Form 10-K.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.



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 1995 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.
Item 11.

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 1995 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


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 1995 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.

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, 1994, 1993 and 1992
Consolidated Balance Sheet - December 31, 1994 and 1993
Consolidated Statement of Cash Flows - years ended December 31, 1994, 1993 and 1992
Consolidated Statement of Shareholders Equity - years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules.
The following financial statement schedules of the Company are 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-18 of this Report on Form 10-K.
(b) Reports on Form 8-K.
None
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 23, 1995.
INVACARE CORPORATION
By /S/ A. Malachi Mixon, III ------------------------------------------------ A. Malachi Mixon, III Chairman of the Board of Directors, President 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 23, 1995.
INVACARE CORPORATION
Report on Form 10-K for the fiscal year ended December 31, 1994.
(J) 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.
(K) 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.
(L) 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 by reference.
(M) 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 by reference.
(N) 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 by reference.
(O) Reference is made to the appropriate exhibit of the Company's report on Form 10-Q for the quarter ended June 30, 1992, which is incorporated herein by reference.
(P) Reference is made to Exhibit 2 of the Company's report on Form 8-K, dated October 29, 1992, which is incorporated herein by reference.
(Q) 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.
(R) 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 by reference.
(S) 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.
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, 1994 and 1993, and the related consolidated statements of earnings, cash flows, and shareholders equity for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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 February 20, 1995
CONSOLIDATED STATEMENT OF EARNINGS
INVACARE CORPORATION AND SUBSIDIARIES
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
INVACARE CORPORATION AND SUBSIDIARIES
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
INVACARE CORPORATION AND SUBSIDIARIES
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
INVACARE CORPORATION AND SUBSIDIARIES
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVACARE CORPORATION AND SUBSIDIARIES
December 31, 1994
ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts of Invacare Corporation and its subsidiaries (the Company). Certain foreign subsidiaries are consolidated using a November 30 fiscal year end. All significant intercompany transactions are eliminated.
Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the presentation used for the year ended December 31, 1994.
Marketable Securities: Current marketable securities are stated at market value, which approximates cost, and consist of short-term investments in repurchase agreements, government securities and certificates of deposit. Marketable securities with original maturities of less than three months are treated as cash equivalents.
Effective January 1, 1994, the Company adopted Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). The new standard requires the classification of the Company's marketable securities. The Company's marketable securities and other long term securities have been classified as available for sale where 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. This new standard was adopted January 1, 1994 and the effect was not material.
Inventories: Inventories are stated at the lower of cost or market with cost principally determined for domestic manufacturing inventories by the last-in, first-out (LIFO) method and market based on the lower of replacement cost or estimated net realizable value. Non-domestic inventories and domestic finished products purchased for resale ($26,617,000 and $21,072,000 at December 31, 1994 and 1993, 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: Certain of 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. A non-renewable warranty is offered on certain products for a maximum period of five years. Components of certain products carry a lifetime warranty. A provision for estimated warranty cost is recorded at the time of sale and is periodically adjusted to reflect actual experience.
Research and Development: Research and development costs are expensed as incurred. The Company's annual expenditures for product development and engineering were approximately $7,651,000 in 1994, $6,840,000 in 1993 and $5,251,000 in 1992.
Revenue Recognition: The Company recognizes revenue when product is shipped and provides an appropriate allowance for estimated returns and adjustments.
Income Taxes: Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires recognizing deferred taxes using the liability method, whereby current enacted tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax returns. As permitted under SFAS 109, the 1992 financial statements, which utilized the deferred method, have not been restated.
Net Earnings Per Share: The weighted average number of shares outstanding used in determining net earnings per share was 14,848,000 in 1994, 14,738,000 in 1993, and 14,237,000 in 1992. Common Shares, Class B Common Shares and the effects of dilutive stock options are included in calculating the weighted average shares outstanding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
ACCOUNTING POLICIES--Continued
Foreign Currency Translation: Substantially all of 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 "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 from 20 to 40 years. The accumulated amortization was $4,418,000 and $2,523,000 at December 31, 1994 and 1993, 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. Based on the Company's review as of December 31, 1994, no impairment of goodwill was evident.
Interest Rate Swap Agreements: 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 variable 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.
RECEIVABLES
Trade receivables are net of allowances for doubtful accounts of $3,251,000 in 1994 and $2,555,000 in 1993.
Installment receivables as of December 31, 1994 and 1993 consist of the following:
In May 1993, the Financial Accounting Standards Board issued Statement No. 114 "Accounting by Creditors for Impairment of a Loan" (SFAS 114). SFAS 114 is effective for fiscal years beginning after December 15, 1994. The Company will be required to adopt SFAS 114 effective January 1, 1995. The new standard requires that impaired loans within the scope of SFAS 114 be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate. The Company does not expect this standard to materially impact its financial condition or results of operations.
INVENTORIES
Inventories consist of the following:
Current cost exceeds the LIFO value of inventories by approximately $777,000 and $612,000 at December 31, 1994 and 1993, respectively.
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
CURRENT LIABILITIES
Accrued expenses consist of the following:
ACQUISITIONS
In August 1994, the Company purchased all the outstanding shares of Rehadap S.A., a Spanish marketer and distributor of precision wheelchairs and other rehab products for people with disabilities. In November 1994, the Company purchased all the outstanding shares of Genus Medical, Inc., a manufacturer of power positioning seating systems for motorized wheelchairs, and electric three and four wheeled scooters. These transactions have been accounted for by the purchase method of accounting and the proforma effects are not material.
In March 1993, the Company purchased the assets of Top End, a manufacturer of specialty products for sports and recreational use for people with physical disabilities. The Company acquired for cash all the shares of Dynamic Controls Limited, a manufacturer of control systems for power drive wheelchairs in June 1993, and in July 1993 acquired Geomarine Systems, Inc., a manufacturer of low air loss therapy systems. These transactions have been accounted for by the purchase method of accounting and the proforma effects are not material.
In October 1992, the Company purchased all of the outstanding shares of the Cofipar/Poirier Group ("Poirier"), for approximately $57,341,000 which included 561,000 Common Shares valued at approximately $11,971,000 as of the date of acquisition. Poirier manufactures and distributes wheelchairs and home medical products in France and other European Economic Community countries. The acquisition has been accounted for by the purchase method of accounting. The excess of the aggregate purchase price over the fair market value of net assets acquired approximated $51,850,000 and is being amortized over 40 years.
The operating results of all acquisitions are included in the Company's consolidated results of operations from the date of acquisition.
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, 1994, 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 $4,548,000 in 1994, $4,867,000 in 1993, and $4,680,000 in 1992. Future minimum operating lease commitments as of December 31, 1994, including minimum payments described in the Related Party Transactions Note, are as follows:
The amount of buildings and equipment capitalized in connection with capital leases was $3,551,000 and $5,006,000 at December 31, 1994 and 1993, respectively. At December 31, 1994 and 1993, accumulated amortization was $1,107,000 and $2,316,000, 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's contributions to the domestic plans are based on an annual resolution of the Board of Directors and the Company has no requirement to make a contribution. The contributions can either be in the form of cash to the Profit Sharing Plan or in the form of cash or Common Shares to the Employee Stock Bonus Trust and Plan. Cash contributions to the Employee Stock Bonus Trust are used to purchase the Company's Common Shares on the open market. Contribution expense for 1994, 1993 and 1992 was $1,455,000, $930,000 and $1,704,000, respectively.
During 1994, the Company contributed $1,400,000 to its Voluntary Employee Benefit Association (VEBA). The VEBA trust was created during 1990 to provide for the payment of self-funded employee health benefits for current employees. No VEBA contributions were made in 1993 and 1992.
During 1992, the Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Post Retirement Benefits Other Than Pensions". The Company has no formal post retirement benefits plans other than the profit sharing plans referred to above and the adoption of the Statement had no material impact on the Company's financial position.
In November 1992, the Financial Accounting Standards Board issued Statement No. 112 "Accounting for Postemployment Benefits" (SFAS 112). SFAS 112 requires accounting for benefits to former and inactive employees after employment but before retirement. This new standard was adopted January 1, 1994 and the effect is not material to the Company's financial condition or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
SHAREHOLDERS' EQUITY TRANSACTIONS
At December 31, 1994, the Company had 50,000,000 authorized Common Shares, without par value, and 12,000,000 authorized Class B Common Shares, without par value. In general, the Class B Common Shares and the 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.
As of December 31, 1994, 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.
The Company's Stock Option Plan (the "1984 Plan") was adopted in 1984 and expired February 28, 1994. The 1984 Plan, as amended, provided for the issuance of up to 2,000,000 of the Company's Common Shares in connection with stock options granted under the plan. No further grants will be made under the 1984 Plan.
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 1,000,000 Common Shares in connection with stock options and other awards granted under the plan. The 1994 Plan allows the Compensation 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, 1994. As of December 31, 1994 the Committee, under the 1994 Plan, has granted all non-qualified stock options at 100% of the fair market value on the date of grant and for a term of ten years.
The 1984 and 1994 Plans have provisions for the cashless exercise of options. Under these provisions the Company acquired 7,135 treasury shares for $199,000 in 1994, 61,611 treasury shares for $1,693,000 in 1993 and 80,521 treasury shares for $1,959,000 in 1992.
As of December 31, 1994, an aggregate of 13,949,240 shares were reserved for conversion of Class B Common Shares, future rights (as defined below) and exercise and future grant of options.
The following summarizes the stock option transactions under the 1984 Plan and the 1994 Plan for 1994, 1993, and 1992:
On April 2, 1991, 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-half of one Common Share at a price of $25 per one-half 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%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
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. Coincident with adoption of the Plan, the Company redeemed Rights outstanding under a prior plan at the price of $.005 per Right.
LONG-TERM OBLIGATIONS
In February 1993, the Company completed a private placement of $25 million in senior notes at 7.45% which contain covenants similar to the revolving credit agreement described below. At December 31, 1994, $47,300,000 of retained earnings is available for dividends. The notes are due in 2003 and require principal payments of $3.6 million per year beginning in 1997. The proceeds from the notes were used to pay down revolving credit agreements and other demand lines.
During 1994, the Company entered into a $200 million long-term credit agreement as described above. The borrowing rates are determined based on the leverage ratios of the Company, as defined in the agreement and range from 1/4 to 1% 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 per the agreement.
Notes payable to banks under credit facilities consist of borrowings under various arrangements by the Company and its foreign subsidiaries and consists of a $10 million demand line, a 10 million Canadian dollar demand line, 12 million deutschmark lines, 25 million of French franc lines and 60 million peseta demand lines. Borrowings under these lines are considered long-term to the extent that unused borrowing capacity is available under the $200 million revolving credit agreement. Interest on amounts
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
LONG-TERM OBLIGATIONS--Continued
borrowed under the various credit facilities is at the respective bank's base rate or an interbank offered rate. Certain borrowings from foreign banks are secured by the assets of foreign subsidiaries or by guarantees of the Company.
In March 1993, the Company fixed the interest rate on 100 million of the outstanding French franc debt through two interest rate swap agreements. Each agreement is for 50 million French francs. The effect of the swap is to exchange short term floating interest rates for a fixed rate of 7.48% for a five year term in one agreement and 7.81% for a three-year term in the other agreement. As of December 31, 1994 and 1993 the weighted average variable interest rate on the French franc debt was 7.2% and 11.6%, respectively.
In July 1989, the Company entered into a seven-year interest rate swap agreement which effectively fixed the interest rate on $5 million of the Company's various variable rate borrowings at 8.89% under revolving credit agreements and notes payable to banks under credit facilities. The weighted average variable interest rate on the debt was 6.8% and 8.8% as of December 31, 1994 and 1993, respectively.
The secured promissory notes financed the purchase of certain buildings and equipment which secure the notes. The notes bear interest at rates from 4.8% to 11.0% and mature through 2004.
The capital leases at December 31, 1994 are principally for a manufacturing facility and computer systems, with payments due through 2007.
The aggregate minimum combined maturities of long-term obligations are approximately $326,000 in 1995, $1,228,000 in 1996, $4,848,000 in 1997, $4,803,000 in 1998, $73,828,000 in 1999, and $18,040,000 thereafter. Interest paid on borrowings was $6,625,000, $7,665,000 and $4,242,000 in 1994, 1993 and 1992, respectively.
INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS 109 (see "Accounting Policies" note).
Earnings before income taxes consisted of the following:
The Company has provided for income taxes as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
INCOME TAXES--Continued
At December 31, 1994, the Company has available indefinite foreign tax loss carryforwards of $2,250,000.
The Company made income tax payments of $16,606,000, $12,264,000, and $7,891,000 during the years ended December 31, 1994, 1993 and 1992, respectively.
A reconciliation to the effective income tax rate from the federal statutory rate follows:
Significant components of deferred income tax assets and liabilities at December 31, 1994 and 1993 are as follows:
The tax effect of certain differences between financial earnings and taxable earnings is as follows for the year ended December 31, 1992:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
RELATED PARTY TRANSACTIONS
The Company leased a facility from a partnership (I-M Associates, Ltd., "Partnership") comprised of certain officers, directors and shareholders of the Company. The General Partner of the Partnership is also a director and chairman of the Company. In March 1994, the Company, through a newly formed subsidiary, exercised its option to acquire the entire facility (land and building) for $3.8 million. As part of the purchase, the Company assumed approximately $1.4 million in indebtedness of industrial development revenue bonds issued by the Sanford Airport Authority. The purchase price was based upon an independent appraisal of the fair market value of the facility. Lease payments during 1994, 1993 and 1992 were $98,000, $544,000 and $530,000, respectively.
In 1988, the Company entered into a 12-1/2 year lease, for the construction of a distribution facility. A general partner of the partnership which owned the facility is a director of the Company. During 1992, the Company purchased the facility from the partnership for $4.1 million. As part of the purchase, the Company assumed the $2.8 million mortgage on the property. The purchase price was based on an independent appraisal. Lease payments during 1992 were $211,000.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
BUSINESS SEGMENTS
The company operates in one business segment, home medical equipment. Geographic information for each of the three years ended December 31 is as follows:
The operations of the Company's Mexican facility are treated as Domestic for segment reporting purposes. Substantially all of the products manufactured at this Mexican facility are sold to customers located in the United States.
Eliminated from above net sales for 1994, 1993 and 1992 were $23,224,000, $14,151,000, and $15,450,000, respectively, of sales by Domestic subsidiaries to Foreign subsidiaries and $1,306,000, $1,606,000, and $1,256,000, respectively, of sales by Foreign subsidiaries to Domestic 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 and extended care markets. The Company performs credit evaluations of its customers' financial condition and on a case by case basis may require a security position in the form of UCC filings, purchase money security interests and/or personal guarantees. Substantially all of the Company's receivables are due from home health care and medical equipment dealers located throughout the United States, Canada, 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 and consistently have been within management's expectations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
INVACARE CORPORATION AND SUBSIDIARIES
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 portfolio contains receivables with terms less than three years and the majority 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 obligations: 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 based on pricing models using current assumptions.
Interest Rate Swaps: Fair values for the Company's interest rate swaps are based on pricing models or formulas using current assumptions.
The carrying amounts and fair values of the Company's financial instruments at December 31, 1994 and 1993 are as follows:
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INVACARE CORPORATION AND SUBSIDIARIES
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.