UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1 to
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OR The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 9, 2004
-------------------------------
Invacare Corporation
(Exact name of registrant as specified in its charter)
Ohio 0-12938 95-2680965
--------------------------------------------------------------------------------
(State or other jurisdiction of (Commission (IRS Employer Identification)
incorporation or organization) File Number No)
One Invacare Way, P.O. Box 4028, Elyria, Ohio 44036
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (440) 329-6000
------------------------------
________________________________________________________________________________
(Former name, former address and former fiscal year, if change since last
report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Invacare Corporation (the "Company") hereby amends Item 9.01 of its Current
Report on Form 8-K filed with the Securities and Exchange Commission on
September 9, 2004 (the "Current Report") to include required financial
statements and pro forma financial information. In the Current Report disclosing
the acquisition of WP Domus GmbH ("Domus") by the Company, the Company indicated
that it would amend the Current Report to include such financial statements and
pro forma financial information no later than 71 days after the date on which
the Current Report was required to be filed. Item 9.01 of the Current Report is
hereby amended and restated as follows:
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
(i) Report of Independent Auditors F-1
(ii) Audited Consolidated Balance Sheet as of December 31, 2003; F-2
(iii)Audited Consolidated Income Statement for the Year ended December 31, F-4
2003;
(iv) Audited Consolidated Statement of Shareholder's Equity for the Year ended F-5
December 31, 2003;
(v) Audited Consolidated Statement of Cash Flow for the Year ended December 31, F-6
2003;
(vi) Notes to Audited Consolidated Financial Statements; F-7
(vii) Consolidated Balance Sheets as of June 30, 2004 and 2003 - Unaudited; F-22
(viii)Consolidated Income Statements for the Six-Months ended June 30, 2004 F-24
and 2003 - Unaudited;
(ix) Consolidated Statements of Shareholder's Equity for the Six-Months ended F-25
June 30, 2004 and 2003 - Unaudited;
(x) Consolidated Statements of Cash Flow for the Six-Months ended June 30, 2004 F-26
and 2003 - Unaudited; and
(ix) Notes to the Consolidated Financial Statements - Unaudited F-27
(b) Pro Forma Condensed Combined Financial Information - Unaudited
(i) Pro Forma Condensed Combined Financial Information; F-33
(ii) Pro Forma Condensed Combined Balance Sheet as of June 30, 2004; F-34
(iii)Pro Forma Condensed Combined Statement of Earnings for the Six Months F-35
Ended June 30, 2004;
Item 9.01 Financial Statements and Exhibits (continued)
(b) Pro Forma Condensed Combined Financial Information - Unaudited (continued)
(iv) Pro Forma Condensed Combined Statement of Earnings for the Year Ended F-36
December 31, 2003; and
(v) Notes to Pro Forma Condensed Combined Financial Statements - Unaudited F-37
(c) Exhibits
Exhibit 2.1 Sale and Purchase Agreement Regarding the Sale and Purchase
of All Shares in WP Domus GmbH by and among WP Domus LLC,
Mr. Peter Schultz and Mr. Wilhelm Kaiser, Invacare GmbH &
Co. KG and Invacare Corporation dated as of July 31, 2004.*
Exhibit 2.2 Guarantee Letter Agreement of Warburg, Pincus Ventures, L.P.
and Warburg, Pincus International, L.P. dated as of
September 9, 2004.*
Exhibit 10.1 Bridge Credit Agreement dated as of September 1, 2004 among
the Banks named therein, Bank One NA, as Agent and Invacare
Corporation.*
Exhibit 23.1 Consent of Independent Auditors.
Exhibit 99.1 Press release dated September 9, 2004.*
* Previously filed as an exhibit to the Current Report on Form 8-K of
Invacare Corporation filed on September 9, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
INVACARE CORPORATION
By:/s/ Gregory C. Thompson
-----------------------------------------
Gregory C. Thompson
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 24, 2004
Shareholder and Board of Directors
WP Domus GmbH, Munich
We have audited the accompanying consolidated balance sheet of WP Domus GmbH and
subsidiaries as of December 31, 2003, and the related consolidated statement of
income, shareholder's equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WP Domus GmbH and
subsidiaries as of December 31, 2003, and the consolidated result of their
operations and their cash flow for the year then ended in conformity with
accounting principles generally accepted in Germany.
Accounting principles generally accepted in Germany vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature of such differences is presented in
Note 10.
Ernst & Young AG Wirtschaftsprufungsgesellschaft
Munich, Germany
November 22, 2004
F-1
WP Domus GmbH, Munich
Consolidated Balance Sheet as of December 31, 2003
--------------------------------------------------------------------------------------------------- ----------------------
ASSETS EUR
----------------------
A. FIXED ASSETS
I. Intangible assets
1. Franchises, industrial rights and similar rights and
assets and licenses in such rights and assets 572,938
2. Goodwill 173,135,238
----------------------
173,708,176
II. Property, plant and equipment
1. Land, land rights and buildings
including buildings on third-party land 3,830,346
2. Technical equipment and machines 454,640
3. Other equipment,furniture and fixtures 3,852,238
4. Payments on account and assets under construction 178,807
----------------------
8,316,031
III. Financial assets
1. Investments 551
2. Long-term investments 4,976
----------------------
5,527
----------------------
182,029,734
----------------------
B. CURRENT ASSETS
I. Inventories
1. Raw materials, consumables and supplies 2,816,447
2. Unfinished goods, work in process 396,674
3. Finished goods and merchandise 1,919,099
----------------------
5,132,220
----------------------
II. Receivables and other assets
1. Trade receivables 6,850,952
2. Other assets 1,076,822
----------------------
7,927,774
III. Cash on hand,
bank balances and checks 7,617,852
----------------------
20,677,846
C. PREPAID EXPENSES 303,092
----------------------
203,010,672
======================
F-2
WP Domus GmbH, Munich
Consolidated Balance Sheet as of December 31, 2003 (continued)
--------------------------------------------------------------------------------------------------- ----------------------
EQUITY AND LIABILITIES
EUR
----------------------
A. EQUITY
I. Subscribed capital 100,000
II. Capital reserve 231,481,000
III. Currency translation adjustment -334,456
IV. Accumulated deficit -183,560,009
V. Minority interest -2,468,664
----------------------
45,217,871
B. ACCRUALS
1. Tax accruals 170,253
2. Other accruals 9,294,530
----------------------
9,464,783
C. LIABILITIES
1. Liabilities to banks 64,741,389
2. Trade payables 2,830,533
3. Liabilities to shareholders 77,301,772
4. Other liabilities: 3,454,324
thereof for taxes: EUR 718,538
thereof for social security: EUR 516,496
----------------------
148,328,018
----------------------
203,010,672
======================
F-3
WP Domus GmbH, Munich
Consolidated Income Statement for the Year ended December 31, 2003
--------------------------------------------------------------------------------------------------- ---------------------
EUR
---------------------
1. Sales 102,944,955
2. Increase in finished goods and work in process 176,657
3. Other operating income 1,312,041
---------------------
104,433,653
4. Cost of materials
a) Cost of raw materials, consumables and supplies
and of purchased merchandise -40,141,197
b) Cost of purchased services -583,922
5. Personnel expenses
a) Wages and salaries -17,866,562
b) Social security and other pension costs -3,652,081
6. Amortization and depreciation
on intangible assets and property, plant and equipment -16,641,314
7. Other operating expenses -16,356,129
---------------------
-95,241,205
8. Other interest and similar income 363,884
9. Interest and similar expenses -11,727,730
thereof to affiliated companies: EUR 7,523,726
---------------------
-11,363,846
---------------------
10. Result from ordinary activities -2,171,398
11. Extraordinary income 119,000
12. Extraordinary expenses -239,165
---------------------
13. Extraordinary result -120,165
14. Income taxes 4,362,052
15. Other taxes 91,441
---------------------
4,453,493
16. Consolidated net profit for the year 2,161,930
---------------------
17. Accumulated losses brought forward -185,594,106
18. Minority interest share on net profit -127,833
---------------------
19. Consolidated accumulated loss -183,560,009
=====================
F-4
WP Domus GmbH, Munich
Consolidated Statement of Shareholder's Equity for the Year ended December 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Currency
Subscribed Capital Translation Accumulated Minority
Capital Reserve Adjustment Deficit Interest Total
--------------------------------------------------------------------------------------------------
EUR EUR EUR EUR EUR EUR
December 31, 2002 100,000 231,481,000 -252,350 -185,594,106 0 45,734,544
Net income 2,034,097 127,833 2,161,930
Currency translation adjustment -82,106 -82,106
Exercise of a call option by
minority shareholder -2,596,497 -2,596,497
--------------------------------------------------------------------------------------------------
December 31, 2003 100,000 231,481,000 -334,456 -183,560,009 -2,468,664 45,217,871
==================================================================================================
F-5
WP Domus GmbH, Munich
Consolidated Statement of Cash Flow for the Year ended December 31, 2003
----------------------------------------------------------------------------------------------------------------------
2003
EUR
---------------------
Cash flow from operating activities
Net income for the year including minorities 2,161,930
Amortization and depreciation of fixed assets 16,641,314
Change in provisions -3,995,736
Accrued interest expenses 7,523,726
Loss from the disposal of fixed assets 786,788
Changes in inventories, trade receivables
and other assets that cannot be allocated to
investing or financing activities 242,756
Changes in trade payables and
other liabilities that cannot be allocated to
investing or financing activities -1,646,682
---------------------
Cash provided by operating activities 21,714,096
Cash flow from investing activities
Cash received from disposals of property, plant
and equipment/intangible assets 68,544
Cash paid for investments in property, plant and
equipment/intangible assets -3,215,120
Cash paid for investments in financial assets -953
---------------------
Cash used in investing activities -3,147,529
Cash flow from financing activities
Cash paid for the redemption of loans -18,492,486
---------------------
Cash used in financing activities -18,492,486
Changes in cash and cash equivalents 74,081
Foreign currency exchange effect on cash
and cash equivalents 7,720
Cash and cash equivalents at the beginning of the year 7,536,051
---------------------
Cash and cash equivalents at the end of the year 7,617,852
=====================
The cash provided by operating activities includes interest paid amounting to
EUR 4,204,004.
F-6
WP Domus GmbH, Munich
Notes to the Consolidated Financial Statements
Prepared in Accordance with German GAAP
Year ended December 31, 2003
(in thousands of EUR)
1. Description of Business
WP Domus GmbH, Munich (along with its subsidiaries, referred to herein as the
"Company") is one of the leading European manufacturers of innovative,
high-quality mobility aids and bathroom safety products for elderly and
handicapped people. The Company consists primarily of three principal operating
subsidiaries (Alber and Aquatec, both based in Germany - and Dolomite, based in
Sweden). The Company operates a worldwide network of proprietary sales
organizations (Canada, France, Austria and Switzerland) and has dedicated
representatives in most other industrialized European countries as well as the
United States of America ("USA"). The names of Domus' principal subsidiaries
also serve as its key brands.
2. Significant Accounting Policies
A summary of significant accounting policies utilized during the preparation of
the accompanying German GAAP consolidated financial statements are as follows:
Accounting Principles
The Company maintains its accounting books and records in domestic currency
based on domestic accounting regulations in the countries in which it operates.
The consolidated financial statements have been prepared in order to present the
Company's consolidated financial position, result of operations, and cash flow
in accordance with accounting principles generally accepted in Germany ("German
GAAP").
Presented in Note 10 is a reconciliation of the Company's net income and
shareholder's equity from that reported under German GAAP to that which would be
reported under accounting principles generally accepted in the United States of
America ("U.S. GAAP").
F-7
Consolidation
The consolidated financial statements include the following entities:
2003
Percentage Equity Net income
----------------------------------------------------
Direct ownership:
Domus Homecare AG, Munich, Germany 98.2 93,223 18,360
Shares and Partnership interests held by Domus Homecare AG:
Alber AG, Spreitenbach, Switzerland 100 101 5
Aquatec GmbH & Co. KG, Isny, Germany 100(1) 17,770 17,602
Dolomite Holding AB, Anderstorp, Sweden 100 3,119 2,076
Dolomite Home Care Products Inc., Markham, Canada 100 811 8
Mobitec Mobilitatshilfen Ges.m.b.H., Mondsee, Austria 100 186 49
Mobitec S.a.r.l, Venissieux, France 100 371 87
Ulrich Alber GmbH & Co. KG, Albstadt, Germany 100(1) 12,564 12,206
WP Gesundheits Verwaltungs GmbH, Munich, Germany 100 25 0
Dolomite AB, Anderstorp, Sweden 100(2) 73 12
(1) Shares held by WP Gesundheits Verwaltungs GmbH and Domus Homecare AG
(2) Shares held by Dolomite Holding AB
The German GAAP consolidation was performed in accordance with Section 301 (1)
of HGB whereby the capital consolidation took place for the first time at the
time of the initial inclusion in the consolidated financial statements. The
differences from capital consolidation are shown under the caption "Goodwill" in
the accompanying consolidated balance sheet.
All significant intercompany balances and transactions have been eliminated
during consolidation.
Revenue Recognition
The Company recognizes revenue when the product is shipped and provides an
appropriate allowance for estimated returns and adjustments.
F-8
Estimates
The preparation of consolidated financial statements in conformity with German
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates include the allowance for
uncollectible accounts receivable, the allowance for excess and obsolete
inventory, warranty accruals, other provisions, valuation allowances related to
deferred tax assets and the recoverability of long-lived assets. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand and in the Company's bank
accounts.
Accounts Receivable
Accounts receivable are valued at the lower of their nominal value or market
value at balance sheet date. A specific allowance is established for receivables
with recognizable collection risks. Uncollectible receivables are written off as
identified. A lump-sum allowance was established as of December 31, 2003 to take
into account general default risks and discounts.
The due date for receivables and other assets is less than one year.
Financial assets are recorded at acquisition costs or at lower value as of
balance sheet date.
Prepaid Expenses
Prepaid expenses include deferred taxes of EUR 146.
Inventories
Inventories are capitalized based on acquisition cost or manufacturing cost in
accordance with the rules of commercial law and tax law, considering the lower
of cost or market principle. Costs included in inventories represent material
unit costs, material overheads, manufacturing unit cost and manufacturing
overhead expenses. For slow moving inventories, appropriate valuation
adjustments are recorded. Obsolescence was taken into account on an individual
basis by write-downs.
Borrowing Costs
Borrowing costs are expensed as incurred.
F-9
Tangible Assets
Tangible assets are capitalized at the acquisition cost or at manufacturing cost
less regular depreciation. Depreciation is carried out using a linear method
according to the expected useful life of the assets. Low value items as defined
by German law are written off completely in the year of acquisition.
Intangible Assets
Intangible assets with determinable useful lives are amortized using the
straight-line method over their estimated period of benefit.
Goodwill arising from the first time consolidation is amortized over a period of
fifteen years or valued at a lower value as appropriate at the balance sheet
date.
Accruals
Other reserves and accrued liabilities are recorded in an amount which covers
all potential losses and uncertain liabilities based upon customary business
judgment.
Liabilities
Liabilities are recorded at their respective repayment amount.
Lease Agreements
All lease agreements are accounted for as operating in nature.
Foreign Currencies
Assets and liabilities of foreign operations are translated at the exchange
rates prevailing on the balance sheet date.
Realized gains and losses on transactions in foreign currencies are credited or
charged to operations as realized. Unrealized losses on transactions in foreign
currencies are also charged to operations, although unrealized gains are
deferred until realized.
F-10
3. Fixed Assets
The development of fixed assets is shown as follows:
At Cost
-------------------------------------------------------------------------
Net Book
Difference Value
January 1, currency December 31, Accumulated Depreciation December
2003 translation Additions Disposals Transfers 2003 Depreciation 2003 31, 2003
EUR EUR EUR EUR EUR EUR EUR EUR EUR
------------------------------------------------------------------------- -----------------------------------
I. Intangible assets
1. Franchises, industrial
and similar rights and
assets and licenses
in such
rights and assets 2,644 0 165 65 0 2,744 2,171 408 573
2. Goodwill 382,019 0 0 3,420 0 378,599 205,464 13,445 173,135
------------------------------------------------------------------------- -----------------------------------
384,663 0 165 3,485 0 381,343 207,635 13,853 173,708
------------------------------------------------------------------------- -----------------------------------
II. Property, plant &
equipment
1. Land, land rights
and buildings including
buildings on
third-party land 7,028 22 83 10 0 7,123 3,293 195 3,830
2. Technical equipment and
machines 3,761 27 582 49 0 4,321 3,866 425 455
3. Other
equipment,
furniture and
fixtures 12,779 3 1,919 2,366 751 13,086 9,234 2,167 3,852
4. Payments on
account and
assets under
construction 479 0 466 14 -751 180 1 1 179
-------------------------------------------------------------------------------------------------------------
24,047 52 3,050 2,439 0 24,710 16,394 2,788 8,316
------------------------------------------------------------------------- -----------------------------------
III. Financial Assets
1. Investments 1 0 0 0 0 1 0 0 1
2. Long-term
investments 5 0 1 0 0 6 1 0 5
------------------------------------------------------------------------- -----------------------------------
------------------------------------------------------------------------- -----------------------------------
6 0 1 0 0 7 1 0 6
------------------------------------------------------------------------- -----------------------------------
------------------------------------------------------------------------- -----------------------------------
408,716 52 3,216 5,924 0 406,060 224,030 16,641 182,030
========================================================================= ===================================
F-11
4. Goodwill
In 2002, Goodwill was written down to EUR 190,000 from EUR 382,019 in order to
state it at a lower value as was considered appropriate at the balance sheet
date.
5. Subscribed Capital
The Company's subscribed capital has been fully paid in or has been contributed
in kind. The shareholder as of December 31, 2003 was:
EUR %
------------------------- --------------------
WP Domus LLC, U.S. 100,000 100
========================= ====================
Subsequent to December 31, 2003, the shareholder entered into an agreement to
sell its interest in the Company to Invacare Corporation, USA. This sale was
finalized on September 9, 2004.
6. Other Provisions and Accrued Liabilities
Other accruals comprise mainly accruals for management bonus as well as stock
options programs (EUR 3,830), warranties (EUR 1,949), for customer bonuses (EUR
1,309) and for vacation not yet taken (EUR 628).
7. Liabilities
The residual terms of the liabilities appear as follows:
residual term residual term residual term
less than from one to more than
total one year five years five years
-------------------------------------------------------------------------------------
EUR EUR EUR EUR
Liabilities to banks 64,741 4,678 60,063 0
Trade payables 2,831 2,831 0 0
Liabilities to shareholders 77,302 0 0 77,302
Other liabilities 3,454 3,454 0 0
-------------------------------------------------------------------------------------
148,328 10,963 60,063 77,302
=====================================================================================
F-12
Bank loans in the amount of EUR 64,741 are secured. Bank liabilities are
guaranteed by the pledge of all fixed assets and part of the current assets.
Moreover, the shares or investment in the following fully consolidated companies
are pledged: Domus Homecare AG, Munich, WP Gesundheits Verwaltungs GmbH, Munich,
Aquatec GmbH & Co. KG, Isny, Ulrich Alber GmbH & Co. KG, Albstadt, Dolomite
Holding AB, Anderstorp/Sweden and Dolomite AB, Anderstorp/Sweden.
8. Consolidated Income Statement Data
External Sales - Geographical Markets EUR
------------------
Germany 57,321
Asia 9,344
Sweden 6,676
Canada 5,382
USA 4,902
France 3,848
United Kingdom 3,406
Other 12,066
------------------
102,945
==================
External Sales - Product Lines EUR
------------------
Bath-lifts 30,679
Power kits for wheelchair drivers 18,500
Auxiliary power kits for care giver 16,822
Walkers 12,882
Shower and toilet aids 6,804
Other 17,258
------------------
102,945
==================
Personnel Expenses
Personnel expenses included costs resulting from the stock option plans
established by Domus Homecare AG, Munich (EUR 3,104).
F-13
Income Taxes
Income taxes include income tax refunds of the German subgroup related to the
years 1999 through 2002 amounting to EUR 5,577.
Due to the trustee structure which exists between general partner and limited
partner of Aquatec GmbH & Co. KG as well as Ulrich Alber GmbH & Co. KG, the
partnerships were not subject to trade tax on income. A similar structure has
been reinforced with the legal restructuring of the German subgroup beginning in
2003.
9. Other Disclosures
Litigation
The Company is a defendant in some legal matters arising in the normal course of
business. In the opinion of management, after consultation with legal counsel,
the ultimate resolution of these matters is not expected to have a material
effect on the accompanying consolidated financial statements.
Other Financial Commitments
Other financial commitments amount to EUR 10,844. They include rental expenses
of EUR 9,600 and leasing liabilities of EUR 1,244.
Employees
The average number of employees was: production (206), distribution (113),
administration (63) and technical (36). The total average number of employees
was 418.
Management
The Company's management at December 31, 2003 was Timothy Curt. On September 9,
2004, James Lawson and Franz Krammer replaced Timothy Curt and were granted sole
power of attorney.
Munich, November 22, 2004
General Manager
F-14
10. Reconciliation to U.S. GAAP
The consolidated financial statements of the Company have been prepared in
accordance with German GAAP, which differ in certain aspects from U.S. GAAP. The
application of U.S. GAAP would have affected the consolidated result of
operations for the year ended December 31, 2003 and the consolidated balance
sheet as of December 31, 2003 to the extent described below.
A reconciliation of net income from German GAAP to U.S. GAAP is as follows (in
thousands of EUR):
December 31,
2003
------------------------
Net income as reported in the consolidated financial statements under German 2,162
GAAP
U.S. GAAP reconciling adjustments:
Goodwill (a) 13,445
Intangible assets (a) (2,394)
Deferred financing costs (b) (758)
Employee stock compensation (c) 1,149
Inventoried costs (d) (154)
Allowance for doubtful accounts receivable (e) (9)
Reserve for excess and obsolete inventories (f) 48
Call option - financing arrangement / minority interest (g) 683
Accrued expenses (h) (734)
Warranty expense (h) 163
Building lease (i) (133)
Property and equipment (fixed assets) (j) 11
Derivative instruments (k) 62
Deferred income taxes (l) (4,815)
------------------------
Subtotal of reconciling adjustments 6,564
------------------------
Net income in accordance with U.S. GAAP 8,726
========================
F-15
A reconciliation of shareholder's equity from German GAAP to U.S. GAAP is as
follows (in thousands of EUR):
December 31,
2003
--------------------------
Shareholder's equity as reported in the consolidated financial 45,218
statements under German GAAP
U.S. GAAP reconciling adjustments
Goodwill (a) (111,023)
Intangible assets (a) 24,571
Deferred financing costs (b) 3,238
Employee stock compensation (c) 1,149
Inventoried costs (d) 145
Allowance for doubtful accounts receivable (e) 108
Reserve for excess and obsolete inventories (f) 456
Call option - financing arrangement / minority interest (g) 262
Accrued expenses (h) 100
Warranty expense (h) 163
Building lease (i) (133)
Property and equipment (fixed assets) (j) 1,417
Derivative instruments (k) 62
Deferred income taxes (l) (4,181)
--------------------------
Subtotal of reconciling adjustments (83,666)
--------------------------
Shareholder's equity in accordance with U.S. GAAP (38,448)
==========================
Changes in shareholder's equity in accordance with U.S. GAAP (in thousands of
EUR):
2003
---------------------
Shareholder's equity in accordance with U.S. GAAP, on
January 1 (47,092)
Net income in accordance with U.S. GAAP 8,726
Other comprehensive income:
Foreign currency translation adjustment (82)
---------------------
Shareholder's equity in accordance with U.S. GAAP, on (38,448)
December 31
=====================
F-16
A description of the reconciling adjustments is as follows:
(a) Goodwill and Intangible Assets
In December 1997, 100% of the Company was acquired by certain Warburg,
Pincus Ventures entities. The acquisition was financed through a
combination of debt and equity. Under German GAAP, no amounts were
allocated to intangible assets and the resulting goodwill was amortized
over a fifteen year period. The reconciling adjustment in net income under
goodwill of EUR 13,445 represents the amortization expense and was reversed
for U.S. GAAP purposes.
Under U.S. GAAP, the business combination would have been accounted for
under the purchase method of accounting as defined in Accounting Principles
Board Opinion ("APB") No. 16, Accounting for Business Combinations, the
then authoritative literature for business combinations. The cost of
acquired entities at the date of acquisition would have been allocated to
identifiable tangible and intangible net assets and the excess of the total
purchase price over the amounts assigned to identifiable net assets was
recorded as goodwill. In 2001, the Company would have changed its
accounting with respect to the resulting goodwill and intangible assets
pursuant to the guidance of Statement of Financial Accounting Standards
("SFAS") No. 142, Accounting for Goodwill and Other Intangible Assets.
Intangible assets for U.S. GAAP purposes consist primarily of business and
product trademarks, trade names, developed technology and customer
relationships. Intangible assets are amortized on a straight-line basis
over their estimated useful lives which are summarized as follows (in
thousands of EUR and years):
Estimated Useful December 31,
Life 2003
-----------------------------------
Business trademark and trade names Indefinite 7,429
Product trademark and trade names Indefinite 1,857
Developed technology 10 - 20 2,026
Customer relationships 10 - 15 13,259
Goodwill Indefinite 65,532
Goodwill represents the excess of consideration paid over the fair value of
net assets acquired in purchase business combinations and, subsequent to
the adoption of SFAS No. 142 in 2001, would not be amortized under U.S.
GAAP. The reconciling adjustment of EUR (2,394) in net income represents
the amortization of the intangibles with finite lives under U.S. GAAP.
In accordance with SFAS No. 142, the Company evaluates the amortization
period for intangible assets with finite lives to determine whether events
or circumstances warranted revised amortization periods. Additionally,
goodwill and indefinite-lived intangible assets are tested for impairment.
Management has concluded that there is no need for changes in the finite
lives assigned to the intangibles nor impairment in goodwill or the
intangibles assets.
F-17
(b) Deferred Financing Costs
According to APB No. 21, Interest on Receivables and Payables, the direct
costs incurred to secure a credit facility should be reported as deferred
financing costs. Under U.S. GAAP, the Company capitalized the direct costs
relating to the issuance of their senior credit facility and began
amortizing these costs at the end of 2002 over the life of the debt
instrument which is six years. Under German GAAP, the costs were expensed
as incurred in 2002.
(c) Employee Stock Compensation
Under U.S. GAAP, the Company accounts for options under its stock-based
compensation plans using the intrinsic value method provided by APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations. The
Company has two stock based compensation plans. For one of those plans, the
grants made in 2003 were less than the estimated fair value at the date of
the grant and accordingly compensation cost was recognized for the
differences between the fair market value less the exercise price of the
underlying shares that vested in 2003. The other stock based compensation
plan is a variable plan and during 2003 the performance criterion under
this plan was met for the first time. Compensation expense was recognized
accordingly.
Under German GAAP, the compensation expense recorded was based on a
conservative calculation. The excess expense is reversed for U.S. GAAP
purposes to reflect the appropriate compensation expense under APB No. 25.
In connection with the purchase of the Company by the Invacare Corporation
in September of 2004, the stock based compensation plans were terminated
and vested options were repurchased from the respective employees.
(d) Inventoried Costs
Accounting Research Bulletin ("ARB") No. 43, Restatement and Revision of
Accounting Research Bulletins provides that general and administrative
costs should be included in inventories if they are clearly related to
production. Under German GAAP, such expenses were not fully capitalized.
F-18
(e) Allowance for Doubtful Accounts Receivable
Under German GAAP, general reserves for accounts receivable are calculated
as a percent of accounts receivable and specific reserves for known
collection issues related to specific transactions or customer balances are
also recorded. While the specific reserves recorded in the German GAAP
financial statements do not reflect a difference in accounting between
German GAAP and U.S. GAAP, the general reserves recorded by the Company
were not supportable by historical bad debt write-offs, and thus do not
meet the criteria for measurement and recording under U.S. GAAP.
(f) Reserve for Excess and Obsolete Inventories
Under German GAAP, obsolete and excess inventory reserves are recorded on a
conservative basis. The reserves have been adjusted for U.S. GAAP reporting
based on historical experience which resulted in a reduction of the reserve
amounts recorded.
(g) Call Option - Financing Arrangement / Minority Interest
During 1999, the Company entered into a financing arrangement with Deutsche
Bank Luxembourg S.A., Luxembourg ("Deutsche Bank"). In connection with that
financing arrangement, a call option was provided to Deutsche Bank. The
option provided Deutsche Bank the right to purchase 1.8% of the stated
share capital of Domus Homecare (a Company subsidiary), upon certain
events, one of which being the repayment of financing obligations. This
option was exercised in 2003 and the Company thus sold 140,400 shares of
Domus Homecare to Deutsche Bank at EUR 1 per share.
Under U.S. GAAP, this derivative instrument would be considered an
extension of the initial financing arrangement and the difference between
the exercise price of the option and the estimated fair market value of the
Domus Homecare per share value was recorded as a liability over the vesting
period (the term of the borrowing). Because this cost was expensed entirely
in the 2003 German GAAP financial statements, costs related primarily to
years prior to 2003 have been reflected as a U.S. GAAP reconciling
adjustment. When legal share transfer occurred in 2003, the aggregate
amount paid by Deutsche Bank of EUR 140 plus the previously accrued amount
of EUR 421 were reclassified to minority interest reflecting the amount
paid for the minority ownership interest.
The primary component of the reconciliation adjustment related to minority
interest as of December 31, 2003 is due to the fact that German GAAP
recognizes minority interest as a proportion of the net fair value of
acquired assets and liabilities, while U.S. GAAP values minority interest
at its historical book value (cost plus historical proportions of
earnings).
F-19
(h) Accrued Expenses (including Warranty Expense)
Under German GAAP, accruals are normally recorded at the high-end of the
possible loss range when no estimate within the range is more identifiable
than any other amount. Under U.S. GAAP, the minimum amount within a range
should be accrued when the liability is probable in nature, can be
reasonably estimated and no specific amount within the range is more
accurate than another.
(i) Building Lease
The Company entered into a lease agreement for building and land in
February 2003, which was accounted for as an operating lease under German
GAAP. This lease met the criteria of a capital lease in accordance with
SFAS No. 13, Accounting for Leases, and therefore, the building and land
were recorded as assets under U.S. GAAP. Since the land component at the
inception date represented less than 25% of the total fair value of the
real property subject to the lease, the lease was treated as a single unit
with the estimated economic life being the life of the building (lease term
15 years). Interest expense has been calculated using an effective annual
interest rate of 6% per annum.
(j) Property and Equipment (Fixed Assets)
Differences between German GAAP and U.S. GAAP relate to both the method of
depreciating assets and also the related useful lives. Under German GAAP,
the Company depreciated certain buildings under an accelerated method (in
prior periods) over a useful life of 25 years. Under U.S. GAAP, the
straight line method of depreciation would have been used and a useful life
of 40 years applied. Other than buildings, the straight line method of
depreciation was applied to all of the remaining property and equipment
under German GAAP and U.S. GAAP. German GAAP useful lives approximate U.S.
GAAP useful lives, except for buildings as mentioned above and also land
improvements (German GAAP 20 years vs. U.S. GAAP 10 years).
F-20
(k) Derivative Instruments
Derivative financial instruments are utilized by the Company to manage its
exposure to fluctuations in interest rates. Derivative instruments used by
the Company are straightforward, non leveraged instruments. Such financial
instruments are not bought and sold for trading purposes. The risk of
credit loss is deemed to be remote, because the counterparties to these
instruments are major international financial institutions with strong
credit ratings and because of the limited positions entered into by the
Company with any one institution. All derivatives, whether designated as
qualifying for hedge accounting treatment or not, are recorded on the
balance sheet at fair value.
The Company entered into various interest rate derivatives with Deutsche
Bank on September 2001 which expired on December 31, 2003 and an interest
rate cap agreement with the Bank of Nova Scotia on June 27, 2003 which
expires on December 31, 2005. The Deutsche Bank derivatives related to the
previous borrowing that was replaced with a senior credit facility entered
into in December 2002. The interest rate cap with the Bank of Nova Scotia
covers a portion of the interest paid on the new credit facility.
The primary reason for the reconciling adjustment for derivative
instruments is because German GAAP does not require balance sheet fair
value presentation for gain positions.
(l) Deferred Income Taxes
Under U.S. GAAP, the Company computes and records income tax in accordance
with SFAS No. 109, Accounting for Income Taxes. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
The reconciling adjustments related to deferred taxes are primarily due to
the fact that deferred tax assets on loss carryforwards and deferred tax
liabilities on goodwill and intangibles were not recorded or necessary
according to German GAAP.
F-21
WP Domus GmbH, Munich
Consolidated Balance Sheets as of June 30, 2004 and 2003
Unaudited
------------------------------------------------------------------------------------------------------------------------------------
A S S E T S 2004 2003
EUR EUR
-----------------------------------------------
A. FIXED ASSETS
I. Intangible assets
1. Franchises, industrial rights and similar rights
and assets and licenses in such rights and assets 397,754 710,248
2. Goodwill 166,476,190 183,214,286
-----------------------------------------------
166,873,944 183,924,534
II. Property, plant and equipment
1. Land, land rights and buildings including
buildings on third-party land 3,725,261 3,651,867
2. Technical equipment and machines 319,976 456,583
3. Other equipment, furniture and fixtures 3,450,381 3,964,512
4. Payments on account and assets under construction 150,131 333,432
-----------------------------------------------
7,645,749 8,406,394
III.Financial assets
1. Investments 1,859 545
2. Long-term investments 4,975 4,022
-----------------------------------------------
6,834 4,567
-----------------------------------------------
174,526,527 192,335,495
B. CURRENT ASSETS
I. Inventories
1. Raw materials, consumables and supplies 2,482,341 3,244,974
2. Unfinished goods, work in process 401,076 408,177
3. Finished goods and merchandise 2,613,548 2,332,152
-----------------------------------------------
5,496,965 5,985,303
-----------------------------------------------
II. Receivables and other assets
1. Trade receivables 9,526,784 8,803,570
2. Other assets 872,107 1,131,250
-----------------------------------------------
10,398,891 9,934,820
III.Cash on hand,
bank balances and checks 2,150,195 2,439,488
-----------------------------------------------
18,046,051 18,359,611
C. PREPAID EXPENSES 393,972 378,416
192,966,550 211,073,522
===============================================
F-22
WP Domus GmbH, Munich
Consolidated Balance Sheets as of June 30, 2004 and 2003
Unaudited
------------------------------------------------------------------------------------------------------------------------------------
2004 2003
EUR EUR
------------------------ ----------------------
E Q U I T Y A N D L I A B I L I T I E S
A. EQUITY
I. Subscribed capital 100,000 100,000
II. Capital reserve 231,481,000 231,481,000
III. Currency translation adjustment -292,990 -227,244
IV. Retained earnings -183,486,359 -187,542,820
V. Minority interest -2,409,658 0
------------------------ ----------------------
45,391,993 43,810,936
B. ACCRUALS
1. Tax accruals 821,366 155,938
2. Other accruals 10,112,739 6,223,218
------------------------ ----------------------
10,934,105 6,379,156
C. LIABILITIES
1. Liabilities to banks 52,175,119 79,485,698
2. Trade payables 4,147,509 3,444,946
3. Liabilities to shareholders 77,301,772 73,576,940
4. Other liabilities 3,016,052 4,375,846
thereof for taxes: EUR 869,095
(prior year: EUR 1,003,893)
thereof for social security: EUR 670,656
(prior year: EUR 671,789)
------------------------ ----------------------
136,640,452 160,883,430
------------------------ ----------------------
192,966,550 211,073,522
======================== ======================
F-23
WP Domus GmbH, Munich
Consolidated Income Statements for Six-Months ended June 30, 2004 and 2003
Unaudited
------------------------------------------------------------------------------------------------------------------------------------
2004 2003
EUR EUR
-------------------- ---------------------
1. Sales 45,828,049 50,431,615
2. Increase in finished goods and work in process 750,139 586,523
3. Other operating income 385,672 812,083
-------------------- ---------------------
46,963,860 51,830,221
4. Cost of materials
a) Cost of raw materials, consumables and supplies
and of purchased merchandise -18,669,295 -19,956,052
b) Cost of purchased services -241,049 -312,889
5. Personnel expenses
a) Wages and salaries -9,391,229 -8,721,799
b) Social security and other
pension costs -1,822,239 -1,764,324
6. Amortization and depreciation
on intangible assets and property, plant and equipment -8,075,706 -8,451,959
7. Other operating expenses -6,557,623 -7,556,022
-------------------- ---------------------
-44,757,141 -46,763,045
8. Other interest and similar income 19,431 33,408
9. Interest and similar expenses -1,355,456 -6,086,626
thereof to affiliated companies: EUR 0
(prior year: EUR -4,175,265)
-------------------- ---------------------
-1,336,025 -6,053,218
-------------------- ---------------------
10. Result from ordinary activities 870,694 -986,042
-------------------- ---------------------
11. Income taxes -711,981 -940,665
12. Other taxes -26,057 -22,007
-------------------- ---------------------
-738,038 -962,672
13. Consolidated net profit/loss for the period 132,656 -1,948,714
-------------------- ---------------------
14. Accumulated losses brought forward -183,560,009 -185,594,106
15. Minority interest share on net profit -59,006 0
-------------------- ---------------------
16. Consolidated accumulated losses -183,486,359 -187,542,820
==================== =====================
F-24
WP Domus GmbH, Munich
Consolidated Statements of Shareholder's Equity for Six-Months ended June 30, 2004 and 2003
Unaudited
------------------------------------------------------------------------------------------------------------------------------------
Currency
Subscribed Capital Translation Accumulated Minority
Capital Reserve Adjustment Deficit Interest Total
------------------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR EUR EUR
December 31, 2003 100,000 231,481,000 -334,456 -183,560,009 -2,468,664 45,217,871
Net income 73,650 59,006 132,656
Currency translation
adjustments 41,466 41,466
-----------------------------------------------------------------------------------------------------
June 30, 2004 100,000 231,481,000 -292,990 -183,486,359 -2,409,658 45,391,993
=====================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
Currency
Subscribed Capital Translation Accumulated Minority
Capital Reserve Adjustment Deficit Interest Total
------------------------------------------------------------------------------------------------------------------------------------
EUR EUR EUR EUR EUR EUR
December 31, 2002 100,000 231,481,000 -252,350 -185,594,106 0 45,734,544
Net income -1,948,714 -1,948,714
Currency translation
adjustments 25,106 25,106
-----------------------------------------------------------------------------------------------------
June 30, 2003 100,000 231,481,000 -227,244 -187,542,820 0 43,810,936
=====================================================================================================
F-25
WP Domus GmbH, Munich
Consolidated Cash Flow Statements for Six-Months ended June 30, 2004 and 2003
Unaudited
------------------------------------------------------------------------------------------------------------------------------------
2004 2003
EUR EUR
------------------ ------------------
Cash flow from operating activities
Net income for the year including minorities 132,656 -1,948,714
Armotization and depreciation of fixed assets 8,075,706 8,451,959
Change in provisions 1,858,354 -7,079,833
Accrued interest expenses 0 4,175,265
Gain / loss from the disposal of fixed assets -4,712 51,842
Changes in inventories, trade receivables and other
assets that cannot be allocated to investing or
financing activities -3,369,192 -2,836,030
Changes in trade payables and other liabilities that
cannot be allocated to investing or financing
activities 886,091 -93,701
------------------ --------------------
Cash provided by operating activities 7,578,903 720,788
Cash flow from investing activities
Cash received from disposals of property, plant and
equipment/intangible assets 58,086 84,275
Cash paid for investments in property, plant and
equipment/intangible assets -640,684 -1,885,656
Cash paid for investments in financial assets -1,308 0
Cash received from the sale of shares in subsidiaries 40,000 0
------------------ --------------------
Cash used in investing activities -543,906 -1,801,381
Cash flow from financing activities
Cash paid for the redemption of loans -12,500,430 -4,016,469
------------------ --------------------
Cash used in financing activities -12,500,430 -4,016,469
Changes in cash and cash equivalents -5,465,433 -5,097,062
Foreign currency exchange effect on cash and cash
equivalents -2,224 499
Cash and cash equivalents at the beginning of the period 7,617,852 7,536,051
------------------ --------------------
Cash and cash equivalents at the end of the period 2,150,195 2,439,488
================== ====================
F-26
WP Domus GmbH, Munich
Note to the Consolidated Financial Statements
Unaudited
1. Reconciliation to U.S. GAAP
The consolidated financial statements of WP Domus GmbH ("Domus" or the
"Company") have been prepared in accordance with accounting principles generally
accepted in Germany ("German GAAP"), which differ in certain aspects from
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). The application of U.S. GAAP would have affected the consolidated
results of operations for the six months ended June 30, 2004 and 2003 and the
consolidated balance sheet as of June 30, 2004 and 2003 to the extent described
below.
A reconciliation of net income from German GAAP to U.S. GAAP is as follows (in
thousands of EUR):
June 30, June 30,
2004 2003
----------------------------------
Net income / (net loss) as reported in the consolidated financial statements 133 (1,949)
under German GAAP
U.S. GAAP reconciling adjustments:
Goodwill (a) 6,659 6,786
Intangible assets (a) (1,197) (1,197)
Deferred financing costs (b) (379) (379)
Employee stock compensation (c) (1,149) 0
Inventoried costs (d) 93 174
Allowance for doubtful accounts receivable (e) (14) 27
Reserve for excess and obsolete inventories (f) 366 43
Call option - financing arrangement / minority interest (g) 19 0
Accrued expenses (h) (100) (532)
Warranty expense (h) (3) 222
Building lease (i) (74) (55)
Property and equipment (fixed assets) (j) (10) 2
Derivative instruments (k) (47) 56
Deferred income taxes (l) (1,661) (2,431)
----------------------------------
Subtotal of reconciling adjustments 2,503 2,716
----------------------------------
Net income in accordance with U.S. GAAP 2,636 767
==================================
F-27
A reconciliation of shareholder's equity from German GAAP to U.S. GAAP is as
follows (in thousands of EUR):
June 30, June 30,
2004 2003
---------------------------------
Shareholder's equity as reported in the consolidated financial 45,392 43,811
statements under German GAAP
U.S. GAAP reconciling adjustments
Goodwill (a) (104,364) (117,682)
Intangible assets (a) 23,374 25,768
Deferred financing costs (b) 2,859 3,617
Employee stock compensation (c) 0 0
Inventoried costs (d) 238 473
Allowance for doubtful accounts receivable (e) 95 144
Reserve for excess and obsolete inventories (f) 823 451
Call option - financing arrangement / minority interest (g) 262 (421)
Accrued expenses (h) 0 302
Warranty expense (h) 160 222
Building lease (i) (208) (55)
Property and equipment (fixed assets) (j) 1,407 1,408
Derivative instruments (k) 15 56
Deferred income taxes (l) (5,842) (1,797)
---------------------------------
(81,181) (87,514)
---------------------------------
Shareholder's equity in accordance with U.S. GAAP (35,789) (43,703)
=================================
F-28
A description of the reconciling adjustments is as follows:
(a) Goodwill and Intangible Assets
In December 1997, 100% of the Company was acquired by certain Warburg, Pincus
Ventures entities. The acquisition was financed through a combination of debt
and equity. Under German GAAP, no amounts were allocated to intangible assets
and the resulting goodwill was amortized over a fifteen year period. The
reconciling adjustments in net income under goodwill of EUR 6,659 for the
six-month period ended June 30, 2004 and EUR 6,786 for the six-month period
ended June 30, 2003 represent the amortization expense and were reversed for
U.S. GAAP purposes.
Under U.S. GAAP, the business combination would have been accounted for under
the purchase method of accounting as defined in Accounting Principles Board
Opinion ("APB") No. 16, Accounting for Business Combinations, the then
authoritative literature for business combinations. The cost of acquired
entities at the date of acquisition would have been allocated to identifiable
tangible and intangible net assets and the excess of the total purchase price
over the amounts assigned to identifiable net assets would have been recorded as
goodwill. In 2001, the Company would have changed its accounting with respect to
the resulting goodwill and intangible assets pursuant to the guidance of
Statement of Financial Accounting Standards ("SFAS") No. 142, Accounting for
Goodwill and Other Intangible Assets.
Intangible assets for U.S. GAAP purposes consist primarily of business and
product trademarks, trade names, developed technology and customer
relationships.
Goodwill represents the excess of consideration paid over the fair value of net
assets acquired in purchase business combinations and, subsequent to the
adoption of SFAS No. 142 in 2001, would not be amortized under U.S. GAAP. The
reconciling adjustments in net income of EUR (1,197) for the six-month period
ended June 30, 2004 and EUR (1,197) for the six-month period ended June 30, 2003
represent the amortization of the intangibles with finite lives under U.S. GAAP.
(b) Deferred Financing Costs
According to APB No. 21, Interest on Receivables and Payables, the direct costs
incurred to secure a credit facility should be reported as deferred financing
costs. Under U.S. GAAP, the Company capitalized the direct costs relating to the
issuance of its senior credit facility and began amortizing these costs at the
end of 2002 over the life of the debt instrument, which is six years. Under
German GAAP, the costs were expensed as incurred in 2002.
F-29
(c) Employee Stock Compensation
Under German GAAP, stock-based compensation costs are recorded on a conservative
basis once the plans are in-the-money.
Under U.S. GAAP, the Company accounts for options under its stock-based
compensation plans using the intrinsic value method provided by APB No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
In connection with the purchase of the Company by the Invacare Corporation in
September of 2004, the stock based compensation plans were terminated and vested
options were repurchased from the respective employees.
(d) Inventoried Costs
Accounting Research Bulletin ("ARB") No. 43, Restatement and Revision of
Accounting Research Bulletins provides that, under U.S. GAAP, general and
administrative costs should be included in inventories if they are clearly
related to production. Under German GAAP, such expenses were not fully
capitalized.
(e) Allowance for Doubtful Accounts Receivable
Under German GAAP, general reserves for accounts receivable are calculated as a
percent of accounts receivable and specific reserves for known collection issues
related to specific transactions or customer balances are also recorded. While
the specific reserves recorded in the German GAAP financial statements do not
reflect a difference in accounting between German GAAP and U.S. GAAP, the
general reserves recorded by the Company were not supportable by historical bad
debt write-offs, and thus do not meet the criteria for measurement and recording
under U.S. GAAP.
(f) Reserve for Excess and Obsolete Inventories
Under German GAAP, obsolete and excess inventory reserves are recorded on a
conservative basis. The reserves have been adjusted for U.S. GAAP reporting
based on historical experience which resulted in a reduction of the reserve
amounts recorded.
F-30
(g) Call Option - Financing Arrangement / Minority Interest
During 1999, the Company entered into a financing arrangement with Deutsche Bank
Luxembourg S.A., Luxembourg ("Deutsche Bank"). In connection with that financing
arrangement, a call option was provided to Deutsche Bank. The option provided
Deutsche Bank the right to purchase 1.8% of the stated share capital of Domus
Homecare (a Company subsidiary), upon certain events, one of which being the
repayment of financing obligations. This option was exercised in 2003 and the
Company thus sold 140,400 shares of Domus Homecare to Deutsche Bank at EUR 1 per
share.
Under U.S. GAAP, this derivative instrument would be considered an extension of
the initial financing arrangement and the difference between the exercise price
of the option and the estimated fair market value of the Domus Homecare per
share value would have been recorded as a liability over the vesting period (the
term of the borrowing). Because this cost was expensed entirely in the 2003
German GAAP financial statements, costs related primarily to years prior to 2003
have been reflected as a U.S. GAAP reconciling adjustment. When legal share
transfer occurred in 2003, the aggregate amount paid by Deutsche Bank of EUR 140
plus the previously accrued amount of EUR 421 were reclassified to minority
interest reflecting the amount paid for the minority ownership interest.
The reconciliation adjustments related to minority interest as of June 30, 2004
and 2003 are primarily due to the fact that German GAAP recognizes minority
interest as a proportion of the net fair value of acquired assets and
liabilities, while U.S. GAAP values minority interest at its historical book
value (cost plus historical proportions of earnings).
(h) Accrued Expenses (including Warranty Expense)
Under German GAAP, accruals are normally recorded at the high-end of the
possible loss range when no estimate within the range is more reasonably
identifiable than any other estimate. Under U.S. GAAP, the minimum amount within
a range should be accrued when the liability is probable in nature, can be
reasonably estimated and no specific amount within the range is more accurate
than another.
(i) Building Lease
The Company entered into a lease agreement for a building and land in February
2003, which was accounted for as an operating lease under German GAAP. This
lease met the criteria of a capital lease in accordance with SFAS No. 13,
Accounting for Leases, and therefore the building and land were recorded as
assets under U.S. GAAP. Since the land component, at the inception date,
represented less than 25% of the total fair value of the real property subject
to the lease, the lease was treated as a single unit with the estimated economic
life being the life of the building (lease term 15 years). Interest expense has
been calculated using an effective annual interest rate of 6% per annum.
F-31
(j) Property and Equipment (Fixed Assets)
German GAAP and U.S. GAAP differ in both the method of depreciating assets and
the related useful lives applied to such assets. Under German GAAP, the Company
depreciated certain buildings under an accelerated method in prior periods over
a useful life of 25 years. Under U.S. GAAP, the straight line method of
depreciation would have been used and a useful life of 40 years applied. The
straight line method of depreciation was applied to all of the remaining
property and equipment under German GAAP and U.S. GAAP. German GAAP useful lives
approximate U.S. GAAP useful lives, except as applied to buildings, as mentioned
above, and also land improvements (German GAAP 20 years vs. U.S. GAAP 10 years).
(k) Derivative Instruments
Derivative financial instruments are utilized by the Company to manage its
exposure to fluctuations in interest rates. Derivative instruments used by the
Company are straightforward, non leveraged instruments. Such financial
instruments are not bought and sold for trading purposes. The risk of credit
loss is deemed to be remote, because the counterparties to these instruments are
major international financial institutions with strong credit ratings and
because of the limited positions entered into by the Company with any one
institution. All derivatives, whether designated as qualifying for hedge
accounting treatment or not, are recorded on the balance sheet at fair value.
The Company entered into various interest rate derivatives with Deutsche Bank on
September 2001 which expired on December 31, 2003 and an interest rate cap
agreement with the Bank of Nova Scotia on June 27, 2003 which expires on
December 31, 2005. The Deutsche Bank derivatives related to the previous
borrowing that was replaced with a senior credit facility entered into in
December 2002. The interest rate cap with the Bank of Nova Scotia covers a
portion of the interest paid on the new credit facility.
The primary reason for the reconciling adjustment for derivative instruments is
because German GAAP does not require balance sheet fair value presentation for
gain positions.
(l) Deferred Income Taxes
Under U.S. GAAP, the Company computes and records income tax in accordance with
SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method
of SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
The reconciling adjustments related to deferred taxes are primarily due to the
fact that deferred tax assets on loss carryforwards and deferred tax liabilities
on goodwill and intangibles were not recorded or necessary under German GAAP.
F-32
INVACARE CORPORATION AND SUBSIDIARIES
Pro Forma Financial Information - (unaudited)
The unaudited pro forma financial information of Invacare Corporation (the
"Company") gives effect to the acquisition of WP Domus GmbH ("Domus"). The
unaudited pro forma condensed combined balance sheet at June 30, 2004 presents
adjustments for the Domus acquisition as if the transaction was completed on
June 30, 2004. The unaudited pro forma condensed combined statements of earnings
for the six-month period ended June 30, 2004 and the year ended December 31,
2003 present adjustments for the Domus acquisition as if the transaction had
been completed on January 1, 2004 and January 1, 2003, respectively. The Domus
historical amounts are presented according to accounting principles generally
accepted in Germany (German GAAP). Euro balances in the related statements of
earnings were translated to U.S. dollars at the average exchange rate for the
six-month period ended June 30, 2004 and the year ended December 31, 2003.
Balance sheet amounts were translated from Euros to U.S. dollars at the exchange
rate at June 30, 2004. Separate pro forma adjustments are reflected for
converting the Domus amounts from German GAAP to accounting principles generally
accepted in the United States (U.S. GAAP) and for recording certain pro forma
and purchase accounting adjustments.
The purchase method of accounting has been used in the preparation of the
unaudited pro forma financial information. Therefore, the estimated aggregate
purchase price is allocated to assets acquired and liabilities assumed based on
fair values. As the purchase price allocation is preliminary, the information
presented herein will differ based upon the final purchase price allocation.
Upon final determination of possible office closures, sales agency transfers and
other consolidation efforts, the purchase price will be allocated to the assets
and liabilities acquired based on fair values as of the date of the purchase.
The pro forma statements are based on available information and certain
assumptions that management believes are reasonable, but are subject to change.
We have made, in our opinion, all adjustments that are necessary to present
fairly the pro forma information. The unaudited pro forma financial statements
do not purport to represent what the actual results of operations or financial
position would have been if the acquisition of Domus as described above had
occurred on the dates indicated or to project our results of operations or
financial position for any future period.
The following unaudited pro forma financial information should be read in
conjunction with:
(a) Invacare Corporation's consolidated financial statements and notes thereto
and management's discussion and analysis for the year ended December 31,
2003 included in Invacare Corporation's Form 10-K for the fiscal year ended
December 31, 2003;
(b) Invacare Corporation's consolidated financial statements and notes thereto
and management's discussion and analysis for the six and nine months ended
June 30, 2004 and September 30, 2004 included in Invacare Corporation's
Form 10-Q for the fiscal quarters ended June 30, 2004 and September 30,
2004;
(c) WP Domus GmbH audited consolidated financial statements and notes thereto
as of and for the year ended December 31, 2003 and the unaudited
consolidated financial statements as of and for the six months ended June
30, 2004 and 2003 included under Item 9.01 of this Form 8-K/A.
F-33
INVACARE CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Combined Balance Sheet
at June 30, 2004
Unaudited (U.S. dollars in thousands)
(1) (2) (3) (4)
Pro Forma
and Purchase
German to Accounting
Invacare Domus U.S. GAAP Adjustments Pro Forma
Historical Historical Adjustments Combined
-------------- --------------- -------------- ---- -------------- --- ---------------
-------------- --------------- -------------- ---- -------------- --- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $6,078 $2,623 $ - $ - $8,701
Marketable securities 1,155 - 1,155
Trade receivables, net 262,559 11,617 115 A 274,291
Installment receivables, net 6,703 - 6,703
Inventories, net 143,644 6,702 1,294 B 900 K 152,540
Deferred income taxes 25,499 - 500 C 25,999
Other current assets 27,743 1,544 3,486 D (3,487) L 29,286
-------- -------- -------- -------- --------
TOTAL CURRENT ASSETS 473,381 22,486 5,395 (2,587) 498,675
OTHER ASSETS 56,634 - 12,035 C 68,669
OTHER INTANGIBLES 19,988 494 28,502 E 40,257 M 89,241
PROPERTY AND EQUIPMENT, NET 156,863 9,324 9,054 F G 175,241
GOODWILL 436,924 203,001 (123,091) H 79,917 N 596,751
-------- -------- -------- -------- --------
TOTAL ASSETS $1,143,790 $235,305 $(68,105) $117,587 $1,428,577
========= ======== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $123,171 $5,058 $ - $ - $128,229
Accrued expenses 85,890 16,010 (617) I 7,130 O P 108,413
Accrued income taxes 19,284 1,001 1,280 C (2,569) Q 18,996
Current maturities of long-term
obligations 1,863 - - - 1,863
-------- -------- -------- -------- -------
TOTAL CURRENT LIABILITIES 230,208 22,069 663 4,561 257,501
LONG-TERM DEBT 230,388 157,884 7,575 F 66,227 R 462,074
OTHER LONG-TERM OBLIGATIONS 39,113 - 18,008 C 7,800 Q 64,921
SHAREHOLDERS' EQUITY
Preferred shares - - - - -
Common shares 7,742 122 - (122) S 7,742
Class B common shares 278 - - - 278
Additional paid-in-capital 116,407 282,268 - (282,268) S 116,407
Retained earnings 508,559 (226,682) (94,351) J 321,033 S 508,559
Accumulated other comprehensive
earnings 44,214 (356) - 356 S 44,214
Unearned compensation on stock awards (1,982) - - - (1,982)
Treasury shares (31,137) - - - (31,137)
-------- -------- -------- -------- -------
TOTAL SHAREHOLDERS' EQUITY 644,081 55,352 (94,351) 38,999 644,081
-------- -------- -------- -------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$1,143,790 $235,305 $(68,105) $117,587 $1,428,577
========= ======== ======== ======== ==========
F-34
INVACARE CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Combined Statement of Earnings
Six Months Ended June 30, 2004
Unaudited
(U.S. dollars in thousands,except per share data)
(1) (2) (3) (4)
Pro Forma and
German to U.S. Purchase
Invacare Domus GAAP Accounting Pro Forma
Historical Historical Adjustments Adjustments Combined
---------------------------------------------------------------------------------------
Net sales $660,631 $ 56,277 $ - $ - $716,908
Cost of products sold 465,128 30,682 (655) T 900 V 496,055
------- ------- ------- ------- -------
Gross profit 195,503 25,595 655 (900) 220,853
Selling, general and administrative 144,984 22,989 (4,747) U 503 W 163,729
expense
Interest expense 5,054 1,664 289 F 3,350 P 10,357
Interest income (2,274) (23) - - (2,297)
------- ------- ------- ------- -------
Earnings before Income Taxes 47,739 965 5,113 (4,753) 49,064
Income taxes 15,515 874 2,040 C (1,349) Q 17,080
------- ------- ------- ------- -------
NET EARNINGS $ 32,224 $ 91 $ 3,073 $ (3,404) $ 31,984
======= ======= ======= ======= =======
Net Earnings per Share - Basic $ 1.04 $ 1.03
======= =======
Weighted Average Shares Outstanding - Basic 31,119 31,119
======= =======
Net Earnings per Share - Assuming Dilution $ 1.00 $ .99
======= =======
Weighted Average Shares Outstanding -
Assuming Dilution 32,259 32,259
======= =======
F-35
INVACARE CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Combined Statement of Earnings
Year Ended December 31, 2003
Unaudited
(U.S. dollars in thousands,except per share data)
(1) (2) (3) (4)
Pro Forma and
German to U.S. Purchase
Invacare Domus GAAP Accounting Pro Forma
Historical Historical Adjustments Adjustments Combined
-----------------------------------------------------------------------------------
Net sales $1,247,176 $ 116,587 $ - $ - $1,363,763
Cost of products sold 872,515 64,885 (243) T 668 V 937,825
------- ------- ------- ------- -------
Gross profit 374,661 51,702 243 (668) 425,938
Selling, general and administrative 262,015 41,470 (12,938) U 929 W 291,476
expense
Interest expense 11,710 13,281 367 F 6,178 P 31,536
Interest income (5,473) (412) (74) - (5,959)
------- ------- ------- ------- -------
Earnings before Income Taxes 106,409 (2,637) 12,888 (7,775) 108,885
Income taxes 35,000 (4,940) 5,453 C (2,487) Q 33,026
------- ------- ------- ------- -------
NET EARNINGS $ 71,409 $ 2,303 $ 7,435 $ (5,288) $ 75,859
======= ======= ======= ======= =======
Net Earnings per Share - Basic $ 2.31 $ 2.46
======= =======
Weighted Average Shares Outstanding - Basic 30,862 30,862
======= =======
Net Earnings per Share - Assuming Dilution $ 2.25 $ 2.39
======= =======
Weighted Average Shares Outstanding -
Assuming Dilution 31,729 31,729
======= =======
F-36
INVACARE CORPORATION AND SUBSIDIARIES
Notes to Pro Forma
Condensed Combined Financial Statements
Unaudited
(U.S. dollars in thousands,except per share data)
Note 1. Estimated Purchase Price
The estimated purchase price is summarized below:
Cash purchase price $230,000
Estimated transaction costs 3,780
--------
Aggregate purchase price $233,780
========
Note 2. Preliminary Allocation of Purchase Price
Cash $ 2,623
Trade receivables 11,732
Inventories 8,896
Deferred income taxes 500
Other current assets 1,543
Other assets 12,035
Other intangibles 69,253
Property and equipment 18,378
Accounts payable (5,058)
Accrued expenses (19,256)
Accrued income taxes (885)
Other long-term obligations (25,808)
------------
73,953
Goodwill 159,827
------------
Aggregate purchase price $ 233,780
=========
F-37
Note 3. Pro Forma Statements
The following are descriptions of the various columns of data, labeled, (1)
through (4), which have been reflected in the accompanying Unaudited Pro Forma
Condensed Combined Balance Sheet and Statements of Earnings:
(1) Represents Invacare historical financial statements as reported.
(2) Represents Domus' historical financial statements, reported in Euros as
included in pages F-2 to F-32 of this Form 8-K/A for the year ended
December 31, 2003 and the six months ended June 30, 2004 and converted to
U.S. dollars and Invacare format for purposes of the pro forma financial
statements.
(3) Represents adjustments from German GAAP to U.S. GAAP.
(4) Represents pro forma adjustments determined in accordance with Regulation
S-X and preliminary estimated purchase price allocations.
Note 4. Pro Forma Adjustments
The following are descriptions for the German to U.S. GAAP adjustments and the
pro forma purchase accounting and other acquisition related adjustments, labeled
(A) through (W), which have been reflected in the accompanying Unaudited Pro
Forma Condensed Combined Balance Sheet and Statements of Earnings:
(A) Adjustment to decrease bad debt reserve for general reserve amounts that
are in accordance with German GAAP, but not in accordance with U.S. GAAP
based upon historical bad debt write-offs.
(B) Adjustments to include in inventory costs, which are expensed under German
GAAP, but capitalized as part of inventory under U.S. GAAP ($291) and to
record excess and obsolete reserves to balances supportable in accordance
with U.S. GAAP ($1,003).
(C) Adjustment to record tax effect of German to U.S. GAAP adjustments.
(D) Adjustment to properly reflect the capitalization of financing costs under
U.S. GAAP as costs were expensed under German GAAP.
(E) Adjustment to record intangible assets associated with the formation of
Domus in December 1997 in accordance with U.S. GAAP.
(F) Adjustment to record building lease accounted for as an operating lease
under German GAAP but as a capital lease in accordance with U.S. GAAP.
(G) Adjustment to accumulated depreciation to reflect useful lives and
depreciation methodology in accordance with company policies and U.S. GAAP
($997).
F-38
Note 4. Pro Forma Adjustments (continued)
(H) Adjustment to record Domus historical goodwill in accordance with U.S.
GAAP.
(I) Adjustment to record accruals, including warranty costs, in accordance with
U.S. GAAP.
(J) Adjustment to record retained earnings impact related to German to U.S.
GAAP adjustments.
(K) Adjustment to record inventories at fair value at date of acquisition.
(L) Adjustment to write off capitalized financing costs associated with debt
extinguished upon acquisition.
(M) Adjustment to reflect the estimated fair value of other acquired
intangibles as follows:
Amortization for Amortization for
Useful Life year ended six months ended
Fair Value (Years) December 31, 2003 June 30, 2004
------------------ ----------------- ------------------- -------------------
------------------ ----------------- ------------------- -------------------
Business
Trademark / Trade $ 16,584 Indefinite $ - $ -
Names
Product
Trademark / Trade 4,137 Indefinite - -
Names
Developed Technology
3,902 20 181 98
1,463 10 136 74
Customer Relationships 22,193 15 1,374 745
20,974 10 1,948 1,056
------ ----- -----
$ 69,253 $3,639 $1,973
====== ====== ======
(N) Adjustment to reflect purchase accounting allocations to specific assets
and liabilities detailed in Note 2.
(O) Adjustment to reflect estimated acquisition costs ($3,780).
F-39
Note 4. Pro Forma Adjustments (continued)
(P) Adjustment to reflect interest expense related to debt incurred to fund
acquisition as follows:
Six Months Year ended
Ended June December 31,
30, 2004 2003
---------- ----------
Revolving credit agreement 87,000,000 euro borrowing $1,576 $2,906
interest based on borrowing rate on date of
acquisition (2.95%) and average EUR to USD conversion
rate for the first six months of 2004 and
full year 2003
Bridge credit agreement 103,000,000 euro borrowing - 1,774 3,272
interest based on borrowing rate on date of
acquisition (2.81%) and average EUR to USD conversion
rate for the first six months of 2004 and
full year 2003
---------- ----------
$3,350 $6,178
========== ==========
(Q) Adjustment to record tax effect of pro forma adjustments.
(R) Adjustment to reflect debt incurred to fund acquisition.
(S) Adjustment to eliminate equity at time of acquisition.
(T) Adjustment to reflect cost of sales in accordance with U.S. GAAP.
(U) Adjustment to reflect amortization on intangibles and non-recurring stock
option plan expense of $1,149 for the six months ended June 30, 2004 and
income of $1,149 for the year ended December 31, 2003 in accordance with
U.S. GAAP.
(V) Adjustment reflects incremental cost of goods sold associated with the
increase in inventories for the fair value write-up in inventories required
under purchase accounting.
(W) Adjustment reflects incremental amortization expense associated with the
increase in intangibles for the fair value write-up in intangibles required
under purchase accounting.
F-40