Invacare 2006 Annual Report Download - page 40

quality solutions. As a result of these changes in reimbursement, the company performed a review of its customers
most vulnerable to changes in the reimbursement for power mobility products and, as part of its 2006 fourth quarter
financial results, the company recorded an incremental reserve against accounts receivable of $26,775,000. In
response to these regulatory changes, the company is implementing tighter credit policies and is working with
certain customers in an effort to help them reduce costs and improve their financial viability.
Selling, general and administrative expenses excluding acquisitions, foreign currency translation and the
incremental reserve against accounts receivable increased $3,706,000 in 2006 or 1% primarily as a result of
increased information technology and distribution costs.
Selling, general and administrative expenses for NA/HME increased 17.7% or $31,699,000 in 2006 compared
to 2005. Acquisitions increased selling, general and administrative expense by approximately $1,656,000 and
foreign currency translation increased expense by $1,082,000. Selling, general and administrative expense also
increased $26,775,000 attributable to the incremental reserve recorded for accounts receivable discussed above.
The remaining increase in expense is $2,186,000 or 1.2%.
Selling, general and administrative expenses for ISG increased by 8.1% or $1,711,000 in 2006 compared to
2005. The increase is attributable to an increase in distribution and sales and marketing expenses. Selling general
and administrative expenses for IPG increased by 3.4% or $463,000 compared to 2005. The increase is attributable
to increased product liability and advertising expenses.
European selling, general and administrative expenses decreased by 1.5% or $1,620,000 in 2006 compared to
2005. Acquisitions increased selling, general and administrative expense by approximately $594,000 and foreign
currency translation decreased expense by $2,647,000. The remaining increase in expense of $433,000 or .4% was
primarily due to higher distribution costs.
Asia/Pacific selling, general and administrative expenses decreased 2.4% or $446,000 in 2006 compared to
2005. Acquisitions increased selling, general and administrative expense by approximately $1,500,000 and foreign
currency translation decreased expense by $859,000. The remaining decline in expense of $1,087,000 or 5.9% is
attributable to reduced cost structure.
Debt Finance Charges, Interest and Fees Associated with Debt Refinancing. As previously disclosed in the
company’s Form 10-Q for the quarter ended September 30, 2006, in November 2006, the company determined that
it was in violation of a financial covenant contained in three Note Purchase Agreements between the company and
various institutional lenders (the “Note Purchase Agreements”). The Note Purchase Agreements related to an
aggregate principal amount of $330 million in long-term debt of the company. The financial covenant limited the
ratio of consolidated debt to consolidated operating cash flow. The company believes the limits were exceeded as a
result of borrowings by the company in early October, 2006 under its $500 million credit facility dated January 14,
2005 with various banks (the “Credit Facility”). The violation of the covenant under the Note Purchase Agreements
also may have constituted a default under both the credit facility and the company’s separate $100 million trade
receivables securitization facility. The company obtained waivers of the covenant violation from each of its lenders
through February 15, 2007. On February 12, 2007, the company closed on its new financing facilities and replaced
all existing debt facilities. Fees incurred during 2006 associated with the waivers of the covenant violation totaled
$3,745,000.
Asset write-downs related to goodwill and other intangibles. As previously disclosed in the company’s
September 30, 2006 Form 10-Q, the company undertakes its annual impairment test of goodwill and intangible
assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, in connection with the preparation
of its fourth quarter results each year. As a result of the reduced profitability of its NA/HME operating segment, and
uncertainty associated with future market conditions, the company recorded an impairment charge related to
goodwill and intangible assets of this segment of $300,417,000. The company is in process of finalizing the
underlying valuation associated with this charge in accordance with SFAS No. 142; however, based on the
information known at this time, this is the company’s best estimate of the impairment.
The impairment of goodwill in the NA/HME operating segment was primarily the result of reduced
government reimbursement levels and changes in reimbursement policies, which negatively affected revenues
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