Invacare 2011 Annual Report Download - page 93

INVACARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-Term Debt—Continued
While there is general concern about the potential for rising interest rates, the company believes that its
exposure to interest rate fluctuations is manageable given that portions of the company’s debt are at fixed rates
into 2013, the company has the ability to utilize swaps to exchange variable rate debt to fixed rate debt, if
needed, and the company’s free cash flow should allow it to absorb any modest rate increases in the months
ahead without any material impact on its liquidity or capital resources. In 2011, the company entered into interest
rate swap agreements to effectively convert a portion of floating rate revolving credit facility debt to fixed rate
debt to avoid the risk of changes in market interest rates. Specifically, interest rate swap agreements for notional
amounts of $18,000,000 and $22,000,000 through September 2013, $20,000,000 and $25,000,000 through May
2013 and $15,000,000 through February 2013 were entered into that fix the LIBOR component of the interest
rate on that portion of the revolving credit facility debt at rates of 0.625%, 0.46%, 1.08%, 0.73% and 1.05%,
respectively, for effective aggregate rates of 2.375%, 2.21%, 2.83%, 2.48% and 2.80%, respectively. As of
December 31, 2011, the weighted average floating interest rate on borrowing was 2.54% compared to 3.29% as
of December 31, 2010.
The Credit Agreement required the company to redeem, purchase or repurchase no less than $100 million in
principal amount of the 9.75% Senior Notes due 2015 and/or the company’s 4.25% Convertible Senior
Subordinated Debentures due 2027 (the “Convertible Notes”) by February 28, 2011. This was completed by
December 31, 2010. After February 28, 2011, the company may redeem, purchase or repurchase the Convertible
Notes so long as no event of default is then occurring or would be caused thereby and the company’s leverage
ratio after such redemption, purchase or repurchase is not more than 3.00 to 1. The Credit Agreement provides
for customary events of default with corresponding grace periods, including, among other things, failure to pay
any principal or interest when due, failure to perform or observe covenants, bankruptcy or insolvency events and
change of control.
In 2007, the company issued $135,000,000 principal amount of Convertible Senior Subordinated
Debentures due 2027. The debentures are unsecured senior subordinated obligations of the company guaranteed
by substantially all of the company’s domestic subsidiaries, pay interest at 4.125% per annum on each February 1
and August 1, and are convertible upon satisfaction of certain conditions into cash, common shares of the
company, or a combination of cash and common shares of the company, subject to certain conditions, and at the
company’s discretion. The debentures allow the company to satisfy the conversion using any combination of
cash or stock. The company intends to satisfy the accreted value of the debentures using cash. Assuming
adequate cash on hand at the time of conversion, the company also intends to satisfy the conversion spread using
cash, as opposed to stock. As of December 31, 2011, the principal amount of the company’s Convertible Notes
exceeded the if-converted value of those notes by $5,307,000. During 2011, the company retired $63,351,000 in
principal amount of Convertible Notes at a premium above par. In accordance with ASC 470-20, Convertible
Debt, the company utilized the inducement method of accounting to calculate the loss associated with the early
retirement of the convertible debt. For the year ended December 31, 2011, the company recorded expense of
$24,200,000 related to the loss on the debt extinguishment including the write-off of $1,554,000 of deferred
financing fees, which were previously capitalized.
The company includes the dilutive effect of shares necessary to settle the conversion spread in the Net
Earnings per Share—Assuming Dilution calculation unless such amounts are anti-dilutive. The initial conversion
rate is 40.3323 shares per $1,000 principal amount of debentures, which represents an initial conversion price of
approximately $24.79 per share. Holders of the debentures can convert the debt to common stock if the
company’s common stock price is at a level in excess of $32.23, a 30% premium to the initial conversion price
for at least 20 trading days during a period of 30 consecutive trading days preceding the date on which the notice
of conversion is given. At a conversion price of $32.23 (30% premium over $24.79), the full conversion of the
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