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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-19946
LINCARE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0331330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
19337 US 19 NORTH, SUITE 500 33758
CLEARWATER, FLORIDA (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (813) 530-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Class
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes ___ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock, $.01 par
value, held by non-affiliates of the registrant, based on the closing sale price
of the common stock on February 28, 1998, as reported in the NASDAQ National
Market System, was approximately $1,866,431,419.
As of February 28, 1998, there were 28,755,915 outstanding shares of the
registrant's common stock, par value $.01, which is the only class of capital
stock of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of
Lincare Holdings Inc. which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1997.
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PART I
ITEM 1. BUSINESS
GENERAL
Lincare Holdings Inc. and subsidiaries ("Lincare" or the "Company") is one
of the nation's largest providers of oxygen and other respiratory therapy
services to patients in the home. The Company's customers typically suffer from
chronic obstructive pulmonary disease ("COPD"), such as emphysema, chronic
bronchitis or asthma, and require supplemental oxygen or other respiratory
therapy services in order to alleviate the symptoms and discomfort of
respiratory dysfunction. Lincare currently serves over 140,000 customers in 39
states through 308 operating centers.
On November 30, 1990, the Company acquired the outstanding capital stock of
Lincare Inc., a subsidiary of Union Carbide Corporation. The Company was formed
by investment partnerships affiliated with the venture capital firms of Welsh,
Carson, Anderson & Stowe and Summit Partners, Dean Witter Capital Corporation,
and members of the management of Lincare Inc.
THE HOME RESPIRATORY MARKET
The Company estimates that the home respiratory therapy market (including
home oxygen equipment and respiratory therapy services) had revenues of
approximately $3.3 billion in 1997, having grown by an estimated 8% to 10% per
year over the last five years. This growth reflects the significant increase in
the number of persons afflicted with COPD, which is attributable, to a large
extent, to the increasing proportion of the population over the age of 65.
Growth in the home respiratory market is further driven by the continued trend
towards treatment of patients in the home as a lower cost alternative to the
acute care setting.
BUSINESS STRATEGY
The Company's strategy is to increase its market share through internal
growth and acquisitions. Lincare focuses primarily on growth within its existing
geographic markets, which the Company believes is generally more profitable than
adding additional operating centers in new markets. In addition, the Company
expands into new geographic markets on a selective basis, either through
acquisitions or by opening new operating centers, when it believes such
expansion will enhance its business. In 1997, Lincare acquired 24 local and
regional competitors with combined annual revenues of approximately $53.0
million. These acquisitions established Lincare in one new state and expanded
its presence in the states where the Company had existing locations.
Revenue growth will be dependent upon the overall growth rate of the home
respiratory care market, as well as on opportunities to increase market share
through effective marketing efforts and selective acquisitions of local or
regional competitors. The Company believes that the growing cost containment
efforts of government and private insurance reimbursement programs and an
increasingly competitive environment have accelerated consolidation trends
within the home health care industry.
The Company will continue to concentrate on providing oxygen and other
respiratory therapy services to patients in the home and to provide home medical
equipment and other services where it believes such services will enhance the
Company's primary business. In 1997, oxygen and other respiratory therapy
services accounted for approximately 90% of the Company's revenues.
PRODUCTS AND SERVICES OF LINCARE
Lincare primarily provides oxygen and other respiratory therapy services to
patients in the home. Lincare also provides a variety of infusion therapies in
certain geographic markets. When a patient is referred to one of the Company's
operating centers by a physician, hospital discharge planner or other source,
the Company's customer representative obtains the necessary medical and
insurance coverage information and coordinates the delivery of patient care. The
prescribed therapy is administered by one of the Company's representatives in
the customer's home, where instructions and training are given to the customer
and the customer's family
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regarding appropriate equipment use and maintenance and the therapy to be
administered. Following the initial setup, Company representatives make periodic
visits to the customer's home, the frequency of which is dictated by the type of
therapy. The Company's services are coordinated with the customer's physician.
During the period that the Company performs services for a customer, the
customer remains under the physician's care and medical supervision. The Company
employs respiratory therapists and nurses to perform certain training and other
functions in connection with the Company's services. The respiratory therapists
and nurses are licensed where required by applicable law.
HOME OXYGEN EQUIPMENT. The major types of oxygen delivery equipment are
liquid oxygen systems and oxygen concentrators. Each method of delivery has
different characteristics that make it more or less suitable to specific patient
applications.
Liquid oxygen systems are thermally insulated containers of liquid
oxygen, consisting of a stationary unit and a portable unit, which are most
commonly used by ambulatory patients.
Oxygen concentrators are stationary units that provide a continuous
flow of oxygen by filtering ordinary room air. Concentrators are most
commonly used by patients confined to the home or with only minimal
mobility.
OTHER RESPIRATORY THERAPY SERVICES. Other respiratory therapy services
offered by the Company include the following:
Nebulizers and associated respiratory medications provide aerosol
therapy for patients suffering from COPD and asthma;
Non-invasive ventilation provides nocturnal ventilatory support for
neuromuscular and COPD patients. This therapy improves daytime function and
decreases incidents of acute illness;
Apnea monitors provide respiratory alarm systems for infants at risk
for sudden infant death syndrome;
Ventilators support respiratory function in severe cases of
respiratory failure where the patient can no longer sustain the mechanics
of breathing without the assistance of a machine;
Continuous positive airway pressure devices maintain open airways in
patients suffering from obstructive sleep apnea by providing airflow at
prescribed pressures during sleep;
INFUSION THERAPY. Lincare provides a variety of infusion therapies
including the following:
Parenteral nutrition involves the intravenous feeding of
life-sustaining nutrients to patients with impaired or altered digestive
tracts or conditions that prohibit adequate oral nutritional support;
Intravenous antibiotic therapy is the infusion of anti-infective
medications into the patient's bloodstream for the treatment of a variety
of infectious diseases;
Enteral nutrition is administered to patients who cannot eat as a
result of an obstruction to the upper gastrointestinal tract or other
medical condition;
Chemotherapy is the administration of cytotoxic drugs to patients
suffering from various types of cancer;
Dobutamine infusions are provided to patients to treat chronic end
stage congestive heart failure that has not responded to standard drug
therapy. These patients require a long-term venous access device and
frequent blood chemistry monitoring;
Immune globulin (IVIG) therapy is utilized for a variety of immune
disorders such as B-cell and T-cell immune deficiency, acute infections,
post transplant immunodeficiency and burns;
Continuous pain management is the administration of analgesic drugs to
patients suffering from acute or chronic pain;
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Central catheter management provides monitoring and supplies to
patients requiring access via a peripherally inserted line into the
superior vena cava.
Lincare also supplies home medical equipment, such as hospital beds,
wheelchairs and other supplies that may be required by patients.
COMPANY OPERATIONS
Management. The Company is managed at the executive level as a portfolio
of local businesses. Decentralization of managerial decision-making enables the
Company's operating centers to respond promptly and effectively to local market
demands and opportunities. The Company believes that the personalized nature of
customer requirements and referral relationships characteristic of the home
health care business mandates the Company's localized operating structure.
Each of the Company's 308 operating centers is managed by a center manager
who has responsibility and accountability for the operating and financial
performance of the center. Service and marketing functions are performed at the
local operating level, while strategic development, financial control and
operating policies are administered at the executive level. Reporting mechanisms
are in place at the operating center level to monitor performance and ensure
field accountability.
A regional management team consisting of 32 area managers directly
supervises individual operating center managers, serving as an additional
mechanism for assessing and improving performance of the Company's operations.
The Company's operating centers are served by 15 billing centers which control
all of the Company's billing and reimbursement functions.
MIS Systems. The Company believes that the proprietary management
information systems developed by the Company are one of its key competitive
advantages and provide management with a critical asset in measuring and
evaluating performance levels throughout the Company. Management reviews monthly
reports containing information critical to the evaluation process, including
revenues and profitability by individual center, accounts receivable and cash
collection management, equipment controls and utilization, customer activity,
and manpower trends. The Company has a staff of 14 full-time computer
programmers which permits the Company to continually enhance its computer
systems in order to provide timely financial and operational information and to
respond promptly to changes in reimbursement regulations and policies.
Accounts Receivable Management. The Company derives a majority of its
revenues from reimbursement by third party payors. The Company accepts
assignment of insurance benefits from customers and, in most instances, invoices
and collects payments directly from Medicare, Medicaid and private insurance
carriers, as well as directly from customers under co-insurance provisions. The
following table sets forth, for the periods indicated, the Company's payor mix.
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
PAYORS ----- ----- -----
Medicare and Medicaid programs.............................. 63% 61% 60%
Private insurance........................................... 25 27 24
Direct payment.............................................. 12 12 16
--- ---- ----
100% 100% 100%
=== ==== ====
Reimbursement is a complicated process which involves submission of claims
to multiple payors, each having its own claims requirements. To operate
effectively in this environment, the Company has designed and implemented
proprietary computer systems to decrease the time required for the submission
and processing of third party payor claims. The Company's systems are capable of
tailoring the submission of claims to the specifications of the individual
payors. The Company's in-house MIS capability also enables it to adjust quickly
to any regulatory or reimbursement changes. These features serve to decrease the
processing time of
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claims by payors, resulting in a more rapid turnover of accounts receivable. In
addition, the Company is capable of submitting claims electronically to any
Medicare carrier or other third party payor that can receive electronic claims
submissions.
The Company's net accounts receivable in terms of days sales outstanding
was 52 days as of December 31, 1997 and 48 days as of December 31, 1996.
SALES AND MARKETING
Favorable trends affecting the U.S. population and home health care have
created an environment which should produce increasing demand for the services
provided by Lincare. The average age of the American population is increasing
and, as a person ages, more health care services are required. Well-documented
changes occurring in the health care industry show a trend of more services
being provided in the home and less in institutions.
Sales activities are generally carried out by the Company's full-time sales
representatives located at the Company's operating centers with assistance from
the center managers. In addition to promoting the high quality of the Company's
services, the sales representatives are trained to provide information
concerning the advantages of home respiratory care. Sales representatives are
often licensed respiratory therapists who are highly knowledgeable in the
provision of supplemental oxygen.
The Company primarily acquires new customers through referrals. The
Company's principal sources of referrals are physicians, hospital discharge
planners, prepaid health plans, clinical case managers and nursing agencies. The
Company's sales representatives maintain continual contact with these medical
professionals in order to strengthen these relationships.
The Company's current base of referral sources recognizes the Company's
reputation for providing high-quality service to patients and provides a steady
flow of customers. While the Company views its referral sources as fundamental
to its business, no single referral source accounts for more than 1.0% of the
Company's revenues. The Company has more than 140,000 active customers, and the
loss of any single customer or group of customers would not materially impact
the Company's business.
Joint Commission on Accreditation of Healthcare Organizations,
("JCAHO"). The Company has received accreditation from the JCAHO, a private
not-for-profit organization that has established voluntary standards for the
provision of home health care services, for all its operating centers.
Accreditation by the JCAHO represents a marketing benefit to the Company's
operating centers and provides for a recognized quality assurance program
throughout the Company. Several proposals have been made to require health care
providers to be accredited or licensed by independent agencies in order to
participate in government reimbursement programs, and such a requirement has
been adopted by certain private payors.
ACQUISITIONS
In 1997, the Company acquired, in unrelated acquisitions, certain operating
assets of 16 local and regional competitors and the common stock of eight
companies. The operations acquired in 1997 had aggregate annualized revenues of
approximately $53.0 million at the time of acquisition. These acquisitions
resulted in the addition of 19 new operating centers.
In 1996, the Company acquired, in unrelated acquisitions, certain operating
assets of eight local and regional competitors, the common stock of seven
companies and, in two separate transactions, the common stock and certain assets
of two related companies and the common stock and certain assets of three
related companies. The operations acquired in 1996 had aggregate annualized
revenues of approximately $44.0 million at the time of acquisition. These
acquisitions resulted in the addition of 30 new operating centers.
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QUALITY CONTROL
The Company is committed to providing consistently high quality products
and services. The Company's quality control procedures are designed to promote
greater responsiveness and sensitivity to individual customer needs and to
provide the highest level of quality assurance and convenience to the referring
physician. Licensed respiratory therapists and registered nurses provide
professional health care support and assist in the Company's sales and marketing
efforts.
SUPPLIERS
The Company purchases its oxygen and equipment from a variety of suppliers.
The Company is not dependent upon any single supplier and believes that its
oxygen and equipment needs can be provided by several manufacturers.
COMPETITION
The home respiratory care market is a fragmented and highly competitive
market that is served by the Company and other national providers and, by
Company estimates, over 2,000 regional and local companies.
Quality of service is the single most important competitive factor within
the home respiratory care market. The relationships between a home respiratory
care company and its customers and referral sources are highly personal. There
is no incentive for either the physician or the patient to alter this
relationship so long as the home respiratory care company is providing
responsive, professional and high-quality service. Other key competitive factors
are strength of local ties to the referral community and efficiency of
reimbursement and accounts receivable management systems.
Home respiratory care companies normally compete based on service.
Reimbursement levels are established by the fee schedules promulgated by
Medicare, Medicaid or by the individual determinations of private insurance
companies. Furthermore, marketing efforts by home respiratory care companies are
directed toward referral sources which do not share financial responsibility for
the payment of services provided to customers.
MEDICARE REIMBURSEMENT
As a supplier of home oxygen and other respiratory therapy services for the
home health care market, the Company participates in Medicare Part B, the
Supplementary Medical Insurance Program, which was established by the Social
Security Act of 1965. Suppliers of home oxygen and other respiratory therapy
services have historically been heavily dependent on Medicare reimbursement due
to the high proportion of elderly suffering from respiratory disease.
On August 5, 1997, the Balanced Budget Act of 1997 ("BBA") was signed into
law. The legislation, among other things, reduces Medicare expenditures by $115
billion over five years. The BBA reduces Medicare payment amounts for oxygen and
oxygen equipment furnished after January 1, 1998, to 75 percent of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999, and each subsequent year thereafter
are reduced to 70 percent of the fee schedule amounts in effect during 1997.
The BBA freezes the Consumer Price Index (U.S. urban average) update for
covered items of durable medical equipment for each of the years 1998 through
2002 while limiting fees for parenteral and enteral nutrients, supplies and
equipment to 1995 reasonable charge levels over the same period. The BBA reduces
payment amounts for covered drugs and biologicals to 95 percent of the average
wholesale price of such covered items for each of the years 1998 through 2002.
The BBA authorizes the Department of Health and Human Services to conduct
up to five competitive bidding demonstration projects for the acquisition of
durable medical equipment and requires that one such project be established for
oxygen and oxygen equipment. Each demonstration project is to be operated over a
three-year period and is to be conducted in not more than three competitive
acquisition areas. The BBA also
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includes provisions designated to reduce health care fraud and abuse including a
surety bond requirement for durable medical equipment providers.
On August 10, 1993, Congress passed the Omnibus Reconciliation Act of 1993
("OBRA 93"). The OBRA 93 legislation, among other things, provided for consumer
price index updates to Medicare fee schedule amounts for durable medical
equipment for 1995 and 1996. A Medicare fee schedule update of 2.8% was
established for durable medical equipment provided in 1997.
Federal and state budgetary and other cost-containment pressures will
continue to impact the home respiratory care industry. The Company cannot
predict what new federal and state budgetary proposals will be adopted and, if
adopted, what effect, if any, such proposals would have on the Company's
business.
GOVERNMENT REGULATION
The federal government and all states in which the Company currently
operates regulate various aspects of its business. In particular, the Company's
operating centers are subject to federal laws covering the repackaging and
dispensing of drugs (including oxygen) and regulating interstate motor-carrier
transportation. The Company's locations also are subject to state laws
governing, among other things, pharmacies, nursing services and certain types of
home health agency activities. Certain of the Company's employees are subject to
state laws and regulations governing the ethics and professional practice of
respiratory therapy, pharmacy and nursing.
As a supplier of services under the Medicare and Medicaid programs, the
Company is subject to the Medicare and Medicaid fraud and abuse laws. These
laws, among other things, prohibit any payment, kickback or rebate in return for
the referral of patients receiving benefits from Medicare, Medicaid or other
federally funded health care programs. Violations of these provisions may result
in civil and criminal penalties and exclusion from participation in such
programs.
Health care is an area of rapid regulatory change. Changes in the law or
new interpretations of existing laws can have an effect on permissible
activities, the relative costs associated with doing business, and the amount of
reimbursement by government and third party payors. The Company cannot predict
the future course of federal, state and local regulation or legislation,
including Medicare and Medicaid statutes and regulations, and of possible
changes in national health care policies, including those pertaining to managed
care organizations. Future legislative and regulatory changes could have an
adverse impact on the Company.
YEAR 2000 REMEDIATION PROGRAM
The Company has assessed the impact of the upcoming change in the century
and has begun converting many of its computer software programs and information
systems to be Year 2000 compliant. The cost to the Company of converting its
existing computer systems is not material in nature and the Company does not
expect the Year 2000 issue, with respect to the remediation of its own systems,
to have a material effect on its future financial results. However, the Company
is highly dependent upon government and private third party payors for payment
of claims for services and equipment. The Company cannot be assured of the
timely remediation of third party claims processing and reimbursement systems.
The failure by a significant government or private payor to correct Year 2000
systems issues, to the extent that such issues delay or prevent timely or
appropriate payment of claims, could have a material impact on the Company's
cash flow from operations. The Company is monitoring the Year 2000 progress of
Medicare payors and other significant government agencies and private payors to
determine the potential impact to the Company.
INSURANCE
The Company currently has in force general liability and product liability
insurance, each with a coverage limit of $10.0 million. In addition, the Company
has professional liability insurance with a coverage limit of $1.0 million per
occurrence and $3.0 million in the aggregate. The Company's product liability
insurance provides coverage on a claims-made basis, while its general and
professional liability insurance are on an
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occurrence basis. All policies are subject to annual renewal and the Company
anticipates adequate amounts of insurance coverage to be available at such
renewal dates.
EMPLOYEES
As of February 28, 1998, the Company had approximately 3,500 employees.
None of the Company's employees are currently covered by collective bargaining
agreements. The Company believes that the relations between the Company's
management and its employees are good.
ENVIRONMENTAL MATTERS
Management believes that the Company is currently in compliance, in all
material respects, with applicable federal, state and local statutes and
ordinances regulating the discharge of hazardous materials into the environment.
Management does not believe it will be required to expend any material amounts
in order to remain in compliance with these laws and regulations or that such
compliance will materially affect its capital expenditures, earnings or
competitive position.
ITEM 2. PROPERTIES
All but one of the Company's 308 operating center locations are leased from
third parties. Each operating center is a combination warehouse and office, with
warehouse space generally comprising approximately 50% of the facility.
Warehouse space is used for storage of adequate supplies of equipment necessary
to conduct the Company's business. The Company also leases a headquarters
facility and 15 separate billing centers.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain other claims and legal actions arising
in the ordinary course of business. In the opinion of the Company, the ultimate
disposition of all matters will not have a material adverse impact on the
Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol LNCR. The following table sets forth the high and low closing
sale prices as reported by NASDAQ for the periods indicated.
HIGH LOW
------ ------
1997
First quarter............................................... $44.25 $36.00
Second quarter.............................................. 44.50 35.25
Third quarter............................................... 53.75 40.00
Fourth quarter.............................................. 59.00 50.00
1996
First quarter............................................... $34.00 $24.75
Second quarter.............................................. 43.50 32.75
Third quarter............................................... 42.25 36.00
Fourth quarter.............................................. 42.88 35.25
There were approximately 232 holders of record of the common stock as of
February 28, 1998.
The Company has not paid any cash dividends on its capital stock and does
not anticipate paying cash dividends in the foreseeable future. It is the
present intention of the Company's Board of Directors to retain all earnings in
the Company in order to support the future growth of the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below under the caption
"Statements of Operations Data" for the years ended December 31, 1997, 1996,
1995, 1994, and 1993 are derived from the consolidated financial statements of
the Company, which consolidated financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants.
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The data set forth below is qualified by reference to, and should be read
in conjunction with, the consolidated financial statements and related notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net revenues................................ $443,181 $348,870 $274,800 $201,142 $154,506
Cost of goods and services.................. 65,932 53,711 41,329 29,058 21,115
Operating expenses.......................... 93,830 75,158 60,272 44,347 34,388
Selling, general and administrative
expenses.................................. 90,225 71,259 57,275 43,249 34,623
Bad debt expense............................ 4,432 3,472 2,190 1,546 1,832
Depreciation expense........................ 27,603 20,790 16,511 13,403 11,764
Amortization expense........................ 14,229 13,128 11,099 7,281 4,695
Non-recurring expense(1).................... 15,557 3,932 1,921 -- --
-------- -------- -------- -------- --------
Operating income............................ 131,373 107,420 84,203 62,258 46,089
Interest income............................. 202 153 294 434 611
Interest expense............................ 1,161 497 892 473 387
Gain (loss) on disposal of property and
equipment................................. (93) (80) 68 101 233
-------- -------- -------- -------- --------
Income before income taxes.................. 130,321 106,996 83,673 62,320 46,546
Income tax expense.......................... 50,173 40,422 32,634 24,367 18,294
-------- -------- -------- -------- --------
Net income available for common............. $ 80,148 $ 66,574 $ 51,039 $ 37,953 $ 28,252
======== ======== ======== ======== ========
Income per common share:
Basic..................................... $ 2.82 $ 2.38 $ 1.86 $ 1.43 $ 1.09
======== ======== ======== ======== ========
Diluted................................... $ 2.73 $ 2.31 $ 1.79 $ 1.34 $ 1.01
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding............................... 28,419 27,998 27,511 26,629 25,852
======== ======== ======== ======== ========
Weighted average number of common shares and
common share equivalents outstanding...... 29,328 28,863 28,567 28,294 27,881
======== ======== ======== ======== ========
- ---------------
(1) In 1997 the Company recorded a non-recurring expense of $15,557,000 of which
$11,849,000 was related to the write-off of obsolete capital equipment and
$3,708,000 was related to an impairment write down of intangible assets
(see Note 11 to the consolidated financial statements). In 1996 the Company
recorded a non-recurring expense of $3,932,000 of which $2,682,000 was
related to the restructuring of certain senior management employment
agreements and $1,250,000 was related to the resolution of an investigation
and associated legal expenses. In 1995 the Company recorded a non-recurring
expense of $1,921,000 related to the abandoned merger between the Company
and Coram Healthcare Corporation. Such non-recurring expense was comprised
of (a) $1,448,000 of professional fees, (b) $199,000 of printing and
mailing expenses, (c) $153,000 of filing fees, and (d) $121,000 of other
direct costs.
AT DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................. $ 42,106 $ 23,633 $ 16,510 $ 18,517 $ 35,642
Total assets................................ 440,388 347,408 260,206 195,778 147,084
Long-term obligations, excluding current
installments.............................. 4,602 8,234 7,383 6,717 7,512
Stockholders' equity........................ 393,067 299,248 221,383 162,088 117,058
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company continues to pursue its strategy of focusing on increasing
market share within its existing geographical markets, through internal growth
and through selective acquisitions of regional or local competitors. In
addition, the Company will continue to expand into new geographical markets on a
selective basis, either through acquisitions or by opening new operating
centers, when the Company believes it will enhance its business. The Company's
focus remains primarily on oxygen and other respiratory therapy services, which
represents approximately 90% of the Company's revenues.
NET REVENUES
The following table sets forth for the periods indicated a summary of the
Company's net revenues by source:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Oxygen and other respiratory therapy................... $397,390 $316,816 $250,287
Home medical equipment and other....................... 45,791 32,054 24,513
-------- -------- --------
Total........................................ $443,181 $348,870 $274,800
======== ======== ========
Net revenues for the year ended December 31, 1997 increased by $94,311,000
(or 27.0%) over 1996. Net revenues for the year ended December 31, 1996
increased by $74,070,000 (or 27.0%) over 1995. The increases are attributable to
the Company's sales and marketing efforts that emphasize quality and customer
service, and the effect of the acquisitions completed by the Company. The
Company estimates that approximately $45,561,000 of the increase in revenues for
year ended December 31, 1997, and $37,905,000 of the increase in revenues for
the year ended December 31, 1996, were attributable to the acquired businesses.
Approximately $41,950,000 of the net revenue increase for the year ended
December 31, 1997 and $31,265,000 for the year ended December 31, 1996, were
attributable to volume growth in the Company's business.
The Company experienced price increases in each of the years 1997, 1996,
and 1995 from Medicare consumer price index updates for durable medical
equipment of 2.8%, 3.0%, and 2.5%, respectively. The company estimates that
price increases from Medicare and other third party payors increased revenue by
$6,800,000, $4,900,000, and $3,100,000 in the years 1997, 1996, and 1995,
respectively.
The Balanced Budget Act of 1997 ("BBA") was signed into law on August 5,
1997. The legislation, among other things, reduces Medicare expenditures by $115
billion over five years. The BBA reduces Medicare payment amounts for oxygen and
oxygen equipment furnished after January 1, 1998, to 75 percent of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999, and each subsequent year thereafter
are reduced to 70 percent of the fee schedule amounts in effect during 1997.
The BBA freezes the Consumer Price Index (U.S. urban average) update for
covered items of durable medical equipment for each of the years 1998 through
2002 while limiting fees for parenteral and enteral nutrients, supplies and
equipment to 1995 reasonable charge levels over the same period. The BBA reduces
payment amounts for covered drugs and biologicals to 95 percent of the average
wholesale price of such covered items for each of the years 1998 through 2002.
COST OF GOODS AND SERVICES
Cost of goods and services as a percentage of net revenues was 14.9% for
the year ended December 31, 1997 and was 15.4% and 15.0% for the years ended
December 31, 1996 and 1995, respectively. The decrease in 1997 is attributable
to the maturity of the Company's respiratory pharmacy operations which commenced
operations in the fourth quarter of 1996.
10
12
OPERATING AND OTHER EXPENSES
The Company continues to maintain a cost structure that, with increased net
revenues, has permitted the Company to spread its fixed operating expenses and
overhead over a larger base of revenues, resulting in improvement in operating
income. Operating expenses expressed as a percentage of net revenues for the
years ended December 31, 1997, 1996, and 1995 were 21.2%, 21.5%, and 21.9%,
respectively. Selling, general and administrative expenses expressed as a
percentage of net revenues for the years ended December 31, 1997, 1996, and 1995
were 20.4%, 20.4%, and 20.8%, respectively.
Bad debt expense as a percentage of net revenues was 1.0% for the years
ended December 31, 1997 and 1996 and 0.8% for the year ended December 31, 1995.
Depreciation expense as a percentage of net revenues increased to 6.2% for
the year ended December 31, 1997 compared with 6.0% for the years ended December
31, 1996 and 1995. The Company's increased depreciation expense reflects
increased capital expenditures primarily for additional oxygen and respiratory
therapy equipment to service the Company's growing customer base.
AMORTIZATION EXPENSE
The Company's net intangible assets were $253,731,000 as of December 31,
1997. Of this total, $5,262,000 (consisting of the value assigned to customer
lists) is being amortized over a period of 3 years, $2,869,000 (consisting of
various covenants not to compete) over a period of three to five years, and
$245,600,000 (consisting of goodwill) over a period of 40 years.
During 1997, the Company amortized $14,229,000 of its intangible assets
compared to $13,128,000 in 1996 and $11,099,000 in 1995.
OPERATING INCOME
As shown in the table below, operating income before non-recurring expense
for the year ended December 31, 1997 increased by $35,578,000 over 1996. In
1997, the Company recorded a non-recurring expense of $15,557,000 relating to
the write-off of obsolete capital equipment and an impairment write down of
intangible assets. Operating income before non-recurring expense for the year
ended December 31, 1996 increased by $25,228,000 over 1995. In 1996, the Company
recognized a non-recurring charge of $3,932,000 related to the restructuring of
certain senior management employment agreements and the resolution of an
investigation. The percentage increases in operating income are attributable to
the Company's continued revenue growth, while maintaining effective control over
expenses.
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Operating income before non-recurring expense.............. $146,930 $111,352 $ 86,124
Percentage of net revenues................................. 33.2% 31.9% 31.3%
INTEREST EXPENSE
Interest expense for the year ended December 31, 1997 was $1,161,000,
compared to $497,000 and $892,000 for the years ended December 31, 1996 and
1995, respectively. The respective increase or decrease in interest expense for
the years 1997, 1996, and 1995 is primarily attributable to fluctuations in the
average borrowings outstanding under the Company's then effective loan
agreements.
INCOME TAXES
The Company's effective income tax rate was 38.5% for the year ended
December 31, 1997, 37.8% for 1996 and 39.0% for 1995.
11
13
ACQUISITIONS
In 1997, the Company acquired, in unrelated acquisitions, certain operating
assets of 16 local and regional competitors and the common stock of eight
companies. The operations acquired in 1997 had aggregate annualized revenues of
approximately $53.0 million at the time of acquisition. The cost of these
acquisitions was $79.7 million and was allocated to acquired assets as follows:
$4.5 million to current assets, $3.8 million to property and equipment, $6.9
million to intangible assets, and $64.5 million to goodwill. These acquisitions
resulted in the addition of 19 new operating centers.
In 1996, the Company acquired, in unrelated acquisitions, certain operating
assets of eight local and regional competitors, the common stock of seven
companies and, in two separate transactions, the common stock and certain assets
of two related companies and the common stock and certain assets of three
related companies. The operations acquired in 1996 had aggregate annualized
revenues of approximately $44.0 million at the time of acquisition. The cost of
these acquisitions was $73.1 million and was allocated to acquired assets as
follows: $6.4 million to current assets, $3.2 million to property and equipment,
$6.4 million to intangible assets, and $57.1 million to goodwill. These
acquisitions resulted in the addition of 30 new operating centers.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's working capital was $42,106,000, as
compared to $23,633,000 at December 31, 1996, and $16,510,000 at December 31,
1995.
Net cash provided by operating activities was $126,550,000 for the year
ended December 31, 1997, compared with $106,883,000 for the year ended December
31, 1996, and $79,523,000 for the year ended December 31, 1995. A significant
portion of the Company's assets consists of accounts receivables from third
party payors that provide reimbursement for the services provided by the
Company. Because of the Company's ability to collect its accounts receivable on
a timely basis, the Company has not been required to obtain interim financing of
its accounts receivable to satisfy operating needs.
Net cash used in investing and financing activities amounted to
$124,013,000, $106,351,000 and $94,537,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Activity in the year ended December 31, 1997
included the Company's investment of $66,249,000 in business acquisitions,
investment in capital equipment of $50,676,000, proceeds of $100,500,000 from
its revolving credit loan and other long-term obligations, and payments of
$115,073,000 related to long-term obligations.
As of December 31, 1997, the Company's principal sources of liquidity
consisted of $42,106,000 of working capital and $96,000,000 available under its
revolving credit loan and line of credit. On November 25, 1997, the Company
entered into a new revolving credit loan and line of credit, increasing its
borrowing capacity from $50,000,000 to $100,000,000. The Company believes that
internally generated funds, together with funds that may be borrowed under such
credit facility, will be sufficient to meet the Company's anticipated capital
requirements for the foreseeable future.
The Company anticipates that capital expenditures for 1998 will be
approximately $60,000,000. The Company believes that it will be able to generate
sufficient funds internally to meet its short-term and long-term capital
expenditure requirements.
The Company's future liquidity will continue to be dependent upon its
operating cash flow and management of accounts receivable. The Company is not
aware of any impact on liquidity due to pending litigation arising in the
ordinary course of business.
NEW ACCOUNTING STANDARDS
For 1998 the Company will be required to adopt Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", No. 131
"Disclosures About Segments of An Enterprise and Related Information", and No.
132 "Employers' Disclosure about Pensions and Other Postretirement Benefits."
Statement 130 establishes rules for reporting and displaying comprehensive
income. Comprehensive income is
12
14
defined as essentially all changes in stockholders' equity exclusive of
transactions with owners. The Company has no items to be reported as
comprehensive income; therefore, adoption of this standard is not expected to
have a material effect on the Company's financial statements. Statement No. 131
requires the disclosure of selected information about operating segments based
on a "management approach." Under the management approach, the operating
segments are determined based on the organization units that the Company's
management uses internally to monitor performance and make operating decisions.
The Company operates in one segment and does not expect the implementation of
this standard to have a significant effect on future financial statement
disclosures. Statement No. 132 standardizes the disclosure requirements of
previous Statements No. 87 (Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits), and
No. 106 (Employers' Accounting for Postretirement Benefits Other Than Pensions).
Statement No. 132 disclosure requirements for the Company's defined contribution
plan are substantially unchanged; therefore, adoption of this standard is not
expected to have a significant effect on future financial statement disclosures.
INFLATION
The Company has not experienced large increases in either the cost of
supplies or operating expenses due to inflation. Because of restrictions on
reimbursement by government and private medical insurance programs and the
pressures to contain the costs of such programs, the Company bears the risk that
reimbursement rates set by such programs will not keep pace with inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are listed in Item 14(a)(1)
and are submitted at the end of this Annual Report on Form 10-K. The
supplementary data required by this Item is included on page S-1. The financial
statements and supplementary data are herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is included in the definitive proxy statement for
the Annual Meeting of Stockholders to be held May 11, 1998, under "Information
Regarding the Board of Directors and Executive Officers" and is herein
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is included in the definitive proxy statement for
the Annual Meeting of Stockholders to be held May 11, 1998, under "Executive
Compensation" and is herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is included in the definitive proxy statement for
the Annual Meeting of Stockholders to be held May 11, 1998, under "Security
Ownership of Principal Stockholders and Management" and is herein incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
13
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Lincare Holdings
Inc. and subsidiaries are filed as part of this Form 10-K starting at page F-1:
Independent Auditors' Report
Consolidated Balance Sheets -- December 31, 1997 and 1996
Consolidated Statements of Operations -- Years ended December 31, 1997,
1996, and 1995.
Consolidated Statements of Stockholders' Equity -- Years ended December
31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows -- Years ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements
(2) The following consolidated financial statement schedule of Lincare
Holdings Inc. and subsidiaries is included in this Form 10-K at page S-1:
Schedule VIII -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits included or incorporated herein:
See Exhibit Index.
(b) The Company did not file a Current Report on Form 8-K during the three
months ended December 31, 1997.
14
16
SIGNATURES
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.
LINCARE HOLDINGS INC.
/s/ PAUL G. GABOS
-------------------------------------
Paul G. Gabos
Secretary, Chief Financial and
Principal Accounting 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 and on the dates indicated.
SIGNATURE POSITION DATE
--------- -------- ----
/s/ JAMES T. KELLY Chairman of the Board March 26, 1998
- ------------------------------------------------
James T. Kelly
/s/ JOHN P. BYRNES Director, President and Chief March 26, 1998
- ------------------------------------------------ Executive Officer
John P. Byrnes
/s/ PAUL G. GABOS Secretary, Chief Financial and March 26, 1998
- ------------------------------------------------ Principal Accounting Officer
Paul G. Gabos
/s/ CHESTER B. BLACK Director March 26, 1998
- ------------------------------------------------
Chester B. Black
/s/ FRANK T. CARY Director March 26, 1998
- ------------------------------------------------
Frank T. Cary
/s/ WILLIAM F. MILLER, III Director March 26, 1998
- ------------------------------------------------
William F. Miller, III
/s/ ANDREW M. PAUL Director March 26, 1998
- ------------------------------------------------
Andrew M. Paul
/s/ THOMAS O. PYLE Director March 26, 1998
- ------------------------------------------------
Thomas O. Pyle
15
17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Lincare Holdings Inc.:
We have audited the consolidated financial statements of Lincare Holdings
Inc. and subsidiaries as listed in the index on page 14. In connection with our
audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule listed in the index on page 14. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
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 financial position of Lincare
Holdings Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
St. Petersburg, Florida
January 28, 1998
F-1
18
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,078 $ 1,541
Accounts and notes receivable (note 2).................... 68,383 51,090
Income taxes receivable................................... 2,530 187
Inventories............................................... 1,542 1,689
Prepaid expenses.......................................... 516 466
-------- --------
Total current assets.............................. 77,049 54,973
-------- --------
Property and equipment (notes 3 and 4)...................... 181,438 150,598
Less accumulated depreciation............................... 73,148 57,068
-------- --------
Net property and equipment........................ 108,290 93,530
-------- --------
Other assets:
Goodwill, less accumulated amortization of $16,954 in 1997
and $11,135 in 1996.................................... 245,600 184,817
Intangible assets, less accumulated amortization of
$36,457 in 1997
and $30,036 in 1996.................................... 5,262 8,867
Covenants not to compete, less accumulated amortization of
$9,531 in 1997
and $7,543 in 1996..................................... 2,869 4,478
Other..................................................... 1,318 743
-------- --------
Total other assets................................ 255,049 198,905
-------- --------
$440,388 $347,408
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations (note 5).... $ 8,580 $ 5,783
Accounts payable.......................................... 14,390 16,958
Accrued expenses:
Compensation and benefits.............................. 8,781 6,895
Other.................................................. 3,192 1,704
-------- --------
Total current liabilities......................... 34,943 31,340
-------- --------
Long-term obligations, excluding current installments (note
5)........................................................ 4,602 8,234
Deferred income taxes (note 6).............................. 6,861 7,681
Minority interest........................................... 915 905
Stockholders' equity (notes 6, 7, and 8):
Common stock, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 28,720,545 in 1997 and
28,254,996 in 1996..................................... 287 282
Additional paid-in capital................................ 111,001 97,335
Retained earnings......................................... 281,779 201,631
-------- --------
Total stockholders' equity........................ 393,067 299,248
Commitments and contingencies (notes 4 and 14)..............
-------- --------
$440,388 $347,408
======== ========
See accompanying notes to consolidated financial statements.
F-2
19
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues (note 9).................................. $443,181 $348,870 $274,800
-------- -------- --------
Costs and expenses:
Cost of goods and services........................... 65,932 53,711 41,329
Operating expenses................................... 93,830 75,158 60,272
Selling, general and administrative expenses......... 90,225 71,259 57,275
Bad debt expense..................................... 4,432 3,472 2,190
Depreciation expense................................. 27,603 20,790 16,511
Amortization expense................................. 14,229 13,128 11,099
Non-recurring expense (note 11)...................... 15,557 3,932 1,921
-------- -------- --------
311,808 241,450 190,597
-------- -------- --------
Operating income............................. 131,373 107,420 84,203
-------- -------- --------
Other income (expenses):
Interest income...................................... 202 153 294
Interest expense..................................... (1,161) (497) (892)
Net gain (loss) on disposal of property and
equipment......................................... (93) (80) 68
-------- -------- --------
(1,052) (424) (530)
-------- -------- --------
Income before income taxes................... 130,321 106,996 83,673
Income tax expense (note 6)............................ 50,173 40,422 32,634
-------- -------- --------
Net income................................... $ 80,148 $ 66,574 $ 51,039
======== ======== ========
Income per common share (note 10):
Basic................................................ $ 2.82 $ 2.38 $ 1.86
======== ======== ========
Diluted.............................................. $ 2.73 $ 2.31 $ 1.79
======== ======== ========
Weighted average number of common shares outstanding... 28,419 27,998 27,511
======== ======== ========
Weighted average number of common shares and common
share equivalents outstanding........................ 29,328 28,863 28,567
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
20
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
(DOLLARS IN THOUSANDS)
Balances at December 31, 1994........................ $271 $ 77,799 $ 84,018 $162,088
Exercise of stock options (note 8)................... 6 2,800 -- 2,806
Tax benefit related to exercise of employee stock
options (notes 6 and 8)............................ -- 5,450 -- 5,450
Net income........................................... -- -- 51,039 51,039
---- -------- -------- --------
Balances at December 31, 1995........................ 277 86,049 135,057 221,383
Exercise of stock options (note 8)................... 5 4,895 -- 4,900
Tax benefit related to exercise of employee stock
options (notes 6 and 8)............................ -- 6,391 -- 6,391
Net income........................................... -- -- 66,574 66,574
---- -------- -------- --------
Balances at December 31, 1996........................ 282 97,335 201,631 299,248
Exercise of stock options (note 8)................... 5 7,113 -- 7,118
Tax benefit related to exercise of employee stock
options (notes 6 and 8)............................ -- 6,553 -- 6,553
Net income........................................... -- -- 80,148 80,148
---- -------- -------- --------
Balances at December 31, 1997........................ $287 $111,001 $281,779 $393,067
==== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
21
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 80,148 $ 66,574 $ 51,039
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in provision for losses on accounts and notes
receivable........................................... (750) (1,433) (1,989)
Depreciation expense................................... 27,603 20,790 16,511
Loss (gain) on disposal of property and equipment...... 93 80 (68)
Amortization expense................................... 14,229 13,128 11,099
Amortization of imputed interest....................... 22 80 130
Deferred income taxes.................................. (1,549) 1,090 2,369
Minority interest in net earnings of subsidiary........ 254 252 196
Non-recurring expense (note 11)........................ 15,557 -- --
Change in operating assets and liabilities:
Increase in accounts and notes receivable............ (13,698) (6,883) (5,524)
Decrease (increase) in inventories................... 441 (256) (53)
(Increase) decrease in prepaid expenses.............. (118) 81 78
(Decrease) increase in accounts payable.............. (2,568) 6,743 336
Increase (decrease) in accrued expenses.............. 2,676 (339) 1,927
Decrease in income taxes............................. 4,210 6,976 3,472
--------- --------- ---------
Net cash provided by operating activities......... 126,550 106,883 79,523
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment.............. 127 276 1,269
Capital expenditures...................................... (50,676) (38,241) (30,148)
Increase in other assets.................................. (575) (524) (13)
Business acquisitions, net of cash acquired (note 13)..... (66,249) (64,764) (58,590)
--------- --------- ---------
Net cash used by investing activities............. (117,373) (103,253) (87,482)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term obligations....................... 101,559 58,000 44,506
Payment of long-term obligations.......................... (115,073) (65,772) (54,247)
Decrease in minority interest............................. (244) (226) (120)
Proceeds from issuance of common stock.................... 7,118 4,900 2,806
--------- --------- ---------
Net cash used by financing activities............. (6,640) (3,098) (7,055)
--------- --------- ---------
Net increase (decrease) in cash................... 2,537 532 (15,014)
Cash and cash equivalents, beginning of year................ 1,541 1,009 16,023
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 4,078 $ 1,541 $ 1,009
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
22
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Lincare Holdings Inc. and subsidiaries (the "Company") provides oxygen,
respiratory therapy services, and infusion therapy services to the home health
care market and also supplies home medical equipment, such as hospital beds,
wheelchairs and other medical supplies. The Company's customers are located in
39 states. The Company's supplies are readily available and the Company is not
dependent on a single supplier or even a few suppliers.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Significant estimates included in these financial statements are related
to the allowance for uncollectible accounts and self-insurance accruals. Actual
results could differ from those estimates.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of Lincare
Holdings Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(d) Revenue Recognition
Revenues are recognized on an accrual basis in the period in which services
and related products are provided to patients and are recorded at net realizable
amounts estimated to be received from patients and third party payors.
(e) Financial Instruments
The Company believes the book value of its cash equivalents, accounts and
notes receivable, income taxes receivable, accounts payable and accrued expenses
approximates fair value due to their short-term nature. The book value of the
Company's credit facility and long-term obligations approximates their fair
value as the current interest rates approximate rates at which similar types of
borrowing arrangements could be currently obtained by the Company. The Company
had no derivative financial instruments at December 31, 1997 or 1996.
(f) Inventories
Inventories, consisting of equipment, supplies and replacement parts, are
stated at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method.
(g) Property and Equipment
Property and equipment is stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over the estimated useful
lives of the assets as set forth in the table below.
Land improvements........................................... 15 years
Buildings and improvements.................................. 5 to 40 years
Equipment and furniture..................................... 3 to 11 years
F-6
23
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Leasehold improvements are amortized on the straight-line method over the
lesser of the lease term or estimated useful life of the asset. Amortization is
included with depreciation expense.
(h) Other Assets
Goodwill results from the excess of cost over net assets of acquired
businesses and is amortized on a straight-line basis over 40 years.
Intangible assets (customer base) are amortized on a straight-line basis
over the estimated life of three years.
Covenants not to compete are amortized on a straight-line basis over the
life of the respective covenants, three to five years.
The Company annually evaluates goodwill and other intangible assets by
utilizing an operating income realization test. In addition, the Company
considers the effects of external changes to the Company's business environment,
including competitive pressures, market changes and technological and regulatory
changes.
(i) Income Taxes
Deferred income taxes 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. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
recovered or settled. The effect on deferred taxes of a change in tax rate is
recognized in income in the period that includes the enactment date.
(j) Pension Plan
The Company has a defined contribution pension plan covering substantially
all employees. The Company makes monthly contributions to the plan equal to the
amount accrued for pension expense. Employer contributions (net of applied
forfeitures) were approximately $1,895,000 in 1997, $1,362,000 in 1996, and
$1,271,000 in 1995.
(k) Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all
short-term investments with a purchased maturity of three months or less to be
cash equivalents.
(l) Stock Options
Prior to January 1, 1995, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1995, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25, and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
F-7
24
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(m) New Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share". It replaces the standards for computing
earnings per share (EPS) under APB Opinion No. 15, "Earnings Per Share" and
makes the computations comparable to international EPS standards. The Company
adopted this statement for financial statements issued for the period ending
December 31, 1997 and restated all prior period EPS data presented accordingly.
Also in 1997, the Company adopted Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure", which
designates certain disclosure requirements for public entities. The Company
adopted this statement for financial statements issued for the period ended
December 31, 1997. As the Company already disclosed any information required by
SFAS No. 129, adoption of this statement did not have any effect on the
financial disclosures of the Company.
(2) ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable at December 31, 1997 and 1996 consist of:
1997 1996
------- -------
(IN THOUSANDS)
Trade....................................................... $76,161 $56,697
Other....................................................... 173 310
------- -------
76,334 57,007
Less allowance for uncollectible accounts................... 7,951 5,917
------- -------
$68,383 $51,090
======= =======
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consist of:
1997 1996
-------- --------
(IN THOUSANDS)
Land and improvements....................................... $ 85 $ 85
Building and improvements................................... 1,151 1,344
Equipment and furniture..................................... 180,202 149,169
-------- --------
$181,438 $150,598
======== ========
Rental equipment of approximately $138,667,000 in 1997 and $118,719,000 in
1996 are included with equipment and furniture.
(4) LEASES
The Company has several noncancelable operating leases, primarily for
buildings, office equipment and vehicles, that expire over the next five years
and provide for purchase or renewal options. Operating lease expense was
approximately $16,012,000 in 1997, $12,617,000 in 1996, and $9,781,000 in 1995.
F-8
25
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:
(IN THOUSANDS)
1998........................................................ $13,219
1999........................................................ 9,237
2000........................................................ 5,571
2001........................................................ 2,341
2002........................................................ 563
-------
Total minimum lease payments...................... $30,931
=======
(5) LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 1997 and 1996 consist of:
1997 1996
------ ------
(IN THOUSANDS)
Borrowings under revolving credit portion of bank credit
agreement bearing interest at the Interbank Offered Rate
(5.96% at December 31, 1997), adjusted for changes in
reserve requirements, plus an applicable margin based upon
the Company's consolidated leverage ratio (consolidated
funded indebtedness to consolidated EBITDA) payable in
2000...................................................... $4,000 $9,000
Unsecured, deferred acquisition obligations net of imputed
interest, payable in various installments through 1998.... 8,225 4,890
Computer equipment purchases financed through installment
loans; interest (4.17% to 4.52%) and principal are payable
monthly through 2000...................................... 957 127
------ ------
Total long-term obligations....................... 13,182 14,017
Less: current installments........................ 8,580 5,783
------ ------
Long-term debt, excluding current installments.... $4,602 $8,234
====== ======
The credit agreement with a commercial bank dated November 25, 1997 permits
the Company to borrow amounts up to $75,000,000 on a revolving credit facility
and $25,000,000 on a line of credit facility. The revolving credit facility has
a termination date of three years from the date of the credit agreement
(November 24, 2000) and the line of credit has a termination date of 364 days
from the date of the credit agreement (November 24, 1998). Outstanding
borrowings under the line of credit at the termination date of the facility may
be converted to a term loan at the option of the Company and shall mature on the
revolving credit facility termination date. At December 31, 1997, there were no
borrowings outstanding on the line of credit. Upon entering into the credit
agreement, an origination fee of $150,000 was paid and is being amortized over
three years. Commitment fees on the unused portion of the facilities (.175% on
the revolving credit facility and .125% on the line of credit at December 31,
1997) are based upon the Company's consolidated leverage ratio for the most
recent four fiscal quarters. Interest accrued on the outstanding principal
balance that is not termed for repayment is payable quarterly. The credit
agreement contains several financial and other covenants and is secured by a
pledge of the stock of the wholly-owned subsidiaries of Lincare Holdings Inc.
Unamortized imputed interest on the deferred acquisition obligations and
installment loans at 4.17% to 8.25% was $103,000 in 1997 and $4,000 in 1996.
F-9
26
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term obligations for each of the five
years subsequent to December 31, 1997 are as follows:
(IN THOUSANDS)
1998........................................................ $ 8,580
1999........................................................ 344
2000........................................................ 4,258
2001........................................................ --
2002........................................................ --
-------
$13,182
=======
(6) INCOME TAXES
The tax effects of temporary differences that account for significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
1997 1996
-------- -------
(IN THOUSANDS)
Deferred tax assets:
Accounts receivable, principally due to allowance for
uncollectible
accounts............................................... -- $(1,748)
Accrued expenses, principally due to deferral for income
tax reporting purposes................................. (3,388) (2,311)
Intangible assets and covenants not to compete,
principally due to differences in amortization......... (7,927) (4,431)
Net operating loss carryforward........................... (220) (489)
-------- -------
Total gross deferred tax assets................... (11,535) (8,979)
-------- -------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... 9,524 9,291
Goodwill, principally due to differences in
amortization........................................... 6,415 4,232
Other..................................................... 2,457 3,137
-------- -------
Total gross deferred tax liabilities.............. 18,396 16,660
-------- -------
Net deferred tax liability........................ $ 6,861 $ 7,681
======== =======
There is no valuation allowance for deferred tax assets. The Company
expects that the results of future operations will generate sufficient taxable
income to allow for the utilization of deferred tax assets.
F-10
27
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense attributable to operations consists of:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Current:
Federal................................................. $44,641 $35,149 $27,164
State................................................... 7,081 4,183 3,102
------- ------- -------
Total current................................... $51,722 $39,332 $30,266
Deferred:
Federal................................................. (1,347) 959 2,072
State................................................... (202) 131 296
------- ------- -------
Total deferred.................................. (1,549) 1,090 2,368
------- ------- -------
Total income tax expense........................ $50,173 $40,422 $32,634
======= ======= =======
Total income tax expense was allocated:
Income from operations.................................. $50,173 $40,422 $32,634
Stockholders' equity for compensation expense for tax
purposes............................................. (6,553) (6,391) (5,450)
------- ------- -------
$43,620 $34,031 $27,184
======= ======= =======
Total income tax expense differs from the amounts computed by applying a
U.S. federal income tax rate of 35% to income before income taxes as a result of
the following:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Computed "expected" tax expense........................... $45,612 $37,449 $29,286
State income taxes, net of federal income tax benefit..... 4,471 2,804 2,209
Other..................................................... 90 169 1,139
------- ------- -------
Total income tax expense........................ $50,173 $40,422 $32,634
======= ======= =======
(7) STOCKHOLDERS' EQUITY
The Company has 4,879,238 authorized shares of preferred stock, all of
which are unissued. The Board of Directors has the authority to issue up to such
number of shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications, limitations and restrictions thereof
without any further vote or action by the stockholders.
(8) STOCK OPTIONS
The Company has four stock option plans that provide for the grant of
options to directors, officers and employees. To date, stock options have been
granted with an exercise price equal to the stock's fair value at the date of
grant. Stock options generally have ten-year terms and generally vest over four
years.
The Company has reserved a total of 2,973,768 shares of common stock for
issuance under its Non-Qualified Stock Option Plan (the "Plan"). At December 31,
1997, there were options for 110,371 shares outstanding and options for 980
shares available for issuance under the Plan. The Company has reserved a total
of 1,600,000 shares of common stock for issuance under its 1991 Stock Plan (the
"1991 Plan"). At December 31, 1997 there were options for 563,500 shares
outstanding and options for 16,800 shares available for issuance under the 1991
Plan. The Company has reserved a total of 500,000 shares of common stock for
F-11
28
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issuance under its 1994 Stock Plan (the "1994 Plan"). At December 31, 1997,
there were options for 447,000 shares outstanding and options for 20,000 shares
available for issuance under the 1994 Plan. The Company has reserved a total of
1,000,000 shares of common stock for issuance under its 1996 Stock Plan (the
"1996 Plan"). At December 31, 1997, there were options for 847,000 shares
outstanding and options for 153,000 shares available for issue under the 1996
Plan.
The per share weighted average fair value of stock options granted during
1997, 1996, and 1995 was $22.71, $17.48 and $11.56 on the date of grant using
the Black Scholes option pricing model with the following weighted average
assumptions: 1997 -- expected dividend yield 0%, risk-free interest rate of
5.71%, expected life of 9 years, and volatility of 39.9%; 1996 -- expected
dividend yield 0%, risk-free interest rate of 6.2%, expected life of 7 years,
and volatility of 42.2%; 1995 -- expected dividend yield 0%, risk-free interest
rate of 6.2%, expected life of 6 years, and volatility of 43.5%.
The Company applies APB Opinion No. 25 in accounting for its stock plans
and, accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income:
As reported..................................... $80,148 $66,574 $51,039
======= ======= =======
Pro forma....................................... $75,843 $64,093 $49,775
======= ======= =======
Income per common share:
Basic -- as reported............................ $ 2.82 $ 2.38 $ 1.86
======= ======= =======
Diluted -- as reported.......................... $ 2.73 $ 2.31 $ 1.79
======= ======= =======
Basic -- pro forma.............................. $ 2.67 $ 2.29 $ 1.81
======= ======= =======
Diluted -- pro forma............................ $ 2.59 $ 2.22 $ 1.74
======= ======= =======
Pro forma net income reflects only options granted in 1997, 1996, and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income or per share
amounts presented above because compensation cost is reflected over the options
vesting period of four years and compensation cost for options granted prior to
January 1, 1995 is not considered.
F-12
29
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information related to the plans is as follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1994........................... 2,155,062 $10.49
Exercised in 1995.......................................... (562,704) 4.99
Canceled in 1995........................................... (91,379) 3.83
Options issued in 1995..................................... 542,000 25.05
---------
Outstanding at December 31, 1995........................... 2,042,979 16.17
Exercised in 1996.......................................... (568,159) 8.74
Canceled in 1996........................................... (29,400) 15.78
Options issued in 1996..................................... 530,000 32.44
---------
Outstanding at December 31, 1996........................... 1,975,420 22.67
Exercised in 1997.......................................... (465,549) 15.15
Canceled in 1997........................................... (16,000) 29.38
Options issued in 1997..................................... 474,000 38.26
---------
Outstanding at December 31, 1997........................... 1,967,871 $28.15
=========
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was as follows:
OPTIONS WEIGHTED
OUTSTANDING AS OF AVERAGE
RANGE OF DECEMBER 31, REMAINING
EXERCISE PRICES 1997 CONTRACTUAL LIFE
--------------- ----------------- ----------------
$ 0.25-$19.00.......................................... 498,871 4.5 years
$24.63-$25.25 ......................................... 615,000 6.2 years
$28.75-$37.81 ......................................... 675,000 7.1 years
$39.00-$39.00 ......................................... 179,000 8.9 years
---------
$ 0.25-$39.00 ......................................... 1,967,871 6.3 years
=========
At December 31, 1997, 1996 and 1995 the number of options exercisable was
700,371, 825,920, and 1,074,152, respectively, and the weighted average exercise
price of those options was $19.39, $15.62, and $13.25, respectively.
In connection with the exercise of certain stock options, the Company
receives a tax deduction for the difference between the fair value of the common
stock at the date of exercise and the exercise price. The related income tax
benefit of approximately $6,553,000 in 1997, $6,391,000 in 1996, and $5,450,000
in 1995 has been recorded as a reduction of income taxes payable and an increase
to additional paid-in capital.
(9) NET REVENUES
Included in the Company's net revenues is reimbursement from the federal
government under the Medicare, Medicaid and other federally funded programs,
which aggregated approximately 63% in 1997, 61% in 1996, and 60% in 1995 of such
net revenues.
F-13
30
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME PER COMMON SHARE
A reconciliation of the numerators and the denominators of the basic and
diluted per common share computations is as follows:
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1997
Basic:
Income available to common stockholders.... $80,148 28,419 $2.82
=====
Effect of Dilutive Securities:
Stock Options.............................. -- 909
------- ------
Diluted:
Income available to common stockholders and
holders of dilutive securities........... $80,148 29,328 $2.73
======= ====== =====
YEAR ENDED DECEMBER 31, 1996
Basic:
Income available to common stockholders.... $66,574 27,998 $2.38
=====
Effect of Dilutive Securities:
Stock Options.............................. -- 865
------- ------
Diluted:
Income available to common stockholders and
holders of dilutive securities........... $66,574 28,863 $2.31
======= ====== =====
YEAR ENDED DECEMBER 31, 1995
Basic:
Income available to common stockholders.... $51,039 27,511 $1.86
=====
Effect of Dilutive Securities:
Stock Options.............................. -- 1,056
------- ------
Diluted:
Income available to common stockholders and
holders of dilutive securities........... $51,039 28,567 $1.79
======= ====== =====
(11) NON-RECURRING EXPENSE
In 1997, the Company recorded a non-recurring expense of $15,557,000 of
which $11,849,000 was related to the write-off of obsolete oxygen rental
equipment and $3,708,000 was related to the impairment write down of certain
customer list intangible assets. The charges were intended to adjust the
carrying value of certain assets affected by provisions contained in the
Balanced Budget Act of 1997. This legislation reduces Medicare reimbursement for
home oxygen equipment and services by 30 percent over the next two years. The
Company is disposing of the obsolete equipment without proceeds; accordingly,
the carrying value was reduced to zero. The fair value of the customer list was
determined based on discounted cash flows taking into account the reduced
reimbursement rates. In 1996, the Company recorded a non-recurring expense of
$3,932,000 of which $2,682,000 was related to the restructuring of certain
senior management employment agreements. The remainder of the charge related to
the resolution of an investigation in the amount of $1,000,000, together with
related legal fees of $250,000. In 1995, the Company recorded a non-recurring
expense of $1,921,000 related to the abandoned merger between the Company and
Coram Healthcare Corporation. Such non-recurring
F-14
31
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense was comprised of (a) $1,448,000 of professional fees, (b) $199,000 of
printing and mailing expenses, (c) $153,000 of filing fees, and (d) $121,000 of
other direct costs.
(12) SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Cash paid for:
Interest.................................................. $ 1,139 $ 414 $ 762
======= ======= =======
Income taxes.............................................. $47,512 $31,566 $25,036
======= ======= =======
(13) BUSINESS COMBINATIONS
During 1997, the Company acquired the outstanding stock or certain assets
of 24 businesses in 24 separate transactions. During 1996, the Company acquired
the outstanding stock or certain assets of 17 businesses in 17 separate
transactions. Consideration for the acquisitions generally included cash,
unsecured non-interest bearing obligations and the assumption of certain
liabilities.
None of the businesses acquired were related to the Company prior to
acquisition. Each acquisition during 1997 and 1996 was accounted for as a
purchase. The results of operations of the acquired companies are included in
the accompanying consolidated statement of operations since the respective date
of acquisition. Each of the acquired companies conducted operations similar to
that of the Company.
The aggregate cost of the acquisitions described above was as follows:
1997 1996
------- -------
(IN THOUSANDS)
Cash........................................................ $66,597 $64,764
Deferred acquisition obligations............................ 11,583 7,905
Assumption of liabilities................................... 1,475 383
------- -------
$79,655 $73,052
======= =======
The aggregate purchase price of the acquisitions described above was
allocated as follows:
1997 1996
------- -------
(IN THOUSANDS)
Current assets (including cash acquired of $348 in 1997 and
$275 in 1996)............................................. $ 4,547 $ 6,362
Property and equipment...................................... 3,755 3,205
Intangible assets........................................... 6,904 6,379
Goodwill.................................................... 64,449 57,106
------- -------
$79,655 $73,052
======= =======
F-15
32
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma supplemental information on the results
of operations for the years ended December 31, 1997 and 1996 include the
acquisitions as if they had been combined at the beginning of the respective
years.
1997 1996
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net revenues................................................ $466,040 $399,630
======== ========
Net income.................................................. $ 84,721 $ 76,803
======== ========
Basic -- income per common share............................ $ 2.98 $ 2.74
======== ========
Diluted -- income per common share.......................... $ 2.89 $ 2.66
======== ========
This unaudited pro forma financial information is not necessarily
indicative of either the results of operations that would have occurred had the
transactions been effected at the beginning of the respective years or of future
results of operations of the combined companies.
(14) CONTINGENCIES
The Company is involved in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of all matters will not have a material adverse impact on the
Company's financial position, results of operations or liquidity.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial results for the years
ended December 31, 1997 and 1996:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997:
Net revenues................................ $101,012 $108,702 $114,772 $118,695
======== ======== ======== ========
Operating income(1)......................... $ 32,825 $ 35,995 $ 38,498 $ 24,055
======== ======== ======== ========
Net income(1)............................... $ 20,055 $ 21,843 $ 23,548 $ 14,702
======== ======== ======== ========
Income per common share:
Basic....................................... $ .71 $ .77 $ .83 $ .51
======== ======== ======== ========
Diluted..................................... $ .69 $ .75 $ .80 $ .50
======== ======== ======== ========
1996:
Net revenues................................ $ 79,772 $ 84,970 $ 89,633 $ 94,495
======== ======== ======== ========
Operating income (2)........................ $ 25,138 $ 27,581 $ 28,787 $ 25,914
======== ======== ======== ========
Net income (2).............................. $ 15,424 $ 16,945 $ 17,637 $ 16,568
======== ======== ======== ========
Income per common share:
Basic....................................... $ .56 $ .61 $ .63 $ .59
======== ======== ======== ========
Diluted..................................... $ .54 $ .59 $ .61 $ .57
======== ======== ======== ========
- ---------------
(1) The 1997 fourth quarter operating income included a non-recurring expense of
$15,557,000 ($9,568,000 after-tax) (see note 11).
(2) The 1996 fourth quarter operating income included a non-recurring expense of
$3,932,000 ($1,649,000 after-tax) (see note 11).
F-16
33
SCHEDULE VIII
LINCARE HOLDINGS INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ---------- ---------- ---------- ---------- -------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Allowance for uncollectible
accounts......................... $5,917 $4,432 $3,724(1) $6,122(2) $7,951
====== ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1996
Deducted from asset accounts:
Allowance for uncollectible
accounts......................... $4,535 $3,472 $2,788(1) $4,878(2) $5,917
====== ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1995
Deducted from asset accounts:
Allowance for uncollectible
accounts......................... $4,723 $2,190 $1,713(1) $4,091(2) $4,535
====== ====== ====== ====== ======
- ---------------
(1) To record allowance on business combinations
(2) To record write-offs
S-1
34
INDEX OF EXHIBITS
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
+3.1- Amended and Restated Certificate of Incorporation of Lincare Holdings Inc. . . . .
+3.2- Amended and Restated By-Laws of Lincare Holdings Inc. . . . . . . . . . . . . . . .
+10.6- Purchase Agreement dated as of September 25, 1991 among the Registrant and the
several purchasers named therein . . . . . . . . . . . . . . . . . . . . . . . . .
+10.10- Non-Qualified Stock Option Plan of Registrant . . . . . . . . . . . . . . . . . . .
+10.11- Lincare Holdings Inc. 1991 Stock Plan . . . . . . . . . . . . . . . . . . . . . . .
+10.12- Non-Qualified Stock Option Agreements dated as of November 30, 1990, as amended,
between the Registrant and James T. Kelly . . . . . . . . . . . . . . . . . . . . .
+10.13- Non-Qualified Stock Option Agreements dated as of November 30, 1990, as amended,
between the Registrant and Howard R. Deutsch . . . . . . . . . . . . . . . . . . .
+10.14- Non-Qualified Stock Option Agreements dated as of November 30, 1990, as amended,
between the Registrant and James M. Emanuel . . . . . . . . . . . . . . . . . . . .
+10.15- Lincare Inc. 401(k) Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.19- Asset Purchase Agreement dated as of September 25, 1991, between Lincare Inc. and
Glasrock Home Health Care, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
++10.20- Asset Purchase Agreement dated as of October 2, 1992, among Lincare Inc., Advance
Home Health Services, Inc. and Diversified Diagnostics Inc., Richard Levy and
Michael D. Moore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+++10.21- Amendment to Non-Qualified Stock Option Agreement dated December 2, 1992, between
the Registrant and James T. Kelly . . . . . . . . . . . . . . . . . . . . . . . . .
+++10.22- Amendment to Non-Qualified Stock Option Agreement dated December 2, 1992, between
the Registrant and Howard R. Deutsch . . . . . . . . . . . . . . . . . . . . . . .
35
Sequentially
Exhibit Numbered
Number Exhibit Page
- ------ ------- ----
+++10.23- Amendment to Non-Qualified Stock Option Agreement dated December 2, 1992,
between the Registrant and James M. Emanuel . . . . . . . . . . . . . . . . . . .
++++10.24- Asset Purchase Agreement effective March 31, 1993, between Lincare Inc. and T2
Medical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*10.26- Loan Agreement dated February 10, 1995, between Registrant and NationsBank of
Florida, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*10.27- Employment Agreement dated as of November 1, 1993 between Lincare Holdings Inc.
and James T. Kelly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*10.28- Employment Agreement dated as of November 1, 1993 between Lincare Holdings Inc.
and Howard R. Deutsch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*10.29- Employment Agreement dated as of November 1, 1993 between Lincare Holdings Inc.
and James M. Emanuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
**10.30- Asset Purchase Agreement dated as of May 24, 1995 between Lincare Inc. and
PrimaCare Health Resources, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
***10.31- Non-Qualified Stock Option Agreements dated as of January 23, 1995, between
the Registrant and James T. Kelly . . . . . . . . . . . . . . . . . . . . . . . .
***10.32- Non-Qualified Stock Option Agreements dated as of January 23, 1995, between
the Registrant and Howard R. Deutsch . . . . . . . . . . . . . . . . . . . . . .
***10.33- Non-Qualified Stock Option Agreements dated as of January 23, 1995, between
the Registrant and James M. Emanuel . . . . . . . . . . . . . . . . . . . . . . .
10.34- Employment Agreement dated as of January 1, 1997 between Lincare Holdings Inc.
and John P. Byrnes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
****10.35- Employment Agreement dated as of January 1, 1997 between Lincare Holdings Inc.
and James T. Kelly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
****10.36- Employment Agreement dated as of January 1, 1997 between Lincare Holdings Inc.
and Howard R. Deutsch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
****10.37- Employment Agreement dated as of January 1, 1997 between Lincare Holdings Inc.
and James M. Emanuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
****10.38- Non-Qualified Stock Option Agreements dated as of January 26, 1996, between
the Registrant and John P. Byrnes . . . . . . . . . . . . . . . . . . . . . . . .
****10.39- Non-Qualified Stock Option Agreements dated as of July 15, 1996 between
the Registrant and John P. Byrnes . . . . . . . . . . . . . . . . . . . . . . . .
10.40- Employment Agreement dated as of June 1, 1997 between Lincare Holdings Inc. and
Paul G. Gabos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.41- Employee Stock Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 38
10.42- Credit Agreement dated November 25, 1997 between Registrant and NationsBank of
Florida N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
10.43- Form of Non-employee Director Stock Option Agreement . . . . . . . . . . . . . . 40
10.44- Form of Non-qualified Stock Option Agreement . . . . . . . . . . . . . . . . . . 41
+++++22.2- List of Subsidiaries of Lincare Holdings Inc. . . . . . . . . . . . . . . . . . .
23.1- Consent of KPMG Peat Marwick LLP . . . . . . . . . . . . . . . . . . . . . . . . 43
27.1- Financial Data Schedule 12/31/97 (for SEC Use Only) . . . . . . . . . . . . . .
27.2- Financial Data Schedule 12/31/96 (for SEC Use Only) . . . . . . . . . . . . . .
27.3- Financial Data Schedule 12/31/95 (for SEC Use Only) . . . . . . . . . . . . . .
- ---------------
+ Incorporated by reference to the corresponding exhibit to the
Registrant's Registration Statement on Form S-1 (No. 33-44672)
36
++ Incorporated by reference to Exhibit A to the Registrant's Form 8-K
dated October 14, 1992.
+++ Incorporated by reference to the corresponding exhibit to the
Registrant's Registration Statement on Form S-1 (No. 33-55260).
++++ Incorporated by reference to the Registrant's Form 8-K dated April 28,
1993.
+++++ Incorporated by reference to the Registrant's Form 10-K dated March
22, 1994.
* Incorporated by reference to the Registrant's Form 10-K dated
March 22, 1995.
** Incorporated by reference to the Registrant's Form 8-K dated May 24,
1995.
*** Incorporated by reference to the Registrant's Form 10-K dated March 27,
1996.
**** Incorporated by reference to the Registrant's Form 10-K dated March 25,
1997.