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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
(MARK ONE)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
 
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 incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
19387 US 19 North
Clearwater, FL
  
33764
(Address of principal executive offices)
  
(Zip Code)
 
Registrant’s telephone number, including area code:
(727) 530-7700
 
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.    Yes x    No ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
   
Outstanding at
October 31, 2002
Common Stock, $0.01 par value
   
105,706,812 shares  
 

Table of Contents
LINCARE HOLDINGS INC.
 
FORM 10-Q
For The Quarterly Period Ended September 30, 2002
 
INDEX
 
        
Page
PART I.    FINANCIAL INFORMATION
     
Item 1
  
Financial Statements (unaudited)
     
      
3
      
4
      
5
      
6
Item 2
     
9
Item 3
     
12
Item 4
     
12
PART II.    OTHER INFORMATION   
     
Item 1
     
13
Item 2
     
13
Item 3
     
13
Item 4
     
13
Item 5
     
13
Item 6
     
13
  
14
  
15

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PART I.    FINANCIAL INFORMATION
 
Item 1.    Financial Statements (Unaudited)
 
LINCARE HOLDINGS INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
    
September 30,
2002
     
December 31, 2001
  
Current assets:
                  
Cash and cash equivalents
   
$
888
 
   
$
0
 
Restricted cash
   
 
4,175
 
   
 
8,350
 
Accounts and notes receivable
   
 
145,391
 
   
 
143,840
 
Inventories
   
 
2,898
 
   
 
2,857
 
Other
   
 
3,853
 
   
 
6,185
 
    
  
Total current assets
   
 
157,205
 
   
 
161,232
 
    
  
Property and equipment
   
 
496,167
 
   
 
441,391
 
Less: accumulated depreciation
   
 
(265,861
)
   
 
(229,076
)
    
  
Net property and equipment
   
 
230,306
 
   
 
212,315
 
    
  
Other assets:
                  
Goodwill
   
 
755,248
 
   
 
684,771
 
Intangible assets
   
 
0
 
   
 
3,949
 
Covenants not to compete
   
 
5,707
 
   
 
6,810
 
Other
   
 
3,006
 
   
 
1,987
 
    
  
Total other assets
   
 
763,961
 
   
 
697,517
 
    
  
Total assets
   
$
1,151,472
 
   
$
1,071,064
 
    
  
Current liabilities:
                  
Current installments of long-term obligations
   
$
49,949
 
   
$
97,489
 
Accounts payable
   
 
26,743
 
   
 
29,946
 
Accrued expenses:
                  
Compensation and benefits
   
 
12,359
 
   
 
18,488
 
Other
   
 
9,325
 
   
 
10,873
 
Income taxes payable
   
 
12,931
 
   
 
5,219
 
    
  
Total current liabilities
   
 
111,307
 
   
 
162,015
 
    
  
Long-term obligations, excluding current installments
   
 
143,588
 
   
 
125,775
 
Deferred income taxes
   
 
59,122
 
   
 
43,568
 
Minority interest
   
 
724
 
   
 
748
 
Stockholders’ equity:
                  
Common stock
   
 
1,215
 
   
 
1,210
 
Additional paid-in capital
   
 
202,969
 
   
 
194,164
 
Retained earnings
   
 
859,774
 
   
 
719,637
 
Less: treasury stock
   
 
(227,227
)
   
 
(176,053
)
    
  
Total stockholders’ equity
   
 
836,731
 
   
 
738,958
 
    
  
Total liabilities and stockholders’ equity
   
$
1,151,472
 
   
$
1,071,064
 
    
  
 
See accompanying notes to unaudited condensed consolidated financial statements.

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LINCARE HOLDINGS INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
(Unaudited)
 
   
For The Three Months Ended
    
For The Nine Months Ended
  
   
September 30,
2002
    
September 30,
2001
    
September 30,
2002
    
September 30,
2001
  
Net revenues
  
$
244,174
 
  
$
206,780
 
  
$
707,150
 
  
$
596,812
 
   
 
 
 
Costs and expenses:
                                
Costs of goods and services
  
 
36,806
 
  
 
31,038
 
  
 
106,659
 
  
 
91,147
 
Operating expenses
  
 
54,716
 
  
 
46,525
 
  
 
158,659
 
  
 
135,036
 
Selling, general and administrative expenses
  
 
51,154
 
  
 
42,315
 
  
 
147,839
 
  
 
123,633
 
Bad debt expense
  
 
3,663
 
  
 
3,101
 
  
 
10,607
 
  
 
8,952
 
Depreciation expense
  
 
16,210
 
  
 
13,815
 
  
 
46,545
 
  
 
40,210
 
Amortization expense
  
 
415
 
  
 
5,257
 
  
 
1,248
 
  
 
15,728
 
   
 
 
 
   
 
162,964
 
  
 
142,051
 
  
 
471,557
 
  
 
414,706
 
   
 
 
 
Operating income
  
 
81,210
 
  
 
64,729
 
  
 
235,593
 
  
 
182,106
 
   
 
 
 
Other income (expense):
                                
Interest income
  
 
39
 
  
 
94
 
  
 
121
 
  
 
313
 
Interest expense
  
 
(3,415
)
  
 
(3,968
)
  
 
(10,671
)
  
 
(11,908
)
Net loss on disposal of property and equipment
  
 
(57
)
  
 
(23
)
  
 
(105
)
  
 
(45
)
Unrealized loss on derivative financial instrument
  
 
0
 
  
 
(4,670
)
  
 
0
 
  
 
(6,305
)
   
 
 
 
   
 
(3,433
)
  
 
(8,567
)
  
 
(10,655
)
  
 
(17,945
)
   
 
 
 
Income before income taxes
  
 
77,777
 
  
 
56,162
 
  
 
224,938
 
  
 
164,161
 
Income taxes
  
 
29,321
 
  
 
21,398
 
  
 
84,801
 
  
 
62,547
 
   
 
 
 
Net income
  
$
48,456
 
  
$
34,764
 
  
$
140,137
 
  
$
101,614
 
   
 
 
 
Basic earnings per common share
  
$
0.45
 
  
$
0.32
 
  
$
1.31
 
  
$
0.95
 
   
 
 
 
Diluted earnings per common share
  
$
0.44
 
  
$
0.31
 
  
$
1.27
 
  
$
0.92
 
   
 
 
 
Weighted average number of common shares outstanding
  
 
106,621,843
 
  
 
107,658,856
 
  
 
107,282,987
 
  
 
107,345,181
 
   
 
 
 
Weighted average number of common shares and common share equivalents outstanding
  
 
109,601,256
 
  
 
110,366,857
 
  
 
110,030,756
 
  
 
110,022,308
 
   
 
 
 
 
 
See accompanying notes to unaudited condensed consolidated financial statements.

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LINCARE HOLDINGS INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
    
For The Nine Months Ended
  
    
September 30,
2002
     
September 30, 2001
  
Cash from operations
   
$
205,499
 
   
$
177,140
 
Investing activities:
                  
Proceeds from sale of property and equipment
   
 
217
 
   
 
136
 
Capital expenditures
   
 
(62,129
)
   
 
(52,793
)
(Increase) decrease in other assets
   
 
(1,134
)
   
 
498
 
Business acquisitions, net of cash acquired
   
 
(56,887
)
   
 
(65,120
)
    
  
    
 
(119,933
)
   
 
(117,279
)
    
  
Financing activities:
                  
Proceeds from long-term obligations
   
 
124,402
 
   
 
52,000
 
Payment of long-term obligations
   
 
(163,303
)
   
 
(125,735
)
Decrease in minority interest
   
 
(98
)
   
 
(137
)
Proceeds from issuance of common stock
   
 
5,495
 
   
 
10,748
 
Proceeds from issuance of treasury stock
   
 
788
 
   
 
596
 
Payment to acquire treasury stock
   
 
(51,962
)
   
 
0
 
    
  
    
 
(84,678
)
   
 
(62,528
)
    
  
Increase (decrease) in cash
   
 
888
 
   
 
(2,667
)
Cash and cash equivalents, beginning of period
   
 
0
 
   
 
3,201
 
    
  
Cash and cash equivalents, end of period
   
$
888
 
   
$
534
 
    
  
 
See accompanying notes to unaudited condensed consolidated financial statements.

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LINCARE HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.    Basis of Presentation
 
The accompanying condensed consolidated balance sheet as of September 30, 2002, the condensed consolidated statements of operations for the three and nine month periods ended September 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes of Lincare Holdings Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2001. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. The accompanying condensed consolidated balance sheet as of December 31, 2001 is derived from the Company’s audited balance sheet as of that date.
 
Note 2.    Business Combinations
 
Lincare routinely acquires the business and related assets of local and regional competitors as an ongoing strategy to increase share within its respective markets. Lincare arrives at a negotiated purchase price taking into account such factors including, but not limited to, the acquired company’s historical and projected revenue growth, operating cash flow, product mix, payor mix, service reputation, and geographical location.
 
During the nine months ended September 30, 2002, the Company acquired, in unrelated acquisitions, certain assets of 22 companies. Each acquisition was accounted for as a purchase. The results of the acquired companies are included in the accompanying consolidated statements of operations since the respective dates of acquisition.
 
The aggregate cost of these acquisitions was as follows:
 
    
(In thousands)
Cash
   
$
56,887
Deferred acquisition obligations
   
 
14,907
Assumption of liabilities
   
 
315
    
    
$
72,109
    
The aggregate purchase price was allocated as follows:
       
Current assets
   
$
1,728
Property and equipment
   
 
2,731
Intangible assets
   
 
145
Goodwill
   
 
67,505
    
    
$
72,109
    
 
Unaudited pro forma supplemental information on the results of operations for the nine months ended September 30, 2002 and September 30, 2001 are provided below and reflect the acquisitions as if they had been combined at the beginning of each respective period. Effective with the adoption of SFAS 142 (see below) on January 1, 2002, the amortization of goodwill and certain intangible assets was discontinued.

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LINCARE HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
    
For The Nine Months
Ended September 30,
    
2002
   
2001
    
(In thousands except
per share data)
Net revenues
   
$
725,594
   
$
631,261
    
  
Net income
   
$
144,247
   
$
109,297
    
  
Income per common share:
              
Basic
   
$
1.34
   
$
1.02
    
  
Diluted
   
$
1.31
   
$
0.99
    
  
 
The 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 preceding periods or of future results of operations of the combined companies.
 
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and certain intangible assets with indefinite useful lives no longer be amortized. Under the requirements of SFAS No. 141, “Business Combinations” issued in July 2001, the criteria for recognizing intangible assets was changed. The Company reclassified $3,949,000 to goodwill from intangible assets (customer base) on January 1, 2002 based on the intangible assets no longer meeting the SFAS No.141 requirements. The total goodwill no longer being amortized at September 30, 2002, which includes the reclassified intangible assets and the year to date 2002 business combinations, was $755,248,000.
 
For assets determined to have indefinite lives, the Company is required to test the assets for impairment in accordance with SFAS No. 142. The Company performed impairment testing of its goodwill as of January 1, 2002 by using a single reporting unit approach and no impairment was indicated. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any transitional impairment loss would have been measured as of January 1, 2002 and recognized as a cumulative effect of a change in accounting principle in the first interim period in the Company’s statement of operations.
 
The following supplemental information for the nine months ended September 30, 2002 and September 30, 2001 are provided to illustrate the effect of SFAS No. 141 and 142 on the results of operations.

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LINCARE HOLDINGS INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
    
For The Nine Months
Ended September 30,
    
2002
   
2001
    
(In thousands except per share data)
Net income
              
As reported
   
$
140,137
   
$
101,614
Amortization of goodwill and certain intangible assets
   
 
0
   
 
9,516
    
  
Adjusted net income
   
$
140,137
   
$
111,130
    
  
Income per common share—basic
              
As reported
   
$
1.31
   
$
0.95
Amortization of goodwill and certain intangible assets
   
 
0
   
 
.09
    
  
Adjusted income per common share—basic
   
$
1.31
   
$
1.04
    
  
Income per common share—diluted
              
As reported
   
$
1.27
   
$
0.92
Amortization of goodwill and certain intangible assets
   
 
0
   
 
.09
    
  
Adjusted income per common share—diluted
   
$
1.27
   
$
1.01
    
  
 
 
Note 3.    Income Per Common Share
 
Basic income per common share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income per common share reflects the potential dilution of securities that could share in earnings, including stock options. When the exercise of stock options is anti-dilutive, they are excluded from the calculation. There were no anti-dilutive stock options excluded from the calculation at September 30, 2002 and 2001.
 
A reconciliation of the numerators and the denominators of the basic and diluted income per common share computations is as follows:
    
Income (Numerator)
   
Shares
(Denominator)
   
Per Share Amount
    
(In thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30, 2002
                   
Basic:
                   
Income available to common stockholders
   
$
140,137
   
107,283
   
$
1.31
                
Effect of dilutive securities:
                   
Stock options
   
 
0
   
2,748
       
    
  
      
Diluted:
                   
Income available to common stockholders and holders of dilutive securities
   
$
140,137
   
110,031
   
$
1.27
    
  
  
NINE MONTHS ENDED SEPTEMBER 30, 2001
                   
Basic:
                   
Income available to common stockholders
   
$
101,614
   
107,345
   
$
0.95
                
Effect of dilutive securities:
                   
Stock options
   
 
  0
   
2,677
       
    
  
      
Diluted:
                   
Income available to common stockholders and holders of dilutive securities
   
$
101,614
   
110,022
   
$
0.92
    
  
  

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LINCARE HOLDINGS INC.
 
Item 2.    Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
Operating Results
 
The following table sets forth for the periods indicated a summary of the Company’s net revenues by source:
 
    
For The Three Months
Ended September 30,
   
For The Nine Months
Ended September 30,
    
2002
   
2001
   
2002
   
2001
    
(In thousands)
   
(In thousands)
Oxygen and other respiratory therapy
   
$
220,944
   
$
182,747
   
$
637,447
   
$
523,358
Home medical equipment and other
   
 
23,230
   
 
24,033
   
 
69,703
   
 
73,454
    
  
  
  
Total
   
$
244,174
   
$
206,780
   
$
707,150
   
$
596,812
    
  
  
  
 
Net revenues for the three months ended September 30, 2002 increased by $37,394,000 (or 18.1%) compared with the three months ended September 30, 2001, and for the nine months ended September 30, 2002 increased $110,338,000 (or 18.5%) compared with the nine months ended September 30, 2001. The increases in net revenues are attributed to underlying growth in the market for the Company’s products, increased market share primarily resulting from the Company’s sales and marketing efforts that emphasize quality and customer service, and the effects of business acquisitions completed by the Company.
 
The contribution of oxygen and other respiratory therapy products to the Company’s net revenues increased during the three and nine months ended September 30, 2002, over the comparable three and nine month periods ended September 30, 2001. During the three and nine month periods ended September 30, 2002, lower margin non-respiratory product lines contributed less to net revenues as compared with the prior year periods. 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 respiratory business.
 
Costs of goods and services as a percentage of net revenues were 15.1% for the three and nine months ended September 30, 2002 compared with 15.0% and 15.3% for the three and nine months ended September 30, 2001. The decrease in costs of goods and services as expressed as a percentage of net revenues for the nine months ended September 30, 2002 is attributed to the Company’s continued focus on home respiratory products, which is enhanced by the Company’s ability to eliminate lower margin non-respiratory product lines from acquired businesses.
 
The Company continues to maintain a cost structure that, with increases in net revenues, has permitted the Company to spread its fixed operating and overhead expenses over a larger base of revenues, resulting in improvement in operating income. Operating expenses expressed as a percentage of net revenues were 22.4% for the three and nine month periods ended September 30, 2002 compared with 22.5% and 22.6% for the three and nine months ended September 30, 2001. Selling, general and administrative expenses as a percentage of net revenues were 20.9% for the three and nine months ended September 30, 2002 compared with 20.5% and 20.7% for the three and nine months ended September 30, 2001. The increase in selling, general and administrative expenses as a percentage of net revenues is attributed to the Company’s increased expansion of its sales and marketing efforts within the geographic markets it currently serves.
 
Amortization expense for the three and nine months ended September 30, 2002 was $415,000 and $1,248,000 as compared with $5,257,000 and $15,728,000 for the three and nine months ended September 30, 2001. The decrease was the result of the Company’s adoption of SFAS No. 142 (see Note 2).
 
Operating income for the three and nine months ended September 30, 2002 increased to $81,210,000 and $235,593,000, respectively, compared with $64,729,000 and $182,106,000 for the three and nine months ended September 30, 2001. The increases in operating income are attributable to the continued growth in net revenues,

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a favorable shift in product mix to higher margin products, control over operating costs, and the reduction in amortization expense attributable to the adoption of SFAS No. 142.
 
Liquidity And Capital Resources
 
Net cash provided from operating activities was $205,499,000 for the nine months ended September 30, 2002 compared with $177,140,000 for the nine months ended September 30, 2001.
 
Net cash used in investing and financing activities was $204,611,000 for the nine months ended September 30, 2002. Activity during the nine-month period ended September 30, 2002 included the Company’s investment of $56,887,000 in business acquisitions, investment in capital equipment of $62,129,000, payments to acquire treasury stock of $51,962,000, proceeds of $124,402,000 from long-term obligations and payments of $163,303,000 related to long-term obligations.
 
As of September 30, 2002, the Company’s principal sources of liquidity consisted of $45,898,000 of working capital and $146,440,000 available under its revolving bank credit facility. The Company believes that internally generated funds, together with funds that may be borrowed under its bank credit facility, will be sufficient to meet the Company’s anticipated capital requirements for the foreseeable future.
 
On June 11, 1999, the Company’s Board of Directors authorized the Company to repurchase up to $200,000,000 of its outstanding common stock. As of May 17, 2002, the Company had fully completed the repurchase of common stock authorized under the program and had repurchased 14,173,500 shares of the Company’s common stock. On May 21, 2002, the Company’s Board of Directors authorized additional repurchases of up to $100,000,000 of the Company’s outstanding common stock. As of September 30, 2002, $29,970,000 or 1,004,300 shares had been repurchased under this program. The total common stock held in treasury as of September 30, 2002 was $227,227,000. Purchases are made through open market or privately negotiated transactions, subject to market conditions and trading restrictions.
 
New Accounting Standards
 
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections,” which clarifies the criteria under which extinguishment of debt can be considered as extraordinary and rescinds the related SFAS Nos. 4 and 64 in addition to SFAS No. 44 and also makes technical corrections to other Statements of Financial Standards. The Company does not believe the adoption of SFAS No. 145, in 2003, will have a material effect on its financial statements.
 
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which is effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and can be measured at fair value and nullifies EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)”. The Company does not believe the adoption of SFAS No. 146 will have a material effect on its financial statements.
 
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.

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In December 2000, the “Consolidated Appropriations Act, 2001” (H.R. 4577) was signed into law. The appropriations act incorporated by reference the text of H.R. 5661, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (“BIPA”), which included certain Medicare reimbursement and other policy changes. Among other things, BIPA required the U.S. General Accounting Office (“GAO”) to study Medicare reimbursement for drugs and biologicals and for related services. The GAO issued its report to Congress, entitled “Medicare Payments for Covered Outpatient Drugs Exceed Providers’ Cost,” in September 2001. The GAO made recommendations designed to improve the accuracy of Medicare payment for drugs and related services, including establishing Medicare payment levels for prescription drugs and their delivery and administration that are more closely related to their costs, examining the benefits and risks of expanding the current competitive bidding demonstration projects for drugs covered under Medicare Part B, and instituting a process to monitor access to Medicare covered drugs to ensure that payment changes do not negatively affect access for particular drugs for groups of beneficiaries or in certain geographic areas. The government, acting through legislation or regulation, may implement some or all of the GAO’s recommendations. The Company cannot predict whether the government will take any such action and, if so, what effect such action will have on the Company’s ability to provide respiratory and infusion drugs and related services to Medicare beneficiaries in the future.
 
The President’s fiscal year 2003 budget includes a proposal to change reimbursement for prescription drugs covered under Medicare Part B. The budget also contains a proposal to adopt a national competitive bidding payment system for durable medical equipment, including home oxygen equipment. The Company cannot predict whether any of the proposals outlined in the President’s budget will be adopted by Congress and become law.
 
Federal and state budgetary and other cost-containment pressures will continue to impact the home respiratory care industry. The Company cannot predict whether new federal and state budgetary proposals will be adopted or the effect, if any, such proposals would have on the Company’s business.
 
Forward Looking Statements
 
Statements contained herein that are not based on historical facts are forward-looking statements that are based on projections and estimates regarding the economy in general, the health care industry and other factors which impact the Company. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statements. The estimates relate to reimbursement by government and third party payors for the Company’s products, the costs associated with government regulation of the health care industry and the effects of competition and industry consolidation. In some cases, forward-looking statements that involve risks and uncertainties contain terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or variations of these terms or other comparable terminology.
 
Key factors that have an impact on the Company’s ability to attain these estimates include potential reductions in reimbursement rates by government and third party payors, changes in reimbursement policies, demand for the Company’s products and services, the availability of appropriate acquisition candidates and the Company’s ability to successfully complete acquisitions, efficient operations of the Company’s existing and future operating facilities, regulation and/or regulatory action affecting the Company or its business, economic and competitive conditions and access to borrowed and/or equity capital on favorable terms.
 
In developing its forward-looking statements, the Company has made certain assumptions relating to reimbursement rates and policies, internal growth and acquisitions and the outcome of various legal and regulatory proceedings. If the assumptions used by the Company differ materially from what actually occurs, then actual results could vary significantly from the performance projected in the forward-looking statements. The Company is under no duty to update any of the forward-looking statements after the date of this Form 10-Q.

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Item 3.    Quantitative and Qualitative Disclosure Regarding Market Risk
 
The Company had no derivative securities as of September 30, 2002. The Company is exposed to changes in interest rates as a result of its revolving bank credit facility which is based on the London Interbank Offered Rate. A 10% increase in interest rates related to the Company’s revolving bank credit facility would not have a material effect on the Company’s earnings over the next fiscal year or the revolving bank credit facility’s fair value.
 
The fair value of the Company’s revolving bank credit facility and senior secured notes are subject to change as a result of changes in interest rates. The Company estimates potential changes in the fair value of interest rate sensitive financial instruments based on a hypothetical decrease (or increase) in interest rates. The Company’s use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is necessarily limited because it does not take into account anticipated operating and financial transactions.
 
The following table sets forth the Company’s estimated impact on the fair value of its long-term obligations and the impact on earnings resulting from a hypothetical 10% decrease in interest rates.
 
Estimated fair value of financial instruments (in thousands):
 
                     
(Assuming 10%
Decrease in Interest Rates)
  
    
Face
Amount
   
Carrying
Amount
   
Fair
Value
     
Hypothetical
Change in
Fair Value
     
Hypothetical
Change in
Annual
Interest
Expense
  
September 30, 2002:
                                         
Revolving bank credit facility
   
$
48,000
   
$
48,000
   
$
48,000
     
$
0
     
$
(144
)
Senior secured notes
   
 
125,000
   
 
125,000
   
 
129,349
     
 
472
     
 
0
 
December 31, 2001:
                                         
Revolving bank credit facility
   
$
75,000
   
$
75,000
   
$
75,000
     
$
0
     
$
(240
)
Senior secured notes
   
 
125,000
   
 
125,000
   
 
126,931
     
 
435
     
 
0
 
 
Item 4.     Controls and Procedures
 
Within the 90 days prior to the date of this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the officers concluded that the Company’s disclosure controls and procedures are effective in timely alerting management to material information relating to the Company required to be included in periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company completed its evaluation.

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PART II.    OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
As a health care provider, Lincare is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documentation and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to patients. Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to legal process.
 
Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.
 
From time to time, the Company receives inquiries from various government agencies requesting patient records and other documents. It has been Lincare’s policy to cooperate with all such requests for information. The government has not instituted any proceedings or served Lincare with any complaints as a result of these inquiries.
 
Private litigants may also make claims against the Company for violations of health care laws in actions known as qui tam suits. In these cases, the government has the opportunity to intervene in, and take control of, the litigation. The Company is a defendant in certain qui tam proceedings. The government has declined to intervene in all unsealed qui tam actions of which the Company is aware. Lincare intends to vigorously defend these suits should they proceed.
 
Items 2-5.    Not Applicable.
 
Item 6.    Exhibits and Reports on Form 8-K
 
 
(a)
 
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 September 30, 2002.

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SIGNATURE
 
Pursuant to the requirements 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.
Registrant
/s/    PAUL G. GABOS        
Paul G. Gabos
Secretary, Chief Financial Officer
and Principal Accounting Officer
 
November 14, 2002

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CERTIFICATIONS
 
I, John P. Byrnes, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Lincare Holdings Inc.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:
  
November 14, 2002
      
By:
  
/s/    JOHN P. BYRNES        
               
John P. Byrnes
Chief Executive Officer

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Table of Contents
 
I, Paul G. Gabos, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Lincare Holdings Inc.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:
  
November 14, 2002
      
By:
  
/s/    PAUL G. GABOS        
               
Paul G. Gabos
Chief Financial Officer

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Table of Contents
 
INDEX OF EXHIBITS
 
 
Exhibit Number
     
Exhibit
     
Sequentially
Numbered
Page
  3.10
(A)
   
Amended and Restarted Certificate of Incorporation of Lincare Holdings Inc.
       
  3.11
(C)
   
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.
       
  3.20
(I)
   
Amended and Restated By-Laws of Lincare Holdings Inc.,
       
10.20
(A)
   
Non-Qualified Stock Option Plan of Registrant
       
10.21
(A)
   
Lincare Holdings Inc. 1991 Stock Plan
       
10.22
(E)
   
Lincare Holdings Inc. 1994 Stock Plan
       
10.23
(E)
   
Lincare Holdings Inc. 1996 Stock Plan
       
10.24
(E)
   
Lincare Holdings Inc. 1998 Stock Plan
       
10.25
(E)
   
Lincare Holdings Inc. 2000 Stock Plan
       
10.26
(F)
   
Lincare Holdings Inc. 2001 Stock Plan
       
10.30
(H)
   
Lincare Inc. 401(k) Plan
       
10.31
(B)
   
Employment Stock Purchase Plan
       
10.40
(G)
   
Form of Executive Employment Agreement Dated December 15, 2001
       
10.50
(B)
   
Form of Non-employment Director Stock Option Agreement
       
10.51
(B)
   
Form of Non-qualified Stock Option Agreement
       
10.60
(H)
   
Amended and Restated Credit Agreement dated as of April 25, 2002
       
10.70
(D)
   
Senior Secured Note Purchase Agreement among Lincare Holdings Inc., as Borrower, and several note holders with Bank of America, N.A., as Agent
       
10.71
(D)
   
Form of Series A Note
       
10.72
(D)
   
Form of Series B Note
       
10.73
(D)
   
Form of Series C Note
       
99.1  
 
   
Certifications pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
(A)
 
Incorporated by reference to the Corresponding exhibit to the Registrant’s Registration Statement on
      
 
Form S-1 (No. 33-44672)
(B)
 
Incorporated by reference to the Registrant’s Form 10-K dated March 26 1998.
(C)
 
Incorporated by reference to the Registrant’s Form 10-Q dated August 12, 1998.
(D)
 
Incorporated by reference to the Registrant’s Form 10-Q dated November 13, 2000.
(E)
 
Incorporated by reference to the Registrant’s Form 10-K dated March 29, 2001.
(F)
 
Incorporated by reference to the Registrant’s Form 10-Q dated August 1, 2001.
(G)
 
Incorporated by reference to the Registrant’s Form 10-K dated March 28, 2002.
(H)
 
Incorporated by reference to the Registrant’s Form 10-Q dated May 13, 2002.
(I)
 
Incorporated by reference to the Registrant’s Form 10-Q dated August 13, 2002.