$0.5 million to intangible assets, $1.1 million interest in joint ventures and
$141.4 million to goodwill. These acquisitions resulted in the addition of 33 new operating centers.
In 2002, the Company acquired, in unrelated
acquisitions, certain operating assets of 28 local and regional companies. The aggregate cost of these acquisitions was $119.8 million and was
allocated to acquired assets as follows: $2.5 million to current assets, $4.0 million to property and equipment, $0.2 million to intangible assets and
$113.2 million to goodwill. These acquisitions resulted in the addition of 26 new operating centers.
Liquidity and Capital Resources
Our primary sources of liquidity have been
internally generated funds from operations, borrowings under credit facilities and proceeds from equity and debt transactions. We have used these funds
to meet our capital requirements, which consist primarily of operational needs, capital expenditures, acquisitions and debt service.
At December 31, 2003, our working capital was $89.9
million, excluding current maturities of the senior secured notes totaling $50.0 million, as compared to $73.0 million, excluding current maturities of
the senior secured notes totaling $30.0 million, at December 31, 2002.
Net cash provided by operating activities was $370.3
million for the year ended December 31, 2003, compared with $287.2 million for the year ended December 31, 2002 and $233.7 million for the year ended
December 31, 2001. A significant portion of our assets consists of accounts receivable from third party payors that are responsible for payment for the
equipment and services we provide. Contributing to the increase in net cash from operating activities was a decrease in net accounts receivable days
sales outstanding (“DSO”) resulting from improved collection performance. Our net accounts receivable in terms of days sales outstanding was
45 days as of December 31, 2003 and 51 days as of December 31, 2002.
Net cash used in investing and financing activities
was $362.0 million, $285.6 million and $236.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. Activity in the year ended
December 31, 2003 included our investment of $133.9 million in business acquisitions, investment in capital equipment of $127.8 million, proceeds of
$570.5 million from our issuance of debt, $410.2 million related to our payment of debt and $264.0 million in payments to repurchase
stock.
As of December 31, 2003, our principal source of
liquidity consisted of $189.0 million available under our revolving credit agreement. The revolving credit agreement, dated April 25, 2002, makes
available to us up to $200.0 million over a five-year period, subject to certain terms and conditions set forth in the agreement. We believe that
internally generated funds, together with funds that may be borrowed under our revolving credit agreement, will be sufficient to meet our anticipated
capital requirements and financial obligations. We believe that our credit standing provides us with adequate access to financial
markets.
On June 4, 2003, the Board of Directors authorized
an increase to the size of our previously authorized share repurchase program, adopted as of February 25, 2003, from $100.0 million to $225.0 million.
As of December 31, 2003, we had repurchased 6,706,000 shares of common stock for $224.7 million under this authorization. Purchases are made through
open market or privately negotiated transactions, subject to market conditions and trading restrictions. As of December 31, 2003, the total common
stock held in treasury, at cost, was $524.3 million.
On June 11, 2003, we completed the sale of $250.0
million aggregate principal amount of 3.0% Convertible Senior Debentures due 2033 (the “Debentures”) in a private placement. The Debentures
are convertible into shares of our common stock based on a conversion rate of 18.7515 shares for each $1,000 principal amount of Debentures. This is
equivalent to a conversion price of approximately $53.33 per share of common stock. On June 23, 2003, we sold an additional $25.0 million principal
amount of Debentures pursuant to the exercise in full of an over-allotment option granted to the initial purchasers of the Debentures. The Debentures
are convertible into common stock in any calendar quarter if, among other circumstances, the last reported sale price of our common stock for at least
20 trading days during the period of 30 consecutive trading days ending on the last trading day of our previous calendar quarter is greater than or
equal to 120% of the applicable conversion price per share ($64.00 per share) of our common stock on such last trading day. Interest on the Debentures
is payable at the rate of 3.0% per annum on June 15 and December 15 of each year, which began on December 15, 2003. The Debentures are senior unsecured
obligations and will mature on June 15, 2033. The Debentures are redeemable by us on or after June 15, 2008 and may be put to us for repurchase on June
15, 2008, 2010, 2013, or 2018.
16
Our future liquidity will continue to be dependent
upon our operating cash flow and management of accounts receivable.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital
expenditures or capital resources.
Future Minimum Obligations
In the normal course of business, we enter into
obligations and commitments that require future contractual payments. The commitments primarily result from repayment obligations for borrowings under
our senior secured notes, revolving bank credit facility and Debentures, as well as contractual lease payments for facility, vehicle, and equipment
leases and deferred acquisition obligations. The following table presents, in aggregate, scheduled payments under our contractual obligations (in
thousands):
|
|
|
|
Fiscal Years
|
|
|
|
|
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
Thereafter
|
|
Total
|
Short-term
debt |
|
|
|
$ |
63,943 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
63,943 |
|
Capital lease
commitments |
|
|
|
|
1,993 |
|
|
|
233 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,226 |
|
Long-term
debt |
|
|
|
|
191 |
|
|
|
45,193 |
|
|
|
200 |
|
|
|
— |
|
|
|
— |
|
|
|
275,000 |
|
|
|
320,584 |
|
Operating
leases |
|
|
|
|
27,533 |
|
|
|
19,519 |
|
|
|
10,584 |
|
|
|
5,091 |
|
|
|
1,289 |
|
|
|
— |
|
|
|
64,016 |
|
Total |
|
|
|
$ |
93,660 |
|
|
$ |
64,945 |
|
|
$ |
10,784 |
|
|
$ |
5,091 |
|
|
$ |
1,289 |
|
|
$ |
275,000 |
|
|
$ |
450,769 |
|
New Accounting Standards
In December 2003, the Financial Accounting Standards
Board revised Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which addressed
consolidation by business enterprises of variable interest entities (“VIEs”) meeting certain criteria. The revised FASB Interpretation, FIN
46R, was issued to clarify certain ambiguities contained within the original Interpretation and to improve the financial reporting by enterprises
involved with VIEs. The Company does not expect this interpretation to have a material impact on its consolidated financial position or results of
operations.
Inflation
We have not experienced large increases in either
the cost of supplies or operating expenses due to inflation. With reductions in reimbursement by government and private medical insurance programs and
pressure to contain the costs of such programs, we bear the risk that reimbursement rates set by such programs will not keep pace with
inflation.
Segment Information
We follow Financial Accounting Standards Board
Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” SFAS No. 131 utilizes the “management” approach for determining reportable segments. The management approach designates
the internal organization that is used by management for making operating decisions and assessing performance as the source of our reportable segments.
We maintain a decentralized approach to management of our local business operations. Decentralization of managerial decision-making enables our
operating centers to respond promptly and effectively to local market demands and opportunities. We provide home health care equipment and services
through 727 operating centers in 47 states. We view each operating center as a distinct part of a single “operating segment,” as each
operating center generally provides the same products to customers. Management reporting and analysis occurs at an individual operating center level and senior
management reviews statements of operation for each of our operating centers on a monthly basis. As a result, all of our operating centers are
aggregated into one reportable segment.
17
Forward-Looking Statements
Statements in this annual report concerning future
results, performance or expectations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as
amended. All forward-looking statements included in this document are based upon information available to Lincare as of the date hereof and Lincare
assumes no obligation to update any such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors
that may cause Lincare’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. 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 Lincare’s
ability to attain these estimates include potential reductions in reimbursement rates by government and third party payors, changes in reimbursement
policies, the demand for Lincare’s products and services, the availability of appropriate acquisition candidates and Lincare’s ability to
successfully complete and integrate acquisitions, efficient operations of Lincare’s existing and future operating facilities, regulation and/or
regulatory action affecting Lincare or its business, economic and competitive conditions, access to borrowed and/or equity capital on favorable terms
and other risks described below.
In developing our forward-looking statements, we
have 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 we use differ materially from what actually occurs, then actual results could vary significantly from the
performance projected in the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this
report.
Certain Risk Factors Relating to the Company’s Business
We operate in a rapidly changing environment that
involves a number of risks. The following discussion highlights some of these risks and others are discussed elsewhere in this report. These and other
risks could materially and adversely affect our business, financial condition, operating results and cash flows.
A MAJORITY OF OUR CUSTOMERS HAVE PRIMARY HEALTH COVERAGE UNDER MEDICARE PART B
AND RECENTLY ENACTED AND FUTURE CHANGES IN THE REIMBURSEMENT RATES OR PAYMENT METHODOLOGIES UNDER THE MEDICARE PROGRAM COULD MATERIALLY AND ADVERSELY
AFFECT OUR BUSINESS.
As a provider of home oxygen and other respiratory
therapy services for the home health care market, we have historically depended heavily on Medicare reimbursement as a result of the high proportion of
elderly persons suffering from respiratory disease. Medicare Part B, the Supplementary Medical Insurance Program, provides coverage to eligible
beneficiaries for DME, such as oxygen equipment, respiratory assistance devices, continuous positive airway pressure devices, nebulizers and associated
respiratory medications, hospital beds and wheelchairs for the home setting. Approximately 75% of our customers have primary coverage under Medicare
Part B. There are increasing pressures on Medicare to control health care costs and to reduce or limit reimbursement rates for home medical equipment
and services. Medicare reimbursement is subject to statutory and regulatory changes, retroactive rate adjustments, administrative and executive orders
and governmental funding restrictions, all of which could materially decrease payments to us for the services and equipment we
provide.
As discussed above, on December 8, 2003, the
President signed DIMA into law. This legislation, among other things, provides expanded Medicare prescription drug coverage, modifies payments to
Medicare providers and institutes administrative reforms intended to improve Medicare program operations. DIMA includes sweeping changes which will
impact a broad spectrum of health care industry participants, including physicians, pharmacies, manufacturers, pharmacy benefit managers, as well as
other Medicare suppliers and providers, including Lincare.
The DIMA legislation contains provisions that
directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. Among other things, DIMA significantly reduces
reimbursement for inhalation drug therapies, reduces payment amounts for five categories of DME, including oxygen, beginning in 2005, freezes payment
amounts for other covered DME items from 2004 to 2007, establishes a competitive
18
acquisition program for DME beginning in 2007, and implements quality standards and
accreditation requirements for DME suppliers. The DIMA provisions, when implemented, could materially and adversely affect our business, financial
condition, operating results and cash flows. See “MEDICARE REIMBURSEMENT” for a full discussion of the DIMA provisions.
A SIGNIFICANT PERCENTAGE OF OUR BUSINESS IS DERIVED FROM THE SALE OF
MEDICARE-COVERED DME ITEMS, INCLUDING OXYGEN, AND RECENT LEGISLATION REDUCES PAYMENT AMOUNTS FOR FIVE CATEGORIES OF DME, INCLUDING OXYGEN, BEGINNING IN
2005 AND IMPOSES A PAYMENT FREEZE FOR OTHER DME FROM 2004 TO 2007.
DIMA contains provisions that would reduce payment
amounts, beginning in 2005, for oxygen equipment, standard wheelchairs (including standard power wheelchairs), nebulizers, diabetic supplies consisting
of lancets and testing strips, hospital beds and air mattresses to the median prices paid under the Federal Employee Health Plan (“FEHP”).
The legislative text of DIMA references comparative pricing data included in testimony of the Office of Inspector General (“OIG”) as the
source data for FEHP pricing. However, the referenced table does not include applicable payment amounts for oxygen. It is expected that the OIG will
issue a subsequent report during 2004 that will establish pricing for oxygen based on the median FEHP payment amount. Until the report is issued, the
Medicare payment amount for oxygen furnished in 2005 will not be known. Median FEHP prices for the items included on the table referenced in the OIG
testimony range between 4 percent and 22 percent below comparable Medicare fee schedule amounts. The OIG may also undertake to revise the FEHP pricing
data and corresponding Medicare reimbursement rates for these items in its subsequent report. We can not predict the outcome of the OIG report or the
Medicare payment rates that will be in effect in 2005 for these items. DIMA also freezes payment amounts for other covered DME items from 2004 to 2007.
Such payment reductions, when implemented in 2005, could have a material adverse effect on our financial position and operating
results.
A SIGNIFICANT PERCENTAGE OF OUR BUSINESS IS DERIVED FROM THE SALE OF
MEDICARE-COVERED RESPIRATORY MEDICATIONS, AND RECENT LEGISLATION IMPOSES SIGNIFICANT REDUCTIONS IN MEDICARE REIMBURSEMENT FOR SUCH INHALATION
DRUGS.
Historically, prescription drug coverage under
Medicare has been limited to drugs furnished incident to a physician’s services and certain self-administered drugs, including inhalation drug
therapies. Prior to DIMA, Medicare reimbursement for covered Part B drugs, including inhalation drugs that we provide, has been limited to 95 percent
of the published average wholesale price (“AWP”) for the drug. DIMA establishes new payment limits and procedures for drugs reimbursed under
Medicare Part B. Payments for inhalation drugs furnished during 2004 declined to 80 percent of the AWP in effect as of April 1, 2003, a reduction of
approximately 15 percent. If these provisions of DIMA are fully implemented, beginning in 2005, inhalation drugs furnished to Medicare beneficiaries
would be reimbursed at 106 percent of the volume-weighted average selling price (“ASP”) of the drug, as determined from data to be provided
by drug manufacturers under a specific formula described in the legislative text. While the net payment amounts for inhalation drugs under the ASP
methodology have not yet been determined, we believe that the ASP provision, if implemented, could result in payment amounts in 2005 of up to 80
percent lower than 2004.
We do not believe that the ASP provisions contained
in DIMA will adequately compensate home care providers for inhalation drug therapies and, if implemented, would completely eliminate the supply of
these critical respiratory medications by home care providers, such as Lincare, adversely affecting more than one million patients across the United
States. The General Accounting Office (“GAO”) is directed under DIMA to conduct a study to examine the adequacy of reimbursement for
inhalation drug therapy under the Medicare program and submit the results of the study in a report to Congress no later than December 8, 2004. We can not
predict the outcome of the GAO study or its potential impact on the implementation of the ASP provisions in 2005. Medicare-covered inhalation drugs
account for approximately one quarter of our net revenues. Such payment adjustments could have a material and adverse effect on our financial position
and operating results.
19
RECENT REGULATORY CHANGES SUBJECT THE MEDICARE REIMBURSEMENT RATES FOR OUR
EQUIPMENT AND SERVICES TO POTENTIAL DISCRETIONARY ADJUSTMENT BY THE CENTERS FOR MEDICARE AND MEDICAID SERVICES (“CMS”), WHICH COULD REDUCE
OUR REVENUES, NET INCOME AND CASH FLOWS.
In February 2003, a final rule governing CMS’
Inherent Reasonableness, or IR, authority became effective. The IR rule establishes a process for adjusting fee schedule amounts for Medicare Part B
services when existing payment amounts are determined to be either grossly excessive or deficient. The rule describes the factors that CMS or its
contractors will consider in making such determinations and the procedures that will be followed in establishing new payment amounts. To date, no
payment adjustments have occurred or been proposed as a result of the IR rule.
The effectiveness of the IR rule itself does not
trigger payment adjustments for any items or services. Nevertheless, the IR rule puts in place a process that could eventually have a significant
impact on Medicare payments for our equipment and services. We can not predict whether or when CMS will exercise its IR authority with respect to our
equipment and services. Such payment adjustments, if implemented, could reduce our revenues, net income and cash flows.
RECENT LEGISLATION ESTABLISHING A COMPETITIVE BIDDING PROCESS UNDER MEDICARE
COULD REDUCE OUR REVENUES, NET INCOME AND CASH FLOWS.
DIMA instructs the Secretary to establish and
implement programs under which competitive acquisition areas are established throughout the United States for contract award purposes for the
furnishing of competitively priced items of DME, including oxygen equipment. The program would be implemented in phases such that competition under the
program occurs in 10 of the largest MSAs in 2007, 80 of the largest MSAs in 2009, and additional areas after 2009. Items selected for competitive
acquisition may be phased in first among the highest cost and highest volume items and services or those items and services that the Secretary
determines have the largest savings potential. In carrying out such programs, the Secretary may exempt rural areas and areas with low-population
density within urban areas that are not competitive, unless there is a significant national market through mail order for a particular item or
service.
For each competitive acquisition area, the Secretary
would conduct a competition under which providers would submit bids to supply certain covered items of DME. Successful bidders would be expected to
meet certain program quality standards in order to be awarded a contract and only successful bidders could supply the covered items to Medicare
beneficiaries in the acquisition area. The applicable contract award prices are expected to be less than would be paid under current Medicare fee
schedules and contracts would be re-bid at least every three years. The Secretary will be required to award contracts to multiple entities submitting
bids in each area for an item or service, but would have the authority to limit the number of contractors in a competitive acquisition area to the
number needed to meet projected demand. The Secretary may use competitive bid pricing information to adjust the payment amount otherwise in effect for
an area that is not a competitive acquisition area. We can not predict the outcome of the competitive acquisition program or the Medicare payment
rates that will be in effect in 2007 and beyond for the items subject to competitive bidding. Competitive bidding, when implemented, could have a
material adverse effect on our financial position and operating results.
FUTURE REDUCTIONS IN REIMBURSEMENT RATES UNDER MEDICAID COULD REDUCE OUR
REVENUES, NET INCOME AND CASH FLOWS.
Due to budgetary shortfalls, many states are
considering, or have enacted, cuts to their Medicaid programs, including funding for our equipment and services. These cuts have included, or may
include, elimination or reduction of coverage for some or all of our equipment and services, amounts eligible for payment under co-insurance
arrangements, or payment rates for covered items. Approximately 5 percent of our customers are eligible for primary Medicaid benefits, and
approximately 8 percent of our payments from primary and secondary insurance benefits are funded by state Medicaid programs. Continued state budgetary
pressures could lead to further reductions in funding for the reimbursement for our equipment and services which, in turn, could have a material
adverse effect on our financial position and operating results.
20
FUTURE REDUCTIONS IN REIMBURSEMENT RATES FROM PRIVATE PAYORS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND OPERATING RESULTS.
Payors such as private insurance companies and
employers are under pressure to increase profitability and reduce costs. In response, certain payors are limiting coverage or reducing reimbursement
rates for the equipment and services we provide. Approximately 17 percent of our customers and approximately 26 percent of our primary and secondary
payments are derived from private payors. Continued financial pressures on these entities could lead to further reimbursement reductions for our
equipment and services that could have a material adverse effect on our financial condition and operating results.
WE DEPEND UPON REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR A SIGNIFICANT MAJORITY
OF OUR REVENUES, AND IF WE FAIL TO MANAGE THE COMPLEX AND LENGTHY REIMBURSEMENT PROCESS, OUR BUSINESS AND OPERATING RESULTS COULD
SUFFER.
We derive a significant majority of our revenues
from reimbursement by third-party payors. We accept assignment of insurance benefits from customers and, in most instances, invoice and collect
payments directly from Medicare, Medicaid and private insurance carriers, as well as from customers under co-insurance provisions. In 2003,
approximately 60 percent of our revenues were derived from Medicare, 26 percent from private insurance carriers, 7 percent from Medicaid and the
balance directly from individual customers and commercial entities.
Our financial condition and results of operations
may be affected by the reimbursement process, which in the health care industry is complex and can involve lengthy delays between the time that
services are rendered and the time that the reimbursement amounts are settled. Depending on the payor, we may be required to obtain certain
payor-specific documentation from physicians and other health care providers before submitting claims for reimbursement. Certain payors have filing
deadlines and they will not pay claims submitted after such time. We can not assure you that we will be able to continue to effectively manage the
reimbursement process and collect payments for our equipment and services promptly.
WE ARE SUBJECT TO EXTENSIVE FEDERAL AND STATE REGULATION, AND IF WE FAIL TO
COMPLY WITH APPLICABLE REGULATIONS, WE COULD SUFFER SEVERE CRIMINAL OR CIVIL SANCTIONS OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS
THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
The federal government and all states in which we
currently operate regulate many aspects of our business. In particular, our operating centers are subject to federal laws that regulate the repackaging
of drugs (including oxygen). We are subject to federal laws that regulate interstate motor-carrier transportation. Our operations also are subject to
state laws governing, among other things, pharmacies, nursing services, distribution of medical equipment and certain types of home health activities.
Certain of our employees are subject to state laws and regulations governing the ethics and professional practices of respiratory therapy, pharmacy and
nursing.
As a health care supplier, we are 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, documenting 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 customer records and other documents to support our
claims for payment. Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to the
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, which could have a material adverse effect on our business.
Health care is an area of rapid regulatory change.
Changes in the law and new interpretations of existing laws may affect permissible activities, the costs associated with doing business, and
reimbursement amounts paid by federal, state and other third-party payors. We can not predict the future of federal, state and local regulation or
legislation, including Medicare and Medicaid statutes and regulations, or possible changes in national health care policies. Future legislation and
regulatory changes could have a material adverse effect on our business.
21
COMPLIANCE WITH NEW REGULATIONS UNDER THE FEDERAL HEALTH INSURANCE PORTABILITY
AND ACCOUNTABILITY ACT OF 1996 AND RELATED RULES, OR HIPAA, RELATING TO THE TRANSMISSION AND PRIVACY OF HEALTH INFORMATION COULD IMPOSE ADDITIONAL
SIGNIFICANT COSTS ON OUR OPERATIONS.
Numerous federal and state laws and regulations
govern the collection, dissemination, use and confidentiality of patient-identifiable health information, including HIPAA. HIPAA requires us to comply
with standards for the use and disclosure of health information within our company and with third parties, such as payors, business associates and
customers. These include standards for common health care electronic transactions and code sets, such as claims information, plan eligibility, payment
information and the use of electronic signatures, and privacy and electronic security of individually identifiable health information. Each set of
HIPAA regulations has a specified compliance date and requires health care providers, including us, in addition to health plans and clearinghouses, to
develop and maintain policies and procedures with respect to protected health information that is used or disclosed.
The HIPAA regulations mandate that standardized
transaction and code sets be developed and used for electronic billing purposes by all payors in the United States, including both government and
private health plans. While the Medicare program has historically used a uniform set of transaction codes for electronic claim submission and payment,
certain billing codes have varied among the different state Medicaid programs and certain health plans. It is currently unknown whether every existing
billing code used by certain Medicaid and private health plans for products provided in the home care setting will have a corresponding code in the
final HIPAA transaction sets. The absence of certain standardized codes for our equipment and services or the inability of certain payors to accept
such electronic codes may preclude us from submitting electronic claims for payment to those payors. Such an outcome would require the submission of
paper claims, which could ultimately result in delays and difficulties in collecting these claims, and could have a material adverse effect on our
financial position and operating results.
If we do not comply with existing or new laws and
regulations related to patient health information, we could be subject to criminal or civil sanctions. New health information standards, whether
implemented pursuant to HIPAA or otherwise, could have a significant effect on the manner in which we handle health care related data and communicate
with payors, and the cost of complying with these standards could be significant.
WE MAY UNDERTAKE ACQUISITIONS THAT COULD SUBJECT US TO UNANTICIPATED LIABILITIES
AND THAT COULD FAIL TO ACHIEVE EXPECTED BENEFITS.
Our strategy is to increase our market share through
internal growth and strategic acquisitions. Consideration for the acquisitions has generally consisted of cash, unsecured non-interest bearing
obligations and the assumption of certain liabilities.
The implementation of an acquisition strategy
entails certain risks, including inaccurate assessment of undisclosed liabilities, entry into markets in which we may have limited or no experience,
diversion of management’s attention and human resources from our underlying business, difficulties in integrating the operations of an acquired
business or in realizing anticipated efficiencies and cost savings, failure to retain key management or operating personnel of the acquired business,
and an increase in indebtedness and a limitation in the ability to access additional capital on favorable terms. The successful integration of an
acquired business may be dependent on the size of the acquired business, condition of the customer billing records, complexity of system conversions
and execution of the integration plan by local management. If we do not successfully integrate the acquired business, we could fail to achieve the
expected revenue contribution from the acquisition or there could be delays in the billing and collection of claims for services rendered to customers,
which could have a material adverse effect on our financial position and operating results.
WE FACE INTENSE NATIONAL, REGIONAL AND LOCAL COMPETITION AND IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY, WE WILL LOSE REVENUES AND OUR BUSINESS WILL SUFFER.
The home respiratory market is a fragmented and
highly competitive industry. We compete against other national providers and, by our estimate, more than 2,000 local and regional providers. Home
respiratory companies compete primarily on the basis of service rather than price since reimbursement levels are established by Medicare and Medicaid
or by the individual determinations of private health plans.
22
Our ability to compete successfully and to increase
our referrals of new customers are highly dependent upon our reputation within each local health care market for providing responsive, professional and
high-quality service and achieving strong customer satisfaction. Given the relatively low barriers to entry in the home respiratory market, we expect
that the industry will become increasingly competitive in the future. Increased competition in the future could limit our ability to attract and retain
key operating personnel and achieve continued growth in our core business.
INCREASES IN OUR COSTS COULD ERODE OUR PROFIT MARGINS AND SUBSTANTIALLY REDUCE
OUR NET INCOME AND CASH FLOWS.
Cost containment in the health care industry,
fueled, in part, by federal and state government budgetary shortfalls, is likely to result in constant or decreasing reimbursement amounts for our
equipment and services. As a result, our profit margins will decrease if we are unable to control our operating cost levels. Labor and related costs
account for approximately 43 percent of our operating costs and expenses. We compete with other health care providers to attract and retain qualified
or skilled personnel. We also compete with various industries for lower-wage administrative and service employees. Since reimbursement rates are
established by fee schedules mandated by Medicare, Medicaid and private payors, we are not able to offset the effects of general inflation in labor and
related cost components, if any, through increases in prices for our equipment and services. Consequently, such cost increases could erode our profit
margins and reduce our net income.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
The fair value of our revolving credit agreement and
senior secured notes are subject to change as a result of changes in market prices or interest rates. We estimate potential changes in the fair value
of interest rate sensitive financial instruments based on a hypothetical increase (or decrease) in interest rates. Our 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 estimated fair
value of our long-term obligations and our estimate of the impact from a 10 percent decrease in interest rates on the fair value of our long-term
obligations and the associated change in annual interest expense.
Market Risk Sensitive Instruments — Interest Rate
Sensitivity
|
|
|
|
|
|
|
|
|
|
(Assuming 10%
Decrease in Interest Rates)
|
|
(dollars in thousands)
|
|
|
|
Face
Amount
|
|
Carrying
Amount
|
|
Fair Value
|
|
Hypothetical
Change in
Fair Value
|
|
Hypothetical
Change in Annual
Interest Expense
|
As of
December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
bank credit facility |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
$ — |
|
Senior
secured notes |
|
|
|
|
95,000 |
|
|
|
95,000 |
|
|
|
98,875 |
|
|
|
117 |
|
|
|
— |
|
Convertible
debt |
|
|
|
|
275,000 |
|
|
|
275,000 |
|
|
|
277,750 |
|
|
|
2,993 |
|
|
|
— |
|
Deferred
obligations |
|
|
|
|
16,753 |
|
|
|
16,753 |
|
|
|
16,753 |
|
|
|
— |
|
|
|
— |
|
As of
December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
bank credit facility |
|
|
|
$ |
60,000 |
|
|
$ |
60,000 |
|
|
$ |
60,000 |
|
|
$ |
— |
|
|
|
($154 |
) |
Senior
secured notes |
|
|
|
|
125,000 |
|
|
|
125,000 |
|
|
|
129,390 |
|
|
|
472 |
|
|
|
— |
|
Convertible
debt |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Deferred
obligations |
|
|
|
|
24,243 |
|
|
|
24,243 |
|
|
|
24,243 |
|
|
|
— |
|
|
|
— |
|
Item 8. Financial Statements and Supplementary
Data
The financial statements required by this item are
listed in Item 15(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.
23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
The Company has conducted an evaluation of its
disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as
of the end of the period covered by this report (the “Evaluation Date”). Based on its evaluation, the Company’s principal executive
officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company is recorded, processed, summarized and reported within the required time periods.
No change in the Company’s internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d – 15(f) under the Securities and Exchange Act of 1934) occurred during the fiscal
quarter ended December 31, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting.
24
PART III
Item 10. Directors and Executive Officers of the
Registrant
Directors and Executive Officers
Information regarding the directors of the Company
will be included in the definitive proxy statement for the Annual Meeting of Stockholders to be held May 17, 2004, under “Information Regarding
the Board of Directors and Executive Officers” and is herein incorporated by reference.
Audit Committee
The Company has a separately-designated standing
Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Additional information regarding the Audit Committee will be included in the definitive proxy statement for the Annual Meeting of Stockholders to be
held May 17, 2004, under “Committees and Meetings of the Board of Directors” and “Audit Committee Report” and is herein
incorporated by reference.
Audit Committee Financial Expert
The Board of Directors has designated William F.
Miller, III as the Audit Committee “Financial Expert” as defined by Item 401(h) of Regulation S-K of the Exchange Act and has determined that
he is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Section 16(a) Beneficial Ownership Reporting Compliance
Information regarding Section 16(a) Beneficial
Ownership Reporting Compliance will be included in the definitive proxy statement for the Annual Meeting of Stockholders to be held May 17, 2004, under
“Compliance with Section 16(a) of the Securities Exchange Act of 1934” and is herein incorporated by reference.
Code of Ethics
The Company has adopted a code of business conduct
and ethics that applies to its directors, officers (including its principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions) as well as its employees. Copies of our code of ethics are available without charge
upon written request directed to Corporate Secretary, Lincare Holdings Inc., 19387 U.S. 19 North, Clearwater, Florida 33764.
Item 11. Executive Compensation
Information regarding executive compensation will be
included in the definitive proxy statement for the Annual Meeting of Stockholders to be held May 17, 2004, under “Executive Compensation” and
is herein incorporated by reference.
| Item 12. |
|
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The response to this item will be included in the
definitive proxy statement for the Annual Meeting of Stockholders to be held May 17, 2004, under “Security Ownership of Certain Beneficial Owners
and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” and is herein incorporated by
reference.
Item 13. Certain Relationships and Related
Transactions
None.
Item 14. Principal Accountant Fees and
Services
The response to this item will be included in the
definitive proxy statement for the Annual Meeting of Stockholders to be held May 17, 2004, under “Audit Committee Report” and
“Information Regarding the Independent Auditors of the Company” and is herein incorporated by reference.
25
PART IV
Item 15. Exhibits, Financial Statement Schedule 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, 2003
and 2002
Consolidated Statements of Operations — Years
ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders’ Equity
— Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows — Years
ended December 31, 2003, 2002 and 2001
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 — Valuation and Qualifying
Accounts
All other schedules for which provision is made in
the applicable accounting regulations of the SEC 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) |
|
Reports on Form 8-K
Furnished October 24, 2003:
Announcement of the financial results for the quarter ended September 30, 2003.
Filed November 26, 2003: Press release addressing the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003. |
26
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 effective March 15, 2004 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 in the capacities and on
the dates indicated.
Signature
|
|
|
|
Position
|
|
Date
|
/s/ JOHN P.
BYRNES
John P. Byrnes
|
|
|
|
Director, President, Chief
Executive Officer and Principal
Executive Officer |
|
March 15, 2004 |
|
|
|
|
|
|
|
/s/ PAUL G.
GABOS
Paul G. Gabos
|
|
|
|
Secretary, Chief Financial and
Principal Accounting Officer |
|
March 15, 2004 |
|
|
|
|
|
|
|
*
Chester B. Black
|
|
|
|
Director |
|
March 15, 2004 |
|
|
|
|
|
|
|
*
Frank T. Cary
|
|
|
|
Director |
|
March 15, 2004 |
|
|
|
|
|
|
|
*
William F. Miller, III
|
|
|
|
Director |
|
March 15, 2004 |
|
|
|
|
|
|
|
*
Frank D. Byrne, M.D.
|
|
|
|
Director |
|
March 15, 2004 |
|
|
|
|
|
|
|
*
Stuart H. Altman, Ph.D.
|
|
|
|
Director |
|
March 15, 2004 |
*By: |
|
/s/ JOHN P. BYRNES
Attorney in fact
|
27
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Lincare Holdings
Inc.:
We have audited the consolidated financial
statements listed in the index on page 26 of Lincare Holdings Inc. and subsidiaries. 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 26. These consolidated financial statements
and the 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 auditing
standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of America. 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 LLP
Tampa, Florida
February 6, 2004
F-1
LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(Dollars in thousands)
|
|
ASSETS
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
9,815 |
|
|
$ |
1,581 |
|
Restricted
cash |
|
|
|
|
7,909 |
|
|
|
— |
|
Accounts and
notes receivable (note 2) |
|
|
|
|
151,194 |
|
|
|
142,740 |
|
Income taxes
receivable |
|
|
|
|
11,117 |
|
|
|
1,816 |
|
Inventories |
|
|
|
|
2,503 |
|
|
|
2,987 |
|
Prepaid and other current assets |
|
|
|
|
4,552 |
|
|
|
4,527 |
|
Total current
assets |
|
|
|
|
187,090 |
|
|
|
153,651 |
|
Property and
equipment (notes 3 and 4) |
|
|
|
|
622,274 |
|
|
|
515,272 |
|
Accumulated
depreciation |
|
|
|
|
(334,150 |
) |
|
|
(279,762 |
) |
Net property
and equipment |
|
|
|
|
288,124 |
|
|
|
235,510 |
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
941,937 |
|
|
|
800,905 |
|
Covenants
not-to-compete, less accumulated amortization of $16,597 in 2003 and $15,010 in 2002 |
|
|
|
|
4,224 |
|
|
|
5,346 |
|
Other |
|
|
|
|
10,285 |
|
|
|
3,189 |
|
Total other
assets |
|
|
|
|
956,446 |
|
|
|
809,440 |
|
Total
assets |
|
|
|
$ |
1,431,660 |
|
|
$ |
1,198,601 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current
installments of long-term obligations (note 5) |
|
|
|
$ |
65,936 |
|
|
$ |
53,718 |
|
Accounts
payable |
|
|
|
|
35,033 |
|
|
|
26,962 |
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
|
|
Compensation
and benefits |
|
|
|
|
30,415 |
|
|
|
17,569 |
|
Liability
insurance |
|
|
|
|
8,891 |
|
|
|
4,787 |
|
Other current
liabilities |
|
|
|
|
6,882 |
|
|
|
7,629 |
|
Total current
liabilities |
|
|
|
|
147,157 |
|
|
|
110,665 |
|
Long-term
obligations, excluding current installments (note 5) |
|
|
|
|
320,817 |
|
|
|
155,525 |
|
Deferred
income taxes (note 6) |
|
|
|
|
114,689 |
|
|
|
75,375 |
|
Minority
interest |
|
|
|
|
750 |
|
|
|
746 |
|
Total
liabilities |
|
|
|
|
583,413 |
|
|
|
342,311 |
|
Stockholders’ equity (notes 6, 7, and 8):
|
|
|
|
|
|
|
|
|
|
|
Common stock,
$.01 par value. Authorized 200,000,000 shares;
issued and outstanding: 122,842,964 and 99,012,166 in 2003, 121,715,964 and 105,798,086 in
2002 |
|
|
|
|
1,229 |
|
|
|
1,217 |
|
Additional
paid-in capital |
|
|
|
|
229,111 |
|
|
|
206,525 |
|
Retained
earnings |
|
|
|
|
1,142,176 |
|
|
|
910,065 |
|
Less treasury
stock, at cost: 23,830,798 shares in 2003 and 15,917,878 shares in 2002 |
|
|
|
|
(524,269 |
) |
|
|
(261,517 |
) |
Total
stockholders’ equity |
|
|
|
|
848,247 |
|
|
|
856,290 |
|
Commitments
and contingencies (notes 4, 5 and 14)
|
|
|
|
|
— |
|
|
|
— |
|
Total
liabilities and stockholders’ equity |
|
|
|
$ |
1,431,660 |
|
|
$ |
1,198,601 |
|
See accompanying notes to consolidated financial statements.
F-2
LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2003, 2002
and 2001
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(In thousands, except per share data)
|
|
Net revenues
(note 9) |
|
|
|
$ |
1,147,356 |
|
|
$ |
960,904 |
|
|
$ |
812,442 |
|
Costs and
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
and services |
|
|
|
|
171,658 |
|
|
|
144,525 |
|
|
|
123,406 |
|
Operating
expenses |
|
|
|
|
253,341 |
|
|
|
215,724 |
|
|
|
183,385 |
|
Selling,
general and administrative expenses |
|
|
|
|
239,656 |
|
|
|
201,468 |
|
|
|
167,269 |
|
Bad debt
expense |
|
|
|
|
17,210 |
|
|
|
14,414 |
|
|
|
12,187 |
|
Depreciation
expense |
|
|
|
|
75,007 |
|
|
|
63,299 |
|
|
|
54,699 |
|
Amortization
expense |
|
|
|
|
1,587 |
|
|
|
1,664 |
|
|
|
21,119 |
|
Other charges
(note 13) |
|
|
|
|
— |
|
|
|
— |
|
|
|
10,650 |
|
|
|
|
|
|
758,459 |
|
|
|
641,094 |
|
|
|
572,715 |
|
Operating
income |
|
|
|
|
388,897 |
|
|
|
319,810 |
|
|
|
239,727 |
|
Other income
(expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
|
|
226 |
|
|
|
164 |
|
|
|
365 |
|
Interest
expense |
|
|
|
|
(17,431 |
) |
|
|
(14,165 |
) |
|
|
(16,013 |
) |
Net loss on
disposal of property and equipment |
|
|
|
|
(428 |
) |
|
|
(147 |
) |
|
|
(71 |
) |
Realized loss
on derivative financial instrument (note 5) |
|
|
|
|
— |
|
|
|
— |
|
|
|
(6,004 |
) |
|
|
|
|
|
(17,633 |
) |
|
|
(14,148 |
) |
|
|
(21,723 |
) |
Income before
income taxes |
|
|
|
|
371,264 |
|
|
|
305,662 |
|
|
|
218,004 |
|
Income tax
expense (note 6) |
|
|
|
|
139,153 |
|
|
|
115,234 |
|
|
|
83,060 |
|
Net
income |
|
|
|
$ |
232,111 |
|
|
$ |
190,428 |
|
|
$ |
134,944 |
|
Income per
common share (note 10):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
2.28 |
|
|
$ |
1.78 |
|
|
$ |
1.26 |
|
Diluted |
|
|
|
$ |
2.22 |
|
|
$ |
1.73 |
|
|
$ |
1.23 |
|
Weighted
average number of common shares outstanding |
|
|
|
|
101,671 |
|
|
|
106,942 |
|
|
|
107,439 |
|
Weighted
average number of common shares and common share equivalents outstanding |
|
|
|
|
104,565 |
|
|
|
109,770 |
|
|
|
110,071 |
|
See accompanying notes to consolidated financial statements.
F-3
LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December
31, 2003, 2002 and 2001
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Total
Stockholders’
Equity
|
|
|
|
|
(Dollars in thousands)
|
|
Balances at
December 31, 2000 |
|
|
|
$ |
1,200 |
|
|
$ |
175,402 |
|
|
$ |
584,693 |
|
|
$ |
(176,845 |
) |
|
$ |
584,450 |
|
Exercise of
stock options (note 8) |
|
|
|
|
10 |
|
|
|
11,103 |
|
|
|
— |
|
|
|
— |
|
|
|
11,113 |
|
Tax benefit
related to exercise of employee stock options (notes 6 and 8) |
|
|
|
|
— |
|
|
|
7,659 |
|
|
|
— |
|
|
|
— |
|
|
|
7,659 |
|
Net
income |
|
|
|
|
— |
|
|
|
— |
|
|
|
134,944 |
|
|
|
— |
|
|
|
134,944 |
|
Treasury
stock issued |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
792 |
|
|
|
792 |
|
Balances at
December 31, 2001 |
|
|
|
|
1,210 |
|
|
|
194,164 |
|
|
|
719,637 |
|
|
|
(176,053 |
) |
|
|
738,958 |
|
Exercise of
stock options (note 8) |
|
|
|
|
7 |
|
|
|
7,260 |
|
|
|
— |
|
|
|
— |
|
|
|
7,267 |
|
Tax benefit
related to exercise of employee stock options (notes 6 and 8) |
|
|
|
|
— |
|
|
|
5,101 |
|
|
|
— |
|
|
|
— |
|
|
|
5,101 |
|
Net
income |
|
|
|
|
— |
|
|
|
— |
|
|
|
190,428 |
|
|
|
— |
|
|
|
190,428 |
|
Treasury
stock issued |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,035 |
|
|
|
1,035 |
|
Treasury
stock acquired |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(86,499 |
) |
|
|
(86,499 |
) |
Balances at
December 31, 2002 |
|
|
|
|
1,217 |
|
|
|
206,525 |
|
|
|
910,065 |
|
|
|
(261,517 |
) |
|
|
856,290 |
|
Exercise of
stock options (note 8) |
|
|
|
|
12 |
|
|
|
13,459 |
|
|
|
— |
|
|
|
— |
|
|
|
13,471 |
|
Tax benefit
related to exercise of employee stock options (notes 6 and 8) |
|
|
|
|
— |
|
|
|
9,127 |
|
|
|
— |
|
|
|
— |
|
|
|
9,127 |
|
Net
income |
|
|
|
|
— |
|
|
|
— |
|
|
|
232,111 |
|
|
|
— |
|
|
|
232,111 |
|
Treasury
stock issued |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,227 |
|
|
|
1,227 |
|
Treasury
stock acquired |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(263,979 |
) |
|
|
(263,979 |
) |
Balances at
December 31, 2003 |
|
|
|
$ |
1,229 |
|
|
$ |
229,111 |
|
|
$ |
1,142,176 |
|
|
$ |
(524,269 |
) |
|
$ |
848,247 |
|
See accompanying notes to consolidated financial statements.
F-4
LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002
and 2001
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(Dollars in thousands)
|
|
Cash flows
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
$ |
232,111 |
|
|
$ |
190,428 |
|
|
$ |
134,944 |
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
losses on accounts and notes receivable |
|
|
|
|
17,210 |
|
|
|
14,414 |
|
|
|
12,187 |
|
Depreciation
expense |
|
|
|
|
75,007 |
|
|
|
63,299 |
|
|
|
54,699 |
|
Loss on
disposal of property and equipment |
|
|
|
|
428 |
|
|
|
147 |
|
|
|
71 |
|
Amortization
expense |
|
|
|
|
1,587 |
|
|
|
1,664 |
|
|
|
21,119 |
|
Amortization
of interest swap contracts |
|
|
|
|
(719 |
) |
|
|
(785 |
) |
|
|
(785 |
) |
Realized loss
on interest rate derivative (note 5) |
|
|
|
|
— |
|
|
|
— |
|
|
|
6,004 |
|
Deferred
income tax benefit |
|
|
|
|
39,315 |
|
|
|
31,807 |
|
|
|
8,983 |
|
Minority
interest in net earnings of subsidiary |
|
|
|
|
89 |
|
|
|
96 |
|
|
|
86 |
|
Change in
assets and liabilities net of effects of acquired businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in
accounts and notes receivable |
|
|
|
|
(19,488 |
) |
|
|
(10,948 |
) |
|
|
(37,276 |
) |
Decrease in
inventories |
|
|
|
|
1,133 |
|
|
|
19 |
|
|
|
1,205 |
|
(Increase)
decrease in prepaid and other current assets |
|
|
|
|
(25 |
) |
|
|
1,658 |
|
|
|
936 |
|
Increase
(decrease) in accounts payable |
|
|
|
|
8,071 |
|
|
|
(2,984 |
) |
|
|
10,134 |
|
Increase in
accrued expenses |
|
|
|
|
15,739 |
|
|
|
305 |
|
|
|
3,309 |
|
Increase
(decrease) in income taxes payable |
|
|
|
|
(175 |
) |
|
|
(1,935 |
) |
|
|
18,089 |
|
Net cash
provided by operating activities |
|
|
|
|
370,283 |
|
|
|
287,185 |
|
|
|
233,705 |
|
Cash flows
from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
sale of property and equipment |
|
|
|
|
6,260 |
|
|
|
244 |
|
|
|
150 |
|
Capital
expenditures |
|
|
|
|
(127,835 |
) |
|
|
(82,928 |
) |
|
|
(74,206 |
) |
(Increase)
decrease in other assets |
|
|
|
|
(5,931 |
) |
|
|
(1,316 |
) |
|
|
648 |
|
Business
acquisitions, net of cash acquired (note 12) |
|
|
|
|
(133,937 |
) |
|
|
(94,703 |
) |
|
|
(149,375 |
) |
Cash
restricted for future payments |
|
|
|
|
(11,469 |
) |
|
|
— |
|
|
|
(8,350 |
) |
Net cash used
by investing activities |
|
|
|
|
(272,912 |
) |
|
|
(178,703 |
) |
|
|
(231,133 |
) |
Cash flows
from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of debt |
|
|
|
|
570,471 |
|
|
|
177,535 |
|
|
|
175,534 |
|
Payments of
debt |
|
|
|
|
(410,241 |
) |
|
|
(206,142 |
) |
|
|
(185,111 |
) |
Payment of
interest rate derivative (note 5) |
|
|
|
|
— |
|
|
|
— |
|
|
|
(7,965 |
) |
Decrease in
minority interest |
|
|
|
|
(86 |
) |
|
|
(97 |
) |
|
|
(136 |
) |
Proceeds from
issuance of common stock |
|
|
|
|
13,471 |
|
|
|
7,267 |
|
|
|
11,113 |
|
Proceeds from
issuance of treasury stock |
|
|
|
|
1,227 |
|
|
|
1,035 |
|
|
|
792 |
|
Payments to
acquire treasury stock |
|
|
|
|
(263,979 |
) |
|
|
(86,499 |
) |
|
|
— |
|
Net cash used
by financing activities |
|
|
|
|
(89,137 |
) |
|
|
(106,901 |
) |
|
|
(5,773 |
) |
Net increase
(decrease) in cash and cash equivalents |
|
|
|
|
8,234 |
|
|
|
1,581 |
|
|
|
(3,201 |
) |
Cash and cash
equivalents, beginning of period |
|
|
|
|
1,581 |
|
|
|
— |
|
|
|
3,201 |
|
Cash and cash
equivalents, end of period |
|
|
|
$ |
9,815 |
|
|
$ |
1,581 |
|
|
$ |
— |
|
See accompanying notes to consolidated financial statements.
F-5
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2003, 2002 and 2001
(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, infusion therapy services and home medical equipment such as hospital beds,
wheelchairs and other medical supplies to the home health care market. The Company’s customers are located in 47 states. The Company’s
equipment and supplies are readily available and the Company is not dependent on a single supplier or even a few suppliers.
(b) Use of Estimates
Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(c) Principles of
Consolidation
The consolidated financial statements include the
accounts of Lincare Holdings Inc. and its majority-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation. Certain amounts in the prior years’ financial statements have been reclassified to conform
to the current year presentation.
(d) Revenue Recognition
The Company’s revenues are recognized on an
accrual basis in the period in which services and related products are provided to customers and are recorded at net realizable amounts estimated to be
paid by customers and third- party payors. The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts
in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. If the
payment amount received differs from the net realizable amount, an adjustment is made to the net realizable amount in the period that these payment
differences are determined. The Company reports revenues in its financial statements net of such adjustments.
The Company’s revenue recognition policy is
consistent with the criteria set forth in Staff Accounting Bulletin 104 — Revenue Recognition (“SAB 104”) for determining when
revenue is realized or realizable and earned. The Company recognizes revenue in accordance with the requirements of SAB 104 that:
• |
|
persuasive evidence of an arrangement exists; |
• |
|
the seller’s price to the buyer is fixed or determinable;
and |
• |
|
collectibility is reasonably assured. |
Due to the nature of the industry and the
reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net
realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available.
Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain
payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash
application, claim denial or account review. Included in accounts receivable are earned but unbilled receivables. Unbilled accounts receivable
represent charges for equipment and supplies delivered to customers for which invoices have not yet been generated by the billing system. Prior to the
delivery of equipment and supplies to customers, the Company performs certain certification and approval procedures to ensure collection is probable
and that unbilled accounts receivable are recorded at net realizable amounts expected to be paid by customers and third-party payors. Billing delays,
ranging from several
F-6
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(1) Description of Business and Summary of Significant Accounting
Policies (Continued)
days to several weeks, can occur due to delays in
obtaining certain required payor-specific documentation from internal and external sources, interim
transactions occurring between cycle billing dates established for each customer within the billing system and business acquisitions awaiting
assignment of new provider enrollment identification numbers.
The Company performs analyses to evaluate the net
realizable value of accounts receivable. Specifically, the Company considers historical realization data, accounts receivable aging trends, other
operating trends and relevant business conditions. Because of continuing changes in the healthcare industry and third-party reimbursement, it is
possible that the Company’s estimates could change, which could have an impact on the Company’s results of operations and cash flows.
(e) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company
considers all short-term investments with a purchased maturity of less than three months to be cash equivalents.
(f) Restricted and Segregated Cash
Restricted and segregated cash was held in an
interest-bearing investment account, was restricted for use and segregated for the purposes of complying with and performing certain contractual
payment obligations in connection with the purchase of health care related assets of Healthcare Solutions, Inc. on May 2, 2003.
(g) Financial Instruments
The Company believes the book value of its cash
equivalents, accounts and notes receivable, income taxes receivable, accounts payable and accrued expenses approximate fair value due to their
short-term nature. The book value of the Company’s revolving credit agreement and deferred acquisition obligations approximate 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 fair
value of the Company’s senior secured notes is estimated based on the discounted value of the future cash flows expected to be paid over the
maturity period of the notes. The estimated fair value of the senior secured notes at December 31, 2003 and 2002 was $98,875,000 and $129,390,000,
respectively. The fair value of the Company’s 3.0% convertible debentures due June 15, 2033, is estimated based on several standard market
variables including the Company’s stock price, yield to put/call through conversion and yield to maturity. The estimated fair value of the
Company’s debentures was $277,750,000 at December 31, 2003. Additional disclosures related to the Company’s financial instruments are included under Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
(h) Inventories
Inventories, consisting of equipment, supplies and
replacement parts, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out (FIFO) method.
(i) Property and Equipment
Property and equipment is stated at cost.
Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets as set forth in the
table below.
Building and
improvements |
|
|
|
5
to 40 years |
Equipment and
furniture |
|
|
|
2
to 20 years |
F-7
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(1) Description of Business and Summary of Significant Accounting
Policies (Continued)
Leasehold improvements are amortized using the
straight-line method over the lesser of the lease term or estimated useful life of the asset. Amortization is included with depreciation
expense.
(j) Goodwill, Other Assets and
Impairment
Goodwill results from the excess of cost over net
assets of acquired businesses and until December 31, 2001, was amortized on a straight-line basis over 40 years. Covenants not-to-compete are amortized
on a straight-line basis over the life of the respective covenants, one to five years.
Estimated amortization expense for each of the five
succeeding fiscal years is as follows:
|
|
|
|
Amortization
Expense
|
|
|
|
|
(In thousands)
|
2004 |
|
|
|
|
$1,491 |
|
2005 |
|
|
|
|
1,422 |
|
2006 |
|
|
|
|
1,179 |
|
2007 |
|
|
|
|
112 |
|
2008 |
|
|
|
|
20 |
|
Total
amortization expense |
|
|
|
$ |
4,224 |
|
On January 1, 2002, the Company adopted SFAS 142,
“Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized
but instead be measured for impairment at least annually, or when events indicate that an impairment may exist. As of the adoption date, amortization
of outstanding goodwill and other indefinite-lived intangible assets ceased. As required by SFAS 142, the Company performs impairment tests annually
and when events or circumstances indicate that the value of goodwill or other indefinite-lived intangible assets might be impaired. In connection with
the SFAS 142 indefinite-lived intangible asset impairment test, the Company utilized the required one-step method to determine whether an impairment
existed as of the adoption date. In connection with the SFAS 142 transitional goodwill impairment test, the Company utilized the required two-step
method for determining that there was no goodwill impairment as of the adoption date.
Had SFAS 142 been in effect for the year ended
December 31, 2001, pro forma net income and net income per share would have been as follows:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(In thousands)
|
|
Net income,
as reported |
|
|
|
$ |
232,111 |
|
|
$ |
190,428 |
|
|
$ |
134,944 |
|
Add: Goodwill
amortization, net of tax |
|
|
|
|
— |
|
|
|
— |
|
|
|
12,656 |
|
Pro forma net
income |
|
|
|
$ |
232,111 |
|
|
$ |
190,428 |
|
|
$ |
147,600 |
|
Net income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
2.28 |
|
|
$ |
1.78 |
|
|
$ |
1.26 |
|
Diluted |
|
|
|
$ |
2.22 |
|
|
$ |
1.73 |
|
|
$ |
1.23 |
|
|
Pro
forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
2.28 |
|
|
$ |
1.78 |
|
|
$ |
1.37 |
|
Diluted |
|
|
|
$ |
2.22 |
|
|
$ |
1.73 |
|
|
$ |
1.34 |
|
F-8
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(1) Description of Business and Summary of Significant Accounting
Policies (Continued)
The Company annually evaluates whether events or
circumstances have occurred that would indicate an impairment in the value of goodwill. The Company also evaluates the useful lives of property and
equipment and certain intangibles to determine whether events or circumstances warrant impairment charges or revised depreciation or amortization
periods. If there is an indication that the carrying value of a long-lived asset is not recoverable, the Company estimates the projected undiscounted
cash flows, excluding interest, of the asset to determine if any impairment loss should be recognized. In this evaluation, the Company considers the
effects of external changes to the Company’s business environment, including competitive pressures, market erosion and technological and
regulatory changes. The impairment loss is determined by comparing the carrying amount of the asset to its estimated fair value. No impairment loss has
been recorded for the years ended December 31, 2003 and 2002.
(k) 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.
(l) Advertising Costs
Advertising costs are charged to expense as
incurred.
(m) Employee Benefit Plans
Pension Plan. The Company has a defined contribution
pension plan covering substantially all employees. Employer contributions (net of applied forfeitures) were approximately $5.7 million in 2003, $6.1
million in 2002 and $5.5 million in 2001.
Employee Stock Purchase Plan. The Company sponsors
an employee stock purchase plan that enables eligible employees to purchase shares of the Company’s common stock at the lower of 85 percent of the
fair market value of the Company’s stock price on: (i) the last day of the offering period; or (ii) the last day of the prior offering period.
Employees may elect to have up to 10% of their base salary withheld on an after-tax basis. Under the employee stock purchase plan, 1.2 million shares have
been authorized for issuance. To date, 309,895 shares have been issued under this authorization. During 2003, the Company issued 47,989 shares at an average
price of $25.55; during 2002, the Company issued 39,458 shares at an average price of $23.69; and during 2001, the Company issued 34,678 shares at an
average price of $22.93 per share. See Note 8 to Consolidated Financial Statements for pro forma results had compensation expense been recognized based
on fair value as of the grant dates as prescribed by FAS123.
(n) Stock Options
Statement of Financial Accounting Standards (SFAS)
No. 123, “Accounting for Stock-Based Compensation,” establishes financial accounting and reporting standards for stock-based compensation
plans. SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based method, or (2) an intrinsic-value-based method which is
prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related
interpretations. The Company has elected to account for its stock-based incentive plans and awards under APB No. 25, and has adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” See
Note 8 to Consolidated Financial Statements for disclosure pursuant to SFAS 148.
F-9
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(1) Description of Business and Summary of Significant Accounting
Policies (Continued)
(o) Segment Information
The Company follows Financial Accounting Standards
Board Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” SFAS No. 131 utilizes the “management” approach for determining reportable segments. The management approach designates
the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s
reportable segments. The Company maintains a decentralized approach to management of its local business operations. Decentralization of managerial
decision-making enables the Company’s operating centers to respond promptly and effectively to local market demands and opportunities. The Company
provides home health care equipment and services through 727 operating centers in 47 states. The Company views each operating center as a distinct part
of a single “operating segment,” as each operating center provides the same products to customers. Management reporting and analysis occurs
at an individual operating center level and senior management reviews statements of operation for each of the Company’s operating centers on a
monthly basis. As a result, all of the Company’s operating centers are aggregated into one reportable segment.
(p) New Accounting Standards
In December 2003, the Financial Accounting Standards
Board revised Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” which addressed
consolidation by business enterprises of variable interest entities (“VIEs”) meeting certain criteria. The revised FASB Interpretation, FIN
46R, was issued to clarify certain ambiguities contained within the original Interpretation and to improve the financial reporting by enterprises
involved with VIEs. The Company does not expect this Interpretation to have a material impact on its consolidated financial position or results of
operations.
(q) Contingencies
The Company is involved in certain claims and legal
matters arising in the ordinary course of its business. The Company uses Statement of Financial Accounting Standards No. 5, “Accounting for
Contingencies,” as guidance on the application of generally accepted accounting principles related to contingencies. The Company evaluates and
records liabilities for contingencies based on known claims and legal actions when it is probable a liability has been incurred and the liability can
be reasonably estimated.
(r) Concentration of Credit
Risk
The Company’s revenues are generated through
locations in 47 states. The Company generally does not require collateral or other security in extending credit to patients; however, the Company
routinely obtains assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans or policies of
customers. Included in the Company’s net revenues is reimbursement from government sources under Medicare, Medicaid and other federally funded
programs, which aggregated approximately 67%, 67% and 62% of net revenues in 2003, 2002 and 2001, respectively.
F-10
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(2) Accounts and Notes Receivable
Accounts and notes receivable at December 31, 2003
and 2002 consist of:
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands)
|
|
Trade |
|
|
|
$ |
173,405 |
|
|
$ |
154,044 |
|
Other |
|
|
|
|
412 |
|
|
|
20 |
|
|
|
|
|
|
173,817 |
|
|
|
154,064 |
|
Less
allowance for uncollectible accounts |
|
|
|
|
22,623 |
|
|
|
11,324 |
|
|
|
|
|
$ |
151,194 |
|
|
$ |
142,740 |
|
(3) Property and Equipment
Property and equipment at December 31, 2003 and 2002
consist of:
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands)
|
|
Land and
improvements |
|
|
|
$ |
3,072 |
|
|
$ |
3,072 |
|
Building and
improvements |
|
|
|
|
19,198 |
|
|
|
18,871 |
|
Equipment and
furniture |
|
|
|
|
600,004 |
|
|
|
493,329 |
|
|
|
|
|
$ |
622,274 |
|
|
$ |
515,272 |
|
Rental equipment of approximately $476.5 million in
2003 and $389.9 million in 2002 is included with equipment and furniture.
(4) Leases
The Company has office equipment classified as
capital leases at December 31, 2003. The amount applicable to these assets and included in property and equipment is:
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands)
|
|
Office
equipment |
|
|
|
$ |
4,094 |
|
|
$ |
— |
|
Less
accumulated depreciation |
|
|
|
|
(1,868 |
) |
|
|
— |
|
|
|
|
|
$ |
2,226 |
|
|
$ |
— |
|
The Company has several noncancelable lease
obligations, primarily for buildings, office equipment and vehicles, that expire over the next five years and provide renewal options. Operating lease
expense was approximately $36.9 million in 2003, $34.1 million in 2002 and $31.1 million in 2001. Future minimum lease payments under capital leases
and noncancelable operating leases as of December 31, 2003, are as follows:
|
|
|
|
Capital
leases
|
|
Operating
leases
|
|
|
|
|
(In thousands)
|
|
2004 |
|
|
|
$ |
1,993 |
|
|
$ |
27,533 |
|
2005 |
|
|
|
|
233 |
|
|
|
19,519 |
|
2006 |
|
|
|
|
— |
|
|
|
10,584 |
|
2007 |
|
|
|
|
— |
|
|
|
5,091 |
|
2008 |
|
|
|
|
— |
|
|
|
1,289 |
|
Total minimum
lease payments |
|
|
|
$ |
2,226 |
|
|
$ |
64,016 |
|
F-11
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(5) Long-Term Obligations
Long-term obligations at December 31, 2003 and 2002
consist of:
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands)
|
|
Borrowings
under five-year revolving credit facility bearing interest at the Interbank Offered Rate, adjusted for changes in reserve requirements, plus an
applicable margin based upon the Company’s consolidated leverage ratio (consolidated funded indebtedness to consolidated earnings before interest,
taxes, depreciation and amortization) payable in 2007 |
|
|
|
$ |
— |
|
|
$ |
60,000 |
|
Borrowings
under senior secured notes bearing fixed interest maturing over three, four and five years: $30.0 million at 8.91% due 2003, $50.0 million at 9.01% due
2004 and $45.0 million at 9.11% due 2005 and proceeds from the sale of interest swap contracts |
|
|
|
|
95,284 |
|
|
|
125,525 |
|
Convertible
debt to mature in 2033, bearing fixed interest of 3.0%, with a callable option in 2008 |
|
|
|
|
275,000 |
|
|
|
— |
|
Capital lease
obligations included in short-term debt ($2.0 million) and long-term obligations ($0.2 million) |
|
|
|
|
2,226 |
|
|
|
— |
|
Unsecured,
deferred acquisition obligations net of imputed interest, payable in various installments through 2004 |
|
|
|
|
14,243 |
|
|
|
23,718 |
|
Total
long-term obligations |
|
|
|
|
386,753 |
|
|
|
209,243 |
|
Less: current
installments |
|
|
|
|
65,936 |
|
|
|
53,718 |
|
Long-term
debt, excluding current installments |
|
|
|
$ |
320,817 |
|
|
$ |
155,525 |
|
The Company’s current revolving credit
agreement with several lenders and Bank of America N.A. as agent, dated April 25, 2002, as amended, permits the Company to borrow amounts up to $200.0
million on a five-year revolving credit facility. The five-year revolving credit facility contains a $20.0 million letter of credit sub-facility which
reduces the principal amount available under the five-year revolving credit facility by the amount of outstanding letters of credit. As of December 31,
2003, $11.0 million was outstanding under the letter of credit sub-facility. The revolving credit agreement has a termination date of April 24, 2007.
Upon entering into the revolving credit agreement, an origination fee of $1.7 million was paid and is being amortized over five years. (Any remaining
portion of the previous amendment fees were recalculated to be amortized over the new five-year time period.) Commitment fees on the unused portion of
the facility (.300% at December 31, 2003) 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 monthly. The revolving 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.
The Company’s $60.0 million 364-day revolving
credit agreement expired on August 22, 2000 and was replaced on September 6, 2000 by $125.0 million of senior secured notes offered through a private
placement. The senior secured notes have a fixed interest rate and mature over three, four and five years: $30.0 million at 8.91% due September 15,
2003, $50.0 million at 9.01% due September 15, 2004 and $45.0 million at 9.11% due September 15, 2005. Upon entering into the senior secured note
agreement, a placement fee of $0.9 million was paid and is being amortized over the periods of the notes. The senior secured notes contain several
financial and other covenants and are secured by a pledge of the stock of the wholly-owned subsidiaries of Lincare Holdings Inc. On September 6, 2000,
the Company entered into an interest swap agreement whereby the interest rate on its $125.0 million of senior secured notes were effectively converted
to variable interest rates. On December 14, 2000, the Company terminated the interest rate swap agreement prior to its maturity at a realized gain of
$3.0 million. The gain was deferred and is being recognized over the maturity periods of the senior secured notes.
F-12
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(5) Long-Term Obligations (Continued)
In addition, the Company entered into an interest
rate collar transaction with an initial notional amount of $125.0 million. The collar had a floor and cap rate with a floating rate option based on
three-month LIBOR. At December 31, 2000, the collar was recorded at a fair value by the Company for $2.0 million in accordance with Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” On November 27, 2001, the Company
terminated the interest rate collar agreement prior to its maturity and paid $8.0 million, realizing a loss of $6.0 million.
On June 11, 2003, the Company completed the sale of
$250.0 million aggregate principal amount of 3.0% Convertible Senior Debentures due 2033 (the “Debentures”) in a private placement. The
Debentures are convertible into shares of Lincare common stock based on a conversion rate of 18.7515 shares for each $1,000 principal amount of
Debentures. This is equivalent to a conversion price of approximately $53.33 per share of common stock. On June 23, 2003, the Company sold an
additional $25.0 million principal amount of Debentures pursuant to the exercise in full of an over-allotment option granted to the initial purchasers
of the Debentures. The Debentures are convertible into common stock in any calendar quarter if, among other circumstances, the last reported sale price
of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of our
previous calendar quarter is greater than or equal to 120% of the applicable conversion price per share ($64.00 per share) of Lincare common stock on
such last trading day. Interest on the Debentures is payable at the rate of 3.0% per annum on June 15 and December 15 of each year, which began on
December 15, 2003. The Debentures are senior unsecured obligations and will mature on June 15, 2033. The Debentures are redeemable by the Company on or
after June 15, 2008, and may be put to the Company for repurchase on June 15, 2008, 2010, 2013, or 2018.
F-13
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(5) Long-Term Obligations (Continued)
The aggregate maturities of long-term obligations
for each of the five years subsequent to December 31, 2003, are as follows:
|
|
|
|
(In thousands)
|
2004 |
|
|
|
$ |
66,127 |
|
2005 |
|
|
|
|
45,426 |
|
2006 |
|
|
|
|
200 |
|
2007 |
|
|
|
|
— |
|
2008 |
|
|
|
|
— |
|
|
|
|
|
$ |
111,753 |
|
(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, 2003 and 2002 are presented
below:
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands)
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses, principally due to deferral for income tax reporting purposes |
|
|
|
$ |
(1,920 |
) |
|
$ |
(352 |
) |
Intangible
assets and covenants not to compete, principally due to differences in amortization |
|
|
|
|
(13,818 |
) |
|
|
(10,589 |
) |
Net operating
loss carryforward |
|
|
|
|
— |
|
|
|
(17 |
) |
Total gross
deferred tax assets |
|
|
|
|
(15,738 |
) |
|
|
(10,958 |
) |
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Property and
equipment, principally due to differences in depreciation |
|
|
|
|
55,063 |
|
|
|
36,627 |
|
Goodwill,
principally due to differences in amortization |
|
|
|
|
64,602 |
|
|
|
45,351 |
|
Other |
|
|
|
|
8,843 |
|
|
|
1,402 |
|
Total gross
deferred tax liabilities |
|
|
|
|
128,508 |
|
|
|
83,380 |
|
Net deferred
tax liability |
|
|
|
$ |
112,770 |
|
|
$ |
72,422 |
|
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-14
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(6) Income Taxes (Continued)
Income tax expense attributable to operations
consists of:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
$ |
93,912 |
|
|
$ |
79,211 |
|
|
$ |
67,760 |
|
State |
|
|
|
|
4,893 |
|
|
|
6,079 |
|
|
|
6,003 |
|
Total
current |
|
|
|
|
98,805 |
|
|
|
85,290 |
|
|
|
73,763 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
34,224 |
|
|
|
27,771 |
|
|
|
8,541 |
|
State |
|
|
|
|
6,124 |
|
|
|
2,173 |
|
|
|
756 |
|
Total
deferred |
|
|
|
|
40,348 |
|
|
|
29,944 |
|
|
|
9,297 |
|
Total income
tax expense |
|
|
|
$ |
139,153 |
|
|
$ |
115,234 |
|
|
$ |
83,060 |
|
Total income
tax expense allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations |
|
|
|
$ |
139,153 |
|
|
$ |
115,234 |
|
|
$ |
83,060 |
|
Stockholders’ equity for compensation expense for tax purposes |
|
|
|
|
(9,127 |
) |
|
|
(5,101 |
) |
|
|
(7,659 |
) |
|
|
|
|
$ |
130,026 |
|
|
$ |
110,133 |
|
|
$ |
75,401 |
|
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,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(In thousands)
|
|
Computed
“expected” tax expense |
|
|
|
$ |
129,942 |
|
|
$ |
106,982 |
|
|
$ |
76,302 |
|
State income
taxes, net of federal income tax benefit |
|
|
|
|
7,161 |
|
|
|
5,364 |
|
|
|
4,393 |
|
Other |
|
|
|
|
2,050 |
|
|
|
2,888 |
|
|
|
2,365 |
|
Total income
tax expense |
|
|
|
$ |
139,153 |
|
|
$ |
115,234 |
|
|
$ |
83,060 |
|
(7) Stockholders’ Equity
The Company has 5,000,000 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 but subject to restrictions imposed by the Company’s revolving credit agreement and senior secured note
agreement.
(8) Stock Options
The Company has seven 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 eight year terms and generally vest over two to four years.
The Company has reserved a total of 11.9 million
shares of common stock for issuance under its Non-Qualified Stock Option Plan (the “Plan”). At December 31, 2003, there were no options
outstanding and no options available for issuance under the Plan. The Company has reserved a total of 6.4 million shares of common stock for issuance
under
F-15
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(8) Stock Options (Continued)
its 1991 Stock Plan (the “1991 Plan”). At December 31, 2003, there were options for 25,800 shares outstanding and no options available for
issuance under the 1991 Plan. The Company has reserved a total of 2.0 million shares of common stock for issuance under its 1994 Stock Plan (the
“1994 Plan”). At December 31, 2003, there were options for .3 million shares outstanding and no options available for issuance under the 1994
Plan. The Company has reserved a total of 4.0 million shares of common stock for issuance under its 1996 Stock Plan (the “1996 Plan”). At
December 31, 2003, there were options for 1.6 million shares outstanding and no options available for issue under the 1996 Plan. The Company has
reserved a total of 3.0 million shares of common stock for issuance under its 1998 stock plan (the “1998 Plan”). At December 31, 2003, there
were options for 2.3 million shares outstanding and 68,000 shares available for issuance under the 1998 Plan. The Company has reserved a total of 2.0
million shares of common stock for issuance under the 2000 Stock Plan (the “2000 Plan”). At December 31, 2003, there were options for 1.3
million shares outstanding and options for 44,500 shares available for issuance under the 2000 Plan. The Company has reserved a total of 6.5 million
shares of common stock for issuance under the 2001 Stock Plan (the “2001 Plan”). At December 31, 2003, there were options for 5.5 million
shares outstanding and options for .9 million shares available for issuance under the 2001 Plan.
The per share weighted average fair value of stock
options granted during 2003, 2002 and 2001 was $13.28, $17.56 and $12.32 on the date of grant using the Black Scholes multiple option pricing model
with the following weighted average assumptions: 2003 — expected dividend yield 0%, risk-free interest rate of 2.0%, expected life of 4 years, and
volatility of 57.7%; 2002 — expected dividend yield 0%, risk-free interest rate of 2.8%, expected life of 8 years, and volatility of 58.8%; 2001
— expected dividend yield 0%, risk-free interest rate of 3.7%, expected life of 4 years, and volatility of 61.4%.
Statement of Financial Accounting Standards (SFAS)
No. 123, “Accounting for Stock-Based Compensation,” establishes financial accounting and reporting standards for stock-based compensation
plans. SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based method, or (2) an intrinsic-value-based method which is
prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25) and related
interpretations. The Company has elected to account for its stock-based incentive plans and awards under APB No. 25, and has adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Had the
Company determined compensation cost based on the fair value at the grant date for stock options under Statement of Financial Accounting Standards No.
123, the Company’s net income would have been reduced to the pro forma amounts indicated below:
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(In thousands, except per share data)
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
|
$ |
232,111 |
|
|
$ |
190,428 |
|
|
$ |
134,944 |
|
Pro
forma |
|
|
|
$ |
215,028 |
|
|
$ |
171,550 |
|
|
$ |
118,513 |
|
Income per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic —
as reported |
|
|
|
$ |
2.28 |
|
|
$ |
1.78 |
|
|
$ |
1.26 |
|
Diluted
— as reported |
|
|
|
$ |
2.22 |
|
|
$ |
1.73 |
|
|
$ |
1.23 |
|
Basic —
pro forma |
|
|
|
$ |
2.11 |
|
|
$ |
1.60 |
|
|
$ |
1.10 |
|
Diluted
— pro forma |
|
|
|
$ |
2.06 |
|
|
$ |
1.56 |
|
|
$ |
1.08 |
|
Pro forma net income reflects only options granted
since December 31, 1994. Therefore, the full impact of calculating compensation cost for stock options under Statement of Financial Accounting
Standards 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-16
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(8) Stock Options (Continued)
Information related to the plans is as
follows:
|
|
|
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
Outstanding
at December 31, 2000 |
|
|
|
|
8,069,000 |
|
|
$ |
12.00 |
|
Exercised in
2001 |
|
|
|
|
(1,073,650 |
) |
|
|
10.37 |
|
Canceled in
2001 |
|
|
|
|
(100,000 |
) |
|
|
16.71 |
|
Options
issued in 2001 |
|
|
|
|
3,066,000 |
|
|
|
25.59 |
|
Outstanding
at December 31, 2001 |
|
|
|
|
9,961,350 |
|
|
|
16.31 |
|
Exercised in
2002 |
|
|
|
|
(675,650 |
) |
|
|
10.88 |
|
Canceled in
2002 |
|
|
|
|
(253,000 |
) |
|
|
16.62 |
|
Options
issued in 2002 |
|
|
|
|
1,332,000 |
|
|
|
27.87 |
|
Outstanding
at December 31, 2002 |
|
|
|
|
10,364,700 |
|
|
|
18.16 |
|
Exercised in
2003 |
|
|
|
|
(1,127,100 |
) |
|
|
11.84 |
|
Canceled in
2003 |
|
|
|
|
(40,150 |
) |
|
|
26.57 |
|
Options
issued in 2003 |
|
|
|
|
1,890,000 |
|
|
|
30.90 |
|
Outstanding
at December 31, 2003 |
|
|
|
|
11,087,450 |
|
|
$ |
20.94 |
|
At December 31, 2003, the range of exercise prices
and weighted average remaining contractual life of outstanding options were as follows:
Range of Exercise Prices
|
|
|
|
Options
Outstanding
as of
December 31, 2003
|
|
Weighted Average
Remaining
Contractual Life
|
$
4.75–$12.25 |
|
|
|
|
2,405,000 |
|
|
3.1
years |
$12.31–$17.81 |
|
|
|
|
2,552,150 |
|
|
3.9
years |
$24.45–$32.00 |
|
|
|
|
6,130,300 |
|
|
6.3 years |
$
4.75–$32.00 |
|
|
|
|
11,087,450 |
|
|
5.1 years |
At December 31, 2003, 2002 and 2001, the number of
options exercisable was 7.5 million, 5.5 million and 3.0 million, respectively, and the weighted average exercise price of those options was $17.07,
$14.47 and $11.05, respectively. All of the securities to be issued upon exercise of outstanding options were the result of options granted under
equity compensation plans approved by the Company’s stockholders.
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 $9.1 million in 2003, $5.1 million in 2002 and $7.7 million in 2001 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 Medicare, Medicaid and other federally funded programs, which aggregated approximately 67% in 2003, 67%
in 2002, and 62% in 2001 of such net revenues.
F-17
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(9) Net Revenues (Continued)
The following table sets forth a summary of the
Company’s net revenues by source:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(In thousands)
|
|
Oxygen and
other respiratory therapy |
|
|
|
$ |
1,041,983 |
|
|
$ |
868,561 |
|
|
$ |
715,123 |
|
Home medical
equipment and other |
|
|
|
|
105,373 |
|
|
|
92,343 |
|
|
|
97,319 |
|
Total |
|
|
|
$ |
1,147,356 |
|
|
$ |
960,904 |
|
|
$ |
812,442 |
|
(10) 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 for the years ended
December 31, 2003, 2002 and 2001.
The effect of approximately 5.2 million common
shares issuable upon conversion of the Company’s 3.0% Convertible Senior Debentures due 2033 (the “Debentures”) was not included in the
computation of diluted earnings per share for the year ended December 31, 2003, because none of the conditions that would permit conversion of the
Debentures had been satisfied during the period. The Company intends to settle the principal amount of Debentures in cash.
A reconciliation of the numerators and the
denominators of the basic and diluted per common share computations is as follows:
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic —
Income available to common stockholders |
|
|
|
$ |
232,111 |
|
|
$ |
190,428 |
|
|
$ |
134,944 |
|
Effect of
dilutive securities — Stock options |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Diluted
— Income available to common stockholders and holders of dilutive securities |
|
|
|
$ |
232,111 |
|
|
$ |
190,428 |
|
|
$ |
134,944 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares |
|
|
|
|
101,671 |
|
|
|
106,942 |
|
|
|
107,439 |
|
Effect of
dilutive securities — Stock options |
|
|
|
|
2,894 |
|
|
|
2,828 |
|
|
|
2,632 |
|
Adjusted
weighted average shares |
|
|
|
|
104,565 |
|
|
|
109,770 |
|
|
|
110,071 |
|
Per share
amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
2.28 |
|
|
$ |
1.78 |
|
|
$ |
1.26 |
|
Diluted |
|
|
|
$ |
2.22 |
|
|
$ |
1.73 |
|
|
$ |
1.23 |
|
F-18
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(11) Supplemental Statements of Cash Flows Information
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
(In thousands)
|
|
Cash paid
for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
$ |
17,332 |
|
|
$ |
15,241 |
|
|
$ |
12,651 |
|
Income
taxes |
|
|
|
$ |
98,981 |
|
|
$ |
86,887 |
|
|
$ |
55,847 |
|
(12) Business Combinations
The Company’s strategy is to increase its
market share through internal growth and strategic acquisitions. Lincare achieves internal growth in existing geographic markets through the addition
of new customers and referral sources to its network of local operating centers. 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.
During 2003, the Company acquired certain assets of
13 businesses in separate transactions. During 2002, the Company acquired certain assets of 28 businesses in 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 2003 and 2002 was accounted for as a purchase. The results of operations of the acquired
companies are included in the accompanying consolidated statements of operations since the respective dates 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:
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands)
|
|
Cash |
|
|
|
$ |
133,937 |
|
|
$ |
94,703 |
|
Deferred
acquisition obligations |
|
|
|
|
19,607 |
|
|
|
24,689 |
|
Assumption of
liabilities |
|
|
|
|
465 |
|
|
|
423 |
|
|
|
|
|
$ |
154,009 |
|
|
$ |
119,815 |
|
The aggregate purchase price of the acquisitions
described above was allocated as follows:
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands)
|
|
Current
assets |
|
|
|
$ |
5,649 |
|
|
$ |
2,495 |
|
Property and
equipment |
|
|
|
|
6,474 |
|
|
|
3,959 |
|
Intangible
assets |
|
|
|
|
465 |
|
|
|
200 |
|
Goodwill |
|
|
|
|
141,421 |
|
|
|
113,161 |
|
|
|
|
|
$ |
154,009 |
|
|
$ |
119,815 |
|
In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill
and Other Intangible Assets.” The Company adopted SFAS No. 141 on July 1, 2001 and adopted SFAS No. 142 in the first quarter of 2002 (see previous
discussion in note (1)(h)).
F-19
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(12) Business Combinations (Continued)
The following unaudited pro forma supplemental
information on the results of operations for the years ended December 31, 2003 and 2002 includes the 2003 acquisitions as if they had been combined at
the beginning of 2002.
|
|
|
|
2003
|
|
2002
|
|
|
|
|
(In thousands, except
per share data)
|
|
Net
revenues |
|
|
|
$ |
1,173,845 |
|
|
$ |
1,042,024 |
|
Net
income |
|
|
|
$ |
236,550 |
|
|
$ |
206,203 |
|
Basic —
income per common share |
|
|
|
$ |
2.33 |
|
|
$ |
1.93 |
|
Diluted
— income per common share |
|
|
|
$ |
2.26 |
|
|
$ |
1.88 |
|
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 2002 or
of future results of operations of the combined companies.
(13) Other Charges
In 2001, we recorded other charges of $10.6 million
of which $4.1 million was related to the settlement of an investigation by the U.S. Attorney’s Office in Sacramento, California, without any
admission of wrongdoing, including a $1.0 million reserve for related legal expenses. The remaining $6.5 million of other charges related to the
execution of employment agreements with 16 mid-level management employees as well as the modification and extension of certain executive officer
employment agreements.
(14) Contingencies
As a health care provider, we are 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, documenting 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 Lincare for payment of services rendered to customers. 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, we receive inquiries from various
government agencies requesting customer records and other documents. It has been our policy to cooperate with all such requests for information. The
government has not instituted any proceedings or served us with any complaints as a result of these inquiries.
Private litigants may also make claims against
health care providers 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. We are a defendant in certain qui tam proceedings. The government has declined to
intervene in all unsealed qui tam actions of which we are aware and we are vigorously defending these suits.
We are also involved in certain other claims and
legal actions in the ordinary course of our business. The ultimate disposition of all such matters is not expected to have a material adverse impact on
our financial position, results of operations or liquidity.
F-20
LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2003, 2002 and 2001
(15) Quarterly Financial Data (Unaudited)
The following is a summary of quarterly financial
results for the years ended December 31, 2003 and 2002:
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
|
|
|
(In thousands, except per share data)
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
|
|
$ |
265,173 |
|
|
$ |
283,132 |
|
|
$ |
296,268 |
|
|
$ |
302,783 |
|
Operating
income |
|
|
|
$ |
88,005 |
|
|
$ |
94,779 |
|
|
$ |
101,715 |
|
|
$ |
104,398 |
|
Net
income |
|
|
|
$ |
52,922 |
|
|
$ |
56,810 |
|
|
$ |
60,423 |
|
|
$ |
61,956 |
|
Income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
0.50 |
|
|
$ |
0.55 |
|
|
$ |
0.61 |
|
|
$ |
0.63 |
|
Diluted |
|
|
|
$ |
0.49 |
|
|
$ |
0.53 |
|
|
$ |
0.59 |
|
|
$ |
0.61 |
|
2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues |
|
|
|
$ |
228,521 |
|
|
$ |
234,455 |
|
|
$ |
244,174 |
|
|
$ |
253,754 |
|
Operating
income |
|
|
|
$ |
76,271 |
|
|
$ |
78,112 |
|
|
$ |
81,210 |
|
|
$ |
84,217 |
|
Net
income |
|
|
|
$ |
45,191 |
|
|
$ |
46,490 |
|
|
$ |
48,456 |
|
|
$ |
50,291 |
|
Income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
0.42 |
|
|
$ |
0.43 |
|
|
$ |
0.45 |
|
|
$ |
0.47 |
|
Diluted |
|
|
|
$ |
0.41 |
|
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
$ |
0.46 |
|
F-21
SCHEDULE
LINCARE HOLDINGS INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
Description
|
|
|
|
Balance at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Charged to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of
Period
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Year Ended
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from
asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
uncollectible accounts |
|
|
|
$ |
11,324 |
|
|
$ |
17,210 |
|
|
$ |
12,146 |
(1) |
|
$ |
18,057 |
(2) |
|
$ |
22,623 |
|
|
|
|
|
|
Year Ended
December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from
asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
uncollectible accounts |
|
|
|
$ |
7,444 |
|
|
$ |
14,414 |
|
|
$ |
6,911 |
(1) |
|
$ |
17,445 |
(2) |
|
$ |
11,324 |
|
|
|
|
|
|
Year Ended
December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from
asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
uncollectible accounts |
|
|
|
$ |
9,489 |
|
|
$ |
12,187 |
|
|
$ |
1,924 |
(1) |
|
$ |
16,156 |
(2) |
|
$ |
7,444 |
|
| (1) |
|
To record allowance on business combinations. |
| (2) |
|
To record write-offs. |
S-1
INDEX OF EXHIBITS
Exhibit
Number
|
|
|
|
Exhibit
|
3.10(C) |
|
|
|
Amended and Restated 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(H) |
|
|
|
Amended and Restated By-Laws of Lincare Holdings Inc. |
4.1(I) |
|
|
|
Lincare Holdings Inc. Indenture dated as of June 11, 2003 |
4.2(I) |
|
|
|
Lincare Holdings Inc. Registration Rights Agreement dated as of June
11, 2003 |
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 |
10.27(J) |
|
|
|
Amended Lincare Holdings Inc. 2001 Stock Plan |
10.30(G) |
|
|
|
Lincare Inc. 401(k) Plan |
10.31(B) |
|
|
|
Employee Stock Purchase Plan |
10.40(F) |
|
|
|
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(G) |
|
|
|
Amended and Restated Credit Agreement dated as of April 25, 2002 |
10.63(J) |
|
|
|
First Amendment to Amended and Restated Credit Agreement dated June 4,
2003 |
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 |
12.1 |
|
|
|
Computation of Ratio of Earnings to Fixed Charges |
21.1 |
|
|
|
List of Subsidiaries of Lincare Holdings Inc. |
24.1 |
|
|
|
Special Powers of Attorney |
31.1 |
|
|
|
Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, executed by John P. Byrnes, Chief Executive Officer |
31.2 |
|
|
|
Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, executed by Paul G. Gabos, Chief Financial Officer |
32.1 |
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John P.
Byrnes, Chief Executive Officer |
32.2 |
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Paul G.
Gabos, Chief Financial Officer |
S-2
| 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-K
dated March 28, 2002. |
| G |
|
Incorporated by reference to the Registrant’s Form 10-Q
dated May 13, 2002. |
| H |
|
Incorporated by reference to the Registrant’s Form 10-Q
dated August 13, 2002. |
| I |
|
Incorporated by reference to the Registrant’s Form 8-K
dated June 12, 2003. |
| J |
|
Incorporated by reference to the Registrant’s Form 10-Q
dated August 14, 2003. |
S-3