LINCARE HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended March 31, 2005

OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________

Commission File Number 0-19946

LINCARE HOLDINGS INC.
(Exact name of registrant as specified in its charter)

Delaware		51-0331330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

19387 US 19 North Clearwater, FL		33764
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:
(727) 530-7700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at April 29, 2005

Common Stock, $0.01 par value		99,040,292

LINCARE HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
For The Quarterly Period Ended March 31, 2005
INDEX

		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Condensed consolidated balance sheets	3
	Condensed consolidated statements of operations	4
	Condensed consolidated statements of cash flows	5
	Notes to unaudited condensed consolidated financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Submission of Matters to a Vote of the Security Holders	22
Item 5.	Other Information	23
Item 6.	Exhibits	23
SIGNATURE		24
INDEX OF EXHIBITS		S-1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	March 31, 2005			December 31, 2004

Current assets:
Cash and cash equivalents	$	100,757		$	33,614
Short-term investments		115,956			192,175
Restricted cash		2,373			2,365
Accounts receivable, net		153,979			137,891
Income taxes receivable		0			4,106
Inventories		2,302			2,354
Prepaid and other current assets		6,459			5,350

Total current assets		381,826			377,855

Property and equipment		692,348			678,377
Accumulated depreciation		(393,433	)		(382,686	)

Net property and equipment		298,915			295,691

Other assets:
Goodwill		1,074,952			1,035,865
Covenants not-to-compete, net		3,015			3,292
Other		8,239			8,361

Total other assets		1,086,206			1,047,518

Total assets	$	1,766,947		$	1,721,064

Current liabilities:
Current installments on long-term obligations	$	73,969		$	67,937
Accounts payable		32,189			26,786
Accrued expenses:
Compensation and benefits		23,762			20,639
Liability insurance		12,805			12,516
Other current liabilities		6,179			4,537
Income taxes payable		15,761			0

Total current liabilities		164,665			132,415

Long-term obligations, excluding current installments		275,000			275,293
Deferred income taxes		151,524			146,327
Minority interest		734			704

Total liabilities		591,923			554,739

Stockholders’ equity:
Common stock		1,257			1,250
Additional paid-in capital		298,923			278,884
Unearned compensation		(5,384	)		(6,184	)
Retained earnings		1,470,222			1,415,604
Treasury stock		(589,994	)		(523,229	)

Total stockholders’ equity		1,175,024			1,166,325

Total liabilities and stockholders’ equity	$	1,766,947		$	1,721,064

See accompanying notes to unaudited condensed consolidated financial statements.

LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)

	For The Three Months Ended

	March 31, 2005			March 31, 2004

Net revenues	$	305,177		$	306,871

Costs and expenses:
Cost of goods and services		56,534			45,852
Operating expenses		70,004			64,805
Selling, general and administrative expenses		61,560			64,536
Bad debt expense		4,578			4,603
Depreciation expense		22,095			21,285
Amortization expense		427			377

		215,198			201,458

Operating income		89,979			105,413

Other income (expense):
Interest income		1,009			154
Interest expense		(3,425	)		(4,550	)
Net gain (loss) on disposal of property and equipment		8			(2	)

		(2,408	)		(4,398	)

Income before income taxes		87,571			101,015
Income tax expense		32,953			38,082

Net income	$	54,618		$	62,933

Basic earnings per common share	$	0.54		$	0.64

Diluted earnings per common share	$	0.51		$	0.60

Weighted average number of common shares outstanding		100,983,920			99,037,298

Weighted average number of common shares and common share equivalents outstanding		108,757,231			106,455,980

See accompanying notes to unaudited condensed consolidated financial statements.

LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	For The Three Months Ended

	March 31, 2005			March 31, 2004

Cash flows from operating activities:
Net income	$	54,618		$	62,933
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		4,578			4,603
Depreciation expense		22,095			21,285
Net (gain) loss on disposal of property and equipment		(8	)		2
Amortization expense		427			377
Amortization of debt issuance costs		174			212
Vesting of restricted stock		800			0
Deferred income tax benefit		5,197			9,448
Minority interest in net earnings of subsidiary		30			21
Change in assets and liabilities net of effects of acquired businesses:
Increase in accounts receivable		(16,738	)		(7,387	)
Decrease in inventories		94			69
Increase (decrease) in prepaid and other assets		(1,210	)		1,115
Increase (decrease) in accounts payable		5,403			(4,057	)
Increase (decrease) in accrued expenses		4,889			(5,282	)
Increase in income taxes payable		27,313			33,326

Net cash provided by operating activities		107,662			116,665

Cash flows from investing activities:
Proceeds from sale of property and equipment		35			6
Capital expenditures		(23,652	)		(25,315	)
Purchases of short-term investments		(109,750	)		(92,000	)
Sales and maturities of short-term investments		185,969			12,000
Business acquisitions, net of cash acquired and purchase price adjustments		(29,832	)		(8,089	)
Cash restricted for future payments		(8	)		(561	)

Net cash provided by (used in) investing activities		22,762			(113,959	)

Cash flows from financing activities:
Proceeds from issuance of debt		37			90
Payments of principal on debt		(9,152	)		(4,109	)
Change in minority interests		0			(89	)
Payments of debt issuance costs		(2	)		(56	)
Proceeds from exercise of stock options and issuance of common shares		12,601			3,517
Proceeds from issuance of treasury shares		0			389
Payments to acquire treasury stock		(66,765	)		0

Net cash used in financing activities		(63,281	)		(258	)

Net increase in cash and cash equivalents		67,143			2,448
Cash and cash equivalents, beginning of period		33,614			9,815

Cash and cash equivalents, end of period	$	100,757		$	12,263

Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,522		$	4,430

Cash paid for taxes	$	148		$	531

See accompanying notes to unaudited condensed consolidated financial statements.

LINCARE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation And Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. They should be read in conjunction with the consolidated financial statements and related notes to the financial statements of Lincare Holdings Inc. and Subsidiaries (the “Company”) on Form 10-K for the fiscal year ended December 31, 2004. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

Cash and Cash Equivalents: For purposes of the balance sheets and statements of cash flows, the Company considers all highly liquid investments with an original maturity of less than three months to be cash equivalents.

Short-term Investments: The Company invests in auction rate securities as part of its cash management strategy. In 2005, we concluded that it was appropriate to classify our holdings of auction rate securities as short-term investments. Previously, such investments had been classified as cash and cash equivalents. Accordingly, we have revised the classification to report these securities as short-term investments in our consolidated balance sheets. We have also made corresponding adjustments to our consolidated statements of cash flows to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. This change in classification does not affect previously reported cash flows from operations in our consolidated statements of cash flows or our previously reported consolidated statements of operations for any period.

The Company classifies its investments in marketable securities with readily determinable fair values as investments available-for-sale in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. The Company has classified all investments as available-for-sale. Available-for-sale securities consist of debt and equity securities not classified as trading securities nor as securities to be held to maturity. Unrealized holding gains and losses on available-for-sale securities are reported as a net amount in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method.

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 65% and 67% of net revenues for the three months ended March 31, 2005 and 2004, respectively.

Note 2. Business Combinations

Lincare acquires the business and related assets of local and regional companies as an ongoing strategy to increase sales within its respective markets. Lincare arrives at a negotiated purchase price taking into account such factors including, but not limited to, the acquired company’s historical and projected revenue growth, operating cash flow, product mix, payor mix, service reputation and geographical location.

During the three months ended March 31, 2005, the Company acquired certain assets of six companies in separate transactions. Each acquisition was accounted for as a purchase. The results of the acquired companies are included in the accompanying consolidated statements of operations since the respective dates of acquisition.

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

The aggregate cost of the acquisitions described above was as follows:

	(In thousands)

Cash	$	29,832
Deferred acquisition obligations		14,907
Assumption of liabilities		164

	$	44,903

The aggregate purchase price was allocated as follows:

Current assets	$	3,844
Property and equipment		1,691
Intangible assets		100
Goodwill		39,268

	$	44,903

Unaudited pro forma supplemental information on the results of operations for the three months ended March 31, 2005 and March 31, 2004, is provided below and reflects the acquisitions as if they had been combined at the beginning of each respective period.

	For The Three Months Ended March 31,

	2005		2004

	(In thousands, except per share data)
Net revenues	$	307,935	$	312,317

Net income	$	56,511	$	65,419

Income per common share:
Basic	$	0.55	$	0.65

Diluted	$	0.52	$	0.61

The unaudited pro forma financial information is not necessarily indicative of either the results of operations that would have occurred had the transactions been effected at the beginning of the respective preceding periods or of future results of operations of the combined companies.

Note 3. Income Per Common Share

Basic income per common share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income per common share reflects the potential dilution of securities that could share in the Company’s earnings, including securities that may be issued on conversion of convertible debentures and exercise of outstanding stock options. When the exercise of stock options is anti-dilutive, they are excluded from the calculation. For the three-month periods ended March 31, 2005 and 2004, the number of excluded shares underlying anti-dilutive stock options was 0 and 9,346, respectively.

In October 2004, the Emerging Issues Task Force (“EITF”) ratified the consensus on EITF Issue 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” that the impact of contingently convertible debt should be included in diluted earnings per share computations regardless of whether the market price conversion condition has been met. This provision is effective for reporting periods ending after December 15, 2004 with the requirement to restate all prior period earnings per share amounts to conform to the provisions of the final EITF.

A reconciliation of the numerators and the denominators of the basic and diluted earnings per common share computations is as follows:

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

	For The Three Months Ended March 31,

	2005		2004

	(In thousands, except per share data)
Numerator:
Basic – Income available to common stockholders	$	54,618	$	62,933
Adjustment for assumed dilution:
Interest on convertible debt, net of tax		1,286		1,285

Diluted – Income available to common stockholders and holders of dilutive securities	$	55,904	$	64,218

Denominator:
Weighted average shares		100,984		99,037
Effect of dilutive securities:
Stock options		2,616		2,262
Convertible debt		5,157		5,157

Adjusted weighted average shares		108,757		106,456

Per share amount:
Basic	$	0.54	$	0.64

Diluted (1)	$	0.51	$	0.60

(1) Figures reflect the application of the “if converted” method of accounting for the Company’s outstanding convertible debentures in accordance with EITF No. 04-8, effective for reporting periods ending after December 15, 2004. Figures in 2004 have been restated for comparative purposes in accordance with the requirements of EITF No. 04-8.

Note 4. Stock Plans

The Company issues stock options and other stock-based awards to key employees and directors under stock-based compensation plans, which are described more fully in Note 8 to the consolidated financial statements in the Company’s 2004 Annual Report on Form 10-K.

Under the 2004 Stock Plan, certain key employees may be granted restricted stock at nominal cost to them. Restricted stock is measured at fair value on the date of the grant, based on the number of shares granted and the quoted price of the Company’s common stock. Such value will be recognized as compensation expense ratably over the corresponding employee’s specified service period. Restricted stock vests upon fulfillment of specified performance and service-based conditions. On July 1, 2004, the Company granted 260,000 shares of restricted stock to certain key employees.

Statement of Financial Accounting Standards 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 options 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 SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:

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

	For The Three Months Ended March 31,

	2005			2004

	(In thousands, except per share data)
Net income:
As reported	$	54,618		$	62,933
Add: Stock-based employee compensation expense included in net income, net of related tax effects		499			0
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(2,343	)		(3,150	)

Pro forma	$	52,774		$	59,783

Earnings per common share:
Basic—as reported	$	0.54		$	0.64

Diluted—as reported (1)	$	0.51		$	0.60

Basic—pro forma	$	0.52		$	0.60

Diluted—pro forma (1)	$	0.49		$	0.56


	(1)	Figures reflect the application of the “if converted” method of accounting for the Company’s outstanding convertible debentures in accordance with EITF No. 04-8, effective for reporting periods ending after December 15, 2004. Figures in 2004 have been restated for comparative purposes in accordance with the requirements of EITF No. 04-8.

Note 5. Comprehensive Income

SFAS No. 130 “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the Company’s consolidated financial statements. The objective of SFAS No. 130 is to report a measure (comprehensive income (loss)) of all changes in equity of an enterprise that result from transactions and other economic events in a period other than transactions with owners.

The Company had no unrealized gains or losses on short-term investments available-for-sale on March 31, 2005 and March 31, 2004.

LINCARE HOLDINGS INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Medicare Reimbursement

As a supplier of home oxygen and other respiratory therapy services for the home health care market, we participate in Medicare Part B, the Supplementary Medical Insurance Program, which was established by the Social Security Act of 1965. Providers of home oxygen and other respiratory therapy services have historically been heavily dependent on Medicare reimbursement due to the high proportion of elderly suffering from respiratory disease. Durable medical equipment (“DME”), including oxygen equipment, is traditionally reimbursed by Medicare based on fixed fee schedules.

On December 8, 2003, the President of the United States signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, codified at Public Law 108-173 (“MMA”). The 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. MMA includes sweeping changes that will impact a broad spectrum of health care industry participants, including physicians, pharmacies, manufacturers and pharmacy benefit managers, as well as other Medicare suppliers and providers including Lincare.

MMA contains provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. Among other things, MMA:

(1)	Significantly reduces reimbursement for inhalation drug therapies. 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 MMA, Medicare reimbursement for covered drugs, including the inhalation drugs that we provide, had been limited to 95 percent of the published average wholesale price (“AWP”) for the drug. MMA 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 15.8%. Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are reimbursed at 106 percent of the volume-weighted average selling price (“ASP”) of the drug, as determined from data provided each quarter by drug manufacturers under a specific formula described in MMA.

	On November 3, 2004, the Centers for Medicare and Medicaid Services (“CMS”) issued its final rule, CMS-1429-FC, which established a monthly dispensing fee of $57.00 per customer for inhalation drug therapy in addition to the ASP-based payment rate for the drugs dispensed. The rule also established an alternative dispensing fee of $80.00 per customer when dispensed in 90-day increments. Payment rates for inhalation drugs are updated quarterly based on the manufacturer ASP calculated for the most recent calendar quarter for which data are available. Manufacturer ASP submissions are due to CMS not later than 30 days after the last day of each calendar quarter. Accordingly, inhalation drug payment rates in the first quarter of 2005 were based on ASP data from the third quarter of 2004. The new ASP-based payment formula in effect for the first quarter of 2005 resulted in substantially reduced payment rates for inhalation drugs. For example, the payment rates for the two most prevalent inhalation drugs, albuterol sulfate and ipratropium bromide, were reduced from $0.39 and $2.82 per milligram to $0.07 and $0.29, respectively, representing reductions of 82% to 90% from 2004 levels. ASP price updates for the second quarter of 2005 have been published by CMS and indicate prices for albuterol and ipratropium of $0.09 and $0.20 per milligram, respectively. The combination of the new ASP payment rates for inhalation drugs commencing in 2005 and the monthly dispensing fee of $57.00 is expected to reduce total reimbursement for inhalation drug therapies provided by the Company by approximately 40% to 50% in fiscal 2005. Medicare-reimbursed inhalation drug therapies provided by the Company in 2004 accounted for approximately 23% of total revenues.

	While Lincare continues to evaluate the impact of the reduced Medicare payment rates on its business, we expect to be able to continue to provide inhalation drugs to Medicare beneficiaries in 2005. The final rule states that CMS intends to revisit the payment amount for the dispensing fee during 2005 and proceed through notice and comment rulemaking in order to establish an appropriate dispensing fee for 2006. Lincare can not determine the outcome of any future rulemaking by CMS nor the impact that such rulemaking might have on our ability to continue to provide inhalation drugs beyond 2005. Further, we can not determine whether quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will result in further reductions in payment rates for inhalation drugs, and what impact such payment reductions could have on Lincare in 2005 and beyond.

(2)	Reduces payment amounts for five categories of DME, including oxygen, beginning in 2005 and freezes payment amounts for other Medicare-covered DME items from 2004 to 2007. MMA contains provisions that will reduce Medicare payment amounts 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”). Reductions in payment rates for 2005 established by CMS for the non-oxygen items subject to the FEHP provisions range between 2% and 14% and are expected to reduce average reimbursement for these types of items provided by the Company by approximately 10%. The non-oxygen DME items subject to the 2005 Medicare price cuts accounted for approximately 2.5% of total revenues for the Company in 2004. MMA also freezes payment amounts for other Medicare-covered DME items from 2004 to 2007.

	On September 13, 2004, the Office of Inspector General (“OIG”) released a report entitled, “Medicare Payment Rates for Home Oxygen Equipment,” which was intended to serve as the basis for establishing Medicare payment rates for oxygen in 2005. In its report, the OIG determined that Medicare allowances are approximately 15.5% higher for stationary oxygen systems and approximately 11.3% higher for portable oxygen systems when compared with surveyed FEHP plans, representing a weighted average difference of approximately 15.1%. The CMS Administrator, in his comment letter to the OIG report, agreed with the OIG’s recommendation to use the pricing information contained in the OIG report to reduce the rates Medicare pays for home oxygen equipment in 2005. CMS also concurred with the OIG’s recommendation to consider alternative methods for determining future Medicare oxygen payment rates, such as competitive bidding, contracts with local or national providers, and capped rental arrangements.

	On February 4, 2005, CMS published notice CMS-1299-N announcing a delay in the implementation of the 2005 Medicare oxygen payment rates. The notice stated that CMS was informed by the OIG that it needed to collect additional information before the FEHP median prices for oxygen could be finalized. On March 30, 2005, CMS released the new Medicare fee schedule amounts for oxygen equipment based on the issuance of the final report by the OIG. The new payment rates were made effective for claims for oxygen equipment furnished after January 1, 2005, that are received by Medicare on or after April 1, 2005. We estimate that the new fee schedule will result in a net price reduction of 8.7% for oxygen equipment provided by the Company to Medicare beneficiaries, or approximately $15.0 to $16.0 million per quarter beginning in the second fiscal quarter of 2005. Oxygen equipment reimbursed by Medicare accounted for approximately 46% of total revenues for the Company in 2004.

(3)	Establishes a competitive acquisition program for DME beginning in 2007. MMA instructs the Secretary of the Department of Health and Human Services (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 metropolitan statistical areas (“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 effect of the competitive acquisition program or the Medicare payment rates that will be in effect in 2007 and beyond for the items ultimately subjected to competitive bidding.

(4)

Implements quality standards and accreditation requirements for DME suppliers. MMA instructs the Secretary to establish and implement quality standards for DME suppliers to be monitored by recognized independent accreditation organizations. Suppliers will be required to comply with these standards in order to receive payment for furnishing any covered item of DME to a Medicare beneficiary and to receive or retain a supplier number used to submit claims for reimbursement. We can not predict the nature or extent of the quality standards or the effect such standards would have on our ability to continue to provide products to Medicare beneficiaries.

On December 13, 2002, CMS issued an interim final rule establishing a process for adjusting payments for Medicare Part B services (other than physician services), pursuant to the agency’s Inherent Reasonableness (“IR”) authority, when existing payment amounts are determined to be either grossly excessive or deficient. The interim final rule describes the factors CMS or its contractors will consider in making such determinations and the procedures that will be followed in establishing new payment amounts. The interim rule became effective on February 11, 2003, but to date, no payment adjustments have occurred as a result of the IR authority.

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 eventually could have a significant impact on Medicare payments for such Part B services as home oxygen, DME and Part B covered prescription drugs. We can not predict whether, especially in light of MMA’s enactment, CMS will exercise its IR authority with respect to certain products and services that we provide to Medicare beneficiaries, or the effect such payment adjustments would have on our financial position or operating results.

Federal and state budgetary and other cost-containment pressures will continue to impact the home respiratory care industry. We can not predict whether new federal and state budgetary proposals will be adopted or the effect, if any, such proposals would have on our business.

Operating Results

The following table sets forth for the periods indicated a summary of the Company’s net revenues by source:

	For The Three Months Ended March 31,

	2005		2004

	(In thousands)
Oxygen and other respiratory therapy	$	275,715	$	278,570
Home medical equipment and other		29,462		28,301

Total	$	305,177	$	306,871

Net revenues for the three months ended March 31, 2005, decreased by $1.7 million, a decrease of 0.6% compared with the three months ended March 31, 2004. The 0.6% decrease in net revenues was comprised of 6.7% internal growth and 3.7% acquisition growth offset by an 11.0% revenue reduction from lower Medicare payment rates for inhalation drugs and certain items of DME that took effect on January 1, 2005 (see “Medicare Reimbursement”). Net revenues for the three months ended March 31, 2005 were negatively impacted by $33.8 million (or 11%) as a result of the Medicare reimbursement reductions. The internal growth in net revenues excluding price reductions is attributed to underlying demographic growth in the market for our products and gains in customer counts resulting primarily from our sales and marketing efforts that emphasize high-quality equipment and customer service. Growth in net revenues from acquisitions is attributed to the effects of acquisitions of local and regional companies and is based on the estimated contribution to net revenues for the four quarters following such acquisitions. During the three months ended March 31, 2005, we completed the acquisition of six companies with aggregate annual revenues of approximately $25.0 million.

The contribution of oxygen and other respiratory therapy products to our net revenues was 90.3% during the three months ended March 31, 2005. Our strategy is to focus on the provision of oxygen and other respiratory therapy services to patients in the home and to provide home medical equipment and other services where we believe such services will enhance our core respiratory business.

Cost of goods and services as a percentage of net revenues increased to 18.5% for the three months ended March 31, 2005, compared with 14.9% for the comparable prior year period. The increase in costs expressed as a percentage of net revenues was due in part to the $33.8 million reduction in revenues from Medicare price cuts taking effect in the first quarter of 2005. Additionally, the Company experienced an increase of $9.2 million in its drug purchasing costs due to a product mix shift in its inhalation drug business.

Operating expenses as a percentage of net revenues for the three months ended March 31, 2005, increased to 22.9% compared with 21.1% for the comparable prior year period. This increase as a percentage of net revenues was due primarily to the effect on revenues of the lower Medicare reimbursement rates taking effect in the first quarter of 2005 and increased operating costs associated with recent business acquisitions.

Selling, general and administrative (“SG&A”) expenses as a percentage of net revenues were 20.2% for the three months ended March 31, 2005, compared with 21.0% for the three months ended March 31, 2004. The reduction in SG&A expense expressed as a percentage of net revenues during the period resulted from cost controls and productivity gains at our overhead locations and lower advertising expenses, which partially offset the impact of the Medicare price cuts taking effect in the first quarter of 2005.

Operating income for the three months ended March 31, 2005, was $90.0 million (29.5% of net revenues) compared with $105.4 million (34.4% of net revenues) for the comparable three months of the prior year. The decrease in operating income is attributed primarily to the reduction of Medicare reimbursement rates for inhalation drugs and certain items of durable medical equipment effective January 1, 2005 and increased costs of purchased inhalation drugs partially offset by gains in labor productivity and control over operating costs.

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.

Net cash provided by operating activities decreased by 7.7% to $107.7 million for the three months ended March 31, 2005, compared with $116.7 million for the three months ended March 31, 2004. The decrease in net cash from operating activities was due primarily to a decrease in net income attributable to the reductions in Medicare reimbursement for respiratory medications and certain items of durable medical equipment that took effect on January 1, 2005.

Net cash used in investing and financing activities was $40.5 million for the three months ended March 31, 2005. Activity during the three-month period ended March 31, 2005 included our investment of $29.8 million in business acquisitions, investment in capital equipment of $23.7 million and repurchases of our common stock for $66.8 million.

As of March 31, 2005, our principal sources of liquidity consisted of $217.2 million of working capital and up to $200.0 million available under our revolving bank credit facility. We believe that internally generated funds, together with funds that may be borrowed under our revolving credit facility, will be sufficient to meet our anticipated capital requirements and financial obligations.

On December 9, 2004, the Board of Directors authorized a plan to repurchase up to $250.0 million of the Company’s common stock. Purchases will be made through the open market or privately negotiated transactions, subject to market conditions and trading restrictions. As of March 31, 2005, there have been approximately 1,639,567 shares purchased at a cost of approximately $66.8 million and the total common stock held in treasury, at cost, was $590.0 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 $64.00 (120% of the applicable conversion price 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. 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.

Our future liquidity will continue to be dependent upon our operating cash flow and management of accounts receivable. We anticipate that funds generated from operations, together with our current cash on hand and funds available under our revolving credit facility, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, and meet our contractual obligations for at least the next 12 months. In addition to our contractual obligations described below, we plan to invest in excess of $100.0 million in acquisitions and repurchase up to $250.0 million of our common stock during 2005.

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

	(remaining 9 months 2005)		2006		2007		2008		2009		Thereafter		Total

Short-term debt	$	70,064	$	3,765	$	0	$	0	$	0	$	0	$	73,829
Capital lease commitments		140		0		0		0		0		0		140
Long-term debt		0		0		0		0		0		275,000		275,000
Interest expense		10,865		8,993		8,484		8,250		8,250		193,508		238,350
Operating leases		23,286		21,587		13,792		5,864		1,596		49		66,174
Employment agreements		1,321		1,761		1,761		1,761		1,761		0		8,365

Total	$	105,676	$	36,106	$	24,037	$	15,875	$	11,607	$	468,557	$	661,858

New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), “Share-Based Payment”. SFAS No. 123(R) revises SFAS 123, “Accounting for Stock-Based Compensation”, amends SFAS 95, “Statement of Cash Flows”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements. The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. The Company will implement this standard effective January 1, 2006. The Company is currently evaluating the impact from this standard on its results of operations and financial position.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”. The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have an impact on the Company’s consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have an impact on the Company’s consolidated financial statements.

Forward Looking Statements

Statements in this 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 other 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 percent 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 herein (see “MEDICARE REIMBURSEMENT”), MMA was signed into law on December 8, 2003. 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. MMA includes sweeping changes that will impact a broad spectrum of health care industry participants, including physicians, pharmacies, manufacturers and pharmacy benefit managers, as well as other Medicare suppliers and providers, including Lincare.

The MMA legislation contains provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. Among other things, MMA significantly reduces reimbursement for inhalation drug therapies in 2005, 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 acquisition program for DME beginning in 2007, and implements quality standards and accreditation requirements for DME suppliers. The MMA 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 MMA provisions.

A SIGNIFICANT PERCENTAGE OF OUR BUSINESS IS DERIVED FROM THE SALE AND RENTAL 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.

MMA contains provisions that 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”). Reductions in payment rates for 2005 established by CMS for the non-oxygen items subject to the FEHP provisions range between 2% and 14% and are expected to reduce average reimbursement for these types of items provided by the Company by approximately 10%. The non-oxygen DME items subject to the 2005 Medicare price cuts accounted for approximately 2.5% of total revenues for the Company in 2004. MMA also freezes payment amounts for other covered DME items from 2004 to 2007.

On September 13, 2004, the OIG released a report entitled, “Medicare Payment Rates for Home Oxygen Equipment,” which was intended to serve as the basis for establishing Medicare payment rates for oxygen in 2005. In its report, the OIG determined that Medicare allowances are approximately 15.5% higher for stationary oxygen systems and approximately 11.3% higher for portable oxygen systems when compared with surveyed FEHP plans, representing a weighted average difference of approximately 15.1%. The CMS Administrator, in his comment letter to the OIG, agreed with the OIG’s recommendation to use the pricing information contained in the OIG report to reduce the rates Medicare pays for home oxygen equipment in 2005. CMS also concurred with the OIG’s recommendation to consider alternative methods for determining future Medicare oxygen payment rates, such as competitive bidding, contracts with local or national providers, and capped rental arrangements.

On February 4, 2005, CMS published notice CMS-1299-N announcing a delay in the implementation of the 2005 Medicare oxygen payment rates. The notice stated that CMS was informed by the OIG that it needed to collect additional information before the FEHP median prices for oxygen could be finalized. On March 30, 2005, CMS released the new Medicare fee schedule amounts for oxygen equipment based on the issuance of the final report by the OIG. The new payment rates were made effective for claims for oxygen equipment furnished after January 1, 2005, that are received by Medicare on or after April 1, 2005. We estimate that the new fee schedule will result in a net price reduction of 8.7% for oxygen equipment provided by the Company to Medicare beneficiaries, or approximately $15.0 to $16.0 million per quarter beginning in the second fiscal quarter of 2005. Oxygen equipment reimbursed by Medicare accounted for approximately 46% of total revenues for the Company in 2004. Such payment reductions, when fully 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 MMA, Medicare reimbursement for covered Part B drugs, including inhalation drugs that we provide, had been limited to 95 percent of the published average wholesale price (“AWP”) for the drug. MMA 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 15.8%. Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are reimbursed at 106 percent of the volume-weighted average selling price (“ASP”) of the drug, as determined from data provided each quarter by drug manufacturers under a specific formula described in MMA.

On November 3, 2004, CMS issued its final rule, CMS-1429-FC, which established a monthly dispensing fee of $57.00 per customer for inhalation drug therapy in addition to the ASP-based payment rate for the drugs dispensed. The rule also established an alternative dispensing fee of $80.00 per customer when dispensed in 90-day increments. Payment rates for inhalation drugs are updated quarterly based on the manufacturer ASP calculated for the most recent calendar quarter for which data are available. Manufacturer ASP submissions are due to CMS not later than 30 days after the last day of each calendar quarter. Inhalation drug payment rates in the first quarter of 2005 were based on ASP data from the third quarter of 2004. The new ASP-based payment formula in effect for the first quarter of 2005 resulted in substantially reduced payment rates for inhalation drugs. For example, the payment rates for the two most prevalent inhalation drugs, albuterol sulfate and ipratropium bromide, were reduced from $0.39 and $2.82 per milligram to $0.07 and $0.29, respectively, representing reductions of 82% to 90% from 2004 levels. ASP price updates for the second quarter of 2005 have been published by CMS and indicate prices for albuterol and ipratropium of $0.09 and $0.20 per milligram, respectively. The combination of the new ASP payment rates for inhalation drugs commencing in 2005 and the monthly dispensing fee of $57.00 is expected to reduce total reimbursement for inhalation drug therapies provided by the Company by approximately 40% to 50% in fiscal 2005. Medicare-reimbursed inhalation drug therapies provided by the Company in 2004 accounted for approximately 23% of total revenues.

While Lincare continues to evaluate the impact of the reduced Medicare payment rates on its business, we expect to be able to continue to provide inhalation drugs to Medicare beneficiaries in 2005. The final rule states that CMS intends to revisit the payment amount for the dispensing fee during 2005 and proceed through notice and comment rulemaking in order to establish an appropriate dispensing fee for 2006. Lincare can not determine the outcome of any future rulemaking by CMS nor the impact that such rulemaking might have on our ability to continue to provide inhalation drugs beyond 2005. Further, we can not determine whether quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will continue to result in further reductions in payment rates for inhalation drugs, and what impact such payment reductions could have on Lincare in 2005 and beyond. Such payment adjustments could have a material adverse effect on our financial position and operating results.

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.

MMA 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% of our customers are eligible for primary Medicaid benefits, and State Medicaid programs fund approximately 10% of our payments from primary and secondary insurance benefits. 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.

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% of our customers and approximately 26% 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 2004, approximately 57% of our revenues were derived from Medicare, 26% from private insurance carriers, 10% 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 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) and 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.

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, including HIPAA, govern the collection, dissemination, use and confidentiality of patient-identifiable health information. HIPAA requires us to comply with standards for the use and disclosure of health information within our company and with third parties. HIPAA also includes 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.

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 disclosed liabilities, the existence 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, and complexity of system conversions and execution of the integration plan by local management. If we do not successfully integrate the acquired business, the acquisition could fail to achieve its expected revenue contribution or there could be delays in the billing and collection of claims for services rendered to customers, which may 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.

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, we must control our operating cost levels, particularly labor and related costs, which account for a significant component of our operating costs and expenditures. 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 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to changes in interest rates as a result of our revolving bank credit facility which is based on the London Interbank Offered Rate. A 10% increase in interest rates related to our revolving bank credit facility would not alone have a material adverse effect on our earnings over the next fiscal year or the fair value of our revolving bank credit facility.

The fair value of our debt securities is subject to change as a result of changes in interest rates. We estimate potential changes in the fair value of interest rate sensitive financial instruments based on a hypothetical decrease (or increase) 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% decrease in interest rates on the fair value of our long-term obligations and the associated change in annual interest expense. We had no derivative securities as of March 31, 2005.

Market Risk Sensitive Instruments – Interest Rate Sensitivity (assuming 10% Decrease in Interest Rates):

(dollars in thousands)	Face Amount		Carrying Amount		Fair Value		Estimated Change in Fair Value

As of March 31, 2005:
Senior secured notes	$	45,000	$	45,000	$	46,359	$	137
Convertible debt		275,000		275,000		290,125		1,925
Deferred obligations		28,969		28,969		28,969		0
Revolving bank credit facility		0		0		0		0
As of December 31, 2004:
Senior secured notes	$	45,000	$	45,000	$	46,591	$	116
Convertible debt		275,000		275,000		295,625		2,234
Deferred obligations		23,230		23,230		23,230		0
Revolving bank credit facility		0		0		0		0

Item 4. 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 March 31, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

As a health care provider, the Company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, 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, the Company receives inquiries from various government agencies requesting customer records and other documents. It has been the Company’s policy to cooperate with all such requests for information. There are several pending government inquiries, but the government has not instituted any proceedings or served us with any complaints as a result of these inquiries. However, the Company can provide no assurances as to the duration or outcome 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 arising in the ordinary course of our business. The ultimate disposition of all such matters is not currently expected to have a material adverse impact on our financial position, results of operations or liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended March 31, 2005, the Company repurchased approximately 1.6 million shares of its common stock at a cost of approximately $66.8 million under a publicly announced repurchase program approved by its Board of Directors. All repurchases were made in the open market, subject to market conditions and trading restrictions.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of the Repurchase Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Repurchase Program

January 1, 2005 to January 31, 2005		0		—		0	$	250,000,000
February 1, 2005 to February 28, 2005		201,700	$	40.23		201,700	$	241,886,000
March 1, 2005 to March 31, 2005		1,437,867	$	40.79		1,437,867	$	183,235,000

Total		1,639,567	$	40.72		1,639,567

Item 3. Defaults Upon Senior Securities - Not Applicable

Item 4. Submission of Matters to a Vote of the Security Holders - Not Applicable

Item 5. Other Information - Not Applicable

Item 6. Exhibits and Reports on Form 8-K

	(a)	Exhibits included or incorporated herein: See Exhibit Index.
	(b)	Furnished February 7, 2005: Announcement of the financial results for the year ended December 31, 2004 and update on Other Events.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LINCARE HOLDINGS INC.

	Registrant

	/s/ PAUL G. GABOS

	Paul G. Gabos Secretary, Chief Financial Officer and Principal Accounting Officer
May 9, 2005

INDEX OF EXHIBITS

Exhibit Number		Exhibit

3.10 (A)		Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.
3.11 (A)		Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.
3.20 (B)		Amended and Restated By-Laws of Lincare Holdings Inc.
4.10 (C)		Lincare Holdings Inc. Indenture dated as of June 11, 2003
4.20 (C)		Lincare Holdings Inc. Registration Rights Agreement dated as of June 11, 2003
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


A		Incorporated by reference to the Registrant’s Form 10-Q dated August 12, 1998.
B		Incorporated by reference to the Registrant’s Form 10-Q dated August 13, 2002.
C		Incorporated by reference to the Registrant’s Form 8-K dated June 12, 2003.

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