10-K 1 g66313e10-k.txt LINCARE HOLDINGS INC. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER 0-19946 LINCARE HOLDINGS INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 51-0331330 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 19337 US 19 NORTH, SUITE 500 CLEARWATER, FLORIDA 33764 ------------------------------------------------ ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (727) 530-7700 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock, $.01 par value, held by non-affiliates of the registrant, based on the closing sale price of the common stock on February 28, 2001, as reported in the NASDAQ National Market System, was approximately $3,153,207,990. As of February 28, 2001, there were 53,589,867 outstanding shares of the registrant's common stock, par value $.01, which is the only class of capital stock of the registrant outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III of this Form 10-K is incorporated by reference to the definitive Proxy Statement for the 2001 Annual Meeting of Stockholders of Lincare Holdings Inc. which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2000. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL Lincare Holdings Inc. and subsidiaries ("Lincare" or the "Company") is one of the nation's largest providers of oxygen and other respiratory therapy services to patients in the home. The Company's customers typically suffer from chronic obstructive pulmonary disease ("COPD"), such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or other respiratory therapy services in order to alleviate the symptoms and discomfort of respiratory dysfunction. Lincare currently serves over 275,000 customers in 44 states through 510 operating centers. THE HOME RESPIRATORY MARKET The Company estimates that the home respiratory therapy market (including home oxygen equipment and respiratory therapy services) represents approximately $4.0 billion in annual sales, with growth in services estimated at approximately 7% per year over the last five years. This growth reflects the significant increase in the number of persons afflicted with COPD, which is largely attributable to the increasing proportion of the population over the age of 65 years. Growth in the home respiratory market is further driven by the continued trend towards treatment of patients in the home as a lower cost alternative to the acute care setting. BUSINESS STRATEGY The Company's strategy is to increase its market share through internal growth and acquisitions. Lincare focuses primarily on growth within its existing geographic markets, which the Company believes is generally more profitable than adding additional operating centers in new markets. In addition, the Company expands into new geographic markets on a selective basis, either through acquisitions or by opening new operating centers, when it believes such expansion will enhance its business. In 2000, Lincare acquired 15 local and regional competitors with combined annual revenues of approximately $82.0 million. These acquisitions expanded the Company's presence in states where the Company had existing locations. Revenue growth will be dependent upon the overall growth rate of the home respiratory care market, as well as on opportunities to increase market share through effective marketing efforts and selective acquisitions of local or regional competitors. The Company believes that the growing cost containment efforts of government and private insurance reimbursement programs have created an increasingly competitive environment, accelerating consolidation trends within the home health care industry. The Company will continue to concentrate on providing oxygen and other respiratory therapy services to patients in the home and to provide home medical equipment and other services where it believes such services will enhance the Company's primary business. In 2000, oxygen and other respiratory therapy services accounted for approximately 86% of the Company's revenues. PRODUCTS AND SERVICES OF LINCARE Lincare primarily provides oxygen and other respiratory therapy services to patients in the home. Lincare also provides a variety of infusion therapies in certain geographic markets. When a patient is referred to one of the Company's operating centers by a physician, hospital discharge planner or other source, the Company's customer representative obtains the necessary medical and insurance coverage information and coordinates the delivery of patient care. The prescribed therapy is administered by one of the Company's representatives in the customer's home, where instructions and training are given to the customer and the customer's family regarding appropriate equipment use and maintenance and the therapy to be administered. Following the initial setup, Company representatives make periodic visits to the customer's home, the frequency of which is dictated by the type of therapy. The Company's services are coordinated with the customer's physician. During the period that the Company performs services for a customer, the customer remains under the physician's care and medical supervision. The Company employs respiratory therapists and nurses to perform 1 3 certain training and other functions in connection with the Company's services. The respiratory therapists and nurses are licensed where required by applicable law. HOME OXYGEN EQUIPMENT. The major types of oxygen delivery equipment are liquid oxygen systems and oxygen concentrators. Each method of delivery has different characteristics that make it more or less suitable to specific patient applications. Oxygen concentrators are stationary units that provide a continuous flow of oxygen by filtering ordinary room air. Concentrators are most commonly used by patients as their primary source of stationary oxygen. These systems are often supplemented with portable gaseous oxygen cylinders, to meet the ambulatory needs of the patient. Liquid oxygen systems are thermally insulated containers of liquid oxygen, consisting of a stationary unit and a portable unit, which are most commonly used by patients with significant ambulatory requirements. OTHER RESPIRATORY THERAPY SERVICES. Other respiratory therapy services offered by the Company include the following: Nebulizers and associated respiratory medications provide aerosol therapy for patients suffering from COPD and asthma; Non-invasive ventilation provides nocturnal ventilatory support for neuromuscular and COPD patients. This therapy improves daytime function and decreases incidents of acute illness; Apnea monitors provide respiratory alarm systems for infants at risk for sudden infant death syndrome; Ventilators support respiratory function in severe cases of respiratory failure where the patient can no longer sustain the mechanics of breathing without the assistance of a machine; and Continuous positive airway pressure devices maintain open airways in patients suffering from obstructive sleep apnea by providing airflow at prescribed pressures during sleep; INFUSION THERAPY. Lincare provides a variety of infusion therapies including the following: Parenteral nutrition involves the intravenous feeding of life-sustaining nutrients to patients with impaired or altered digestive tracts or conditions that prohibit adequate oral nutritional support; Intravenous antibiotic therapy is the infusion of anti-infective medications into the patient's bloodstream for the treatment of a variety of infectious diseases; Enteral nutrition is administered to patients who cannot eat as a result of an obstruction to the upper gastrointestinal tract or other medical condition; Chemotherapy is the administration of cytotoxic drugs to patients suffering from various types of cancer; Dobutamine infusions are provided to patients to treat chronic end-stage congestive heart failure that has not responded to standard drug therapy. These patients require a long-term venous access device and frequent blood chemistry monitoring; Immune globulin (IVIG) therapy is utilized for a variety of immune disorders such as B-cell and T-cell immune deficiency, acute infections, post transplant immunodeficiency and burns; Continuous pain management is the administration of analgesic drugs to patients suffering from acute or chronic pain; and Central catheter management provides monitoring and supplies to patients requiring access via a peripherally inserted line into the superior vena cava. 2 4 Lincare also supplies home medical equipment, such as hospital beds, wheelchairs and other supplies that may be required by patients. COMPANY OPERATIONS Management. The Company 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 believes that the personalized nature of customer requirements and referral relationships characteristic of the home health care business mandate the Company's localized operating structure. Each of the Company's 510 operating centers is managed by a center manager who has responsibility and accountability for the operating and financial performance of the center. Service and marketing functions are performed at the local operating level, while strategic development, financial control and operating policies are administered at the executive level. Reporting mechanisms are in place at the operating center level to monitor performance and ensure field accountability. A team of area managers directly supervises individual operating center managers, serving as an additional mechanism for assessing and improving performance of the Company's operations. The Company's operating centers are served by 24 billing centers which control all of the Company's billing and reimbursement functions. MIS Systems. The Company believes that the proprietary management information systems developed by the Company are one of its key competitive advantages. These systems provide management with a critical asset in measuring and evaluating performance levels throughout the Company. Management reviews monthly reports containing information critical to the evaluation process, including revenues and profitability by individual center, accounts receivable and cash collection management, equipment controls and utilization, customer activity, and manpower trends. The Company has an in-house staff of computer programmers which enables the Company to continually enhance its computer systems in order to provide timely financial and operational information and to respond promptly to changes in reimbursement regulations and policies. Accounts Receivable Management. The Company derives a majority of its revenues from reimbursement by third party payors. The Company accepts assignment of insurance benefits from customers and, in most instances, invoices and collects payments directly from Medicare, Medicaid and private insurance carriers, as well as directly from customers under co-insurance provisions. The following table sets forth, for the periods indicated, the Company's payor mix.
YEAR ENDED DECEMBER 31, ------------------------- 2000 1999 1998 PAYORS ----- ----- ----- Medicare and Medicaid programs.............................. 61% 62% 62% Private insurance........................................... 30 29 29 Direct payment.............................................. 9 9 9 --- --- --- 100% 100% 100% === === ===
Reimbursement is a complicated process which involves submission of claims to multiple payors, each having its own claims requirements. To operate effectively in this environment, the Company has designed and implemented proprietary computer systems to decrease the time required for the submission and processing of third party payor claims. The Company's systems are capable of tailoring the submission of claims to the specifications of the individual payors. The Company's in-house MIS capability also enables it to adjust quickly to any regulatory or reimbursement changes. These features serve to decrease the processing time of claims by payors, resulting in a more rapid turnover of accounts receivable. In addition, the Company is capable of submitting claims electronically to any Medicare carrier or other third party payor that can receive electronic claims submissions. 3 5 SALES AND MARKETING Favorable trends affecting the U.S. population and home health care have created an environment which should produce increasing demand for the services provided by Lincare. The average age of the American population is increasing and, as a person ages, more health care services are generally required. Further, well-documented changes occurring in the health care industry show a trend toward home care rather than institutional care as a matter of patient preference and cost containment. Sales activities are generally carried out by the Company's full-time sales representatives located at the Company's operating centers with assistance from the center managers. In addition to promoting the high quality of the Company's services, the sales representatives are trained to provide information concerning the advantages of home respiratory care. Sales representatives are often licensed respiratory therapists who are highly knowledgeable in the provision of supplemental oxygen and other respiratory therapies. The Company primarily acquires new customers through referrals. The Company's principal sources of referrals are physicians, hospital discharge planners, prepaid health plans, clinical case managers and nursing agencies. The Company's sales representatives maintain continual contact with these medical professionals in order to strengthen these relationships. The Company's current base of referral sources recognizes the Company's reputation for providing high-quality service to patients and provides a steady flow of customers. While the Company views its referral sources as fundamental to its business, no single referral source accounts for more than 1.0% of the Company's revenues. The Company has more than 275,000 active customers, and the loss of any single customer or group of customers would not materially impact the Company's business. The Company has received accreditation from the Community Health Accreditation Program ("CHAP"). CHAP is one of only two national accrediting bodies in the nation to receive deeming authority from the federal government. By approving CHAP for deeming authority, the government certified that CHAP's Standards of Excellence met or exceeded the government's own standards for Medicare certification. Accreditation by a national accrediting body represents a marketing benefit to the Company's operating centers and provides for a recognized quality assurance program throughout the Company. Several proposals have been made to require health care providers to be accredited or licensed by independent agencies in order to participate in government reimbursement programs. Many private payors already require such accreditation. ACQUISITIONS In 2000, the Company acquired, in unrelated acquisitions, certain operating assets of 15 local and regional competitors. The operations acquired in 2000 had aggregate annualized revenues of approximately $82.0 million at the time of acquisition. These acquisitions resulted in the addition of 48 new operating centers. In 1999, the Company acquired, in unrelated acquisitions, certain operating assets of 18 local and regional competitors and the common stock of four companies. The operations acquired in 1999 had aggregate annualized revenues of approximately $61.0 million at the time of acquisition. These acquisitions resulted in the addition of 21 new operating centers. QUALITY CONTROL The Company is committed to providing consistently high quality products and services. The Company's quality control procedures and training programs are designed to promote greater responsiveness and sensitivity to individual customer needs and to provide the highest level of quality assurance and convenience to the customer and the referring physician. Licensed respiratory therapists and registered nurses provide professional health care support and assist in the Company's sales and marketing efforts. 4 6 SUPPLIERS The Company purchases its oxygen and equipment from a variety of suppliers. The Company is not dependent upon any single supplier and believes that its oxygen and equipment needs can be provided by several manufacturers. COMPETITION The home respiratory care market is a fragmented and highly competitive industry that is served by the Company, other national providers and, by Company estimates, over 2,000 regional and local providers. Quality of service is the single most important competitive factor within the home respiratory care market. The relationships between a home respiratory care company and its customers and referral sources are highly personal. There is no incentive for either the physician or the patient to alter this relationship so long as the home respiratory care company is providing responsive, professional and high-quality service. Other key competitive factors are strength of local ties to the referral community and efficiency of reimbursement and accounts receivable management systems. Home respiratory care companies compete primarily on the basis of service since reimbursement levels are established by the fee schedules promulgated by Medicare, Medicaid or by the individual determinations of private insurance companies. Furthermore, marketing efforts by home respiratory care companies are directed toward referral sources which generally do not share financial responsibility for the payment of services provided to customers. MEDICARE REIMBURSEMENT As a supplier of home oxygen and other respiratory therapy services for the home health care market, the Company participates in Medicare Part B, the Supplementary Medical Insurance Program, which was established by the Social Security Act of 1965. Suppliers of home oxygen and other respiratory therapy services have historically been heavily dependent on Medicare reimbursement due to the high proportion of elderly suffering from respiratory disease. On December 21, 2000, an approximately $35 billion Medicare "giveback" package was signed into law as part of H.R. 4577, the "Consolidated Appropriations Act, 2001." The appropriations act incorporates by reference the text of H.R. 5661, the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"), which includes sweeping reimbursement and other policy changes intended to mitigate the effects of reimbursement cuts contained in the Balanced Budget Act of 1997. Among other things, BIPA: (1) modifies payments for durable medical equipment ("DME") items. Specifically, for items provided in 2001, BIPA updates payments by the full increase in the consumer price index for urban consumers ("CPI-U") during the 12-month period ending June 2000. The update is implemented in two steps: for the period January 1, 2001 through June 30, 2001, DME payments will remain the same as were in effect before enactment of BIPA, and for the period of July 1, 2001 through December 31, 2001, DME items will receive the full CPI-U update increased by a "transitional allowance" of 3.28 percent. As provided under BIPA, the transitional allowance will not be taken into account in calculating payment amounts after 2001. No DME payment increase is authorized for 2002. The DME payment update specifically does not apply to oxygen and oxygen equipment. (2) requires the U.S. General Accounting Office ("GAO") to study Medicare reimbursement for drugs and biologicals and for related services. The study, which the GAO is directed to complete within nine months of enactment of BIPA, must include specific recommendations for revised payment methodologies. The Department of Health and Human Services ("HHS") is required to revise the current payment methodologies based on the GAO's recommendations; however, total payments may not exceed the aggregate payments that would otherwise have been made under current law. BIPA imposes a temporary moratorium on reductions in Medicare reimbursement for drugs and biologicals until GAO submits its findings to Congress. 5 7 On November 29, 1999, the Balanced Budget Refinement Act of 1999 ("BBA Refinement Act") was signed into law. This legislation was designed to mitigate the effects of the Balanced Budget Act of 1997 ("BBA") on health care providers. The BBA Refinement Act restores approximately $1.2 billion in funding in 2000 and $16 billion over five years, and affects a wide range of health care providers. With respect to the services provided by the Company, the BBA Refinement Act provides for temporary increases in Medicare payment rates for durable medical equipment (including oxygen equipment) of 0.3% in 2001 and 0.6% in 2002. Furthermore, the BBA Refinement Act temporarily prohibits the HHS from exercising its inherent reasonableness authority to reduce payments for non-physician Part B services, including durable medical equipment, and excludes durable medical equipment from the home health consolidated billing requirements established in the BBA. On August 5, 1997, the Balanced Budget Act of 1997 ("BBA") was signed into law. The legislation, among other things, was intended to reduce Medicare expenditures by $115 billion over five years. The BBA reduced Medicare reimbursement amounts for oxygen and oxygen equipment furnished after January 1, 1998, to 75 percent of the fee schedule amounts in effect during 1997. Reimbursement amounts for oxygen and oxygen equipment furnished after January 1, 1999, and each subsequent year thereafter, were reduced to 70 percent of the fee schedule amounts in effect during 1997. The BBA also reduced payment amounts for covered drugs and biologicals furnished after January 1, 1998 to 95 percent of the average wholesale price of such covered items. The BBA authorizes HHS to conduct up to five competitive bidding demonstration projects for the acquisition of durable medical equipment and requires that one such project be established for oxygen and oxygen equipment. Each demonstration project is to be operated over a three-year period and is to be conducted in not more than three competitive acquisition areas. The first demonstration project became effective in Polk County, Florida on October 1, 1999. A second demonstration site was established in the three counties surrounding San Antonio, Texas and became effective on February 1, 2001. The BBA also includes provisions designated to reduce health care fraud and abuse including a surety bond requirement, which has not yet been implemented, for durable medical equipment providers. Federal and state budgetary and other cost-containment pressures will continue to impact the home respiratory care industry. The Company cannot predict whether new federal and state budgetary proposals will be adopted or the effect, if any, such proposals would have on the Company's business. GOVERNMENT REGULATION The federal government and all states in which the Company currently operates regulate various aspects of its business. In particular, the Company's operating centers are subject to federal laws covering the repackaging of drugs (including oxygen) and regulating interstate motor-carrier transportation. The Company's locations also are subject to state laws governing, among other things, pharmacies, nursing services, distribution of medical equipment and certain types of home health activities. Certain of the Company's employees are subject to state laws and regulations governing the ethics and professional practice of respiratory therapy, pharmacy and nursing. As a supplier of services under the Medicare and Medicaid programs, the Company is subject to the Medicare and Medicaid fraud and abuse laws. These laws, among other things, prohibit any payment, kickback or rebate in return for the referral of patients receiving benefits from Medicare, Medicaid or other federally funded health care programs. Violations of these provisions may result in civil and criminal penalties and exclusion from participation in such programs. Health care is an area of rapid regulatory change. Changes in the law and new interpretations of existing laws may affect permissible activities, the relative costs associated with doing business, and reimbursement amounts paid by federal, state and other third party payors. The Company cannot 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 legislative and regulatory changes could have an adverse impact on the Company. 6 8 INSURANCE The Company currently has in force general liability, product liability and professional liability insurance with primary and excess coverage limits of $10.0 million. The Company's product liability insurance provides coverage on a claims-made basis, while its general and professional liability insurance are on an occurrence basis. All policies are subject to annual renewal and the Company anticipates adequate amounts of insurance coverage to be available at such renewal dates. EMPLOYEES As of February 28, 2001, the Company had approximately 5,500 employees. None of the Company's employees are covered by collective bargaining agreements. The Company believes that the relations between the Company's management and its employees are good. ENVIRONMENTAL MATTERS Management believes that the Company is currently in compliance, in all material respects, with applicable federal, state and local statutes and ordinances regulating the discharge of hazardous materials into the environment. Management does not believe it will be required to expend any material amounts in order to remain in compliance with these laws and regulations or that such compliance will materially affect its capital expenditures, earnings or competitive position. ITEM 2. PROPERTIES All but one of the Company's 510 operating center locations are leased from unrelated third parties. Each operating center is a combination warehouse and office, with warehouse space generally comprising approximately 50% of the facility. Warehouse space is used for storage of adequate supplies of equipment necessary to conduct the Company's business. The Company also currently leases its headquarters facility and 24 separate billing centers from unrelated third parties. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company receives inquiries from various government agencies requesting patient records and other documents. It has been Lincare's policy to cooperate with all such requests for information. The government has not instituted any proceedings or served Lincare with any complaints as a result of these inquiries. Private litigants may also make claims against the Company for violations of health care laws in actions known as qui tam suits and the government may intervene in, and take control of, such actions. The Company is a defendant in certain qui tam proceedings. Lincare intends to vigorously defend these suits should they proceed. The government has declined to intervene in all unsealed qui tam actions of which the Company is aware. As a health care provider, Lincare is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documentation and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to patients. Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to legal process. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs. The Company is also involved in certain other claims and legal actions arising in the ordinary course of its business. The ultimate disposition of all such matters is not expected to have a material adverse impact on the Company's financial position, results of operations or liquidity. 7 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders during the fourth quarter of 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ National Market System under the symbol LNCR. The following table sets forth the high and low closing sale prices as reported by NASDAQ for the periods indicated.
HIGH LOW ------ ------ 2000 First quarter............................................... $39.00 $21.31 Second quarter.............................................. 34.75 23.31 Third quarter............................................... 29.88 24.44 Fourth quarter.............................................. 61.06 28.19 1999 First quarter............................................... $39.94 $19.38 Second quarter.............................................. 31.44 23.25 Third quarter............................................... 32.94 23.50 Fourth quarter.............................................. 34.69 24.44
There were approximately 194 holders of record of the common stock as of February 28, 2001. The Company has not paid any cash dividends on its capital stock and does not anticipate paying cash dividends in the foreseeable future. It is the present intention of the Company's Board of Directors to retain all earnings in the Company in order to support the future growth of the Company's business. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below under the caption "Statements of Operations Data" for the years ended December 31, 2000, 1999, 1998, 1997 and 1996, are derived from the consolidated financial statements of the Company audited by KPMG LLP, independent certified public accountants. 8 10 The data set forth below is qualified by reference to, and should be read in conjunction with, the consolidated financial statements, accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Net revenue................................. $702,484 $581,786 $487,407 $443,181 $348,870 Cost of goods and services.................. 112,949 89,592 76,367 65,932 53,711 Operating expenses.......................... 158,794 131,240 111,222 93,830 75,158 Selling, general and administrative expenses.................................. 147,699 128,345 107,691 90,225 71,259 Bad debt expense............................ 10,537 6,981 5,849 4,432 3,472 Depreciation expense........................ 47,960 41,178 34,430 27,603 20,790 Amortization expense........................ 19,495 15,954 12,745 14,229 13,128 Non-recurring expense(1).................... -- -- -- 15,557 3,932 -------- -------- -------- -------- -------- Operating income............................ 205,050 168,496 139,103 131,373 107,420 Interest income............................. 1,763 468 447 202 153 Interest expense............................ 18,019 5,940 1,177 1,161 497 Gain (loss) on disposal of property and equipment................................. 8 (277) (113) (93) (80) -------- -------- -------- -------- -------- Income before income taxes.................. 188,802 162,747 138,260 130,321 106,996 Income tax expense.......................... 71,934 62,007 52,954 50,173 40,422 -------- -------- -------- -------- -------- Net income.................................. $116,868 $100,740 $ 85,306 $ 80,148 $ 66,574 ======== ======== ======== ======== ======== Income per common share: Basic..................................... $ 2.20 $ 1.77 $ 1.47 $ 1.41 $ 1.19 ======== ======== ======== ======== ======== Diluted................................... $ 2.16 $ 1.74 $ 1.44 $ 1.37 $ 1.15 ======== ======== ======== ======== ======== Weighted average number of common shares outstanding............................... 53,087 56,942 57,992 56,837 55,999 ======== ======== ======== ======== ======== Weighted average number of common shares and common share equivalents outstanding...... 54,151 57,989 59,435 58,655 57,726 ======== ======== ======== ======== ========
--------------- (1) In 1997, the Company recorded a non-recurring expense of $15,557,000, of which $11,849,000 was related to the write down of impaired capital equipment and $3,708,000 was related to the write down of impaired intangible assets. In 1996, the Company recorded a non-recurring expense of $3,932,000, of which $2,682,000 was related to the restructuring of certain senior management employment agreements and $1,250,000 was related to the resolution of an investigation and associated legal expenses.
AT DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................. $ 84,475 $ 70,179 $ 49,078 $ 42,106 $ 23,633 Total assets................................ 877,595 716,824 582,639 440,388 347,408 Long-term obligations, excluding current installments.............................. 204,024 159,000 22,258 4,602 8,234 Stockholders' equity........................ 584,450 486,111 495,656 393,067 299,248
9 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company continues to pursue its strategy of increasing market share within its existing geographical markets through internal growth and selective acquisitions of local and regional competitors. In addition, the Company will continue to expand into new geographical markets on a selective basis, either through acquisitions or by opening new operating centers, when the Company believes it will enhance its business. The Company's focus remains primarily on oxygen and other respiratory therapy services, which represent approximately 86% of the Company's revenues. NET REVENUES The following table sets forth for the periods indicated a summary of the Company's net revenues by source:
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Oxygen and other respiratory therapy............... $607,071 $521,870 $433,594 Home medical equipment and other................... 95,413 59,916 53,813 -------- -------- -------- Total.................................... $702,484 $581,786 $487,407 ======== ======== ========
Net revenues for the year ended December 31, 2000 increased by $120,698,000 (20.8%)over 1999. Net revenues for the year ended December 31, 1999 increased by $94,379,000 (or 19.4%) over 1998. The increases in net revenues are attributable to the Company's sales and marketing efforts that emphasize quality and customer service, and the effect of the acquisitions completed by the Company. The Company's revenues were adversely impacted in 1999 and 1998 by provisions contained in the Balanced Budget Act of 1997 (the "BBA") which reduced Medicare payment amounts for certain equipment and supplies provided by the Company. The BBA provisions resulted in a reduction of the Company's revenues by approximately $19,343,000 (or 3.9%) and $73,221,000 (or 16.5%) for the years ended December 31, 1999 and 1998, respectively. The BBA reduced Medicare payment amounts for oxygen and oxygen equipment furnished after January 1, 1998, to 75 percent of the fee schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen equipment furnished after January 1, 1999 were reduced to 70 percent of the fee schedule amounts in effect during 1997. The BBA also reduced payment amounts for covered drugs and biologicals furnished after January 1, 1998 to 95 percent of the average wholesale price of such covered items. COST OF GOODS AND SERVICES Cost of goods and services as a percentage of net revenues was 16.1% for the year ended December 31, 2000 and was 15.4% and 15.7% for the years ended December 31, 1999 and 1998, respectively. The increase in cost of goods for the year ended December 31, 2000 was the result of the Company's purchase of the assets of United Medical, Inc. ("UMI") on June 28, 2000. The UMI locations operated by the Company provide a more broad base of durable medical equipment and supplies which have lower gross margins than the Company's traditional respiratory care business. OPERATING AND OTHER EXPENSES The Company continues to maintain a cost structure that, with increased net revenues, has permitted the Company to spread its fixed operating expenses and overhead over a larger base of revenues, resulting in improvement in operating income. Operating expenses expressed as a percentage of net revenues for the years ended December 31, 2000, 1999 and 1998 were 22.6%, 22.6% and 22.8%, respectively. Selling, general and administrative expenses expressed as a percentage of net revenues for the years ended December 31, 2000, 1999 and 1998 were 21.0%, 22.1% and 22.1%. Bad debt expense as a percentage of net revenues was 1.5% for the year ended December 31, 2000 and 1.2% for each of the years ended December 31, 1999 and 1998. Continued growth in the pace of the 10 12 Company's acquisition program has contributed to the increase in the Company's bad debt expense. The integration of these acquired companies into the Company's regional billing and collections offices can disrupt the operations of these offices and adversely impact the amount of accounts receivable written off as uncollectable. Depreciation expense as a percentage of net revenues was 6.8% for the year ended December 31, 2000 compared with 7.1% for each of the years ended December 31, 1999 and 1998, respectively. The decrease in depreciation expense as a percentage of net revenues in 2000 is attributable to reduced capital expenditures for respiratory assist devices resulting from changes in Medicare coverage guidelines on October 1, 1999. AMORTIZATION EXPENSE The Company's net intangible assets were $550,291,000 as of December 31, 2000. Of this total, $8,501,000 (consisting of the value assigned to customer lists) is being amortized over a period of three years, $1,153,000 (consisting of various covenants not to compete) over a period of one to five years and $540,637,000 (consisting of goodwill) over a period of 40 years. During 2000, the Company amortized $19,495,000 of its intangible assets compared to $15,954,000 in 1999 and $12,745,000 in 1998. The increase in amortization expense in 2000 is attributed to the amortization of intangible assets associated with business combinations in 2000. OPERATING INCOME As shown in the table below, operating income for the year ended December 31, 2000 increased by $36,554,000 from 1999.
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Operating income........................................... $205,050 $168,496 $139,103 Percentage of net revenues................................. 29.2% 29.0% 28.5%
INTEREST EXPENSE Interest expense for the year ended December 31, 2000 was $18,019,000, compared to $5,940,000 and $1,177,000 for the years ended December 31, 1999 and 1998, respectively. The increase in interest expense in 2000 is primarily attributable to additional borrowings utilized for the Company's open market repurchases of approximately 6.7 million shares of its outstanding common stock during 2000 and the purchase of the assets of United Medical, Inc. on June 28, 2000. INCOME TAXES The Company's effective income tax rate was 38.1% for the year ended December 31, 2000, 38.1% for 1999 and 38.3% for 1998. ACQUISITIONS In 2000, the Company acquired, in unrelated acquisitions, certain operating assets of 15 local and regional competitors. The operations acquired in 2000 had aggregate annualized revenues of approximately $82,000,000 at the time of acquisition. The cost of these acquisitions was $162,387,000 and was allocated to acquired assets as follows: $7,318,000 to current assets, $6,562,000 to property and equipment, $6,142,000 to intangible assets and $142,365,000 to goodwill. These acquisitions resulted in the addition of 48 new operating centers. In 1999, the Company acquired, in unrelated acquisitions, certain operating assets of 18 local and regional competitors and the common stock of four other companies. The operations acquired in 1999 had aggregate annualized revenues of approximately $61,000,000 at the time of acquisition. The cost of these acquisitions was $103,356,000 and was allocated to acquired assets as follows: $2,969,000 to current assets, $6,097,000 to 11 13 property and equipment, $7,132,000 to intangible assets, and $87,158,000 to goodwill. These acquisitions resulted in the addition of 21 new operating centers. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company's working capital was $84,475,000, as compared to $70,179,000 at December 31, 1999 and $49,078,000 at December 31, 1998. Net cash provided by operating activities was $215,029,000 for the year ended December 31, 2000, compared with $149,155,000 for the year ended December 31, 1999 and $145,442,000 for the year ended December 31, 1998. A significant portion of the Company's assets consists of accounts receivables from third party payors that are responsible for payment for the services provided by the Company. The Company's net accounts receivable in terms of days sales outstanding was 56 days as of December 31, 2000 and 62 days as of December 31, 1999. Net cash used in investing and financing activities was $215,527,000, $150,556,000 and $144,420,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Activity in the year ended December 31, 2000 included the Company's investment of $150,326,000 in business acquisitions, investment in capital equipment of $58,622,000, proceeds of $314,018,000 from its revolving credit loan and other long-term obligations, and payments of $283,663,000 related to long-term obligations. The Company anticipates that capital expenditures for 2001 will be approximately $70,000,000 to $80,000,000 which includes construction costs of a headquarters building on the land purchased in 1999. As of December 31, 2000, the Company's principal sources of liquidity consisted of $84,475,000 of working capital and $158,000,000 available under its three year bank credit facility. The Company's $60,000,000 364-day revolving credit facility expired on August 22, 2000 and was replaced on September 6, 2000 by $125,000,000 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 as follows: $30,000,000 at 8.91% due September 15, 2003, $50,000,000 at 9.01% due September 15, 2004 and $45,000,000 at 9.11% due September 15, 2005. Upon entering into the senior secured note agreement a placement fee of $893,000 was paid and is being amortized over the periods of the notes. The Company believes that internally generated funds, together with funds that may be borrowed under its three year bank credit facility, will be sufficient to meet the Company's anticipated capital requirements and financial obligations for the foreseeable future. On June 11, 1999, the Company's Board of Directors authorized the Company to repurchase up to $200,000,000 of its outstanding common stock. Purchases are made through open market or privately negotiated transactions, subject to market conditions and trading restrictions. As of December 31, 2000, $178,007,000 of common stock had been repurchased under this program. The total common stock held in treasury was $176,845,000 as of December 31, 2000. The Company's future liquidity will continue to be dependent upon its operating cash flow and management of accounts receivable. The Company does not expect any impact on liquidity due to pending litigation. NEW ACCOUNTING STANDARDS In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133," which deferred, for one year, the effective date for the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires that an entity recognize all derivative instruments as either assets or liabilities on the balance sheet and measure those instruments at fair values. The Company manages interest rate risk by using derivative instruments. During 2000, the Company entered into an interest rate swap agreement whereby the interest rate on its $125,000,000 senior secured notes was effectively converted to a variable interest rate based on three month LIBOR plus a fixed spread. In addition, the Company entered into an interest rate collar transaction with an initial notional amount of $125,000,000. The collar has a floor rate of 5.81% and a cap rate 12 14 of 8.00% with a floating rate option based on three month LIBOR. The collar contract matures from 2003 - 2005. The collar is used to offset variability with respect to the Company's variable rate debt. During the fourth quarter of 2000, the Company terminated the swap agreement prior to its maturity at a gain of $3,018,000. The gain was deferred and will be recognized over the original term of the swap contract provided the senior notes remain outstanding. The collar contract was recorded at a fair value by the Company at December 31, 2000 for $1,961,000. Upon adoption of SFAS No. 133, changes in the fair value of the collar over its remaining term that are effective hedges of the variability in the Company's variable rate debt will be recorded in other comprehensive income. Changes in fair value that are not effective hedges will be recorded in earnings. The Company believes that a portion of the changes in fair value may qualify for hedge accounting under SFAS No. 133. In December 1999, the Securities and Exchange Commission (the "Commission") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"), which summarized certain views of the Commission in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition policies are consistent with the guidance of SAB 101. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Services of Financial Assets and Extinguishments of Liabilities", which is effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosure, but it carries over most of SFAS No. 125's provisions without reconsideration. The Company does not believe the adoption of SFAS No. 140 will have any effect on its financial statements. INFLATION The Company has not experienced large increases in either the cost of supplies or operating expenses due to inflation. Because of reductions in reimbursement by government and private medical insurance programs and pressure to contain the costs of such programs, the Company bears the risk that reimbursement rates set by such programs will not keep pace with inflation. QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK During September 1999 as part of the Company's stock repurchase program, the Company sold European Put Options ("Puts") on underlying shares of the Company's common stock. The Puts had a six-month maturity period and the Company was paid a $4,454,000 premium in advance which was accounted for as additional paid-in capital. The Company had the option to settle the Puts in cash or in shares of common stock. In March 2000, the Company amended the terms of the Puts to extend the maturity date of the Puts by two months. In connection with extending the maturity period of the Puts, the Company was paid an additional cash premium of $280,000. In May 2000, the Puts expired out-of-the-money with no obligation to the Company. The fair value of the Company's long-term obligations and interest rate collar are subject to change as a result of changes in market prices or interest rates. The Company estimates potential changes in the fair value of interest rate sensitive financial instruments based on a hypothetical increase (or decrease) in interest rates. The Company's use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is necessarily limited because it does not take into account anticipated operating and financial transactions. 13 15 The following table sets forth the Company's estimated impact on the fair value of its long-term obligations and interest rate collar plus the impact on earnings resulting from a 10% decrease in interest rates. Estimated fair value of financial instruments (in thousands):
(ASSUMING 10% DECREASE IN INTEREST RATES) ------------------------------- HYPOTHETICAL HYPOTHETICAL FACE CARRYING FAIR CHANGE IN CHANGE IN AMOUNT AMOUNT VALUE FAIR VALUE INTEREST EXPENSE -------- -------- -------- ------------ ---------------- December 31, 2000: Three year revolving bank credit agreement......................... $ 78,000 $ 78,000 $ 78,000 $ 0 $ (624) Senior secured notes................. 125,000 125,000 125,820 447 0 Interest rate collar................. 0 1,961 1,961 1,717 635 December 31, 1999: Three year revolving bank credit agreement......................... $159,000 $159,000 $159,000 $ 0 $(1,034)
FORWARD LOOKING STATEMENTS Statements contained herein that are not based on historical facts are forward-looking statements that are based on projections and estimates regarding the economy in general, the health care industry and other factors which impact the Company. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, levels of activity, performance or achievements to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statements. The estimates relate to reimbursement by government and third party payors for the Company's products and services, the costs associated with government regulation of the health care industry and the effects of competition and industry consolidation. In some cases, forward-looking statements that involve risks and uncertainties contain terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or variations of these terms or other comparable terminology. Key factors that have an impact on the Company's ability to attain these estimates include potential reductions in reimbursement rates by government and third party payors, changes in reimbursement policies, demand for the Company's products and services, the availability of appropriate acquisition candidates and the Company's ability to successfully complete acquisitions, efficient operations of the Company's existing and future operating facilities, regulation and/or regulatory action affecting the Company or its business, economic and competitive conditions and access to borrowed and/or equity capital on favorable terms. In developing its forward-looking statements, the Company has made certain assumptions relating to reimbursement rates and policies, internal growth and acquisitions and the outcome of various legal and regulatory proceedings. If the assumptions used by the Company differ materially from what actually occurs, then actual results could vary significantly from the performance projected in the forward-looking statements. The Company is under no duty to update any of the forward-looking statements after the date of this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item are listed in Item 14(a)(1) and are submitted at the end of this Annual Report on Form 10-K. The supplementary data required by this Item is included on page S-1. The financial statements and supplementary data are herein incorporated by reference. 14 16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item will be included in the definitive proxy statement for the Annual Meeting of Stockholders to be held May 7, 2001, under "Information Regarding the Board of Directors and Executive Officers" and is herein incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION The response to this item will be included in the definitive proxy statement for the Annual Meeting of Stockholders to be held May 7, 2001, under "Executive Compensation" and is herein incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item will be included in the definitive proxy statement for the Annual Meeting of Stockholders to be held May 7, 2001, under "Security Ownership of Principal Stockholders and Management" and is herein incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. 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, 2000 and 1999 Consolidated Statements of Operations -- Years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows -- Years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2) The following consolidated financial statement schedule of Lincare Holdings Inc. and subsidiaries is included in this Form 10-K at page S-1: Schedule VIII -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Exhibits included or incorporated herein: See Exhibit Index. (b) The Company did not file a Current Report on Form 8-K during the three months ended December 31, 2000. 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LINCARE HOLDINGS INC. /s/ PAUL G. GABOS -------------------------------------- Paul G. Gabos Secretary, Chief Financial and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE POSITION DATE --------- -------- ---- /s/ JOHN P. BYRNES Director, President, Chief Executive March 29, 2001 ------------------------------------------------ Officer and Principal Executive John P. Byrnes Officer /s/ PAUL G. GABOS Secretary, Chief Financial and March 29, 2001 ------------------------------------------------ Principal Accounting Officer Paul G. Gabos * Director March 29, 2001 ------------------------------------------------ Chester B. Black * Director March 29, 2001 ------------------------------------------------ Frank T. Cary * Director March 29, 2001 ------------------------------------------------ William F. Miller, III * Director March 29, 2001 ------------------------------------------------ Frank D. Byrne
*By: /s/ JOHN P. BYRNES -------------------------- Attorney in fact 16 18 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Lincare Holdings Inc.: We have audited the consolidated financial statements of Lincare Holdings Inc. and subsidiaries as listed in the index on page 15. 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 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, 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 St. Petersburg, Florida February 6, 2001 F-1 19 LINCARE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 3,201 $ 3,699 Accounts and notes receivable (note 2).................... 116,838 104,762 Income taxes receivable................................... 5,210 5,837 Inventories............................................... 3,882 3,612 Other..................................................... 7,121 1,700 -------- -------- Total current assets.............................. 136,252 119,610 -------- -------- Property and equipment (notes 3 and 4)...................... 364,819 305,168 Less accumulated depreciation............................... 176,770 134,041 -------- -------- Net property and equipment........................ 188,049 171,127 -------- -------- Other assets: Goodwill, less accumulated amortization of $48,644 in 2000 and $35,166 in 1999.................................... 540,637 413,856 Intangible assets, less accumulated amortization of $49,819 in 2000 and $44,491 in 1999.................................... 8,501 8,577 Covenants not to compete, less accumulated amortization of $12,673 in 2000 and $11,984 in 1999.................................... 1,153 951 Other..................................................... 3,003 2,703 -------- -------- Total other assets................................ 553,294 426,087 -------- -------- $877,595 $716,824 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term obligations (note 5).... $ 6,328 $ 12,436 Accounts payable.......................................... 23,499 20,598 Accrued expenses: Compensation and benefits.............................. 15,455 10,859 Other.................................................. 6,495 5,538 -------- -------- Total current liabilities......................... 51,777 49,431 -------- -------- Long-term obligations, excluding current installments (note 5)........................................................ 204,024 159,000 Interest rate derivative financial instrument (note 1)...... 1,961 -- Deferred income taxes (note 6).............................. 34,585 21,493 Minority interest........................................... 798 789 Stockholders' equity (notes 6, 7, and 8): Common stock, $.01 par value. Authorized 200,000,000 shares; issued and outstanding: 59,983,332 and 53,317,717 in 2000, 58,397,702 and 54,069,202 in 1999................................................... 600 584 Additional paid-in capital................................ 176,002 135,741 Retained earnings......................................... 584,693 467,825 Less treasury stock, at cost: 6,665,615 shares in 2000 and 4,328,500 shares in 1999............................... 176,845 118,039 -------- -------- Total stockholders' equity........................ 584,450 486,111 Commitments and contingencies (notes 4 and 13).............. -------- -------- $877,595 $716,824 ======== ========
See accompanying notes to consolidated financial statements. F-2 20 LINCARE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues (note 9)................................. $ 702,484 $581,786 $487,407 --------- -------- -------- Costs and expenses: Cost of goods and services.......................... 112,949 89,592 76,367 Operating expenses.................................. 158,794 131,240 111,222 Selling, general and administrative expenses........ 147,699 128,345 107,691 Bad debt expense.................................... 10,537 6,981 5,849 Depreciation expense................................ 47,960 41,178 34,430 Amortization expense................................ 19,495 15,954 12,745 --------- -------- -------- 497,434 413,290 348,304 --------- -------- -------- Operating income............................ 205,050 168,496 139,103 --------- -------- -------- Other income (expenses): Interest income..................................... 1,763 468 447 Interest expense.................................... (18,019) (5,940) (1,177) Net gain (loss) on disposal of property and equipment........................................ 8 (277) (113) --------- -------- -------- (16,248) (5,749) (843) --------- -------- -------- Income before income taxes.................. 188,802 162,747 138,260 Income tax expense (note 6)........................... 71,934 62,007 52,954 --------- -------- -------- Net income.................................. $ 116,868 $100,740 $ 85,306 ========= ======== ======== Income per common share (note 10): Basic............................................... $ 2.20 $ 1.77 $ 1.47 ========= ======== ======== Diluted............................................. $ 2.16 $ 1.74 $ 1.44 ========= ======== ======== Weighted average number of common shares outstanding......................................... 53,087 56,942 57,992 ========= ======== ======== Weighted average number of common shares and common share equivalents outstanding....................... 54,151 57,989 59,435 ========= ======== ========
See accompanying notes to consolidated financial statements. F-3 21 LINCARE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ADDITIONAL TOTAL COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK EQUITY ------ ---------- -------- -------- ------------- (DOLLARS IN THOUSANDS) Balances at December 31, 1997............... $574 $110,714 $281,779 -- $393,067 Exercise of stock options (note 8).......... 9 9,412 -- -- 9,421 Tax benefit related to exercise of employee stock options (notes 6 and 8)............. -- 8,702 -- -- 8,702 Net income.................................. -- -- 85,306 -- 85,306 Treasury stock issued....................... -- -- -- 891 891 Treasury stock acquired..................... -- -- -- 1,731 1,731 ---- -------- -------- -------- -------- Balances at December 31, 1998............... 583 128,828 367,085 840 495,656 Exercise of stock options (note 8).......... 1 1,847 -- -- 1,848 Proceeds from sale of put options (note 7)........................................ -- 4,454 -- -- 4,454 Tax benefit related to exercise of employee stock options (notes 6 and 8)............. -- 612 -- -- 612 Net income.................................. -- -- 100,740 -- 100,740 Treasury stock issued....................... -- -- -- 1,061 1,061 Treasury stock acquired..................... -- -- -- 118,260 118,260 ---- -------- -------- -------- -------- Balances at December 31, 1999............... 584 135,741 467,825 118,039 486,111 Exercise of stock options (note 8).......... 16 21,839 -- -- 21,855 Proceeds from sale of put options (note 7)........................................ -- 280 -- -- 280 Tax benefit related to exercise of employee stock options (notes 6 and 8)............. -- 18,142 -- -- 18,142 Net income.................................. -- -- 116,868 -- 116,868 Treasury stock issued....................... -- -- -- 941 941 Treasury stock acquired..................... -- -- -- 59,747 59,747 ---- -------- -------- -------- -------- Balances at December 31, 2000............... $600 $176,002 $584,693 $176,845 $584,450 ==== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 22 LINCARE HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 --------- --------- --------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 116,868 $ 100,740 $ 85,306 Adjustments to reconcile net income to net cash provided by operating activities: Increase in provision for losses on accounts and notes receivable........................................... (1,390) (6,260) (2,080) Depreciation expense................................... 47,960 41,178 34,430 Gain/loss on disposal of property and equipment........ (8) 277 113 Amortization expense................................... 19,495 15,954 12,745 Amortization of imputed interest....................... -- 15 67 Amortization of interest swap contracts................ (33) -- -- Deferred income taxes.................................. 13,092 8,539 8,790 Minority interest in net earnings of subsidiary........ 137 83 264 Change in operating assets and liabilities: Increase in accounts and notes receivable............ (3,939) (9,302) (8,377) (Increase) decrease in inventories................... 1,685 (225) (1,103) Increase in other current assets..................... (5,456) (1,435) (113) Increase in accounts payable......................... 2,901 1,430 4,779 Increase (decrease) in accrued expenses.............. 4,948 (167) 2,942 (Increase) decrease in income taxes.................. 18,769 (1,672) 7,679 --------- --------- --------- Net cash provided by operating activities......... 215,029 149,155 145,442 --------- --------- --------- Cash flows from investing activities: Proceeds from sale of property and equipment.............. 310 632 158 Capital expenditures...................................... (58,622) (66,882) (62,188) (Increase) decrease in other assets....................... (445) (1,884) 498 Business acquisitions, net of cash acquired (note 12)..... (150,326) (73,426) (95,704) --------- --------- --------- Net cash used by investing activities............. (209,083) (141,560) (157,236) --------- --------- --------- Cash flows from financing activities: Proceeds from long-term obligations....................... 314,018 273,000 64,000 Payment of long-term obligations.......................... (283,663) (170,879) (59,512) Decrease in minority interest............................. (128) (220) (253) Proceeds from issuance of common stock.................... 21,855 1,848 9,421 Proceeds from put options................................. 280 4,454 -- Proceeds from issuance of treasury stock.................. 941 1,061 891 Payment to acquire treasury stock......................... (59,747) (118,260) (1,731) --------- --------- --------- Net cash provided (used) by financing activities...................................... (6,444) (8,996) 12,816 --------- --------- --------- Net increase (decrease) in cash and cash equivalents..................................... (498) (1,401) 1,022 Cash and cash equivalents, beginning of year................ 3,699 5,100 4,078 --------- --------- --------- Cash and cash equivalents, end of year...................... $ 3,201 $ 3,699 $ 5,100 ========= ========= =========
See accompanying notes to consolidated financial statements. F-5 23 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Lincare Holdings Inc. and subsidiaries (the "Company") provides oxygen, respiratory therapy services, and infusion therapy services to the home health care market and also supplies home medical equipment, such as hospital beds, wheelchairs and other medical supplies. The Company's customers are located in 44 states. The Company's supplies are readily available and the Company is not dependent on a single supplier or even a few suppliers. (b) Use of Estimates 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 subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (d) Revenue Recognition Revenues are recognized on an accrual basis in the period in which services and related products are provided to patients and are recorded at net realizable amounts estimated to be received from patients and third party payors. (e) Financial Instruments The Company believes the book value of its cash equivalents, accounts and notes receivable, income taxes receivable, accounts payable and accrued expenses approximate fair value due to their short-term nature. The book value of the Company's bank revolving credit facility 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 are 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, 2000 was $125,820,000. (f) Inventories Inventories, consisting of equipment, supplies and replacement parts, are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. F-6 24 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (g) Property and Equipment Property and equipment is stated at cost. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets as set forth in the table below. Building and improvements................................... 5 to 40 years Equipment and furniture..................................... 3 to 20 years
Leasehold improvements are amortized on the straight-line method over the lesser of the lease term or estimated useful life of the asset. Amortization is included with depreciation expense. (h) Other Assets Goodwill results from the excess of cost over net assets of acquired businesses and is amortized on a straight-line basis over 40 years. Intangible assets (customer base) are amortized on a straight-line basis over the estimated life of three years. Covenants not to compete are amortized on a straight-line basis over the life of the respective covenants, one to five years. The Company periodically evaluates the ability to recover goodwill and other intangible assets by utilizing a cash flow from operating income test. In addition, the Company considers the effects of external changes to the Company's business environment, including competitive pressures, market changes and technological and regulatory changes. (i) Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred taxes of a change in tax rate is recognized in income in the period that includes the enactment date. (j) Pension Plan The Company has a defined contribution pension plan covering substantially all employees. The Company makes monthly contributions to the plan equal to the amount accrued for pension expense. Employer contributions (net of applied forfeitures) were approximately $4,093,000 in 2000, $3,537,000 in 1999, and $2,248,000 in 1998. (k) Statements of Cash Flows For purposes of the statements of cash flows, the Company considers all short-term investments with a purchased maturity of three months or less to be cash equivalents. (l) Stock Options The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation", estab- F-7 25 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) lished accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. (m) 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. As a result, the Company has one reportable segment. (n) New Accounting Standards In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133," which deferred, for one year, the effective date for the implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires that an entity recognize all derivative instruments as either assets or liabilities on the balance sheet and measure those instruments at fair values. The Company manages interest rate risk by using derivative instruments. During 2000, the Company entered into an interest rate swap agreement whereby the interest rate on its $125,000,000 senior secured notes was effectively converted to a variable interest rate based on three month LIBOR plus a fixed spread. In addition, the Company entered into an interest rate collar transaction with an initial notional amount of $125,000,000. The collar has a floor rate of 5.81% and a cap rate of 8.00% with a floating rate option based on three month LIBOR. The collar contract matures from 2003 -- 2005. The collar is used to offset variability with respect to the Company's variable rate debt. During the fourth quarter of 2000, the Company terminated the swap agreement prior to its maturity at a gain of $3,018,000. The gain was deferred and will be recognized over the original term of the swap contract provided the senior notes remain outstanding. The collar contract was recorded at a fair value by the Company at December 31, 2000 for $1,961,000. Upon adoption of SFAS No. 133, changes in the fair value of the collar over its remaining term that are effective hedges of the variability in the Company's variable rate debt will be recorded in other comprehensive income. Changes in fair value that are not effective hedges will be recorded in earnings. The Company believes that a portion of the changes in fair value may qualify for hedge accounting under SFAS No. 133. In December 1999, the Securities and Exchange Commission (the "Commission") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"), which summarized certain views of the Commission in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition policies are consistent with the guidance of SAB 101. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Services of Financial Assets and Extinguishments of Liabilities", which is effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal F-8 26 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) years ending after December 15, 2000. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosure, but it carries over most of SFAS No. 125's provisions without reconsideration. The Company does not believe the adoption of SFAS No. 140 will have any effect on its financial statements. (2) ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable at December 31, 2000 and 1999 consist of:
2000 1999 -------- -------- (IN THOUSANDS) Trade....................................................... $126,069 $109,310 Other....................................................... 258 349 -------- -------- 126,327 109,659 Less allowance for uncollectible accounts................... 9,489 4,897 -------- -------- $116,838 $104,762 ======== ========
(3) PROPERTY AND EQUIPMENT Property and equipment at December 31, 2000 and 1999 consist of:
2000 1999 -------- -------- (IN THOUSANDS) Land and improvements $3,063... $ 3,170 Building and improvements 9,483... 1,901 Equipment and furniture 352,273.. 300,097 -------- -------- $364,819 $305,168 ======== ========
Rental equipment of approximately $267,812,000 in 2000 and $227,928,000 in 1999 are included with equipment and furniture. (4) LEASES The Company has several noncancelable operating leases, primarily for buildings, office equipment and vehicles, that expire over the next five years and provide for purchase or renewal options. Operating lease expense was approximately $27,763,000 in 2000, $24,118,000 in 1999 and $18,739,000 in 1998. Future minimum lease payments under noncancelable operating leases as of December 31, 2000 are as follows:
(IN THOUSANDS) 2001........................................................ $21,425 2002........................................................ 14,393 2003........................................................ 6,547 2004........................................................ 2,009 2005........................................................ 671 ------- Total minimum lease payments...................... $45,045 =======
F-9 27 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) LONG-TERM OBLIGATIONS Long-term obligations at December 31, 2000 and 1999 consist of:
2000 1999 -------- -------- (IN THOUSANDS) Borrowings under three year revolving bank credit agreement bearing interest (8.02% at December 31, 2000) 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 2002..... $ 78,000 $159,000 Borrowings under private placement senior secured notes bearing fixed interest maturing over three, four and five years: $30,000,000 at 8.91% due 2003, $50,000,000 at 9.01% due 2004 and $45,000,000 at 9.11% due 2005 and proceeds from the sale of interest swap contracts.................. 126,024 -- Unsecured, deferred acquisition obligations net of imputed interest, payable in various installments through 2001.... 6,328 12,201 Computer equipment purchases financed through installment loans; interest (4.17% to 4.52%) and principal paid in full in 2000.............................................. -- 235 -------- -------- Total long-term obligations....................... 210,352 171,436 Less current installments......................... 6,328 12,436 -------- -------- Long-term debt, excluding current installments.... $204,024 $159,000 ======== ========
The bank credit facility with several lenders and Bank of America N.A. as agent dated August 23, 1999 and amended June 7, 2000 permits the Company to borrow amounts up to $240,000,000 on a three year revolving credit facility. The three year revolving credit facility contains a $20,000,000 letter of credit sub facility which reduces the principal amount available under the three year credit facility by the amount of outstanding letters of credit. As of December 31, 2000, $4,000,000 was outstanding under the letter of credit sub facility. The three year revolving credit facility has a termination date of August 22, 2002. Upon entering into the credit agreement, an origination fee of $1,840,000 was paid and is being amortized over three years. Commitment fees on the unused portion of the facility (.48% at December 31, 2000) 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 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 $60,000,000 364-day revolving bank credit facility expired on August 22, 2000 and was replaced on September 6, 2000 by $125,000,000 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: $30,000,000 at 8.91% due September 15, 2003, $50,000,000 at 9.01% due September 15, 2004 and $45,000,000 at 9.11% due September 15, 2005. Upon entering into the senior secured note agreement a placement fee of $893,000 was paid and is being amortized over the periods of the notes. The senior secured notes contain several financial and other covenants and is secured by a pledge of the stock of the wholly-owned subsidiaries of Lincare Holdings Inc. Interest swap agreements entered into on September 6, 2000 were sold on December 14, 2000 for $3,018,000. The proceeds are being amortized over the maturity period of the senior secured notes. Unamortized imputed interest on the deferred acquisition obligations and installment loans at 4.17% to 6.0% were zero in 2000 and $35,000 in 1999. F-10 28 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate maturities of long-term obligations for each of the five years subsequent to December 31, 2000 are as follows:
(IN THOUSANDS) 2001........................................................ $ 6,577 2002........................................................ 78,249 2003........................................................ 30,243 2004........................................................ 50,196 2005........................................................ 45,087 -------- $210,352 ========
(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, 2000 and 1999 are presented below:
2000 1999 -------- -------- (IN THOUSANDS) Deferred tax assets: Accrued expenses, principally due to deferral for income tax reporting purposes................................. $ (3,728) $ (4,516) Intangible assets and covenants not to compete, principally due to differences in amortization......... (8,713) (7,587) Net operating loss carryforward........................... (73) (145) -------- -------- Total gross deferred tax assets................... (12,514) (12,248) -------- -------- Deferred tax liabilities: Accounts receivable, principally due to valuation adjustment............................................. 1 4 Property and equipment, principally due to differences in depreciation........................................... 25,798 18,308 Goodwill, principally due to differences in amortization........................................... 19,141 12,615 Other..................................................... 754 2,814 -------- -------- Total gross deferred tax liabilities.............. 45,694 33,741 -------- -------- Net deferred tax liability........................ $ 33,180 $ 21,493 ======== ========
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-11 29 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense attributable to operations consists of:
YEAR ENDED DECEMBER 31, ---------------------------- 2000 1999 1998 -------- ------- ------- (IN THOUSANDS) Current: Federal................................................ $ 55,345 $47,574 $36,423 State.................................................. 4,902 4,215 3,850 -------- ------- ------- Total current.................................. 60,247 51,789 40,273 -------- ------- ------- Deferred: Federal................................................ 10,737 9,387 11,535 State.................................................. 950 831 1,146 -------- ------- ------- Total deferred................................. 11,687 10,218 12,681 -------- ------- ------- Total income tax expense....................... $ 71,934 $62,007 $52,954 ======== ======= ======= Total income tax expense was allocated: Income from operations................................. $ 71,934 $62,007 $52,954 Stockholders' equity for compensation expense for tax purposes............................................ (18,142) (612) (8,702) -------- ------- ------- $ 53,792 $61,395 $44,252 ======== ======= =======
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, --------------------------- 2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Computed "expected" tax expense........................... $66,081 $56,961 $48,391 State income taxes, net of federal income tax benefit..... 3,804 3,280 3,247 Other..................................................... 2,049 1,766 1,316 ------- ------- ------- Total income tax expense........................ $71,934 $62,007 $52,954 ======= ======= =======
(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. During September 1999 as part of the Company's stock repurchase program, the Company sold European Put Options ("Puts") on underlying shares of the Company's common stock. The Puts had a six-month maturity period and the Company was paid a $4,454,000 premium in advance which was accounted for as additional paid in capital. The Company had the option to settle the Puts in cash or in shares of common stock. In March 2000, the Company amended the terms of the Puts to extend the maturity date of the Puts by two months. In connection with extending the maturity period of the Puts, the Company was paid an additional cash premium of $280,000. In May 2000, the Puts expired out-of-the-money with no obligation to the Company. F-12 30 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) STOCK OPTIONS The Company has six stock option plans that provide for the grant of options to directors, officers and employees. To date, stock options have been granted with an exercise price equal to the stock's fair value at the date of grant. Stock options generally have ten-year terms and generally vest over four years. The Company has reserved a total of 5,947,536 shares of common stock for issuance under its Non-Qualified Stock Option Plan (the "Plan"). At December 31, 2000, there were options for 80,000 shares outstanding and no options available for issuance under the Plan. The Company has reserved a total of 3,200,000 shares of common stock for issuance under its 1991 Stock Plan (the "1991 Plan"). At December 31, 2000, there were options for 129,400 shares outstanding and no options available for issuance under the 1991 Plan. The Company has reserved a total of 1,000,000 shares of common stock for issuance under its 1994 Stock Plan (the "1994 Plan"). At December 31, 2000, there were options for 178,500 shares outstanding and 24,000 options available for issuance under the 1994 Plan. The Company has reserved a total of 2,000,000 shares of common stock for issuance under its 1996 Stock Plan (the "1996 Plan"). At December 31, 2000, there were options for 1,252,350 shares outstanding and options for 131,000 shares available for issue under the 1996 Plan. The Company has reserved a total of 1,500,000 shares of common stock for issuance under its 1998 stock plan (the "1998 Plan"). At December 31, 2000, there were options for 1,394,250 shares outstanding and options for 72,000 shares available for issue under the 1998 Plan. The Company has reserved a total of 1,000,000 shares of common stock for issuance under the 2000 Stock Plan (the "2000 Plan"). At December 31, 2000, there were options for 1,000,000 shares outstanding and no options available for issuance under the 2000 Plan. The per share weighted average fair value of stock options granted during 2000, 1999, and 1998 was $16.70, $17.61 and $23.61 on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions: 2000 -- expected dividend yield 0%, risk-free interest rate of 4.9%, expected life of 7 years, and volatility of 62.6%; 1999 -- expected dividend yield 0%, risk-free interest rate of 6.9%, expected life of 8 years, and volatility of 60.6%; 1998 -- expected dividend yield 0%, risk-free interest rate of 5.3%, expected life of 9 years, and volatility of 59.0%. The Company applies Accounting Principles Board Opinion No. 25 in accounting for its stock plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
2000 1999 1998 -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported................................... $116,868 $100,740 $85,306 ======== ======== ======= Pro forma..................................... $106,207 $ 93,103 $78,689 ======== ======== ======= Income per common share: Basic -- as reported.......................... $ 2.20 $ 1.77 $ 1.47 ======== ======== ======= Diluted -- as reported........................ $ 2.16 $ 1.74 $ 1.44 ======== ======== ======= Basic -- pro forma............................ $ 2.00 $ 1.64 $ 1.36 ======== ======== ======= Diluted -- pro forma.......................... $ 1.96 $ 1.61 $ 1.32 ======== ======== =======
F-13 31 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 are not considered. Information related to the plans is as follows:
WEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE PRICE ---------- ---------------- Outstanding at December 31, 1997.......................... 3,935,742 $14.22 Exercised in 1998......................................... (903,942) 10.42 Canceled in 1998.......................................... (83,000) 21.34 Options issued in 1998.................................... 1,090,000 33.83 ---------- Outstanding at December 31, 1998.......................... 4,038,800 19.88 Exercised in 1999......................................... (114,800) 16.40 Canceled in 1999.......................................... (53,500) 28.79 Options issued in 1999.................................... 681,000 24.50 ---------- Outstanding at December 31, 1999.......................... 4,551,500 20.56 Exercised in 2000......................................... (1,523,500) 14.32 Canceled in 2000.......................................... (75,000) 32.12 Options issued in 2000.................................... 1,081,500 24.78 ---------- Outstanding at December 31, 2000.......................... 4,034,500 $24.00 ==========
At December 31, 2000, the range of exercise prices and weighted average remaining contractual life of outstanding options were as follows:
OPTIONS WEIGHTED OUTSTANDING AVERAGE AS OF REMAINING RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE PRICES 2000 LIFE --------------- ------------ ---------------- $ 9.50 -$18.91 ........................................... 1,101,250 4.1 years $19.50 -$24.50 ........................................... 1,005,000 6.9 years $24.63 -$24.63 ........................................... 1,013,000 7.1 years $29.38 -$35.63 ........................................... 915,250 6.6 years --------- $ 9.50 -$35.63 ........................................... 4,034,500 6.1 years =========
At December 31, 2000, 1999 and 1998, the number of options exercisable was 1,380,750, 2,074,000 and 1,535,800, respectively, and the weighted average exercise price of those options was $19.18, $14.09 and $12.61, respectively. In connection with the exercise of certain stock options, the Company receives a tax deduction for the difference between the fair value of the common stock at the date of exercise and the exercise price. The related income tax benefit of approximately $18,142,000 in 2000, $612,000 in 1999 and $8,702,000 in 1998 has been recorded as a reduction of income taxes payable and an increase to additional paid-in capital. F-14 32 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 61% in 2000, 62% in 1999, and 62% in 1998 of such net revenues. (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 antidilutive, they are excluded from the calculation. A reconciliation of the numerators and the denominators of the basic and diluted per common share computations is as follows:
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 2000 Basic: Income available to common stockholders.... $116,868 53,087 $2.20 ===== Effect of dilutive securities: Stock options.............................. -- 1,064 -------- ------ Diluted: Income available to common stockholders and holders of dilutive securities........... $116,868 54,151 $2.16 ======== ====== ===== YEAR ENDED DECEMBER 31, 1999 Basic: Income available to common stockholders.... $100,740 56,942 $1.77 ===== Effect of dilutive securities: Stock options.............................. -- 1,047 -------- ------ Diluted: Income available to common stockholders and holders of dilutive securities........... $100,740 57,989 $1.74 ======== ====== ===== YEAR ENDED DECEMBER 31, 1998 Basic: Income available to common stockholders.... $ 85,306 57,992 $1.47 ===== Effect of dilutive securities: Stock options.............................. -- 1,443 -------- ------ Diluted: Income available to common stockholders and holders of dilutive securities........... $ 85,306 59,435 $1.44 ======== ====== =====
F-15 33 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- (IN THOUSANDS) Cash paid for: Interest.................................................. $14,434 $ 5,823 $ 1,106 ======= ======= ======= Income taxes.............................................. $44,451 $53,461 $37,699 ======= ======= =======
(12) BUSINESS COMBINATIONS During 2000, the Company acquired the outstanding stock or certain assets of 15 businesses in 15 separate transactions. During 1999, the Company acquired the outstanding stock or certain assets of 22 businesses in 22 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 2000 and 1999 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:
2000 1999 -------- -------- (IN THOUSANDS) Cash........................................................ $150,326 $ 73,426 Deferred acquisition obligations............................ 9,261 11,988 Assumption of liabilities................................... 2,800 17,942 -------- -------- $162,387 $103,356 ======== ========
The aggregate purchase price of the acquisitions described above was allocated as follows:
2000 1999 -------- -------- (IN THOUSANDS) Current assets.............................................. $ 7,318 $ 2,969 Property and equipment...................................... 6,562 6,097 Intangible assets........................................... 6,142 7,132 Goodwill.................................................... 142,365 87,158 -------- -------- $162,387 $103,356 ======== ========
The following unaudited pro forma supplemental information on the results of operations for the years ended December 31, 2000 and 1999 include the acquisitions as if they had been combined at the beginning of 1999.
2000 1999 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues................................................ $740,655 $664,158 ======== ======== Net income.................................................. $118,404 $108,773 ======== ======== Basic -- income per common share............................ $ 2.23 $ 1.91 ======== ======== Diluted -- income per common share.......................... $ 2.19 $ 1.88 ======== ========
F-16 34 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1999 or of future results of operations of the combined companies. (13) CONTINGENCIES From time to time, the Company receives inquiries from various government agencies requesting patient records and other documents. It has been Lincare's policy to cooperate with all such requests for information. The government has not instituted any proceedings or served Lincare with any complaints as a result of these inquiries. Private litigants may also make claims against the Company for violations of health care laws in actions known as qui tam suits and the government may intervene in, and take control of, such actions. The Company is a defendant in certain qui tam proceedings. Lincare intends to vigorously defend these suits should they proceed. The government has declined to intervene in all unsealed qui tam actions of which the Company is aware. As a health care provider, Lincare is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documentation and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to patients. Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to legal process. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs. The Company is also involved in certain other claims and legal actions in the ordinary course of its business. The ultimate disposition of all such matters is not expected to have a material adverse impact on the Company's financial position, results of operations or liquidity. F-17 35 LINCARE HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of quarterly financial results for the years ended December 31, 2000 and 1999:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 2000: Net revenues................................ $159,497 $167,621 $186,022 $189,344 ======== ======== ======== ======== Operating income............................ $ 47,113 $ 48,956 $ 53,386 $ 55,595 ======== ======== ======== ======== Net income.................................. $ 27,136 $ 28,217 $ 29,671 $ 31,844 ======== ======== ======== ======== Income per common share: Basic....................................... $ .51 $ .53 $ .56 $ .61 ======== ======== ======== ======== Diluted..................................... $ .50 $ .52 $ .55 $ .59 ======== ======== ======== ======== 1999: Net revenues................................ $136,081 $143,025 $150,247 $152,433 ======== ======== ======== ======== Operating income............................ $ 38,579 $ 40,806 $ 43,500 $ 45,611 ======== ======== ======== ======== Net income.................................. $ 23,503 $ 24,810 $ 26,021 $ 26,406 ======== ======== ======== ======== Income per common share: Basic....................................... $ .40 $ .43 $ .46 $ .49 ======== ======== ======== ======== Diluted..................................... $ .40 $ .42 $ .45 $ .47 ======== ======== ======== ========
F-18 36 SCHEDULE VIII LINCARE HOLDINGS INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) YEAR ENDED DECEMBER 31, 2000 Deducted from asset accounts Allowance for uncollectible accounts........................... $4,897 $10,537 $5,816(1) $11,761(2) $9,489 ====== ======= ====== ======= ====== YEAR ENDED DECEMBER 31, 1999 Deducted from asset accounts: Allowance for uncollectible accounts........................... $9,353 $ 6,981 $1,891(1) $$13,328(2) $4,897 ====== ======= ====== ======= ====== YEAR ENDED DECEMBER 31, 1998 Deducted from asset accounts: Allowance for uncollectible accounts........................... $7,951 $ 5,849 $2,632(1) $ 7,079(2) $9,353 ====== ======= ====== ======= ======
--------------- (1) To record allowance on business combinations (2) To record write-offs S-1 37 INDEX OF EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE ------- ------- ------------ A 3.10 -- Amended and Restated Certificate of Incorporation of Lincare Holdings Inc................... B 3.11 -- Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc................................................................................ A 3.20 -- Amended and Restated By-Laws of Lincare Holdings Inc........................................ A 10.20 -- Non-Qualified Stock Option Plan of Registrant............................................... A 10.21 -- Lincare Holdings Inc. 1991 Stock Plan....................................................... 10.22 -- Lincare Holdings Inc. 1994 Stock Plan....................................................... 10.23 -- Lincare Holdings Inc. 1996 Stock Plan....................................................... 10.24 -- Lincare Holdings Inc. 1998 Stock Plan....................................................... 10.25 -- Lincare Holdings Inc. 2000 Stock Plan....................................................... A 10.30 -- Lincare Inc. 401(k) Plan.................................................................... C 10.31 -- Employment Stock Purchase Plan.............................................................. C 10.40 -- Employment Agreement dated as of January 1, 1997 between Lincare Holdings Inc. and John P. Byrnes.............................................................................. C 10.41 -- Employment Agreement dated as of June 1, 1997 between Lincare Holdings Inc. and Paul G. Gabos............................................................................... H 10.42 -- Employment Agreement dated as of January 1, 1997 between Lincare Holdings Inc. and James T. Kelly.............................................................................. 10.43 -- Employment Agreement dated as of January 1, 1998 between Lincare Holdings Inc. and Shawn S. Schabel............................................................................ C 10.50 -- Form of Non-employee Director Stock Option Agreement........................................ C 10.51 -- Form of Non-qualified Stock Option Agreement................................................ G 10.52 -- Non-Qualified Stock Option Agreements dated as of January 23, 1995 between the Registrant and James M. Emanuel........................................................................ H 10.53 -- Non-Qualified Stock Option Agreements dated as of January 26, 1996 between the Registrant and John P. Byrnes.......................................................................... H 10.54 -- Non-Qualified Stock Option Agreements dated as of July 15, 1996 between the Registrant and John P. Byrnes.......................................................................... D 10.60 -- Three-Year Credit Agreement among Lincare Holdings Inc., as Borrower, Certain Subsidiaries of Borrower from time to time party thereto, as Guarantors, the several Lenders from time to time party thereto and Bank of America, N.A., as Agent................................... E 10.61 -- First Amendment to the Three-Year Credit Agreement dated June 20, 2000...................... E 10.62 -- Second Amendment to the Three-Year Credit Agreement dated August 21, 2000................... E 10.70 -- Senior Secured Note Purchase Agreement among Lincare Holdings Inc., as Borrower, and several note holders with Bank of America, N.A., as Agent........................................... E 10.71 -- Form of Series A Note....................................................................... E 10.72 -- Form of Series B Note....................................................................... E 10.73 -- Form of Series C Note....................................................................... F 22.10 -- List of Subsidiaries of Lincare Holdings Inc................................................ 23.10 -- Consent of KPMG LLP......................................................................... 99.0 -- Powers of Attorney..........................................................................
38 A Incorporate 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-Q dated August 12, 1998. C Incorporate by reference to the Registrant's Form 10-K dated March 26, 1998. D Incorporate by reference to the Registrant's Form 10-Q dated November 12, 1999. E Incorporate by reference to the Registrant's 10-Q dated November 13, 2000. F Incorporate by reference to the Registrant's Form 10-K dated March 22, 1994. G Incorporate by reference to the Registrant's Form 10-K dated March 27, 1996. H Incorporate by reference to the Registrant's Form 10-K dated March 25, 1997.