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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
COMMISSION FILE NUMBER 0-19946
LINCARE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 51-0331330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19337 US 19 NORTH, SUITE 500, 33764
CLEARWATER, FL (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (727) 530-7700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT APRIL 30, 1999
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<S> <C>
Common Stock, $0.01 par value............................... 58,364,532 shares
</TABLE>
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LINCARE HOLDINGS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets..................... 3
Condensed consolidated statements of operations........... 4
Condensed consolidated statements of cash flows........... 5
Notes to condensed consolidated financial statements...... 6
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 7
Item 3 Quantitative and Qualitative Disclosure Regarding Market
Risk...................................................... 9
PART II. OTHER INFORMATION
Item 1 Legal Proceedings........................................... 9
Item 2 Changes in Securities....................................... 9
Item 3 Defaults Upon Senior Securities............................. 9
Item 4 Submission of Matters to a Vote of the Security Holders..... 9
Item 5 Other Information........................................... 9
Item 6 Exhibits and Reports on Form 8-K............................ 9
SIGNATURE........................................................... 10
</TABLE>
2
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LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,123 $ 5,100
Accounts and notes receivable............................. 94,275 85,187
Income tax receivable..................................... -- 3,553
Inventories............................................... 2,801 2,908
Prepaid expenses.......................................... 575 478
-------- --------
Total current assets.............................. 99,774 97,226
-------- --------
Property and equipment...................................... 271,783 246,033
Less: accumulated depreciation.............................. 115,476 105,799
-------- --------
Net property and equipment........................ 156,307 140,234
-------- --------
Other assets:
Goodwill.................................................. 386,723 336,485
Intangible assets......................................... 7,974 6,102
Covenants not to compete.................................. 1,547 1,772
Other..................................................... 759 820
-------- --------
Total other assets................................ 397,003 345,179
-------- --------
Total assets................................. $653,084 $582,639
======== ========
Current liabilities:
Current installments of long-term obligations............. $ 14,526 $ 12,923
Accounts payable.......................................... 18,915 19,169
Accrued expenses:
Compensation and benefits.............................. 10,485 10,679
Other.................................................. 8,105 5,377
Income taxes payable................................... 7,428 --
-------- --------
Total current liabilities......................... 59,459 48,148
-------- --------
Long-term obligations, excluding current installments....... 57,166 22,258
Deferred income taxes....................................... 15,651 15,651
Minority interest........................................... 990 926
Stockholders' equity:
Common stock.............................................. 584 583
Additional paid-in capital................................ 129,256 128,828
Retained earnings......................................... 390,588 367,085
Less: treasury stock...................................... 610 840
-------- --------
Total stockholders' equity........................ 519,818 495,656
-------- --------
Total liabilities and stockholders' equity... $653,084 $582,639
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1999 1998
------------ ------------
(IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Net revenues................................................ $ 136,081 $ 111,904
---------- ----------
Costs and expenses:
Costs of goods and services............................... 21,597 18,019
Operating expenses........................................ 30,937 26,640
Selling, general and administrative expenses.............. 29,995 25,472
Bad debt expense.......................................... 1,633 1,343
Depreciation expense...................................... 9,550 8,010
Amortization expense...................................... 3,790 2,985
---------- ----------
97,502 82,469
---------- ----------
Operating income.................................. 38,579 29,435
---------- ----------
Other income (expense):
Interest income........................................... 49 125
Interest expense.......................................... (652) (87)
Net loss on disposal of property and equipment............ (8) (11)
---------- ----------
(611) 27
---------- ----------
Income before income taxes........................ 37,968 29,462
Income taxes................................................ 14,465 11,284
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Net income........................................ $ 23,503 $ 18,178
========== ==========
Income per common share.....................................
Basic..................................................... $ 0.40 $ 0.32
========== ==========
Diluted................................................... $ 0.40 $ 0.31
========== ==========
Weighted average number of common shares outstanding........ 58,355,360 57,581,120
========== ==========
Weighted average number of common shares and common share
equivalents outstanding................................... 59,397,126 59,445,207
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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LINCARE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
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MARCH 31, MARCH 31,
1999 1998
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(IN THOUSANDS)
<S> <C> <C>
Cash from operations........................................ $ 42,268 $ 42,872
Investing activities:
Proceeds from sale of property and equipment.............. 14 48
Capital expenditures...................................... (22,881) (16,258)
Decrease in other assets.................................. 61 49
Business acquisitions, net of cash acquired............... (37,455) (7,860)
-------- --------
(60,261) (24,021)
-------- --------
Financing activities:
Proceeds from long-term obligations....................... 57,000 3,000
Payment of long-term obligations.......................... (42,491) (9,956)
Decrease in minority interest............................. -- (253)
Proceeds from issuance of common stock.................... 277 3,625
Treasury stock issued (acquired).......................... 230 (318)
-------- --------
15,016 (3,902)
-------- --------
Increase (decrease) in cash................................. (2,977) 14,949
Cash and cash equivalents, beginning of period.............. 5,100 4,078
-------- --------
Cash and cash equivalents, end of period.................... $ 2,123 $ 19,027
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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LINCARE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of March 31, 1999,
the condensed consolidated statements of operations for the three months ended
March 31, 1999 and 1998 and the condensed consolidated statements of cash flows
for the three months ended March 31, 1999 and 1998 are unaudited. In the opinion
of management, all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the entire year. The accompanying condensed consolidated balance sheet as of
December 31, 1998 is derived from the Lincare Holdings Inc. (the "Company")
audited balance sheet as of that date.
NOTE 2 -- BUSINESS COMBINATIONS
During the three months ended March 31, 1999 the Company acquired, in
unrelated acquisitions, the stock of four companies and certain assets of two
companies. Each acquisition was accounted for as a purchase. The results of the
acquired companies are included in the accompanying consolidated statements of
operations since the respective dates of acquisition.
The aggregate cost of these acquisitions was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash........................................................ $37,455
Deferred acquisition obligations............................ 6,065
Assumption of liabilities................................... 17,560
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$61,080
=======
</TABLE>
The aggregate purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 2,191
Property and equipment...................................... 2,776
Intangible assets........................................... 2,975
Goodwill.................................................... 53,138
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$61,080
=======
</TABLE>
Unaudited pro forma supplemental information on the results of operations
for the three months ended March 31, 1999 and March 31, 1998 are provided below
and reflect the acquisitions as if they had been combined at the beginning of
each respective period.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net revenues................................................ $139,941 $119,659
======== ========
Net income.................................................. $ 23,832 $ 19,175
======== ========
Income per common share:
Basic..................................................... $ 0.41 $ 0.33
======== ========
Diluted................................................... $ 0.41 $ 0.32
======== ========
</TABLE>
The unaudited pro forma financial information is not necessarily indicative
of either the results of operations that would have occurred had the
transactions been effected at the beginning of the respective preceding periods
or of future results of operations of the combined companies.
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LINCARE HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
BALANCED BUDGET ACT OF 1997
On August 5, 1997, the Balanced Budget Act of 1997 ("BBA") was signed into
law. This legislation, among other things, reduces Medicare expenditures by $115
billion over five years. The BBA reduces Medicare payment amounts for oxygen and
oxygen equipment furnished after January 1, 1998, to 75 percent of the fee
schedule amounts in effect during 1997. Payment amounts for oxygen and oxygen
equipment furnished after January 1, 1999, and each subsequent year are reduced
to 70 percent of the fee schedule amounts in effect during 1997.
The BBA freezes the Consumer Price Index (U.S. urban average) update for
covered items of durable medical equipment for each of the years 1998 through
2002 while limiting fees for parenteral and enteral nutrients, supplies and
equipment to 1995 reasonable charge levels over the same period. The BBA reduces
payment amounts for covered drugs and biologicals to 95 percent of the average
wholesale price of such covered items for each of the years 1998 through 2002.
The BBA authorizes the Department of Health and Human Services to conduct
up to five competitive bidding demonstration projects for the acquisition of
durable medical equipment and requires that one such project be established for
oxygen and oxygen equipment. Each demonstration project is to be operated over a
three-year period and is to be conducted in not more than three competitive
acquisition areas. The BBA also includes provisions designated to reduce health
care fraud and abuse including a surety bond requirement for durable medical
equipment providers.
OPERATING RESULTS
The following table sets forth for the periods indicated a summary of the
Company's net revenues by source:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
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(IN THOUSANDS)
<S> <C> <C>
Oxygen and other respiratory therapy........................ $121,622 $ 99,987
Home medical equipment and other............................ 14,459 11,917
-------- --------
Total............................................. $136,081 $111,904
======== ========
</TABLE>
Net revenues for the three months ended March 31, 1999 increased by
$24,177,000 (or 21.6%) compared with the three months ended March 31, 1998. The
price cuts attributable to the BBA reduced the Company's revenues by
approximately $4,520,000 for the three months ended March 31, 1999. Excluding
the effect on the Company's revenues from the Medicare price reductions,
internally generated growth increased revenues by approximately $13,936,000 (or
12.5%) while growth from acquisitions increased revenues by approximately
$14,762,000 (or 13.1%) for the three months ended March 31, 1999 over the
comparable prior year period.
Cost of goods and services as a percentage of net revenues was 15.9% for
the three months ended March 31, 1999 compared with 16.1% for the three months
ended March 31, 1998.
Operating expenses as a percentage of net revenues were 22.7% for the three
months ended March 31, 1999 as compared to 23.8% for the three months ended
March 31, 1998.
Selling, general and administrative expenses as a percentage of net
revenues were 22.0% for the three months ended March 31, 1999 compared with
22.8% for the three months ended March 31, 1998.
The Company was able to offset approximately $1,200,000 of the price cuts
attributed to the BBA in the first quarter of 1999 by maintaining a cost
structure that, with increases in net revenues, allows the Company to spread its
overhead over the larger base of revenue, resulting in improvements in operating
income.
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Amortization expense for the three months ended March 31, 1999 increased to
$3,790,000 compared with $2,985,000 for the three month period ending March 31,
1998. The increase is attributable to the amortization of intangible assets
associated with business combinations in 1998 and the first quarter of 1999.
Operating income for the three months ended March 31, 1999 increased to
$38,579,000 compared with $29,435,000 for the three months ended March 31, 1998.
The increases in operating income are attributable to the continued revenue
growth and efforts to control costs.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities was $42,268,000 for the three
months ended March 31, 1999 compared with $42,872,000 for the three months ended
March 31, 1998.
Net cash used in investing and financing activities was $45,245,000 for the
three months ended March 31, 1999 compared with $27,923,000 for the three months
ended March 31, 1998. Activity during the three-month period ended March 31,
1999 included the Company's investment of $37,455,000 in business acquisitions,
investment in capital equipment of $22,881,000, proceeds of $57,000,000 from
long-term obligations, and payments of $42,491,000 related to long-term
obligations.
YEAR 2000 REMEDIATION
Certain risks may exist with respect to potential malfunctions of computer
hardware and software and embedded microprocessors due to the upcoming change in
the century (the "Year 2000 problem"). Malfunctions may arise due to the design
of microchips and microprocessors and computer systems that are programmed to
use two rather than four digits to define the applicable year. The Company is
involved in an extensive, ongoing program to identify and remediate potential
issues arising from the Year 2000 problem.
The Company uses a proprietary and internally developed management
information system (MIS) which serves as the platform for the operating and
financial activities of the Company. The MIS system processes billings to and
collections from third party payors for services provided by the Company and
supports all of the Company's accounting, finance and general ledger functions.
The system provides management with information used to measure and evaluate
performance levels throughout the Company including revenues and profitability,
accounts receivable and collections, equipment controls and utilization,
customer activity and manpower trends. The Company has completed, in all
material respects, the conversion of its mission-critical MIS software thereby
mitigating the risk of Year 2000 problems. The costs associated with this
conversion were immaterial and fully expensed in the prior fiscal year.
The Company is assessing its use of ancillary, third party computer
software used to electronically submit medical claims to certain payors. In the
event that the use of this software is impacted by the Year 2000 problem, the
Company's contingency plan includes the submission of paper claims to such
payors. The Company does not believe that this will have a material effect on
the Company's ability to receive payment for services rendered.
Certain medical devices and equipment provided by the Company to its
customers may contain embedded technology such as microprocessors that could be
affected by the Year 2000 problem. The Company has identified those categories
of devices and equipment that may be sensitive to the change in century, and has
developed a plan to determine the Year 2000 status of specific items. In the
event that the Company identifies specific devices and equipment that are not
Year 2000 compliant, or the Company is unable to determine the status of such
items, the Company will remove such items from service and replace them with
therapeutically comparable, Year 2000 compliant equipment from alternate
vendors. The Company does not believe that the scope and cost of exchanging
non-compliant devices and equipment will have a material impact on the Company's
financial position.
The Company is highly dependent upon certain government and private payors
for payment of claims for services and equipment provided by the Company. The
Company is in the process of determining the Year 2000 compliance of computer
systems used by third party payors to process claims for medical services and
equipment submitted by the Company for payment. The Company cannot be assured of
the timely
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remediation of third party claims processing and payment systems. The failure by
a significant third party payor to correct Year 2000 problems, to the extent
that such issues delay or prevent timely or appropriate payment of claims, could
have a material impact on the Company's cash flow from operations. The Company
is monitoring the Year 2000 progress of Medicare Part B carriers, and other
government agencies and private payors with which the Company does significant
business, to determine the potential impact to the Company. The Company is also
in the process of determining the contingency plans of these payors to release
payments to providers such as the Company in the event of claims processing
system failures. Such plans may include cash advances to providers based on
historical payment trends or processing claims on paper rather than in an
electronic format.
QUANTITATIVE AND QUALITATIVE DISCLOSURE REGARDING MARKET RISK
The Company has no derivative securities as of March 31, 1999. The Company
is exposed to changes in interest rates as a result of its bank credit agreement
which is based on the London Interbank Offered Rate.
A 10% increase in interest rates related to the Company's bank credit
facility would not have a material effect on the Company's earnings over the
next fiscal year or the bank credit agreement's fair value.
FORWARD LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not based on historical
facts are forward looking statements, subject to uncertainties and risks,
including, but not limited to, the constantly changing health care environment,
potential reductions in reimbursement by government and third party payors for
the Company's products and services, the demand for the Company's products and
services, economic and competitive conditions, the availability of appropriate
acquisition candidates and the successful completion of acquisitions, access to
borrowed and/or equity capital on favorable terms, and other risks detailed in
the Company's Securities and Exchange Commission filings.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
The Company has received inquiries from government agencies requesting
patient records and other documents. The Company is cooperating with the
government's requests for information. The government has not disclosed the
basis for these inquiries. Thus, the duration or outcomes of these matters
cannot be predicted with any degree of certainty.
Items 2-5 Not applicable.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C> <C>
27.0 -- Financial Data Schedule (for SEC Use Only)
</TABLE>
(b) The Company did not file a Current Report on Form 8-K during the three
months ended March 31, 1999.
9
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lincare Holdings Inc.
--------------------------------------
Registrant
/s/ PAUL G. GABOS
--------------------------------------
Paul G. Gabos
Secretary, Chief Financial Officer
and Principal Accounting Officer
May 12, 1999
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LINCARE HOLDINGS FOR THE THREE MONTHS ENDED MARCH 31,
1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,123
<SECURITIES> 0
<RECEIVABLES> 103,471
<ALLOWANCES> 9,196
<INVENTORY> 2,801
<CURRENT-ASSETS> 99,774
<PP&E> 271,783
<DEPRECIATION> 115,476
<TOTAL-ASSETS> 653,084
<CURRENT-LIABILITIES> 59,459
<BONDS> 0
0
0
<COMMON> 584
<OTHER-SE> 519,234
<TOTAL-LIABILITY-AND-EQUITY> 653,084
<SALES> 136,081
<TOTAL-REVENUES> 136,081
<CGS> 21,597
<TOTAL-COSTS> 21,597
<OTHER-EXPENSES> 75,905
<LOSS-PROVISION> 1,633
<INTEREST-EXPENSE> 652
<INCOME-PRETAX> 37,968
<INCOME-TAX> 14,465
<INCOME-CONTINUING> 23,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,503
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
