##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 Commission file number: 1-10858
 Manor Care, Inc.
  Delaware
    
    34-1687107(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)333 N. Summit Street, Toledo, Ohio
(Address of principal executive offices)
    
    43604-2617
(Zip Code)
 Registrants telephone number, including area code: (419) 252-5500
 þ o
  þ o o
 o þ




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##### 



Manor Care, Inc.
Form 10-Q
Table of Contents
 PageNumberPart I. Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    3Consolidated Statements of Income  Three and nine months ended September 30, 2006 and 2005
    
    4Consolidated Statements of Cash Flows  Nine months ended September 30, 2006 and 2005
    
    5Notes to Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    28Item 4. Controls and Procedures
    
    28Part II. Other InformationItem 1. Legal Proceedings
    
    29Item 1A. Risk Factors
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 3. Defaults Upon Senior Securities
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    30Item 5. Other Information
    
    30Item 6. Exhibits
    
    30Signatures
    
    31Exhibit Index
    
    32EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



Part I. Financial Information
 
 Financial Statements
 Manor Care, Inc.
 
  September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note1)(In thousands, except per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,299
    
    
    $
    12,293Receivables, less allowances for doubtful
accounts of $65,593 and $60,726, respectively
    
    
    594,763
    
    
    
    494,620Prepaid expenses and other assets
    
    
    23,958
    
    
    
    24,416Deferred income taxes
    
    
    9,221Total current assets
    
    
    643,241
    
    
    
    531,329Property and equipment, net of accumulated
depreciation of $912,945 and $812,707, respectively
    
    
    1,483,989
    
    
    
    1,484,475Goodwill
    
    
    132,756
    
    
    
    103,357Intangible assets, net of amortization of $1,675 and $3,309, respectively
    
    
    15,369
    
    
    
    20,012Other assets
    
    
    199,218
    
    
    
    200,061Total assets
    
    $
    2,474,573
    
    
    $
    2,339,234Liabilities And Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    114,978
    
    
    $
    112,952Employee compensation and benefits
    
    
    167,070
    
    
    
    157,002Accrued insurance liabilities
    
    
    113,292
    
    
    
    108,275Income tax payable
    
    
    23,923
    
    
    
    4,936Other accrued liabilities
    
    
    55,692
    
    
    
    62,938Deferred income taxes
    
    
    
    
    
    
    3,633Long-term debt due within one year
    
    
    44,220
    
    
    
    25,435Total current liabilities
    
    
    519,175
    
    
    
    475,171Long-term debt
    
    
    956,209
    
    
    
    707,666Deferred income taxes
    
    
    95,214
    
    
    
    102,919Other liabilities
    
    
    287,868
    
    
    
    279,755Shareholders equity:Preferred stock, $.01 par value, 5 million shares authorizedCommon stock, $.01 par value, 300 million shares authorized,
111.0 million shares issued
    
    
    1,110
    
    
    
    1,110Capital in excess of par value
    
    
    403,032
    
    
    
    364,845Retained earnings
    
    
    1,398,664
    
    
    
    1,319,162Accumulated other comprehensive loss
    
    
    (978
    )
    
    
    (978
    )1,801,828
    
    
    
    1,684,139Less treasury stock, at cost (37.0 and 32.3 million shares, respectively)
    
    
    (1,185,721
    )
    
    
    (910,416
    )Total shareholders equity
    
    
    616,107
    
    
    
    773,723Total liabilities and shareholders equity
    
    $
    2,474,573
    
    
    $
    2,339,234
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##### Table of Contents



Manor Care, Inc.
 
   Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Revenues
    
    $
    915,515
    
    
    $
    840,279
    
    
    $
    2,679,024
    
    
    $
    2,553,240Expenses:Operating
    
    
    752,495
    
    
    
    688,154
    
    
    
    2,211,511
    
    
    
    2,116,525General and administrative
    
    
    45,437
    
    
    
    39,673
    
    
    
    141,334
    
    
    
    116,619Depreciation and amortization
    
    
    36,732
    
    
    
    34,592
    
    
    
    108,820
    
    
    
    103,668Asset impairment
    
    
    
    
    
    
    2,451
    
    
    
    11,082
    
    
    
    2,451834,664
    
    
    
    764,870
    
    
    
    2,472,747
    
    
    
    2,339,263Income before other income (expenses) and
income taxes
    
    
    80,851
    
    
    
    75,409
    
    
    
    206,277
    
    
    
    213,977Other income (expenses):Interest expense
    
    
    (8,749
    )
    
    
    (11,026
    )
    
    
    (23,668
    )
    
    
    (31,358
    )Early extinguishment of debt
    
    
    
    
    
    
    (4,053
    )
    
    
    
    
    
    
    (4,053
    )Gain (loss) on sale of assets
    
    
    (125
    )
    
    
    17,296
    
    
    
    (284
    )
    
    
    17,505Equity in earnings of affiliated companies
    
    
    971
    
    
    
    1,276
    
    
    
    4,558
    
    
    
    4,099Interest income and other
    
    
    203
    
    
    
    1,635
    
    
    
    1,431
    
    
    
    2,708Total other income (expenses), net
    
    
    (7,700
    )
    
    
    5,128
    
    
    
    (17,963
    )
    
    
    (11,099
    )Income before income taxes
    
    
    73,151
    
    
    
    80,537
    
    
    
    188,314
    
    
    
    202,878Income taxes
    
    
    26,649
    
    
    
    30,350
    
    
    
    69,256
    
    
    
    74,249Income before cumulative effect
    
    
    46,502
    
    
    
    50,187
    
    
    
    119,058
    
    
    
    128,629Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (2,476
    )Net income
    
    $
    46,502
    
    
    $
    50,187
    
    
    $
    116,582
    
    
    $
    128,629Earnings per share  basic:Income before cumulative effect
    
    $
    .63
    
    
    $
    .61
    
    
    $
    1.56
    
    
    $
    1.52Cumulative effect
    
    
    
    
    
    
    
    
    
    
    (.03
    )Net income
    
    $
    .63
    
    
    $
    .61
    
    
    $
    1.53
    
    
    $
    1.52Earnings per share  diluted:Income before cumulative effect
    
    $
    .60
    
    
    $
    .60
    
    
    $
    1.51
    
    
    $
    1.49Cumulative effect
    
    
    
    
    
    
    
    
    
    
    (.03
    )Net income
    
    $
    .60
    
    
    $
    .60
    
    
    $
    1.48
    
    
    $
    1.49Weighted-average shares:Basic
    
    
    73,833
    
    
    
    81,699
    
    
    
    76,326
    
    
    
    84,737Diluted
    
    
    77,386
    
    
    
    83,651
    
    
    
    78,887
    
    
    
    86,482Cash dividends declared per common share
    
    $
    .16
    
    
    $
    .15
    
    
    $
    .48
    
    
    $
    .45
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Manor Care, Inc.
 
   Nine Months Ended September 302006
    
    
    2005(In thousands)Operating ActivitiesNet income
    
    $
    116,582
    
    
    $
    128,629Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    108,820
    
    
    
    103,668Asset impairment and other non-cash charges
    
    
    15,050
    
    
    
    2,451Stock options and restricted stock compensation
    
    
    14,980
    
    
    
    4,819Early extinguishment of debt
    
    
    
    
    
    
    4,053Provision for bad debts
    
    
    42,920
    
    
    
    23,388Deferred income taxes
    
    
    (20,559
    )
    
    
    (4,221
    )Net (gain) loss on sale of assets
    
    
    284
    
    
    
    (17,505
    )Equity in earnings of affiliated companies
    
    
    (4,558
    )
    
    
    (4,099
    )Changes in assets and liabilities, excluding sold facilities and acquisitions:Receivables
    
    
    (145,800
    )
    
    
    (62,567
    )Prepaid expenses and other assets
    
    
    9,771
    
    
    
    17,286Liabilities
    
    
    17,238
    
    
    
    94,747Total adjustments
    
    
    38,146
    
    
    
    162,020Net cash provided by operating activities
    
    
    154,728
    
    
    
    290,649Investing ActivitiesInvestment in property and equipment
    
    
    (105,759
    )
    
    
    (97,137
    )Investment in systems development
    
    
    (2,822
    )
    
    
    (1,888
    )Investment in partnership
    
    
    (9,275
    )Acquisitions
    
    
    (19,298
    )
    
    
    (7,086
    )Proceeds from sale of assets
    
    
    40
    
    
    
    27,909Net cash used in investing activities
    
    
    (137,114
    )
    
    
    (78,202
    )Financing ActivitiesNet borrowings under revolving credit facility
    
    
    18,800Proceeds from issuance of senior notes
    
    
    250,000
    
    
    
    400,000Principal payments of long-term debt
    
    
    (1,472
    )
    
    
    (101,325
    )Payment of financing costs and debt prepayment premium
    
    
    (5,915
    )
    
    
    (13,581
    )Net payment of convertible note hedge and warrant option transactions
    
    
    
    
    
    
    (53,800
    )Purchase of common stock for treasury
    
    
    (270,634
    )
    
    
    (303,571
    )Dividends paid
    
    
    (37,080
    )
    
    
    (38,401
    )Proceeds from exercise of stock options
    
    
    14,374
    
    
    
    9,185Excess tax benefits from share-based payment arrangements
    
    
    17,319Net cash used in financing activities
    
    
    (14,608
    )
    
    
    (101,493
    )Net increase in cash and cash equivalents
    
    
    3,006
    
    
    
    110,954Cash and cash equivalents at beginning of period
    
    
    12,293
    
    
    
    32,915Cash and cash equivalents at end of period
    
    $
    15,299
    
    
    $
    143,869
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Manor Care, Inc.
 
   Note 1  Accounting Policies
 Basis of Presentation
    Goodwill
  Long-Term
    
    
    Hospice andCare
    
    
    Home Health
    
    
    Other
    
    
    Total(In thousands)Balance at January 1, 2006
    
    $
    11,045
    
    
    $
    36,384
    
    
    $
    55,928
    
    
    $
    103,357Goodwill from acquisitions
    
    
    438
    
    
    
    18,329
    
    
    
    10,632
    
    
    
    29,399Balance at September 30, 2006
    
    $
    11,483
    
    
    $
    54,713
    
    
    $
    66,560
    
    
    $
    132,756
 Insurance Liabilities
  6




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Stock-Based Compensation
  New Accounting Standards
    7




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##### Table of Contents



Reclassification
  Note 2  Asset Impairment
  Note 3  Debt
  September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Revolving credit facility
    
    $
    41,600
    
    
    $
    22,800Senior Notes, 6.25%, due May 1, 2013 (1)
    
    
    199,589
    
    
    
    199,542Convertible Senior Notes:2.125%, due April 15, 2023: (2)Old Notes
    
    
    6,552
    
    
    
    6,552New Notes
    
    
    93,433
    
    
    
    93,4332.125%, due August 1, 2035 (3)
    
    
    400,000
    
    
    
    400,0002.0%, due June 1, 2036
    
    
    250,000Other debt
    
    
    3,523
    
    
    
    3,914Capital lease obligations
    
    
    5,732
    
    
    
    6,8601,000,429
    
    
    
    733,101Less amounts due within one year
    
    
    44,220
    
    
    
    25,435Long-term debt
    
    $
    956,209
    
    
    $
    707,666
 
 (1)
    
    Net of discount(2)
    
    Interest rate increased to 2.625% from August 20, 2003 through December 31, 2008(3)
    
    Interest rate will decrease to 1.875% after August 1, 2010  8




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9




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##### Table of Contents



Note 4  Stock Purchase
   Note 5  Stock-Based Compensation
  
    
    Compensation cost for restricted stock or restricted stock units granted prior to
January 1, 2006, but not yet vested, and any new awards after January 1, 2006. The
grant-date fair value is based on the market closing stock price on the day prior to grant.
    
    Compensation cost for stock options granted prior to January 1, 2006, but not yet
vested, and any new awards after that date. The grant-date fair value is determined under
the Black-Scholes option valuation model.
    
    Compensation cost for SARs outstanding at January 1, 2006 based on the fair-value
calculation every quarter using the Black-Scholes option valuation model.
 10




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##### Table of Contents




    
    The difference between the SAR liability measured under the intrinsic-value method in
accordance with Statement 123 versus the fair-value method under Statement 123R was
recorded as a one-time cumulative effect as of January 1, 2006. The Companys SAR
liability increased $4.0 million ($2.5 million after tax, or $.03 per share) as a result of
the fair-value calculation using the Black-Scholes option valuation model. When an SAR is
cash-settled, the Company adjusts its expense to the intrinsic value.
    11




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005(In thousands, except earnings per share)Net income  as reported
    
    $
    50,187
    
    
    $
    128,629Deduct: Total stock-based employee compensation
expense determined under fair-value based
method for all awards, net of related tax effects
    
    
    (34
    )
    
    
    (10,410
    )Net income  pro forma
    
    $
    50,153
    
    
    $
    118,219Earnings per share  as reported:Basic
    
    $
    .61
    
    
    $
    1.52Diluted
    
    $
    .60
    
    
    $
    1.49Earnings per share  pro forma:Basic
    
    $
    .61
    
    
    $
    1.40Diluted
    
    $
    .60
    
    
    $
    1.36
 Plan Information
   12




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##### Table of Contents



Stock Options
  Weighted-Weighted-
    
    Average
    
    AggregateAverage
    
    Remaining
    
    IntrinsicExercise
    
    Contractual
    
    ValueShares
    
    Price
    
    Term (years)
    
    (In thousands)Outstanding at Dec. 31, 2005
    
    
    5,126,194
    
    
    $
    27.89Granted
    
    
    690,398
    
    
    
    41.45Forfeited
    
    
    (4,050
    )
    
    
    29.71Exercised
    
    
    (2,134,179
    )
    
    
    25.07Outstanding at Sept. 30, 2006
    
    
    3,678,363
    
    
    
    32.07
    
    
    
    5.2
    
    
    $
    74,368Exercisable at Sept. 30, 2006
    
    
    3,228,363
    
    
    
    31.06
    
    
    
    5.0
    
    
    $
    68,537
  Restricted Stock.
 13




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##### Table of Contents



Weighted-AverageGrant-DateShares
    
    Fair ValueRestricted stock at Dec. 31, 2005
    
    
    999,489
    
    
    $
    20.40Issue of performance-vested
    
    
    95,737
    
    
    
    39.77Issue of time-vested
    
    
    15,400
    
    
    
    45.06Restrictions lapse due to retirement
    
    
    (296,816
    )
    
    
    16.71Delivered for tax withholdings
    
    
    (38,687
    )
    
    
    37.79Restricted stock at Sept. 30, 2006
    
    
    775,123
    
    
    
    23.83
  Performance-Vested Restricted Stock.
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Restricted Stock Units.
  Weighted-AverageGrant-DateUnits
    
    Fair ValueRestricted units at Dec. 31, 2005
    
    
    97,300
    
    
    $
    37.05Granted
    
    
    192,800
    
    
    
    39.64Forfeited
    
    
    (8,450
    )
    
    
    37.71Restricted units at Sept. 30, 2006
    
    
    281,650
    
    
    
    38.81
 Cash-Settled Stock Appreciation Rights.
  Weighted-Weighted-
    
    Average
    
    AggregateAverage
    
    Remaining
    
    IntrinsicNumber
    
    Exercise
    
    Contractual
    
    Valueof SARs
    
    Price
    
    Term (years)
    
    (In thousands)Outstanding at Dec. 31, 2005
    
    
    1,587,050
    
    
    $
    25.76Forfeited
    
    
    (74,725
    )
    
    
    32.35Exercised
    
    
    (529,600
    )
    
    
    18.51Outstanding
at Sept. 30, 2006
    
    
    982,725
    
    
    
    29.17
    
    
    
    7.0
    
    
    $
    22,707Exercisable at Sept. 30, 2006
    
    
    317,625
    
    
    
    17.56
    
    
    
    5.7
    
    
    $
    11,027
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Note 6  Revenues
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Skilled nursing and assisted living services
    
    $
    756,097
    
    
    $
    709,203
    
    
    $
    2,235,034
    
    
    $
    2,162,692Hospice and home health services
    
    
    127,918
    
    
    
    99,450
    
    
    
    348,063
    
    
    
    292,263Rehabilitation services
(excludes intercompany revenues)
    
    
    22,931
    
    
    
    24,600
    
    
    
    71,857
    
    
    
    73,972Other services
    
    
    8,569
    
    
    
    7,026
    
    
    
    24,070
    
    
    
    24,313$
    915,515
    
    
    $
    840,279
    
    
    $
    2,679,024
    
    
    $
    2,553,240
 Note 7  Contingencies
   16




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Note 8  Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except earnings per share)Numerator:Numerator for basic EPS  income before
cumulative effect
    
    $
    46,502
    
    
    $
    50,187
    
    
    $
    119,058
    
    
    $
    128,629After-tax amount of interest expense on
Convertible Senior Notes (Old Notes)
    
    
    27
    
    
    
    27
    
    
    
    82
    
    
    
    82Numerator for diluted EPS
    
    $
    46,529
    
    
    $
    50,214
    
    
    $
    119,140
    
    
    $
    128,711Denominator:Denominator for basic EPS  weighted-average shares
    
    
    73,833
    
    
    
    81,699
    
    
    
    76,326
    
    
    
    84,737Effect of dilutive securities:Stock options
    
    
    961
    
    
    
    1,105
    
    
    
    960
    
    
    
    1,077Restricted stock or units
    
    
    81
    
    
    
    
    
    
    
    51Convertible Senior Notes
    
    
    2,511
    
    
    
    789
    
    
    
    1,550
    
    
    
    649Forward contract
    
    
    
    
    
    
    58
    
    
    
    
    
    
    
    19Denominator for diluted EPS 
adjusted for weighted-average
shares and assumed conversions
    
    
    77,386
    
    
    
    83,651
    
    
    
    78,887
    
    
    
    86,482EPS  Income before cumulative effect:Basic
    
    $
    .63
    
    
    $
    .61
    
    
    $
    1.56
    
    
    $
    1.52Diluted
    
    $
    .60
    
    
    $
    .60
    
    
    $
    1.51
    
    
    $
    1.49
 17




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Note 9  Employee Benefit Plans
  Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Service cost
    
    $
    806
    
    
    $
    429
    
    
    $
    2,398
    
    
    $
    1,288Interest cost
    
    
    1,165
    
    
    
    990
    
    
    
    3,370
    
    
    
    2,969Expected return on plan assets
    
    
    (1,112
    )
    
    
    (1,183
    )
    
    
    (3,337
    )
    
    
    (3,550
    )Amortization of unrecognized transition asset
    
    
    (12
    )
    
    
    (12
    )
    
    
    (36
    )
    
    
    (36
    )Amortization of prior service cost
    
    
    646
    
    
    
    490
    
    
    
    1,815
    
    
    
    1,471Amortization of net loss
    
    
    299
    
    
    
    235
    
    
    
    904
    
    
    
    705Net pension cost
    
    $
    1,792
    
    
    $
    949
    
    
    $
    5,114
    
    
    $
    2,847
 Note 10  Segment Information
  18




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##### Table of Contents



Long-Term
    
    
    Hospice andCare
    
    
    Home Health
    
    
    Other
    
    
    Total(In thousands)Three months ended September 30, 2006Revenues from external customers
    
    $
    756,097
    
    
    $
    127,918
    
    
    $
    31,500
    
    
    $
    915,515Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    29,148
    
    
    
    29,148Depreciation and amortization
    
    
    34,792
    
    
    
    812
    
    
    
    1,128
    
    
    
    36,732Operating margin
    
    
    138,671
    
    
    
    21,465
    
    
    
    2,884
    
    
    
    163,020Three months ended September 30, 2005Revenues from external customers
    
    $
    709,203
    
    
    $
    99,450
    
    
    $
    31,626
    
    
    $
    840,279Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    27,225
    
    
    
    27,225Depreciation and amortization
    
    
    32,808
    
    
    
    761
    
    
    
    1,023
    
    
    
    34,592Operating margin
    
    
    131,448
    
    
    
    17,437
    
    
    
    3,240
    
    
    
    152,125Nine months ended September 30, 2006Revenues from external customers
    
    $
    2,235,034
    
    
    $
    348,063
    
    
    $
    95,927
    
    
    $
    2,679,024Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    85,497
    
    
    
    85,497Depreciation and amortization
    
    
    102,897
    
    
    
    2,312
    
    
    
    3,611
    
    
    
    108,820Operating margin
    
    
    404,197
    
    
    
    56,346
    
    
    
    6,970
    
    
    
    467,513Nine months ended September 30, 2005Revenues from external customers
    
    $
    2,162,692
    
    
    $
    292,263
    
    
    $
    98,285
    
    
    $
    2,553,240Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    72,615
    
    
    
    72,615Depreciation and amortization
    
    
    96,968
    
    
    
    2,331
    
    
    
    4,369
    
    
    
    103,668Operating margin
    
    
    382,641
    
    
    
    44,704
    
    
    
    9,370
    
    
    
    436,715
 Note 11
 Subsequent Event
  19




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##### Table of Contents



Results of Operations  Overview
 Federal Medicare Payment Legislation.
 Critical Accounting Policies
 General and Professional Liability.
 Workers Compensation Liability.
 20




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##### Table of Contents



Results of Operations 
Quarter and Year-To-Date September 30, 2006 Compared with September 30, 2005
 Revenues  Quarter.
 Revenues  First Nine Months.
   21




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##### Table of Contents



Revenue Factors  Quarter and First Nine Months.
 Third Quarter
    
    
    
    
    
    First Nine Months2006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseMedicare
    
    $
    383.16
    
    
    $
    361.13
    
    
    
    6
    %
    
    $
    380.34
    
    
    $
    356.26
    
    
    
    7
    %Medicaid
    
    $
    153.13
    
    
    $
    146.49
    
    
    
    5
    %
    
    $
    151.81
    
    
    $
    146.52
    
    
    
    4
    %Private and other (skilled only)
    
    $
    227.02
    
    
    $
    213.70
    
    
    
    6
    %
    
    $
    226.28
    
    
    $
    212.83
    
    
    
    6
    %
   Third Quarter
    
    First Nine Months2006
    
    2005
    
    2006
    
    2005Total
    
    
    89
    %
    
    
    88
    %
    
    
    89
    %
    
    
    88
    %Excluding start-up facilities
    
    
    89
    %
    
    
    88
    %
    
    
    90
    %
    
    
    88
    %Skilled nursing facilities
    
    
    89
    %
    
    
    89
    %
    
    
    90
    %
    
    
    89
    %
   Operating Expenses  Quarter.
  22




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##### Table of Contents



Operating Expenses  First Nine Months.
   General and Administrative Expenses.
 23




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##### Table of Contents



Depreciation and Amortization.
 Asset Impairment.
  Interest Expense.
 Early Extinguishment of Debt.
 Gain on Sale of Assets.
 Interest Income and Other.
 Income Taxes.
 24




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##### Table of Contents



Cumulative Effect of Change in Accounting Principle.
 Financial Condition  September 30, 2006 and December 31, 2005
    Liquidity and Capital Resources
 Cash Flows.
 Investing Activities.
 Debt Agreements.
 25




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##### Table of Contents



Stock Purchase.
 Cash Dividends.
 26




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##### Table of Contents



Cautionary Statement Concerning Forward-Looking Statements
    27




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##### Table of Contents



Quantitative and Qualitative Disclosures About Market Risk
    Fair ValueExpected Maturity Dates
    
    
    
    
    
    
    Sept. 30,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    Total
    
    
    2006(Dollars in thousands)Long-term debt:Fixed-rate debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    949,985
    
    
    $
    949,985
    
    
    $
    1,150,262Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.0
    %
    
    
    3.0
    %Variable-rate debt
    
    $
    41,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    41,600
    
    
    $
    41,600Average interest rate
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1)
 
 (1)
    
    The weighted-average interest rate on loans under the revolving credit
facility was 5.8 percent at September 30, 2006. We can borrow under the revolving credit
facility, at our option, on either a competitive advance basis or a revolving credit basis.
Competitive borrowings will bear interest at market rates on either a fixed- or floating-rate
basis, at our option. Revolving borrowings will bear interest at variable rates that reflect,
at our option, the agent banks base lending rate or an increment over Eurodollar indices,
which ranges from 0.275 to 0.50 percent per annum, depending on our leverage ratio, as defined
in the revolving credit facility. 
 Controls and Procedures
  28




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##### Table of Contents



Part II. Other Information
 
 Legal Proceedings.
  
 Risk Factors.
  
 Unregistered Sales of Equity Securities and Use of Proceeds.
  Approximate DollarTotal Number of Shares
    
    Value of Shares thatTotal Number of
    
    Average
    
    Purchased as Part of
    
    May Yet Be PurchasedShares
    
    Price Paid
    
    Publicly Announced
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    Plans or Programs (1)
    
    Programs (1)7/1/06-7/31/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    170,275,7478/1/06-8/31/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    170,275,7479/1/06-9/30/06 (2)
    
    
    76,708
    
    
    
    (2)
    
    
    
    76,708
    
    
    $
    170,275,747Total
    
    
    76,708
    
    
    
    
    
    
    
    76,708
 
 (1)
    
    The Companys Board of Directors authorized the following share repurchase
programs:
 AmountDate
    
    Approved
    
    ExpirationAnnounced
    
    (in millions)
    
    DateJuly 22, 2005
    
    $
    300
    
    
    December 31, 2006January 27, 2006
    
    $
    100
    
    
    December 31, 2006May 10, 2006
    
    $
    300
    
    
    December 31, 2007
 (2)
    
    In May 2006, the Company purchased 2.0 million shares of its common stock under an
accelerated share repurchase agreement for an aggregate cost of $99.9 million. At the end of
the contract period in September 2006, the Company received a settlement of 76,708 shares of
its common stock as a result of a price adjustment. Under this agreement, the average price
paid per share was $49.01. See Note 4 to the consolidated financial statements for additional
discussion. 29




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##### Table of Contents



Defaults Upon Senior Securities.
  
 Submission of Matters to a Vote of Security Holders.
  
 Other Information.
 Retirement of M. Keith Weikel
  Modification of Restricted Stock Unit Award Agreement and Non-Qualified Stock Option Agreement of
M. Keith Weikel
  
 Exhibits.
 S-K Item601 No.31.1*
    
    Chief Executive Officer Certification31.2*
    
    Chief Financial Officer Certification32.1*
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith. 30




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##### Table of Contents



Signatures
  Manor Care, Inc.
(Registrant)Date  November 3, 2006
    By
    /s/ Steven M. CavanaughSteven M. Cavanaugh, Vice President andChief Financial Officer 31




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##### Table of Contents



Exhibit Index
 Exhibit31.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 32