##### 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 March 31, 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
(State or other jurisdiction of
incorporation or organization)
    
    34-1687107
(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 Non-accelerated filer
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  March 31, 2006 and December 31, 2005
    
    3Consolidated
Statements of Income  Three months ended March 31, 2006 and 2005
    
    4Consolidated
Statements of Cash Flows  Three months ended March 31, 2006 and 2005
    
    5Notes to Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    22Item 4.
    
    Controls and Procedures
    
    22Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    22Item 1A.
    
    Risk Factors
    
    22Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    23Item 3.
    
    Defaults Upon Senior Securities
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    23Item 5.
    
    Other Information
    
    23Item 6.
    
    Exhibits
    
    24Signatures
    
    
    
    25Exhibit Index
    
    
    
    26EX-10.1 Employment AgreementEX-31.1 Certification of CEOEX-31.2 Certification of CFOEX-32.1 Certification of CEOEX-32.2 Certification of CFO
  2




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##### Table of Contents



Part I. Financial Information
 
 Financial Statements.
 Manor Care, Inc.
 
  March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)(In thousands, except per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    22,512
    
    
    $
    12,293Receivables, less allowances for doubtful
accounts of $58,983 and $60,726, respectively
    
    
    505,127
    
    
    
    494,620Prepaid expenses and other assets
    
    
    23,589
    
    
    
    24,416Total current assets
    
    
    551,228
    
    
    
    531,329Property and equipment, net of accumulated
depreciation of $844,262 and $812,707, respectively
    
    
    1,479,583
    
    
    
    1,484,475Goodwill
    
    
    114,427
    
    
    
    103,357Intangible assets, net of amortization of $1,285 and $3,309, respectively
    
    
    15,659
    
    
    
    20,012Other assets
    
    
    191,552
    
    
    
    200,061Total assets
    
    $
    2,352,449
    
    
    $
    2,339,234Liabilities And Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    113,664
    
    
    $
    112,952Employee compensation and benefits
    
    
    151,523
    
    
    
    157,002Accrued insurance liabilities
    
    
    107,626
    
    
    
    108,275Income tax payable
    
    
    23,341
    
    
    
    4,936Other accrued liabilities
    
    
    67,599
    
    
    
    62,938Deferred income taxes
    
    
    2,721
    
    
    
    3,633Long-term debt due within one year
    
    
    2,655
    
    
    
    2,635Total current liabilities
    
    
    469,129
    
    
    
    452,371Long-term debt
    
    
    707,190
    
    
    
    730,466Deferred income taxes
    
    
    91,568
    
    
    
    102,919Other liabilities
    
    
    287,936
    
    
    
    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
    
    
    384,442
    
    
    
    364,845Retained earnings
    
    
    1,331,069
    
    
    
    1,319,162Accumulated other comprehensive loss
    
    
    (978
    )
    
    
    (978
    )1,715,643
    
    
    
    1,684,139Less treasury stock, at cost (32.0 and 32.3 million shares, respectively)
    
    
    (919,017
    )
    
    
    (910,416
    )Total shareholders equity
    
    
    796,626
    
    
    
    773,723Total liabilities and shareholders equity
    
    $
    2,352,449
    
    
    $
    2,339,234
  3




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##### Table of Contents





Manor Care, Inc.









Three Months Ended March 31,2006
    
    
    2005(In thousands, except per share data)Revenues
    
    $
    869,295
    
    
    $
    879,202ExpensesOperating
    
    
    722,910
    
    
    
    734,150General and administrative
    
    
    52,105
    
    
    
    36,266Depreciation and amortization
    
    
    35,942
    
    
    
    33,447Asset impairment
    
    
    11,082822,039
    
    
    
    803,863Income before other income (expenses) and
income taxes
    
    
    47,256
    
    
    
    75,339Other income (expenses):Interest expense
    
    
    (7,140
    )
    
    
    (10,116
    )Gain (loss) on sale of assets
    
    
    58
    
    
    
    (454
    )Equity in earnings of affiliated companies
    
    
    1,586
    
    
    
    1,368Interest income and other
    
    
    835
    
    
    
    359Total other expenses, net
    
    
    (4,661
    )
    
    
    (8,843
    )Income before income taxes
    
    
    42,595
    
    
    
    66,496Income taxes
    
    
    15,590
    
    
    
    26,133Income before cumulative effect
    
    
    27,005
    
    
    
    40,363Cumulative effect of change in accounting principle, net of tax
    
    
    (2,476
    )Net income
    
    $
    24,529
    
    
    $
    40,363Earnings per share  basic:Income before cumulative effect
    
    $
    .34
    
    
    $
    .47Cumulative effect
    
    
    (.03
    )Net income
    
    $
    .31
    
    
    $
    .47Earnings per share  diluted:Income before cumulative effect
    
    $
    .33
    
    
    $
    .46Cumulative effect
    
    
    (.03
    )Net income
    
    $
    .30
    
    
    $
    .46Weighted-average shares:Basic
    
    
    78,923
    
    
    
    86,169Diluted
    
    
    80,841
    
    
    
    87,720Cash dividends declared per common share
    
    $
    .16
    
    
    $
    .15




4



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##### Table of Contents



Manor Care, Inc.
 
   Three Months Ended March 31,2006
    
    
    2005(In thousands)Operating ActivitiesNet income
    
    $
    24,529
    
    
    $
    40,363Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    35,942
    
    
    
    33,447Asset impairment and other non-cash charges
    
    
    15,050Stock option and restricted stock compensation
    
    
    6,664
    
    
    
    745Provision for bad debts
    
    
    11,786
    
    
    
    8,515Deferred income taxes
    
    
    (12,263
    )
    
    
    (436
    )Net (gain) loss on sale of assets
    
    
    (58
    )
    
    
    454Equity in earnings of affiliated companies
    
    
    (1,586
    )
    
    
    (1,368
    )Changes in assets and liabilities, excluding sold facilities and acquisitions:Receivables
    
    
    (24,897
    )
    
    
    (105,813
    )Prepaid expenses and other assets
    
    
    1,758
    
    
    
    3,283Liabilities
    
    
    16,025
    
    
    
    71,424Total adjustments
    
    
    48,421
    
    
    
    10,251Net cash provided by operating activities
    
    
    72,950
    
    
    
    50,614Investing ActivitiesInvestment in property and equipment
    
    
    (30,023
    )
    
    
    (29,320
    )Investment in systems development
    
    
    (1,001
    )
    
    
    (748
    )Investment in partnership
    
    
    (1,228
    )Acquisitions
    
    
    (298
    )Net cash used in investing activities
    
    
    (32,550
    )
    
    
    (30,068
    )Financing ActivitiesNet repayments under revolving credit facility
    
    
    (22,800
    )Principal payments of long-term debt
    
    
    (456
    )
    
    
    (487
    )Purchase of common stock for treasury
    
    
    (5,042
    )
    
    
    (1,755
    )Dividends paid
    
    
    (12,622
    )
    
    
    (12,927
    )Proceeds from exercise of stock options
    
    
    6,569
    
    
    
    5,229Excess tax benefits from share-based payment arrangements
    
    
    4,170Net cash used in financing activities
    
    
    (30,181
    )
    
    
    (9,940
    )Net increase in cash and cash equivalents
    
    
    10,219
    
    
    
    10,606Cash and cash equivalents at beginning of period
    
    
    12,293
    
    
    
    32,915Cash and cash equivalents at end of period
    
    $
    22,512
    
    
    $
    43,521
  5




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##### Table of Contents



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
    
    
    
    
    
    
    
    10,632
    
    
    
    11,070Balance at March 31, 2006
    
    $
    11,483
    
    
    $
    36,384
    
    
    $
    66,560
    
    
    $
    114,427
 Insurance Liabilities
  6




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##### Table of Contents



Stock-Based Compensation
  Note 2
 Asset Impairment
  Note 3
 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 stock price close 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. 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.
 7




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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 is 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 the SAR is
cash-settled, the Company will adjust its expense to the intrinsic value.
    8




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##### Table of Contents



Three months endedMarch 31, 2005(In thousands, except earnings per share)Net income
 as reported
    

    $
    40,363Deduct:
Total stock-based employee compensation expense determined under
fair-value based method for all awards, net of related tax effects
    

    
    (8,001
    )Net income  pro forma
    

    $
    32,362Earnings per share  as reported:Basic
    

    $
    .47Diluted
    

    $
    .46Earnings per share  pro forma:Basic
    

    $
    .38Diluted
    

    $
    .37
 Plan Information
   9




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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
    
    
    615,398
    
    
    
    40.06Forfeited
    
    
    (1,850
    )
    
    
    31.22Exercised
    
    
    (633,126
    )
    
    
    24.01Outstanding at March 31, 2006
    
    
    5,106,616
    
    
    
    29.84
    
    
    
    5.4
    
    
    $
    74,094Exercisable at March 31, 2006
    
    
    4,656,616
    
    
    
    28.92
    
    
    
    5.3
    
    
    $
    71,831
  10




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Restricted Stock.
  Weighted-AverageGrant-DateShares
    
    
    Fair ValueRestricted stock at Dec. 31, 2005
    
    
    999,489
    
    
    $
    20.40Issue of performance-vested
    
    
    95,737
    
    
    
    39.77Delivered for tax withholdings
    
    
    (38,687
    )
    
    
    37.79Restricted stock at March 31, 2006
    
    
    1,056,539
    
    
    
    21.52
  Performance-Vested Restricted Stock.
 11




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##### Table of Contents



Restricted Stock Units.
  Weighted-AverageGrant-DateUnits
    
    
    Fair ValueRestricted units at Dec. 31, 2005
    
    
    97,300
    
    
    $
    37.05Granted
    
    
    182,350
    
    
    
    39.38Forfeited
    
    
    (2,850
    )
    
    
    37.49Restricted units at March 31, 2006
    
    
    276,800
    
    
    
    38.58
 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
    
    
    (27,000
    )
    
    
    31.73Exercised
    
    
    (371,775
    )
    
    
    18.61Outstanding at March 31, 2006
    
    
    1,188,275
    
    
    
    27.87
    
    
    
    7.3
    
    
    $
    19,586Exercisable at March 31, 2006
    
    
    466,050
    
    
    
    17.41
    
    
    
    6.2
    
    
    $
    12,555
 12




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##### Table of Contents



Note 4
 Revenues
  Three months ended March 31,2006
    
    
    2005(In thousands)Skilled nursing and assisted living services
    
    $
    731,942
    
    
    $
    749,468Hospice and home health services
    
    
    104,800
    
    
    
    95,331Rehabilitation services
(excludes intercompany revenues)
    
    
    24,849
    
    
    
    24,796Other services
    
    
    7,704
    
    
    
    9,607$
    869,295
    
    
    $
    879,202
 Note 5
 Contingencies
   13




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Note 6  Earnings Per Share
  Three months ended March 31,2006
    
    
    2005(In thousands, except earnings per share)Numerator:Numerator
for basic EPS  income before
cumulative effect
    
    $
    27,005
    
    
    $
    40,363After-tax amount of interest expense on
Convertible Senior Notes (Old Notes)
    
    
    27
    
    
    
    26Numerator for diluted EPS
    
    $
    27,032
    
    
    $
    40,389Denominator:Denominator
for basic EPS  weighted-average shares
    
    
    78,923
    
    
    
    86,169Effect of dilutive securities:Stock options
    
    
    951
    
    
    
    1,045Restricted stock or units
    
    
    19Convertible Senior Notes due 2023
    
    
    948
    
    
    
    506Denominator
for diluted EPS 
adjusted for weighted-average
shares and assumed conversions
    
    
    80,841
    
    
    
    87,720EPS  Income before cumulative effect:Basic
    
    $
    .34
    
    
    $
    .47Diluted
    
    $
    .33
    
    
    $
    .46
  14




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##### Table of Contents



Note 7
 Employee Benefit Plans
  Three months ended March 31,2006
    
    
    2005(In thousands)Service cost
    
    $
    1,108
    
    
    $
    429Interest cost
    
    
    1,035
    
    
    
    990Expected return on plan assets
    
    
    (1,045
    )
    
    
    (1,183
    )Amortization of unrecognized transition asset
    
    
    (12
    )
    
    
    (12
    )Amortization of prior service cost
    
    
    490
    
    
    
    490Amortization of net loss
    
    
    249
    
    
    
    235Net pension cost
    
    $
    1,825
    
    
    $
    949
 15




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##### Table of Contents



Note 8
 Segment Information
  Long-Term
    
    Hospice andCare
    
    Home Health
    
    Other
    
    Total(In thousands)Three months ended March 31, 2006Revenues from external customers
    
    $
    731,942
    
    
    $
    104,800
    
    
    $
    32,553
    
    
    $
    869,295Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    29,019
    
    
    
    29,019Depreciation and amortization
    
    
    33,781
    
    
    
    709
    
    
    
    1,452
    
    
    
    35,942Operating margin
    
    
    126,987
    
    
    
    16,364
    
    
    
    3,034
    
    
    
    146,385Three months ended March 31, 2005Revenues from external customers
    
    $
    749,468
    
    
    $
    95,331
    
    
    $
    34,403
    
    
    $
    879,202Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    19,649
    
    
    
    19,649Depreciation and amortization
    
    
    31,709
    
    
    
    773
    
    
    
    965
    
    
    
    33,447Operating margin
    
    
    129,513
    
    
    
    12,451
    
    
    
    3,088
    
    
    
    145,052
 16




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Critical Accounting Policies
 General and Professional Liability.
 Workers Compensation Liability.
 Results
of Operations   Quarter Ended March 31, 2006 Compared with Quarter Ended March 31, 2005
 Overview.
 17




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##### Table of Contents



Revenues.
  First Quarter2006
    
    2005
    
    IncreaseMedicare
    
    $
    375.59
    
    
    $
    352.50
    
    
    
    7
    %Medicaid
    
    $
    150.79
    
    
    $
    146.10
    
    
    
    3
    %Private and other (skilled only)
    
    $
    223.74
    
    
    $
    211.59
    
    
    
    6
    %
   18




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##### Table of Contents



Operating Expenses.
   General and Administrative Expenses.
 Depreciation and Amortization.
 Interest Expense.
 Income Taxes.
 19




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##### Table of Contents



Financial
Condition  March 31, 2006 and December 31, 2005
  Liquidity and Capital Resources
 Cash Flows.
 Investing Activities.
 Debt Agreement.
   Stock Purchase.
 20




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##### Table of Contents



Cash Dividends.
  Cautionary Statement Concerning Forward-Looking Statements
   21




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##### Table of Contents



Quantitative and Qualitative Disclosures About Market Risk
  
 Controls and Procedures
  
 Part II. Other Information
 
 Legal Proceedings.
  
 Risk Factors.
  22




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##### Table of Contents



Unregistered Sales of Equity Securities and Use of Proceeds.
  Total Number of
    
    Approximate DollarShares Purchased as
    
    Value of Shares thatTotal Number
    
    Average
    
    Part of Publicly
    
    May Yet Be Purchasedof Shares
    
    Price Paid
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs (1)
    
    Programs (1)1/1/06-1/31/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    140,910,1362/1/06-2/28/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    140,910,1363/1/06-3/31/06
    
    
    117,900
    
    
    $
    42.76
    
    
    
    117,900
    
    
    $
    135,868,633Total
    
    
    117,900
    
    
    $
    42.76
    
    
    
    117,900
 
 (1)
    
    On July 22, 2005, Manor Care announced that its Board of Directors authorized
management to spend $300 million to purchase common stock through December 31, 2006. On
January 27, 2006, Manor Care announced that its Board of Directors authorized management to
spend an additional $100 million to purchase common stock through December 31, 2006. 
 Defaults Upon Senior Securities.
  
 Submission of Matters to a Vote of Security Holders.
  
 Other Information.
  23




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##### Table of Contents



Exhibits.
 S-K Item601 No.10.1
    
    Form of Employment Agreement by and among Steven M. Cavanaugh, Heartland Employment Services,
LLC, and Manor Care, Inc.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
 
 24




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##### Table of Contents



Signatures
  Manor Care, Inc.
(Registrant)Date May 5, 2006
    By
    /s/ Geoffrey G. MeyersGeoffrey G. Meyers, Executive Vice Presidentand Chief Financial Officer 
 25




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##### Table of Contents



Exhibit Index
 Exhibit10.1
    
    Form of Employment Agreement by and among Steven M. Cavanaugh, Heartland Employment Services,
LLC, and Manor Care, Inc.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
 26