##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended June 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
(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 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 - June 30, 2006 and December 31, 2005
    
    3Consolidated Statements of Income - Three and six months ended June 30, 2006 and 2005
    
    4Consolidated Statements of Cash Flows - Six months ended June 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
    
    27Item 4.
    
    Controls and Procedures
    
    28Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    28Item 1A.
    
    Risk Factors
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    29Item 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.
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)(In thousands, except per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    12,257
    
    
    $
    12,293Receivables, less allowances for doubtful
accounts of $57,549 and $60,726, respectively
    
    
    516,093
    
    
    
    494,620Prepaid expenses and other assets
    
    
    27,651
    
    
    
    24,416Total current assets
    
    
    556,001
    
    
    
    531,329Property and equipment, net of accumulated
depreciation of $878,844 and $812,707, respectively
    
    
    1,484,747
    
    
    
    1,484,475Goodwill
    
    
    132,756
    
    
    
    103,357Intangible assets, net of amortization of $1,490 and $3,309, respectively
    
    
    15,554
    
    
    
    20,012Other assets
    
    
    198,048
    
    
    
    200,061Total assets
    
    $
    2,387,106
    
    
    $
    2,339,234Liabilities And Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    115,184
    
    
    $
    112,952Employee compensation and benefits
    
    
    156,811
    
    
    
    157,002Accrued insurance liabilities
    
    
    108,908
    
    
    
    108,275Income tax payable
    
    
    37,889
    
    
    
    4,936Other accrued liabilities
    
    
    59,749
    
    
    
    62,938Deferred income taxes
    
    
    985
    
    
    
    3,633Long-term debt due within one year
    
    
    8,600
    
    
    
    25,435Total current liabilities
    
    
    488,126
    
    
    
    475,171Long-term debt
    
    
    956,669
    
    
    
    707,666Deferred income taxes
    
    
    88,618
    
    
    
    102,919Other liabilities
    
    
    284,118
    
    
    
    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
    
    
    396,683
    
    
    
    364,845Retained earnings
    
    
    1,363,957
    
    
    
    1,319,162Accumulated other comprehensive loss
    
    
    (978
    )
    
    
    (978
    )1,760,772
    
    
    
    1,684,139Less treasury stock, at cost (37.4 and 32.3 million shares, respectively)
    
    
    (1,191,197
    )
    
    
    (910,416
    )Total shareholders equity
    
    
    569,575
    
    
    
    773,723Total liabilities and shareholders equity
    
    $
    2,387,106
    
    
    $
    2,339,234
  3




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##### Table of Contents



Manor Care, Inc.
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Revenues
    
    $
    894,214
    
    
    $
    833,759
    
    
    $
    1,763,509
    
    
    $
    1,712,961Expenses:Operating
    
    
    736,106
    
    
    
    694,221
    
    
    
    1,459,016
    
    
    
    1,428,371General and administrative
    
    
    43,792
    
    
    
    40,680
    
    
    
    95,897
    
    
    
    76,946Depreciation and amortization
    
    
    36,146
    
    
    
    35,629
    
    
    
    72,088
    
    
    
    69,076Asset impairment
    
    
    
    
    
    
    
    
    
    
    11,082816,044
    
    
    
    770,530
    
    
    
    1,638,083
    
    
    
    1,574,393Income before other income (expenses) and
income taxes
    
    
    78,170
    
    
    
    63,229
    
    
    
    125,426
    
    
    
    138,568Other income (expenses):Interest expense
    
    
    (7,779
    )
    
    
    (10,216
    )
    
    
    (14,919
    )
    
    
    (20,332
    )Gain (loss) on sale of assets
    
    
    (217
    )
    
    
    663
    
    
    
    (159
    )
    
    
    209Equity in earnings of affiliated companies
    
    
    2,001
    
    
    
    1,455
    
    
    
    3,587
    
    
    
    2,823Interest income and other
    
    
    393
    
    
    
    714
    
    
    
    1,228
    
    
    
    1,073Total other expenses, net
    
    
    (5,602
    )
    
    
    (7,384
    )
    
    
    (10,263
    )
    
    
    (16,227
    )Income before income taxes
    
    
    72,568
    
    
    
    55,845
    
    
    
    115,163
    
    
    
    122,341Income taxes
    
    
    27,017
    
    
    
    17,766
    
    
    
    42,607
    
    
    
    43,899Income before cumulative effect
    
    
    45,551
    
    
    
    38,079
    
    
    
    72,556
    
    
    
    78,442Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (2,476
    )Net income
    
    $
    45,551
    
    
    $
    38,079
    
    
    $
    70,080
    
    
    $
    78,442Earnings per share  basic:Income before cumulative effect
    
    $
    .60
    
    
    $
    .44
    
    
    $
    .94
    
    
    $
    .91Cumulative effect
    
    
    
    
    
    
    
    
    
    
    (.03
    )Net income
    
    $
    .60
    
    
    $
    .44
    
    
    $
    .90
    (a)
    
    $
    .91Earnings per share  diluted:Income before cumulative effect
    
    $
    .58
    
    
    $
    .43
    
    
    $
    .91
    
    
    $
    .89Cumulative effect
    
    
    
    
    
    
    
    
    
    
    (.03
    )Net income
    
    $
    .58
    
    
    $
    .43
    
    
    $
    .88
    
    
    $
    .89Weighted-average shares:Basic
    
    
    76,277
    
    
    
    86,391
    
    
    
    77,593
    
    
    
    86,280Diluted
    
    
    78,489
    
    
    
    88,125
    
    
    
    79,658
    
    
    
    87,923Cash dividends declared per common share
    
    $
    .16
    
    
    $
    .15
    
    
    $
    .32
    
    
    $
    .30
 
 (a)
    
    Doesnt add due to rounding  4




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##### Table of Contents



Manor Care, Inc.
 Six Months Ended June 30,2006
    
    
    2005(In thousands)Operating ActivitiesNet income
    
    $
    70,080
    
    
    $
    78,442Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    72,088
    
    
    
    69,076Asset impairment and other non-cash charges
    
    
    15,050Stock option and restricted stock compensation
    
    
    11,338
    
    
    
    2,308Provision for bad debts
    
    
    27,658
    
    
    
    14,974Deferred income taxes
    
    
    (16,949
    )
    
    
    (4,958
    )Net (gain) loss on sale of assets
    
    
    159
    
    
    
    (209
    )Equity in earnings of affiliated companies
    
    
    (3,587
    )
    
    
    (2,823
    )Changes in assets and liabilities, excluding sold facilities and acquisitions:Receivables
    
    
    (51,868
    )
    
    
    (55,439
    )Prepaid expenses and other assets
    
    
    2,686
    
    
    
    6,716Liabilities
    
    
    21,866
    
    
    
    42,068Total adjustments
    
    
    78,441
    
    
    
    71,713Net cash provided by operating activities
    
    
    148,521
    
    
    
    150,155Investing ActivitiesInvestment in property and equipment
    
    
    (69,287
    )
    
    
    (64,776
    )Investment in systems development
    
    
    (1,424
    )
    
    
    (883
    )Investment in partnership
    
    
    (6,185
    )Acquisitions
    
    
    (19,298
    )Proceeds from sale of assets
    
    
    40
    
    
    
    1,403Net cash used in investing activities
    
    
    (96,154
    )
    
    
    (64,256
    )Financing ActivitiesNet repayments under revolving credit facility
    
    
    (16,800
    )Proceeds from issuance of senior notes
    
    
    250,000Principal payments of long-term debt
    
    
    (1,032
    )
    
    
    (924
    )Payment of financing costs
    
    
    (5,547
    )
    
    
    (500
    )Purchase of common stock for treasury
    
    
    (270,634
    )
    
    
    (13,394
    )Dividends paid
    
    
    (25,268
    )
    
    
    (25,884
    )Proceeds from exercise of stock options
    
    
    7,651
    
    
    
    8,551Excess tax benefits from share-based payment arrangements
    
    
    9,227Net cash used in financing activities
    
    
    (52,403
    )
    
    
    (32,151
    )Net increase (decrease) in cash and cash equivalents
    
    
    (36
    )
    
    
    53,748Cash and cash equivalents at beginning of period
    
    
    12,293
    
    
    
    32,915Cash and cash equivalents at end of period
    
    $
    12,257
    
    
    $
    86,663
  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
    
    
    
    18,329
    
    
    
    10,632
    
    
    
    29,399Balance at June 30, 2006
    
    $
    11,483
    
    
    $
    54,713
    
    
    $
    66,560
    
    
    $
    132,756
 6




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Insurance Liabilities
  Stock-Based Compensation
  New Accounting Standard
  Reclassification
  Note 2  Asset Impairment
  7




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##### Table of Contents



Note 3  Debt
  June 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Revolving credit facility
    
    $
    6,000
    
    
    $
    22,800Senior Notes, 6.25%, due May 1, 2013 (1)
    
    
    199,573
    
    
    
    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
    
    
    3,601
    
    
    
    3,914Capital lease obligations
    
    
    6,110
    
    
    
    6,860965,269
    
    
    
    733,101Less amounts due within one year
    
    
    8,600
    
    
    
    25,435Long-term debt
    
    $
    956,669
    
    
    $
    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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Note 4  Stock Purchase
   9




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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 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.
    
    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 the SAR is
cash-settled, the Company adjusts its expense to the intrinsic value.
   10




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Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005(In thousands, except earnings per share)Net income  as reported
    
    $
    38,079
    
    
    $
    78,442Deduct: Total stock-based employee compensation
expense determined under fair-value based
method for all awards, net of related tax effects
    
    
    (2,375
    )
    
    
    (10,376
    )Net income  pro forma
    
    $
    35,704
    
    
    $
    68,066Earnings per share  as reported:Basic
    
    $
    .44
    
    
    $
    .91Diluted
    
    $
    .43
    
    
    $
    .89Earnings per share  pro forma:Basic
    
    $
    .41
    
    
    $
    .79Diluted
    
    $
    .40
    
    
    $
    .77
 Plan Information
  11




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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
    
    
    (3,750
    )
    
    
    30.50Exercised
    
    
    (1,312,129
    )
    
    
    24.89Outstanding at June 30, 2006
    
    
    4,425,713
    
    
    
    30.48
    
    
    
    5.2
    
    
    $
    72,776Exercisable at June 30, 2006
    
    
    3,975,713
    
    
    
    29.47
    
    
    
    5.1
    
    
    $
    69,357
  12




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##### Table of Contents



Restricted Stock.
  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 June 30, 2006
    
    
    775,123
    
    
    
    23.83
  13




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Performance-Vested Restricted Stock.
 Restricted Stock Units.
  Weighted-AverageGrant-DateUnits
    
    
    Fair ValueRestricted units at Dec. 31, 2005
    
    
    97,300
    
    
    $
    37.05Granted
    
    
    192,600
    
    
    
    39.64Forfeited
    
    
    (5,350
    )
    
    
    37.77Restricted units at June 30, 2006
    
    
    284,550
    
    
    
    38.79
 Cash-Settled Stock Appreciation Rights.
 14




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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
    
    
    (50,400
    )
    
    
    31.99Exercised
    
    
    (432,575
    )
    
    
    18.58Outstanding at June 30, 2006
    
    
    1,104,075
    
    
    
    28.29
    
    
    
    7.1
    
    
    $
    20,564Exercisable at June 30, 2006
    
    
    408,200
    
    
    
    17.32
    
    
    
    5.9
    
    
    $
    12,082
 Note 6  Revenues
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Skilled nursing and assisted living services
    
    $
    746,995
    
    
    $
    704,021
    
    
    $
    1,478,937
    
    
    $
    1,453,489Hospice and home health services
    
    
    115,345
    
    
    
    97,482
    
    
    
    220,145
    
    
    
    192,813Rehabilitation services
(excludes intercompany revenues)
    
    
    24,077
    
    
    
    24,576
    
    
    
    48,926
    
    
    
    49,372Other services
    
    
    7,797
    
    
    
    7,680
    
    
    
    15,501
    
    
    
    17,287$
    894,214
    
    
    $
    833,759
    
    
    $
    1,763,509
    
    
    $
    1,712,961
 Note 7  Contingencies
  15




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16




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Note 8  Earnings Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except earnings per share)Numerator:Numerator for basic EPS  income before
cumulative effect
    
    $
    45,551
    
    
    $
    38,079
    
    
    $
    72,556
    
    
    $
    78,442After-tax amount of interest expense on
Convertible Senior Notes (Old Notes)
    
    
    27
    
    
    
    29
    
    
    
    54
    
    
    
    55Numerator for diluted EPS
    
    $
    45,578
    
    
    $
    38,108
    
    
    $
    72,610
    
    
    $
    78,497Denominator:Denominator for basic
EPS  weighted-average shares
    
    
    76,277
    
    
    
    86,391
    
    
    
    77,593
    
    
    
    86,280Effect of dilutive securities:Stock options
    
    
    968
    
    
    
    1,080
    
    
    
    959
    
    
    
    1,063Restricted stock or units
    
    
    53
    
    
    
    
    
    
    
    36Convertible Senior Notes
    
    
    1,191
    
    
    
    654
    
    
    
    1,070
    
    
    
    580Denominator for diluted EPS 
adjusted for weighted-average
shares and assumed conversions
    
    
    78,489
    
    
    
    88,125
    
    
    
    79,658
    
    
    
    87,923EPS  Income before cumulative effect:Basic
    
    $
    .60
    
    
    $
    .44
    
    
    $
    .94
    
    
    $
    .91Diluted
    
    $
    .58
    
    
    $
    .43
    
    
    $
    .91
    
    
    $
    .89
   17




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Note 9  Employee Benefit Plans
  Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Service cost
    
    $
    484
    
    
    $
    430
    
    
    $
    1,592
    
    
    $
    859Interest cost
    
    
    1,170
    
    
    
    989
    
    
    
    2,205
    
    
    
    1,979Expected return on plan assets
    
    
    (1,180
    )
    
    
    (1,184
    )
    
    
    (2,225
    )
    
    
    (2,367
    )Amortization of unrecognized transition asset
    
    
    (12
    )
    
    
    (12
    )
    
    
    (24
    )
    
    
    (24
    )Amortization of prior service cost
    
    
    679
    
    
    
    491
    
    
    
    1,169
    
    
    
    981Amortization of net loss
    
    
    356
    
    
    
    235
    
    
    
    605
    
    
    
    470Net pension cost
    
    $
    1,497
    
    
    $
    949
    
    
    $
    3,322
    
    
    $
    1,898
 Note 10  Segment Information
  18




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Long-Term
    
    Hospice andCare
    
    Home Health
    
    Other
    
    Total(In thousands)Three months ended June 30, 2006Revenues from external customers
    
    $
    746,995
    
    
    $
    115,345
    
    
    $
    31,874
    
    
    $
    894,214Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    27,330
    
    
    
    27,330Depreciation and amortization
    
    
    34,324
    
    
    
    791
    
    
    
    1,031
    
    
    
    36,146Operating margin
    
    
    138,539
    
    
    
    18,517
    
    
    
    1,052
    
    
    
    158,108Three months ended June 30, 2005Revenues from external customers
    
    $
    704,021
    
    
    $
    97,482
    
    
    $
    32,256
    
    
    $
    833,759Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    25,741
    
    
    
    25,741Depreciation and amortization
    
    
    32,451
    
    
    
    797
    
    
    
    2,381
    
    
    
    35,629Operating margin
    
    
    121,680
    
    
    
    14,816
    
    
    
    3,042
    
    
    
    139,538Six months ended June 30, 2006Revenues from external customers
    
    $
    1,478,937
    
    
    $
    220,145
    
    
    $
    64,427
    
    
    $
    1,763,509Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    56,349
    
    
    
    56,349Depreciation and amortization
    
    
    68,105
    
    
    
    1,500
    
    
    
    2,483
    
    
    
    72,088Operating margin
    
    
    265,526
    
    
    
    34,881
    
    
    
    4,086
    
    
    
    304,493Six months ended June 30, 2005Revenues from external customers
    
    $
    1,453,489
    
    
    $
    192,813
    
    
    $
    66,659
    
    
    $
    1,712,961Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    45,390
    
    
    
    45,390Depreciation and amortization
    
    
    64,160
    
    
    
    1,570
    
    
    
    3,346
    
    
    
    69,076Operating margin
    
    
    251,193
    
    
    
    27,267
    
    
    
    6,130
    
    
    
    284,590
 19




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of
Operations
 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 June 30, 2006 Compared with June 30, 2005
 Revenues  Quarter.
 Revenues  First Half.
   21




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##### Table of Contents



Revenue Factors  Quarter and First Half.
 Second Quarter
    
    First Half2006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseMedicare
    
    $
    382.31
    
    
    $
    355.26
    
    
    
    8
    %
    
    $
    378.95
    
    
    $
    353.87
    
    
    
    7
    %Medicaid
    
    $
    151.52
    
    
    $
    146.97
    
    
    
    3
    %
    
    $
    151.15
    
    
    $
    146.53
    
    
    
    3
    %Private and other (skilled only)
    
    $
    228.00
    
    
    $
    213.17
    
    
    
    7
    %
    
    $
    225.89
    
    
    $
    212.38
    
    
    
    6
    %
   Second Quarter
    
    First Half2006
    
    2005
    
    2006
    
    2005Total
    
    
    89
    %
    
    
    88
    %
    
    
    90
    %
    
    
    88
    %Skilled nursing facilities
    
    
    90
    %
    
    
    88
    %
    
    
    90
    %
    
    
    89
    %
   Operating Expenses  Quarter.
  22




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##### Table of Contents



Operating Expenses  First Half.
   General and Administrative Expenses.
 Depreciation and Amortization.
 23




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##### Table of Contents



Asset Impairment.
 Interest Expense.
 Income Taxes.
 Cumulative Effect of Change in Accounting Principle.
 Financial Condition  June 30, 2006 and December 31, 2005
    Liquidity and Capital Resources
 Cash Flows.
 24




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##### Table of Contents



Investing Activities.
 Debt Agreements.
    Stock Purchase.
 25




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##### Table of Contents



Cash Dividends.
  Cautionary Statement Concerning Forward-Looking Statements
    26




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##### Table of Contents



Quantitative and Qualitative Disclosures About Market Risk
    Expected Maturity DatesFair Value June 30,2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter
    
    Total
    
    2006(Dollars in thousands)Long-term debt:Fixed-rate debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    949,985
    
    
    $
    949,985
    
    
    $
    1,057,605Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.0
    %
    
    
    3.0
    %Variable-rate debt
    
    $
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,000
    
    
    $
    6,000Average interest rate
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1)
 
 (1)
    
    The weighted-average interest rate on loans under the revolving credit
facility was 8.25 percent at June 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. 27




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##### Table of Contents



Controls and Procedures
  
 Part II. Other Information
 
 Legal Proceedings.
  
 Risk Factors.
  28




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
  Total Number of
    
    Approximate DollarShares Purchased as
    
    Value of SharesPart of Publicly
    
    that May Yet BeAnnounced Plans or
    
    Purchased Under theTotal Number of
    
    Average Price Paid
    
    Programs
    
    Plans or ProgramsPeriod
    
    Shares Purchased
    
    per Share
    
    (1)
    
    (1)4/1/06-4/30/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    135,868,6335/1/06-5/31/06 (2)
    
    
    5,623,441
    
    
    $
    47.23
    
    
    
    5,623,441
    
    
    $
    170,275,7476/1/06-6/30/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    170,275,747Total
    
    
    5,623,441
    
    
    $
    47.23
    
    
    
    5,623,441
 
 (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. See Note 4 to the consolidated financial
statements for additional discussion. 
 Item 3.
    
    Defaults Upon Senior Securities.
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders.
  29




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##### Table of Contents



Item
    
    For
    
    Withheld
    
    Not Voteda
    
    
    72,366,979
    
    
    
    1,684,719
    
    
    
    4,947,874b
    
    
    72,249,375
    
    
    
    1,802,323
    
    
    
    4,947,874c
    
    
    72,208,751
    
    
    
    1,842,947
    
    
    
    4,947,874d
    
    
    73,549,352
    
    
    
    502,346
    
    
    
    4,947,874e
    
    
    73,551,623
    
    
    
    500,075
    
    
    
    4,947,874f
    
    
    72,737,347
    
    
    
    1,314,351
    
    
    
    4,947,874g
    
    
    71,202,738
    
    
    
    2,848,960
    
    
    
    4,947,874
 
 Item 5.
    
    Other Information.
  
 Item 6.
    
    Exhibits.
 S-K Item601 No.4.1
    
    Second Amendment, dated as of June 22, 2006, to the Credit Agreement dated as of May 27, 2005
(as amended by the First Amendment, dated as of August 3, 2005), among Manor Care, Inc., as
the Borrower, and the lenders party thereto (filed as Exhibit 4.1 to Manor Care, Inc.s Form
8-K filed on June 23, 2006 and incorporated herein by reference)4.2
    
    Indenture, dated May 17, 2006, between Manor Care, Inc. the Subsidiary Guarantors and U.S.
Bank National Association, as Trustee (filed as Exhibit 4.1 to Manor Care, Inc.s Form 8-K
filed on May 17, 2006 and incorporated herein by reference)4.3
    
    Registration Rights Agreement, dated May 17, 2006, among Manor Care, Inc., the Guarantors and
the Initial Purchasers named therein (filed as Exhibit 4.3 to Manor Care, Inc.s Form 8-K
filed on May 17, 2006 and incorporated herein by reference)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 200299.1
    
    Purchase Agreement, dated May 11, 2006, among Manor Care, Inc., the Subsidiary Guarantors and
the Initial Purchasers named therein (filed as Exhibit 99.1 to Manor Care, Inc.s Form 8-K
filed on May 17, 2006 and incorporated herein by reference)99.2
    
    Accelerated Share Repurchase Agreement, dated May 25, 2006, among Manor Care, Inc. and
Merrill Lynch Financial Markets, Inc. (filed as Exhibit 99.1 to Manor Care, Inc.s Form 8-K
filed on May 26, 2006 and incorporated herein by reference)
 
 *
    
    Filed herewith. 30




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##### Table of Contents



Signatures
  Manor Care, Inc.
(Registrant)Date August 4 , 2006
    By
    /s/ Steven M. CavanaughSteven M. Cavanaugh, Vice President and Chief 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