MANOR CARE 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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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
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
Commission file number: 1-10858
Manor Care, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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34-1687107 |
(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.) |
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333 N. Summit Street, Toledo, Ohio
(Address of principal executive offices)
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43604-2617
(Zip Code) |
Registrants telephone number, including area code: (419) 252-5500
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the close of business on October 31, 2006.
Common stock, $0.01 par value 73,951,397 shares
Manor Care, Inc.
Form 10-Q
Table of Contents
2
Part I. Financial Information
Item 1. Financial Statements.
Manor Care, Inc.
Consolidated Balance Sheets
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September 30, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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(Note1) |
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(In thousands, except per share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
15,299 |
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$ |
12,293 |
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Receivables, less allowances for doubtful
accounts of $65,593 and $60,726, respectively |
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594,763 |
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494,620 |
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Prepaid expenses and other assets |
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23,958 |
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24,416 |
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Deferred income taxes |
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9,221 |
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Total current assets |
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643,241 |
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531,329 |
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Property and equipment, net of accumulated
depreciation of $912,945 and $812,707, respectively |
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1,483,989 |
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1,484,475 |
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Goodwill |
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132,756 |
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103,357 |
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Intangible assets, net of amortization of $1,675 and $3,309, respectively |
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15,369 |
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20,012 |
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Other assets |
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199,218 |
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200,061 |
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Total assets |
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$ |
2,474,573 |
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$ |
2,339,234 |
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Liabilities And Shareholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
114,978 |
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$ |
112,952 |
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Employee compensation and benefits |
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167,070 |
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157,002 |
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Accrued insurance liabilities |
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113,292 |
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108,275 |
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Income tax payable |
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23,923 |
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4,936 |
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Other accrued liabilities |
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55,692 |
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62,938 |
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Deferred income taxes |
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3,633 |
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Long-term debt due within one year |
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44,220 |
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25,435 |
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Total current liabilities |
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519,175 |
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475,171 |
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Long-term debt |
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956,209 |
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707,666 |
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Deferred income taxes |
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95,214 |
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102,919 |
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Other liabilities |
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287,868 |
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279,755 |
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Shareholders equity: |
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Preferred stock, $.01 par value, 5 million shares authorized |
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Common stock, $.01 par value, 300 million shares authorized,
111.0 million shares issued |
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1,110 |
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1,110 |
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Capital in excess of par value |
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403,032 |
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364,845 |
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Retained earnings |
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1,398,664 |
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1,319,162 |
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Accumulated other comprehensive loss |
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(978 |
) |
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(978 |
) |
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1,801,828 |
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1,684,139 |
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Less treasury stock, at cost (37.0 and 32.3 million shares, respectively) |
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(1,185,721 |
) |
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(910,416 |
) |
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Total shareholders equity |
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616,107 |
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773,723 |
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Total liabilities and shareholders equity |
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$ |
2,474,573 |
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$ |
2,339,234 |
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See notes to consolidated financial statements.
3
Manor Care, Inc.
Consolidated Statements of Income
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30 |
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September 30 |
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2006 |
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2005 |
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2006 |
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2005 |
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(In thousands, except per share amounts) |
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Revenues |
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$ |
915,515 |
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$ |
840,279 |
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$ |
2,679,024 |
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$ |
2,553,240 |
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Expenses: |
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Operating |
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752,495 |
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688,154 |
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2,211,511 |
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2,116,525 |
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General and administrative |
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45,437 |
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39,673 |
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141,334 |
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116,619 |
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Depreciation and amortization |
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36,732 |
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34,592 |
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108,820 |
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103,668 |
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Asset impairment |
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2,451 |
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11,082 |
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2,451 |
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834,664 |
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764,870 |
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2,472,747 |
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2,339,263 |
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Income before other income (expenses) and
income taxes |
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80,851 |
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75,409 |
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206,277 |
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213,977 |
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Other income (expenses): |
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Interest expense |
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(8,749 |
) |
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(11,026 |
) |
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(23,668 |
) |
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(31,358 |
) |
Early extinguishment of debt |
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(4,053 |
) |
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(4,053 |
) |
Gain (loss) on sale of assets |
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(125 |
) |
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17,296 |
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(284 |
) |
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17,505 |
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Equity in earnings of affiliated companies |
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971 |
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1,276 |
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4,558 |
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4,099 |
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Interest income and other |
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|
203 |
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1,635 |
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1,431 |
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2,708 |
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Total other income (expenses), net |
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(7,700 |
) |
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5,128 |
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(17,963 |
) |
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(11,099 |
) |
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Income before income taxes |
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73,151 |
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80,537 |
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188,314 |
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202,878 |
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Income taxes |
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26,649 |
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30,350 |
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|
69,256 |
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74,249 |
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Income before cumulative effect |
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46,502 |
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50,187 |
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119,058 |
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128,629 |
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Cumulative effect of change in accounting
principle, net of tax |
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(2,476 |
) |
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Net income |
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$ |
46,502 |
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$ |
50,187 |
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$ |
116,582 |
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$ |
128,629 |
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Earnings per share basic: |
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Income before cumulative effect |
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$ |
.63 |
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$ |
.61 |
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$ |
1.56 |
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$ |
1.52 |
|
Cumulative effect |
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(.03 |
) |
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Net income |
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$ |
.63 |
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$ |
.61 |
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$ |
1.53 |
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$ |
1.52 |
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Earnings per share diluted: |
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Income before cumulative effect |
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$ |
.60 |
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$ |
.60 |
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$ |
1.51 |
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$ |
1.49 |
|
Cumulative effect |
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(.03 |
) |
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Net income |
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$ |
.60 |
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$ |
.60 |
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$ |
1.48 |
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$ |
1.49 |
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Weighted-average shares: |
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Basic |
|
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73,833 |
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|
81,699 |
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|
76,326 |
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|
84,737 |
|
Diluted |
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|
77,386 |
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|
83,651 |
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|
78,887 |
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|
86,482 |
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Cash dividends declared per common share |
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$ |
.16 |
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$ |
.15 |
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$ |
.48 |
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$ |
.45 |
|
See notes to consolidated financial statements.
4
Manor Care, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended September 30 |
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2006 |
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2005 |
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(In thousands) |
|
Operating Activities |
|
|
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|
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Net income |
|
$ |
116,582 |
|
|
$ |
128,629 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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|
108,820 |
|
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|
103,668 |
|
Asset impairment and other non-cash charges |
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|
15,050 |
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|
2,451 |
|
Stock options and restricted stock compensation |
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|
14,980 |
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|
4,819 |
|
Early extinguishment of debt |
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|
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|
|
4,053 |
|
Provision for bad debts |
|
|
42,920 |
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|
23,388 |
|
Deferred income taxes |
|
|
(20,559 |
) |
|
|
(4,221 |
) |
Net (gain) loss on sale of assets |
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|
284 |
|
|
|
(17,505 |
) |
Equity in earnings of affiliated companies |
|
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(4,558 |
) |
|
|
(4,099 |
) |
Changes in assets and liabilities, excluding sold facilities and acquisitions: |
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Receivables |
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|
(145,800 |
) |
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|
(62,567 |
) |
Prepaid expenses and other assets |
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|
9,771 |
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|
17,286 |
|
Liabilities |
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|
17,238 |
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|
94,747 |
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Total adjustments |
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|
38,146 |
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|
162,020 |
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Net cash provided by operating activities |
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|
154,728 |
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|
290,649 |
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Investing Activities |
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Investment in property and equipment |
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(105,759 |
) |
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|
(97,137 |
) |
Investment in systems development |
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|
(2,822 |
) |
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|
(1,888 |
) |
Investment in partnership |
|
|
(9,275 |
) |
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|
Acquisitions |
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|
(19,298 |
) |
|
|
(7,086 |
) |
Proceeds from sale of assets |
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|
40 |
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|
27,909 |
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|
Net cash used in investing activities |
|
|
(137,114 |
) |
|
|
(78,202 |
) |
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|
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|
|
Financing Activities |
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|
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|
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|
|
Net borrowings under revolving credit facility |
|
|
18,800 |
|
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|
|
Proceeds from issuance of senior notes |
|
|
250,000 |
|
|
|
400,000 |
|
Principal 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 |
|
|
|
9,185 |
|
Excess tax benefits from share-based payment arrangements |
|
|
17,319 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(14,608 |
) |
|
|
(101,493 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
3,006 |
|
|
|
110,954 |
|
Cash and cash equivalents at beginning of period |
|
|
12,293 |
|
|
|
32,915 |
|
|
|
|
|
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|
|
Cash and cash equivalents at end of period |
|
$ |
15,299 |
|
|
$ |
143,869 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
Manor Care, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
Note 1 Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of Manor Care, Inc. (the Company), all
adjustments considered necessary for a fair presentation are included. Operating results for the
nine months ended September 30, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.
The balance sheet at December 31, 2005 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. For further information, refer
to the consolidated financial statements and footnotes thereto included in Manor Care, Inc.s
annual report on Form 10-K for the year ended December 31, 2005.
At September 30, 2006, the Company operated 276 skilled nursing facilities, 65 assisted living
facilities, 114 hospice and home health offices, and 91 outpatient therapy clinics.
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
|
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|
|
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Long-Term |
|
|
Hospice and |
|
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|
|
|
|
|
Care |
|
|
Home Health |
|
|
Other |
|
|
Total |
|
|
|
(In thousands) |
|
Balance at January 1, 2006 |
|
$ |
11,045 |
|
|
$ |
36,384 |
|
|
$ |
55,928 |
|
|
$ |
103,357 |
|
Goodwill from acquisitions |
|
|
438 |
|
|
|
18,329 |
|
|
|
10,632 |
|
|
|
29,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
11,483 |
|
|
$ |
54,713 |
|
|
$ |
66,560 |
|
|
$ |
132,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Liabilities
At September 30, 2006 and December 31, 2005, workers compensation liability consisted of
short-term reserves of $21.2 million and $20.8 million, respectively, which were included in
accrued insurance liabilities, and long-term reserves of $39.0 million and $40.5 million,
respectively, which were included in other long-term liabilities. The expense for workers
compensation was $5.6 million and $18.6 million for the three and nine months ended September 30,
2006, respectively,
6
and $5.3 million and $22.1 million for the three and nine months ended September 30, 2005,
respectively. Although management believes that the Companys liability reserves are adequate,
there can be no assurance that these reserves will not require material adjustment in future
periods. See Note 7 for discussion of the Companys general and professional liability.
Stock-Based Compensation
Compensation costs subject to graded vesting based on a service condition are amortized to expense
on the straight-line method.
New Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. Management is in the process of evaluating the
impact of adopting FIN 48.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (Statement 157).
Statement 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. Statement
157 applies under other accounting pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this statement does not require any new fair value
measurements. Statement 157 is effective for fiscal years beginning after November 15, 2007.
Management is in the process of evaluating the impact of adopting Statement 157.
In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132R
(Statement 158). Statement 158 requires an employer to (1) recognize a plans funded status on its
consolidated balance sheet, (2) recognize as a component of other comprehensive income, net of tax,
the gains or losses and prior service costs or credits that arise during the period, but are not
recognized as components of net periodic benefit costs, (3) disclose additional information about
certain effects on net periodic benefit cost for the next fiscal year, and (4) measure a plans
assets and obligations as of the end of the employers fiscal year. Items 1-3 are effective as of
December 31, 2006 for the Company. Item 4 is effective for fiscal years ending after December 15,
2008, but the Company already measures its plan assets and obligations as of December 31. There is
no change in the income statement recognition of benefit costs. Management is in the process of
evaluating the impact of adopting Statement 158.
7
Reclassification
Certain reclassifications affecting long-term debt due within one year and long-term debt have been
made in the 2005 financial statements to conform with the 2006 presentation.
Note 2 Asset Impairment
During the Companys quarterly review of long-lived assets in the first quarter of 2006, management
determined that its medical transcription business should be written down by $11.1 million ($7.0
million after tax, or $.09 per share) based on its estimated realizable value. During March, the
Company was notified that its largest medical transcription customer would not agree to a price
increase, adversely affecting the future profitability of this business. As a result, the Company
decided to exit this business and is in discussions with a third party to evaluate alternatives.
The transcription business is not included in the Companys reportable segments.
Note 3 Debt
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Revolving credit facility |
|
$ |
41,600 |
|
|
$ |
22,800 |
|
Senior Notes, 6.25%, due May 1, 2013 (1) |
|
|
199,589 |
|
|
|
199,542 |
|
Convertible Senior Notes: |
|
|
|
|
|
|
|
|
2.125%, due April 15, 2023: (2) |
|
|
|
|
|
|
|
|
Old Notes |
|
|
6,552 |
|
|
|
6,552 |
|
New Notes |
|
|
93,433 |
|
|
|
93,433 |
|
2.125%, due August 1, 2035 (3) |
|
|
400,000 |
|
|
|
400,000 |
|
2.0%, due June 1, 2036 |
|
|
250,000 |
|
|
|
|
|
Other debt |
|
|
3,523 |
|
|
|
3,914 |
|
Capital lease obligations |
|
|
5,732 |
|
|
|
6,860 |
|
|
|
|
|
|
|
|
|
|
|
1,000,429 |
|
|
|
733,101 |
|
Less amounts due within one year |
|
|
44,220 |
|
|
|
25,435 |
|
|
|
|
|
|
|
|
Long-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 |
In June 2006, the Company amended its five-year, $300 million revolving credit facility. The
amended credit facility changed the existing credit facility, primarily, by (1) increasing the
8
unsecured credit availability by $100 million to $400 million, with the uncommitted option to
increase the facility by up to an additional $100 million (accordion feature), (2) changing the
expiration date from May 27, 2010 to June 22, 2011, and (3) decreasing the interest rate margin and
facility fee. As of September 30, 2006, $41.6 million was outstanding under this facility, and
after consideration of usage for letters of credit, $313.0 million, plus the accordion feature, was
available for future borrowing.
In May 2006, the Company issued $250 million principal amount of 2.0% convertible senior notes due
in 2036 (the 2036 Notes) in a private placement. Starting with the six-month period beginning June
1, 2013, the Company may under certain circumstances be obligated to pay contingent interest to the
holders of the 2036 Notes. The Companys obligation to pay contingent interest is considered to be
an embedded derivative, and the value is not material. The Company registered the Notes with the
Securities and Exchange Commission in August 2006. The Notes are guaranteed by substantially all
of the Companys subsidiaries.
The 2036 Notes are convertible into cash and, if applicable, shares of the Companys common stock
based on an initial conversion rate, subject to adjustment, of 20.0992 shares per $1,000 principal
amount of 2036 Notes (which represents an initial conversion price of approximately $49.75 per
share), only under the following circumstances: (1) if the average of the last reported sales
prices of the Companys common stock for the 20 trading days immediately prior to the conversion
date is greater than or equal to 130 percent of the conversion price per share of common stock on
such conversion date; (2) if the Company has called the Notes for redemption; (3) upon the
occurrence of specified corporate transactions; or (4) if the credit ratings assigned to the 2036
Notes decline to certain levels. In general, upon conversion of a note, a holder will receive (a)
cash equal to the lesser of the principal amount of the note or the conversion value of the note
and (b) common stock of the Company for any conversion value in excess of the principal amount.
At its option, the Company may redeem the 2036 Notes on or after June 1, 2013 for cash at 100
percent of the principal amount. The holders of the 2036 Notes may require the Company to purchase
all or a portion of their notes on June 1, 2013 or if certain fundamental changes occur, in each
case at a repurchase price in cash equal to 100 percent of the principal amount of the repurchased
2036 Notes.
The net proceeds from the issuance of the 2036 Notes were $244.3 million, after deducting fees and
expenses. The Company used the net proceeds to purchase its common stock (a portion of which
purchase was completed under an accelerated share repurchase agreement, as discussed in Note 4).
9
Note 4 Stock Purchase
As of December 31, 2005, the Company had remaining authority to purchase $40.9 million of its
common stock. In 2006, the Company announced that its Board of Directors authorized management to
spend an additional $400 million to purchase common stock. The Company purchased 5.8 million
shares during the first nine months of 2006 for $270.6 million, including 2.0 million shares as
part of an accelerated share repurchase (ASR) agreement described below. At September 30, 2006,
the Company had remaining unused repurchase authority of $170.3 million.
In May 2006, the Company purchased 2.0 million shares of its common stock under an accelerated
share repurchase (ASR) agreement with an investment bank for an aggregate cost of $99.9 million.
The agreement allowed the Company to repurchase the shares immediately, while the investment bank
purchased the shares in the market over time. The ASR agreement was subject to a market price
adjustment based on the volume-weighted average price during the contract period, which was subject
to an upper and lower limit. 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 the price adjustment.
The ASR agreement and related price adjustment were recorded as treasury stock in shareholders
equity.
Note 5 Stock-Based Compensation
The Company has a stock plan (Equity Plan) that was approved by shareholders, as explained more
fully below. Under the Equity Plan, the Company has issued non-qualified stock options, restricted
stock (time- and performance-vested), and restricted stock units. The Company has another plan
under which it has awarded cash-settled stock appreciation rights (SARs). Prior to January 1,
2006, the Company accounted for these plans under the recognition and measurement provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, as permitted by FASB Statement No. 123 Accounting for Stock-Based
Compensation (Statement 123). The Company recognized stock-based compensation expense for all
awards in its results of operations, except for stock options. Effective January 1, 2006, the
Company adopted the fair-value recognition provisions of FASB Statement No. 123R, Share-Based
Payment (Statement 123R), using the modified-prospective-transition method. Under this transition
method, compensation cost recognized in 2006 includes:
|
|
|
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
|
|
|
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 Companys 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. |
Based on the method of adoption, the Company has not restated its stock-based compensation expense
recorded in prior years. In the first nine months of 2006 and 2005, the Companys income statement
included compensation cost related to these plans of $27.4 million and $10.3 million, respectively,
and an income tax benefit of $8.8 million and $3.0 million, respectively, excluding the cumulative
effect as previously discussed.
As a result of adopting Statement 123R, the Companys pretax income for the first nine months of
2006 was lower by $3.8 million ($2.4 million after tax, or $.03 per share), due to expensing its
stock options. Prior to adoption of Statement 123R, the Company presented all tax benefits of
deductions resulting from the exercise of its stock options as operating cash flows in the
Statement of Cash Flows. Statement 123R requires the cash flows resulting from the tax benefits of
tax deductions in excess of the compensation cost recognized for those options (excess tax
deductions) to be classified as financing cash flows. The $17.3 million of excess tax benefits
classified as a financing cash flow for the first nine months of 2006 would have been classified as
an operating cash flow if the Company had not adopted Statement 123R.
The following table illustrates the effect on net income and earnings per share in the three and
nine months ended September 30, 2005 as if the Company had applied the fair-value recognition
provisions of Statement 123 to stock-based employee compensation for its options. Effective March
15, 2005, stock options were awarded to executive officers that vest immediately, which resulted in
pro forma expense, net of tax, of $4.2 million. In addition, the vesting of the stock options
awarded in February 2003 and 2004 with an original three-year vesting were accelerated to vest
immediately. The accelerated vesting of prior-year awards resulted in additional pro forma
expense, net of related tax effects, of $3.0 million, as included in the table below. The Company
accelerated the vesting of the prior-year awards in order to avoid compensation expense when
Statement 123R was adopted.
11
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
|
|
(In thousands, except earnings per share) |
|
Net income as reported |
|
$ |
50,187 |
|
|
$ |
128,629 |
|
Deduct: 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 |
|
|
$ |
118,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share as reported: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.61 |
|
|
$ |
1.52 |
|
Diluted |
|
$ |
.60 |
|
|
$ |
1.49 |
|
|
|
|
|
|
|
|
|
|
Earnings per share pro forma: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
.61 |
|
|
$ |
1.40 |
|
Diluted |
|
$ |
.60 |
|
|
$ |
1.36 |
|
Plan Information
The Companys Amendment and Restatement of the Equity Incentive Plan (Equity Plan) that was
approved by shareholders in May 2004 allows the Company to grant awards of non-qualified stock
options, incentive stock options, restricted stock, restricted stock units and stock appreciation
rights to key employees, consultants and directors. A maximum of 10,000,000 shares of common stock
are authorized for issuance under the Equity Plan, with no more than 3,750,000 shares to be granted
as restricted stock or restricted stock units. Shares covered by expired or canceled options, by
surrender or repurchase of restricted stock, or by shares withheld for the exercise price or tax
withholding thereon, may also be awarded under the Equity Plan. The Equity Plan replaced the
Companys previous key employee stock option plan, outside director stock option plan, and key
senior management employee restricted stock plan. Under the Equity Plan, there were 4.9 million
shares available for future awards at September 30, 2006, excluding performance-vested awards that
have not been issued. Generally, the Company uses treasury shares when issuing shares for equity
awards.
As of September 30, 2006, there was $21.7 million of total unrecognized compensation cost related
to nonvested awards. The awards include stock options, restricted stock, and restricted stock
units, but exclude performance-vested restricted stock and SARs. The cost is expected to be
recognized over a weighted-average period of 5.1 years. Shares delivered to the Company by
employees to cover the payment of the option price and tax withholdings of the option exercise or
restricted stock had a value of $56.4 million for the first nine months of 2006. The cash received
for the exercise of stock options was $14.4 million for the first nine months of 2006.
12
Stock Options. The exercise price of each option equals the market closing price of the
Companys stock on the day prior to date of grant. An options maximum term is 10 years for
pre-2006 awards and seven years for 2006 awards. For all nonvested options, the options cliff vest
in three years, with the exception that an employee eligible for normal retirement has a one-year
cliff-vesting period. Dividends are not paid on unexercised options.
The following table summarizes activity in the Companys stock option plans for the first nine
months of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Value |
|
|
Shares |
|
Price |
|
Term (years) |
|
(In thousands) |
Outstanding at Dec. 31, 2005 |
|
|
5,126,194 |
|
|
$ |
27.89 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
690,398 |
|
|
|
41.45 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4,050 |
) |
|
|
29.71 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,134,179 |
) |
|
|
25.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Sept. 30, 2006 |
|
|
3,678,363 |
|
|
|
32.07 |
|
|
|
5.2 |
|
|
$ |
74,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at Sept. 30, 2006 |
|
|
3,228,363 |
|
|
|
31.06 |
|
|
|
5.0 |
|
|
$ |
68,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding options are the options that are expected to vest. During the first nine months of
2006, 290,398 options were granted under the Equity Plans reload feature, and the fair value was
expensed immediately because the options were exercisable on the date of grant. The reload feature
allows an employee to exercise an option by delivering shares of the Companys common stock to
cover the options exercise price and withholding taxes. The employee is automatically granted an
additional option for the shares of common stock delivered to the Company. The weighted-average
grant-date fair value of options granted in the first nine months of 2006 was $9.04 using the
Black-Scholes option valuation model with the following assumptions: weighted-average expected
volatility 28 percent (range of 21-33 percent), weighted-average expected term 3.3 years,
weighted-average dividend yield 1.6 percent and risk-free rate range of 4.5-5.1 percent. The
expected volatility was based on historical volatility of the Companys daily stock price close
over a specified period. The expected term was based on the historical exercise patterns, if
available, for each option award. The Company granted 984,518 options in the first nine months of
2005 with a weighted-average grant-date fair value of $11.42. The total intrinsic value of options
exercised during the first nine months of 2006 was $46.1 million.
Restricted Stock. In the first nine months of 2006, the non-management members of the
Companys Board of Directors were issued an aggregate 15,400 restricted shares with a grant-date
fair value of $45.06 per share, which vest at retirement. In the first nine months of 2005,
non-management directors and certain executive officers were issued an aggregate 286,090
13
restricted shares with a weighted-average grant-date fair value of $35.43 per share. The holders
of restricted stock are paid cash dividends that are not forfeitable.
The following table summarizes restricted stock activity for the first nine months of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
|
|
Shares |
|
Fair Value |
Restricted stock at Dec. 31, 2005 |
|
|
999,489 |
|
|
$ |
20.40 |
|
Issue of performance-vested |
|
|
95,737 |
|
|
|
39.77 |
|
Issue of time-vested |
|
|
15,400 |
|
|
|
45.06 |
|
Restrictions lapse due to retirement |
|
|
(296,816 |
) |
|
|
16.71 |
|
Delivered for tax withholdings |
|
|
(38,687 |
) |
|
|
37.79 |
|
|
|
|
|
|
|
|
|
|
Restricted stock at Sept. 30, 2006 |
|
|
775,123 |
|
|
|
23.83 |
|
|
|
|
|
|
|
|
|
|
The 2005 performance-vested restricted stock awards were issued upon certification by the
Compensation Committee, as discussed below, but remain restricted until retirement. The
compensation expense related to time-vested restricted stock issued prior to 2006 is amortized
based on the specified vesting period or up to the employees expected retirement date, as stated
in the award agreement. An employees retirement before the expected retirement date requires an
acceleration of any remaining unrecognized compensation expense. During the first half of 2006,
the Company continued its acceleration of the amortization of compensation expense related to
certain awards based on the announcement in the fourth quarter of 2005 of certain employees actual
retirement dates. Because the Company adopted Statement 123R, any new or modified retirement date
vested awards after December 31, 2005 are required to be amortized up to the employees retirement
eligible date. During the second quarter of 2006, the non-management directors were issued
restricted stock valued at $0.7 million, which was immediately expensed. The Company recorded
compensation expense for time-vested restricted stock of $4.3 million and $2.3 million in the first
nine months of 2006 and 2005, respectively. If the Company had recorded the expense based on the
specified vesting period or up to the employees retirement eligible dates, the Company would have
expensed $0.9 million and $9.6 million for the first nine months of 2006 and 2005, respectively.
Performance-Vested Restricted Stock. In 2005, contingent upon the achievement of certain
performance-based criteria for each year, certain executive officers were awarded restricted stock
for 2005, 2006 and 2007, which vest at the end of the respective year but remain restricted until
retirement. For 2005, 95,737 restricted shares with a fair value of $39.77 per share were issued
in January 2006, after the Compensation Committee of the Board of Directors certified the
performance against the criteria previously set by the Committee. In 2006, similar awards were
granted for 2006, 2007 and 2008. For performance-vested restricted stock related to
14
2006, there are target awards of 93,533 shares with a weighted-average grant-date fair value of
$37.28. Depending on the Companys actual performance, the awards could range from zero shares to
225 percent of the target shares. The Company accrues the expense based on the number of awards
that are probable of vesting over the year the award is earned.
Restricted Stock Units. Generally, the restricted stock units vest one third on each of the
third, fourth and fifth anniversary of the grant date. The units earn dividend equivalents that
will be forfeited if the original award does not vest. The Company issued its first restricted
stock units in the fourth quarter of 2005.
The following table summarizes restricted stock units, excluding dividend equivalents, for the
first nine months of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
|
|
Units |
|
Fair Value |
Restricted units at Dec. 31, 2005 |
|
|
97,300 |
|
|
$ |
37.05 |
|
Granted |
|
|
192,800 |
|
|
|
39.64 |
|
Forfeited |
|
|
(8,450 |
) |
|
|
37.71 |
|
|
|
|
|
|
|
|
|
|
Restricted units at Sept. 30, 2006 |
|
|
281,650 |
|
|
|
38.81 |
|
|
|
|
|
|
|
|
|
|
Cash-Settled Stock Appreciation Rights. In 2006, the Company changed from intrinsic value to
fair value for valuing its SARs. Excluding the cumulative effect, the amount expensed for the
first nine months is not materially different from the amount that would have been expensed under
the intrinsic-value method. The SARs have a three-year cliff vest and a maximum term of 10 years.
Substantially all of the outstanding SARS are expected to vest. During the first nine months of
2006, SAR payments were $13.0 million. Management does not anticipate granting any additional
SARs.
The following table summarizes SAR activity for the first nine months of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
|
Number |
|
Exercise |
|
Contractual |
|
Value |
|
|
of SARs |
|
Price |
|
Term (years) |
|
(In thousands) |
Outstanding at Dec. 31, 2005 |
|
|
1,587,050 |
|
|
$ |
25.76 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(74,725 |
) |
|
|
32.35 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(529,600 |
) |
|
|
18.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at Sept. 30, 2006 |
|
|
982,725 |
|
|
|
29.17 |
|
|
|
7.0 |
|
|
$ |
22,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at Sept. 30, 2006 |
|
|
317,625 |
|
|
|
17.56 |
|
|
|
5.7 |
|
|
$ |
11,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Note 6 Revenues
Revenues for certain health care services are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Skilled nursing and assisted living services |
|
$ |
756,097 |
|
|
$ |
709,203 |
|
|
$ |
2,235,034 |
|
|
$ |
2,162,692 |
|
Hospice and home health services |
|
|
127,918 |
|
|
|
99,450 |
|
|
|
348,063 |
|
|
|
292,263 |
|
Rehabilitation services
(excludes intercompany revenues) |
|
|
22,931 |
|
|
|
24,600 |
|
|
|
71,857 |
|
|
|
73,972 |
|
Other services |
|
|
8,569 |
|
|
|
7,026 |
|
|
|
24,070 |
|
|
|
24,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
915,515 |
|
|
$ |
840,279 |
|
|
$ |
2,679,024 |
|
|
$ |
2,553,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Contingencies
One or more subsidiaries or affiliates of the Company have been identified as potentially
responsible parties (PRPs) in a variety of actions (the Actions) relating to waste disposal sites
which allegedly are subject to remedial action under the Comprehensive Environmental Response
Compensation Liability Act, as amended, 42 U.S.C. Sections 9601 et seq. (CERCLA) and similar state
laws. CERCLA imposes retroactive, strict joint and several liability on PRPs for the costs of
hazardous waste clean-up. The Actions arise out of the alleged activities of Cenco, Incorporated
and its subsidiary and affiliated companies (Cenco). Cenco was acquired in 1981 by a wholly owned
subsidiary of the Company. The Actions allege that Cenco transported and/or generated hazardous
substances that came to be located at the sites in question. Environmental proceedings such as the
Actions may involve owners and/or operators of the hazardous waste site, multiple waste generators
and multiple waste transportation disposal companies. Such proceedings involve efforts by
governmental entities and/or private parties to allocate or recover site investigation and clean-up
costs, which costs may be substantial. The potential liability exposure for currently-pending
environmental claims and litigation, without regard to insurance coverage, cannot be quantified
with precision, because of the inherent uncertainties of litigation in the Actions and the fact
that the ultimate cost of the remedial actions for some of the waste disposal sites where
subsidiaries or affiliates of the Company are alleged to be a potentially responsible party has not
yet been quantified. At September 30, 2006 and December 31, 2005, the Company had $4.8 million
accrued in other long-term liabilities based on its current assessment of the likely outcome of the
Actions. The amount of the Companys reserve is based on managements continual monitoring of the
litigation activity, estimated clean-up costs and the portion of the liability for which the
Company is responsible. At September 30, 2006 and December 31, 2005, there were no receivables
related to insurance recoveries.
The Company is party to various other legal matters arising in the ordinary course of business
including patient care-related claims and litigation. At September 30, 2006 and December 31,
16
2005, the general and professional liability consisted of short-term reserves of $64.9 million and
$61.8 million, respectively, which were included in accrued insurance liabilities, and long-term
reserves of $115.0 million and $118.5 million, respectively, which were included in other long-term
liabilities. The expense for general and professional liability claims, premiums and
administrative fees was $17.7 million and $53.7 million for the three and nine months ended
September 30, 2006, respectively, and $18.1 million and $54.5 million for the three and nine months
ended September 30, 2005, respectively, which was included in operating expenses. Although
management believes that the Companys liability reserves are adequate, there can be no assurance
that such provision and liability will not require material adjustment in future periods.
Note 8 Earnings Per Share
The calculation of earnings per share (EPS) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except earnings per share) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic EPS income before
cumulative effect |
|
$ |
46,502 |
|
|
$ |
50,187 |
|
|
$ |
119,058 |
|
|
$ |
128,629 |
|
After-tax amount of interest expense on
Convertible Senior Notes (Old Notes) |
|
|
27 |
|
|
|
27 |
|
|
|
82 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted EPS |
|
$ |
46,529 |
|
|
$ |
50,214 |
|
|
$ |
119,140 |
|
|
$ |
128,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS weighted-average shares |
|
|
73,833 |
|
|
|
81,699 |
|
|
|
76,326 |
|
|
|
84,737 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
961 |
|
|
|
1,105 |
|
|
|
960 |
|
|
|
1,077 |
|
Restricted stock or units |
|
|
81 |
|
|
|
|
|
|
|
51 |
|
|
|
|
|
Convertible Senior Notes |
|
|
2,511 |
|
|
|
789 |
|
|
|
1,550 |
|
|
|
649 |
|
Forward contract |
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS
adjusted for weighted-average
shares and assumed conversions |
|
|
77,386 |
|
|
|
83,651 |
|
|
|
78,887 |
|
|
|
86,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS Income before cumulative effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.63 |
|
|
$ |
.61 |
|
|
$ |
1.56 |
|
|
$ |
1.52 |
|
Diluted |
|
$ |
.60 |
|
|
$ |
.60 |
|
|
$ |
1.51 |
|
|
$ |
1.49 |
|
17
Options to purchase 0.5 million shares of the Companys common stock in the first nine months
of 2005 were not included in the computation of diluted EPS, because the options average exercise
price of $38 was greater than the average market price of the common shares.
The Companys warrants related to its $400 million convertible senior notes due in 2035 were not
included in the computation of diluted EPS, because the warrants current conversion price of
$59.62 was greater than the average market price of the common shares.
Note 9 Employee Benefit Plans
The Company has two qualified and two non-qualified defined benefit pension plans included in the
table below. Two of the plans future benefits are frozen. The components of net pension cost are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Service cost |
|
$ |
806 |
|
|
$ |
429 |
|
|
$ |
2,398 |
|
|
$ |
1,288 |
|
Interest cost |
|
|
1,165 |
|
|
|
990 |
|
|
|
3,370 |
|
|
|
2,969 |
|
Expected 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 |
|
|
|
1,471 |
|
Amortization of net loss |
|
|
299 |
|
|
|
235 |
|
|
|
904 |
|
|
|
705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
1,792 |
|
|
$ |
949 |
|
|
$ |
5,114 |
|
|
$ |
2,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Segment Information
The Company provides a range of health care services. The Company has two reportable operating
segments long-term care, which includes the operation of skilled nursing and assisted living
facilities, and hospice and home health. The Other category includes the non-reportable segments
and corporate items. The revenues in the Other category include services for rehabilitation and
other services. Asset information, including capital expenditures, is not reported by segment by
the Company. Operating performance represents revenues less operating expenses and does not
include general and administrative expenses, depreciation and amortization, asset impairment, other
income and expense items, income taxes and cumulative effect.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
Hospice and |
|
|
|
|
|
|
|
|
|
Care |
|
|
Home Health |
|
|
Other |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Three months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
756,097 |
|
|
$ |
127,918 |
|
|
$ |
31,500 |
|
|
$ |
915,515 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
29,148 |
|
|
|
29,148 |
|
Depreciation and amortization |
|
|
34,792 |
|
|
|
812 |
|
|
|
1,128 |
|
|
|
36,732 |
|
Operating margin |
|
|
138,671 |
|
|
|
21,465 |
|
|
|
2,884 |
|
|
|
163,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
709,203 |
|
|
$ |
99,450 |
|
|
$ |
31,626 |
|
|
$ |
840,279 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
27,225 |
|
|
|
27,225 |
|
Depreciation and amortization |
|
|
32,808 |
|
|
|
761 |
|
|
|
1,023 |
|
|
|
34,592 |
|
Operating margin |
|
|
131,448 |
|
|
|
17,437 |
|
|
|
3,240 |
|
|
|
152,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
2,235,034 |
|
|
$ |
348,063 |
|
|
$ |
95,927 |
|
|
$ |
2,679,024 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
85,497 |
|
|
|
85,497 |
|
Depreciation and amortization |
|
|
102,897 |
|
|
|
2,312 |
|
|
|
3,611 |
|
|
|
108,820 |
|
Operating margin |
|
|
404,197 |
|
|
|
56,346 |
|
|
|
6,970 |
|
|
|
467,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
2,162,692 |
|
|
$ |
292,263 |
|
|
$ |
98,285 |
|
|
$ |
2,553,240 |
|
Intercompany revenues |
|
|
|
|
|
|
|
|
|
|
72,615 |
|
|
|
72,615 |
|
Depreciation and amortization |
|
|
96,968 |
|
|
|
2,331 |
|
|
|
4,369 |
|
|
|
103,668 |
|
Operating margin |
|
|
382,641 |
|
|
|
44,704 |
|
|
|
9,370 |
|
|
|
436,715 |
|
Note 11
Subsequent Event
On October 31, 2006, the Company elected to terminate one of its qualified defined benefit pension
plans effective December 31, 2006. This plan, with frozen benefits prior to 1997, covers certain
non-union employees. In conjunction with this process, the Company will be making lump-sum
distributions to terminated vested participants who have elected this option in the fourth quarter
of 2006. In the first quarter of 2007, the Company will make either lump-sum distributions to
participants or transfer account balances to a licensed insurance company for all remaining vested
participants based on the option elected by the participants. In accordance with FASB Statement
No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, these actions will result in a partial settlement in the fourth
quarter of 2006 and a full settlement in the first quarter of 2007. Depending on the interest
rate, election chosen by the participants, associated fees and return on assets, the Company
expects a total pretax charge of approximately $33 million, with about $7 million to $10 million of
this occurring in the fourth quarter and the remainder in the first quarter of 2007. At this time,
the Company expects this charge to be a non-cash charge, because the pension assets are sufficient
to cover the pension obligations. The charge to be recorded in the
19
fourth quarter is dependent on the terminated vested participants elections, because the accounting rules do not allow recognition of the settlement until the Company is relieved of its
obligation.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations Overview
Federal Medicare Payment Legislation. On July 27, 2006, the Centers for Medicare & Medicaid
Services, or CMS, announced a market basket increase of 3.1 percent effective October 1, 2006 for
our skilled nursing facilities.
Critical Accounting Policies
General and Professional Liability. Our general and professional reserves include amounts for
patient care-related claims and incurred but not reported claims. The amount of our reserves is
determined based on an estimation process that uses information obtained from both Company-specific
and industry data. The estimation process requires us to continuously monitor and evaluate the
life cycle of the claims. Using data obtained from this monitoring and our assumptions about
emerging trends, we estimate the size of ultimate claims based on our historical experience and
other available industry information. The most significant assumptions used in the estimation
process include determining the trend in costs, the expected cost of claims incurred but not
reported, and the expected costs to settle unpaid claims. Our assumptions take into consideration
our internal efforts to contain our costs by reviewing our risk management programs, our
operational and clinical initiatives, and other industry changes affecting the long-term care
market. In comparing the first nine months of 2006 with the same period in 2005, the number of new
claims is similar, and our average settlement cost per claim has decreased. Our accrual for
current claims is $5.1 million per month. Although we believe our liability reserves are adequate
and appropriate, we can give no assurance that these reserves will not require material adjustment
in future periods.
Workers Compensation Liability. Our workers compensation reserves are determined based on
an estimation process that uses Company-specific data. We continuously monitor the claims and
develop information about the ultimate cost of the claims based on our historical experience.
During 2003 and continuing into 2004, we expanded and increased attention to our safety, training
and claims management programs. The number of new claims in the first nine months of 2006
decreased in comparison to the prior-year period. As a result, our workers compensation expense
decreased $3.5 million for the first nine months of 2006 in comparison to the prior-year period.
Although we believe our liability reserves are adequate and appropriate,
20
we can give no assurance that these reserves will not require material adjustment in future periods.
Results of Operations
Quarter and Year-To-Date September 30, 2006 Compared with September 30, 2005
Revenues Quarter. Our revenues increased $75.2 million, or 9 percent, from the third
quarter of 2005. Revenues from our long-term care segment (skilled nursing and assisted living
facilities) increased $46.9 million, or 7 percent, due to increases in rates/patient mix of $41.8
million and occupancy of $8.3 million that were partially offset by a decrease in capacity of $3.2
million. Our revenues from the hospice and home health segment increased $28.5 million, or 29
percent, primarily from an increase in the number of patients utilizing our hospice services.
Revenues First Nine Months. Our revenues in the first nine months of 2006 increased $125.8
million, or 5 percent, compared with the first nine months of 2005. Our revenues increased $178.5
million, or 7 percent, when excluding $52.7 million of prior-year revenues associated with provider
assessments for several states, including Pennsylvania, in the first quarter of 2005. See the
explanation below on how revenues and expenses are affected by provider assessments.
The Medicaid program is financed jointly by the federal government and the states. Under federal
law, the states share of Medicaid costs generally must be financed from state or local public
funds. However, the federal government provides additional federal matching funds to the states
for Medicaid reimbursement purposes, based partly on provider assessments. Implementation of a
provider assessment plan requires approval by CMS in order to qualify for the federal matching
funds. These plans usually take the form of a bed tax or quality assessment fee, which is imposed
uniformly across classes of providers within the state. In turn, the state generally utilizes the
additional federal matching funds generated by the assessment to pay increased reimbursement rates
to the providers, which often include repayment of a portion of the provider assessment based on
the providers percentage of Medicaid patients. In January 2005, CMS approved the Pennsylvania
provider assessment, retroactive to July 1, 2003. The provider assessment is recorded in operating
expenses. The associated Medicaid rate increase is recorded in revenues.
Revenues from our long-term care segment, excluding the prior-year revenues associated with
provider assessments, increased $125.0 million, or 6 percent, due to increases in rates/patient mix
of $117.5 million and occupancy of $30.8 million that were partially offset by a decrease in
capacity of $23.3 million. Our revenues from the hospice and home health segment increased $55.8
million, or 19 percent, primarily from an increase in the number of patients utilizing our hospice
services.
21
Revenue Factors Quarter and First Nine Months. Our average rates per day for the long-term
care segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
|
|
First Nine Months |
|
|
|
|
2006 |
|
2005 |
|
Increase |
|
2006 |
|
2005 |
|
Increase |
Medicare |
|
$ |
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 |
% |
We previously expected our average Medicare rate to decrease $17 to $20 per day in the first
quarter of 2006 as a result of the expiration of add-on payments and new patient classification
refinements. Our average Medicare rate for the first nine months of 2006 was higher than our 2005
fourth-quarter rate, because of our continuing shift to higher-acuity and higher-rate-category
patients. Our average Medicaid rate excluded prior-period revenues. The increase in overall rates
was also a result of the shift in the mix of our patients to a higher percentage of Medicare
patients.
Our occupancy levels were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
First Nine Months |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Total |
|
|
89 |
% |
|
|
88 |
% |
|
|
89 |
% |
|
|
88 |
% |
Excluding start-up facilities |
|
|
89 |
% |
|
|
88 |
% |
|
|
90 |
% |
|
|
88 |
% |
Skilled nursing facilities |
|
|
89 |
% |
|
|
89 |
% |
|
|
90 |
% |
|
|
89 |
% |
The quality mix of revenues from Medicare, private pay and insured patients that related to our
long-term care segment and rehabilitation operations increased from 71 percent for the third
quarter and first nine months of 2005 to 72 percent for the third quarter and first nine months of
2006.
Our bed capacity declined between the third quarters and first nine months of 2005 and 2006,
primarily because of the divestiture of four facilities in 2005.
Operating Expenses Quarter. Our operating expenses in the third quarter of 2006 increased
$64.3 million, or 9 percent, compared with the third quarter of 2005.
Operating expenses from our long-term care segment increased $39.7 million, or 7 percent, between
the third quarters of 2005 and 2006. The largest portion of the operating expense increase of
$16.1 million related to labor costs. Our average wage rate increased 4 percent compared with the
third quarter of 2005. The other significant operating expense increases included ancillary costs,
excluding internal labor, of $9.3 million and bad debt expense of $6.7 million. Ancillary costs,
which include various types of therapies, medical supplies and
22
prescription drugs, increased as a result of our more medically-complex patients. Bad debt expense
has increased primarily due to an increase in the aging of our accounts receivable.
Our operating expenses from our hospice and home health segment increased $24.4 million, or 30
percent, between the third quarters of 2005 and 2006. The increase in our costs was directly
related to the growth in our business. The increase related to labor costs of $13.8 million, other
nursing care costs, including medical equipment and supplies, of $3.9 million and ancillary costs,
including pharmaceuticals, of $2.9 million.
Operating Expenses First Nine Months. Our operating expenses in the first nine months of
2006 increased $95.0 million, or 4 percent, compared with the first nine months of 2005. Our
operating expenses increased $141.9 million, or 7 percent, when excluding the retroactive
prior-year provider assessments of $46.9 million for several states, including Pennsylvania, that
were recorded in the first quarter of 2005. See the discussion of provider assessments in the
Revenues section.
Excluding the prior-year provider assessments in 2005, operating expenses from our long-term care
segment increased $97.7 million, or 6 percent, between the first nine months of 2005 and 2006. The
largest portion of the operating expense increase of $36.0 million related to labor costs. The
other significant operating expense increases included ancillary costs, excluding internal labor,
of $24.0 million and bad debt expense of $20.4 million.
Our operating expenses from our hospice and home health segment increased $44.2 million, or 18
percent. The increase related to labor costs of $24.7 million, other nursing care costs, including
medical equipment and supplies, of $8.8 million, and ancillary costs, including pharmaceuticals, of
$4.8 million.
General and Administrative Expenses. Our general and administrative expenses increased $5.8
million and $24.7 million between the third quarters and first nine months of 2005 and 2006,
respectively. The costs associated with our stock-based compensation, deferred compensation plans
and non-qualified benefit plans increased $5.0 million and $17.3 million, respectively. Our 2006
third-quarter expense was higher than normal because of our stock price increase of over 11
percent, compared to a decrease in our stock price in the 2005 third quarter. Our year-to-date
expense includes costs associated with our stock price increase of over 31 percent, stock option
grants that vested immediately as a result of an option reload feature, and executive retirements
that accelerated the amortization of restricted stock expense in the first half of the year. The
remaining increases related to wages, costs associated with new computer systems and other
inflationary costs. See Note 5 to the consolidated financial statements for additional discussion
of stock-based compensation.
23
Depreciation and Amortization. We recorded a $1.5 million adjustment to correct the
amortization of leasehold improvements in the second quarter of 2005. See Note 1 to the
consolidated financial statements in our Form 10-K for the year ended December 31, 2005 for further
discussion. Excluding the leasehold improvement adjustment, our depreciation increased $2.4
million and $7.1 million between the third quarters and first nine months of 2005 and 2006,
respectively, because of the completion of new construction projects and renovations to existing
facilities.
Asset Impairment. During the first quarter of 2006, we recorded a charge of $11.1 million
($7.0 million after tax, or $.09 per share) related to the write-down of our transcription business
assets, as explained in Note 2 to the consolidated financial statements.
During the third quarter of 2005, we recorded a charge of $2.5 million related to the write-off of
one facilitys assets, which related primarily to leasehold improvements. We concluded that we
would not be able to improve the facilitys cash flow to a level sufficient to justify the asset
value. We continue to operate this leased skilled nursing facility.
Interest Expense. Interest expense decreased $2.3 million and $7.7 million between the third
quarters and first nine months of 2005 and 2006, respectively, because of lower interest rates
partially offset by higher debt levels. In May 2006, we issued $250 million principal amount of
2.0% convertible senior notes due in 2036. See Note 3 to the consolidated financial statements for
additional discussion of our debt issuance.
Early Extinguishment of Debt. In the third quarter of 2005, we redeemed the remaining $100
million of our subsidiarys 7.5% Senior Notes due in 2006 and recorded expense of $4.1 million,
including a make-whole payment for early redemption of the notes and an unwind fee related to
termination of the interest rate swap agreements.
Gain on Sale of Assets. Our gain on sale of assets in the third quarter of 2005 related
primarily to a $17.6 million gain from the sale of three, non-strategic skilled nursing facilities
in New Mexico.
Interest Income and Other. Our interest income was higher in the third quarter of 2005 as a
result of the short-term investment of our cash and cash equivalents.
Income Taxes. Our effective tax rate was 36.4 percent in the third quarter of 2006, compared
to 37.7 percent in the third quarter of 2005. Our effective tax rate in the third quarter of 2006
was lower than expected due primarily to the favorable revision of estimated tax liabilities for
prior tax years.
24
Cumulative Effect of Change in Accounting Principle. The cumulative effect of the change in
accounting for SARs of $4.0 million ($2.5 million after tax, or $.03 per share) was a result of the
adoption of Statement 123R, as discussed in Note 5 to the consolidated financial statements.
Financial Condition September 30, 2006 and December 31, 2005
Receivables increased as a result of the federal governments withholding industry providers
Medicare reimbursement payments for the last nine days of September. We received approximately $65
million in the first week of October related to this period.
Long-term debt due within one year increased, because the loans outstanding under our revolving
credit facility increased from $22.8 million at December 31, 2005 to $41.6 million at September 30,
2006.
Long-term debt increased as a result of the issuance of $250 million of convertible senior notes in
May 2006.
Liquidity and Capital Resources
Cash Flows. During the first nine months of 2006, we satisfied our cash requirements
primarily with cash generated from operating activities and issuance of convertible senior notes.
We used the cash principally for capital expenditures, acquisitions, the purchase of our common
stock, the payment of debt and the payment of dividends. Cash flows from operating activities were
$154.7 million for the first nine months of 2006 compared with $290.6 million for the first nine
months of 2005. Our operating cash flows in 2006 included an increase in accounts receivable due
to the federal government withholding industry providers Medicare reimbursement for the last nine
days of September. We received approximately $65 million in the first week of October related to
this period. We have paid about $45 million more in federal tax payments for the first nine months
of 2006 compared to the prior-year period. Our operating cash flows in 2005 included Medicare
settlement payments of $31.9 million related to the former Manor Care home office cost reports for
1997 through 1999, which are recorded as receivables and are under appeal.
Investing Activities. Our expenditures for property and equipment of $105.8 million in the
first nine months of 2006 included $41.1 million to construct new facilities and expand existing
facilities. We opened our first freestanding hospice facility in the second quarter of 2006. We
purchased one hospice and one rehabilitation business in the first nine months of 2006. We also
invested additional funds in our pharmacy partnership.
Debt Agreements. In June 2006, we amended our five-year, $300 million revolving credit
facility. The amendment increased our unsecured credit availability by $100 million to $400
million, while maintaining our uncommitted option to increase the facility by up to an additional
25
$100 million (accordion feature). The amendment also extended the expiration date to
June 22, 2011 and decreased the interest rate margin and facility fee. As of September 30, 2006,
there was $41.6 million outstanding under this facility. After consideration of usage for letters
of credit, there was $313.0 million plus the accordion feature available for future borrowing.
In May 2006, we issued $250 million of 2.0% convertible senior notes due 2036. The net proceeds
were $244.3 million, after deducting fees and expenses. We used the net proceeds to purchase our
common stock, as discussed below. See Note 3 to the consolidated financial statements for further
discussion of our debt issuance.
The holders of our $100 million Convertible Senior Notes due 2023 have the ability to convert the
notes when the average of the last reported stock price for 20 trading days immediately prior to
conversion is greater than or equal to $37.34, which it was as of September 30, 2006. The holders
of $6.6 million principal amount of the Old Notes can convert their notes into shares of our common
stock. The holders of $93.4 million principal amount of the New Notes can convert their notes into
cash for the principal value and into shares of our common stock for the excess value, if any.
In addition, the holders of the $93.4 million principal amount of New Notes, the $400 million
principal amount of 2.125% Convertible Senior Notes, and the $250 million principal amount of 2.0%
Convertible Senior Notes may require us to convert or repurchase their notes upon the occurrence of
certain events, a circumstance we currently view as remote. We are required to satisfy the
principal value in cash upon conversion or repurchase.
Stock Purchase. At December 31, 2005, we had remaining authority to purchase $40.9 million of
our common stock. In January 2006, our Board of Directors authorized us to spend up to $100
million to purchase our common stock through December 31, 2006. In May 2006, our Board authorized
an additional $300 million to purchase our common stock through December 31, 2007. With these
authorizations, we purchased 5.8 million shares in the first nine months of 2006 for $270.6
million, including 2.0 million shares as part of an accelerated share repurchase agreement. As of
September 30, 2006, we had $170.3 million remaining authority to repurchase our shares. See Note 4
to the consolidated financial statements for additional discussion of our accelerated share
repurchase agreement. We may use the shares purchased for internal stock option and 401(k) match
programs and for other uses, such as possible acquisitions.
Cash Dividends. On October 26, 2006, we announced that the Company will pay a quarterly cash
dividend of 16 cents per share to shareholders of record on November 6, 2006. This dividend will
be approximately $11.8 million and is payable November 20, 2006. Although we currently intend to
declare and pay regular, quarterly cash dividends, there can be no assurance that any dividends
will be declared, paid or increased in the future.
26
We believe that our cash flow from operations will be sufficient to cover operating needs, future
capital expenditure requirements, scheduled debt payments of miscellaneous small borrowing
arrangements and capitalized leases, cash dividends and some share repurchases. Because of our
significant annual cash flow, we believe that we will be able to refinance the major pieces of our
debt as they mature. It is likely that we will pursue growth from acquisitions, partnerships and
other ventures that we would fund from excess cash from operations, credit available under our
revolving credit facility and other financing arrangements that are normally available in the
marketplace.
Cautionary Statement Concerning Forward-Looking Statements
This report may include forward-looking statements. We have based these forward-looking statements
on our current expectations and projections about future events. We identify forward-looking
statements in this report by using words or phrases such as anticipate, believe, estimate,
expect, intend, may be, objective, plan, predict, project and will be and similar
words or phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties.
Factors which may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by us in those statements
include, among others, changes in the health care industry because of political and economic
influences; changes in Medicare, Medicaid and certain private payors reimbursement levels or
coverage requirements; existing government regulations, including applicable health care, tax, and
health and safety regulations, and changes in, or the failure to comply with, governmental
regulations or the interpretations thereof; legislative proposals for health care reform; general
economic and business conditions; conditions in financial markets; competition; our ability to
maintain or increase our revenues and control our operating costs; the ability to attract and
retain qualified personnel; changes in current trends in the cost and volume of patient
care-related claims and workers compensation claims and in insurance costs related to such claims;
and other litigation.
Although we believe the expectations reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that we will attain these expectations or that any
deviations will not be material. Except as otherwise required by the federal securities laws, we
disclaim any obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this report to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any such statement is
based.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the discussion of our market risk in our Form 10-K for the year ended December 31, 2005. In
May 2006, we issued $250 million of 2.0% convertible senior notes due 2036.
The table below provides information about our debt obligations that are sensitive to changes in
interest rates. The table presents principal cash flows and weighted-average interest rates by
expected maturity dates. We assume the holders of our $100 million and $400 million convertible
senior notes will not require us to redeem or convert the notes through 2010, and we do not expect
to redeem them in 2010. Therefore, we have included both of these notes in the Thereafter
column.
The following table provides information about our significant interest rate risk at September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
Expected 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 |
|
|
$ |
1,150,262 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate debt |
|
$ |
41,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,600 |
|
|
$ |
41,600 |
|
Average 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 banks 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. |
Item 4. Controls and Procedures
We performed an evaluation under the supervision and with the participation of our management,
including the chief executive officer, or CEO, and chief financial officer, or CFO, of the
effectiveness of the design and operation of our disclosure procedures. Based on that evaluation,
our management, including the CEO and CFO, concluded that our disclosure controls and procedures
were effective as of September 30, 2006. There were no changes in our internal control over
financial reporting in the third quarter of 2006 that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
28
Part II. Other Information
Item 1. Legal Proceedings.
See Note 7 Contingencies in the notes to the consolidated financial statements for a discussion
of litigation related to environmental matters and patient care-related claims.
Item 1A. Risk Factors.
There were no material changes in our risk factors included in our Form 10-K for the year ended
December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to stock repurchased by the Company during
the third quarter of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
Value of Shares that |
|
|
Total Number of |
|
Average |
|
Purchased as Part of |
|
May Yet Be Purchased |
|
|
Shares |
|
Price Paid |
|
Publicly Announced |
|
Under the Plans or |
Period |
|
Purchased |
|
per Share |
|
Plans or Programs (1) |
|
Programs (1) |
7/1/06-7/31/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
170,275,747 |
|
8/1/06-8/31/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
170,275,747 |
|
9/1/06-9/30/06 (2) |
|
|
76,708 |
|
|
|
(2) |
|
|
|
76,708 |
|
|
$ |
170,275,747 |
|
Total |
|
|
76,708 |
|
|
|
|
|
|
|
76,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys Board of Directors authorized the following share repurchase
programs: |
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Date |
|
Approved |
|
Expiration |
Announced |
|
(in millions) |
|
Date |
July 22, 2005 |
|
$ |
300 |
|
|
December 31, 2006 |
January 27, 2006 |
|
$ |
100 |
|
|
December 31, 2006 |
May 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
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
Retirement of M. Keith Weikel
On November 1, 2006, Paul A. Ormond, chairman, president and chief executive officer of Manor Care,
Inc., announced that M. Keith Weikel, the senior executive vice president and chief operating
officer of the Company and a member of its board of directors, will retire in December 2006.
Modification of Restricted Stock Unit Award Agreement and Non-Qualified Stock Option Agreement of
M. Keith Weikel
Also on November 1, 2006, with the consent of its Compensation Committee, the Company modified Mr.
Weikels January 31, 2006 Restricted Stock Unit Award Agreement to provide that the restricted
units thereunder would be fully vested and mature upon his termination of employment as a result of
his retirement and modified his January 31, 2006 Non-Qualified Stock Option Agreement to provide
that the stock option thereunder would be fully exercisable upon his termination of employment as a
result of his retirement.
Item 6. Exhibits.
|
|
|
S-K Item |
|
|
601 No. |
|
|
31.1*
|
|
Chief Executive Officer Certification |
|
|
|
31.2*
|
|
Chief Financial Officer Certification |
|
|
|
32.1*
|
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2*
|
|
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 |
30
Signatures
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.
|
|
|
|
|
|
Manor Care, Inc.
(Registrant)
|
|
Date November 3, 2006 |
By |
/s/ Steven M. Cavanaugh
|
|
|
|
Steven M. Cavanaugh, Vice President and |
|
|
|
Chief Financial Officer |
|
|
31
Exhibit Index
|
|
|
Exhibit |
|
|
31.1
|
|
Chief Executive Officer Certification |
|
|
|
31.2
|
|
Chief Financial Officer Certification |
|
|
|
32.1
|
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
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