Manor Care, Inc. 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 June 30, 2007
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
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(IRS Employer |
incorporation or organization)
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Identification No.) |
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333 N. Summit Street, Toledo, Ohio
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43604-2617 |
(Address of principal executive offices)
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(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 July 31, 2007.
Common stock, $0.01 par value 73,281,931 shares
Manor Care, Inc.
Form 10-Q
Table of Contents
2
Part I. Financial Information
Item 1. Financial Statements.
Manor Care, Inc.
Consolidated Balance Sheets
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June 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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(Note 1) |
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(In thousands, except share and per share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
87,436 |
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$ |
17,658 |
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Receivables, less allowances for doubtful
accounts of $84,131 and $74,644, respectively |
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550,004 |
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565,831 |
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Prepaid expenses and other assets |
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35,419 |
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34,924 |
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Deferred income taxes |
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3,289 |
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781 |
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Total current assets |
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676,148 |
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619,194 |
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Property and equipment, net of accumulated
depreciation of $917,381 and $844,471, respectively |
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1,478,898 |
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1,493,576 |
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Goodwill |
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134,621 |
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132,997 |
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Intangible assets, net of amortization of $2,236 and $1,862,
respectively |
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5,408 |
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5,782 |
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Other assets |
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132,797 |
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146,928 |
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Total assets |
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$ |
2,427,872 |
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$ |
2,398,477 |
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Liabilities And Shareholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
109,602 |
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$ |
120,621 |
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Employee compensation and benefits |
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169,549 |
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165,001 |
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Accrued insurance liabilities |
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109,066 |
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109,538 |
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Income tax payable |
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29,465 |
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10,118 |
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Other accrued liabilities |
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59,015 |
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79,904 |
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Long-term debt due within one year |
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383,762 |
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38,447 |
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Total current liabilities |
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860,459 |
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523,629 |
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Long-term debt |
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567,813 |
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955,211 |
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Deferred income taxes |
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65,358 |
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78,741 |
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Other liabilities |
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284,578 |
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267,703 |
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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, $.01 par value, 300 million shares authorized,
111.0 million shares issued |
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1,110 |
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1,110 |
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Capital in excess of par value |
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419,766 |
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407,506 |
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Retained earnings |
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1,485,352 |
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1,437,145 |
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Accumulated other comprehensive loss |
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(12,757 |
) |
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(29,217 |
) |
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1,893,471 |
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1,816,544 |
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Less treasury stock, at cost (37.8 and 38.3 million shares,
respectively) |
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(1,243,807 |
) |
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(1,243,351 |
) |
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Total shareholders equity |
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649,664 |
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573,193 |
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Total liabilities and shareholders equity |
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$ |
2,427,872 |
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$ |
2,398,477 |
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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 June 30, |
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Six Months Ended June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(In thousands, except per share amounts) |
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Revenues |
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$ |
957,780 |
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$ |
894,214 |
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$ |
1,916,846 |
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$ |
1,763,509 |
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Expenses: |
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Operating |
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790,310 |
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736,106 |
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1,580,434 |
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1,459,016 |
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General and administrative |
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53,372 |
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43,792 |
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126,875 |
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95,897 |
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Depreciation and amortization |
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37,852 |
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36,146 |
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74,839 |
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72,088 |
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Asset impairment |
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11,082 |
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881,534 |
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816,044 |
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1,782,148 |
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1,638,083 |
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Income before other income (expenses) and
income taxes |
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76,246 |
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78,170 |
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134,698 |
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125,426 |
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Other income (expenses): |
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Interest expense |
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(8,550 |
) |
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(7,779 |
) |
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(17,220 |
) |
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(14,919 |
) |
Loss on sale of assets |
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(361 |
) |
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(217 |
) |
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(5,132 |
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(159 |
) |
Equity in earnings of affiliated companies |
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525 |
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2,001 |
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984 |
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3,587 |
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Interest income and other |
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1,272 |
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393 |
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1,138 |
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1,228 |
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Total other expenses, net |
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(7,114 |
) |
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(5,602 |
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(20,230 |
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(10,263 |
) |
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Income before income taxes |
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69,132 |
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72,568 |
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114,468 |
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115,163 |
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Income taxes |
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25,488 |
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27,017 |
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40,965 |
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42,607 |
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Income before cumulative effect |
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43,644 |
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45,551 |
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73,503 |
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72,556 |
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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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$ |
43,644 |
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$ |
45,551 |
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$ |
73,503 |
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$ |
70,080 |
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Earnings per share basic: |
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Income before cumulative effect |
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$ |
.60 |
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$ |
.60 |
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$ |
1.00 |
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$ |
.94 |
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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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$ |
1.00 |
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$ |
.90 |
(a) |
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Earnings per share diluted: |
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Income before cumulative effect |
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$ |
.54 |
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$ |
.58 |
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$ |
.93 |
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$ |
.91 |
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Cumulative effect |
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(.03 |
) |
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Net income |
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$ |
.54 |
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$ |
.58 |
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$ |
.93 |
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$ |
.88 |
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Weighted-average shares: |
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Basic |
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73,231 |
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76,277 |
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73,138 |
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77,593 |
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Diluted |
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80,595 |
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78,489 |
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78,748 |
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79,658 |
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Cash dividends declared per common share |
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$ |
.17 |
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$ |
.16 |
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$ |
.34 |
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$ |
.32 |
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(a) |
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Doesnt add due to rounding |
See notes to consolidated financial statements.
4
Manor Care, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Six Months Ended June 30, |
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2007 |
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2006 |
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(In thousands) |
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Operating Activities |
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Net income |
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$ |
73,503 |
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$ |
70,080 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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74,839 |
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|
72,088 |
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Asset impairment and other non-cash charges |
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24,936 |
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|
15,050 |
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Stock option and restricted stock compensation |
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9,576 |
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|
11,338 |
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Provision for bad debts |
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|
28,335 |
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|
27,658 |
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Deferred income taxes |
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(15,891 |
) |
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(16,949 |
) |
Net loss on sale of assets |
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5,132 |
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|
159 |
|
Equity in earnings of affiliated companies |
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(984 |
) |
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(3,587 |
) |
Changes in assets and liabilities, excluding sold facilities and acquisitions: |
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Receivables |
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(40,103 |
) |
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(51,868 |
) |
Prepaid expenses and other assets |
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9,543 |
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|
2,686 |
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Liabilities |
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(7,122 |
) |
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21,866 |
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Total adjustments |
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88,261 |
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|
78,441 |
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Net cash provided by operating activities |
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|
161,764 |
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|
148,521 |
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Investing Activities |
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Investment in property and equipment |
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(53,408 |
) |
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(69,287 |
) |
Investment in systems development |
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(4,709 |
) |
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(1,424 |
) |
Investment in partnership |
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(6,185 |
) |
Acquisitions |
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(2,695 |
) |
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(19,298 |
) |
Net change in restricted cash and cash equivalents |
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(7,428 |
) |
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Proceeds from sale of assets |
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|
33,952 |
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40 |
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Net cash used in investing activities |
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(34,288 |
) |
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(96,154 |
) |
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Financing Activities |
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Net repayments under revolving credit facility |
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(36,000 |
) |
|
|
(16,800 |
) |
Proceeds from issuance of senior notes |
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|
250,000 |
|
Principal payments of long-term debt |
|
|
(8,534 |
) |
|
|
(1,032 |
) |
Payment of financing costs |
|
|
|
|
|
|
(5,547 |
) |
Purchase of common stock for treasury |
|
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|
|
|
|
(270,634 |
) |
Dividends paid |
|
|
(24,871 |
) |
|
|
(25,268 |
) |
Proceeds from exercise of stock options |
|
|
5,049 |
|
|
|
7,651 |
|
Excess tax benefits from share-based payment arrangements |
|
|
6,658 |
|
|
|
9,227 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(57,698 |
) |
|
|
(52,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
69,778 |
|
|
|
(36 |
) |
Cash and cash equivalents at beginning of period |
|
|
17,658 |
|
|
|
12,293 |
|
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|
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|
Cash and cash equivalents at end of period |
|
$ |
87,436 |
|
|
$ |
12,257 |
|
|
|
|
|
|
|
|
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
six months ended June 30, 2007 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2007.
The balance sheet at December 31, 2006 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, 2006.
At June 30, 2007, the Company operated 280 skilled nursing facilities, 65 assisted living
facilities, 122 hospice and home health offices, and 85 outpatient therapy clinics.
Comprehensive Income
Comprehensive income represents the sum of net income plus other comprehensive income (loss).
Comprehensive income was $44.2 million for the second quarter of 2007, which included net income of
$43.6 million and other comprehensive income of $0.6 million. Comprehensive income was $90.0
million for the first half of 2007, which included net income of $73.5 million and other
comprehensive income of $16.5 million. The other comprehensive income primarily represented the
remaining amortization of unrecognized pension costs related to the Companys terminated pension
plan. Comprehensive income was $45.6 million and $70.1 million for the second quarter and first
half of 2006, respectively, which represented net income.
Goodwill
During the first quarter of 2007, the Company reorganized its reporting structure by combining its
rehabilitation operating segment with its long-term care operating segment. The Company refers to
this new segment as long-term care and rehabilitation. Prior to the reorganization, rehabilitation
was included in the Other category. See Note 9 for further discussion of segments.
6
The changes in the carrying amount of goodwill by segment after the reorganization are as follows:
|
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Long-Term |
|
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Care and |
|
|
Hospice and |
|
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|
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|
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Rehabilitation |
|
|
Home Health |
|
|
Other |
|
|
Total |
|
|
|
(In thousands) |
|
Balance at January 1, 2006 |
|
$ |
66,522 |
|
|
$ |
36,384 |
|
|
$ |
451 |
|
|
$ |
103,357 |
|
Goodwill from acquisitions |
|
|
10,290 |
|
|
|
19,350 |
|
|
|
|
|
|
|
29,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
76,812 |
|
|
|
55,734 |
|
|
|
451 |
|
|
|
132,997 |
|
Goodwill from acquisitions |
|
|
1,624 |
|
|
|
|
|
|
|
|
|
|
|
1,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
78,436 |
|
|
$ |
55,734 |
|
|
$ |
451 |
|
|
$ |
134,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Liabilities
At June 30, 2007 and December 31, 2006, the workers compensation liability consisted of short-term
reserves of $20.8 million and $21.0 million, respectively, which were included in accrued insurance
liabilities, and long-term reserves of $37.0 million at each date, which were included in other
long-term liabilities. The expense for workers compensation was $5.7 million and $11.5 million
for the three and six months ended June 30, 2007, respectively, and $6.7 million and $13.0 million
for the three and six months ended June 30, 2006, 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 5 for discussion of the Companys
general and professional liability.
New Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair
Value Measurements (Statement 157), which 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 February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (Statement 159), which permits entities to voluntarily choose to measure
many financial instruments and certain other items at fair value at specified election dates. Such
election, which may be applied on an instrument-by-instrument basis, is typically irrevocable. If
the fair value option is elected for an instrument, Statement 159 specifies that all subsequent
changes in fair value for that instrument shall be reported in earnings. Statement 159
7
is effective for fiscal years beginning after November 15, 2007. Management is in the process of
evaluating the impact of adopting Statement 159.
Note 2 Divestitures
The Company had a 20 percent ownership and voting interest in two hospitals, with affiliates of
Health Management Associates, Inc. holding the remaining interest. In the first quarter of 2007,
the Company entered into an agreement to sell these investments, resulting in a net loss of $4.7
million. The transaction closed in April 2007, and the Company received $32.0 million from the
sale of these investments.
Note 3 Debt
During the second quarter of 2007, the holders of $5.3 million principal amount of New Notes due
2023 elected to convert their notes. The holders received the principal value in cash and 90,751
shares of the Companys common stock for the excess value.
The holders of the $6.6 million of Old Notes due 2023, $88.2 million of New Notes due 2023, $400
million of Convertible Senior Notes due 2035, and $250 million of Convertible Senior Notes due 2036
could convert their notes at June 30, 2007, because the Companys average stock price for the prior
20 trading days exceeded the conversion price of $37.34, $37.34, $53.70 and $64.68, respectively,
for each of the notes. The $6.6 million par value of Old Notes is only convertible into the
Companys common stock and would not utilize current assets for payment. The remaining notes
totaling $738.2 million are required to be classified as a current liability, except when the
Company has the ability and intent to finance the notes with long-term debt, such as its $400
million revolving credit facility, which matures June 22, 2011. As of June 30, 2007, there were no
loans outstanding under the revolving credit facility, and after consideration of usage for letters
of credit, $355.2 million was available for future borrowing. As a result, the Company classified
$355.2 million of these notes as long-term and the remaining $383.0 million as current.
Note 4 Income Taxes
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), which 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.
As a result of adopting FIN 48, the Company reduced retained earnings by $0.3 million. As of the
date of adoption, the total amount of unrecognized tax benefits was $11.1 million. The total
amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$4.6 million.
8
Upon adoption of FIN 48, the Company elected to make a change in accounting principle concerning
the financial statement presentation of interest and penalties related to income taxes.
Such interest and penalties are now classified in the income statement as income taxes. Prior to
the change, interest expense was classified as interest expense, interest income was classified as
interest income and other, and penalties were classified as operating expenses. Prior to
adoption, accrued interest and penalties were $0.2 million. Upon adoption, the Company increased
its accrued interest and penalties to $0.6 million.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction
and in most states. With few exceptions, the Company is no longer subject to U.S. federal, state
or local income tax examinations for years before 2003. The Internal Revenue Service has recently
completed an examination of the Companys 2002 through 2004 U.S. income tax returns, and all issues
raised for those years have been resolved.
Except for the effect of the first-quarter settlement discussed below, the Company has not
identified any positions for which it is reasonably possible that the total amount of unrecognized
tax benefit will materially increase or decrease in the next 12 months. During the first quarter
of 2007, the Company reduced its unrecognized tax benefit balance by approximately $2.0 million
related to the resolution of a dispute involving availability of tax credits in a local tax
jurisdiction. This amount reduced the effective tax rate by $1.3 million.
Note 5 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 June 30, 2007 and December 31, 2006, the Company had $4.8 million accrued
in other long-term liabilities, based
9
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 June 30,
2007 and December 31, 2006, 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 June 30, 2007 and December 31, 2006, the
general and professional liability consisted of short-term reserves of $62.0 million and $61.7
million, respectively, which were included in accrued insurance liabilities, and long-term reserves
of $104.0 million and $109.0 million, respectively, which were included in other long-term
liabilities. The expense for general and professional liability claims, premiums and
administrative fees was $13.1 million and $28.4 million for the three and six months ended June 30,
2007, respectively, and $17.9 million and $35.9 million for the three and six months ended June 30,
2006, 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 6 Stock-Based Compensation
During the first quarter of 2006, the Company recorded the cumulative effect of the change in
accounting for stock appreciation rights, or SARs, of $4.0 million ($2.5 million after tax, or $.03
per share) as a result of the adoption of FASB Statement No. 123R, Share-Based Payment (Statement
123R). The Company was required to change the measurement method for its SARs liability from
intrinsic value to fair value on January 1, 2006.
Stock-based compensation expense, related to stock options, time- and performance-vested restricted
stock, restricted stock units and stock appreciation rights, was $21.7 million and $19.1 million
for the first halves of 2007 and 2006, respectively, excluding the cumulative effect discussed
previously. During the first half of 2007, the following awards were granted: 345,000 stock
options with an exercise price of $53.21 and a weighted-average grant-date fair value of $13.68,
which cliff vest in three years, and 191,800 restricted stock units with a grant-date fair value of
$53.21, which cliff vest in three years. For performance-vested restricted stock related to 2007,
there are target awards of 113,267 shares, with a weighted-average grant-date fair value of $44.53.
Depending on the Companys actual performance, the actual shares awarded could range from zero to
225 percent of the target shares. The Company accrues the expense based on the number of awards
that are probable of vesting.
Shares delivered by employees to the Company to cover the payment of the option price and tax
withholdings related to option exercises or vesting of stock had a value of $28.8 million and $35.6
million for the first halves of 2007 and 2006, respectively.
10
Note 7 Earnings Per Share
The calculation of earnings per share (EPS) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except earnings per share) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic EPS income before
cumulative effect |
|
$ |
43,644 |
|
|
$ |
45,551 |
|
|
$ |
73,503 |
|
|
$ |
72,556 |
|
After-tax amount of interest expense on
Convertible Senior Notes (Old Notes) |
|
|
27 |
|
|
|
27 |
|
|
|
55 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted EPS |
|
$ |
43,671 |
|
|
$ |
45,578 |
|
|
$ |
73,558 |
|
|
$ |
72,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS weighted-average shares |
|
|
73,231 |
|
|
|
76,277 |
|
|
|
73,138 |
|
|
|
77,593 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
914 |
|
|
|
968 |
|
|
|
846 |
|
|
|
959 |
|
Restricted stock or units |
|
|
148 |
|
|
|
53 |
|
|
|
122 |
|
|
|
36 |
|
Convertible Senior Notes |
|
|
6,302 |
|
|
|
1,191 |
|
|
|
4,642 |
|
|
|
1,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS
adjusted for weighted-average
shares and assumed conversions |
|
|
80,595 |
|
|
|
78,489 |
|
|
|
78,748 |
|
|
|
79,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS Income before cumulative effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.60 |
|
|
$ |
.60 |
|
|
$ |
1.00 |
|
|
$ |
.94 |
|
Diluted |
|
$ |
.54 |
|
|
$ |
.58 |
|
|
$ |
.93 |
|
|
$ |
.91 |
|
Options to purchase 0.2 million shares of the Companys common stock in the first half of 2007
were not included in the computation of diluted EPS, because the options average exercise price of
$53 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 prior to the second quarter of 2007, because the
warrants current conversion price of $59.55 was greater than the average market price of the
common shares. The dilutive effect of the Convertible Senior Notes increased significantly in the
second quarter of 2007 as a result of the increase in the Companys stock price.
11
Note 8 Employee Benefit Plans
The Company has two qualified and two non-qualified defined benefit pension plans included in the
table below. Effective December 31, 2006, the Company elected to terminate its qualified,
overfunded, defined benefit pension plan. This plan, with frozen benefits prior to 1997, covers
certain non-union employees. In the first quarter of 2007, the Company made either lump-sum
distributions to participants or transferred account balances to a licensed insurance company for
all remaining vested participants, based on the option elected by the participants. The Company
was relieved of its obligation with respect to this plan, which resulted in a full settlement of
the plan in the first quarter of 2007. The Company recorded a non-cash pretax charge of $24.9
million ($15.6 million after tax, or $.20 per share) in the first quarter of 2007 related to the
terminated plan, with a $0.1 million adjustment in the second quarter of 2007.
The components of net pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Service cost |
|
$ |
679 |
|
|
$ |
484 |
|
|
$ |
1,357 |
|
|
$ |
1,592 |
|
Interest cost |
|
|
452 |
|
|
|
1,170 |
|
|
|
1,174 |
|
|
|
2,205 |
|
Expected return on plan assets |
|
|
(47 |
) |
|
|
(1,180 |
) |
|
|
(441 |
) |
|
|
(2,225 |
) |
Amortization of unrecognized transition asset |
|
|
(12 |
) |
|
|
(12 |
) |
|
|
(24 |
) |
|
|
(24 |
) |
Amortization of prior service cost |
|
|
482 |
|
|
|
679 |
|
|
|
970 |
|
|
|
1,169 |
|
Amortization of net loss |
|
|
22 |
|
|
|
356 |
|
|
|
242 |
|
|
|
605 |
|
Settlement loss (adjustment) |
|
|
(103 |
) |
|
|
|
|
|
|
24,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
1,473 |
|
|
$ |
1,497 |
|
|
$ |
27,979 |
|
|
$ |
3,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9 Segment Information
The Company provides a range of health care services. During the first quarter of 2007, the
Company reorganized its reporting structure by combining its rehabilitation operating segment with
its long-term care operating segment. The Company refers to this new segment as long-term care and
rehabilitation. Prior to the reorganization, rehabilitation was included in the Other category.
The Company changed its prior-year segment disclosures to conform with the new reporting structure.
The Company has two reportable operating segments long-term care and rehabilitation, which
operates skilled nursing and assisted living facilities and provides rehabilitation services, and
hospice and home health. The Other category includes the non-reportable segments and corporate
items. The revenues in the Other category include other health care services and prior to 2007,
medical transcription revenues. 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
12
administrative expenses, depreciation and amortization, asset impairment, other income and expense
items, income taxes, and cumulative effect.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
|
|
|
|
|
|
Care and |
|
Hospice and |
|
|
|
|
|
|
Rehabilitation |
|
Home Health |
|
Other |
|
Total |
|
|
(In thousands) |
Three months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
817,166 |
|
|
$ |
135,421 |
|
|
$ |
5,193 |
|
|
$ |
957,780 |
|
Depreciation and amortization |
|
|
36,481 |
|
|
|
1,122 |
|
|
|
249 |
|
|
|
37,852 |
|
Operating margin |
|
|
149,842 |
|
|
|
18,778 |
|
|
|
(1,150 |
) |
|
|
167,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
771,073 |
|
|
$ |
115,345 |
|
|
$ |
7,796 |
|
|
$ |
894,214 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
1,057 |
|
|
|
1,057 |
|
Depreciation and amortization |
|
|
34,959 |
|
|
|
791 |
|
|
|
396 |
|
|
|
36,146 |
|
Operating margin |
|
|
139,224 |
|
|
|
18,517 |
|
|
|
367 |
|
|
|
158,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,638,835 |
|
|
$ |
268,038 |
|
|
$ |
9,973 |
|
|
$ |
1,916,846 |
|
Depreciation and amortization |
|
|
72,196 |
|
|
|
2,077 |
|
|
|
566 |
|
|
|
74,839 |
|
Operating margin |
|
|
305,572 |
|
|
|
32,924 |
|
|
|
(2,084 |
) |
|
|
336,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,527,863 |
|
|
$ |
220,145 |
|
|
$ |
15,501 |
|
|
$ |
1,763,509 |
|
Intersegment revenues |
|
|
|
|
|
|
|
|
|
|
2,032 |
|
|
|
2,032 |
|
Depreciation and amortization |
|
|
69,365 |
|
|
|
1,500 |
|
|
|
1,223 |
|
|
|
72,088 |
|
Operating margin |
|
|
269,348 |
|
|
|
34,881 |
|
|
|
264 |
|
|
|
304,493 |
|
Note 10 Subsequent Event
The Company announced that it had entered into an Agreement and Plan of Merger, dated as of July 2,
2007 (the Merger Agreement), with MCHCR-CP Merger Sub Inc. (MergerCo). MergerCo is indirectly
owned and controlled by The Carlyle Group.
The Merger Agreement contemplates that MergerCo will be merged with and into the Company (the
Merger), with the Company continuing as the surviving corporation in the Merger and each
outstanding share of common stock of the Company being converted in the Merger into the right to
receive $67.00 per share in cash, without interest.
The Company has made customary representations and warranties in the Merger Agreement and agreed to
certain customary covenants, including covenants regarding operation of the business
13
of the Company
and its subsidiaries prior to the closing and covenants prohibiting the Company from soliciting, or
providing information or entering into discussions concerning, proposals
relating to alternative business combination transactions, except in limited circumstances to
permit the board of directors of the Company to comply with its fiduciary duties.
Consummation of the Merger is subject to customary conditions, including adoption of the Merger
Agreement by the Companys stockholders, the absence of certain legal impediments to consummation
of the Merger, receipt of certain regulatory consents and approvals, and the expiration or
termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.
MergerCo has obtained equity and debt financing commitments to finance the transactions
contemplated by the Merger Agreement, including the payment of the merger consideration, cashout of
options and other equity awards, repayment of indebtedness, and payment of all related fees and
expenses. The obligations of MergerCo are not conditioned on the receipt of this financing.
MergerCo, however, is not required to consummate the Merger until after the completion of a
marketing period (the Marketing Period). Subject to certain exceptions, the Marketing Period is the
first period of 30 consecutive days (subject to tolling and extension under certain circumstances)
following the date of the Merger Agreement throughout which MergerCo shall have certain financial
information with respect to the Company required to consummate the debt financing, the Companys
independent public accountants shall not have withdrawn any relevant audit opinion and the
conditions to closing (other than conditions that by their nature may be satisfied only at closing
and certain conditions relating to governmental approvals and financing-related restructuring)
shall have been satisfied.
The Company and MergerCo may terminate the Merger Agreement under certain circumstances. The Merger
Agreement provides that, upon the termination of the Merger Agreement under specified
circumstances, the Company may be required to pay MergerCo a termination fee equal to $175.0
million and, in some cases, expenses up to a cap of $15.0 million (which amounts reduce any
applicable termination fee). The Merger Agreement further provides that, in the event that the
Company terminates the Merger Agreement because MergerCo has not received the proceeds of debt
financing necessary to consummate the Merger at the end of the Marketing Period, and the Company is
not otherwise in breach of its obligations under the Merger Agreement, then MergerCo is required to
pay a termination fee in an aggregate amount equal to $175.0 million, and such fee represents the
Companys sole and exclusive remedy. The Company, on the one hand, and MergerCo, on the other hand,
are also subject to an overall cap on damages of $250.0 million for breaches of the Merger
Agreement.
In connection with the Merger and the required stockholder approval, the Company will file a proxy
statement with the Securities and Exchange Commission.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
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 ultimate size of 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 half of 2007 with the same period in 2006, the number of new claims
and our average settlement cost per claim have decreased. Our accrual for current claims is $4.3
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 and industry data. We continuously monitor the
claims and develop information about the ultimate cost of the claims based on our historical
experience. In comparing the first half of 2007 with the same period in 2006, the number of new
claims was similar. Our workers compensation expense decreased $1.5 million for the first half of
2007 in comparison to the prior-year period. 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.
Results of Operations
Quarter and Year-To-Date June 30, 2007 Compared with June 30, 2006
Overview. During the second quarter of 2007, there were unusual items totaling $.11 per share
as follows:
|
¨ |
|
Our stock-based compensation expense of $11.6 million and deferred compensation expense
of $4.5 million were higher than expected. The expense for the quarter was higher than
expected by $10.3 million, or $.08 per share, primarily because of our stock price increase
of over 20 percent for the quarter. Of the stock-based compensation and deferred
compensation expense, we recorded approximately 15 percent in operating expenses and the
remaining amount in general and administrative expenses. |
15
|
¨ |
|
We recorded expenses of $2.8 million, or $.02 per share, for transaction costs related
to our evaluation of strategic alternatives. See Note 10 to our consolidated financial
statements for a discussion of the sale of the Company. |
|
|
¨ |
|
We recorded expenses of $1.1 million, or about $.01 per share, related to separation and
other expenses for former officers. |
During the first half of 2007, there were unusual items totaling $.39 per share as follows:
|
¨ |
|
We recorded a non-cash charge of $24.8 million, or $.20 per share, as a result of the
termination and full settlement of an overfunded defined benefit pension plan, as discussed
in Note 8 to our consolidated financial statements. |
|
|
¨ |
|
Our stock-based compensation expense of $21.7 million and deferred compensation expense
of $7.9 million were higher than expected. The expense for the first half was higher than
expected by $18.0 million, or $.14 per share, primarily because of our stock price increase
of over 39 percent for the first half of 2007. Of the stock-based compensation and
deferred compensation expense, we recorded approximately 20 percent in operating expenses
and the remaining amount in general and administrative expenses. |
|
|
¨ |
|
We recorded a loss of $4.7 million, $.04 per share, related to the sale of our
investment in two hospitals, as discussed in Note 2 to our consolidated financial
statements. |
|
|
¨ |
|
We recorded expenses of $2.8 million, or $.02 per share, for transaction costs as
discussed above. |
|
|
¨ |
|
We recorded expenses of $1.1 million, or about $.01 per share, related to separation and
other expenses for former officers. |
|
|
¨ |
|
The items above were partially offset by a tax benefit of $1.4 million, or $.02 per
share, related primarily to tax credits from prior periods. |
During the first half of 2006, there were unusual items totaling $.21 per share as follows:
|
¨ |
|
Our stock-based compensation expense of $19.1 million and deferred compensation expense
of $4.0 million were higher than expected. The expense for the first half was higher than
expected by $11.3 million, or $.09 per share, primarily because of our stock price increase
of 18 percent for the first half, 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. Of the stock-based compensation and deferred compensation
expense, we recorded approximately 20 percent in operating expenses and the remaining
amount in general and administrative expenses. |
|
|
¨ |
|
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 reported
on a separate line item in our income statement. We were required to change the
measurement method for our SARs liability from intrinsic value to fair value on January 1,
2006. |
|
|
¨ |
|
We recorded a charge of $11.1 million, or $.09 per share, related to the write-down of
our transcription business, which we sold in the fourth quarter of 2006. We reported the
charge on a separate line item in our income statement. |
16
Revenues Quarter. Our revenues increased $63.6 million, or 7 percent, from the second
quarter of 2006. As discussed in Note 9 to our consolidated financial statements, we reorganized
our reporting structure by combining our rehabilitation services with skilled nursing and assisted
living services. Revenues from our long-term care and rehabilitation segment increased $46.1
million, or 6 percent, due to increases in rates/patient mix of $50.7 million and capacity of $1.8
million that were partially offset by a decrease in occupancy of $6.4 million. Our revenues from
the hospice and home health segment increased $20.1 million, or 17 percent, primarily from an
increase in the number of patients utilizing our hospice services.
Revenues First Half. Our revenues in the first half of 2007 increased $153.3 million, or 9
percent, compared with the first half of 2006. Revenues from our long-term care and rehabilitation
segment increased $111.0 million, or 7 percent, due to increases in rates/patient mix of $116.4
million and capacity of $6.6 million that were partially offset by a decrease in occupancy of $12.0
million. Our revenues from the hospice and home health segment increased $47.9 million, or 22
percent, primarily from an increase in the number of patients utilizing our hospice services.
Revenue Factors Quarter and First Half. Our average rates per day for the long-term care
and rehabilitation segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
|
|
|
First Half |
|
|
|
|
2007 |
|
2006 |
|
Increase |
|
2007 |
|
2006 |
|
Increase |
Medicare |
|
$ |
412.46 |
|
|
$ |
382.31 |
|
|
|
8 |
% |
|
$ |
409.46 |
|
|
$ |
378.95 |
|
|
|
8 |
% |
Medicaid |
|
$ |
158.84 |
|
|
$ |
151.52 |
|
|
|
5 |
% |
|
$ |
158.78 |
|
|
$ |
151.15 |
|
|
|
5 |
% |
Private and other (skilled only) |
|
$ |
240.25 |
|
|
$ |
228.00 |
|
|
|
5 |
% |
|
$ |
239.35 |
|
|
$ |
225.89 |
|
|
|
6 |
% |
Our average Medicare rate increased 3.1 percent due to the market basket increase effective October
1, 2006. The remaining increase was a result of our continued shift to higher-acuity and
higher-rate-category patients compared with the first half of 2006. Our average Medicaid rate in
the table above excluded prior-period revenues. When taking into account the increase in state
provider assessments, the net Medicaid rate increased approximately 4 percent for the first half of
2007 compared with the prior-year period.
Our occupancy levels were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
First Half |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Total |
|
|
89 |
% |
|
|
89 |
% |
|
|
89 |
% |
|
|
90 |
% |
Skilled nursing facilities |
|
|
89 |
% |
|
|
90 |
% |
|
|
89 |
% |
|
|
90 |
% |
The quality mix of revenues from Medicare, private pay and insured patients that related to our
long-term care and rehabilitation segment increased from 72 percent for the second quarter and
first half of 2006 to 73 percent for the second quarter and first half of 2007.
17
We increased our bed capacity between the first halves of 2006 and 2007, primarily by opening four
skilled nursing facilities between November 2006 and April 2007.
Operating Expenses Quarter. Our operating expenses in the second quarter of 2007 increased
$54.2 million, or 7 percent, compared with the second quarter of 2006.
Operating expenses from our long-term care and rehabilitation segment increased $35.5 million, or 6
percent, between the second quarters of 2006 and 2007. The largest portion of the operating
expense increase related to labor costs of $25.2 million and ancillary costs, excluding internal
labor, of $9.8 million. Our average wage rate increased 5 percent compared with the second quarter
of 2006. Ancillary costs, which include various types of therapies, medical supplies and
prescription drugs, increased as a result of our more medically complex patients. Our general and
professional liability costs decreased $5.0 million.
Our operating expenses from our hospice and home health segment increased $19.8 million, or 20
percent, between the second quarters of 2006 and 2007. The increase related to labor costs of
$12.6 million, ancillary costs, including pharmaceuticals, of $2.5 million, and other nursing care
costs, including medical equipment and supplies, of $1.5 million. Our operating margin percentage
in 2007 was lower than 2006 primarily because of additional costs associated with the start-up of
new offices and inpatient facilities.
Operating Expenses First Half. Our operating expenses in the first half of 2007 increased
$121.4 million, or 8 percent, compared with the first half of 2006.
Operating expenses from our long-term care and rehabilitation segment increased $74.7 million, or 6
percent, between the first halves of 2006 and 2007. The largest portion of the operating expense
increase of $44.0 million related to labor costs. The other significant operating expense
increases included ancillary costs, excluding internal labor, of $19.8 million and provider
assessments of $8.5 million. General and professional liability expense decreased $7.7 million.
Our operating expenses from our hospice and home health segment increased $49.9 million, or 27
percent. The increase related to labor costs of $30.2 million, ancillary costs, including
pharmaceuticals, of $6.2 million, and other nursing care costs, including medical equipment and
supplies, of $5.1 million.
General and Administrative Expenses. Our general and administrative expenses increased $9.6
million and $31.0 million from the second quarters and first halves of 2006 and 2007, respectively.
Our expense in the first half of 2007 included $24.8 million related to the non-cash charge as a
result of terminating one of our pension plans, as discussed in Note 8 to our consolidated
financial statements. Our expense in the second quarter and first half of 2007 included
18
$2.8
million of transaction expenses, as discussed in the overview. Excluding these charges in 2007,
the increase in general and administrative expenses primarily related to an increase in costs
associated with our
stock-based and deferred compensation. Our stock price increased 18 percent in the first half of
2006 and 39 percent in the first half of 2007. In addition, our stock-based compensation in 2006
included 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.
Interest Expense. Interest expense increased $0.8 million and $2.3 million between the second
quarters and first halves of 2006 and 2007, respectively, because of higher debt levels partially
offset by lower interest rates. In May 2006, we issued $250 million principal amount of 2.0%
Convertible Senior Notes due in 2036.
Equity in Earnings of Affiliated Companies. Our equity earnings declined in 2007 primarily
due to the sale of our ownership interest in two hospitals, as discussed in Note 2 to our
consolidated financial statements.
Income Taxes. Our effective tax rate was 35.8 percent in the first half of 2007 compared with
37.0 percent in the first half of 2006. Our effective tax rate in 2007 was lower than expected,
primarily due to tax credits from prior years recorded in the first quarter.
Financial Condition June 30, 2007 and December 31, 2006
There was a reclassification between long-term debt due within one year and long-term debt, because
the holders of our $400 million and $250 million Convertible Senior Notes could convert their notes
at June 30, 2007, as discussed further in Note 3 to our consolidated financial statements.
Liquidity and Capital Resources
Cash Flows. During the first half of 2007, we satisfied our cash requirements primarily with
cash generated from operating activities. We used the cash principally for capital expenditures,
the paydown of debt, and the payment of dividends. Cash flows from operating activities were
$161.8 million for the first half of 2007, an increase of $13.2 million from the first half of
2006. The additional operating cash flows were primarily due to an increase in net income,
excluding non-cash charges.
Investing Activities. Our expenditures for property and equipment of $53.4 million in the
first half of 2007 included $14.1 million to construct new facilities and expand existing
facilities. In 2007, we opened one skilled nursing facility in January and one in April. The
proceeds from sale of assets primarily related to the sale of our investment in two hospitals, as
discussed further in Note 2 to our consolidated financial statements.
19
Debt Agreements. As of June 30, 2007, there were no loans outstanding under our $400 million
revolving credit facility, with an uncommitted option available to increase the facility by up to
an additional $100 million (accordion feature). After consideration of usage for letters of
credit,
$355.2 million, plus the accordion feature, was available for future borrowings.
During the second quarter of 2007, the holders of $5.3 million principal amount of New Notes due
2023 elected to convert their notes. The holders received the principal value in cash and 90,751
shares of our common stock for the excess value.
The holders of our $94.7 million Convertible Senior Notes due 2023, $400 million Convertible Senior
Notes due 2035 and $250 million Convertible Senior Notes due 2036 have the ability to convert their
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, $53.70 and $64.68, respectively, which it was as of
June 30, 2007. The holders of $6.6 million principal amount of the Old Notes due 2023 can convert
their notes into shares of our common stock. The holders of $88.2 million principal amount of the
New Notes due 2023, $400 million principal amount of Convertible Senior Notes due 2035 and $250
million principal amount of Convertible Senior Notes due 2036 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 $88.2 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. We are required to satisfy the principal value in cash upon conversion or
repurchase.
Stock Purchase. At December 31, 2006, we had remaining authority to purchase $112.1 million
of our common stock. We repurchased no shares during the first half of 2007. We may use shares
repurchased for internal stock option and 401(k) match programs and for other uses, such as
possible acquisitions.
Cash Dividends. On July 26, 2007, we announced that the Company will pay a quarterly cash
dividend of 17 cents per share to shareholders of record on August 13, 2007. This dividend will
approximate $12.5 million and is payable August 27, 2007. Although we 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.
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
20
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, 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.
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, 2006.
During the second quarter of 2007, the holders of $5.3 million principal amount of New Notes due
2023 elected to convert their notes. The holders received the principal value in cash and 90,751
21
shares of our common stock for the excess value. As of December 31, 2006, the carrying amount of
our fixed-rate debt was $950.0 million with a fair value of $1,069.0 million. As of June 30, 2007,
the carrying amount of our fixed-rate debt was $944.7 million with a fair value of $1,331.4
million.
Item 4. Controls and Procedures
An evaluation was performed 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 June 30, 2007. There were no changes in our internal control over financial
reporting in the second quarter of 2007 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings.
As of August 3, 2007, we were aware of one lawsuit that was filed by an alleged stockholder of the
Company relating to our proposed transaction with The Carlyle Group. The lawsuit was filed in the
Circuit Court of Lucas County, Ohio. It names the Company, the Companys directors, and The
Carlyle Group as defendants. The plaintiff seeks to represent a putative class of all public
holders of the Companys common stock. The lawsuit alleges, among other things, that the Companys
directors breached their fiduciary duties to our stockholders by approving the proposed
transaction. Specifically, the directors were alleged to have breached their fiduciary duties of
loyalty, care, independence, good faith, and fair dealing by approving a transaction for inadequate
consideration. The lawsuit seeks preliminary and permanent injunctive relief prohibiting
consummation of the merger, unspecified damages, attorneys fees, and other relief. The Company
believes that the lawsuit is without merit and intends to contest it vigorously.
See Note 5 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, 2006.
22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not repurchase any of our common stock during the second quarter of 2007. On May 10, 2006,
Manor Care announced that its Board of Directors authorized management to spend $300 million to
purchase common stock through December 31, 2007. As of June 30, 2007, we had $112.1 million
remaining authority.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
At the Companys Annual Meeting of Stockholders held on May 8, 2007, the stockholders voted to
elect the following directors: a) Mary Taylor Behrens, b) Joseph F. Damico, c) Stephen L.
Guillard, d) William H. Longfield, e) Paul A. Ormond, f) John T. Schwieters, g) Richard C. Tuttle,
h) Gail R. Wilensky and i) Thomas L. Young. All directors were approved. The votes were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Item |
|
For |
|
Against |
|
Abstain |
a |
|
|
67,712,743 |
|
|
|
419,547 |
|
|
|
447,333 |
|
b |
|
|
65,685,506 |
|
|
|
2,445,088 |
|
|
|
449,028 |
|
c |
|
|
68,054,729 |
|
|
|
74,897 |
|
|
|
449,995 |
|
d |
|
|
66,451,587 |
|
|
|
1,658,383 |
|
|
|
469,652 |
|
e |
|
|
67,422,935 |
|
|
|
690,659 |
|
|
|
466,029 |
|
f |
|
|
66,376,793 |
|
|
|
1,721,975 |
|
|
|
480,855 |
|
g |
|
|
66,705,870 |
|
|
|
1,393,893 |
|
|
|
479,859 |
|
h |
|
|
67,623,160 |
|
|
|
475,747 |
|
|
|
480,718 |
|
i |
|
|
63,863,319 |
|
|
|
4,206,990 |
|
|
|
509,311 |
|
Item 5. Other Information.
None
23
Item 6. Exhibits.
|
|
|
S-K Item |
|
|
601 No. |
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of July 2, 2007, between MCHCR-CP Merger Sub Inc. and
Manor Care, Inc. (filed as Exhibit 2.1 to Manor Care, Inc.s Form 8-K filed on July 2, 2007
and incorporated herein by reference) |
|
|
|
4.1*
|
|
Supplemental Indenture for 2.125% Convertible Senior Notes due 2035, dated as of May 17,
2006, among Manor Care, Inc., the subsidiary guarantors as named therein and U.S. Bank
National Association (as successor to Wachovia Bank, National Association), as Trustee |
|
|
|
10.1*
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Paul A. Ormond |
|
|
|
10.2*
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Stephen L.
Guillard |
|
|
|
10.3*
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Steven M.
Cavanaugh |
|
|
|
10.4*
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Richard A. Parr
II |
|
|
|
10.5*
|
|
Amendment to the HCR Manor Care Senior Executive Retirement Plan, dated as of June 18, 2007 |
|
|
|
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 |
24
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 August 3, 2007 |
By |
/s/ Steven M. Cavanaugh
|
|
|
|
Steven M. Cavanaugh, Vice President and |
|
|
|
Chief Financial Officer |
|
|
25
Exhibit Index
|
|
|
Exhibit |
|
|
4.1
|
|
Supplemental Indenture for 2.125% Convertible Senior Notes due 2035, dated as of May 17,
2006, among Manor Care, Inc., the subsidiary guarantors as named therein and U.S. Bank
National Association (as successor to Wachovia Bank, National Association), as Trustee |
|
|
|
10.1
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Paul A. Ormond |
|
|
|
10.2
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Stephen L.
Guillard |
|
|
|
10.3
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Steven M.
Cavanaugh |
|
|
|
10.4
|
|
Employment Agreement dated as of June 13, 2007, between Manor Care, Inc. and Richard A. Parr
II |
|
|
|
10.5
|
|
Amendment to the HCR Manor Care Senior Executive Retirement Plan, dated as of June 18, 2007 |
|
|
|
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 |
26