##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2004 OR [  ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 Commission file number: 1-10858 Manor Care, Inc.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    34-1687107
(IRS Employer
Identification No.)333 N. Summit Street, Toledo, Ohio
(Address of principal executive offices)
    
    43604-2617
(Zip Code)
 Registrants telephone number, including area code: (419) 252-5500 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 [X] No
[  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No
[  ] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the close of business on April 30, 2004. Common stock, $0.01 par value  88,888,688 shares




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Manor Care, Inc.
Form 10-Q
Table of Contents PageNumberPart I.
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance
Sheets - March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income - Three months ended March 31, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows - Three months ended March 31, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    16Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    17Item 3.
    
    Defaults Upon Senior Securities
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 5.
    
    Other Information
    
    
    17Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    17Signatures
    
    
    
    
    18Exhibit Index
    
    
    
    
    19EX-10.1  Savings Plan for Corporate OfficersEX-31.1  CEO CertificationEX-31.2  CFO CertificationEX-32.1  Section 906 CEO CertificationEX-32.2  Section 906 CFO Certification
  2




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Part I. Financial Information 
 Item 1. Financial Statements. Manor Care, Inc. 
  March 31,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)(In thousands, except per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    126,519
    
    
    $
    86,251Receivables, less allowances for doubtful
accounts of $57,664 and $60,652, respectively
    
    
    412,461
    
    
    
    405,213Prepaid expenses and other assets
    
    
    25,327
    
    
    
    27,484Deferred income taxes
    
    
    69,598
    
    
    
    66,451Total current assets
    
    
    633,905
    
    
    
    585,399Property and equipment, net of accumulated
depreciation of $774,275 and $755,038, respectively
    
    
    1,530,440
    
    
    
    1,514,250Goodwill
    
    
    87,873
    
    
    
    87,906Intangible assets, net of amortization of $4,275 and $4,161, respectively
    
    
    9,283
    
    
    
    9,397Other assets
    
    
    196,363
    
    
    
    199,759Total assets
    
    $
    2,457,864
    
    
    $
    2,396,711Liabilities And Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    101,132
    
    
    $
    101,481Employee compensation and benefits
    
    
    130,820
    
    
    
    125,858Accrued insurance liabilities
    
    
    112,874
    
    
    
    110,186Income tax payable
    
    
    20,587
    
    
    
    1,410Other accrued liabilities
    
    
    55,871
    
    
    
    46,560Long-term debt due within one year
    
    
    6,865
    
    
    
    2,007Total current liabilities
    
    
    428,149
    
    
    
    387,502Long-term debt
    
    
    657,872
    
    
    
    659,181Deferred income taxes
    
    
    139,045
    
    
    
    137,200Other liabilities
    
    
    237,475
    
    
    
    237,723Shareholders equity:Preferred stock, $.01 par value, 5 million shares authorizedCommon stock, $.01 par value, 300 million shares authorized,
111.0 million shares issued
    
    
    1,110
    
    
    
    1,110Capital in excess of par value
    
    
    361,719
    
    
    
    357,832Retained earnings
    
    
    1,118,150
    
    
    
    1,089,577Accumulated other comprehensive loss
    
    
    (1,189
    )
    
    
    (662
    )1,479,790
    
    
    
    1,447,857Less treasury stock, at cost (22.0 million shares)
    
    
    (484,467
    )
    
    
    (472,752
    )Total shareholders equity
    
    
    995,323
    
    
    
    975,105Total liabilities and shareholders equity
    
    $
    2,457,864
    
    
    $
    2,396,711
 See notes to consolidated
financial statements. 3




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Manor Care, Inc. 
 
 Three Months Ended March 31,2004
    
    2003(In thousands, except earnings per share)Revenues
    
    $
    797,338
    
    
    $
    730,520Expenses:Operating
    
    
    659,358
    
    
    
    611,487General and administrative
    
    
    34,791
    
    
    
    30,709Depreciation and amortization
    
    
    31,747
    
    
    
    31,674725,896
    
    
    
    673,870Income before other income (expenses)
and income taxes
    
    
    71,442
    
    
    
    56,650Other income (expenses):Interest expense
    
    
    (10,719
    )
    
    
    (8,875
    )Gain on sale of assets
    
    
    2,405
    
    
    
    189Equity in earnings of affiliated companies
    
    
    2,053
    
    
    
    1,541Interest income and other
    
    
    563
    
    
    
    701Total other expenses, net
    
    
    (5,698
    )
    
    
    (6,444
    )Income before income taxes
    
    
    65,744
    
    
    
    50,206Income taxes
    
    
    24,654
    
    
    
    19,078Net income
    
    $
    41,090
    
    
    $
    31,128Earnings per share:Basic
    
    $
    .47
    
    
    $
    .33Diluted
    
    $
    .46
    
    
    $
    .33Weighted-average shares:Basic
    
    
    88,195
    
    
    
    93,659Diluted
    
    
    89,991
    
    
    
    94,504Cash dividends declared per common share
    
    $
    .14
 See notes to consolidated
financial statements. 4




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Manor Care, Inc. 
 
 Three Months Ended March 31,2004
    
    2003(In thousands)Operating ActivitiesNet income
    
    $
    41,090
    
    
    $
    31,128Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    31,747
    
    
    
    31,674Provision for bad debts
    
    
    6,634
    
    
    
    10,025Deferred income taxes
    
    
    (1,302
    )
    
    
    19,708Net gain on sale of assets
    
    
    (2,405
    )
    
    
    (189
    )Equity in earnings of affiliated companies
    
    
    (2,053
    )
    
    
    (1,541
    )Changes in assets and liabilities, excluding sold facilities and acquisitions:Receivables
    
    
    (14,890
    )
    
    
    (5,134
    )Prepaid expenses and other assets
    
    
    7,019
    
    
    
    (1,951
    )Liabilities
    
    
    43,617
    
    
    
    (2,979
    )Total adjustments
    
    
    68,367
    
    
    
    49,613Net cash provided by operating activities
    
    
    109,457
    
    
    
    80,741Investing ActivitiesInvestment in property and equipment
    
    
    (61,454
    )
    
    
    (23,245
    )Investment in systems development
    
    
    (980
    )
    
    
    (1,177
    )Acquisitions
    
    
    
    
    
    
    (10,868
    )Proceeds from sale of assets
    
    
    17,107
    
    
    
    1,975Net cash used in investing activities
    
    
    (45,327
    )
    
    
    (33,315
    )Financing ActivitiesNet repayments under bank credit agreement
    
    
    
    
    
    
    (23,400
    )Principal payments of long-term debt
    
    
    (77
    )
    
    
    (5,563
    )Purchase of common stock for treasury
    
    
    (24,121
    )
    
    
    (33,073
    )Dividends paid
    
    
    (12,517
    )Proceeds from exercise of stock options
    
    
    12,853
    
    
    
    100Net cash used in financing activities
    
    
    (23,862
    )
    
    
    (61,936
    )Net increase (decrease) in cash and cash equivalents
    
    
    40,268
    
    
    
    (14,510
    )Cash and cash equivalents at beginning of period
    
    
    86,251
    
    
    
    30,554Cash and cash equivalents at end of period
    
    $
    126,519
    
    
    $
    16,044
 See notes to consolidated
financial statements. 5




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Manor Care, Inc. 
 
 Note 1  Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States 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 accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management of Manor Care, Inc. (the Company), the interim data includes all
adjustments necessary for a fair statement of the results of the interim
periods and all such adjustments are of a normal recurring nature. Operating
results for the three months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States 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, 2003. At March 31, 2004, the Company operated 289 skilled nursing facilities, 69
assisted living facilities, 91 outpatient therapy clinics and 90 hospice and
home health offices. Comprehensive Income Comprehensive income represents the sum of net income plus other comprehensive
income (loss). Comprehensive income totaled $40.6 million and $31.4 million
for the first quarters of 2004 and 2003, respectively. The other comprehensive
loss in the first quarters of 2004 represents the reversal of the unrealized
gain on investments sold in 2004. The other comprehensive income in the first
quarter of 2003 primarily represents the unrealized gain on investments. Insurance Liabilities At March 31, 2004 and December 31, 2003, the workers compensation liability
consisted of short-term reserves of $28.8 million and $26.5 million,
respectively, which were included in accrued insurance liabilities, and
long-term reserves of $40.5 million, which were included in other long-term
liabilities. The expense for workers compensation was $9.3 million and $12.3
million for the first quarters of 2004 and 2003, respectively. Although
management believes that the Companys liability reserves are adequate, there
can be no assurance that these reserves will not require material adjustment in
future periods. See Note 3 for discussion of the Companys general and 6




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professional liability. Stock-Based Compensation Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair market value of the shares at the date of
grant. The Company accounts for the stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, the Company recognizes no compensation expense
for the stock options. During the first quarter of 2004, employees delivered
shares to the Company to cover the payment of the option price and related tax
withholdings on the option exercises. These shares had a value of $5.4
million. The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation for options
granted since 1995. Three months ended March 31,2004
    
    2003(In thousands, except earnings per share)Net income  as reported
    
    $
    41,090
    
    
    $
    31,128Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (1,623
    )
    
    
    (1,801
    )Net income  pro forma
    
    $
    39,467
    
    
    $
    29,327Earnings per share  as reported:Basic
    
    $
    .47
    
    
    $
    .33Diluted
    
    $
    .46
    
    
    $
    .33Earnings per share  pro forma:Basic
    
    $
    .45
    
    
    $
    .31Diluted
    
    $
    .44
    
    
    $
    .31
 7




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Note 2  Revenues Revenues for certain health care services are as follows: Three months ended March 31,2004
    
    2003(In thousands)Skilled nursing and assisted living services
    
    $
    676,562
    
    
    $
    629,969Hospice and home health services
    
    
    92,093
    
    
    
    72,888Rehabilitation services
(excludes intercompany revenues)
    
    
    21,824
    
    
    
    19,659Other services
    
    
    6,859
    
    
    
    8,004$
    797,338
    
    
    $
    730,520
 Note 3  Contingencies One or more subsidiaries or affiliates of Manor Care of America, Inc. (MCA)
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 MCA. 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 MCA is alleged to be a potentially responsible party
has not yet been quantified. At March 31, 2004, the Company had $4.5 million
accrued in other long-term liabilities based on its current assessment of the
likely outcome of the Actions which was reviewed with its outside advisors. At
March 31, 2004, there were no insurance recoveries receivable. The Company is party to various other legal matters arising in the ordinary
course of business including patient care-related claims and litigation. At
March 31, 2004 and December 31, 2003, the general and professional liability
consisted of short-term reserves of $69.8 million, which were included in accrued insurance liabilities, and long-term reserves of
$107.5 million, which 8




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were included in other long-term liabilities. The
expense for general and professional liability claims, premiums and
administrative fees was $20.5 million and $20.8 million for the first quarters
of 2004 and 2003, respectively, which was included in operating expenses.
Although management believes that the Companys liability reserves are
adequate, there can be no assurance that such provision and liability will not
require material adjustment in future periods. Note 4  Earnings Per Share The calculation of earnings per share (EPS) is as follows: Three months ended March 31,2004
    
    2003(In thousands, except earnings per share)Numerator:Net income
    
    $
    41,090
    
    
    $
    31,128Denominator:Denominator for basic EPS -
weighted-average shares
    
    
    88,195
    
    
    
    93,659Effect of dilutive securities:Stock options
    
    
    1,337
    
    
    
    551Non-vested restricted stock
    
    
    459
    
    
    
    294Denominator for diluted EPS -
adjusted for weighted-average
shares and assumed conversions
    
    
    89,991
    
    
    
    94,504EPS:Basic
    
    $
    .47
    
    
    $
    .33Diluted
    
    $
    .46
    
    
    $
    .33
 Options to purchase shares of the Companys common stock that were not included
in the computation of diluted EPS because the options exercise prices were
greater than the average market price of the common shares were: 0.4 million
shares with an average exercise price of $39 for the first quarter of 2004 and
5.3 million shares with an average exercise price of $24 for the first quarter
of 2003. The Companys diluted EPS calculation does not include the conversion of the
Companys contingently convertible senior notes because none of the
contingencies were met at March 31, 2004. For a summary description of the
contingencies, refer to the Companys debt footnote in the Form 10-K for the
year ended December 31, 2003. For a more detailed discussion of
the contingencies, refer to Form S-3 filed on July 30, 2003 (and related subsequent
amendments). 9




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These documents have been filed with the SEC and are available
through our website, www.hcr-manorcare.com. Note 5  Employee Benefit Plans The Company has two qualified and one non-qualified defined benefit pension
plans included in the table below. Two of the plans future benefits are
frozen. The components of net pension income are as follows: Three months ended March 31,2004
    
    2003(In thousands)Service cost
    
    $
    72
    
    
    $
    65Interest cost
    
    
    638
    
    
    
    646Expected return on plan assets
    
    
    (1,226
    )
    
    
    (1,197
    )Amortization of unrecognized transition asset
    
    
    (12
    )
    
    
    (12
    )Amortization of prior service cost
    
    
    9
    
    
    
    9Amortization of net loss
    
    
    211
    
    
    
    147Net pension income
    
    $
    (308
    )
    
    $
    (342
    )
 The Company also has a senior executive retirement plan, which is a
non-qualified plan designed to provide pension benefits and death benefits for
certain officers. The expense for this plan amounted to $1.3 million and $0.1
million for the first quarters of 2004 and 2003, respectively. 10




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Note 6  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 are derived from 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, other income and expense items, and income
taxes. Long-Term
    
    Hospice andCare
    
    Home Health
    
    Other
    
    Total(In thousands)Three months ended March 31, 2004Revenues from external customers
    
    $
    676,562
    
    
    $
    92,093
    
    
    $
    28,683
    
    
    $
    797,338Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    16,996
    
    
    
    16,996Depreciation and amortization
    
    
    30,039
    
    
    
    771
    
    
    
    937
    
    
    
    31,747Operating margin
    
    
    117,443
    
    
    
    16,040
    
    
    
    4,497
    
    
    
    137,980Three months ended March 31, 2003Revenues from external customers
    
    $
    629,969
    
    
    $
    72,888
    
    
    $
    27,663
    
    
    $
    730,520Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    14,486
    
    
    
    14,486Depreciation and amortization
    
    
    29,522
    
    
    
    966
    
    
    
    1,186
    
    
    
    31,674Operating margin
    
    
    104,435
    
    
    
    10,933
    
    
    
    3,665
    
    
    
    119,033
 11




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Item 2. Managements 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 along with our independent actuary
develop information about 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 quarter of 2004
with the first quarter of 2003, the number of new claims is flat. Our accrual
rate for current claims is $5.5 million per month. Although we believe our
liability reserves are adequate, we can give no assurance that these reserves
will not require material adjustment in future periods. Results of Operations

Quarter Ended March 31, 2004 Compared with Quarter Ended March 31, 2003 Revenues.Our revenues increased $66.8 million, or 9 percent, from the
first quarter of 2003 to 2004. Revenues from our long-term care segment
(skilled nursing and assisted living services) increased $46.6 million, or 7
percent, due to increases in rates/patient mix  $46.7 million and occupancy
 $6.4 million that were partially offset by a decrease in capacity  $6.5
million. Our revenues from the hospice and home health segment increased $19.2
million, or 26 percent, primarily from an increase in hospice services
provided. Our rate increases for the long-term care segment related to Medicare, Medicaid
and private pay. Our average Medicare rate increased 7 percent from $310 per
day in the first quarter of 2003 to $333 per day in the first quarter of 2004.
Our Medicare rates increased effective October 1, 2003 as a result of a 3.0
percent inflation update and an additional 3.26 percent rate increase designed
to make up for previous forecast error underpayments by the Centers for
Medicare & Medicaid Services, or CMS. Our average Medicaid rate increased 4
percent from $128 per day in the first quarter of 2003 to $133 per day in the
first quarter of 2004. Private and other rates for our skilled nursing
facilities increased 4 percent from $189 per day in the first quarter of 2003
to $197 per day in the first quarter of 2004. The increase in overall rates
was also a result of a shift in the mix of our patients to a higher percentage
of Medicare patients. 12




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Our occupancy levels were 88 percent for the first quarters of 2003 and 2004.
Excluding start-up facilities, our occupancy levels were 88 percent for the
first quarter of 2003 and 89 percent for the first quarter of 2004. Our
occupancy levels for skilled nursing facilities were 89 percent for the first
quarters of 2003 and 2004. 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 68 percent for the first quarter of
2003 to 69 percent for the first quarter of 2004. Our bed capacity declined between the first quarters of 2003 and 2004 primarily
because we sold three skilled nursing facilities with 374 beds in May 2003 and
four skilled nursing facilities with 745 beds in January 2004. In the second
quarter of 2004, we sold one facility in Pennsylvania and will allow lease
agreements to expire on six facilities in Florida for a total of 973 beds. Operating Expenses.Our operating expenses in the first quarter of 2004
increased $47.9 million, or 8 percent, compared with the first quarter of 2003. Operating expenses from our long-term care segment increased $33.6 million, or
6 percent, between the first quarters of 2003 and 2004. The largest portion of
the long-term care operating expense increase related to labor costs of $21.8
million. Our wage rate increases continue to be maintained at approximately 4
percent compared with the first quarter of 2003. Our other operating expense
increase for this segment included ancillary costs, excluding internal labor,
of $8.8 million. Ancillary costs, which include various types of therapies,
medical supplies and prescription drugs, increased as a result of our more
medically complex patients. Operating expenses from our hospice and home health segment increased $14.1
million, or 23 percent, primarily due to an increase in services provided. The
increase related to labor costs of $9.1 million, ancillary costs including
pharmaceuticals of $1.3 million and other direct nursing care costs of $1.3
million. General and Administrative Expenses.Our general and administrative
expenses, which approximated 4 percent of revenues, increased $4.1 million
between the first quarters of 2003 and 2004. The increase related to pension
plans, deferred compensation plans and other general inflationary costs. Interest Expense.Interest expense increased $1.8 million from the first
quarter of 2003 to 2004, primarily because of higher interest rates associated
with our fixed-rate senior notes issued in April 2003 compared with our
variable-rate credit agreement debt that was paid off. Our interest rate swap
agreements that we entered into in May 2003 to hedge certain fixed-rate senior
notes reduced our interest expense by $0.7 million in the first quarter of
2004. Gain on Sale of Assets.Our gain on sale of assets in 2004 primarily
resulted from the sale of four skilled nursing facilities in January 2004 and
the sale of certain other assets. 13




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Financial Condition  March 31, 2004 and December 31, 2003 Net property and equipment increased $16.2 million primarily because of $24.8
million in new construction and renovations to existing facilities and $36.7
million to purchase four leased facilities in Ohio. These increases were
partially offset by depreciation of $30.1 million and disposal of assets of
$14.7 million. Income tax payable increased $19.2 million primarily due to deferral of tax
payments to future quarters. Long-term debt due within one year increased reflecting our plans to prepay a
$5.8 million Industrial Revenue Bond in the second quarter of 2004. Liquidity and Capital Resources Cash Flows.During the first quarter of 2004, we satisfied our cash
requirements with cash generated from operating activities. We used the cash
principally for capital expenditures, for the purchase of our common stock and
the payment of dividends. Cash flows from operating activities were $109.5
million for the first quarter of 2004, an increase of $28.7 million from the
first quarter of 2003. Our operating cash flows increased primarily because of
an increase in net income and the absence of an $18.6 million environmental
liability payment that we made in the first quarter of 2003. Investing Activities.Our expenditures for property and equipment of
$61.5 million in the first quarter of 2004 included $36.7 million to purchase
four leased facilities in Ohio and $5.9 million to construct new facilities and
expand existing facilities. The proceeds from the sale of assets primarily
related to the sale of four skilled nursing facilities in Texas. Debt Agreement.As of March 31, 2004, there were no loans outstanding
under our three-year $200 million revolving credit facility. After
consideration of usage for letters of credit, there was $149.9 million
available for future borrowings. We have elected to prepay one of our
Industrial Revenue Bonds of $5.8 million in April 2004, which was classified as
a current liability at March 31, 2004. This will also reduce our letter of
credit usage by $6.1 million. Stock Purchase.In April 2003, our Board of Directors authorized us to
spend up to $100 million to purchase our common stock through December 31,
2004. With this authorization, we purchased 682,400 shares in the first
quarter of 2004 for $24.1 million. We had $68.7 million remaining authority to
repurchase our shares as of March 31, 2004. We may use the shares for internal
stock option and 401(k) match programs and for other uses, such as possible
acquisitions. 14




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Cash Dividends.On April 23, 2004, we announced that the Company will pay
a quarterly cash dividend of 14 cents per share to shareholders of record on
May 7, 2004. This dividend will approximate $12.5 million and is payable May
21, 2004. We intend to declare and pay regular quarterly cash dividends;
however, 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 repurchase. 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 bank credit agreement 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; 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; competition and general
economic and business conditions; 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; other litigation; and our ability to complete the
previously announced settlement with the Department of Justice. 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
obligations or undertaking to publicly release any updates or revisions to any 15




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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, 2003. The fair value of our fixed-rate debt has increased from
$725.2 million at December 31, 2003 to $737.6 million at March 31, 2004. The
fair value of our interest rate swaps has decreased from a payable position of
$4.8 million at December 31, 2003 to $1.2 million at March 31, 2004. 
 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 March 31, 2004. There were no significant changes in our
internal control over financial reporting in the first quarter of 2004 that
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings. See Note 3  Contingencies in the notes to the consolidated financial
statements for a discussion of litigation related to environmental matters and
patient care-related claims. 16




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##### Table of Contents



Item 2. Changes in Securities and Use of Proceeds. The following table provides information with respect to stock repurchased by
the Company during the first quarter of 2004: Total Number of
    
    Approximate DollarShares Purchased as
    
    Value of Shares thatTotal Number
    
    Average
    
    Part of Publicly
    
    May Yet Be Purchasedof Shares
    
    Price Paid
    
    Announced Plans or
    
    Under the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs (1)
    
    Programs (1)1/1/04-1/31/04
    
    
    75,000
    
    
    $
    33.21
    
    
    
    75,000
    
    
    $
    90,346,6302/1/04-2/29/04
    
    
    207,400
    
    
    $
    35.22
    
    
    
    207,400
    
    
    $
    83,042,3803/1/04-3/31/04
    
    
    400,000
    
    
    $
    35.81
    
    
    
    400,000
    
    
    $
    68,716,620Total
    
    
    682,400
    
    
    $
    35.35
    
    
    
    682,400
  (1)
    
    On April 9, 2003, the Company announced that its Board of Directors
authorized management to spend $100 million to purchase common stock
through December 31, 2004. 
 Item 3. Defaults Upon Senior Securities. None 
 Item 4. Submission of Matters to a Vote of Security Holders. None 
 Item 5. Other Information. None 
 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits S-K Item601 No.10.1
    
    HCR Manor Care Senior Management Savings Plan for Corporate Officers,
amended and restated as of February 11, 200431.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 17




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##### Table of Contents



(b)
    
    Reports on Form 8-KOn January 30, 2004, Manor Care, Inc. filed a Form 8-K and under Item 12
furnished the January 30, 2004 press release reporting the Companys
financial results for the fourth quarter of 2003. 
 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 May 4, 2004
    
    By
    
    /s/ Geoffrey G. MeyersGeoffrey G. Meyers, Executive Vice
Presidentand Chief Financial Officer
 18




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##### Table of Contents



Exhibit Index Exhibit10.1
    
    HCR Manor Care Senior Management Savings Plan for Corporate Officers,
amended and restated as of February 11, 200431.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 19