##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended March 31, 2005ORo
    

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
    
    34-1687107(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)333 N. Summit Street, Toledo, Ohio
    
    43604-2617(Address of principal executive offices)
    
    (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 þ   No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of
the Exchange Act). Yes þ   No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the close of business on April 29, 2005. Common stock, $0.01 par value  86,390,319 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, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Income -
Three months ended March 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows -
Three months ended March 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    18Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3.
    
    Defaults Upon Senior Securities
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits
    
    
    19Signatures
    
    
    
    
    20Exhibit Index
    
    
    
    
    21EX-31.1 CertificationEX-31.2 CertificationEX-32.1 CertificationEX-32.2 Certification
  2




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Part I. Financial Information 
 Item 1. Financial Statements. Manor Care, Inc. 
  March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)
    
    
    (Note 1)(In thousands, except per share data)AssetsCurrent assets:Cash and cash equivalents
    
    $
    43,521
    
    
    $
    32,915Receivables, less allowances for doubtful
accounts of $56,057 and $54,532, respectively
    
    
    522,509
    
    
    
    425,278Prepaid expenses and other assets
    
    
    24,777
    
    
    
    24,762Deferred income taxes
    
    
    59,804
    
    
    
    57,412Total current assets
    
    
    650,611
    
    
    
    540,367Property and equipment, net of accumulated
depreciation of $792,542 and $768,915, respectively
    
    
    1,492,593
    
    
    
    1,495,152Goodwill
    
    
    93,007
    
    
    
    92,672Intangible assets, net of amortization of $4,665 and $4,499, respectively
    
    
    11,111
    
    
    
    9,099Other assets
    
    
    198,094
    
    
    
    203,408Total assets
    
    $
    2,445,416
    
    
    $
    2,340,698Liabilities And Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    106,735
    
    
    $
    102,178Employee compensation and benefits
    
    
    136,413
    
    
    
    139,900Accrued insurance liabilities
    
    
    100,534
    
    
    
    102,973Income tax payable
    
    
    15,405
    
    
    
    4,710Other accrued liabilities
    
    
    110,892
    
    
    
    49,992Long-term debt due within one year
    
    
    2,467
    
    
    
    2,501Total current liabilities
    
    
    472,446
    
    
    
    402,254Long-term debt
    
    
    552,193
    
    
    
    555,275Deferred income taxes
    
    
    127,840
    
    
    
    134,518Other liabilities
    
    
    267,382
    
    
    
    264,492Shareholders 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
    
    
    383,600
    
    
    
    366,649Retained earnings
    
    
    1,226,787
    
    
    
    1,208,493Accumulated other comprehensive loss
    
    
    (1,218
    )
    
    
    (1,227
    )1,610,279
    
    
    
    1,575,025Less treasury stock, at cost (24.6 and 25.0 million shares, respectively)
    
    
    (584,724
    )
    
    
    (590,866
    )Total shareholders equity
    
    
    1,025,555
    
    
    
    984,159Total liabilities and shareholders equity
    
    $
    2,445,416
    
    
    $
    2,340,698
 See notes to consolidated financial statements. 3




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Manor Care, Inc. 
 
 Three Months Ended March 31,2005
    
    
    2004(In thousands, except per share amounts)Revenues
    
    $
    879,202
    
    
    $
    797,338Expenses:Operating
    
    
    734,150
    
    
    
    659,358General and administrative
    
    
    53,979
    
    
    
    34,791Depreciation and amortization
    
    
    33,447
    
    
    
    31,747821,576
    
    
    
    725,896Income before other income (expenses)
and income taxes
    
    
    57,626
    
    
    
    71,442Other income (expenses):Interest expense
    
    
    (10,116
    )
    
    
    (10,719
    )Gain (loss) on sale of assets
    
    
    (454
    )
    
    
    2,405Equity in earnings of affiliated companies
    
    
    1,368
    
    
    
    2,053Interest income and other
    
    
    359
    
    
    
    563Total other expenses, net
    
    
    (8,843
    )
    
    
    (5,698
    )Income before income taxes
    
    
    48,783
    
    
    
    65,744Income taxes
    
    
    17,562
    
    
    
    24,654Net income
    
    $
    31,221
    
    
    $
    41,090Earnings per share:Basic
    
    $
    .36
    
    
    $
    .47Diluted
    
    $
    .36
    
    
    $
    .45Weighted-average shares:Basic
    
    
    86,029
    
    
    
    88,195Diluted
    
    
    87,672
    
    
    
    90,533Cash dividends declared per common share
    
    $
    .15
    
    
    $
    .14
 See notes to consolidated financial statements. 4




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Manor Care, Inc. 
 
 Three Months Ended March 31,2005
    
    
    2004(In thousands)Operating ActivitiesNet income
    
    $
    31,221
    
    
    $
    41,090Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    33,447
    
    
    
    31,747Restricted stock compensation
    
    
    18,458
    
    
    
    391Provision for bad debts
    
    
    8,515
    
    
    
    6,634Deferred income taxes
    
    
    (9,070
    )
    
    
    (1,302
    )Net (gain) loss on sale of assets
    
    
    454
    
    
    
    (2,405
    )Equity in earnings of affiliated companies
    
    
    (1,368
    )
    
    
    (2,053
    )Changes in assets and liabilities, excluding sold facilities and acquisitions:Receivables
    
    
    (105,813
    )
    
    
    (14,890
    )Prepaid expenses and other assets
    
    
    3,283
    
    
    
    6,628Liabilities
    
    
    71,487
    
    
    
    43,617Total adjustments
    
    
    19,393
    
    
    
    68,367Net cash provided by operating activities
    
    
    50,614
    
    
    
    109,457Investing ActivitiesInvestment in property and equipment
    
    
    (29,320
    )
    
    
    (61,454
    )Investment in systems development
    
    
    (748
    )
    
    
    (980
    )Proceeds from sale of assets
    
    
    
    
    
    
    17,107Net cash used in investing activities
    
    
    (30,068
    )
    
    
    (45,327
    )Financing ActivitiesPrincipal payments of long-term debt
    
    
    (487
    )
    
    
    (77
    )Purchase of common stock for treasury
    
    
    (1,755
    )
    
    
    (24,121
    )Dividends paid
    
    
    (12,927
    )
    
    
    (12,517
    )Proceeds from exercise of stock options
    
    
    5,229
    
    
    
    12,853Net cash used in financing activities
    
    
    (9,940
    )
    
    
    (23,862
    )Net increase in cash and cash equivalents
    
    
    10,606
    
    
    
    40,268Cash and cash equivalents at beginning of period
    
    
    32,915
    
    
    
    86,251Cash and cash equivalents at end of period
    
    $
    43,521
    
    
    $
    126,519
 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
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
three months ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. The balance sheet at December 31, 2004 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, 2004. At March 31, 2005, the Company operated 279 skilled nursing facilities, 65 assisted living
facilities, 97 hospice and home health offices and 88 outpatient therapy clinics. Restricted Stock Accounting In anticipation of adopting the Financial Accounting Standards Board (FASB) Statement No. 123
(revised 2004), Share-Based Payment, the Company reviewed its accounting practices for all
stock-based compensation, including restricted stock. Following this review, the Company
determined that the method of amortizing the non-cash compensation related to its restricted stock
should be changed. Historically, the Company amortized its restricted stock compensation to the
expected retirement date. After further evaluation, the Company determined that its restricted
stock compensation should be amortized to the retirement eligible date. The Company recorded a
non-cash pretax charge of $10.3 million ($6.6 million after tax, or $.08 per share), which was
included in general and administrative expenses, to reflect the correction for the years 2000
through 2004. The effect on the Companys prior years earnings per share was not material. In
addition, there were restricted stock awards to retirement eligible employees in March 2005 that
resulted in a pretax charge of $8.2 million ($5.2 million after tax or $.06 per share). A large
portion of the March awards included supplemental awards for 2004, as explained more fully in the
Companys proxy statement filed with the Securities and Exchange Commission on April 11, 2005, and
represented the majority of the expense. 6




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Comprehensive Income Comprehensive income represents the sum of net income plus other comprehensive income (loss).
Comprehensive income totaled $31.2 million and $40.6 million for the first quarters of 2005 and
2004, respectively. The other comprehensive loss in the first quarter of 2004 represents the
reversal of the unrealized gain on investments sold in 2004. Insurance Liabilities At March 31, 2005 and December 31, 2004, the workers compensation liability consisted of
short-term reserves of $24.4 million and $23.7 million, respectively, which were included in
accrued insurance liabilities, and long-term reserves of $43.5 million and $41.5 million,
respectively, which were included in other long-term liabilities. The expense for workers
compensation was $10.0 million and $9.3 million for the first quarters of 2005 and 2004,
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 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 Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. Accordingly, the Company recognizes no
compensation expense for the stock options. 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 FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation for options granted since 1995.
Effective March 15, 2005, stock options were awarded to executive officers that vest immediately.
In addition, the vesting of the stock options awarded in February 2003 and 2004 with an original
three year vesting were accelerated to vest immediately. The Company accelerated the vesting of
the prior year awards in order to avoid compensation expense when the new accounting standard for
share-based compensation is required to be adopted, as discussed in more detail under New
Accounting Standard. Management believes that the executive officers will continue to be employed
until the original vesting period; therefore, the Company has not recorded any expense under APB
25. The accelerated vesting of prior year awards resulted in additional pro forma expense, net of
related tax effects, of $3.0 million, as included in the table below. All outstanding options are
vested at March 31, 2005. 7




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Three months ended March 31,2005
    
    
    2004(In thousands, except earnings per share)Net income  as reported
    
    $
    31,221
    
    
    $
    41,090Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (8,001
    )
    
    
    (1,623
    )Net income  pro forma
    
    $
    23,220
    
    
    $
    39,467Earnings per share  as reported:Basic
    
    $
    .36
    
    
    $
    .47Diluted
    
    $
    .36
    
    
    $
    .45Earnings per share  pro forma:Basic
    
    $
    .27
    
    
    $
    .45Diluted
    
    $
    .26
    
    
    $
    .43
 New Accounting Standard In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment, which is
a revision of Statement No. 123. Statement 123R replaces APB Opinion No. 25 and amends Statement
No. 95, Statement of Cash Flows. Statement 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on
their fair value. The pro forma footnote disclosure is no longer an alternative to financial
statement recognition. In April 2005, the Securities and Exchange Commission postponed the
effective date. Statement 123R is effective for the Company beginning January 1, 2006, but early
adoption is permitted in periods in which financial statements have not been issued. There are two
transition alternatives, modified-prospective and modified-retrospective. Under the
modified-prospective method, the Company will be required to recognize compensation cost in the
financial statements on the date of adoption. Under the modified-retrospective method, the Company
will be required to restate prior periods by recognizing in the financial statements the same
amount of compensation cost as previously reported in the pro forma footnote disclosures under
Statement 123. The Company will be permitted to apply the modified-retrospective method either to
all periods presented or to the start of the fiscal year in which Statement 123R is adopted. In addition, Statement 123R requires awards classified as liabilities (such as cash-settled stock
appreciation rights) to be measured at fair value at each reporting date versus measured at
intrinsic value under Statement 123. The time value of the liability will be recognized as
compensation cost but then be reversed as the settlement date approaches. At expiration, total 8




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compensation cost will not differ from that which would result under the intrinsic-value method.
Management expects to adopt this Statement on January 1, 2006 under the modified-prospective- transition method. As discussed previously, all of the Companys options are vested so it will not
have expense related to prior year awards. Management has not determined the impact of adoption of
cash-settled stock appreciation rights. Note 2  Revenues Revenues for certain health care services are as follows: Three months ended March 31,2005
    
    
    2004(In thousands)Skilled nursing and assisted living services
    
    $
    749,468
    
    
    $
    676,562Hospice and home health services
    
    
    95,331
    
    
    
    92,093Rehabilitation services
(excludes intercompany revenues)
    
    
    24,796
    
    
    
    21,824Other services
    
    
    9,607
    
    
    
    6,859$
    879,202
    
    
    $
    797,338
 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,
2005, 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 9




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was reviewed with its outside advisors. At March 31, 2005, there were no receivables related to insurance recoveries. The Company is party to various other legal matters arising in the ordinary course of business
including patient care-related claims and litigation. At March 31, 2005 and December 31, 2004, the
general and professional liability consisted of short-term reserves of $60.1 million and $65.9
million, respectively, which were included in accrued insurance liabilities, and long-term reserves
of $119.5 million and $122.5 million, respectively, which were included in other long-term
liabilities. The expense for general and professional liability claims, premiums and
administrative fees was $18.2 million and $20.5 million for the first quarters of 2005 and 2004,
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 31,2005
    
    
    2004(In thousands, except earnings per share)Numerator:Numerator for basic EPS  net income
    
    $
    31,221
    
    
    $
    41,090After-tax amount of interest expense on
Convertible Senior Notes (Old Notes)
    
    
    28
    
    
    
    27Numerator for diluted EPS
    
    $
    31,249
    
    
    $
    41,117Denominator:Denominator for basic EPS  weighted-average shares
    
    
    86,029
    
    
    
    88,195Effect of dilutive securities:Stock options
    
    
    1,045
    
    
    
    1,337Non-vested restricted stock
    
    
    92
    
    
    
    459Convertible Senior Notes
    
    
    506
    
    
    
    542Denominator for diluted EPS 
adjusted for weighted-average
shares and assumed conversions
    
    
    87,672
    
    
    
    90,533EPS:Basic
    
    $
    .36
    
    
    $
    .47Diluted
    
    $
    .36
    
    
    $
    .45
 10




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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: 0.6 million shares with an average exercise price of $38 for the first
quarter of 2005 and 0.4 million shares with an average exercise price of $39 for the first quarter
of 2004. Note 5  Employee Benefit Plans The Company has two qualified and two non-qualified defined benefit pension plans included in the
table below. Two of the plans future benefits are frozen. The components of net pension cost are
as follows: Three months ended March 31,2005
    
    
    2004(In thousands)Service cost
    
    $
    429
    
    
    $
    413Interest cost
    
    
    990
    
    
    
    1,039Expected return on plan assets
    
    
    (1,183
    )
    
    
    (1,226
    )Amortization of unrecognized transition asset
    
    
    (12
    )
    
    
    (12
    )Amortization of prior service cost
    
    
    490
    
    
    
    490Amortization of net loss
    
    
    235
    
    
    
    211Net pension cost
    
    $
    949
    
    
    $
    915
 Note 6  Shareholder Rights Plan The Companys shareholder rights plan expired on May 2, 2005. Note 7  Segment Information The Company provides a range of health care services. The Company has two reportable operating
segments, long-term care, which includes the operation of skilled nursing and assisted living
facilities, and hospice and home health. The Other category includes the non-reportable segments
and corporate items. The revenues in the Other category include services for rehabilitation and
other services. Asset information, including capital expenditures, is not reported by segment by
the Company. Operating performance represents revenues less operating expenses and does not
include general and administrative expenses, depreciation and amortization, other income and
expense items, and income taxes. 11




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Long-Term
    
    
    Hospice andCare
    
    
    Home Health
    
    
    Other
    
    
    Total(In thousands)Three months ended March 31, 2005Revenues from external customers
    
    $
    749,468
    
    
    $
    95,331
    
    
    $
    34,403
    
    
    $
    879,202Intercompany revenues
    
    
    
    
    
    
    
    
    
    
    19,649
    
    
    
    19,649Depreciation and amortization
    

    
    31,709
    
    
    
    773
    
    
    
    965
    
    
    
    33,447Operating margin
    
    
    129,513
    
    
    
    12,451
    
    
    
    3,088
    
    
    
    145,052Three 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
    
    
    
    137,980
 12




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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 2005 with
the first quarter of 2004, the number of new claims is similar and our average settlement cost per
claim is down. Our accrual rate for current claims is $5.1 million per month. Although we believe
our liability reserves are adequate and appropriate, we can give no assurance that these reserves
will not require material adjustment in future periods. Workers Compensation Liability.Our workers compensation reserves are determined based on
an estimation process that uses company-specific data. We continuously monitor the claims and
develop information about the ultimate cost of the claims based on our historical experience.
During 2003 and continuing into 2004, we expanded and increased attention to our safety, training
and claims management programs. As a result, the number of new claims in the first quarter of 2005
decreased in comparison to the prior year period. Our workers compensation expense increased $0.7
million for the first quarter of 2005 in comparison to the prior year period primarily because of
inflation. 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 Ended March 31, 2005 Compared with Quarter Ended March 31, 2004 Revenues.Our revenues increased $81.9 million, or 10 percent, from the first quarter of 2004
to 2005, primarily related to the increased revenues of $63.2 million associated with provider
assessments for several states, including Pennsylvania. The first quarter Pennsylvania effect was
$7.4 million. Revenues from our long-term care segment, excluding the revenues associated with
provider assessments, increased $9.7 million, or 1 percent, due to increases in rates/patient mix
of $49.0 million and occupancy of $8.9 million that were partially offset by a decrease in capacity
of 13




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$48.2 million. Our revenues from the hospice and home health segment increased $3.2 million, or 4
percent, primarily from an increase in the number of patients utilizing our hospice services. Our average rates per day for the long-term care segment were as follows: First Quarter2005
    
    
    2004
    
    
    IncreaseMedicare
    
    $
    352.50
    
    
    $
    333.37
    
    
    

    6
    %Medicaid
    
    $
    146.10
    
    
    $
    133.22
    
    
    
    10
    %Private and other (skilled only)
    
    $
    211.59
    
    
    $
    197.07
    
    
    
    7
    %
 Our average Medicare rates increased as a result of an inflation update of 2.8 percent effective
October 1, 2004, as well as higher acuity Medicare patients. Our average Medicaid rate excluded
the prior year Pennsylvania revenues associated with provider assessments but included the first
quarter effect. For comparison purposes, our average Medicaid rate was $141 when excluding the
first quarter Pennsylvania effect. Our occupancy levels were 88 percent for the first quarter of 2004 and 89 percent for the first
quarter of 2005. Excluding start-up facilities, our occupancy levels were 89 percent for the first
quarters of 2004 and 2005. Excluding start-up facilities, our occupancy levels for skilled nursing
facilities were 89 percent for the first quarter of 2004 and 90 percent for the first quarter of
2005. 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 69 percent for the first
quarter of 2004 to 71 percent for the first quarter of 2005. Our bed capacity declined between the first quarters of 2004 and 2005 primarily because of the
divestiture of 21 facilities in 2004. Operating Expenses.Our operating expenses in the first quarter of 2005 increased $74.8
million, or 11 percent, compared with the first quarter of 2004, primarily related to the increase
in provider assessments of $57.5 million for several states, including Pennsylvania. The first
quarter Pennsylvania provider assessment effect was $7.3 million. Excluding the increase in provider assessments, operating expenses from our long-term care segment
increased $3.3 million, or 1 percent, between the first quarters of 2004 and 2005. The largest
portion of the operating expense increase related to ancillary costs, excluding internal labor, of
$13.0 million. Ancillary costs, which include various types of therapies, medical supplies and
prescription drugs, increased as a result of our more medically complex patients. Partially
offsetting this increase were decreases in labor costs of $9.7 million and general and professional
liability expense of $2.2 million. Our labor costs have decreased due to the divestiture of
facilities in 2004. Our wage rates increased 4 percent compared with the first quarter of 2004. 14




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##### Table of Contents



During the quarter, our hospice and home health segment was reorganized in preparation for future
growth. We appointed a new general manager and new divisional and regional management. Margins
declined this quarter as our operating expenses increased $6.8 million or 9 percent, primarily due
to a $4.2 million increase in labor costs. General and Administrative Expenses.Our general and administrative expenses increased $19.2
million between the first quarters of 2004 and 2005. The increase primarily related to restricted
stock compensation as discussed in Note 1 to the consolidated financial statements. Depreciation and Amortization.Our depreciation expense increased $1.6 million from the first
quarters of 2004 to 2005. Excluding our divested facilities in 2004, depreciation expense
increased $2.4 million because of the completion of new construction projects and renovations to
existing facilities. Interest Expense.Interest expense decreased $0.6 million from the first quarter of 2004 to
2005 because of lower debt levels partially offset by higher interest rates. 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 certain other assets. Income Taxes.Our effective tax rate was 36.0 percent in the first quarter of 2005 compared
with 37.5 percent in the first quarter of 2004. Our effective tax rate in the first quarter is
lower than our expected tax rate of 37.0 percent that was disclosed in our 2004 Form 10-K because
of an adjustment to prior years state tax liability. Financial Condition  March 31, 2005 and December 31, 2004 Receivables and other accrued liabilities have both increased primarily as a result of the
Pennsylvania revenues and associated provider assessment. The receipts and payments related to
Pennsylvania are scheduled for the second quarter. Liquidity and Capital Resources Cash Flows.During the first quarter of 2005, we satisfied our cash requirements with cash
generated from operating activities. We used the cash principally for capital expenditures and the
payment of dividends. Cash flows from operating activities were $50.6 million for the first
quarter of 2005, a decrease of $58.8 million from the first quarter of 2004. Our operating cash
flows in 2005 decreased primarily because of federal income tax payments of $14.1 million and
Medicare settlement payments of $31.9 million related to the former Manor Care home office cost
reports for 1997 through 1999, which are under appeal and recorded as receivables. 15




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##### Table of Contents



Investing Activities.Our expenditures for property and equipment of $29.3 million in the
first quarter of 2005 included $9.3 million to construct new facilities and expand existing
facilities. Debt Agreement.As of March 31, 2005, there were no loans outstanding under our three-year
$200 million revolving credit facility. After consideration of usage for letters of credit, there
was $151.4 million available for future borrowings. The holders of our $100 million Convertible
Senior Notes had the right to require us to purchase the Notes on April 15, 2005 but only $15,000
was requested for redemption. The next put date is April 15, 2008. Stock Purchase.In July 2004, our Board of Directors authorized us to spend up to $100
million to purchase our common stock through December 31, 2005. With this authorization, we
purchased 50,000 shares in the first quarter of 2005 for $1.8 million. We had $55.5 million
remaining authority to repurchase our shares as of March 31, 2005. We may use the shares for
internal stock option and 401(k) match programs and for other uses, such as possible acquisitions. Cash Dividends.On April 22, 2005, we announced that the Company will pay a quarterly cash
dividend of 15 cents per share to shareholders of record on May 9, 2005. This dividend will
approximate $13.0 million and is payable May 23, 2005. 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
revolving credit facility and other financing arrangements that are normally available in the
marketplace. Cautionary Statement Concerning Forward-Looking Statements This report may include forward-looking statements. We have based these forward-looking statements
on our current expectations and projections about future events. We identify forward-looking
statements in this report by using words or phrases such as anticipate, believe, estimate,
expect, intend, may be, objective, plan, predict, project, and will be and similar
words or phrases, or the negative thereof. These forward-looking statements are subject to numerous assumptions, risks and uncertainties.
Factors which may cause our actual results, performance or achievements to be materially 16




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##### Table of Contents



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;
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; 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 obligations 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, 2004. The
fair value of our fixed-rate debt has decreased from $610.9 million at December 31, 2004 to $601.9
million at March 31, 2005. The fair value of our interest rate swaps has increased from a payable
position of $5.0 million at December 31, 2004 to a payable position of $7.7 million at March 31,
2005. 
 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, 2005. There were no significant changes in our internal control
over financial reporting in the first quarter of 2005 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. 17




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##### Table of Contents



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. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The following table provides information with respect to stock repurchased by the Company during
the first quarter of 2005: Approximate DollarTotal Number of
    
    
    Value of SharesShares Purchased as
    
    
    that May Yet BePart of Publicly
    
    
    Purchased Under theTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Plans or ProgramsPeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Programs (1)
    
    
    (1)1/1/05-1/31/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    57,273,0772/1/05-2/28/05
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    57,273,0773/1/05-3/31/05
    
    
    50,000
    
    
    $
    35.09
    
    
    
    50,000
    
    
    $
    55,518,482Total
    
    
    50,000
    
    
    $
    35.09
    
    
    
    50,000
   (1)
    
    On July 23, 2004, Manor Care announced that its Board of Directors
authorized management to spend an additional $100 million to purchase common stock through
December 31, 2005. 
 Item 3. Defaults Upon Senior Securities. None 
 Item 4. Submission of Matters to a Vote of Security Holders. None 
 Item 5. Other Information. None 18




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##### Table of Contents



Item 6. Exhibits. S-K Item601 No.31.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 19




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##### Table of Contents



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 10, 2005
By

    /s/ Geoffrey G. MeyersGeoffrey G. Meyers,Executive Vice President
and Chief Financial Officer 20




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##### Table of Contents



Exhibit Index Exhibit31.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 21