10-Q

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 September 30, 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.

(Exact name of registrant as specified in its charter)

Delaware	34-1687107
(State or other jurisdiction of	(IRS Employer
incorporation 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 [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 October 29, 2004.

Common stock, $0.01 par value — 86,437,598 shares

Manor Care, Inc.
Form 10-Q
Table of Contents

		Page
		Number
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets - September 30, 2004 and December 31, 2003		3
	Consolidated Statements of Income - Three and nine months ended September 30, 2004 and 2003		4
	Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 and 2003		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.	Controls and Procedures		20
Part II. Other Information
Item 1.	Legal Proceedings		21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3.	Defaults Upon Senior Securities		21
Item 4.	Submission of Matters to a Vote of Security Holders		21
Item 5.	Other Information		21
Item 6.	Exhibits		22
Signatures			23
Exhibit Index			24
EX-10.1 Agreement by and between Manor Care, Inc., Heartland Employment Services, Inc., Health Care and Retirement Corporation of American and Paul A. Ormond, effective August 20, 2004
EX-10.2 Agreement by and between Manor Care, Inc., Heartland Employment Services, Inc., Health Care and Retirement Corporation of American and Trustee, effective August 20, 2004
EX-10.3 Agreement by and between Manor Care, Inc. and Paul Ormond, effective August 20, 2004
EX-10.4 Form of Split Dollar Assgnmt Term. Agrmt by & between Health Care & Retirement Corp of America Heartland Employment Svcs, Trustee, and Paul A. Ormond and M. Keith Weikel effective 12-16-03
EX-10.5 Form of Split Dollar Assignment Termination Agrmt by/between Health Care & Retirement Corp of America, Manor Care, Heartland Employment Svcs, and remaining executive officers, effect. 12-16-03
EX-31.1 Chief Executive Officer Certification
EX-31.2 Chief Financial Officer Certification
EX-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
EX-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

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Part I. Financial Information

Item 1. Financial Statements.

Manor Care, Inc.

Consolidated Balance Sheets

	September 30,			December 31,
	2004			2003
	(Unaudited)			(Note1)
	(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents	$	25,786		$	86,251
Receivables, less allowances for doubtful accounts of $52,980 and $60,652, respectively		417,701			405,213
Prepaid expenses and other assets		24,881			27,484
Deferred income taxes		67,849			66,451
Total current assets		536,217			585,399
Property and equipment, net of accumulated depreciation of $827,198 and $755,038, respectively		1,517,079			1,514,250
Goodwill		91,997			87,906
Intangible assets, net of amortization of $4,577 and $4,161, respectively		10,731			9,397
Other assets		192,438			199,759
Total assets	$	2,348,462		$	2,396,711
Liabilities And Shareholders’ Equity
Current liabilities:
Accounts payable	$	105,509		$	101,481
Employee compensation and benefits		131,594			125,858
Accrued insurance liabilities		101,876			110,186
Income tax payable		24,019			1,410
Other accrued liabilities		54,470			46,560
Long-term debt due within one year		1,128			2,007
Total current liabilities		418,596			387,502
Long-term debt		554,599			659,181
Deferred income taxes		140,446			137,200
Other liabilities		265,201			237,723
Shareholders’ equity:
Preferred stock, $.01 par value, 5 million shares authorized
Common stock, $.01 par value, 300 million shares authorized, 111.0 million shares issued		1,110			1,110
Capital in excess of par value		363,203			357,832
Retained earnings		1,172,682			1,089,577
Accumulated other comprehensive loss		(1,170	)		(662	)
		1,535,825			1,447,857
Less treasury stock, at cost (24.5 and 22.0 million shares, respectively)		(566,205	)		(472,752	)
Total shareholders’ equity		969,620			975,105
Total liabilities and shareholders’ equity	$	2,348,462		$	2,396,711

See notes to consolidated financial statements.

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Manor Care, Inc.

Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2004			2003			2004			2003
	(In thousands, except per share amounts)
Revenues	$	806,818		$	761,279		$	2,403,291		$	2,242,385
Expenses
Operating		663,403			638,235			1,982,518			1,882,746
General and administrative		34,045			36,649			101,942			113,995
Depreciation and amortization		31,943			32,058			95,966			95,595
		729,391			706,942			2,180,426			2,092,336
Income before other income (expenses) and income taxes		77,427			54,337			222,865			150,049
Other income (expenses):
Interest expense		(10,150	)		(10,842	)		(32,117	)		(31,034	)
Early extinguishment of debt		(11,162	)					(11,162	)
Gain on sale of assets		1,696			1,731			3,371			4,054
Equity in earnings of affiliated companies		1,765			2,090			5,662			5,230
Interest income and other		278			307			1,195			1,439
Total other expenses, net		(17,573	)		(6,714	)		(33,051	)		(20,311	)
Income before income taxes		59,854			47,623			189,814			129,738
Income taxes		20,779			16,584			69,514			48,652
Net income	$	39,075		$	31,039		$	120,300		$	81,086
Earnings per share:
Basic	$	.45		$	.35		$	1.38		$	.90
Diluted	$	.45		$	.35		$	1.35		$	.89
Weighted-average shares:
Basic		86,158			88,060			87,250			90,272
Diluted		87,591			89,720			88,848			91,532
Cash dividends declared per common share	$	.14		$	.125		$	.42		$	.125

See notes to consolidated financial statements.

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Manor Care, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30
	2004			2003
	(In thousands)
Operating Activities
Net income	$	120,300		$	81,086
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		95,966			95,595
Early extinguishment of debt		11,162
Provision for bad debts		20,421			23,930
Deferred income taxes		1,848			46,338
Net gain on sale of assets		(3,371	)		(4,054	)
Equity in earnings of affiliated companies		(5,662	)		(5,230	)
Changes in assets and liabilities, excluding sold facilities and acquisitions:
Receivables		(33,917	)		(21,564	)
Prepaid expenses and other assets		12,461			(1,633	)
Liabilities		61,166			40,081
Total adjustments		160,074			173,463
Net cash provided by operating activities		280,374			254,549
Investing Activities
Investment in property and equipment		(122,187	)		(74,059	)
Investment in systems development		(2,196	)		(2,728	)
Acquisitions		(4,025	)		(12,556	)
Proceeds from sale of assets		32,220			16,748
Proceeds from sale of minority interests in consolidated entity		2,778
Net cash used in investing activities		(93,410	)		(72,595	)
Financing Activities
Net repayments under bank credit agreement					(259,300	)
Principal payments of long-term debt		(105,990	)		(13,896	)
Proceeds from issuance of senior notes					299,372
Payment of financing costs and debt prepayment premium		(10,949	)		(7,320	)
Purchase of common stock for treasury		(108,248	)		(139,277	)
Dividends paid		(37,195	)		(11,150	)
Proceeds from exercise of stock options		14,953			2,694
Net cash used in financing activities		(247,429	)		(128,877	)
Net increase (decrease) in cash and cash equivalents		(60,465	)		53,077
Cash and cash equivalents at beginning of period		86,251			30,554
Cash and cash equivalents at end of period	$	25,786		$	83,631

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 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), all normal recurring adjustments considered necessary for a fair presentation are included. Operating results for the nine months ended September 30, 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 September 30, 2004, the Company operated 282 skilled nursing facilities, 66 assisted living facilities, 88 outpatient therapy clinics and 94 hospice and home health offices. Subsequent to September 30, 2004, the Company sold five facilities that it operated.

Comprehensive Income

Comprehensive income represents the sum of net income plus other comprehensive income (loss). Comprehensive income totaled $39.1 million and $119.8 million for the three and nine months ended September 30, 2004, respectively, and $31.5 million and $80.8 million for the three and nine months ended September 30, 2003, respectively. The other comprehensive loss in the first nine months of 2004 primarily represents the reversal of the unrealized gain on investments sold. The other comprehensive loss in the first nine months of 2003 represents the reversal of the unrealized gain on investments sold partially offset by the unrealized gain on other securities held by the Company.

Insurance Liabilities

At September 30, 2004 and December 31, 2003, the workers’ compensation liability consisted of short-term reserves of $24.1 million and $26.5 million, respectively, which were included in accrued insurance liabilities, and long-term reserves of $45.5 million and $40.5 million, respectively, which were included in other long-term liabilities. The expense for workers’

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compensation was $6.4 million and $24.6 million for the three and nine months ended September 30, 2004, respectively, and $10.2 million and $34.7 million for the three and nine months ended September 30, 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 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						Nine months ended
	September 30						September 30
	2004			2003			2004			2003
	(In thousands, except earnings per share)
Net income – as reported	$	39,075		$	31,039		$	120,300		$	81,086
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(898	)		(3,569	)		(3,420	)		(7,480	)
Net income – pro forma	$	38,177		$	27,470		$	116,880		$	73,606
Earnings per share – as reported:
Basic	$	.45		$	.35		$	1.38		$	.90
Diluted	$	.45		$	.35		$	1.35		$	.89
Earnings per share – pro forma:
Basic	$	.44		$	.31		$	1.34		$	.82
Diluted	$	.43		$	.31		$	1.31		$	.80

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New Accounting Standard

The Emerging Issues Task Force (EITF) of the FASB reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”, at its September 30, 2004 meeting that was ratified by the FASB at its October 13, 2004 meeting. EITF Issue No.04-8 requires companies to include the contingent convertible notes in diluted earnings per share as if the notes were converted to common shares at the time of issuance (the “if-converted” method). EITF Issue No. 04-8 should be applied to reporting periods ending after the effective date, which is expected to be December 15, 2004. The Company has $100 million contingently Convertible Senior Notes that were issued in April 2003 and are convertible into 3.2 million shares of common stock when the average stock price for 20 trading days reaches or exceeds $37.34. Companies are currently required to include these potential shares only when the conversion triggers are reached. As of September 30, 2004, diluted earnings per share does not include the conversion because none of the contingencies were met. As a result of the EITF consensus, the Company is evaluating its options prior to year end with respect to its notes in order to reduce the number of incremental shares that would be included in diluted earnings per share.

Note 2 – Revenues

Revenues for certain health care services are as follows:

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2004		2003		2004		2003
			(In thousands)
Skilled nursing and assisted living services	$	680,902	$	648,705	$	2,032,300	$	1,919,189
Hospice and home health services		96,745		83,168		285,095		239,800
Rehabilitation services (excludes intercompany revenues)		21,192		21,659		63,526		61,673
Other services		7,979		7,747		22,370		21,723
	$	806,818	$	761,279	$	2,403,291	$	2,242,385

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

8

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 September 30, 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 September 30, 2004, there were no receivables related to insurance recoveries.

The Company is party to various other legal matters arising in the ordinary course of business including patient care-related claims and litigation. At September 30, 2004 and December 31, 2003, the general and professional liability consisted of short-term reserves of $65.6 million and $69.8 million, respectively, which were included in accrued insurance liabilities, and long-term reserves of $122.5 million and $107.5 million, respectively, which were included in other long-term liabilities. The expense for general and professional liability claims, premiums and administrative fees was $20.0 million and $60.8 million for the three and nine months ended September 30, 2004, respectively, and $25.0 million and $67.7 million for the three and nine months ended September 30, 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 – Debt

During August 2004, the Company purchased $50 million of the 7½% Senior Notes due 2006 issued by its wholly owned subsidiary, Manor Care of America, Inc., and guaranteed by the Company, and $50 million of its 8% Senior Notes due 2008, pursuant to previously announced cash tender offers. The offers were financed with cash on hand. The Company recorded costs of $11.2 million related to these tender offers, including $10.5 million for the prepayment premium, $0.4 million for fees and expenses, and $0.3 million for the write-off of deferred financing costs.

The Company may be required to redeem $100 million of Convertible Senior Notes from its holders on April 15, 2005, which the Company is required to pay in cash. The Company has the ability and intent to finance the payment of the Convertible Senior Notes with its revolving credit facility that matures April 21, 2006. The Convertible Senior Notes are classified as long-term based on the maturity date of the Company’s revolving credit facility.

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Note 5 - Earnings Per Share

The calculation of earnings per share (EPS) is as follows:

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2004		2003		2004		2003
	(In thousands, except earnings per share)
Numerator:
Net income	$	39,075	$	31,039	$	120,300	$	81,086
Denominator:
Denominator for basic EPS - weighted-average shares		86,158		88,060		87,250		90,272
Effect of dilutive securities:
Stock options		969		1,253		1,137		910
Non-vested restricted stock		464		407		461		350
Denominator for diluted EPS - adjusted for weighted-average shares and assumed conversions		87,591		89,720		88,848		91,532
EPS:
Basic	$	.45	$	.35	$	1.38	$	.90
Diluted	$	.45	$	.35	$	1.35	$	.89

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: 1.2 million shares with an average exercise price of $35 for the nine months of 2004 and 3.0 million shares with an average exercise price of $28 for the nine months 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 September 30, 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). These documents have been filed with the SEC and are available through our website, www.hcr-manorcare.com.

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Note 6 – 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						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
				(In thousands)
Service cost	$	55		$	65		$	165		$	196
Interest cost		585			646			1,756			1,937
Expected return on plan assets		(1,194	)		(1,197	)		(3,583	)		(3,591	)
Amortization of unrecognized transition asset		(12	)		(12	)		(36	)		(36	)
Amortization of prior service cost		9			9			28			28
Amortization of net loss		178			147			532			440
Net pension income	$	(379	)	$	(342	)	$	(1,138	)	$	(1,026	)

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 $3.9 million for the three and nine months ended September 30, 2004, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2003, respectively.

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 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 expense, depreciation and amortization, other income and expense items, and income taxes. The “Other” category is not comparative as the Company recorded $8.4 million of operating expenses in the second quarter of 2003 related to a proposed settlement of a review of certain Medicare cost reports filed by facilities of the former Manor Care, Inc. for the period 1992-1998. The settlement was finalized and paid in the second quarter of 2004. See Management’s Discussion and Analysis for additional discussion of this expense.

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	Long-Term		Hospice and
	Care		Home Health		Other		Total
	(In thousands)
Three months ended September 30, 2004
Revenues from external customers	$	680,902	$	96,745	$	29,171	$	806,818
Intercompany revenues						17,994		17,994
Depreciation and amortization		30,260		732		951		31,943
Operating margin		123,562		18,067		1,786		143,415
Three months ended September 30, 2003
Revenues from external customers	$	648,705	$	83,168	$	29,406	$	761,279
Intercompany revenues						14,392		14,392
Depreciation and amortization		30,116		988		954		32,058
Operating margin		102,996		14,869		5,179		123,044
Nine months ended September 30, 2004
Revenues from external customers	$	2,032,300	$	285,095	$	85,896	$	2,403,291
Intercompany revenues						51,806		51,806
Depreciation and amortization		90,928		2,216		2,822		95,966
Operating margin		357,880		53,339		9,554		420,773
Nine months ended September 30, 2003
Revenues from external customers	$	1,919,189	$	239,800	$	83,396	$	2,242,385
Intercompany revenues						44,112		44,112
Depreciation and amortization		89,347		2,941		3,307		95,595
Operating margin		313,967		43,820		1,852		359,639

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations - Overview

     Federal Medicare Payment Legislation. The Centers for Medicare & Medicaid Services, or CMS, recently announced the annual increase in Medicare reimbursement for the next fiscal year. Beginning October 1, 2004, our Medicare rates will increase by 2.8 percent for our nursing home business and 3.3 percent for our hospice business. Beginning January 1, 2005, our Medicare rates will increase by 2.3 percent for our home health business.

Critical Accounting Policies

     General and Professional Liability. We purchase general and professional liability insurance and have maintained an unaggregated self-insured retention limit per occurrence ranging from $0.5 million to $12.5 million, depending on the policy year and state. In addition, for the policy period beginning June 1, 2004, we formed a captive insurance entity to provide a coverage layer of $12.5 million in excess of $12.5 million per claim.

Our general and professional reserves include amounts for patient care-related claims and incurred but not reported claims. We evaluated the adequacy of our general and professional liability reserves with our independent actuary during the second quarter of 2004 for all policy periods through May 31, 2004. 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 nine months of 2004 with the first nine months of 2003, the number of new claims is down. Based on our semi-annual review with our independent actuary, we maintained our accrual for current claims at $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.

     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

13

safety, training and claims management programs. The number of new claims in 2004 decreased in comparison to the prior year period. As a result of these factors, our workers’ compensation expense decreased $3.8 million for the third quarter of 2004 and $10.1 million for the first nine months of 2004 in comparison to prior year periods. 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 and Year-To-Date September 30, 2004 Compared with September 30, 2003

     Revenues. Our revenues increased $45.5 million, or 6 percent, from the third quarter of 2003 to 2004. Revenues from our long-term care segment (skilled nursing and assisted living facilities) increased $32.2 million, or 5 percent, due to increases in rates/patient mix—$59.6 million and occupancy—$4.6 million that were partially offset by a decrease in capacity—$32.0 million. Our revenues from the hospice and home health segment increased $13.6 million, or 16 percent, primarily because of an increase in hospice services provided.

Our revenues in the first nine months of 2004 increased $160.9 million, or 7 percent, compared with the first nine months of 2003. Revenues from our long-term care segment increased $113.1 million, or 6 percent, due to increases in rates/patient mix—$161.4 million and occupancy—$13.4 million that were partially offset by a decrease in capacity—$61.7 million. Our revenues from the hospice and home health care segment increased $45.3 million, or 19 percent, primarily because of an increase in hospice services provided.

Our average rates per day for the long-term care segment were as follows:

	Third Quarter							First Nine Months
	2004		2003		Increase			2004		2003		Increase
Medicare	$	338.60	$	311.98		9	%	$	335.83	$	311.17		8	%
Medicaid	$	136.64	$	131.04		4	%	$	135.14	$	130.21		4	%
Private and other (skilled only)	$	200.45	$	190.34		5	%	$	199.48	$	189.30		5	%

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. The remaining increase in the Medicare rates was a result of higher acuity Medicare patients. We expect our Medicare rates to increase 2.8 percent effective October 1, 2004 for the inflation update. In the third quarter of 2004, we recorded $5.6 million of Medicaid revenues related to Pennsylvania’s retroactive rate increase for the twelve months ended June 30, 2004. This retroactive portion is not included in the average Medicaid rate above. We expect our Medicaid rates to continue to increase approximately 3-4 percent in comparison to prior year periods. The increase in overall

14

rates was also a result of a shift in the mix of our patients to a higher percentage of Medicare patients.

Our occupancy levels were as follows:

	Third Quarter						First Nine Months
	2004			2003			2004			2003
Total		89	%		88	%		88	%		88	%
Excluding start-up facilities		89	%		89	%		88	%		88	%
Skilled nursing facilities		89	%		89	%		89	%		89	%

The quality mix of revenues from Medicare, private pay and insured patients that related to skilled nursing and assisted living facilities and rehabilitation operations was 69 percent for the third quarter and first nine months of 2004 compared to 67 percent for the third quarter and first nine months of 2003.

Our bed capacity declined between the third quarters and first nine months of 2003 and 2004 primarily because of the divestiture of facilities as a result of sale, lease expiration or closure. We divested 3 facilities with 374 beds in the second quarter of 2003, 5 facilities with 805 beds in the first quarter of 2004, 7 facilities with 973 beds in the second quarter of 2004 and 3 facilities with 443 beds in the third quarter of 2004.

     Operating Expenses. Our operating expenses in the third quarter of 2004 increased $25.2 million, or 4 percent, compared with the third quarter of 2003.

Operating expenses from our long-term care segment increased $11.6 million, or 2 percent, between the third quarters of 2003 and 2004. The largest portion of the long-term care operating expense increase related to ancillary costs of $10.1 million, excluding internal labor. Ancillary costs, which include various types of therapies, medical supplies and prescription drugs, increased as a result of our more medically complex patients. Our labor costs increased $4.7 million that was offset by a decline in general and professional liability expense of $4.8 million. Our average wage rates increased 5 percent compared with the third quarter of 2003.

Our operating expenses from our hospice and home health segment increased $10.4 million, or 15 percent, between the third quarters of 2003 and 2004. The increase in our costs was directly related to the growth in our business. The increase related to labor costs of $6.2 million, ancillary costs including pharmaceuticals of $1.1 million and other direct nursing care costs, including medical equipment and supplies, of $0.8 million.

Our operating expenses in the first nine months of 2004 increased $99.8 million, or 5 percent, compared with the first nine months of 2003. During the second quarter of 2003, we recorded an expense of $8.4 million for a proposed settlement of a review of certain Medicare cost reports filed

15

by facilities of the former Manor Care, Inc. prior to the implementation of the prospective payment system. This review, which was conducted by the Department of Justice and the Office of Inspector General of the Department of Health and Human Services, focused primarily on nursing cost allocations made in reliance upon instructions from the facilities’ Medicare fiscal intermediary for the period 1992-1998. We believe the former Manor Care facilities were fully entitled to the reimbursement they received for these allocations. The definitive settlement agreement was finalized and $8.4 million paid in the second quarter of 2004.

Operating expenses from our long-term care segment increased $69.2 million, or 4 percent, between the first nine months of 2003 and 2004. The largest portion of the long-term care operating expense increase of $39.8 million related to labor costs. Our other operating expense increase for this segment included ancillary costs, excluding internal labor, of $24.7 million. Offsetting these increases were decreases in our general and professional liability expense by $6.7 million and bad debt expense by $3.5 million.

Our operating expenses from our hospice and home health segment increased $35.8 million, or 18 percent, between the first nine months of 2003 and 2004. The increase related to labor costs of $22.6 million, ancillary costs including pharmaceuticals of $3.5 million and other direct nursing care costs, including medical equipment and supplies, of $2.7 million.

     General and Administrative Expenses. Our general and administrative expenses decreased $2.6 million and $12.1 million from the third quarters and first nine months of 2003 to 2004, respectively. In the second quarter of 2003, we recorded a charge of $6.2 million related to restructuring split-dollar life insurance policies for officers and key employees in order to comply with contractual requirements and the Sarbanes-Oxley Act of 2002, as well as to address tax law changes. Excluding this charge, the decrease in expense primarily related to costs associated with our stock appreciation rights and deferred compensation plans. During the third quarter of 2003, our stock price increased 20 percent that resulted in a significant increase in expense. During 2004, our stock price has been stable and as a result no major fluctuations occurred in this expense. The decrease in these costs included in general and administrative expenses was $6.2 million from the third quarters of 2003 to 2004 and $13.9 million from the first nine months of 2003 to 2004.

The remaining increases related to pension plans and other inflationary costs.

     Depreciation and Amortization. Our depreciation expense increased $1.6 million from the first nine months of 2003 to 2004. Excluding our divested facilities, depreciation expense increased $3.2 million because of new construction projects and renovations to existing facilities. Our amortization decreased $1.2 million from the first nine months of 2003 to 2004, primarily due to a decline in software amortization.

16

     Interest Expense. Interest expense decreased $0.7 million from the third quarters of 2003 and 2004, primarily due to the purchase of $100 million of senior notes in August 2004. Interest expense increased $1.1 million from the first nine months 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.

     Early Extinguishment of Debt. We incurred $11.2 million in costs related to the early extinguishment of $50 million of 7½% Senior Notes and $50 million of 8% Senior Notes, pursuant to our previously announced cash tender offers. The costs included a prepayment premium of $10.5 million, fees and expenses of $0.4 million and the write off of deferred financing costs of $0.3 million.

     Gain on Sale of Assets. Our gain on sale of assets in 2004 primarily resulted from the sale of seven skilled nursing and two assisted living facilities and sale of certain other assets. Our gain on sale of assets in 2003 primarily related to the sale of non-strategic land parcels, securities and three skilled nursing facilities.

     Equity in Earnings of Affiliated Companies. Our equity earnings increased in the first nine months of 2004 compared with the prior year period primarily because of our ownership interests in two hospitals.

     Income Taxes. Our effective tax rate was lower in the third quarter of 2004 due to the resolution of certain tax issues during the quarter that allowed us to adjust prior years’ estimated tax liability by $1.7 million. We expect our effective tax rate to be 36 percent in the fourth quarter of 2004 because of the recent retroactive renewal of the Work Opportunity Tax Credit by Congress. We expect our effective tax rate to be 36.5 percent for annualized 2004 and 37.5 percent for 2005. During the third quarter of 2003, our effective tax rate was 34.8 percent as a result of a decrease in our deferred tax rate in the third quarter of 2003.

Financial Condition – September 30, 2004 and December 31, 2003

Net property and equipment increased $2.8 million primarily because of $85.5 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 $91.1 million and disposal of assets of $28.0 million.

Income tax payable increased $22.6 million primarily due to deferral of tax payments to future quarters.

Long-term debt decreased because we purchased $50 million principal amount of the 7½% Senior Notes due 2006 issued by our wholly owned subsidiary, Manor Care of America, Inc., and $50

17

million principal amount of our 8% Senior Notes due 2008, pursuant to our previously announced cash tender offers.

Liquidity and Capital Resources

     Cash Flows. During the first nine months of 2004, we satisfied our cash requirements primarily with cash generated from operating activities. We used the cash principally for capital expenditures, the purchase of our common stock, the pay down of debt and the payment of dividends. Cash flows from operating activities were $280.4 million for the first nine months of 2004, an increase of $25.8 million from the first nine months of 2003. The increase in cash flows resulted primarily from an increase in net income.

     Investing Activities. Our expenditures for property and equipment of $122.2 million in the first nine months of 2004 included $36.7 million to purchase four leased facilities in Ohio and $21.6 million to construct new facilities and expand existing facilities. The proceeds from the sale of assets primarily related to the sale of seven skilled nursing facilities and two assisted living facilities.

     Debt Agreements. As of September 30, 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 $156.1 million available for future borrowings. During August 2004, we purchased $50 million principal amount of the 7½% Senior Notes due 2006 issued by our wholly owned subsidiary, Manor Care of America, Inc., and guaranteed by us, and $50 million principal amount of our 8% Senior Notes due 2008, pursuant to our previously announced cash tender offers. The offers were financed with cash on hand.

     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. In July 2004, our Board of Directors authorized an additional $100 million through December 31, 2005. With these authorizations, we purchased 3,362,700 shares in the first nine months of 2004 for $108.2 million and had $84.6 million remaining authority at September 30, 2004. 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 October 22, 2004, we announced that the Company will pay a quarterly cash dividend of 14 cents per share to shareholders of record on November 8, 2004. This dividend will approximate $12.1 million and is payable November 22, 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

18

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 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; 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.

19

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. In August 2004, we purchased $50 million principal amount of each of our 7½% Senior Notes due 2006 and 8% Senior Notes due 2008, pursuant to our previously announced cash tender offers. The offers were financed with cash on hand.

The table below provides information about our derivative financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and weighted-average interest rates by expected maturity dates. We believe the holders of the Convertible Senior Notes will not require us to redeem or convert the notes through 2009. Therefore, we have included these notes in the Thereafter column. For interest rate swaps, the table presents notional amounts by expected (contractual) maturity date. Notional amounts are used to calculate the contractual payments to be exchanged under the contract.

The following table provides information about our significant interest rate risk at September 30, 2004:

																	Fair
	Expected Maturity Dates																Value
																	Sept. 30,
	2005	2006			2007		2008			2009	Thereafter			Total			2004
						(Dollars in thousands)
Long-term debt:
Fixed rate debt		$	100,000				$	150,000			$	300,000		$	550,000		$	605,319
Average interest rate			7.5	%				8.0	%			5.0	%		6.3	%
Interest rate swaps – fixed to variable:
Notional amount		$	100,000				$	100,000						$	200,000		$	4,312
Pay variable rate			L+ 5.1	%				L+ 5.0	%						L+ 5.1	%
Receive fixed rate			7.5	%				8.0	%						7.8	%

L= six-month LIBOR (approximately 2.2 % at September 30, 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 September 30, 2004. There were no significant changes in our internal control over financial reporting in the third quarter of 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

20

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 third quarter of 2004:

					Total Number of		Approximate Dollar
			Average		Shares Purchased		Value of Shares that
	Total Number		Price		as Part of Publicly		May Yet Be
	of Shares		Paid per		Announced Plans or		Purchased Under the
Period	Purchased		Share		Programs (1)		Plans or Programs (1)
7/1/04-7/31/04		225,000	$	31.47		225,000	$	114,038,348
8/1/04-8/31/04		444,500	$	30.41		444,500	$	100,521,551
9/1/04-9/30/04		525,000	$	30.35		525,000	$	84,589,346
Total		1,194,500	$	30.58		1,194,500

(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, but this authorization was utilized by September 2004.
	On July 23, 2004, the Company 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

21

Item 6. Exhibits.

S-K Item
601 No.
10.1*	Agreement by and between Manor Care, Inc., Heartland Employment Services, Inc., Health Care and Retirement Corporation of America and Paul A. Ormond, effective August 20, 2004
10.2*	Agreement by and between Manor Care, Inc., Heartland Employment Services, Inc., Health Care and Retirement Corporation of America and Trustee, effective August 20, 2004
10.3*	Agreement by and between Manor Care, Inc. and Paul A. Ormond, effective August 20, 2004
10.4*	Form of Split Dollar Assignment Termination Agreement by and between Health Care and Retirement Corporation of America, Manor Care, Inc., Heartland Employment Services, Inc., Trustee, and Paul A. Ormond and M. Keith Weikel, effective December 16, 2003
10.5*	Form of Split Dollar Assignment Termination Agreement by and between Health Care and Retirement Corporation of America, Manor Care, Inc., Heartland Employment Services, Inc., and remaining executive officers, effective December 16, 2003
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

* Filed herewith.

22

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Manor Care, Inc. (Registrant)
Date November 2, 2004	By	/s/ Geoffrey G. Meyers
		Geoffrey G. Meyers, Executive Vice President
		and Chief Financial Officer

23

Exhibit Index

Exhibit
10.1	Agreement by and between Manor Care, Inc., Heartland Employment Services, Inc., Health Care and Retirement Corporation of America and Paul A. Ormond, effective August 20, 2004
10.2	Agreement by and between Manor Care, Inc., Heartland Employment Services, Inc., Health Care and Retirement Corporation of America and Trustee, effective August 20, 2004
10.3	Agreement by and between Manor Care, Inc. and Paul A. Ormond, effective August 20, 2004
10.4	Form of Split Dollar Assignment Termination Agreement by and between Health Care and Retirement Corporation of America, Manor Care, Inc., Heartland Employment Services, Inc., Trustee, and Paul A. Ormond and M. Keith Weikel, effective December 16, 2003
10.5	Form of Split Dollar Assignment Termination Agreement by and between Health Care and Retirement Corporation of America, Manor Care, Inc., Heartland Employment Services, Inc., and remaining executive officers, effective December 16, 2003
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

EX-10.1

                                                                    EXHIBIT 10.1

                                    AGREEMENT

         This AGREEMENT (the "Agreement") by and between Manor Care, Inc.
("Manor Care"), Heartland Employment Services, Inc. ("Company"), Health Care and
Retirement Corporation of America ("HCRA") and Paul A. Ormond ("Executive")
effective August 20, 2004.

                                    RECITALS

         WHEREAS, Executive is a participant in the Senior Executive Retirement
Program ("SERP"), a non-qualified benefit plan providing retirement benefits to
participants, in accordance with a formula based on the participant's highest
three-year average earnings and years of service (the "SERP Benefit") first
established by HCRA and subsequently adopted by Manor Care and then by the
Company; and

         WHEREAS, HCRA, Manor Care and the Company each elected to fund their
obligations under the SERP through a collateral assignment "split-dollar" life
insurance arrangement; and

         WHEREAS, Executive entered into a Split Dollar Assignment Insurance
Agreement ("SDA") with HCRA, pursuant to which the Executive became the owner of
certain life insurance policy(ies) (the "Policy") which was designed to generate
cash value sufficient to fund the Executive's SERP Benefit, and HCRA and then
later Manor Care and the Company agreed to pay the premiums on such Policy and
retain an interest (the "Corporate Interest") in the cash value of the Policy;
and

         WHEREAS, Executive remains the owner of one policy which makes up part
of the Policy (the "Retained Policy"), and transferred the ownership of the
remaining policies which make up the Policy (the "ILIT Policy") to an
irrevocable life insurance trust formed under that Irrevocable Trust Agreement
dated September 28 1992 between Executive as grantor and __________________
_______, as Trustee ("Trustee").

         WHEREAS, Section 5.10 of the SDA provides that in the event of a
"change in control," as defined in the SDA, Manor Care would be required to take
actions to fully fund the cash value of the Policy to equal the SERP Benefit
Executive was projected to receive at retirement which action would include, if
necessary, releasing a portion of its Corporate Interest in the Policy and, to
the extent applicable, providing a tax gross-up payment to the Executive to
cover any income taxes payable by the Executive as the result of the release of
the Corporate Interest; and

         WHEREAS, the transaction in September, 1998 between the former Health
Care and Retirement Corporation and the former Manor Care, Inc. constituted a
change in control under Section 5.10 of the SDA; and

         WHEREAS, on August 20, 1999 HCRA, Manor Care and Executive entered into
a Severance Agreement ("Severance Agreement") pursuant to which HCRA agreed to
provide



Executive with certain severance benefits upon termination of his employment
following a change in control of Manor Care (as defined in the Severance
Agreement), including but not limited to, fully funding the SERP Benefit and
giving Executive additional service and earnings credits for determining the
amount of the SERP Benefits, as well as making certain assumptions regarding
timing of payment of the SERP Benefit; and

         WHEREAS, the provisions of the Sarbanes-Oxley Act, effective in July,
2002, negatively impacted the SDA by potentially prohibiting the continued
payment of premiums by Manor Care to the extent such payments may be considered
loans to Executive; and

         WHEREAS, in September, 2003 the Internal Revenue Service adopted new
regulations the effect of which will be to change the tax treatment of the SDA
by causing the full cash value in the Policy to become taxable to Executive at
retirement; and

         WHEREAS, Section 4.1 of the SDA provides that in the event of adverse
tax consequences to Executive from recovery by the Company of the Corporate
Interest in the Policy, the Company may delay recovery of its Corporate
Interest; and

         WHEREAS, Executive and the Compensation Committee of the Manor Care
Board of Directors has received and reviewed the recommendations of its tax and
compensation consultants, Deloitte & Touche, regarding the obligations to
Executive under the SERP, Severance Agreement and the SDA, as impacted by
provisions of Sarbanes-Oxley Act and the IRS regulations referenced above; and

         WHEREAS, Compensation Committee and Executive, having fully reviewed
the obligations of Manor Care and the impact of the provisions of Sarbanes-Oxley
Act and the IRS regulations referred to above, and in view of the
recommendations of Deloitte & Touche, have agreed on actions designed to
mitigate the impact of the changes in tax treatment of the SDA on the Company
and Executive; and

         WHEREAS, the Company, Manor Care, HCRA and Executive desire to enter
into this Agreement for the purpose of implementing the actions of the Board and
the Compensation Committee with respect to Executive's SERP benefit and
Executive's agreements with respect thereto.

         NOW THEREFORE, in consideration of the foregoing and the mutual
promises and commitments contained herein, and for other good and valuable
consideration, the parties agree as follows:

         1. SERP Benefit The Company will pay the full amount of the SERP
Benefit to Executive in cash in accordance with the provisions of the SERP.

         2. Delay in Recovery of Corporate Interest. Due to the adverse tax
consequences to Executive as a result of the IRS regulations, pursuant to
Section 4.1 of the SDA, the Company agrees that the portion of the Corporate
Interest attributable to the Retained Policy shall be repaid in installments of
$2,365 per year. Such obligation shall commence in and with respect to the first
full calendar year following Executive's retirement, and such amount shall be
due and payable on December 31 of such year and subsequent years until the
Corporate Interest has been

                                       2



repaid. In the event that the Corporate Interest is not repaid in full upon
Executive's death, then the remainder of the Corporate Interest will become due
and payable upon Executive's death.

         3. Additional Compensation and Tax Gross-Up. Until the Company recovers
the full Corporate Interest from both the Retained Policy and the ILIT Policy,
the Company agrees to make an additional payment to Executive ("Gross-Up
Payment") each year, in an amount such that after payment of all federal, state
and local income, employment and gift taxes imposed on Gross-Up Payment,
Executive retains an amount of Gross-Up Payment sufficient to pay (i) all the
income, employment and gift tax payments which Executive will be required to pay
on income imputed to Executive under Section 101 of the Internal Revenue Code of
1986, as amended as a result of the Policy; and (ii) the required annual
repayment of the Corporate Interest on both the Retained Policy and the ILIT
Policy.

         4. Non-Competition/Non-Solicitation. In consideration of the benefits
to be provided by Paragraphs 1, 2 and 3, of this Agreement, Executive agrees
that Paragraphs 13(a)-13(c) of the Severance Agreement are amended by adding one
(1) year to the periods specified therein so that the
non-competition/non-solicitation obligations contained therein shall be
effective for a period of two (2) years following the termination of his
employment.

         5. Acknowledgement. Executive acknowledges and agrees that Manor Care,
the Company and HCRA by complying with the terms of this Agreement will have
fulfilled all obligations of HCRA under Section 5.10 of the SDA, and so long as
Manor Care and the Company perform their obligations under this Agreement,
Executive shall take no action seeking additional benefits under Section 5.10 of
the SDA.

         6. Other Provisions Effective. The parties agree that all other
provisions of the Severance Agreement, not amended herein, shall remain in full
force and effect.

         7. Further Actions. Each party agrees to take such further action, do
such other things, and execute such other writings as shall be necessary and
proper to carry out the terms and provisions of this Agreement. Manor Care shall
cause the Company, HCRA or any successor employer of the Executive to honor and
fulfill its responsibilities and agreements under this Agreement.

         8. Interpretation. This Agreement shall be subject to and shall be
construed under the laws of the State of Ohio.

         9. Headings. Any headings or captions in this Agreement are for
reference purposes only, and shall not expand, limit, change or affect the
meaning of any provision of this Agreement.

         10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same Agreement.

         11. Successors. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives. This Agreement shall inure
to the benefit of and be binding upon Manor Care, the Company, HCRA and their
successors and assigns. Manor Care

                                       3



shall require any successor to all or substantially all of the business and/or
assets of Manor Care, the Company or HCRA, whether direct or indirect, by
purchase, merger, consolidation, acquisition of stock, or otherwise, expressly
to assume and agree to perform this Agreement in the same manner and to the same
extent as Manor Care, the Company or HCRA would be required to perform if no
such succession had taken place.

EXECUTIVE:                                 MANOR CARE, INC.

_________________________________          By:  ________________________________
Paul A. Ormond
                                           Its: ________________________________

                                           HEARTLAND EMPLOYMENT SERVICES, INC.

                                           By:  ________________________________

                                           Its: ________________________________

                                           HEALTH CARE AND RETIREMENT
                                           CORPORATION OF AMERICA

                                           By:  ________________________________

                                           Its: ________________________________

                                       4

EX-10.2

                                                                    EXHIBIT 10.2

                                    AGREEMENT

         This AGREEMENT (the "Agreement") by and between Manor Care, Inc.
("Manor Care"), Heartland Employment Services, Inc. ("Company"), Health Care and
Retirement Corporation of America ("HCRA") and __________________________ as
Trustee ("Trustee") under a certain Irrevocable Trust Agreement dated September
28, 1992 between Paul A. Ormond ("Executive") as grantor and __________________
as Trustee ("Trust ") is effective August 20, 2004.

                                    RECITALS

         WHEREAS, Executive entered into a Split Dollar Assignment Insurance
Agreement on September 28, 1992 and amended and restated same on January 17,
2002 ("SDA") with HCRA, pursuant to which the Trust became the owner of certain
life insurance policy (ies) (the "Policy") on the life of Executive and the
Company agreed to pay the premiums on such Policy and retain an interest (the
"Corporate Interest") in the cash value of the Policy; and

         WHEREAS, in September 2003 the Internal Revenue Service adopted new
regulations the effect of which will be to change the tax treatment of the SDA
by causing the full cash value in the Policy to become taxable to Executive at
retirement and Executive to be subject to gift tax as a result of the Policy
being held by the Trust; and

         WHEREAS, Section 4.1 of the SDA provides that in the event of adverse
tax consequences to Executive from recovery by the Company of the Corporate
Interest in the Policy, the Company may delay recovery of its Corporate
Interest; and

         WHEREAS, the Compensation Committee of the Manor Care Board of
Directors has received and reviewed the recommendations of its tax and
compensation consultants, Deloitte & Touche, regarding the impact of the IRS
regulations referred to above, and in view of the recommendations of Deloitte &
Touche, have agreed on actions designed to mitigate the impact of the changes in
tax treatment of the SDA on the Company and Executive; and

         WHEREAS, the Company, Manor Care, HCRA and Trustee desire to enter into
this Agreement for the purpose of implementing the actions of the Board and the
Compensation Committee with respect to the Policy.

         NOW THEREFORE, in consideration of the foregoing and the mutual
promises and commitments contained herein, and for other good and valuable
consideration, the parties agree as follows:

         1. Delay in Recovery of Corporate Interest. Due to the adverse tax
consequences to Executive as a result of the IRS regulations, pursuant to
Section 4.1 of the SDA, the Company and the Trust agrees that the Corporate
Interest shall be repaid in installments of $7,635 per year. Such obligation
shall commence in and with respect to the first full calendar year following
Executive's retirement, and such amount shall be due and payable on December 31
of such year and subsequent years until the Corporate Interest has been repaid.
In the event that the Corporate



Interest is not repaid in full upon Executive's death, then the remainder of the
Corporate Interest will become due and payable upon Executive's death.

         2. Acknowledgement. Trustee of the Trust acknowledges and agrees
that Manor Care, the Company and HCRA by complying with the terms of this
Agreement will have fulfilled all obligations of HCRA under Section 5.10 of the
SDA, and so long as Manor Care and the Company perform their obligations under
this Agreement, Trustee of the Trust shall take no action seeking additional
benefits under Section 5.10 of the SDA.

         3. Further Actions. Each party agrees to take such further action, do
such other things, and execute such other writings as shall be necessary and
proper to carry out the terms and provisions of this Agreement. Manor Care shall
cause the Company, HCRA or any successor employer of Executive to honor and
fulfill its responsibilities and agreements under this Agreement.

         4. Interpretation. This Agreement shall be subject to and shall be
construed under the laws of the State of Ohio.

         5. Headings. Any headings or captions in this Agreement are for
reference purposes only, and shall not expand, limit, change or affect the
meaning of any provision of this Agreement.

         6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same Agreement.

         7. Successors. This Agreement shall inure to the benefit of and be
binding upon Manor Care, the Company, HCRA and their successors and assigns.
Manor Care shall require any successor to all or substantially all of the
business and/or assets of Manor Care, the Company or HCRA, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock, or
otherwise, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent as Manor Care, the Company or HCRA would be
required to perform if no such succession had taken place. This Agreement shall
be binding upon and inure to the benefit of the Trust, any successor to Trustee
of the Trust and/or any successor or assigns of the Trust, including the
beneficiaries of the Trust.

TRUSTEE                                    MANOR CARE, INC.

By:   ___________________________          By:  ________________________________
Name: ___________________________          Its: ________________________________
Its:  ___________________________

                                       2



                                           HEARTLAND EMPLOYMENT SERVICES, INC.

                                           By:  ________________________________
                                           Its: ________________________________

                                           HEALTH CARE AND RETIREMENT
                                           CORPORATION OF AMERICA

                                           By:  ________________________________
                                           Its: ________________________________

                                       3

EX-10.3

                                                                    EXHIBIT 10.3

                                       Manor Care, Inc.
                                       333 N. Summit Street
                                       Toledo, OH 43604

August 20, 2004

Mr. Paul A. Ormond

Dear Paul:

         The Compensation Committee of the Board of Directors of Manor Care,
Inc. ("Manor Care") recognizes your efforts and would like to provide you with
the opportunity to earn retirement/death benefits in addition to those provided
by the Supplemental Executive Retirement Plan and the Supplemental Corporate
Officer-Senior Executive Life Insurance Program. Accordingly, Manor Care will
purchase a life insurance policy on your life (the "Policy") with premiums
payable in the total amount of $3,400,000 over five years, and with such other
terms with such insurance carrier as may mutually be agreed upon. Manor Care
will solicit your input on the form of such Policy and the selection of the
insurance carrier. Manor Care will be the owner of the Policy. In the event that
you retire from the Company on or after your attainment of age 60, then subject
to the terms of this letter Manor Care will transfer to you the ownership of the
Policy. Manor Care will designate the beneficiary of the Policy as you may
instruct; provided, however, that except as provided below, if you terminate
employment prior to age 60, Manor Care will be the beneficiary of the Policy.

         Except as provided below, if you voluntarily terminate employment with
Manor Care prior to attaining age 60 Manor Care will continue as the owner of
the Policy, you shall have no rights to have the Policy transferred to you and
Manor Care shall have no further obligations to you under this Agreement. In
such case Manor Care as the owner of the Policy may in its discretion continue
such Policy in force or may surrender the Policy for its cash value at anytime.

         In the event prior to your attaining age 60 your employment terminates
due to (i) Manor Care terminating your employment for reasons other than Cause
(as defined in the Severance Agreement dated August 20, 1999 between Health Care
Retirement Corporation of America, HCR ManorCare, Inc. and you (the "Severance
Agreement"), (ii) death, (iii) your disability such that you become entitled to
disability benefits under Manor Care's long term disability plan, (iv) your
voluntary termination of employment following a Corporate Transaction (as
defined in the Severance Agreement) under such circumstances that you are
entitled under the terms of the Severance Agreement to Severance Benefits (as
defined in the Severance Agreement) thereunder, (v) your voluntary termination
of employment following an involuntary reduction in your overall compensation
opportunities as in effect on the date hereof, or (vi) your voluntary
termination of employment following a material reduction in your
responsibilities or title but not including any change in your title of Chairman
which is determined to be made by the Board of



August 20, 2004
Page 2

Directors of Manor Care in good faith as being in accordance with corporate
governance standards generally applicable in the relevant marketplace, then in
addition to and as part of any severance which may be payable under the terms of
your Severance Agreement, Manor Care will transfer ownership of the Policy to
you (or in the event of your death to your estate or other beneficiary you
designate) as of the first business day following your termination of
employment.

         You shall be responsible for all taxes imposed on you with respect to
the Policy transfer. To the extent that such transfer results in a tax
withholding obligation on Manor Care, then Manor Care may satisfy such
withholding from any other payments which may be due to you from Manor Care. If
there are not sufficient funds upon which to satisfy any such withholding
requirements, then Manor Care may satisfy any withholding obligations from the
cash surrender value of the Policy. Alternatively, at your election you may
satisfy the withholding Obligation by paying Manor Care such amount from other
funds.

         Nothing contained in this letter agreement conveys upon you the right
to continue to be employed by Manor Care, constitutes a contract or agreement of
employment or restricts Manor Care's right to terminate you at any time, with or
without cause.

         The laws of the State of Ohio will govern the terms of this letter
agreement.

         Please indicate your acceptance of the terms set forth in this letter
agreement by signing and dating it below and returning it to me.

                                      Very truly yours,

                                      Chairman, Compensation Committee of
                                      the Board of Directors of Manor Care, Inc.

                                      Agreed and Accepted.

                                      __________________________________________
                                      Paul A. Ormond                        Date

EX-10.4

                                                                    EXHIBIT 10.4

             FORM OF SPLIT DOLLAR ASSIGNMENT TERMINATION AGREEMENT

         This SPLIT DOLLAR ASSIGNMENT TERMINATION AGREEMENT ("Termination
Agreement") by and between Health Care and Retirement Corporation of America
("Company"), Manor Care, Inc. ("Manor Care"), Heartland Employment Services,
Inc. ("HES"), ______________ ("Employee") and __________________________ as
Trustee ("Trustee") and Paul A. Ormond, and M.P. Weikel, under a certain
Irrevocable Trust Agreement dated __________________ between Employee as grantor
and ___________________________ as Trustee ("Trust Agreement"), is effective
December 16, 2003.

                                    RECITALS

         WHEREAS, Company and HES are direct or indirect subsidiaries of Manor
Care and serve as employer corporations for individuals providing services to or
on behalf of Manor Care and its subsidiaries and affiliated entities; and

         WHEREAS, from January 1, 2000 and continuing through the present,
Employee has been employed by HES; prior to January 1, 2000 Employee was
employed by Company; and

         WHEREAS, among other benefits provided to Employee by Company and HES
are executive life insurance benefits under the Supplemental Corporate
Officer-Senior Executive Life Insurance Program ("SCO-SELIP") pursuant to which
Employee is entitled to receive life insurance death benefits equal to two (2)
times salary, prior to retirement, and two (2) times final salary,
post-retirement (the "SCO - SELIP Benefits"); and

         WHEREAS, Company and HES elected to fund their obligations under the
SCO-SELIP through collateral assignment split dollar life insurance arrangements
("CASD") pursuant to which each participant under the SCO-SELIP or an
irrevocable trust created by the participant became the owner of life insurance
policies subject to a collateral assignment to Company of a corporate interest
equal to the amount of premiums paid by Company or HES; the CASD policies were
designed to generate cash value such that at the participant's retirement the
policies would have generated sufficient cash value to provide the SCO-SELIP
Benefits without payment of additional premiums; and

         WHEREAS, Company, Employee and Trustee entered into a Split Dollar
Assignment Insurance Agreement dated __________________ ("SDA") pursuant to
which Employee and Trustee granted Company the right to receive the corporate
interest from the life insurance policy(ies) supporting the SCO-SELIP
obligations of Company (the "Policy") and Company agreed to pay the premiums on
the Policy, with all such premium payments being referred to as the "Corporate
Interest"; and

         WHEREAS, Trustee is and has always been the owner and the beneficiary
of the Policy under the Trust Agreement; and



         WHEREAS, Section 5.10 of the SDA provided that in the event of a change
in control, as defined in the SDA, Company would be required to release a
portion of its Corporate Interest in the Policy and, if necessary, provide a
gross-up payment to the Employee for any income taxes payable on such transfer;
and

         WHEREAS, the transaction in September, 1998 between the former Health
Care and Retirement Corporation and the former Manor Care, Inc. constituted a
change in control under Section 5.10 of the SDA; and

         WHEREAS, the provisions of the Sarbanes-Oxley Act, effective in July,
2002, negatively impacted the CASD arrangement by potentially prohibiting the
continued payment of premiums by Manor Care to the extent such payments may be
considered loans to the Employee; and

         WHEREAS, in order to comply with the potential prohibition of continued
premium payments by the Sarbanes-Oxley Act, Company discontinued premium
payments under the SDA; and

         WHEREAS, in September, 2003 the Internal Revenue Service adopted
regulations the effect of which will be to change the tax treatment of the SDA
by causing the cash value in the Policy to become taxable to the Employee at
retirement; and

         WHEREAS, IRS Notice 2002-8 established a "safe harbor" so that if the
SDA is terminated prior to January 1, 2004 the cash value of the Policy will not
be taxable to Employee at the time of such termination; and

         WHEREAS, the provisions of Sarbanes-Oxley and the IRS regulations and
notices referenced above, have impacted the original design of the SCO-SELIP so
as to reduce the advantages and benefits of the CASD arrangements for both
Company and the participants; and

         WHEREAS, the Compensation Committee of the Manor Care Board of
Directors has received and reviewed the recommendations of its consulting firm,
Watson Wyatt, regarding the implementation of Section 5.10 of the SDA, as well
as Watson Wyatt's recommendation regarding the provisions of Sarbanes-Oxley Act
and the IRS regulations and notices referenced above; and

         WHEREAS, in view of the recommendations of Watson Wyatt, the
Compensation Committee has approved the termination of the SDA pursuant to
Section 4.1(c) thereof on the terms and conditions stated herein; and

         WHEREAS, in light of the potential adverse tax consequences of
continuing the SDA, the Employee and Trustee also desire to terminate the SDA
pursuant to Section 4.1(c) thereof on the terms and conditions stated herein.

                                       2



         NOW THEREFORE, in consideration of the foregoing and the mutual
promises and commitments contained herein, and for other good and valuable
consideration, the parties agree as follows:

         1. Termination of SDA. The parties agree, pursuant to Section 4.1(c),
that the SDA shall terminate effective December 16, 2003. Except as provided in
this Termination Agreement, upon termination of the SDA, Company shall have no
further obligations under the SDA to make premium payments on the Policy.

         2. Waiver and Return of Corporate Interest. Upon termination of the
SDA, Manor Care, HES and Company waive their rights to that portion of the
Corporate Interest to the extent that the cash value of the Policy is sufficient
to sustain the Policy with a death benefit equal to two (2) times Employee's
annual salary as of the date hereof ("Termination Death Benefit"), without
payment of any additional premiums. Any portion of the Corporate Interest that
is in excess of the amount necessary to sustain the Policy equal to the
Termination Death Benefit, without any additional payment of premiums on the
Policy, shall be distributed to Manor Care as soon as practicable after the
effective date of this Termination Agreement and Manor Care, HES and Company
shall thereafter have no further Corporate Interest in the Policy. Manor Care,
HES and Company shall execute a Release of Collateral Assignment with respect to
the Policy in substantially the form attached hereto as Exhibit A, with respect
to the amount of the Corporate Interest waived by Manor Care, HES and Company
pursuant to this Termination Agreement. Employee acknowledges that he will be
deemed to have ordinary income equal to the amount of the Corporate Interest
waived by Manor Care, HES and Company under this Termination Agreement.

         3. Supplemental Payment For Future Premiums and Gross-Up. HES agrees
that following termination of the SDA, and so long as Employee remains an
employee of HES or any successor corporation designated by Manor Care, then
Employee is entitled to receive a supplemental payment from HES or any successor
corporation designated by Manor Care in an amount such that after payment of all
federal, state and local income taxes and Medicare taxes imposed on the
supplemental payment, Employee retains an amount of the payment sufficient to
pay premiums on the Policy in the amount necessary to (i) provide a cash value
of the Policy necessary to sustain the Policy equal to the Termination Death
Benefit, in the event that the waiver of the Corporate Interest under Paragraph
2 of this Termination Agreement was not sufficient to provide such benefits;
(ii) increase the death benefits available under the Policy to account for
future salary increases of Employee so that the Policy will be sufficient to
provide an amount equal to the SCO-SELIP Benefit; and (iii) maintain the death
benefits available under the Policy in the event of any shortfalls under the
Policy.

         4. Gross-Up Payment on Waiver of Corporate Interest. HES agrees to make
an additional payment to Employee, within 30 days following the date hereof, in
an amount such that after payment of all federal, state and local income taxes
and Medicare taxes imposed on the payment, Employee retains an amount of the
payment sufficient to pay the personal income tax and Medicare tax liability
Employee will incur as a result of the income received, on the waiver of the
Corporate Interest required by Paragraph 2 of this Termination Agreement.

                                       3



         5. Acknowledgment. Employee and Trustee acknowledge and agree that
Manor Care, Company and HES by complying with the terms of this Termination
Agreement will have fulfilled all obligations of Company under the SDA and so
long as Manor Care, Company and HES perform their obligations under this
Termination Agreement, Employee and Trustee shall take no other action seeking
additional benefits under the SDA; provided, however, that Company agrees that
following execution of this Termination Agreement, it will undertake in good
faith to evaluate with Employee the best alternatives to providing the
originally anticipated value in the Policy on an after-tax basis (including
payment of any gift taxes as may be due) and will implement such alternative as
deemed by the Compensation Committee of Manor Care to be in the best interests
of Manor Care consistent with the original commitment to Employee regarding the
after-tax benefits of the CASD arrangement related to the SCO-SELIP, which may
include in Manor Care's discretion, the reimbursement of gift taxes imposed on
the waiver of the Corporate Interest required by Paragraph 2, on the
supplemental payments required by Paragraph 3, on any gross-up payment made to
Employee under Paragraphs 3 and 4 and on Employee's portion of the cash value of
the Policy, plus a gross-up of all income taxes on such reimbursement.

         6. Amendment and Termination This Termination Agreement shall not be
modified or amended except by a written agreement of the parties to this
Termination Agreement. This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto, their successors and assigns and their
respective trustees, officers, directors, shareholders, affiliates, subsidiaries
and their successors and assigns.

         7. Further Actions. Each party agrees to take such further action, do
such other things, and execute such other writings as shall be necessary and
proper to carry out the terms and provisions of this Termination Agreement.
Manor Care shall cause Company, HES or any successor employer of Employee to
honor and fulfill its responsibilities and agreements under this Termination
Agreement.

         8. Interpretation. This Termination Agreement shall be subject to and
shall be construed under the laws of the State of Ohio.

         9. Headings. Any headings or captions in this Agreement are for
reference purposes only, and shall not expand, limit, change or affect the
meaning of any provision of this Termination Agreement.

         10. Counterparts. This Termination Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same Termination Agreement.

         11. Amendment to Employment Agreement. This Termination Agreement shall
constitute an amendment to any current Employment Agreement previously entered
into by the parties and shall be incorporated into and made a part of such
Employment Agreement.

         12. Successors. This Termination Agreement shall inure to the benefit
of and be enforceable by the Employee's legal representatives. This Termination
Agreement shall inure to the benefit of and be binding upon Manor Care, Company,
HES and Trustee and their successors

                                       4



and assigns. Manor Care shall require any successor to all or substantially all
of the business and/or assets of Manor Care, Company or HES, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock, or
otherwise, expressly to assume and agree to perform this Termination Agreement
in the same manner and to the same extent as Manor Care, Company or HES would be
required to perform if no such succession had taken place.

         IN WITNESS WHEREOF, the parties hereby execute this Termination
Agreement as of the date first written above.

Employee:                                  Health Care and Retirement
                                           Corporation Of America:

_________________________________          By:   _______________________________
                                           Name: Wade B. O'Brian
                                           Its:  Vice President

Trustee                                    Heartland Employment Services, Inc.

By:   ___________________________          By:   _______________________________
Name: ___________________________          Name: Wade B. O'Brian
Its:  ___________________________          Its:  Vice President

                                           Manor Care, Inc.

                                           By:   _______________________________
                                           Name: R. Jeffrey Bixler
                                           Its:  Vice President

                                       5

EX-10.5

                                                                    EXHIBIT 10.5

                  SPLIT DOLLAR ASSIGNMENT TERMINATION AGREEMENT

         This SPLIT DOLLAR ASSIGNMENT TERMINATION AGREEMENT ("Termination
Agreement") by and between Health Care and Retirement Corporation of America
("Company"), Manor Care, Inc. ("Manor Care"), Heartland Employment Services,
Inc. ("HES") and _________________________ ("Employee") is effective December
16, 2003.

                                    RECITALS

         WHEREAS, Company and HES are direct or indirect subsidiaries of Manor
Care and serve as employer corporations for individuals providing services to or
on behalf of Manor Care and its subsidiaries and affiliated entities; and

         WHEREAS, from January 1, 2000 and continuing through the present,
Employee has been employed by HES; prior to January 1, 2000 Employee was
employed by Company; and

         WHEREAS, among other benefits provided to Employee by Company and HES
are executive life insurance benefits under the Supplemental Corporate
Officer-Senior Executive Life Insurance Program ("SCO-SELIP") pursuant to which
Employee is entitled to receive life insurance death benefits equal to two (2)
times salary, prior to retirement, and two (2) times final salary,
post-retirement (the "SCO - SELIP Benefits"); and

         WHEREAS, Company and HES elected to fund their obligations under the
SCO-SELIP through collateral assignment split dollar life insurance arrangements
("CASD") pursuant to which each participant under the SCO-SELIP became the owner
of life insurance policies subject to a collateral assignment to the Company of
a corporate interest equal to the amount of premiums paid by the Company or HES;
the CASD policies were designed to generate cash value such that at the
participant's retirement the policies would have generated sufficient cash value
to provide the SCO-SELIP Benefits without payment of additional premiums; and

         WHEREAS, Company and Employee entered into a Split Dollar Assignment
Insurance Agreement dated January 1, 1993 ("SDA") pursuant to which Employee
granted the Company the right to receive the corporate interest from the life
insurance policy(ies) supporting the SCO-SELIP obligations of Company (the
"Policy") and the Company agreed to pay the premiums on the Policy, with all
such premium payments being referred to as the "Corporate Interest"; and

         WHEREAS, Section 5.10 of the SDA provided that in the event of a change
in control, as defined in the SDA, the Company would be required to release a
portion of its



Corporate Interest in the Policy and, if necessary, provide a gross-up payment
to the Employee for any income taxes payable on such transfer; and

         WHEREAS, the transaction in September, 1998 between the former Health
Care and Retirement Corporation and the former Manor Care, Inc. constituted a
change in control under Section 5.10 of the SDA; and

         WHEREAS, the provisions of the Sarbanes-Oxley Act, effective in July,
2002, negatively impacted the CASD arrangement by potentially prohibiting the
continued payment of premiums by Manor Care to the extent such payments may be
considered loans to the Employee; and

         WHEREAS, in order to comply with the potential prohibition of continued
premium payments by the Sarbanes-Oxley Act, the Company discontinued premium
payments under the SDA; and

         WHEREAS, in September, 2003 the Internal Revenue Service adopted
regulations the effect of which will be to change the tax treatment of the SDA
by causing the cash value in the Policy to become taxable to the Employee at
retirement; and

         WHEREAS, IRS Notice 2002-8 established a "safe harbor" so that if the
SDA is terminated prior to January 1, 2004 the cash value of the Policy will not
be taxable to Employee at the time of such termination; and

         WHEREAS, the provisions of Sarbanes-Oxley and the IRS regulations and
notices referenced above, have impacted the original design of the SCO-SELIP so
as to reduce the advantages and benefits of the CASD arrangements for both the
Company and the participants; and

         WHEREAS, the Compensation Committee of the Manor Care Board of
Directors has received and reviewed the recommendations of its consulting firm,
Watson Wyatt, regarding the implementation of Section 5.10 of the SDA, as well
as Watson Wyatt's recommendation regarding the provisions of Sarbanes-Oxley Act
and the IRS regulations and notices referenced above; and

         WHEREAS, in view of the recommendations of Watson Wyatt, the
Compensation Committee has approved the termination of the SDA pursuant to
Section 4.1(c) thereof on the terms and conditions stated herein; and

         WHEREAS, in light of the potential adverse tax consequences of
continuing the SDA, the Employee also desires to terminate the SDA pursuant to
Section 4.1(c) thereof on the terms and conditions stated herein.

         NOW THEREFORE, in consideration of the foregoing and the mutual
promises and commitments contained herein, and for other good and valuable
consideration, the parties agree as follows:



         1. Termination of SDA. The parties agree, pursuant to Section 4.1(c),
that the SDA shall terminate effective December 16, 2003. Except as provided in
this Termination Agreement, upon termination of the SDA the Company shall have
no further obligations under the SDA to make premium payments on the Policy.

         2. Waiver and Return of Corporate Interest. Upon termination of the
SDA, Manor Care, HES and Company waive their rights to that portion of the
Corporate Interest to the extent that the cash value of the Policy is sufficient
to sustain the Policy with a death benefit equal to two (2) times Employee's
annual salary as of the date hereof ("Termination Death Benefit"), without
payment of any additional premiums Policy. Any portion of the Corporate Interest
that is in excess of the amount necessary to sustain the Policy equal to the
Termination Death Benefit, without any additional payment of premiums on the
Policy, shall be distributed to Manor Care as soon as practicable after the
effective date of this Termination Agreement and Manor Care, HES and Company
shall thereafter have no further Corporate Interest in the Policy. Manor Care,
HES and Company shall execute a Release of Collateral Assignment with respect to
the Policy in substantially the form attached hereto as Exhibit A, with respect
to the amount of the Corporate Interest waived by Manor Care, HES and Company
pursuant to this Termination Agreement. Employee acknowledges that he will be
deemed to have ordinary income equal to the amount of the Corporate Interest
waived by Manor Care, HES and Company under this Termination Agreement.

         3. Supplemental Payment For Future Premiums and Gross-Up. HES agrees
that following termination of the SDA, and so long as Employee remains an
employee of HES or any successor corporation designated by Manor Care, then
Employee is entitled to receive a supplemental payment from HES or any successor
corporation designated by Manor Care in an amount such that after payment of all
federal, state and local income taxes imposed on the supplemental payment,
Employee retains an amount of the payment sufficient to pay premiums on the
Policy in the amount necessary to (i) provide a cash value of the Policy
necessary to sustain the Policy equal to the Termination Death Benefit, in the
event that the waiver of the Corporate Interest under Paragraph 2 of this
Termination Agreement was not sufficient to provide such benefits; (ii) increase
the death benefits available under the Policy to account for future salary
increases of Employee so that the Policy will be sufficient to provide an amount
equal to the SCO-SELIP Benefit; and (iii) maintain the death benefits available
under the Policy in the event of any shortfalls under the Policy.

         4. Gross-Up Payment on Waiver of Corporate Interest. HES agrees to make
an additional payment to Employee, within 30 days following the date hereof, in
an amount such that after payment of all federal, state and local income taxes
imposed on the payment, Employee retains an amount of the payment sufficient to
pay the personal income tax liability Employee will incur as a result of the
income received, on the waiver of the Corporate Interest required by Paragraph 2
of this Termination Agreement.



         5. Acknowledgment. Employee acknowledges and agrees that Manor Care,
the Company and HES by complying with the terms of this Termination Agreement
will have fulfilled all obligations of the Company under the SDA and so long as
Manor Care, Company and HES perform their obligations under this Termination
Agreement, Employee shall take no other action seeking additional benefits under
the SDA.

         6. Amendment and Termination This Termination Agreement shall not be
modified or amended except by a written agreement of the parties to this
Termination Agreement. This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto, their successors and assigns and their
respective trustees, officers, directors, shareholders, affiliates, subsidiaries
and their successors and assigns.

         7. Further Actions. Each party agrees to take such further action, do
such other things, and execute such other writings as shall be necessary and
proper to carry out the terms and provisions of this Termination Agreement.
Manor Care shall cause the Company, HES or any successor employer of the
Employee to honor and fulfill its responsibilities and agreements under this
Termination Agreement.

         8. Interpretation. This Termination Agreement shall be subject to and
shall be construed under the laws of the State of Ohio.

         9. Headings. Any headings or captions in this Agreement are for
reference purposes only, and shall not expand, limit, change or affect the
meaning of any provision of this Termination Agreement.

         10. Counterparts. This Termination Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, and all of
which together shall constitute one and the same Termination Agreement.

         11. Amendment to Employment Agreement. This Termination Agreement shall
constitute an amendment to any current Employment Agreement previously entered
into by the parties and shall be incorporated into and made a part of such
Employment Agreement.

         12. Successors. This Termination Agreement shall inure to the benefit
of and be enforceable by the Employee's legal representatives. This Termination
Agreement shall inure to the benefit of and be binding upon Manor Care, the
Company, HES and their successors and assigns. Manor Care shall require any
successor to all or substantially all of the business and/or assets of Manor
Care, the Company or HES, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock, or otherwise, expressly to assume and agree
to perform this Termination Agreement in the same manner and to the same extent
as Manor Care, the Company or HES would be required to perform if no such
succession had taken place.



         IN WITNESS WHEREOF, the parties hereby execute this Termination
Agreement as of the date first written above.

Employee:                                 Health Care and Retirement Corporation
                                          Of America:
_________________________________
                                          By:  _________________________________
                                          Its: _________________________________

                                          Heartland Employment Services, Inc.

                                          By:  _________________________________
                                          Its: _________________________________

                                          Manor Care, Inc.

                                          By:  _________________________________
                                          Its: _________________________________

EX-31.1

                                                                    EXHIBIT 31.1

                                CEO CERTIFICATION

I, Paul A. Ormond, certify that:

     (1) I have reviewed this quarterly report on Form 10-Q of Manor Care, Inc.;

     (2) Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

     (3) Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash flows
         of the registrant as of, and for, the periods presented in this report;

     (4) The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
         registrant and have:

              a.  Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

              b.  Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

              c.  Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

     (5) The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         functions):

              a.  All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

              b.  Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.

Date: November 2, 2004

/s/ Paul A. Ormond
Chairman, President and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                                CFO CERTIFICATION

I, Geoffrey G. Meyers, certify that:

     (1) I have reviewed this quarterly report on Form 10-Q of Manor Care, Inc.;

     (2) Based on my knowledge, this report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

     (3) Based on my knowledge, the financial statements, and other financial
         information included in this report, fairly present in all material
         respects the financial condition, results of operations and cash flows
         of the registrant as of, and for, the periods presented in this report;

     (4) The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
         registrant and have:

              a.  Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

              b.  Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

              c.  Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

     (5) The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         functions):

              a.  All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

              b.  Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.

Date: November 2, 2004

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

EX-32.1

                                                                    EXHIBIT 32.1

                Certification pursuant to 18 U.S.C. Section 1350,
                             as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

I, Paul A. Ormond, Chairman, President and Chief Executive Officer of Manor
Care, Inc. (the Company) certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of
my knowledge:

         (1)  The Quarterly Report of the Company on Form 10-Q for the period
              ended September 30, 2004 as filed with the Securities and Exchange
              Commission on the date hereof (the Report) fully complies with the
              requirements of section 13(a) or 15(d) of the Securities Exchange
              Act of 1934; and

         (2)  The information contained in the Report fairly presents, in all
              material respects, the financial condition and results of
              operations of the Company as of, and for, the periods presented in
              the Report.

/s/ Paul A. Ormond

Paul A. Ormond
Chairman, President and Chief Executive Officer
November 2, 2004

EX-32.2

                                                                    EXHIBIT 32.2

                Certification pursuant to 18 U.S.C. Section 1350,
                             as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

I, Geoffrey G. Meyers, Executive Vice President and Chief Financial Officer of
Manor Care, Inc. (the Company) certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:

         (1)  The Quarterly Report of the Company on Form 10-Q for the period
              ended September 30, 2004 as filed with the Securities and Exchange
              Commission on the date hereof (the Report) fully complies with the
              requirements of section 13(a) or 15(d) of the Securities Exchange
              Act of 1934; and

         (2)  The information contained in the Report fairly presents, in all
              material respects, the financial condition and results of
              operations of the Company as of, and for, the periods presented in
              the Report.

/s/ Geoffrey G. Meyers

Geoffrey G. Meyers
Executive Vice President and Chief Financial Officer
November 2, 2004