Exhibit 10.3
     EMPLOYMENT AGREEMENT (this “Agreement”) dated as of June 13, 2007, between
MANOR CARE, INC., a Delaware corporation (the “Company”), and STEVEN M.
CAVANAUGH (the “Executive”).
               WHEREAS the Executive is a skilled and dedicated employee of the
Company who has important management responsibilities and talents that benefit
the Company; and
               WHEREAS the Compensation Committee (the “Committee”) of the Board
of Directors of the Company (the “Board”) considers it essential to the best
interests of the Company and its stockholders to assure that the Company and its
subsidiaries will have the continued dedication of the Executive;
               NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
               SECTION 1. Definitions. For purposes of this Agreement, the
following terms shall have the meanings set forth below:
          (a) “Affiliate(s)” means, with respect to any specified Person, any
other Person that, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
          (b) “Annual Incentive Plan” means the Company’s Annual Incentive Plan
as in effect from time to time.
          (c) “Cause” means the occurrence of any one of the following:
     (i) the Executive is convicted of, or pleads guilty or nolo contendere to,
any felony;
     (ii) the Executive commits one or more acts constituting wilful financial
dishonesty or fraud in connection with the performance of his duties; or
     (iii) the Executive continually and wilfully fails, for at least 14 days
following written notice from the Company, to perform substantially the
Executive’s employment duties (other than as a result of incapacity due to
physical or mental illness or after delivery by the Executive of a Notice of
Termination for Good Reason).
               For purposes of this provision, no act or failure to act on the
part of the Executive shall be considered “wilful” unless it is done, or omitted
to be done, by the Executive in bad faith or without reasonable belief that the
Executive’s action or

 

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omission was in the best interests of the Company. The termination of employment
of the Executive for Cause shall not be effective unless and until there has
been delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than two-thirds of the entire membership of the
Board (excluding the Executive) at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that in the good faith opinion of the Board, the Executive is
guilty of the conduct described in clause (i), (ii) or (iii) above and
specifying the particulars thereof in detail.
          (d) “Change in Control” means the occurrence of any of the following:
     (i) during any period of twelve consecutive months, the individuals who, as
of the beginning of such period, were members of the Board (the “Incumbent
Directors”) cease for any reason, prior to the end of such period, to constitute
at least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the beginning of such period whose appointment
or election, or nomination for election, by the Company’s stockholders was
approved by a vote of at least a majority of the Incumbent Directors shall be
considered as though such individual were an Incumbent Director, but excluding,
for purposes of this proviso, any such individual whose assumption of office
after the beginning of such period occurs as a result of an actual or threatened
proxy contest with respect to election or removal of directors or other actual
or threatened solicitation of proxies or consents by or on behalf of a “person”
(as such term is used in Section 13(d) of the Exchange Act) (each, a “Person”)
other than the Board or the Company;
     (ii) the consummation of (A) a merger, consolidation, statutory share
exchange, reorganization or similar form of corporate transaction (including as
a part of a series of other transactions) involving (x) the Company or (y) any
of its Subsidiaries, but in the case of this clause (y) only if Company Voting
Securities (as defined below) are issued or issuable or (B) a sale or other
disposition of all or substantially all the assets of the Company (any such
event, a “Reorganization”), unless, immediately following such Reorganization,
(1) all or substantially all the individuals and entities who were the
“beneficial owners” (as such term is defined in Rule 13d-3 under the Exchange
Act (or a successor rule thereto)) of shares of the Company’s common stock or
other securities eligible to vote for the election of the Board outstanding
immediately prior to the consummation of such Reorganization (such securities,
the “Company Voting Securities”) beneficially own, directly or indirectly, more
than 65% of the combined voting power of the then outstanding voting securities
of the corporation or other entity resulting from such Reorganization (including
a corporation or other entity that, as a result of such transaction, owns the
Company or all or substantially all the Company’s assets either directly or
through one or more subsidiaries) (the “Continuing Entity”) in substantially the
same proportions as their ownership, immediately prior to the consummation of
such Reorganization, of the outstanding Company Voting Securities (excluding any
outstanding voting securities of the Continuing

 

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Entity that such beneficial owners hold immediately following the consummation
of the Reorganization as a result of their ownership prior to such consummation
of voting securities of any corporation or other entity involved in or forming
part of such Reorganization other than the Company or a Subsidiary), (2) no
Person (excluding any employee benefit plan (or related trust) sponsored or
maintained by the Continuing Entity or any corporation or other entity
controlled by the Continuing Entity) beneficially owns, directly or indirectly,
15% or more of the combined voting power of the then outstanding voting
securities of the Continuing Entity and (3) at least a majority of the members
of the board of directors or other governing body of the Continuing Entity
immediately after the Reorganization are Incumbent Directors;
     (iii) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company; or
     (iv) any Person, corporation or other entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) becomes the beneficial
owner, directly or indirectly, of securities of the Company representing 15% or
more of the combined voting power of the Company Voting Securities; provided,
however, that for purposes of this subparagraph (iv), the following acquisitions
shall not constitute a Change in Control: (A) any acquisition by the Company or
any Subsidiary, (B) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any Subsidiary, (C) any
acquisition by an underwriter temporarily holding such Company Voting Securities
pursuant to an offering of such securities or (D) any acquisition pursuant to a
Reorganization that does not constitute a Change in Control.
          (e) “Change in Control Date” means the date on which a Change in
Control occurs (if any).
          (f) “Code” means the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated thereunder.
          (g) “Competing Business” shall mean any person, corporation or other
entity engaged in the United States of America in providing skilled nursing,
assisted living, home health, hospice or rehabilitation services or providing or
attempting to provide any other product or service which is the same as or
similar to products or services sold or provided by the Company or any of its
subsidiaries within the two-year period prior to the Termination Date.
          (h) “Disability” means that either (i) the Executive is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than twelve
months or (ii) the Executive is, by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than twelve months,

 

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receiving income replacement benefits for a period of not less than three months
under an accident and health plan covering the Company’s employees.
          (i) “Employee Benefits” means the perquisites and benefits as provided
under any and all employee retirement income and welfare benefit policies,
plans, programs or arrangements in which the Executive is entitled to
participate at any time of determination, including any stock option, stock
purchase, stock appreciation, savings, pension, supplemental employee
retirement, or other retirement income or welfare benefit, deferred
compensation, incentive compensation, group or other life, health, medical,
hospital or other insurance (whether funded by actual insurance or self-insured
by the Company), disability, salary continuation, expense reimbursement and
other employee benefit policies.
          (j) “Exchange Act” means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute thereto.
          (k) “Excise Tax” means the excise tax imposed by Section 4999 of the
Code, together with any interest or penalties imposed with respect to such tax.
          (l) “Good Reason” means, without the Executive’s express written
consent, the occurrence of any one or more of the following:
     (i) the failure to elect or reelect or otherwise to maintain Executive in
the office(s) or position(s) with the Company set forth in Section 3 and any
other office(s) or position(s) that Executive held immediately prior to the
Change in Control Date;
     (ii) the occurrence of any of the following which is not remedied within
ten days after written notice to the Board from Executive:
     (A) a significant adverse change, whether involving a reduction or
expansion, in the nature or scope of the authorities, positions, powers,
functions, responsibilities or duties attached to the office(s) and position(s)
with the Company set forth in Section 3 and any other office(s) or position(s)
that Executive held immediately prior to the Change in Control Date, including
ceasing to report to the Company’s Chief Executive Officer and any other change
in the reporting lines, offices and positions to which Executive reported or
which reported to the Executive immediately prior to the Change in Control Date
and any change due to the Company no longer being a reporting company under the
Exchange Act;
     (B) a reduction in Executive’s annual base salary as in effect immediately
prior to the Change in Control Date;
     (C) a material reduction in the scope or value of Employee Benefits as in
effect immediately prior to the Change in Control Date;

 

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     (D) any material breach of this Agreement by the Company; or
     (E) the continuation or repetition of harassing or denigrating treatment of
Executive which is inconsistent with Executive’s position with the Company;
     (iii) the failure of the Company to comply with and satisfy the
requirements of Section 14(c); or
     (iv) the Company (A) relocates its principal executive offices, or requires
Executive to have his principal place of employment changed, to any location
which increases by more than 25 miles Executive’s commuting distance as compared
to his commuting distance immediately prior to the Change in Control Date or
(B) requires Executive to travel away from his principal place of employment in
the course of discharging his responsibilities or duties hereunder at least 20%
more (in terms of aggregate days in any calendar year or in any two consecutive
calendar quarters when annualized for purposes of comparison to any prior year)
than the average of such time that was required of Executive in the three full
years immediately prior to the Change in Control Date.
               The Executive’s right to terminate employment for Good Reason
shall not be affected by the Executive’s incapacity due to physical or mental
illness. A termination of employment by the Executive for Good Reason for
purposes of this Agreement shall be effectuated by giving the Company written
notice (“Notice of Termination for Good Reason”) of the termination setting
forth in reasonable detail the specific conduct of the Company that constitutes
Good Reason and the specific provisions of this Agreement on which the Executive
relied. A termination of employment by the Executive for Good Reason shall be
effective on the 30th day following the date when the Notice of Termination for
Good Reason is given, unless the Company elects to treat such termination as
effective as of an earlier date. If the Executive continues to provide services
to the Company after one of the events giving rise to Good Reason has occurred,
the Executive shall not be deemed to have consented to such event or to have
waived the Executive’s right to terminate his or her employment for Good Reason
in connection with such event.
          (m) “Incentive Amount” means the greater of (i) the amount payable to
the Executive under his Annual Incentive Plan award for the award period ending
in the year in which the Change in Control Date occurs determined on the basis
of target award level achievement and (ii) the amount payable to the Executive
under his Annual Incentive Plan award for the award period ending in the year in
which the Change in Control Date occurs on the basis of award level achievement
(expressed as a percentage) equal to the average of the actual award levels
(expressed as a percentage) achieved by the Executive under the Annual Incentive
Plan with respect to each of the three full years prior to the year in which the
Change in Control Date occurs (or such lesser number of years for which the
Executive was employed by the Company).

 

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          (n) “Payment” means any payment, benefit or distribution (or
combination thereof) by the Company, any of its Affiliates or any trust
established by the Company or its Affiliates, to or for the benefit of the
Executive, whether paid, payable, distributed, distributable or provided
pursuant to this Agreement or otherwise, including any payment, benefit or other
right that constitutes a “parachute payment” within the meaning of Section 280G
of the Code.
          (o) “Performance Award Plan” means the Company’s Performance Award
Plan as in effect from time to time.
          (p) “Person” shall have the meaning set forth in Section 1(d)(i).
          (q) “Protection Period” means the period commencing on the Change in
Control Date and ending on the second anniversary thereof.
          (r) “Qualifying Termination” means any termination of the Executive’s
employment (i) by the Company, other than for Cause, death or Disability, that
is effective (or with respect to which the Executive is given written notice)
during the Protection Period or (ii) by the Executive for Good Reason that is
effective (or with respect to which the Executive has given Notice of
Termination for Good Reason) during the Protection Period.
          (s) “Specified Performance Level” means (i) in the case of any
Performance Share (as defined in Section 7), performance achievement (expressed
as a percentage) relative to the applicable performance goals established by the
Company for each applicable year for Performance Shares generally (provided
that, in the case of any such year for which more than one actual performance
level was determined, the actual performance level for such year shall be deemed
to be the average of all such levels for such year), equal to the greatest of,
as applicable, (A) the average actual aggregate award level or levels of the
Company (as approved by the Committee and expressed as a percentage) for each of
the three full years prior to the year in which the Change in Control Date
occurs, (B) if the Change in Control Date occurs after June 30 in any year, the
average actual aggregate award level or levels of the Company (as approved by
the Committee and expressed as a percentage) for each of the two full years
prior to the year in which the Change in Control Date occurs and the partial
year in which the Change in Control Date occurs, utilizing, in the case of such
partial year, the aggregate award level of the Company for such year as
determined by the Committee prior to the Change in Control Date and expressed as
a percentage based on the Committee’s review of year-to-date financial
performance of the Company for such year, and (C) such other performance
achievement level as may be determined by the Committee prior to the Change in
Control Date (expressed as a percentage) based on the Committee’s review of
Company performance, in comparison to actual award levels approved by the
Committee, for the multi-year period commencing in 2005 with respect to which
various awards of Performance Shares were made and such other factors as the
Committee determines are relevant to determining an appropriate performance
achievement level, (ii) in the case of any Annual Incentive Plan award, award
level achievement (expressed as a percentage) equal to the greater of (A) the
average actual award level achievement of the Executive

 

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(as approved by the Committee and expressed as a percentage) for each of the
three full years prior to the year in which the Change in Control Date occurs
(or such lesser number of years for which the Executive was employed by the
Company) relative to the applicable performance goals established by the Company
for each of such full years and (B) such other award level achievement as may be
determined by the Committee prior to the Change in Control Date (expressed as a
percentage) based on the Committee’s review of year-to-date performance of the
Company and the Executive for the year in which the Change in Control Date
occurs and such other factors as the Committee determines are relevant to
determining an appropriate performance achievement level and (iii) in the case
of any Performance Award Plan award, performance achievement (expressed as a
percentage) relative to the applicable performance goals established by the
Company for each applicable year for Performance Award Plan awards generally
(provided that, in the case of any such year for which more than one actual
performance level was determined, the actual performance level for such year
shall be deemed to be the average of all such levels for such year), equal to
the greatest of, as applicable, (A) the average actual performance achievement
level of the Company (as approved by the Committee and expressed as a
percentage) for each of the three full years prior to the year in which the
Change in Control Date occurs, (B) if the Change in Control Date occurs after
June 30 in any year, the average actual performance achievement level of the
Company (as approved by the Committee and expressed as a percentage) for each of
the two full years prior to the year in which the Change in Control Date occurs
and the partial year in which the Change in Control Date occurs, utilizing, in
the case of such partial year, the performance achievement level of the Company
for such year as determined by the Committee prior to the Change in Control Date
and expressed as a percentage based on the Committee’s review of year-to-date
financial performance of the Company for such year, and (C) such other
performance achievement level as may be determined by the Committee prior to the
Change in Control Date (expressed as a percentage) based on the Committee’s
review of Company performance, in comparison to actual performance achievement
levels approved by the Committee, for the multi-year period commencing in 2005
with respect to which various awards under the Performance Achievement Plan were
made and such other factors as the Committee determines are relevant to
determining an appropriate performance achievement level.
          (t) “Subsidiary” means any entity in which the Company, directly or
indirectly, possesses 50% or more of the total combined voting power of all
classes of its stock.
          (u) “Termination Date” means the date (if any) on which the
termination of the Executive’s employment, in accordance with the terms of this
Agreement, is effective.
               SECTION 2. Effectiveness; Effect on Prior Agreement. (a) This
Agreement and Executive’s employment hereunder shall become effective as of the
date hereof (the “Effective Date”). This Agreement and Executive’s employment
hereunder shall remain in effect until the second anniversary of the Effective
Date, except that, beginning on the first anniversary of the Effective Date and
on each anniversary thereafter (i.e., one year prior to the scheduled expiration
of the term hereof), the term of

 

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this Agreement and Executive’s employment hereunder shall be automatically
extended for an additional one-year period, unless, prior to the occurrence of a
Change in Control, the Company or Executive provides the other party with
90 days’ prior written notice before the applicable anniversary that the term of
this Agreement and Executive’s employment hereunder shall not be so extended
(the last day of such period, giving effect to all such extensions, the “Normal
Expiration Date”), provided that upon the occurrence of a Change in Control
prior to the Normal Expiration Date, (A) the term of this Agreement shall not
expire or terminate, (B) the Company shall have no further right to amend,
modify or terminate this Agreement or the term thereof without the Executive’s
written consent in accordance with Section 18, (C) the Employment Term (as
defined in Section 3) shall not expire unless expressly terminated by the
Company or Executive in accordance with Section 4 and (D) any purported
termination of this Agreement or the term thereof by the Company (other than in
connection with a termination of Executive’s employment for any reason other
than Cause, death or Disability) shall be deemed to be a termination of
Executive’s employment by the Company other than for Cause; provided, however,
that Sections 6, 7 and 8 of this Agreement shall only be effective with respect
to the first Change in Control that occurs during the term of this Agreement.
          (b) Effective as of the Effective Date, this Agreement shall replace
and supersede in its entirety the Employment Agreement dated as of May 6, 2006
among the Executive, the Company and the other parties thereto (the “Prior
Agreement”), which shall have no further force or effect. In addition, the
receipt of severance benefits under Section 5 or 6 shall be conditioned on the
waiver of any other cash severance benefits otherwise payable to the Executive
under any severance plan or policy available generally to Company employees.
               SECTION 3. Terms and Conditions of Employment. (a) The Company
hereby agrees to continue to employ the Executive, and the Executive hereby
agrees to continue to be employed by the Company, as its Vice President, Chief
Financial Officer and Assistant Secretary on the terms and conditions set forth
herein for the period commencing on the Effective Date and ending on the earlier
of (i) the termination of the Executive’s employment for any reason and (ii) the
termination of this Agreement in accordance with its terms (such period of
employment, the “Employment Term”).
          (b) During the Employment Term, the Executive shall have authorities,
powers, functions, responsibilities and duties consistent with those held by the
Executive immediately prior to the Effective Date and shall devote substantially
all the Executive’s business time to the performance of such responsibilities
and duties.
          (c) During the Employment Term, the Executive shall report directly to
the Chief Executive Officer of the Company.
          (d) During the Employment Term, the Executive’s principal place of
employment shall be at the Company’s current principal executive offices in
Toledo, Ohio. The Executive acknowledges that his responsibilities and duties
shall require him to travel on business to the extent necessary to fully perform
such responsibilities and duties.

 

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          (e) During the Employment Term, the Executive shall, without
limitation to Sections 3 and 4, be entitled to the following compensation and
benefits:
     (i) Annual base salary at a rate no less than the rate in effect
immediately prior to the Effective Date, subject to such subsequent upward
adjustments as may be determined by the Board from time to time, which shall be
payable on the Company’s normal payroll schedule;
     (ii) Such annual, short-term and long-term incentive and equity
compensation awards as may be determined by the Board; and
     (iii) Participation in the employee benefit, welfare, retirement,
perquisite and other plans, programs and policies provided to other similarly
situated employees or provided to other senior executives of the Company, as
determined by the Board from time to time, and subject to the terms and
conditions of such arrangements as in effect from time to time.
          (f) Exhibit A of this Agreement sets forth, as of the date of this
Agreement:
     (i) With respect to Performance Shares, (A) the Executive’s outstanding
awards, including the applicable performance goals and target and maximum award
levels, and (B) the actual aggregate award levels of the Company (as approved by
the Committee and expressed as a percentage) for each of 2005 and 2006 relative
to the applicable performance goals established by the Company for each of such
years for Performance Shares generally.
     (ii) With respect to the Annual Incentive Plan, (A) the Executive’s target
and maximum award levels, and (B) the Executive’s actual award level (expressed
as a percentage) under the Annual Incentive Plan with respect to each of 2004,
2005 and 2006 (or such lesser number of years for which the Executive was
employed by the Company).
     (iii) With respect to the Performance Award Plan, (A) the Executive’s
outstanding awards, including the applicable performance goals and payout
levels, and (B) the actual payout levels of the Company (as approved by the
Committee and expressed as a percentage) for each of 2004, 2005 and 2006
relative to the applicable performance goals established by the Company for each
of such years for Performance Award Plan awards generally.
               SECTION 4. Termination of Employment. (a) The Executive’s
employment hereunder may be terminated by the Company or the Executive at any
time and for any reason, subject to the terms and conditions of this Agreement.
          (b) Except as otherwise provided herein, each party hereto shall give
the other party at least 30 days prior written notice of any termination of the
Executive’s employment by such party. Notwithstanding the foregoing, the
Executive’s employment shall automatically terminate without notice in the event
of the Executive’s death.

 

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          (c) In the event of any termination of the Executive’s employment
hereunder, the Executive shall be entitled to receive promptly (i) any annual
base salary, annual bonus or other amounts earned and payable, but not yet paid
as of the Termination Date, under the terms of the applicable benefit plan,
practice, policy or program, (ii) reimbursement of any unreimbursed business
expenses incurred through the Termination Date, (iii) any other payments
explicitly set forth in any benefit plans, practices, policies and programs in
which the Executive participates and (iv) as otherwise required by applicable
law (the rights to such payments, the “Accrued Rights”).
          (d) In addition to the Accrued Rights, the Executive may be entitled
to additional payments and benefits under Section 5 or 6. In the event that
payments and benefits under Section 6 become payable, the Executive shall not be
entitled to receive any payments or benefits under Section 5.
               SECTION 5. Severance Prior to a Change in Control. (a) Upon any
voluntary termination of the Executive’s employment, whether or not for Good
Reason, the Executive shall not be entitled to any additional payments or
benefits under this Section 5 other than the Accrued Rights.
          (b) Upon the termination of Executive’s employment by the Company for
Cause, the Executive shall not be entitled to any additional payments or
benefits under this Section 5 other than the Accrued Rights.
          (c) Upon the termination of Executive’s employment by the Company for
any reason other than for Cause, death or Disability, the Company shall, in
addition to payment of the Accrued Rights, continue payment of Executive’s
then-current annual base salary, on the Company’s normal payroll schedule, for a
period of two years after the Termination Date.
          (d) Upon the termination of Executive’s employment as a result of
death prior to the Change in Control Date, the Company shall, in addition to
payment of the Accrued Rights, continue payment of Executive’s then-current
annual base salary on the Company’s normal payroll schedule for a period of two
years after the Termination Date; provided, however, that such payments shall be
offset by any survivor benefits, excluding life insurance proceeds, received by
Executive’s spouse or other designated beneficiary under the Company’s plans,
programs and policies.
          (e) Upon the termination of Executive’s employment as a result of his
Disability prior to the Change in Control Date, the Company shall, in addition
to payment of the Accrued Rights, continue payment of Executive’s then-current
annual base salary on Company’s normal payroll schedule for a period of two
years after the Termination Date; provided, however, that such payments shall be
offset by any disability benefits received by Executive, or his legal guardian,
under the Company’s plans, programs and policies.

 

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               SECTION 6. Severance after a Change in Control. (a) In the event
of a Qualifying Termination, the Executive shall be entitled to the following
payments and benefits in lieu of any payments or benefits otherwise payable
under Section 5:
     (i) The Company shall pay the Executive an amount equal to three times the
sum of (A) the Executive’s annual base salary as in effect immediately prior to
the Termination Date (without regard to any reduction giving rise to Good
Reason) and (B) the Executive’s Incentive Amount, in a lump-sum payment payable
no later than the tenth business day after the Termination Date.
     (ii) The Company shall, at the Company’s expense, continue to provide for a
period of three years after such Qualifying Termination (the “Continuation
Period”) group medical, dental and vision benefits substantially similar to
those which the Executive was receiving or entitled to receive immediately prior
to the Change in Control Date.
     (iii) The Company shall take whatever action is necessary to fund
completely any split-dollar life insurance arrangement maintained by the Company
for the benefit of the Executive, effective as of the Termination Date, and
based on the assumption that the Executive’s service with the Company continues
through the end of the Continuation Period.
     (iv) Effective as of the Termination Date, Executive shall be credited with
an additional 36 months of service with the Company for the purpose of
determining service credits and benefits due to Executive under the Company’s
tax-qualified and non-qualified pension, retirement and savings plans in which
the Executive, his dependents or his beneficiaries participated immediately
prior to the Change in Control Date, provided that such credits and benefits
with respect to tax-qualified plans shall be provided under a non-qualified plan
to the extent necessary under applicable law and plan terms.
     (v) The Executive shall be entitled to receive the Accrued Rights.
          (b) Non-Qualifying Termination. In the event of any termination of
Executive’s employment other than a Qualifying Termination (including a
termination of employment as a result of death or Disability) on or after the
Change in Control Date, the Executive shall not be entitled to any payments or
benefits from the Company under this Section 6. Notwithstanding the foregoing,
the Executive shall be entitled to payment of the Accrued Rights and may be
entitled to payments and benefits under Section 5.
               SECTION 7. Impact of a Change in Control on Equity Compensation
and Other Incentive Awards. Effective as of the Change in Control Date,
notwithstanding any provision to the contrary in the Company’s Equity Incentive
Plan, as amended and restated, Annual Incentive Plan or Performance Award Plan
or any award agreements thereunder, (a) all outstanding (i) stock options and
stock appreciation rights, (ii) restricted shares subject to service, but not
performance, based vesting requirements (including any such shares delivered in
connection with the vesting of Performance

 

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Shares (as defined below)) and (iii) restricted stock units, in each case then
held by the Executive that are unexercisable or otherwise unvested, shall
automatically become fully vested and unrestricted and immediately exercisable,
as the case may be, (b) all outstanding restricted share awards that are subject
to performance-based vesting or delivery requirements (“Performance Shares”)
then held by the Executive that are unvested shall automatically become vested
on the basis that (i) all service based requirements have been satisfied and
(ii) all performance-based requirements have been satisfied at the Specified
Performance Level for Performance Shares for all relevant periods, (c) the
Executive’s outstanding Annual Incentive Plan award for the year in which the
Change in Control Date occurs shall become irrevocably payable, without regard
to any term or condition applicable to such award except as specified herein, at
the same time as similar Annual Incentive Plan awards would generally otherwise
be payable based on the terms thereof as in effect immediately prior to the
Change in Control Date (or, if earlier, upon the Executive’s termination of
employment for any reason), in an amount equal to the greater of (i) the amount
payable to the Executive under such award determined on the basis of target
performance achievement and (ii) the amount payable to the Executive under such
award determined on the basis of achieving a Specified Performance Level for
such award, and (d) each of the Executive’s Performance Award Plan awards (if
any) outstanding in the year in which the Change in Control Date occurs shall
become irrevocably payable, without regard to any term or condition applicable
to such award except as specified herein, at the same time or times as similar
Performance Award Plan awards would generally otherwise be payable based on the
terms thereof as in effect immediately prior to the Change in Control Date (or,
if earlier, upon the Executive’s termination of employment for any reason), in
an amount equal to the greater of (i) the amount payable to the Executive under
such award determined on the basis of target performance achievement and
(ii) the amount payable to the Executive under such award determined on the
basis of achieving a Specified Performance Level for such award.
               SECTION 8. Certain Additional Payments by the Company.
(a) Notwithstanding anything in this Agreement to the contrary and except as set
forth below, in the event it shall be determined that any Payment that is paid
or payable to or for the benefit of the Executive during the term of this
Agreement would be subject to the Excise Tax, the Executive shall be entitled to
receive an additional payment (a “280G Gross-Up Payment”) in an amount such
that, after payment by the Executive of all taxes (and any interest or penalties
imposed with respect to such taxes), including any income and employment taxes
and Excise Taxes imposed upon the 280G Gross-Up Payment, the Executive retains
an amount of the 280G Gross-Up Payment equal to the Excise Tax imposed upon such
Payments. The Company’s obligation to make 280G Gross-Up Payments under this
Section 8 shall not be conditioned upon the Executive’s termination of
employment and shall survive and apply after the Executive’s termination of
employment.
          (b) Subject to the provisions of Section 8(c), all determinations
required to be made under this Section 8, including whether and when a 280G
Gross-Up Payment is required, the amount of such 280G Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, shall be made in
accordance with the terms of this

 

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Section 8 by a nationally recognized certified public accounting firm that shall
be designated by the Company (the “Accounting Firm”). The Accounting Firm shall
provide detailed supporting calculations both to the Company and the Executive
within 15 business days of the receipt of notice from the Executive that there
has been a Payment or such earlier time as is requested by the Company or the
Executive. For purposes of determining the amount of any 280G Gross-Up Payment,
the Executive shall be deemed to pay Federal income tax at the highest marginal
rate applicable to individuals in the calendar year in which any such 280G
Gross-Up Payment is to be made and deemed to pay state and local income taxes at
the highest marginal rates applicable to individuals in the state or locality of
the Executive’s residence or place of employment in the calendar year in which
any such 280G Gross-Up Payment is to be made, net of the maximum reduction in
Federal income taxes that can be obtained from deduction of state and local
taxes, taking into account limitations applicable to individuals subject to
Federal income tax at the highest marginal rate. All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any 280G Gross-Up Payment,
as determined pursuant to this Section 8, shall be paid by the Company to the
Executive within five business days of the receipt of the Accounting Firm’s
determination, provided that, in no event, shall such payment be made later than
the last day of the calendar year after the calendar year in which the
applicable Excise Tax is paid. If the Accounting Firm determines that no Excise
Tax is payable by the Executive, it shall so indicate to the Executive in
writing. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
the Excise Tax, at the time of the initial determination by the Accounting Firm
hereunder, it is possible that the amount of the 280G Gross-Up Payment
determined by the Accounting Firm to be due to the Executive, consistent with
the calculations required to be made hereunder, will be lower than the amount
actually due (an “Underpayment”). In the event the Company exhausts its remedies
pursuant to Section 8(c) and the Executive thereafter is required to make a
payment of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment (which, for the
avoidance of doubt, shall be calculated on an after-tax basis consistent with
this Section 8) shall be paid by the Company to the Executive within five
business days of the receipt of the Accounting Firm’s determination.
          (c) The Executive shall notify the Company in writing of any written
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a 280G Gross-Up Payment. Such notification shall be
given as soon as practicable, but no later than ten business days after the
Executive is informed in writing of such claim. Failure to give timely notice
shall not prejudice the Executive’s right to 280G Gross-Up Payments and rights
of indemnity under this Section 8. The Executive shall apprise the Company of
the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which the Executive gives such notice to the
Company (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If the Company notifies the Executive in
writing prior to the expiration of such period that the Company desires to
contest such claim, the Executive shall (i) give the Company any information
reasonably requested by the Company relating to such claim, (ii) take such
action in connection with contesting such

 

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 14
claim as the Company shall reasonably request in writing from time to time,
including accepting legal representation with respect to such claim by an
attorney reasonably selected by the Company, (iii) cooperate with the Company in
good faith in order effectively to contest such claim and (iv) permit the
Company to participate in any proceedings relating to such claim; provided,
however, that the Company shall bear and pay directly all costs and expenses
(including additional income taxes, interest and penalties) incurred in
connection with such contest, and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax (including
interest or penalties) imposed as a result of such representation and payment of
costs and expenses. Without limitation on the foregoing provisions of this
Section 8(c), the Company shall control all proceedings taken in connection with
such contest, and, at its sole discretion, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the
applicable taxing authority in respect of such claim and may, at its sole
discretion, either direct the Executive to pay the tax claimed and sue for a
refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that (A) if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive, on an interest-free basis, and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties) imposed with respect
to such advance or with respect to any imputed income in connection with such
advance and (B) if such contest results in any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be due, such extension
must be limited solely to such contested amount. Furthermore, the Company’s
control of the contest shall be limited to issues with respect to which the 280G
Gross-Up Payment would be payable hereunder, and the Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
          (d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 8(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company’s complying with the requirements of Section 8(c)) promptly pay to the
Company the amount of such refund received (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 8(c), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of the 30-day period after such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of 280G Gross-Up Payment
required to be paid.
               SECTION 9. Section 409A. It is the intention of the Company and
the Executive that the provisions of this Agreement comply with Section 409A of
the Code and the final regulations promulgated thereunder (including the
transition rules thereof),

 

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 15
and all provisions of this Agreement shall be construed and interpreted in a
manner consistent with Section 409A of the Code and such final regulations. To
the extent necessary to avoid imposition of any additional tax or interest
penalties under Section 409A (such tax and interest penalties, a “Section 409A
Tax”), notwithstanding the timing of payment provided in any other Section of
this Agreement, the timing of any payment, distribution or benefit pursuant to
this Agreement shall be subject to a six-month delay in a manner consistent with
Section 409A(a)(2)(B)(i) of the Code, provided that (a) the Executive shall be
credited with interest in respect of such payment, distribution or benefit
during such six-month period at the rate set forth in Section 16 and (b) if the
Executive dies during such six-month period, any such delayed payments shall not
be further delayed, and shall be immediately payable to the Executive’s devisee,
legatee or other designee or, should there be no such designee, to the
Executive’s estate in accordance with the applicable provisions of this
Agreement. From and after the Effective Date and for the remainder of the term
of this Agreement, (i) the Company shall administer and operate this Agreement
in compliance with Section 409A of the Code and the final regulations
promulgated thereunder and any other applicable rules, regulations or other
guidance promulgated thereunder as in effect from time to time, (ii) in the
event that the Company determines, after conducting a reasonable review, that
any provision of this Agreement does not comply with Section 409A of the Code or
any such rules, regulations or guidance and that the Executive may become
subject to a Section 409A Tax, the Company and the Executive shall negotiate in
good faith to amend or modify such provision to avoid the application of such
Section 409A Tax, provided that such amendment or modification shall not (and
the Executive shall not be obligated to consent to any such amendment or
modification that would) reduce the economic value to the Executive of such
provision, and (iii) in the event that, notwithstanding the foregoing, the
Executive is subject to a Section 409A Tax with respect to any such provision,
then except to the extent such Section 409A Tax is attributable to the
Executive’s breach of the Executive’s obligations under the immediately
preceding clause (ii), the Executive shall be entitled to receive an additional
payment from the Company (a “409A Gross-Up Payment”) in an amount such that,
after payment by the Executive of all taxes (and any interest or penalties
imposed with respect to such taxes), including any income and employment taxes
(and any interest and penalties imposed with respect thereto) and any
Section 409A Tax imposed upon the 409A Gross-Up Payment, the Executive retains
an amount of the 409A Gross-Up Payment equal to the Section 409A Tax imposed
with respect to such provision. The provisions of Sections 8(c) and (d) shall
apply mutatis mutandis to any claim by the Internal Revenue Service that, if
successful, would give rise to a 409A Gross-Up Payment by the Company.
               SECTION 10. Non-Competition/Non-Solicitation and Confidentiality.
(a) Executive covenants and agrees that during Executive’s employment with the
Company and for a period of two years following the termination of Executive’s
employment, including termination by the Company for Cause or without Cause,
Executive shall not, in the United States of America, engage, directly or
indirectly, whether as principal or as agent, officer, director, employee,
consultant, shareholder or otherwise, alone or in association with any other
person, corporation or other entity, in any Competing Business. Notwithstanding
the foregoing, Executive may own, directly

 

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or indirectly, up to 1% of the outstanding equity of any business which may be a
Competing Business without violating the provisions of this Section 10(a).
          (b) Executive agrees that during his employment with the Company he
shall not, directly or indirectly, solicit the business of, or do business with,
any customer or prospective customer of the Company or its subsidiaries for any
business purpose other than for the benefit of the Company or any of its
subsidiaries. Executive further agrees that for two years following termination
of his employment with the Company, including termination by the Company for
Cause or without Cause, Executive shall not, directly or indirectly, solicit the
business of, or do business with, any customers or prospective customers of the
Company or any of its subsidiaries; provided, however, that this provision shall
not apply to soliciting to provide or providing any services which the Company
or any of its subsidiaries does not provide, or has not traditionally sought to
provide.
          (c) Executive agrees that, during his employment with the Company and
for two years following termination of Executive’s employment with the Company,
including termination by the Company for Cause or without Cause, Executive shall
not, directly or indirectly, solicit or induce, or attempt to solicit or induce,
any employee of the Company to leave the employment of the Company for any
reason whatsoever, or hire or engage any employee of the Company except into the
employment of the Company, provided that the foregoing shall not apply to any
employee hired through a general hiring process without any direct or indirect
involvement by the Executive in recruiting such person for hire.
          (d) The Executive acknowledges that the confidential information and
trade secrets of the Company obtained by the Executive while employed by the
Company are the property of the Company. Therefore, the Executive agrees that
the Executive shall not disclose to any unauthorized Person or use for the
Executive’s own purposes any such information or trade secrets without the prior
written consent of the Company, unless and to the extent that the aforementioned
matters (i) become generally known to and available for use by the public other
than as a result of the Executive’s acts or omissions in violation of this
Agreement, (ii) were within the Executive’s possession prior to its being
obtained by the Executive in the course of the Executive’s employment with the
Company or (iii) are required to be disclosed pursuant to applicable law.
               SECTION 11. No Mitigation or Offset; Enforcement of this
Agreement. (a) Except as expressly provided in Section 5(d) and (e), the
Company’s obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action which
the Company may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement and, except as otherwise expressly provided for in
this Agreement, such amounts shall not be reduced whether or not the Executive
obtains other employment.

 

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 17
          (b) The Company shall reimburse the Executive for, promptly upon the
Executive’s demand, any and all reasonable legal fees and expenses that the
Executive may incur during the period from the Effective Date until the
expiration of this Agreement in accordance with its terms, as a result of any
contest, dispute or proceeding (regardless of whether formal legal proceedings
are ever commenced and regardless of the outcome thereof and including all
stages of any contest, dispute or proceeding) by the Company, the Executive or
any other Person with respect to the validity or enforceability of, or liability
under, any provision of this Agreement (including as a result of any contest by
the Executive regarding the amount of any payment owed pursuant to this
Agreement).
               SECTION 12. Non-Exclusivity of Rights. Nothing in this Agreement
shall prevent or limit the Executive’s continuing or future participation in any
plan, practice, policy or program provided by the Company or a Subsidiary for
which the Executive may qualify, nor shall anything in this Agreement limit or
otherwise affect any rights the Executive may have under any plan, contract or
agreement with the Company or a Subsidiary (other than the Prior Agreement).
Vested benefits and other amounts that the Executive is otherwise entitled to
receive under any incentive compensation (including any equity award agreement),
deferred compensation, retirement, pension or other plan, practice, policy or
program of, or any contract or agreement with, the Company or a Subsidiary
(other than the Prior Agreement) shall be payable in accordance with the terms
of each such plan, practice, policy, program, contract or agreement, as the case
may be, except as explicitly modified by this Agreement.
               SECTION 13. Withholding. The Company may deduct and withhold from
any amounts payable under this Agreement such Federal, state, local, foreign or
other taxes as are required to be withheld pursuant to any applicable law or
regulation.
               SECTION 14. Assignment. (a) This Agreement is personal to the
Executive and, without the prior written consent of the Company, shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution, and any assignment in violation of this Agreement shall be void.
          (b) Notwithstanding the foregoing Section 14(a), this Agreement and
all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive’s personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts would still be payable to him or her
hereunder if he or she had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the Executive’s devisee, legatee or other designee or, should there be no such
designee, to the Executive’s estate.
          (c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company (a “Successor”) to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement (except for

 

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 18
purposes of Section 10), (i) the term “Company” shall mean the Company as
hereinbefore defined and any Successor and any permitted assignee to which this
Agreement is assigned and (ii) the term “Board” shall mean the Board as
hereinbefore defined and the board of directors or equivalent governing body of
any Successor and any permitted assignee to which this Agreement is assigned.
               SECTION 15. Dispute Resolution. (a) Except as otherwise
specifically provided herein, the Executive and the Company each hereby
irrevocably submit to the exclusive jurisdiction of any Federal court located
within the State of Ohio over any dispute arising out of or relating to this
Agreement. Except as otherwise specifically provided in this Agreement, the
parties undertake not to commence any suit, action or proceeding arising out of
or relating to this Agreement in a forum other than a forum described in this
Section 15(a); provided, however, that nothing herein shall preclude the Company
or the Executive from bringing any suit, action or proceeding in any other court
for the purposes of enforcing the provisions of this Section 15 or enforcing any
judgment obtained by the Company or the Executive.
          (b) The agreement of the parties to the forum described in Section
15(a) is independent of the law that may be applied in any suit, action or
proceeding and the parties agree to such forum even if such forum may under
applicable law choose to apply non-forum law. The parties hereby waive, to the
fullest extent permitted by applicable law, any objection that they now or
hereafter have to personal jurisdiction or to the laying of venue of any such
suit, action or proceeding brought in an applicable court described in
Section 15(a), and the parties agree that they shall not attempt to deny or
defeat such personal jurisdiction by motion or other request for leave from any
such court. The parties agree that, to the fullest extent permitted by
applicable law, a final and non-appealable judgment in any suit, action or
proceeding brought in any applicable court described in Section 15(a) shall be
conclusive and binding upon the parties and may be enforced in any other
jurisdiction.
          (c) The parties hereto irrevocably consent to the service of any and
all process in any suit, action or proceeding arising out of or relating to this
Agreement by the mailing of copies of such process to such party at such party’s
address specified in Section 22.
               SECTION 16. Default in Payment. Any payment not made within ten
business days after it is due in accordance with this Agreement shall thereafter
bear interest, compounded annually, at the prime rate in effect from time to
time at Citibank, N.A., or any successor thereto.
               SECTION 17. GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO BE
MADE IN THE STATE OF DELAWARE AND THE VALIDITY, INTERPRETATION, CONSTRUCTION AND
PERFORMANCE OF THIS AGREEMENT IN ALL RESPECTS SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF DELAWARE WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW.

 

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               SECTION 18. Amendment; No Waiver. No provision of this Agreement
may be amended, modified, waived or discharged except by a written document
signed by the Executive and a duly authorized officer of the Company. The
failure of a party to insist upon strict adherence to any term of this Agreement
on any occasion shall not be considered a waiver of such party’s rights or
deprive such party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. No failure or delay by either
party in exercising any right or power hereunder will operate as a waiver
thereof, nor will any single or partial exercise of any such right or power, or
any abandonment of any steps to enforce such right or power, preclude any other
or further exercise thereof or the exercise of any other right or power. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party, which are
not set forth expressly in this Agreement.
               SECTION 19. Severability. If any term or provision of this
Agreement is invalid, illegal or incapable of being enforced by any applicable
law or public policy, all other conditions and provisions of this Agreement
shall nonetheless remain in full force and effect so long as the economic and
legal substance of the transactions contemplated by this Agreement is not
affected in any manner materially adverse to any party. Upon any such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner in order that the transactions
contemplated hereby be consummated as originally contemplated to the fullest
extent possible.
               SECTION 20. Entire Agreement. This Agreement sets forth the
entire agreement of the parties hereto in respect of the subject matter
contained herein and, except as specifically set forth herein, supersedes all
prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer,
Executive or representative of any party hereto. None of the parties shall be
liable or bound to any other party in any manner by any representations and
warranties or covenants relating to such subject matter except as specifically
set forth herein.
               SECTION 21. Survival. The rights and obligations of the parties
under the provisions of this Agreement, including Sections 2, 8, 9, 10 and 11,
shall survive and remain binding and enforceable, notwithstanding the expiration
of the Protection Period or the term of this Agreement, the termination of the
Executive’s employment with the Company for any reason or any settlement of the
financial rights and obligations arising from the Executive’s employment
hereunder, to the extent necessary to preserve the intended benefits of such
provisions.
               SECTION 22. Notices. All notices or other communications required
or permitted by this Agreement will be made in writing and all such notices or
communications will be deemed to have been duly given when delivered or (unless
otherwise specified) mailed by United States certified or registered mail,
return receipt requested, postage prepaid, addressed as follows:

 

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  If to the Company:   Manor Care, Inc.
 
      333 N. Summit St.
 
      Toledo, OH 43604
 
      Attention: General Counsel
 
      Fax: (419) 252-5599
 
       
 
  If to the Executive:   At the address for the Executive most recently on file
with the Company

or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
               SECTION 23. Headings and References. The headings of this
Agreement are inserted for convenience only and neither constitute a part of
this Agreement nor affect in any way the meaning or interpretation of this
Agreement. When a reference in this Agreement is made to a Section, such
reference shall be to a Section of this Agreement unless otherwise indicated.
               SECTION 24. Counterparts. This Agreement may be executed in one
or more counterparts (including via facsimile), each of which shall be deemed to
be an original, but all of which together shall constitute one and the same
instrument.
               SECTION 25. Interpretation. For purposes of this Agreement, the
words “include” and “including”, and variations thereof, shall not be deemed to
be terms of limitation but rather shall be deemed to be followed by the words
“without limitation”. The term “or” is not exclusive. The word “extent” in the
phrase “to the extent” shall mean the degree to which a subject or other thing
extends, and such phrase shall not mean simply “if”.
               IN WITNESS WHEREOF, this Agreement has been executed by the
parties as of the date first written above.

                  MANOR CARE, INC.    
 
           
 
  By:   /s/ Paul A. Ormond    
 
           
 
      Paul A. Ormond    
 
      Chairman, President and    
 
      Chief Executive Officer    
 
           
 
      /s/ Steven M. Cavanaugh    
 
           
 
      Steven M. Cavanaugh