UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to § 240.14a-12

 

Manor Care, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

o  No fee required.

o  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

þ  Fee paid previously with preliminary materials.

 

 

 

 

 

 

 

 

 

Manor Care, Inc.

 

September 14, 2007

 

Dear Stockholder:

 

The board of directors of Manor Care, Inc. (“Manor Care,” “we,” “us” or “our”) has unanimously (with Paul A. Ormond and Steven L. Guillard taking no part in the vote) approved a merger agreement providing for the merger of Manor Care with MCHCR-CP Merger Sub, Inc. (“MergerCo”), which is an affiliate of The Carlyle Group, which is a private equity firm. If the merger is completed, you will receive $67.00 in cash, without interest, for each share of our common stock that you own, and Manor Care will become wholly owned by MCHCR-CP Holdings, Inc., the sole stockholder of MergerCo and an affiliate of The Carlyle Group.

 

You will be asked, at a special meeting of the Manor Care stockholders, to consider and vote on a proposal to adopt the merger agreement. After careful consideration, our board of directors approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and unanimously (with Messrs. Ormond and Guillard taking no part in the vote due to potential conflicts of interest as a result of their positions as officers of Manor Care and The Carlyle Group’s interest in having certain members of Manor Care’s management team participate as investors in the merger) declared that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of our stockholders. THE BOARD OF DIRECTORS UNANIMOUSLY (WITH MESSRS. ORMOND AND GUILLARD TAKING NO PART IN THE RECOMMENDATION) RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT.

 

The time, date and place of the special meeting to consider and vote upon the adoption of the merger agreement are as follows:

 

2:00 p.m., eastern time, on October 17, 2007

in the auditorium of One SeaGate, Toledo, Ohio

 

The proxy statement attached to this letter provides you with information about the merger and the special meeting. A copy of the merger agreement is attached as Annex A to this proxy statement. We encourage you to read the entire proxy statement carefully. You may also obtain additional information on us from documents we have filed with the Securities and Exchange Commission.

 

Your vote is very important, regardless of the number of shares of our common stock you own. The merger cannot be completed unless holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting of stockholders vote for the adoption of the merger agreement. If you do not vote, it will have the same effect as a vote against the adoption of the merger agreement.

 

Whether or not you plan to attend the special meeting of stockholders in person, please vote your shares using one of the three alternatives offered on your proxy card to ensure your representation and the presence of a quorum at the special meeting. If you attend the meeting, you may vote your shares in person, even though you have previously voted by proxy.

 

Thank you in advance for your cooperation and continued support.

 

On behalf of your Board of Directors,

 

 

Paul A. Ormond

Chairman of the Board, President and

Chief Executive Officer

 

THIS PROXY STATEMENT IS DATED SEPTEMBER 14, 2007 AND IS FIRST BEING

MAILED TO STOCKHOLDERS ON OR ABOUT SEPTEMBER 17, 2007

Manor Care, Inc.

 

Notice of Special Meeting of Stockholders

October 17, 2007

 

 

Manor Care, Inc. will hold a special meeting of stockholders on October 17, 2007 at 2:00 p.m., eastern time, in the auditorium of One SeaGate, Toledo, Ohio. At the meeting, we will:

 

 

Only stockholders of record at the close of business on September 10, 2007 will be entitled to notice of and to vote at the special meeting.

 

Your vote is very important, regardless of the number of shares of our common stock you own. The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock on the record date for the special meeting. Whether or not you plan to attend the special meeting of stockholders in person, please vote your shares using one of the three alternatives offered on your proxy card to ensure your representation and the presence of a quorum at the special meeting. If you attend the special meeting, you may vote your shares in person, even though you have previously voted by proxy. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote “FOR” the adoption of the merger agreement.

 

If you fail to vote by proxy or in person, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and, if a quorum is present, will have the same effect as a vote against the adoption of the merger agreement. If you are a stockholder of record and wish to vote in person at the special meeting, you may withdraw your proxy and vote in person.

 

Stockholders of Manor Care who do not vote in favor of the adoption of the merger agreement will have the right to seek appraisal of the fair value of their shares if the merger is completed, but only if they submit a written demand for appraisal to Manor Care before the vote is taken on the merger agreement and comply with all requirements of Delaware law, which are summarized in the accompanying proxy statement under the caption “Appraisal Rights” beginning on page 69.

 

By Order of the Board of Directors,

 

Richard A. Parr II

Secretary

 

September 14, 2007

 

TABLE OF CONTENTS

 

MANOR CARE, INC.
333 N. Summit St.
Toledo, Ohio 43604

PROXY STATEMENT

 

This proxy statement and the accompanying proxy card are being mailed to our stockholders in connection with the solicitation of proxies by our Board of Directors for a special meeting of stockholders to be held on October 17, 2007, beginning at 2:00 p.m., eastern time, at One SeaGate, Toledo, Ohio, in the auditorium adjacent to the lobby, and any adjournment or postponement thereof. The mailing commenced on or about September 17, 2007.

 

SUMMARY

 

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To understand the merger fully, and for a more complete description of the legal terms of the merger, you should carefully read this entire proxy statement, the annexes attached to this proxy statement and the documents referred to or incorporated by reference in this proxy statement. We have included page references in parentheses to direct you to the appropriate place in this proxy statement for a more complete description of the topics presented in this summary. In this proxy statement, the terms “Manor Care,” “HCR Manor Care,” “we,” “us” and “our” refer to Manor Care, Inc.

 

The Parties to the Merger Agreement (page 14)

 

Manor Care, Inc.

333 N. Summit Street

Toledo, OH 43604-2617

(419) 252-5500

 

Manor Care, Inc., a Delaware corporation, provides a range of health care services, including skilled nursing care, assisted living, post-acute medical and rehabilitation care, hospice care, home health care and rehabilitation therapy. The most significant portion of our business relates to long-term care, including skilled nursing care and assisted living. Our other segment is hospice and home health care.

 

We are a leading owner and operator of long-term care centers in the United States, with the majority of our facilities operating under the respected Heartland, ManorCare Health Services and Arden Courts names. On September 10, 2007, we operated 280 skilled nursing facilities and 65 assisted living facilities in 30 states, with 62 percent of our facilities located in Florida, Illinois, Michigan, Ohio and Pennsylvania.

 

Our hospice and home health business specializes in all levels of hospice care, home health and rehabilitation therapy, through 122 offices in 25 states as of September 10, 2007. In addition, we operated 10 inpatient hospice facilities at September 10, 2007.

 

In addition to the rehabilitation provided in each of our skilled nursing centers, we provide rehabilitation therapy in our 83 outpatient therapy clinics and at work sites, schools, hospitals and other health care settings. Our outpatient rehabilitation therapy business primarily performs services in Midwestern and Mid-Atlantic states, Texas and Florida.

 

MCHCR-CP Merger Sub Inc. (“MergerCo”)

In care of The Carlyle Group

1001 Pennsylvania Avenue NW

Washington, DC 20004

(202) 729-5626

 

MergerCo is a Delaware corporation and the wholly-owned subsidiary of MCHCR-CP Holdings, Inc. (“Holdings”). MergerCo and Holdings were formed at the direction of The Carlyle Group in anticipation of

the merger. Subject to the terms of the merger agreement and in accordance with Delaware law, at the effective time of the merger, MergerCo will merge with and into Manor Care. MergerCo has de minimis assets and no operations.

 

The Carlyle Group (“Carlyle”)

1001 Pennsylvania Avenue, NW

Washington, DC 20004

(202) 729-5626

 

The Carlyle Group is a global private equity firm with $58.5 billion under management. Carlyle invests in buyouts, venture & growth capital, real estate and leveraged finance in Asia, Europe and North America, focusing on aerospace & defense, automotive & transportation, consumer & retail, energy & power, healthcare, industrial, infrastructure, technology & business services and telecommunications & media. Since 1987, the firm has invested $28.3 billion of equity in 636 transactions for a total purchase price of $132 billion. The Carlyle Group employs more than 800 people in 18 countries. In the aggregate, Carlyle portfolio companies have more than $87 billion in revenue and employ more than 286,000 people around the world.

 

The Special Meeting

 

Time, Place and Date (page 15)

 

The special meeting will be held on October 17, 2007, beginning at 2:00 p.m., eastern time, in the auditorium of One SeaGate, Toledo, Ohio.

 

Purpose (page 15)

 

You will be asked to consider and vote on a proposal to adopt an Agreement and Plan of Merger, dated as of July 2, 2007 (as it may be amended from time to time, the “merger agreement”), between MCHCR-CP Merger Sub, Inc. (“MergerCo”) and Manor Care, Inc. The merger agreement provides that MergerCo will be merged with and into Manor Care (the “merger”), with Manor Care being the surviving corporation in the merger (the “surviving corporation”). Each outstanding share of Manor Care common stock (other than shares held in our treasury or owned by MergerCo or its sole stockholder, MCHCR-CP Holdings, Inc., and shares held by stockholders who properly demand statutory appraisal rights) will be converted into the right to receive $67.00 in cash, without interest.

 

You will also be asked to consider and vote on a proposal to adjourn or postpone the special meeting, if determined to be necessary.

 

The persons named in the accompanying proxy card will also have discretionary authority to vote upon other business, if any, that properly comes before the special meeting and any adjournments or postponements of the special meeting.

 

Record Date and Quorum (page 15)

 

You are entitled to vote at the special meeting if you owned shares of our common stock at the close of business on September 10, 2007, the record date for the special meeting. You will have one vote for each share of Manor Care common stock that you owned on the record date. As of the record date, there were 73,281,931 shares of our common stock entitled to be voted.

 

A quorum is the number of shares that must be present to have the special meeting. The quorum requirement for the special meeting is a majority of the outstanding shares as of the record date, present in person or represented by proxy. If you submit a valid proxy card or attend the special meeting, your shares will be counted to determine whether a quorum is present. Abstentions and broker non-votes count toward the quorum. A “broker non-vote” occurs when a nominee (such as a bank or broker) holding shares for a beneficial owner does not have discretionary voting power and does not receive voting instructions from the beneficial owner before the meeting.

Required Vote (page 15)

 

Completion of the merger requires the adoption of the merger agreement by the affirmative vote of the holders of a majority of the outstanding shares of our common stock at the close of business on the record date for the special meeting. A failure to vote your shares of our common stock or an abstention will have the same effect as voting against the merger. The proposal to adjourn or postpone the special meeting and approval of any other item require the affirmative vote of a majority of the shares represented in person or by proxy and entitled to vote on such item.

 

Although abstentions and broker non-votes count for quorum purposes, in the case of the adoption of the merger agreement, they will have the same effect as a vote against the merger.

 

Share Ownership of Directors and Executive Officers (page 72)

 

As of the record date for the special meeting, the directors and executive officers of Manor Care beneficially owned, in the aggregate, 4,204,243 shares of our common stock, or approximately 5.6% of the outstanding shares of our common stock. The directors and executive officers have informed us that they intend to vote all of their shares of Manor Care common stock “FOR” the adoption of the merger agreement and “FOR” any adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Voting and Proxies (page 15)

 

Any Manor Care stockholder of record entitled to vote may submit a proxy by returning a signed proxy card by mail, by internet or by telephone following the instructions on your proxy card, or may vote in person by appearing at the special meeting. If your shares are held in “street name” by your bank, broker or other nominee, you should instruct your nominee on how to vote your shares using the instructions provided by your nominee. If you do not provide your nominee with instructions, your shares will not be voted and that will have the same effect as voting against the merger.

 

Revocability of Proxy (page 15)

 

Any Manor Care stockholder of record who executes and returns a proxy card may revoke the proxy at any time before it is voted in any one of the following ways:

 

 

 

 

 

If you hold your shares indirectly in the name of a bank, broker, or other nominee, the revocation must be performed by your nominee by submitting a new proxy card or giving us written notice of the revocation.

 

When the Merger Will be Completed (page 49)

 

We are working to complete the merger as soon as possible. We anticipate completing the merger by the end of 2007, subject to adoption of the merger agreement by our stockholders and the satisfaction of the other closing conditions. In addition, MergerCo is not obligated to complete the merger until the expiration of a 30 consecutive calendar day (subject to tolling and extension under certain circumstances) “marketing period” throughout which MergerCo shall have the financial information that we are required to provide pursuant to the merger agreement to complete the debt financing of the merger, our independent public accountants shall not have withdrawn any relevant audit opinion and the conditions to closing (other than conditions that by their nature may be satisfied only at closing and certain conditions relating to governmental approvals and the financing-related CMBS restructuring (as defined below under “The Merger Agreement — CMBS Restructuring” beginning on page 62)) shall have been satisfied.

 

Effects of the Merger (page 49)

 

If the merger agreement is adopted by our stockholders and the other conditions to closing are satisfied, MergerCo will merge with and into Manor Care. The separate corporate existence of MergerCo will cease, and Manor Care will continue as the surviving corporation, wholly owned by entities sponsored by or co-investors with Carlyle. Upon completion of the merger, our common stock will be converted into the right to receive $67.00 per share, without interest and less any required withholding taxes. The surviving corporation will be a privately held corporation, and you will cease to have any ownership interest in the surviving corporation or any rights as its stockholder.

 

Recommendation of Our Board of Directors (page 25)

 

After careful consideration, our board of directors unanimously (with Messrs. Ormond and Guillard taking no part in the vote) approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and declared that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of our stockholders. ACCORDINGLY, OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT AND “FOR” ANY PROPOSAL BY MANOR CARE TO ADJOURN OR POSTPONE THE SPECIAL MEETING, IF DETERMINED TO BE NECESSARY.

 

In reaching its decision, our board of directors considered a variety of business, financial and market factors and, in evaluating the merger, consulted with our management team and legal and financial advisors. In considering the recommendation of our board of directors with respect to the merger, you should be aware that certain of our directors and executive officers have interests in the merger that differ from, or are in addition to, your interests as a stockholder. See “The Merger — Interests of Our Directors and Executive Officers in the Merger” beginning on page 39.

 

For the factors considered by our board of directors in reaching its decision to approve the merger agreement and the merger, see “The Merger — Reasons for the Merger” beginning on page 23.

 

Opinion of JPMorgan (page 25 and Annex B)

 

J.P. Morgan Securities Inc. (“JPMorgan”) delivered its opinion to our board of directors that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in its opinion, the merger consideration of $67.00 in cash per share to be received by our stockholders in the merger was fair, from a financial point of view, to such stockholders.

 

The full text of the written opinion of JPMorgan, dated July 1, 2007, which sets forth the assumptions made, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement. Our stockholders are encouraged to read the opinion carefully in its entirety. JPMorgan’s written opinion is addressed to our board of directors, and is directed only to the consideration to be received in the merger and does not constitute a recommendation to any of our stockholders as to how such stockholder should vote at the special meeting. Pursuant to an engagement letter between Manor Care and JPMorgan, we have agreed to pay JPMorgan a transaction fee of 0.55% of the aggregate consideration to be paid in the transaction, or approximately $34.8 million (less the amount of the opinion fee to Citigroup Global Markets Inc.), $5 million of which was payable upon delivery of its opinion and the remainder of which is payable upon and contingent on consummation of the merger. In addition, affiliates of JPMorgan will be entitled to receive fees from MergerCo pursuant to debt commitment letters delivered by affiliates of JPMorgan to MergerCo as described under “The Merger — Financing — Debt Financing” beginning on page 37.

 

Opinion of Citi (page 31 and Annex C)

 

In connection with the merger, our board of directors received a written opinion, dated July 1, 2007, from Citigroup Global Markets Inc. (“Citi”), as to the fairness, from a financial point of view and as of the date of the opinion, of the $67.00 per share merger consideration to be received in the merger by holders of our common stock. The full text of Citi’s written opinion is attached as Annex C to this proxy statement. Our stockholders are encouraged to read this opinion carefully in its entirety for a description of the assumptions made, procedures

followed, matters considered and limitations on the review undertaken. Citi’s opinion was provided to our board of directors in connection with its evaluation of the per share merger consideration from a financial point of view. Citi’s opinion does not address any other aspects or implications of the merger and does not constitute a recommendation to any of our stockholders as to how such stockholder should vote or act on any matters relating to the proposed merger. Pursuant to an engagement letter between Manor Care and Citi, we have agreed to pay Citi an opinion fee of $5 million, all of which was payable upon delivery of its opinion.

 

Financing (page 36)

 

MergerCo estimates the total amount of funds necessary to complete the merger and the related transactions to be approximately $6.6 billion, which includes approximately $5.4 billion (net of the impact of certain call options entered into in connection with Manor Care’s 2.125% convertible senior notes due 2035) to be paid out to our stockholders and holders of other equity-based interests in Manor Care, with the remainder to be applied to refinance existing indebtedness and pay related fees and expenses in connection with the merger, the financing arrangements and the related transactions. These payments are expected to be funded by a combination of equity contributions by entities sponsored by or co-investors with Carlyle and debt financing, as well as our available cash.

 

In connection with the execution and delivery of the merger agreement, MergerCo has obtained commitments to provide up to $5.5 billion in debt financing, consisting of (1) a first lien term loan facility in an aggregate principal amount of $700 million, (2) a revolving first lien credit facility in an aggregate principal amount of $200 million, (3) a secured real estate credit facility in an aggregate principal amount of approximately $4.6 billion (subject to reduction by amount drawn under the bridge facility described in clause (4) below) (the “CMBS facility”) and (4) a senior bridge loan facility in an aggregate principal amount of $4.6 billion, which will be available to the extent that any portion of the CMBS facility is not available, to finance a portion of the merger consideration, the refinancing of certain of our debt outstanding on the closing date of the merger and to pay fees, commissions and expenses in connection with the merger and, in the case of the first lien term loan facility and the revolving first lien credit facility, to provide cash collateral for bonds and/or letters of credit and for working capital and general corporate purposes. MergerCo has agreed to use its reasonable best efforts to consummate the debt financing on the terms and conditions described in the commitments. In addition, MergerCo has obtained an equity commitment from Carlyle Partners V, L.P. The facilities contemplated by the debt financing commitments are subject to various conditions, as described in further detail under “The Merger — Financing — Conditions to the Financing” beginning on page 39.

 

The closing of the merger is not conditioned on the receipt of the debt financing by MergerCo. MergerCo, however, is not required to consummate the merger until after the completion of the marketing period, as described above under “When the Merger Will be Completed” and in further detail under “The Merger Agreement — Effective Time; The Marketing Period” beginning on page 49.

 

Treatment of Outstanding Equity-Based Awards (page 50)

 

Except as otherwise agreed between MergerCo and the holder of outstanding equity-based awards, at the effective time of the merger:

 

 

In the case of stock equivalent units outstanding under our deferred compensation plans, at the effective time of the merger, each such stock equivalent unit will cease to represent the right to receive a share of our common stock and instead will be converted into the right to receive $67.00 per unit. Such amounts will be credited under our deferred compensation plans and will be notionally reinvested in the future in accordance with the terms of the applicable plan.

 

Interests of Our Directors and Executive Officers in the Merger (page 39)

 

Our directors and executive officers may have interests in the merger that are different from, or in addition to, yours, including the following:

 

 

 

 

Our board of directors was aware of these interests and considered them, among other matters, in making its decisions.

 

Material United States Federal Income Tax Consequences of the Merger (page 45)

 

For U.S. federal income tax purposes, the merger will be treated as a sale of the shares of our common stock for cash by each of our stockholders. As a result, in general, each stockholder will recognize gain or loss equal to the difference, if any, between the amount of cash received in the merger and such stockholder’s adjusted tax basis in the shares surrendered. Such gain or loss will be capital gain or loss if the shares of common stock surrendered are held as a capital asset in the hands of the stockholder, and will be long-term capital gain or loss if the shares of common stock have a holding period of more than one year at the time of the merger. Stockholders are urged to consult their own tax advisors as to the particular tax consequences to them of the merger.

 

Regulatory Approvals (page 47)

 

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “Hart-Scott-Rodino Act”), provides that transactions such as the merger may not be completed until certain information has been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and certain waiting period requirements have been satisfied. Manor Care and Carlyle Partners V MC, L.P. filed notification reports with the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Act on August 2, 2007 and on August 1, 2007, respectively. We received notification on August 13, 2007 that the waiting period under the Hart-Scott-Rodino Act has been terminated.

 

The merger and the CMBS restructuring are also subject to certain health care-related local, state and federal regulatory requirements for notice, abbreviated review or full regulatory review and approval of the merger or related transactions as part of the CMBS restructuring, which will encompass the need for new permits, licenses, certificates of need, third party payor agreements, certifications and contracts, as well as other requirements as mandated by the applicable jurisdictions within which Manor Care provides or owns licensed or otherwise regulated services.

 

Procedure for Receiving Merger Consideration (page 50)

 

Within two business days after the effective time of the merger, a paying agent will mail a letter of transmittal and instructions to you and the other Manor Care stockholders. The letter of transmittal and instructions will tell you how to surrender your stock certificates in exchange for the merger consideration. You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a signed letter of transmittal.

 

No Solicitation of Transactions (page 56)

 

The merger agreement restricts our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving Manor Care. Notwithstanding these restrictions, under certain limited circumstances required for our board of directors to comply with its fiduciary duties, our board of directors may respond to a bona fide written proposal for an alternative transaction or, upon paying the termination fee specified in the merger agreement, terminate the merger agreement and enter into an agreement with respect to a superior proposal.

 

Conditions to Closing (page 63)

 

Before we can complete the merger, a number of conditions must be satisfied. These include:

 

 

 

 

 

 

Other than the conditions pertaining to the stockholder approval, the absence of governmental orders, the expiration or termination of the Hart-Scott-Rodino Act waiting period and the receipt of the required governmental consents and approvals and mailing of filings and notices, either Manor Care, on the one hand, or MergerCo, on the other hand, may elect to waive conditions to their respective performance and complete the merger.

 

Termination of the Merger Agreement (page 65)

 

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after stockholder approval has been obtained, as follows:

 

 

 

 

 

Termination Fees and Expenses (page 66)

 

Under certain circumstances, in connection with the termination of the merger agreement, we will be required to pay to MergerCo a termination fee of $175 million and in certain circumstances will be required to reimburse MergerCo for its documented out-of-pocket fees and expenses incurred in connection with the merger up to a total of $15 million, which amount will be credited against any termination fee payment.

 

MergerCo has agreed to pay us a termination fee of $175 million if we terminate the merger agreement in certain circumstances related to the failure of MergerCo to receive the proceeds of the debt financing. If, in the event that MergerCo becomes obligated to pay this termination fee, then our termination of the merger agreement in these circumstances and receipt of payment of such termination fee shall be our sole and exclusive remedy against MergerCo for any loss or damage suffered as a result of any breach of the merger agreement by MergerCo and the failure of the merger to be consummated.

 

The parties have agreed that the aggregate liability of Manor Care and our subsidiaries, as a group, on the one hand, or MergerCo, on the other hand, arising from any breach of the merger agreement shall be capped at $250 million.

 

Market Price of Our Stock (page 71)

 

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the trading symbol “HCR”. The closing sale price of our common stock on the NYSE on April 10, 2007, which was the last trading day before we announced that our board of directors was exploring strategic alternatives, including a potential sale of Manor Care, was $55.75. The closing sale price of our common stock on the NYSE on June 29, 2007, which was the last trading day before we announced the merger, was $65.29. On September 13, 2007, the last trading day before the date of this proxy statement, the closing price of our common stock on the NYSE was $64.56.

 

Appraisal Rights (page 69 and Annex D)

 

Pursuant to section 262 of the Delaware General Corporation Law, referred to as the DGCL, our stockholders have the right to dissent from the merger and receive a cash payment for the judicially determined fair value of their shares of our common stock. The judicially determined fair value under section 262 could be greater than, equal to or less than the $67.00 per share that our stockholders are entitled to receive in the merger. Stockholders that wish to exercise their appraisal rights must not vote in favor of the adoption of the merger agreement and must strictly comply with all of the procedures required by the DGCL. A copy of section 262 of the DGCL is attached to this proxy statement as Annex D.

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

 

The following questions and answers are intended to address some commonly asked questions regarding the special meeting and the merger. These questions and answers may not address all questions that may be important to you as our stockholder. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement.

 

What is the proposed transaction?

 

The proposed transaction is the merger of Manor Care with an affiliate of Carlyle pursuant to the merger agreement. Once the merger agreement has been adopted by the Manor Care stockholders and the other closing conditions under the merger agreement have been satisfied or waived, MergerCo will merge with and into Manor Care. Manor Care will be the surviving corporation in the merger and will become wholly owned by an entity sponsored by or co-investors with Carlyle.

 

What will I receive in the merger?

 

Upon completion of the merger, you will receive $67.00 in cash, without interest and less any required withholding taxes, for each share of our common stock that you own. For example, if you own 100 shares of our common stock, you will receive $6,700.00 in cash in exchange for your shares of our common stock, less any required withholding taxes. You will not own shares in the surviving corporation.

 

Where and when is the special meeting?

 

The special meeting will take place in the auditorium of One SeaGate, Toledo, Ohio, on October 17, 2007, at 2:00 p.m., eastern time.

 

What vote of our stockholders is required to adopt the merger agreement and for the adjournment or postponement of the special meeting, if determined to be necessary?

 

For us to complete the merger, holders of a majority of the outstanding shares of our common stock at the close of business on the record date must vote their shares “FOR” the adoption of the merger agreement. Accordingly, failure to vote or an abstention will have the same effect as a vote against adoption of the merger agreement. The proposal to adjourn or postpone the special meeting and approval of any other item require the affirmative vote of a majority of the shares represented in person or by proxy and entitled to vote on such item.

 

How does our board of directors recommend that I vote on the merger agreement and the adjournment or postponement of the special meeting if determined to be necessary?

 

Our board of directors unanimously (with Messrs. Ormond and Guillard taking no part in the recommendation) recommends that our stockholders vote “FOR” the adoption of the merger agreement and “FOR” the adjournment or postponement of the special meeting, if determined to be necessary. You should read “The Merger — Reasons for the Merger” beginning on page 23 for a discussion of the factors that our board of directors considered in deciding to recommend the adoption of the merger agreement.

 

What do I need to do now?

 

We urge you to read this proxy statement carefully, including its annexes, and to consider how the merger affects you. If you are a stockholder of record, then you can ensure that your shares are voted at the special meeting by completing, signing, dating and mailing each proxy card and returning it in the envelope provided, by voting on the internet at http://www.cesvote.com or by telephone at (888) 693-8683. If you hold your shares in “street name”, you can ensure that your shares are voted at the special meeting by instructing to your bank, broker or other nominee on how to vote, as discussed below.

If my shares are held in “street name” by my bank, broker or other nominee, will my nominee vote my shares for me?

 

Yes, but only if you provide instructions to your bank, broker or other nominee on how to vote. You should follow the directions provided by your nominee regarding how to instruct your nominee to vote your shares. Without those instructions, your shares will not be voted, which will have the same effect as voting against adoption of the merger agreement.

 

Can I change my vote?

 

Yes. You can change your vote at any time before your proxy is voted at the special meeting. If you are a registered stockholder, you may revoke your proxy by notifying us at Manor Care, Inc., in care of National City Bank, P.O. Box 535800, Pittsburgh, PA 15253 in writing or by submitting by mail a new proxy dated after the date of the proxy being revoked or by casting a new vote by internet at http://www.cesvote.com or by telephone at (888) 693-8683. In addition, your proxy may be revoked by attending the special meeting and voting in person (you must vote in person, as simply attending the special meeting will not cause your proxy to be revoked).

 

Please note that if you hold your shares in “street name” and you have instructed your bank, broker or other nominee to vote your shares, the above-described options for changing your vote do not apply, and instead you must follow the directions received from your nominee to change your vote.

 

Who counts the votes?

 

Our transfer agent, National City Bank, tabulates the votes and acts as inspector of the election.

 

Is my vote confidential?

 

Yes. All proxy cards and vote tabulations identifying individual stockholders are handled in a manner that protects your voting privacy.

 

How do I vote my HCR Manor Care Stock Purchase and Retirement Savings 401(k) Plan shares?

 

If you hold shares through the HCR Manor Care Stock Purchase and Retirement Savings 401(k) Plan, you will receive a separate proxy card which describes the three alternative methods for voting. Use one of these alternatives to instruct the plan trustee how to vote the shares allocated to your plan account. If you do not vote by one of these methods (or you submit an unclear voting designation or no voting designation at all), the plan trustee will vote the shares in your account the same way as the majority of the other plan participants voted their shares. Any revocation of your vote must be submitted to the plan trustee, and you will not be entitled to vote your shares in person at the meeting.

 

What does it mean if I get more than one proxy card or vote instruction card?

 

If your shares are registered differently or are in more than one account, you will receive more than one proxy card or, if you hold your shares in “street name”, more than one vote instruction card. Please complete and return all of the proxy cards or vote instruction cards you receive to ensure that all of your shares are voted.

 

Should I send in my stock certificates now?

 

No. Shortly after the merger is completed, you will receive a letter of transmittal with instructions informing you how to send in your stock certificates to the paying agent in order to receive the merger consideration. You should use the letter of transmittal to exchange stock certificates for the merger consideration to which you are entitled as a result of the merger. DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY.

What happens if I sell my shares before the special meeting?

 

The record date of the special meeting is earlier than the special meeting and the date that the merger is expected to be completed. If you transfer your shares of our common stock after the record date but before the special meeting, you will retain your right to vote at the special meeting, but will have transferred the right to receive $67.00 per share in cash to be received by our stockholders in the merger. In order to receive the $67.00 per share, you must hold your shares through completion of the merger.

 

Am I entitled to exercise appraisal rights instead of receiving the merger consideration for my shares?

 

Yes. As a holder of our common stock, you are entitled to appraisal rights under Delaware law in connection with the merger if you meet certain conditions, which conditions are described in this proxy statement under the caption “Appraisal Rights” beginning on page 69.

 

Can I attend the meeting in person?

 

Yes. If you were a stockholder of record at the business on September 10, 2007, you or your designated proxy may attend the meeting. We may ask that you or your proxy present valid identification for admission.

 

Who can help answer my other questions?

 

If you have more questions about the merger, please contact our Corporate Communications Department at (419) 252-5500. If you need assistance in submitting your proxy or voting your shares or need additional copies of this proxy statement or the enclosed proxy card, you should contact our proxy solicitation agent, Georgeson, Inc., at (888) 605-8302. If your bank, broker or other nominee holds your shares, you should call your nominee for additional information.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement, and the documents to which we refer you in this proxy statement, contain forward-looking statements about our plans, objectives, expectations and intentions. Forward-looking statements include information concerning possible or assumed future results of operations of Manor Care, the expected completion and timing of the merger and other information relating to the merger. We identify forward-looking statements in this proxy statement by using words or phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may be,” “objective,” “plan,” “predict,” “project,” “will be” and similar words or phrases, or the negative thereof. For each of these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should read statements that contain these words carefully. They discuss our future expectations or state other forward-looking information, and may involve known and unknown risks over which we have no control. Those risks include, without limitation:

 

 

 

 

 

We believe that the assumptions on which our forward-looking statements are based are reasonable. However, we cannot assure you that the actual results or developments we anticipate will be realized or, if realized, that they will have the expected effects on our business or operations. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Forward-looking statements speak only as of the date of this proxy statement or the date of any document incorporated by reference in this document. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

THE PARTIES TO THE MERGER AGREEMENT

 

Manor Care, Inc.

 

Manor Care, Inc., a Delaware corporation, provides a range of health care services, including skilled nursing care, assisted living, post-acute medical and rehabilitation care, hospice care, home health care and rehabilitation therapy. The most significant portion of our business relates to long-term care, including skilled nursing care and assisted living. Our other segment is hospice and home health care.

 

We are a leading owner and operator of long-term care centers in the United States, with the majority of our facilities operating under the respected Heartland, ManorCare Health Services and Arden Courts names. On September 10, 2007, we operated 280 skilled nursing facilities and 65 assisted living facilities in 30 states, with 62 percent of our facilities located in Florida, Illinois, Michigan, Ohio and Pennsylvania.

 

Our hospice and home health business specializes in all levels of hospice care, home health and rehabilitation therapy, through 122 offices in 25 states as of September 10, 2007. In addition, we operated 10 inpatient hospice facilities at September 10, 2007.

 

In addition to the rehabilitation provided in each of our skilled nursing centers, we provide rehabilitation therapy in our 83 outpatient therapy clinics and at work sites, schools, hospitals and other health care settings. Our outpatient rehabilitation therapy business primarily performs services in Midwestern and Mid-Atlantic states, Texas and Florida.

 

Manor Care’s principal executive offices are at 333 N. Summit Street, Toledo, OH 43604-2617, and our telephone number is (419) 252-5500.

 

MCHCR-CP Merger Sub Inc.

 

MCHCR-CP Merger Sub Inc. (“MergerCo”) is a Delaware corporation and wholly-owned subsidiary of Holdings. Holdings and MergerCo were formed at the direction of The Carlyle Group in anticipation of the merger. Subject to the terms and conditions of the merger agreement and in accordance with Delaware law, at the effective time of the merger MCHCR-CP Merger Sub Inc. will merge with and into Manor Care, Inc. MCHCR-CP Merger Sub Inc. has de minimis assets and no operations. Following the closing of the merger, the capital stock of Holdings will be owned by investment funds managed by The Carlyle Group or its affiliates and certain co-investors designated by The Carlyle Group, as well as any members of management of Manor Care who agree to convert their equity in Manor Care into equity of Holdings in connection with the merger. MCHCR-CP Merger Sub Inc. has its principal executive offices at c/o The Carlyle Group, 1001 Pennsylvania Avenue, NW, Washington, DC, 20004, and its telephone number is (202) 729-5626.

 

The Carlyle Group

 

The Carlyle Group is a global private equity firm with $58.5 billion under management. Carlyle invests in buyouts, venture & growth capital, real estate and leveraged finance in Asia, Europe and North America, focusing on aerospace & defense, automotive & transportation, consumer & retail, energy & power, healthcare, industrial, infrastructure, technology & business services and telecommunications & media. Since 1987, the firm has invested $28.3 billion of equity in 636 transactions for a total purchase price of $132 billion. The Carlyle Group employs more than 800 people in 18 countries. In the aggregate, Carlyle portfolio companies have more than $87 billion in revenue and employ more than 286,000 people around the world.

 

THE SPECIAL MEETING

 

Time, Place and Purpose of the Special Meeting

 

This proxy statement and the accompanying proxy card are being mailed to our stockholders in connection with the solicitation of proxies by our board of directors for special meeting of stockholders to be held on October 17, 2007, beginning at 2:00 p.m., eastern time, at One SeaGate, Toledo, Ohio, in the auditorium adjacent to the lobby, and any adjournment or postponement thereof. The mailing commenced on or about September 17, 2007. The purpose of the special meeting is for our stockholders to consider and vote upon the adoption of the merger agreement and to consider and vote on a proposal to adjourn or postpone the special meeting, if determined to be necessary. Our stockholders must adopt the merger agreement for the merger to occur. If the stockholders fail to adopt the merger agreement, the merger will not occur. A copy of the merger agreement is attached to this proxy statement as Annex A.

 

Record Date and Quorum

 

The holders of record of our common stock as of the close of business on September 10, 2007, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting. On the record date, there were 73,281,931 shares of our common stock outstanding.

 

The holders of a majority of the outstanding shares of our common stock at the close of business on the record date represented in person or by proxy will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Once a share is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and any postponement or adjournment of the special meeting. However, if a new record date is set for the adjourned special meeting, then a new quorum will have to be established.

 

Required Vote

 

Completion of the merger requires the adoption of the merger agreement by the affirmative vote of the holders of a majority of the outstanding shares of our common stock at the close of business on the record date for the special meeting. The proposal to adjourn or postpone the special meeting and approval of any other item require the affirmative vote of a majority of the shares represented in person or by proxy and entitled to vote on such item. Each outstanding share of our common stock is entitled to one vote.

 

As of September 10, 2007, the record date for the special meeting, the directors and executive officers of Manor Care beneficially owned, in the aggregate, 4,204,243 shares of Manor Care common stock, or approximately 5.6% of the outstanding shares of Manor Care common stock. The directors and executive officers have informed us that they intend to vote all of their shares of our common stock “FOR” the adoption of the merger agreement and “FOR” any adjournment or postponement of the special meeting, if determined to be necessary.

 

Proxies; Revocation

 

If you are a stockholder of record and submit a proxy by returning a signed proxy card by mail, by internet or by telephone, your shares will be voted at the special meeting as you indicate on your proxy card. If no instructions are indicated on your proxy card, your shares of Manor Care common stock will be voted “FOR” the adoption of the merger agreement and “FOR” any adjournment or postponement of the special meeting, if determined to be necessary.

 

If your shares are held in “street name” by your bank, broker or other nominee, you should instruct your nominee how to vote your shares using the instructions provided by your nominee. If you have not received such voting instructions or require further information regarding such voting instructions, contact your nominee and they can give you directions on how to vote your shares. Under the rules of the NYSE, nominees who hold shares in “street name” for customers may not exercise their voting discretion with respect to the approval of non-routine matters such as the merger proposal and thus, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote such shares with respect to the adoption of the merger agreement (i.e., “broker

non-votes”). Shares of our common stock held by persons attending the special meeting but not voting, or shares for which we have received proxies with respect to which holders have abstained from voting, will be considered abstentions. Abstentions and properly executed broker non-votes, if any, will be treated as shares that are present and entitled to vote at the special meeting for purposes of determining whether a quorum exists but will have the same effect as a vote “AGAINST” adoption of the merger agreement and any adjournment or postponement of the special meeting.

 

You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must either advise us in writing at Manor Care Inc., in care of National City Bank, P.O. Box 535800, Pittsburgh, PA 15253, submit by mail a new proxy card dated after the date of the proxy you wish to revoke, cast a new vote by internet at http://www.cesvote.com or by telephone at (888) 693-8683, or attend the special meeting and vote your shares in person. Attendance at the special meeting will not by itself constitute revocation of a proxy.

 

Please note that if you hold your shares in “street name” and you have instructed your bank, broker or other nominee to vote your shares, the options for revoking your proxy described in the paragraph above do not apply and instead you must follow the directions provided by your nominee to change your vote.

 

If you hold shares through the HCR Manor Care Stock Purchase and Retirement Savings 401(k) Plan, you will receive a separate proxy card which describes the three alternative methods for voting. Use one of these alternatives to instruct the plan trustee how to vote the shares allocated to your plan account. If you do not vote by one of these methods (or you submit an unclear voting designation or no voting designation at all), the plan trustee will vote the shares in your account the same way as the majority of the other plan participants voted their shares. Any revocation of your vote must be submitted to the plan trustee, and you will not entitled to vote your shares in person at the meeting. The Manor Care, Inc. Nonqualified Retirement Savings and Investment Plan trustee has the exclusive right to vote the shares held in this plan.

 

Manor Care does not expect that any matter other than the adoption of the merger agreement (and the approval of the adjournment or postponement of the special meeting, if determined to be necessary) will be brought before the special meeting. If, however, any such other matter is properly presented at the special meeting or any adjournment or postponement of the special meeting, the persons appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment.

 

Adjournments and Postponements

 

Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment may be made without notice (if the adjournment is not for more than thirty days), other than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. Whether or not a quorum exists, holders of a majority of the shares of our common stock present in person or represented by proxy at the special meeting and entitled to vote thereat may adjourn the special meeting. If no instructions are indicated on your proxy card, your shares of our common stock will be voted “FOR” any adjournment or postponement of the special meeting, if determined necessary or appropriate, to solicit additional proxies. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow our stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.

 

Solicitation of Proxies

 

Manor Care will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of Manor Care may solicit proxies personally and by telephone, facsimile or other electronic means of communication. These persons will not receive additional or special compensation for such solicitation services. Manor Care will, upon request, reimburse banks, brokers and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions. Manor Care has retained Georgeson Inc. to assist it in the solicitation of proxies for the special meeting and will pay Georgeson Inc. a fee of approximately $25,000, plus reimbursement of out-of-pocket expenses.

 

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact our proxy solicitor:

 

Georgeson Inc.

17 State Street

New York, New York 10004

Telephone: (888) 605-8302

Attention: Manor Care Special Meeting

 

THE MERGER

 

Background of the Merger

 

Our board of directors periodically reviews and assesses strategic alternatives available to us. At a regularly scheduled meeting of the board held on January 30, 2007, Mr. Ormond provided an update on industry developments, including recent transactions involving other health care services companies. Mr. Ormond agreed to continue to evaluate the capital markets and to update the board regarding market conditions. In early March 2007, Mr. Ormond spoke individually with the other members of our board of directors by telephone to apprise them of discussions he had had with various shareholders, analysts and investment bankers, including JPMorgan, regarding strategic alternatives. Each of the board members approved Mr. Ormond to provide information to JPMorgan for the purpose of evaluating for the board a full range of alternatives open to Manor Care in the current market environment.

 

At a meeting of the board held on April 10, 2007, our board of directors considered a review of our strategic plan and potential alternatives to maximize shareholder value. The board consulted with JPMorgan regarding its analysis of our strategic alternatives, including, among other things, maintaining the status quo, a strategic acquisition of another company, a sale and lease-back of certain Manor Care properties, a spin-off of Manor Care’s real estate and a sale of Manor Care to a strategic or financial buyer. After further discussions between members of the board and our management, the board determined at the meeting that it was advisable and in the best interests of Manor Care and our stockholders to further explore strategic alternatives to enhance shareholder value, including through a potential sale of Manor Care. We retained JPMorgan as financial advisor, and Cravath, Swaine & Moore LLP (“Cravath”) as legal counsel, to Manor Care and the board. We announced our board’s determination to explore strategic alternatives to enhance shareholder value in an April 11, 2007 press release.

 

Also at the April 10, 2007 meeting of the board, JPMorgan confirmed that, in the event that the board determined to pursue a sale process, JPMorgan would be willing to offer debt financing to all potential acquirors of Manor Care, noting that no acquiror would be obligated to use JPMorgan as its debt financing source. Representatives of Cravath discussed with the board the nature of the potential conflict of interest that might arise from JPMorgan acting both as the financial advisor to Manor Care and a possible financing source in connection with a sale of Manor Care and described to the board certain procedures that JPMorgan undertook to institute to ensure the separation between the financing teams and the team advising Manor Care and the safeguards that Manor Care could undertake with regard to such conflict, including obtaining an additional opinion from another investment bank as to the fairness, from a financial point of view, of the consideration to be received in any transaction that might result from a sale process.

 

Representatives of JPMorgan were then excused from the board meeting, and the board engaged in a discussion of the risks and benefits relating to JPMorgan’s offer, including the potential conflict of interest and the related safeguards, with management and representatives of Cravath. After this discussion, our board of directors determined that, in the interest of facilitating any potential sale process, JPMorgan should make a debt financing package available to all potential acquirors, subject to the implementation of the appropriate procedural safeguards. The board of directors also determined that, should we enter into a transaction involving a change of control of Manor Care, the board would request that JPMorgan be willing to opine on the fairness, from a financial point of view, of the consideration to be received by our stockholders and the board would also seek to secure the opinion of another investment bank not providing financing to the acquiror as to the fairness, from a financial point of view, of the consideration to be received by our stockholders.

 

Thereafter, and continuing into July 2007, JPMorgan refined and updated its analysis of our strategic alternatives. JPMorgan also began to contact potential strategic and financial acquirors to gauge their interest in acquiring Manor Care. Over the course of the following weeks, JPMorgan contacted 48 potential acquirors, including 10 potential strategic acquirors, to assess their interest in acquiring Manor Care.

 

On April 19, 2007, the board of directors again met to discuss the exploration of our strategic alternatives. Representatives of JPMorgan reviewed for the board the work that management, with the assistance of JPMorgan and Cravath, undertook in connection with the exploration of each of our previously identified strategic alternatives. With respect to the sale of the company alternative, representatives of JPMorgan updated the board on the contacts

made by JPMorgan to potential financial and strategic acquirors, noting that at least 24 parties had expressed interest, but that several of the potential strategic acquirors stated that they were not interested in exploring further an acquisition of Manor Care and only two potential strategic acquirors expressed any meaningful degree of interest in an acquisition of Manor Care. Following a discussion between the board and JPMorgan and Cravath regarding next steps, the board directed our management, with the assistance of JPMorgan and Cravath, to continue to explore strategic alternatives, including a potential sale of Manor Care.

 

Over the course of April 2007, JPMorgan continued to make contacts with potential acquirors of Manor Care and to analyze the relative merits of our other strategic alternatives. During this period, JPMorgan distributed introductory information materials and a form confidentiality agreement to prospective acquirors that had expressed interest in Manor Care. We subsequently executed confidentiality agreements with 21 potential financial acquirors and two potential strategic acquirors.

 

At the regular meeting of our board of directors on May 8, 2007, the board received an update regarding the on-going exploration of our strategic alternatives, including, among other things, maintaining the status quo, a strategic acquisition of another company, a sale and lease-back of certain Manor Care properties, a spin-off of Manor Care’s real estate and the sale of the company. Representatives of Cravath reviewed with the board the fiduciary duties of directors in the context of considering our strategic alternatives. Representatives of JPMorgan reviewed and discussed with the board JPMorgan’s current analysis, based on various generally accepted valuation methods, of the value that each strategic alternative could yield to our stockholders which continued to show highest values for the sale of the company alternative. Representatives of JPMorgan also updated the board on the progress of the potential sale of the company process, noting that, of the 23 parties that had entered into confidentiality agreements, eight potential financial acquirors and two potential strategic acquirors had provided preliminary indications of interest to JPMorgan.

 

At its May 8, 2007 meeting, our board also received a report of the compensation committee of the board with respect to changes in the retention and change in control programs for our executive officers, which were previously approved by the compensation committee of the board at the compensation committee’s meetings on April 19, 2007, and earlier on May 8, 2007. Hewitt Associates, the compensation committee’s special independent compensation consultants, reviewed and discussed with the compensation committee its recommendations with respect to various retention and change of control arrangements, and Cravath reviewed with the compensation committee a summary of the proposed retention and change in control arrangements. In discussing these arrangements, the compensation committee noted the increased threat posed by competitors offering to hire our executive officers following our announcement of the review of strategic alternatives. Based on the compensation committee’s review of Manor Care’s retention and change in control arrangements, on June 13, 2007, Manor Care entered into new employment agreements with each of Paul A. Ormond, Stephen L. Guillard, Steven M. Cavanaugh and Richard A. Parr II. For a discussion of the impact of the merger on Manor Care’s compensation arrangements, see “The Merger — Interests of Our Directors and Executive Officers in the Merger” beginning on page 39.

 

Over the course of May and June 2007, the continuing potential acquirors conducted their due diligence of Manor Care. In mid-May 2007, we held in-depth management presentations with each of the continuing potential acquirors, and the potential acquirors conducted in-depth business accounting and legal due diligence. During the course of their due diligence process and prior to the submission of final acquisition proposals, all but two of the potential buyers dropped out of the process.

 

On June 8, 2007, JPMorgan distributed a bid procedures letter and a draft merger agreement to the seven potential financial acquirors and one potential strategic acquiror that were still actively engaged in the process. The bid procedures letter requested that proposals for an acquisition of Manor Care, accompanied by equity and debt financing commitments, sponsor guarantees and comments on the draft merger agreement, be submitted by June 22, 2007. A copy of the draft merger agreement and a summary thereof was also provided to our board of directors.

 

On June 11, 2007, we retained Citi to render an opinion to our board of directors as to the fairness, from a financial point of view, of the consideration to be received by holders of our common stock in connection with a potential sale of the company.

By June 25, 2007, Carlyle and one continuing strategic acquiror submitted proposals for the acquisition of Manor Care, together with debt financing commitments and comments on the draft merger agreement and, in the case of Carlyle, an equity financing commitment and sponsor guarantee. Carlyle offered merger consideration of $67.00 per share in cash, while the potential strategic acquiror offered merger consideration of $65.00 per share divided equally between cash and the acquiror’s common stock. The Carlyle offer was subject to a condition that would have required Mr. Ormond and other members of senior management to enter into employment and related agreements with Carlyle prior to the execution of a merger agreement. From June 25 to July 2, 2007, Cravath held discussions and negotiated the terms of the acquisition documents with counsel for each of the potential acquirors. On June 25, 2007, Manor Care entered into a confidentiality agreement with the continuing potential strategic acquiror so that Manor Care could conduct due diligence on the potential strategic acquiror to better assess the value of the stock component of its proposal.

 

Our board of directors met on June 26, 2007 to further analyze our strategic alternatives and to consider the proposals submitted by the two potential acquirors. Representatives of JPMorgan reviewed and discussed with the board JPMorgan’s further refined analysis of our strategic alternatives. Representatives of JPMorgan also reviewed with the board the financial terms of each of the acquisition proposals, including the amount of the proposed equity and debt financing and the resulting transaction leverage. Representatives of Cravath reviewed with the board the legal terms of each potential acquiror’s proposal, including terms relating to the conditionality of the acquiror’s obligation to consummate the merger. Management discussed with the board its views of the risks associated with each strategic alternative. In addition, JPMorgan reviewed and discussed with the board its updated preliminary financial analysis with respect to Manor Care, including a review of our full range of strategic alternatives and Citi reviewed and discussed with the board the proposed transaction from a financial perspective. With respect to the potential sale of the company process, representatives of JPMorgan and Cravath discussed with the board, in light of the proposals made by each of the potential acquirors, the process to solicit improved terms from the potential acquirors. Following discussion, the board determined that a sale of Manor Care likely would provide our stockholders with greater value than any of Manor Care’s other strategic alternatives. Nevertheless, the board directed that our management and JPMorgan continue to conduct their analysis with respect to the other strategic alternatives. The board also directed JPMorgan and Cravath to seek improved terms from each of the potential acquirors. In light of the threshold condition to Carlyle’s offer, the board also authorized Mr. Ormond to meet with Carlyle, on behalf of himself and other members of senior management, subject to full disclosure to the board regarding any such meeting and any agreement reached prior to the board’s consideration of a transaction with Carlyle. As a precaution against any potential resulting conflict of interest, the board determined that Mr. Ormond and Mr. Guillard would thereafter be recused from any votes and certain discussions regarding the board’s consideration of strategic alternatives.

 

After the June 26, 2007 board meeting, JPMorgan communicated to each of the potential acquirors that our board of directors was seeking that certain financial and contractual terms be improved. At the board’s direction, JPMorgan also commenced due diligence regarding the financial condition of the potential strategic acquiror in order to evaluate the stock consideration offered by this potential acquiror.

 

On June 27, 2007, Carlyle presented to Mr. Ormond its plans for Manor Care and described the general structure of co-investment opportunities and equity incentive plans they had offered in past acquisitions and that could be considered for a transaction involving Manor Care. During that discussion, Carlyle also indicated that it would request certain changes to Mr. Ormond’s existing employment agreement. No terms for equity participation or employment with the surviving corporation were offered, and no understandings or agreements were reached with respect to any co-investment or equity participation by Mr. Ormond or any other member of senior management or any employment terms for Mr. Ormond or any other member of senior management.

 

Prior to the meeting of the board on the morning of June 28, 2007 described below, Carlyle orally informed JPMorgan that it was increasing its proposal to a best and final offer of $67.50 per share and removed the condition, contained in Carlyle’s initial offer, that would have required Mr. Ormond and other members of senior management to enter into employment and related agreements prior to the execution of a merger agreement. The potential strategic acquiror informed Manor Care in writing that it was not willing to increase its offer price any further.

On the morning of June 28, 2007, our board of directors met to review our strategic alternatives and to discuss the best and final proposals submitted by the potential acquirors. Mr. Ormond described to the board his June 27 discussions with Carlyle, which discussions had been authorized at the previous board meeting. Mr. Ormond reported that, although the parties had discussed various possibilities regarding the general outlines of a relationship following a transaction, no formal or informal agreements had been reached. Representatives of JPMorgan reported to the board regarding the potential sale of the company process, including with respect to the negotiations that took place with the potential acquirors since the board’s meeting on June 26, 2007. JPMorgan reviewed the terms of each of the two proposals, noting that Carlyle had agreed not to condition the execution of a merger agreement on any prior agreements with Mr. Ormond and other members of senior management. JPMorgan provided the board with an updated analysis of other strategic alternatives and discussed with the board the relative merits of all such alternatives. Representatives of Cravath then reviewed with the board the legal terms of the two proposals, noting that significant progress had been made in negotiations with Carlyle with respect to, among other things, closing conditions and the remedies available to Manor Care in the event that MergerCo did not acquire Manor Care upon satisfaction of such conditions, but that the potential strategic acquiror had not meaningfully improved its proposed contractual terms. Representatives of Cravath responded to questions from the board regarding the legal terms of the offers and again discussed with the board the fiduciary duties of directors in connection with evaluating strategic alternatives. Additional discussions were held among the non-management directors, JPMorgan and Cravath in the absence of Mr. Ormond, Mr. Guillard or any other member of management. The non-management directors, JPMorgan and Cravath discussed the possibility of continuing negotiations with the strategic bidder, but, in light of the superiority of Carlyle’s offer and the expressed unwillingness of the strategic bidder to improve its terms or pricing, the board determined that this action would be productive and advisable only in the event that negotiations with Carlyle reached an impasse. The board also determined that, considering the strategic alternatives available to Manor Care, the dynamics of the bidding process, the state of the debt markets and certain other factors, JPMorgan and Cravath should be instructed to proceed without unnecessary delay in their efforts to finalize the negotiation of a definitive transaction agreement with Carlyle at the maximum obtainable price and on the best possible terms.

 

On the evening of June 28, 2007, our board of directors met to review developments that had occurred over the course of the day. Management informed the board that a $53.2 million jury verdict had been returned against Manor Care in litigation relating to patient care in New Mexico, which verdict had also been disclosed by management to Carlyle and its counsel earlier in the day. The board discussed with representatives of JPMorgan and Cravath the implications of this verdict for Manor Care and the potential sale of the company process, including the request from Carlyle to conduct further due diligence on this matter.

 

On the evening of June 29, 2007, our board of directors met to review the progress of negotiations with Carlyle and other developments that had occurred since the board’s meeting on the evening of June 28, 2007. Management and JPMorgan informed the board that, in responding to questions raised by Carlyle in the course of the due diligence process earlier that week, management and JPMorgan had determined earlier that day that a sale of Manor Care would give rise to additional costs in connection with the termination of certain warrants issued by Manor Care to an affiliate of JPMorgan. The warrants were issued in July 2005 and give the JPMorgan affiliate the right to acquire up to 8,938,960 shares of Manor Care common stock from us. The terms of the warrants provide for termination effective on the date of a stockholder vote approving a merger involving Manor Care in which our stockholders receive any cash consideration. Upon termination of the warrants, we would be required to pay the JPMorgan affiliate an amount in cash equal to the value of the warrants. The value of the warrants is a combination of their intrinsic value (the difference between the market price and the strike price) plus the time value. Also in July 2005, we purchased options from the JPMorgan affiliate with respect to our common stock in connection with Manor Care’s 2.125% convertible senior notes due 2035 (the “2035 convertible notes”). The options give Manor Care the right to purchase from the JPMorgan affiliate approximately the number of shares of Manor Care common stock that are issuable upon conversion of the 2035 convertible notes (other than any additional shares issuable in the context of a sale of Manor Care pursuant to the make-whole provision of the 2035 convertible notes). The original terms of the options provide that following a merger involving Manor Care, the options would continue, but would be adjusted, substantially consistent with the terms of the 2035 convertible notes, to substitute shares of Manor Care with the merger consideration unless or until the options are exercised in connection with conversion of the 2035 convertible notes. In the event of a merger, Manor Care would not have a contractual right to terminate the options. Our initial presentation to potential acquirors included the intrinsic value but did not include the time value

of the warrants, and thus bidders had not included it in the calculation of their respective initial bids. Following further review by JPMorgan and management, JPMorgan and management determined that the time value of the warrants would result in an amount significantly in excess of $50 million due to the JPMorgan affiliate. This additional cost would, in the context of a sale of Manor Care, increase Manor Care’s net debt by the full time value of the warrants and directly affect the value of Manor Care on a dollar-for-dollar basis. Manor Care discussed with the JPMorgan affiliate the possibility of terminating the options upon closing of the merger in a manner that would take into account both the intrinsic value and the time value of the options, and which would result in a cap on the net payment owed to the JPMorgan affiliate in respect of the time value of the options offset against the time value of the warrants of approximately $50 million. The board acknowledged that recent developments could have an impact on the value of Manor Care to any potential acquiror, and the directors discussed various approaches to minimizing the cumulative impact of the time value cost of the warrants, the New Mexico verdict and other concerns. Additional discussions were held among the non-management directors, JPMorgan and Cravath in the absence of Mr. Ormond, Mr. Guillard or any other member of management. Following these discussions, the board instructed JPMorgan to specifically quantify for Carlyle the additional warrant liability, to continue negotiations with Carlyle and to engage the strategic bidder in additional negotiations on July 2, 2007, if successful negotiations had not been concluded with Carlyle prior to that time.

 

Following the meeting of our board on June 29, 2007, JPMorgan and Cravath engaged in extensive negotiations with Carlyle and its counsel regarding the pricing and terms of a potential transaction. At the same time, Manor Care negotiated with the JPMorgan affiliate to reach an agreement to terminate both the options and the warrants upon the closing of the merger under which agreement the net payment to the JPMorgan affiliate in respect of the time value of the options offset against the time value of the warrants would be capped at $47 million. As a result, Carlyle submitted a revised offer to purchase Manor Care for $67.00 per share.

 

On the evening of July 1, 2007, our board met to review Manor Care’s strategic alternatives and the revised financial and legal terms that had been proposed by Carlyle. Representatives of JPMorgan reported to the board regarding the potential sale of the company process, including with respect to the negotiations that had taken place with Carlyle since the board’s meeting on June 29, 2007, and reviewed the terms of Carlyle’s proposal. Representatives of Cravath then reviewed with the board the contractual terms of Carlyle’s proposal, noting that Carlyle had further improved its proposed merger agreement terms with respect to closing conditions and other matters. Representatives of Cravath responded to questions from the board regarding the legal terms of the offer and again discussed with the board the fiduciary duties of directors in connection with evaluating strategic alternatives.

 

After further discussions between the board and representatives of JPMorgan and Cravath, the board requested that each of JPMorgan and Citi render an opinion as to the fairness, from a financial point of view, of the consideration to be received by holders of our common stock in the proposed merger. JPMorgan and Citi each separately delivered to the board an oral opinion, and each such oral opinion was confirmed by delivery of a written opinion dated July 1, 2007, to the effect that, as of the date of such opinion and based on and subject to the matters described in such opinion, the consideration to be received by the holders of our common stock in the proposed merger was fair, from a financial point of view, to such holders.

 

Notwithstanding that Mr. Ormond and Mr. Guillard confirmed that they had no agreement or understanding with Carlyle so that no potential conflict of interest existed, all members of management, including Mr. Ormond and Mr. Guillard, left the meeting after the delivery of JPMorgan’s and Citi’s respective oral opinions, and further discussions regarding the potential sale of Manor Care were conducted by the non-management directors, JPMorgan and Cravath.

 

Following additional discussion and deliberation, our board of directors determined that, based on all information available to the board, a sale of Manor Care to Carlyle at $67.00 per share would provide our stockholders with greater value than any of Manor Care’s other strategic alternatives, and the board unanimously (other than Mr. Ormond and Mr. Guillard, who did not take part in the vote) approved the merger agreement with an entity sponsored by Carlyle, the merger and the other transactions contemplated by the merger agreement, authorized Manor Care to enter into the merger agreement and resolved to recommend that our stockholders vote to adopt the merger agreement.

The merger agreement was executed by Manor Care, Inc. and MCHCR-CP Merger Sub Inc. as of July 2, 2007. On July 2, 2007, before the opening of trading on the NYSE, Manor Care and Carlyle issued a joint press release announcing the merger.

 

Reasons for the Merger

 

In reaching its decision to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement and to recommend that our stockholders vote to adopt the merger agreement, our board of directors considered a number of potentially positive factors, including the following material factors:

 

 

 

 

 

 

 

 

 

Our board of directors also considered and balanced against the potentially positive factors a number of potentially negative factors concerning the merger, including the following material factors:

 

 

During its consideration of the transaction with MergerCo, our board of directors was also aware that all of our directors and executive officers have interests in the merger that are, or may be, different from, or in addition to, those of our stockholders generally, as described under “The Merger — Interests of Our Directors and Executive Officers in the Merger” beginning on page 39.

 

After taking into account all of the factors set forth above, as well as others, our board of directors determined that the potentially positive factors outweighed the potentially negative factors. Furthermore, our board of directors determined it to be advisable and in the best interests of our stockholders that we enter into the merger agreement, and that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of our stockholders. Our board of directors has unanimously (with Messrs. Ormond and Guillard taking no part in the vote) approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommends that our stockholders vote to adopt the merger agreement at the special meeting.

 

Our board of directors did not assign relative weights to the above factors or the other factors considered by it. In addition, our board of directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of the board of directors may have given different weights to different factors.

 

Recommendation of Our Board of Directors

 

On July 1, 2007, after evaluating a variety of business, financial and market factors with the assistance of our management and our legal and financial advisors, and after due discussion and due consideration, our board of directors unanimously (with Messrs. Ormond and Guillard taking no part in the vote) approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and declared that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of our stockholders. ACCORDINGLY, OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT.

 

Opinion of JPMorgan

 

Pursuant to an engagement letter, dated April 20, 2007, we retained JPMorgan as our financial advisor in connection with our analysis and consideration of various strategic alternatives, including the proposed merger, and to render an opinion to our board of directors as to the fairness, from a financial point of view, of the consideration to be received by our stockholders in connection with the proposed merger.

 

At the meeting of our board of directors on July 1, 2007, JPMorgan rendered its oral opinion, which opinion was confirmed by delivery of a written opinion dated July 1, 2007, to our board of directors that, as of such date and based upon and subject to the factors and assumptions set forth in its opinion, the consideration to be received by our stockholders in the proposed merger is fair, from a financial point of view, to such stockholders. No limitations were imposed by our board of directors upon JPMorgan with respect to the investigations made or procedures followed by it in rendering its opinions.

 

The full text of JPMorgan’s written opinion, dated July 1, 2007, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached as Annex B to this proxy statement and is incorporated herein by reference. Our stockholders are urged to read the opinion in its entirety. JPMorgan’s written opinion is addressed to our board of directors, is directed only to the fairness, from a financial point of view, of the consideration to be received by our stockholders in the proposed merger and does not constitute a recommendation to any of our stockholders as to how such stockholder should vote at the Manor Care special meeting. The summary of JPMorgan’s opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the opinion.

 

In arriving at its opinion, JPMorgan, among other things:

 

 

JPMorgan also held discussions with certain members of our management with respect to certain aspects of the proposed merger, and the past and current business operations of Manor Care, our financial condition and future prospects and operations, and certain other matters JPMorgan believed necessary or appropriate to its inquiry.

JPMorgan relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy and completeness of all information that was publicly available or was furnished to or discussed with JPMorgan by us or otherwise reviewed by or for JPMorgan. JPMorgan did not conduct, and was not provided with, any valuation or appraisal of any of the assets or liabilities of Manor Care, nor did JPMorgan evaluate the solvency of Manor Care under any state or federal laws relating to bankruptcy, insolvency or similar matters. In relying on financial analyses and forecasts provided to it, JPMorgan assumed that they were reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by management as to our expected future results of operations and financial condition to which such analyses or forecasts relate. JPMorgan expressed no view as to such analyses or forecasts or the assumptions on which they were based. JPMorgan also assumed that the proposed merger and the other transactions contemplated by the merger agreement will be consummated as described in the merger agreement and that the definitive merger agreement would not differ in any material respect from the draft provided to JPMorgan. JPMorgan also assumed that the representations and warranties made by each of the parties in the merger agreement are and will be true and correct in all ways material to its analysis. JPMorgan relied as to all legal matters relevant to the rendering of its opinion upon the advice of counsel. JPMorgan further assumed that all material governmental, regulatory or other consents and approvals necessary for the consummation of the proposed merger would be obtained without any adverse effect on Manor Care.

 

The projections furnished to JPMorgan regarding Manor Care were prepared by our management. We do not publicly disclose internal management projections of the type provided to JPMorgan in connection with JPMorgan’s analysis of the proposed merger, and such projections were not prepared with a view toward public disclosure. These projections were based on numerous variables and assumptions that are inherently uncertain and may be beyond the control of management, including, without limitation, factors related to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in such projections.

 

JPMorgan’s opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to JPMorgan as of, the date of such opinion. Subsequent developments may affect JPMorgan’s opinion and JPMorgan does not have any obligation to update, revise, or reaffirm such opinion. JPMorgan’s opinion is limited to the fairness, from a financial point of view, of the consideration to be received by our stockholders in the proposed merger, and JPMorgan has expressed no opinion as to the fairness of the proposed merger to, or any consideration of, creditors or other constituencies of Manor Care or the underlying decision by us to engage in the proposed merger. JPMorgan expressed no opinion as to the price at which Manor Care’s common stock will trade at any future time, whether before or after the closing of the proposed merger.

 

In accordance with customary investment banking practice, JPMorgan employed generally accepted valuation methods in reaching its opinion. The following is a summary of the material financial analyses utilized by JPMorgan in connection with providing its opinion.

 

Public Trading Multiples

 

Using publicly available information, including filings with the SEC and published Wall Street equity research estimates, JPMorgan compared selected financial data of Manor Care with similar data for selected publicly traded companies engaged in businesses which JPMorgan judged to be similar to Manor Care. These companies were

selected, among other reasons, because of their operational and overall business similarities with our business. The companies reviewed in connection with this analysis were classified into three groups as follows:

 

 

For each selected company, JPMorgan computed the multiple of firm value, which consists of the market value of the company’s equity as of June 29, 2007 (with the exception of Genesis Healthcare Corporation, which was based on the company’s market value using an unaffected stock price as of January 12, 2007, the last trading day prior to the announcement of its transaction with Formation Capital LLC and JER Partners), plus the company’s net debt, to estimated 2007 and 2008 earnings before interest, taxes, depreciation and amortization, which is referred to as EBITDA. JPMorgan also calculated the price to earnings ratio for each selected company as of June 29, 2007. JPMorgan then computed median and mean multiples for each group of selected companies. These financial statistics were calendarized for a December year-end and yielded the following reference ranges:

 

 

Based on the multiples of firm value computed as set forth above and taking into account differences in our business and such other companies and such other factors as JPMorgan deemed appropriate, JPMorgan derived a range of multiples of firm value to estimated 2007 and 2008 EBITDA of 9.0x to 10.5x and 8.5x to 9.5x, respectively, for Manor Care. These multiples were then applied to our management’s estimates of 2007 and 2008 EBITDA, yielding implied trading values for Manor Care of approximately $49.50 to $58.50 and $51.50 to $58.25 per share, respectively. In addition, based on the price to earnings multiples as set forth above and taking into account differences between our business and such other companies and such other factors as JPMorgan deemed appropriate, JPMorgan derived a range of price to estimated 2007 and 2008 earnings of 19.5x to 20.5x and 17.0x to 18.0x, respectively. These multiples were then applied to our management’s estimates of 2007 and 2008 earnings per share, yielding implied trading values for Manor Care of approximately $54.50 to $57.25 and $55.50 to $58.75, respectively.

Discounted Cash Flow Analysis

 

JPMorgan conducted a discounted cash flow analysis for the purpose of determining the fully diluted equity value per share for our common stock. In accordance with customary valuation practices, JPMorgan calculated the unlevered free cash flows that we are expected to generate during fiscal years 2007 through 2016 based upon financial projections prepared by our management through the years ended 2012 and with management guidance through the years ended 2016. JPMorgan also calculated a range of terminal asset values for Manor Care at the end of the 10-year period ending 2016 by applying a perpetual growth rate ranging from 2.5% to 3.5% of our unlevered free cash flow during the final year of the 10-year period. The 2.5% to 3.5% growth rate range corresponded to JPMorgan’s assumption of organic long-term growth for Manor Care and was chosen based on JPMorgan’s review of the current and historical growth trends of both Manor Care and the selected companies considered in JPMorgan’s public trading multiples analysis, as well as the expected growth characteristics of Manor Care in 2016. The unlevered free cash flows and the range of terminal asset values were then discounted to present values using a range of discount rates from 9.75% to 10.25%, which were chosen by JPMorgan based upon an analysis of our weighted average cost of capital. The present value of the unlevered free cash flows and the range of terminal asset values were then adjusted for our estimated net debt as of July 1, 2007, option exercise proceeds, and present value of potential future cash payments associated with litigation damages. Based on the adjusted management projections, the discounted cash flow analysis, on a fully-diluted basis, indicated a range of equity values for our common stock of approximately $56.25 to $67.50 per share.

 

Selected Transaction Analysis

 

JPMorgan performed a selected transaction analysis, which compares the per share merger consideration to be received in the proposed merger to an implied range of per share values for Manor Care derived from an analysis of selected precedent transactions deemed by JPMorgan to be similar to the proposed merger. Using publicly available information, JPMorgan examined selected transactions within the skilled nursing provider and healthcare facilities industry segments that JPMorgan, based on its experience with mergers and acquisitions analysis, deemed relevant to arriving at its opinion. JPMorgan selected these transactions, among other reasons, because the targets involved in such transactions operate in a similar industry to Manor Care and have similar lines of business to Manor Care. However, none of the target companies or selected transactions is identical or directly comparable to Manor Care or the proposed merger, respectively. Accordingly, JPMorgan made judgments and assumptions concerning

differences in financial and operating characteristics of the target companies and other factors that could affect the pricing of the selected transactions. Specifically, JPMorgan reviewed the following transactions:

 

 

JPMorgan calculated the latest-twelve-months EBITDA transaction value multiples for the skilled nursing provider transactions and healthcare facilities transactions by dividing the publicly announced value of each selected transaction by the latest-twelve-month EBITDA of the target company prior to the announcement of the transaction, which yielded the following reference ranges:

 

Firm Value/LTM EBITDA

 

 

Based on various judgments concerning the relative comparability of each of the selected transactions to the proposed merger, JPMorgan did not rely solely on the quantitative results of the selected transaction analysis in developing a reference range or otherwise applying its analysis. JPMorgan, based on its experience with mergers and acquisitions and this segment of the healthcare industry, and using the selected skilled nursing provider and healthcare facilities transaction multiples as a general guide, selected a range of multiples of transaction values to latest-twelve-months EBITDA that it believed reflected an appropriate range of transaction multiples applicable to Manor Care. JPMorgan applied a range of comparable transaction multiples of 10.0x to 12.5x to our Firm Value/LTM EBITDA (calculated as of September 30, 2007), and arrived at an estimated range of equity values for our common stock of $53.50 to $67.50. The range applied was narrower than that set forth in the table above primarily because JPMorgan focused on certain transactions that were most comparable to the proposed merger based on the operating and financial characteristics of the targets (specifically, transactions at the higher end of the range in the table above, including Mariner Healthcare and Genesis Healthcare).

In addition to the financial analyses performed by JPMorgan in connection with providing its opinion, JPMorgan presented the following additional financial analyses at the request of our board of directors:

 

Historical Stock Price Analysis

 

JPMorgan reviewed the historical trading prices for our common stock for a 52-week period ended April 10, 2007. The high and low trading prices for our common stock for such 52-week period were $45.68 and $55.83, respectively. JPMorgan noted that the $67.00 per share price in the proposed merger represented a 20.2% premium to our closing stock price on April 10, 2007, the last trading day prior to the date we publicly announced that we were exploring strategic alternatives with respect to the business, and a 2.6% premium to our closing stock price on June 29, 2007, the last trading day prior to the announcement of the proposed merger.

 

Leveraged Buyout Analysis

 

Using projections prepared by our management, JPMorgan calculated potential returns to equity investors in connection with a hypothetical leveraged acquisition of Manor Care. For purposes of this analysis, JPMorgan assumed the transaction would be completed on September 30, 2007 and that a subsequent sale of Manor Care would occur in 2012 at a price equal to 10.5x management’s estimated 2012 EBITDA (including public company costs). JPMorgan selected an exit multiple of up to 10.5x as it bore consistency with the last 2 years’ trading multiple for Manor Care and was greater than the mean value of Manor Care’s trading multiple for the last 10 years, and was greater than the last years’, 2 years’, 5 years’ and 10 years’ trading multiples of the publicly-traded selected companies considered in JPMorgan’s public trading multiples analysis. JPMorgan also assumed that the required rate of return would range from 17.5% to 22.5% in a transaction of this type. Based on this analysis, JPMorgan estimated a range of implied equity values for our common stock of $64.25 to $69.25 per share.

 

The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by JPMorgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. JPMorgan believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of its analyses as a whole, could create an incomplete view of the processes underlying the analyses and its opinion. In arriving at its opinion, JPMorgan did not attribute any particular weight to any analyses or factors considered by it and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support its opinion. Rather, JPMorgan considered the totality of the factors and analyses performed in determining its opinion. Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Accordingly, forecasts and analyses used or made by JPMorgan are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Moreover, JPMorgan’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be bought or sold. None of the selected companies reviewed as described in the above summary is identical to Manor Care and none of the selected transactions reviewed was identical to the proposed merger. However, the companies selected were chosen because they are publicly traded companies with operations and businesses that, for purposes of JPMorgan’s analysis, may be considered similar to ours. The transactions selected were similarly chosen because their participants, size and other factors, for purposes of JPMorgan’s analysis, may be considered similar to the proposed merger. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to Manor Care and the transactions compared to the proposed merger.

 

As a part of its investment banking business, JPMorgan and its affiliates are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for estate, corporate and other purposes. JPMorgan was selected to advise us with respect to the proposed merger and deliver an opinion to our board of directors with respect to the proposed merger on the basis of such experience and its familiarity with Manor Care.

Pursuant to its engagement letter, JPMorgan has acted as financial advisor to Manor Care with respect to the proposed merger and Manor Care has agreed to pay JPMorgan (1) a fee of $5 million upon the delivery of its opinion and (2) a transaction fee in an amount equal to 0.55% of the aggregate consideration to be paid in the proposed merger, or approximately $34.8 million, which is subject to reduction for fees associated with a second fairness opinion. The transaction fee shall be payable upon consummation of the proposed merger and the $5 million fee paid with respect to JPMorgan’s delivery of its opinion shall be credited towards such amount. JPMorgan will also be entitled to receive 25% of any termination fee paid to Manor Care in the event that the proposed merger is terminated, abandoned or fails to occur and the $5 million fee paid with respect to JPMorgan’s delivery of its opinion shall be credited towards such amount. In addition, we have agreed to reimburse JPMorgan for its expenses incurred in connection with its services, including the reasonable fees and disbursements of counsel, and will indemnify JPMorgan against certain liabilities, including liabilities arising under the Federal securities laws.

 

From time to time, JPMorgan and its affiliates have in the past provided, are currently providing and in the future may provide investment banking, commercial banking and other financial services to Manor Care for which JPMorgan has received, and would expect to receive, customary compensation. In particular, in the last two years JPMorgan and its affiliates acted, on behalf of Manor Care, as the sole bookrunner on our $250 million issuance of 2.0% convertible senior notes due 2036 in May 2006 and our $400 million issuance of 2.125% convertible senior notes due 2035 in August 2005. In addition, JPMorgan and its affiliates have also provided a variety of services to Carlyle and its affiliates. All such services were performed for customary compensation. In connection with the proposed merger, JPMorgan and its affiliates offered financing terms to potential acquirors of Manor Care (including Carlyle and its affiliates) and are arranging and providing financing of the merger consideration for MergerCo. See “The Merger — Financing” beginning on page 36. In the ordinary course of its businesses, JPMorgan and its affiliates may actively trade the debt and equity securities of Manor Care or affiliates of Carlyle for its own accounts or for the accounts of customers and, accordingly, JPMorgan may at any time hold long or short positions in such securities. Among other transactions, an affiliate of JPMorgan entered into an option transaction and a warrant transaction with Manor Care in July 2005. In connection with the merger agreement, the JPMorgan affiliate and Manor Care entered into an agreement to terminate both the option transaction and the warrant transaction on the closing date of the merger. Under the agreement, the net payment to the JPMorgan affiliate in respect of the time value of the options offset against the time value of the warrants, which is referred to as call spread value in JPMorgan’s opinion, is capped at $47 million.

 

Opinion of Citi

 

Manor Care requested that Citi evaluate the fairness, from a financial point of view, of the consideration to be received in the merger by holders of Manor Care common stock. On July 1, 2007, at a meeting of Manor Care’s board of directors held to evaluate the merger, Citi rendered to Manor Care’s board of directors an oral opinion, which was confirmed by delivery of a written opinion dated July 1, 2007, to the effect that, as of that date and based on and subject to the matters described in its opinion, the $67.00 per share merger consideration was fair, from a financial point of view, to the holders of Manor Care common stock.

 

The full text of Citi’s written opinion, dated July 1, 2007, which describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken, is attached to this proxy statement as Annex C and is incorporated into this proxy statement by reference. Citi’s opinion was provided to Manor Care’s board of directors in connection with its evaluation of the per share merger consideration from a financial point of view. Citi’s opinion does not address any other aspects or implications of the merger and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matters relating to the proposed merger.

 

In arriving at its opinion, Citi:

 

 

 

In rendering its opinion, Citi assumed and relied, without assuming any responsibility for independent verification, on the accuracy and completeness of all financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with Citi and on the assurances of Manor Care’s management that it was not aware of any relevant information that was omitted or remained undisclosed to Citi. With respect to financial forecasts and other information and data relating to Manor Care provided to or otherwise reviewed by or discussed with Citi, Citi was advised by Manor Care’s management, and Citi assumed, with Manor Care’s consent, that the forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of Manor Care’s management as to Manor Care’s future financial performance both before and after giving effect to certain acquisitions proposed to be undertaken by Manor Care. Citi assumed, with Manor Care’s consent, that the merger would be consummated in accordance with the terms of the merger agreement, without waiver, modification or amendment of any term, condition or agreement in any respect material to Citi’s opinion and in compliance with all applicable laws and that, in the course of obtaining the necessary regulatory or third party approvals, consents, releases and waivers for the merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on Manor Care or the merger. Representatives of Manor Care advised Citi, and Citi also assumed, with Manor Care’s consent, that the final terms of the merger agreement would not vary materially from those set forth in the draft reviewed by Citi.

 

Citi did not make, and it was not provided with, an independent evaluation or appraisal of the assets or liabilities, contingent or otherwise, of Manor Care, and Citi did not make any physical inspection of the properties or assets of Manor Care. Citi’s opinion does not address any terms or other aspects or implications of the merger (other than the $67.00 per share merger consideration to the extent expressly specified in the opinion). Citi expressed no view as to, and its opinion does not address, Manor Care’s underlying business decision to effect the merger, the relative merits of the merger as compared to any alternative business strategies that might exist for Manor Care or the effect of any other transaction in which Manor Care might engage. Citi was not requested to, and did not, solicit third party indications of interest in the possible acquisition of Manor Care; however, Citi held discussions with Manor Care and its other advisors regarding the results of the solicitation process undertaken as of the date of Citi’s opinion by or on behalf of Manor Care. Citi also was not requested to, and did not, participate in the negotiation or structuring of the merger. Citi’s opinion was necessarily based on information available to Citi, and financial, stock market and other conditions and circumstances existing and disclosed to Citi, as of the date of its opinion. Except as described above, Manor Care imposed no other instructions or limitations on Citi with respect to the investigations made or procedures followed by Citi in rendering its opinion.

 

In preparing its opinion, Citi performed a variety of financial and comparative analyses, including those described below. The summary of these analyses is not a complete description of the analyses underlying Citi’s opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to summary description. Citi arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole, and did

not draw, in isolation, conclusions from or with regard to any one factor or method of analysis for purposes of its opinion. Accordingly, Citi believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

 

In its analyses, Citi considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Manor Care. No company, business or transaction used in those analyses as a comparison is identical or directly comparable to Manor Care or the merger, and an evaluation of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed.

 

The estimates contained in Citi’s analyses and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of businesses or securities do not necessarily purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Citi’s analyses are inherently subject to substantial uncertainty.

 

The type and amount of consideration payable in the merger was determined through negotiations between Manor Care and Carlyle and the decision to enter into the merger was solely that of our board of directors. Citi’s opinion was only one of many factors considered by our board of directors in its evaluation of the merger and should not be viewed as determinative of the views of Manor Care’s board of directors or management with respect to the merger or the merger consideration.

 

The following is a summary of the material financial analyses presented to Manor Care’s board of directors in connection with Citi’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand Citi’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Citi’s financial analyses.

 

Selected Publicly Traded Companies Analysis

 

Citi reviewed financial and stock market information of Manor Care and the following eight selected publicly held companies, three of which are in the skilled nursing facilities industry and five of which are hospitals:

 

 

Citi reviewed, among other things, enterprise values of the selected companies, calculated as fully diluted equity value based on closing stock prices on June 29, 2007, plus debt, less cash, as a multiple of latest 12 months earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA, and calendar years 2007 and 2008 estimated EBITDA. Citi also reviewed equity values of the selected companies based on closing stock prices on June 29, 2007 as a multiple of calendar years 2007 and 2008 estimated earnings per share, commonly referred to as EPS, and the ratio of 2007 estimated price-to-earnings to 2007 through 2012 estimated earnings growth, commonly referred to as PEG ratio. Citi then applied a range of selected multiples of 10.0x to 12.0x in the case of latest 12 months EBITDA, 9.0x to 11.0x in the case of calendar year 2007 estimated EBITDA, 8.0x to 10.0x in the case of calendar year 2008 estimated EBITDA, 18.5x to 20.5x in the case of calendar year 2007

estimated EPS, 16.5x to 18.5x in the case of calendar year 2008 estimated EPS, and 1.20x to 1.35x in the case of 2007 estimated PEG ratio derived from the selected companies to Manor Care’s latest 12 months (as of March 31, 2007) EBITDA, calendar years 2007 and 2008 estimated EBITDA and EPS, and 2007 through 2012 estimated EPS growth multiplied by its 2007 estimated EPS, respectively. Estimated financial data of the selected companies were based on research analysts’ estimates, public filings and other publicly available information. Estimated financial data of Manor Care were based on internal estimates of Manor Care’s management. This analysis indicated the following selected per share equity reference range for Manor Care, as compared to the per share merger consideration:

 

 

Selected Precedent Transactions Analysis

 

Using publicly available information, Citi reviewed transaction values in the following six selected transactions in the skilled nursing facility industry:

 

 

Citi reviewed, among other things, transaction values, calculated as the purchase price paid for the target company’s equity, plus debt, less cash, in the selected transactions as multiples of latest 12 months revenue and EBITDA. In reviewing the selected transactions, Citi focused particularly on the Formation Capital, LLC and JER Partners/Genesis HealthCare Corporation transaction and the Sun Healthcare Group, Inc./Harborside Healthcare Corporation transaction given, among other things, that the target companies involved in such transactions had operating businesses similar to those of Manor Care and such companies, as is the case with Manor Care, owned a substantial portion of the real estate associated with their facilities. Citi then applied a range of selected multiples of 1.00x to 1.10x in the case of latest 12 months revenue and 11.5x to 13.0x in the case of latest 12 months EBITDA derived from those transactions to Manor Care’s latest 12 months (as of March 31, 2007) revenue and EBITDA, respectively. Financial data for the selected transactions were based on public filings and publicly available financial information at the time of announcement of the relevant transaction. Financial data for Manor Care were based on internal estimates of Manor Care’s management. This analysis indicated the following selected per share equity reference range for Manor Care, as compared to the per share merger consideration:

 

 

Sum-of-the-Parts Analysis

 

Citi performed a sum-of-the parts analysis of Manor Care’s real estate property and operating business, based on internal estimates of Manor Care’s management. The estimated value of Manor Care’s real estate property was calculated by applying a range of capitalization rates of 7.0% to 7.5% to the estimated maximum rent, less costs, of the property, which capitalization rate range was derived taking into account, among other things, the purchase prices paid in selected transactions referred to above under “Selected Precedent Transactions Analysis.” The estimated value of Manor Care’s operating business was calculated by applying a range of EBITDA multiples of 7.5x to 8.5x to such business’ calendar year 2007 estimated EBITDA, adjusted for rent expense, which range of EBITDA multiples was derived taking into account, among other things, EBITDA trading multiples of selected companies in the skilled nursing facility industry referred to above under “Selected Publicly Traded Companies

Analysis” which do not own associated real estate. This analysis indicated the following selected per share equity reference range for Manor Care, as compared to the per share merger consideration:

 

 

Discounted Cash Flow Analysis

 

Citi performed a discounted cash flow analysis of Manor Care to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that Manor Care could generate for the last quarter of fiscal year 2007 through fiscal year 2012, based on internal estimates of Manor Care’s management both before and after giving effect to acquisitions (including investments in new facilities and expansions) proposed to be undertaken by Manor Care. Estimated terminal values for Manor Care were calculated by applying a range of EBITDA terminal value multiples of 8.5x to 9.5x to Manor Care’s fiscal year 2013 estimated EBITDA, which range of EBITDA terminal value multiples was derived taking into account, among other things, EBITDA trading multiples of selected companies in the skilled nursing facility industry referred to above under “Selected Publicly Traded Companies Analysis.” The cash flows and terminal values were then discounted to present value using discount rates ranging from 7.6% to 8.2%, which discount rate range was derived based on a weighted average cost of capital calculation. This analysis indicated the following implied per share equity reference ranges for Manor Care, both including and excluding acquisitions, as compared to the per share merger consideration:

 

 

Leveraged Buyout Analysis

 

Citi performed a leveraged buyout analysis of Manor Care, based on internal estimates of Manor Care’s management, to calculate the theoretical purchase price that could be paid by a hypothetical financial buyer in an acquisition of Manor Care, taking into account the pro forma leverage structure of Manor Care resulting from the proposed financing for the merger and internal rates of return generally required of financial buyers. Estimated financial data for Manor Care were based on internal estimates of Manor Care’s management both before and after giving effect to acquisitions (including investments in new facilities and expansions) proposed to be undertaken by Manor Care and after taking into account potential cost savings which Manor Care’s management estimated could be realized by a financial buyer by virtue of the fact that Manor Care would no longer be a public company and change of control costs related to Manor Care’s outstanding convertible debentures. Citi assumed that a financial buyer would attempt to realize a return on its investment in calendar year 2012. Estimated exit values for Manor Care were calculated by applying a range of exit value multiples of 8.5x to 9.5x to Manor Care’s fiscal year 2013 estimated EBITDA. Citi then derived a range of theoretical purchase prices based on an assumed required internal rate of return for a financial buyer of approximately 18.0% to 22.0%. This analysis indicated the following implied per share equity reference ranges for Manor Care, both including and excluding potential acquisitions, as compared to the per share merger consideration:

 

 

Miscellaneous

 

Under the terms of Citi’s engagement, Manor Care has agreed to pay Citi for its opinion services in connection with the merger an aggregate fee of $5 million, which fee was payable upon delivery of Citi’s opinion (regardless of the conclusion reached in such opinion). Manor Care also has agreed to reimburse Citi for reasonable travel and other expenses incurred by Citi in performing its services, including reasonable fees and expenses of its legal

counsel, and to indemnify Citi and related persons against liabilities, including liabilities under the federal securities laws, arising out of its engagement.

 

Citi and its affiliates in the past have provided, currently are providing and in the future may provide services to Carlyle and certain of its affiliates unrelated to the proposed merger, for which services Citi and its affiliates have received, and expect to receive, compensation, including, among other things, having acted or acting (1) as financial advisor to Carlyle and certain of its portfolio companies in connection with certain sale and acquisition transactions, (2) in various roles in connection with securities offerings of certain portfolio companies of Carlyle and (3) as a lender in connection with credit facilities of certain portfolio companies of Carlyle. In the ordinary course of business, Citi and its affiliates may actively trade or hold the securities of Manor Care and certain portfolio companies of Carlyle for its own account or for the account of its customers and, accordingly, may at any time hold a long or short position in such securities. In addition, Citi and its affiliates (including Citigroup Inc. and its affiliates) may maintain relationships with Manor Care, Carlyle and their respective affiliates.

 

Manor Care selected Citi to provide certain financial advisory services in connection with the merger based on Citi’s reputation and experience. Citi is an internationally recognized investment banking firm which regularly engages in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes.

 

Certain Projected Financial Data

 

During the due diligence process, Manor Care provided potential acquirors, JPMorgan and Citi with certain projected financial data prepared by our management, including projected revenue, EBITDA and free cash flow after interest expense, divestitures and investments (“available cash flow”), which are set forth below for the 2007 through 2010 fiscal years. Our prior public guidance of 2007 earnings per share of $2.70 to $2.80 is consistent with the projected revenue and EBITDA. Both the public guidance and the projections assumed no reductions in anticipated reimbursement levels. These projections were prepared for internal budgeting and other purposes, and were not prepared with a view toward public disclosure or with a view toward complying with the published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information or generally accepted accounting principles. The projected financial data are not facts and should not be relied upon as being necessarily indicative of future results, and readers of this document are cautioned not to place undue reliance on these projections. These projections are “forward-looking statements” and actual results may differ materially from them; see “Cautionary Statement Regarding Forward-Looking Statements” on page 13.

 

 

Financing

 

The total amount of funds necessary to complete the merger and the related transactions is anticipated to be approximately $6.6 billion, which includes approximately $5.4 billion (net of the impact of certain call options entered into in connection with Manor Care’s 2.125% convertible senior notes due 2035) to be paid out to our stockholders and holders of other equity-based interests in Manor Care, with the remainder to be applied to refinance existing indebtedness and pay related fees and expenses in connection with the merger, the financing arrangements and the related transactions.

 

These funds are anticipated to come from the following sources:

 

 

 

 

Equity Financing

 

Carlyle Partners V, L.P., delivered an equity commitment letter for $1.3 billion to MergerCo, subject to certain limitations. These commitments constitute all of the equity portion of the merger financing, other than shares of Manor Care common stock exchanged for MergerCo common stock.

 

The equity commitment letter provides that the equity funds will be contributed to fund the purchase of shares of common stock of MergerCo, solely to the extent necessary to pay the merger consideration and payment of related fees and expenses, and for no other purpose. The equity commitment is generally subject to certain other terms contained in the equity commitment letter, including the satisfaction or waiver at the closing of the conditions precedent to the obligations of MergerCo to consummate the merger. The equity commitment letter will expire automatically upon the earliest to occur of (1) the closing of the merger, (2) the termination of the merger agreement and (3) the assertion by Manor Care or any of its affiliates in any litigation or other proceeding of any claim or suit under or in connection with the merger agreement.

 

Debt Financing

 

MergerCo has entered into a debt financing commitment letter with J.P. Morgan Securities Inc., JPMorgan Chase Bank, N.A., Credit Suisse Securities (USA) LLC, Credit Suisse, Cayman Islands Branch, Column Financial, Inc., Banc of America Securities LLC, and Bank of America, N.A., providing (1) OpCo with committed financing for $900 million in senior secured credit facilities and (2) the PropCo borrowers with $4.6 billion under a secured real estate credit facility and/or related bridge credit facility.

 

The documentation governing the senior secured credit facilities, the CMBS facility and the bridge facility has not been finalized and, accordingly, their actual terms may differ from those described in this proxy statement.

 

Senior Secured Credit Facilities

 

The senior secured credit facilities are expected to be comprised of a $700 million term loan facility and a $200 million revolving credit facility. As a result of the merger, MergerCo will be merged with and into Manor Care. OpCo, as a subsidiary of Manor Care (the surviving corporation), will be the borrower under the senior secured credit facilities. All obligations of OpCo under the senior secured credit facilities will be guaranteed by MergerCo, Manor Care and each existing and future direct or indirect wholly owned material domestic subsidiary of OpCo, subject to certain exceptions. The obligations of OpCo and the guarantors under the senior secured credit facilities will be secured by substantially all of the assets of OpCo and the guarantors, including the equity interests in certain subsidiaries.

 

The full amount of the term loans is expected to be used to fund a portion of the merger consideration, to refinance our existing indebtedness and to pay related fees and expenses. The term loans are expected to bear

interest based on either the adjusted London inter-bank offered rate (“LIBOR”) plus an initial spread, or the alternate base rate (“ABR”) plus an initial spread, at the option of OpCo. The term loans will mature seven years after the effective date of the merger and will also require quarterly interim amortization payments, with the balance payable at the final maturity date of the term loans. The borrower may make voluntary prepayments of the term loans at any time without premium or penalty. In addition, the term loans are required to be prepaid in certain circumstances, including with the net cash proceeds of debt issuances (other than debt otherwise permitted), the net cash proceeds of certain asset sales (subject to reinvestment rights and other exceptions) and specified percentages of certain cash flows.

 

The revolving credit facilities will be available at closing for working capital and other general corporate purposes. The revolving credit facilities will mature six years after the effective date of the merger and are expected to bear interest based on either LIBOR plus an initial spread, or ABR plus an initial spread, at the option of OpCo.

 

The senior secured credit facilities will contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, asset sales, mergers and consolidations, dividends and other distributions, redemptions and prepayments of certain indebtedness. The senior secured facilities will also include customary events of default, including upon a change of control.

 

CMBS Facility

 

It is expected that the PropCo borrowers will obtain approximately $4.6 billion in gross proceeds from the CMBS facility, subject to the lenders’ ability to reduce the amount of such CMBS facility by the amount of the bridge facility, if any, drawn in a single drawing on the effective date of the merger.

 

Interest payable by the PropCo borrowers is expected to accrue at a rate based on 30-day LIBOR plus an initial spread, subject to an adjustment, and calculated on an actual/360 basis. At the option of the PropCo borrowers, the CMBS facility will have either a 24-month term, with the option of five consecutive 12-month extensions thereafter, or a 48-month term, with the option of three consecutive 12-month extensions thereafter, following the effective date of the merger. The PropCo borrowers will be expected to purchase a LIBOR interest rate cap prior to funding of the CMBS facility at a strike rate no higher than 6.0%, for a period of at least two years after the effective date, if the term is 24 months, or for a period of at least four years after the effective date, if the term is 48 months.

 

Real Estate Bridge Facility

 

With respect to those properties intended for the CMBS facility, if and to the extent the PropCo borrowers are not able to satisfy the conditions for including such properties in the CMBS facility (and the CMBS lenders do not waive the satisfaction of such conditions), JPMorgan Chase, Column and Bank of America have committed to provide the bridge facility on the terms set forth below, in the amount of $4.6 billion less the amount of the CMBS facility. The bridge loans and the guarantees thereof will be senior to all subordinated obligations of the PropCo borrowers and the guarantors.

 

Interest payable by the PropCo borrowers is expected to accrue at a rate per annum based on 30-day LIBOR plus an initial spread, subject to an adjustment and calculated on an actual/360 basis, and provided that the weighted average spread of the CMBS facility and the bridge facility shall not exceed a certain level. The term of the bridge facility will be the same as the CMBS facility.

 

The real estate bridge facility will contain customary representations and warranties and covenants for similar financings. The real estate bridge facility will also include customary events of default.

Conditions to the Financing

 

The debt financing commitments will expire if not drawn on or prior to the date which is fourteen days after the termination date specified in the merger agreement. The facilities contemplated by the debt and bridge financing commitments are subject to customary closing conditions, including:

 

 

The CMBS facility is subject to certain additional closing conditions, including:

 

 

Although the debt financing described in this proxy statement is not subject to the lenders’ satisfaction with their due diligence or to a “market out”, such financing is subject to certain market flex provisions and might not be funded on the effective date because of failure to meet the closing conditions or for other reasons.

 

Since the final terms of the debt financing facilities have not been agreed upon, such terms may differ from those set forth above and, in certain cases, such differences may be significant. We do not intend to update or otherwise revise any statements concerning the terms of the financing included in this proxy statement to reflect circumstances existing after the date when such statements were made or to reflect the occurrence of future events even in the event that any of the statements regarding the financing arrangements are shown to be in error or otherwise no longer appropriate.

 

As of the date of this proxy statement, no alternative financing arrangements or alternative financing plans have been made in the event the debt financing described herein is not available as anticipated.

 

Interests of Our Directors and Executive Officers in the Merger

 

In addition to their interests in the merger as stockholders, certain of our directors and executive officers have interests in the merger that differ from, or are in addition to, your interests as a stockholder. In considering the recommendation of our board of directors to vote “FOR” the adoption of the merger agreement, you should be aware of these interests. Our board of directors was aware of, and considered the interests of, our directors and executive officers in approving the merger agreement, the merger and the transactions contemplated by the merger agreement. Except as described below, such persons have, to our knowledge, no material interest in the merger that differs from your interests generally.

 

Treatment of Outstanding Equity-Based Awards

 

As of the date of this proxy statement, certain of our directors and executive officers held stock options, stock appreciation rights, restricted shares, stock awards subject to performance-based vesting criteria (which we refer to as performance share awards), restricted stock units and stock equivalent units.

 

  Stock Options and Stock Appreciation Rights

 

Except as otherwise agreed between MergerCo and the holder of an outstanding stock option or stock appreciation right, at the effective time of the merger, each outstanding stock option or stock appreciation right, whether or not then exercisable, will be canceled and the holder of each such stock option or stock appreciation right that has an exercise price of less than $67.00 will be entitled to receive a cash payment, without interest and less applicable withholding taxes, equal to the product of:

 

 

The following table summarizes the outstanding vested and unvested stock options and stock appreciation rights held by our directors and executive officers as of September 10, 2007, and, unless otherwise agreed between MergerCo and the holder of such stock options or stock appreciation rights, the consideration that each of them will receive at the effective time of the merger in connection with the cancellation of their options and stock appreciation rights:

 

 

  Restricted Stock

 

Except as otherwise agreed between MergerCo and the holder of outstanding restricted shares, at the effective time of the merger, each outstanding restricted share will immediately vest and will be converted into the right to receive $67.00 per share in cash, without interest and less applicable withholding taxes. As of September 10, 2007, no director or executive officer other than Mr. Guillard holds restricted shares. Mr. Guillard currently holds 15,000 restricted shares. Unless otherwise agreed between MergerCo and Mr. Guillard, these shares will be converted into $1,005,000 in cash at the effective time of the merger.

 

  Performance Share Awards

 

Except as otherwise agreed between MergerCo and the holder of outstanding performance shares, at the effective time of the merger, each outstanding performance share award will immediately vest with respect to the maximum number of shares subject to the award and will be converted into the right to receive $67.00 per share, without interest and less any applicable withholding taxes.

 

As of September 10, 2007, based on the maximum performance level, Messrs. Ormond, Guillard, Cavanaugh and Parr held performance share awards with respect to 401,555, 78,750, 33,750 and 22,500 shares of our common stock, respectively. Unless otherwise agreed between MergerCo and the relevant executive, at the effective time of the merger, these shares will be converted into $26,904,185, $5,276,250, $2,261,250 and $1,507,500 in cash, respectively. No other director or executive officer holds performance share awards.

 

  Restricted Stock Units

 

Except as otherwise agreed between MergerCo and the holder of outstanding restricted stock units, at the effective time of the merger, each outstanding restricted stock unit will be converted into the right to receive $67.00 per share in cash. Except in the case of restricted stock units held by Mr. Ormond, cash with respect to the restricted stock units will be paid as soon as practicable following the effective time of the merger, without interest and less any applicable withholding taxes. In the case of restricted stock units held by Mr. Ormond, due to restrictions under Section 409A of the Internal Revenue Code, in the event that the completion of the merger occurs before January 1, 2008, payment of cash with respect to his restricted stock units must be deferred until the first business day of January 2008 (or the date his employment terminates, if earlier). Cash equal to the amount payable to Mr. Ormond will be deposited in an interest bearing money market account immediately following the effective time of the merger, and will be paid to him less any applicable withholding taxes.

 

None of our directors (other than Messrs. Ormond and Guillard) holds restricted stock units. The following table summarizes the outstanding restricted stock units held by our executive officers as of September 10, 2007, and, unless otherwise agreed between MergerCo and the holder of such restricted stock units, the consideration that each of them will receive in connection with the cancellation of their restricted stock units:

 

 

  Stock Equivalent Units

 

Certain of our executive officers have elected to notionally invest a portion of their account balances under our deferred compensation plans in stock equivalent units with respect to shares of our common stock. At the effective time of the merger, each such stock equivalent unit will cease to represent the right to receive a share of our common stock and instead will be converted into the right to receive $67.00 per unit. Such amounts will be credited under our deferred compensation plans and will be notionally reinvested in the future in accordance with the terms of the applicable plan.

 

None of our directors (other than Messrs. Ormond and Guillard) holds stock equivalent units. The following table summarizes the outstanding stock equivalent units held by our executive officers as of September 10, 2007 and the value of the amount that will be credited as of the effective time of the merger to each executive officer’s account under our deferred compensation plans:

 

 

Employment Agreements

 

We have entered into an employment agreement with each of Paul A. Ormond, Stephen L. Guillard, Steven M. Cavanaugh and Richard A. Parr II. The completion of the merger will constitute a change in control for purposes of these employment agreements.

 

The employment agreements provide that in the event that an executive’s employment is terminated by us without cause or by the executive for “good reason” (as defined in the employment agreements) during the three-year period following a change in control, in the case of Mr. Ormond, or during the two-year period following a change in control, in the case of the other executives, the executive will be entitled to the payments and benefits described below. In addition, solely in the case of Mr. Ormond, if he terminates his employment for any reason during the 180-day period that begins one year after a change in control, he will also be entitled to such payments and benefits. Such payments and benefits include: (1) a lump-sum payment equal to three times the sum of the executive’s annual base salary and annual incentive bonus (which bonus will be calculated at the maximum level for Messrs. Ormond and Guillard, and, in the case of Messrs. Cavanaugh and Parr, calculated at the greater of the target level and a level based on a formula specified in their employment agreements) and, solely in the case of Messrs. Ormond and Guillard, the maximum award amount under Manor Care’s performance award plan for the period that ends in the year in which the change in control occurs; (2) three years of continued medical, dental and vision benefits; (3) an additional 36 months of service credit under Manor Care’s tax-qualified and supplemental pension, retirement and savings plans; (4) solely in the case of Messrs. Ormond and Cavanaugh, full funding by Manor Care of any split dollar life insurance arrangements maintained by Manor Care for the executive’s benefit, based on the assumption that the executive will remain employed for three additional years; and (5) solely in the case of Mr. Ormond, three years of continued use of office space, support services and furnishings provided by Manor Care.

 

Pursuant to the employment agreements, upon a change in control, all outstanding stock options, stock appreciation rights, restricted shares and restricted stock units will become fully vested, and outstanding performance share awards will become vested at the levels specified in the employment agreements. For a description of the treatment of each executive’s equity-based awards in connection with the merger, see “Treatment of Outstanding Equity-Based Awards” beginning at page 39. In addition, each executive’s annual bonus under Manor

Care’s annual incentive plan for the year in which the change in control occurs will become irrevocably payable at the greater of the target level and a level based on a formula specified in each employment agreement. Based on current compensation levels, the maximum annual incentive bonuses for Messrs. Ormond, Guillard, Cavanaugh and Parr for the year in which the merger occurs would be equal to $2,267,000, $600,000, $270,000 and $315,000, respectively. Furthermore, any amounts payable to the executives under Manor Care’s performance award plan for each performance period in which the change in control occurs will become irrevocably payable at the greater of the target level and a level based on a formula specified in the employment agreements. Assuming that the completion of the merger occurs in 2007, amounts payable in respect of the periods then in effect to Messrs. Ormond, Guillard and Cavanaugh would be $2,926,550, $360,000 and $75,000, respectively. Mr. Parr does not participate in Manor Care’s performance award plan.

 

In addition to the foregoing, the employment agreements provide that Manor Care will make certain tax “gross-up” payments to address taxes, interest and penalties that may be imposed under applicable tax laws in connection with golden parachute payments and non-qualified deferred compensation and will reimburse the executives for certain legal fees and related expenses incurred in connection with the enforcement of the employment agreements.

 

The employment agreements contain non-competition, non-solicitation and no-hire provisions that apply for a period of two years following termination of employment, in the case of Messrs. Ormond, Cavanaugh and Parr, and for a period of three years following termination of employment, in the case of Mr. Guillard.

 

Life Insurance Arrangement with Mr. Ormond

 

Pursuant to an agreement between us and Mr. Ormond regarding Manor Care’s purchase of a life insurance policy with premiums payable in a total amount equal to $3,400,000, (1) if, at any time, Mr. Ormond’s employment is terminated by Manor Care without cause, (2) if, following a change in control, Mr. Ormond terminates his employment for “good reason” (within the meaning of Mr. Ormond’s employment agreement) or (3) if, during the 180-day period that begins one year after a change in control, Mr. Ormond terminates his employment for any reason, Manor Care will transfer ownership of the life insurance policy to Mr. Ormond. The completion of the merger will constitute a change in control for purposes of the agreement.

 

Benefit Arrangements with the Surviving Corporation

 

Pursuant to the merger agreement, for a period of one year following the completion of the merger, the surviving corporation will either (1) maintain our employee benefit plans and agreements (other than equity-based plans) at the level in effect on the date of the merger agreement or (2)(a) provide each employee with a base salary and bonus opportunity that, taken as a whole, have a value (or potential value, in the case of bonus opportunity) that is not less favorable in the aggregate than the base salary and bonus opportunity provided to such employee on the date of the completion of the merger and (b) provide benefits to each such employee that, taken as a whole, have a value that is not less favorable in the aggregate (excluding any value attributable to equity-based compensation) than the benefits provided to each such employee on date of the completion of the merger.

 

In addition, the surviving corporation has agreed to honor and continue, without amendment or modification (other than any amendment required to comply with applicable law or any amendment adopted with the consent of the affected employee), for a period of one year following the completion of the merger, or, if sooner, until all obligations thereunder have been satisfied, each of our employment, severance, retention and termination plans, policies, programs, agreements and arrangements (including any change in control severance agreement between Manor Care and any employee).

 

The surviving corporation will also, subject to specified limitations, recognize an employee’s service with Manor Care with respect to determining eligibility to participate, level of benefits, vesting, benefit accruals and early retirement subsidies under the surviving corporation’s employee benefit plans, to the extent that such recognition would not result in any duplication of benefits.

 

The surviving corporation will also recognize expenses incurred by employees prior to the completion of the merger during the calendar year in which the merger occurs for purposes of satisfying such year’s deductible and co-

payment limitations under such plans. In addition, the surviving corporation will also waive pre-existing condition limitations with respect to the employees under its welfare benefit plans (except to the extent that such pre-existing condition limitations would have been applicable under our employee benefit plans).

 

Following the closing of the merger, the surviving corporation will also make payments to certain employees under the Manor Care performance award plan as determined in the discretion of the chief executive officer of the surviving corporation, subject to an aggregate cap of approximately $2.1 million and certain other limitations. Following the closing of the merger, the surviving corporation will also allow senior management of Manor Care to determine the level of payments to be made to employees under Manor Care’s annual cash incentive plans for the 2007 annual performance period, subject to certain limitations, provided that such payments do not exceed the sum of 110% of the aggregate payments made under such annual cash incentive plans with respect to the 2006 annual performance period and $1 million.

 

Directors’ and Officers’ Indemnification and Insurance

 

The merger agreement provides that all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the effective time of the merger and rights to advancement of expenses relating thereto now existing in favor of any person who is or prior to the effective time of the merger becomes, or has been at any time prior to the date of the merger agreement, a director, officer, employee or agent (including as a fiduciary with respect to an employee benefit plan) of Manor Care, any of our subsidiaries or any of our or their respective predecessors (each, an “indemnified party”) as provided in the organizational documents of Manor Care or any of our subsidiaries or any indemnification agreement between such indemnified party and us or any of our subsidiaries (in each case, as in effect on date of the merger agreement or, with respect to any indemnification agreement entered into after the date of the merger agreement, to the extent the terms thereof are no more favorable in any material respect to the indemnified party than those of certain indemnification agreements existing prior to the date of the merger agreement) shall survive the merger and shall not be amended, repealed or otherwise modified in any manner that would adversely affect any right thereunder of any such indemnified party.

 

The merger agreement also provides that, without limiting any right of any indemnified party pursuant to any indemnification agreement, from and after the effective time of the merger, in the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, the surviving corporation shall, for a period of six years after the effective time, indemnify and hold harmless, to the fullest extent permitted by law, each such indemnified party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorney’s fees and expenses), judgments, fines and amounts paid in settlement of or in connection with any such threatened or actual claim, arising out of, or pertaining to (1) the fact that such an indemnified party was a director (including in a capacity as a member of any board committee), officer, employee or agent of Manor Care, any of our subsidiaries or any of our or their respective predecessors or (2) the merger agreement or any of the transactions contemplated by the merger agreement, whether in any case asserted or arising before or after the effective time of the merger. The surviving corporation has agreed not to settle, compromise or consent to the entry of any judgment in any threatened or actual claim for which indemnification could be sought by an indemnified party under the merger agreement, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability arising out of such claim or such indemnified party otherwise consents in writing to such settlement, compromise or consent (which consent is not to be unreasonably withheld). The surviving corporation has also agreed to cooperate with an indemnified party in the defense of any matter for which such indemnified party could seek indemnification under the merger agreement.

 

The merger agreement further provides that the surviving corporation shall obtain, at or prior to the effective time, prepaid (or “tail”) directors’ and officers’ liability insurance policies in respect of acts or omissions occurring at or prior to the effective time of the merger for six years from the effective time, covering each indemnified party on terms with respect to such coverage and amounts no less favorable than those of such policies in effect on the date of the merger agreement. In the event the surviving corporation is unable to obtain such “tail” insurance policies, then, for a period of six years from the effective time, the surviving corporation is required to maintain in effect our current directors’ and officers’ liability insurance policies in respect of acts or omissions occurring at or prior to the effective time, covering each indemnified party on terms with respect to such coverage and amounts no less favorable than those of such policies in effect on the date of the merger agreement; provided that the surviving

corporation may substitute policies of a reputable and financially sound insurance company containing terms no less favorable to any indemnified party; provided further that in satisfying these obligations the surviving corporation is not obligated to pay for coverage for any 12-month period aggregate premiums for insurance in excess of 250% of the amount paid by us for coverage for the period of 12 months beginning on June 1 most recently commenced prior to the date of the merger agreement, although the surviving corporation is required to provide such coverage as may be obtained for such amount.

 

Positions with the Surviving Corporation and Arrangements with Holdings, MergerCo and Carlyle

 

Holdings and MergerCo have informed us that they currently intend to retain the members of our management team, and that they expect that Mr. Ormond and the other executive officers of Manor Care will remain in their current positions with the surviving corporation following completion of the merger. Mr. Ormond and other members of our senior management team have also informed us that they intend to remain employed by the surviving corporation following completion of the merger.

 

As of the date of this proxy statement, no member of our management has entered into any agreement with Holdings, MergerCo or Carlyle regarding employment with, or the right to purchase or participate in the equity of, Holdings, MergerCo or the surviving corporation. In addition, as of the date of this proxy statement, no member of our board of directors has entered into any agreement with Holdings, MergerCo or Carlyle regarding the right to purchase or participate in the equity of Holdings, MergerCo or the surviving corporation. On June 27, 2007, Mr. Ormond engaged in general discussions with representatives of Carlyle, Holdings and MergerCo regarding revised terms of employment and the general structure of co-investment opportunities and equity incentive plans that could be considered. In addition to revised terms of employment, Holdings and MergerCo have informed us that they anticipate offering members of management the opportunity to convert a portion of their current equity interests in Manor Care into equity in Holdings and that they also intend to create equity-based incentive compensation plans for management of the surviving corporation. Although we believe members of our management team are likely to enter into new arrangements with Holdings or the surviving corporation regarding employment with the surviving corporation and the right to purchase or participate in the equity of Holdings, such matters are subject to negotiations and discussion and no terms or conditions have been finalized. Any such new arrangements are expected to be entered into prior to the completion of the merger, but are not a condition to the consummation of the merger.

 

Appraisal Rights

 

Our stockholders have the right under Delaware law to dissent from the adoption of the merger agreement, to exercise appraisal rights and to receive payment in cash for the fair value of their shares of our common stock determined in accordance with Delaware law. The fair value of shares of our common stock, as determined in accordance with Delaware law, may be more or less than the merger consideration to be paid to non-dissenting stockholders in the merger. To preserve their rights, stockholders who wish to exercise appraisal rights must not vote in favor of the adoption of the merger agreement and must follow specific procedures. Dissenting stockholders must precisely follow these specific procedures to exercise appraisal rights, or their appraisal rights may be lost. These procedures are described in this proxy statement, and the provisions of Delaware law that grant appraisal rights and govern such procedures are attached as Annex D to this proxy statement. See “Appraisal Rights” beginning on page 69.

 

Delisting and Deregistration of Our Common Stock

 

If the merger is completed, our common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we will no longer file periodic reports with the SEC on account of our common stock.

 

Material United States Federal Income Tax Consequences of the Merger

 

The following is a discussion of the material United States federal income tax consequences of the merger to U.S. holders whose shares of our common stock are converted into the right to receive cash in the merger. The

discussion is based upon the Internal Revenue Code, Treasury regulations, Internal Revenue Service rulings and judicial and administrative decisions in effect as of the date of this proxy statement, all of which are subject to change (possibly with retroactive effect) or to different interpretations. The following discussion does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our stockholders. This discussion applies only to stockholders who, on the date on which the merger is completed, hold shares of our common stock as a capital asset. The following discussion does not address taxpayers subject to special treatment under U.S. federal income tax laws, such as insurance companies, financial institutions, dealers in securities, tax-exempt organizations, mutual funds, real estate investment trusts, investors in pass-through entities, S corporations and taxpayers subject to the alternative minimum tax. In addition, the following discussion may not apply to stockholders who acquired their shares of our common stock upon the exercise of employee stock options or otherwise as compensation for services or through a tax-qualified retirement plan or who hold their shares as part of a hedge, straddle, conversion transaction or other integrated transaction. If our common stock is held through a partnership, the U.S. federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships that are holders of our common stock and partners in such partnerships are urged to consult their own tax advisors regarding the tax consequences to them of the merger.

 

The following discussion does not address potential foreign, state, local and other tax consequences of the merger. All stockholders are urged to consult their own tax advisors regarding the U.S. federal income tax consequences, as well as the foreign, state and local tax consequences, of the disposition of their shares in the merger.

 

For purposes of this summary, a “U.S. holder” is a holder of shares of our common stock, who or that is, for U.S. federal income tax purposes:

 

 

Except with respect to the backup withholding discussion below, this discussion does not discuss the tax consequences to any stockholder who or that, for U.S. federal income tax purposes, is not a U.S. holder.

 

For U.S. federal income tax purposes, the merger will be treated as a sale of our common stock for cash by each of our stockholders. Accordingly, in general, the U.S. federal income tax consequences to a stockholder receiving cash in the merger will be as follows:

 

 

Cash payments made pursuant to the merger will be reported to our stockholders and the Internal Revenue Service to the extent required by the Internal Revenue Code and applicable Treasury regulations. These amounts

ordinarily will not be subject to withholding of U.S. federal income tax. However, backup withholding of the tax at applicable rates will apply to all cash payments to which a U.S. holder is entitled pursuant to the merger agreement if such holder (1) fails to supply the paying agent with the stockholder’s taxpayer identification number (Social Security number, in the case of individuals, or employer identification number, in the case of other stockholders), certify that such number is correct, and otherwise comply with the backup withholding rules, (2) has received notice from the Internal Revenue Service of a failure to report all interest and dividends required to be shown on the stockholder’s U.S. federal income tax returns, or (3) is subject to backup withholding in certain other cases. Accordingly, each U.S. holder will be asked to complete and sign a Substitute Form W-9, which is to be included in the appropriate letter of transmittal for the shares of our common stock, in order to provide the information and certification necessary to avoid backup withholding or to otherwise establish an exemption from backup withholding tax, unless an exemption applies and is established in a manner satisfactory to the paying agent. Stockholders who are not U.S. holders should complete and sign a Form W-8BEN (or other applicable tax form) and return it to the paying agent in order to provide the information and certification necessary to avoid backup withholding tax or otherwise establish an exemption from backup withholding tax. Certain of our stockholders will be asked to provide additional tax information in the appropriate letter of transmittal for the shares of our common stock.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

 

The foregoing discussion of certain material U.S. federal income tax consequences is included for general informational purposes only. We urge you to consult your own tax advisor to determine the particular tax consequences to you (including the application and effect of any state, local or foreign income and other tax laws) of the receipt of cash in exchange for shares of our common stock pursuant to the merger.

 

Regulatory Approvals

 

Under the merger agreement, we and MergerCo have agreed to use our reasonable best efforts to complete the transactions contemplated by the merger agreement as promptly as practicable, including obtaining all necessary governmental approvals. The Hart-Scott-Rodino Act provides that transactions such as the merger may not be completed until certain information has been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and certain waiting period requirements have been satisfied. Manor Care and Carlyle Partners V MC, L.P. filed notification reports with the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Act on August 2, 2007 and on August 1, 2007, respectively. We received notification on August 13, 2007 that the waiting period under the Hart-Scott-Rodino Act has been terminated.

 

The merger and the CMBS restructuring are also subject to certain health care-related local, state and federal regulatory requirements for notice, abbreviated review, or full regulatory review and approval of the merger or related transitions as part of the CMBS restructuring, which will encompass the need for new permits, licenses, certificates of need, third party payor agreements and certifications and contracts, as well as other requirements as mandated by the applicable jurisdictions within which Manor Care provides or owns licensed or otherwise regulated services.

 

While we believe that we will receive the requisite approvals and clearances for the merger, there can be no assurance that a challenge to the merger on antitrust grounds will not be made or, if a challenge is made, that the result of such challenge would permit the merger and the CMBS restructuring to proceed. Similarly, there can be no assurance that the parties will obtain the other regulatory approvals necessary to complete the merger or that the granting of these approvals will not involve the imposition of conditions to the completion of the merger or require changes to the terms of the merger. These conditions or changes could result in the conditions to the merger not being satisfied prior to the termination date or at all. Under the merger agreement, Manor Care and MergerCo have agreed to use reasonable best efforts to obtain the required governmental approvals in connection with the execution of the merger agreement and completion of the merger.

 

The filing of a certificate of merger in Delaware at or before the effective date of the merger is also required for the completion of the merger.

 

Litigation Concerning the Merger

 

On July 3, 2007, Alexander Crescente filed a purported stockholder class action in the Circuit Court of Lucas County, Ohio. The lawsuit names as defendants Manor Care, all of our current directors and Carlyle. The case is captioned Crescente v. Manor Care, Inc. et al., Cause No. CI-200704789. The suit alleges that, in connection with the pending merger, the defendants have breached their fiduciary duties of loyalty, due care, independence, good faith and fair dealing, or have aided and abetted such breaches. The plaintiff asks the court to declare the suit a proper class action suit and to certify the plaintiff as class representative and plaintiff’s counsel as class counsel. Among other things, the plaintiff seeks (1) a declaration that the merger agreement violates the individual defendants’ fiduciary duties, (2) an injunction that prevents the consummation of the merger and (3) an indeterminate amount of fees, expenses and costs to plaintiff and plaintiff’s counsel.

 

On September 13, 2007, counsel for Manor Care and our directors and counsel for Carlyle entered into a memorandum of understanding with counsel for the plaintiff providing for the settlement of the lawsuit. Under the terms of the memorandum of understanding, Manor Care has agreed to provide additional disclosures related to the merger which are included in this proxy statement. In agreeing to make these additional disclosures, Manor Care is not admitting that our prior disclosures were in any way materially misleading or inadequate. Furthermore, Manor Care and the other defendants deny the plaintiff’s allegations and deny having committed, or having aided and abetted, any breach of fiduciary duty or other violation of law in connection with the pending merger.

 

The settlement will be subject to customary conditions, including court approval following notice to members of the proposed settlement class. If approved by the court, the settlement will resolve all claims that were or could have been brought on behalf of the proposed settlement class in the actions being settled, including all claims relating to the merger and the disclosures made in connection therewith. In addition, as part of the proposed settlement, we have agreed to pay up to $340,000 to the plaintiff’s counsel for their fees and expenses incurred in pursuing the action, subject to final approval of the settlement and of such fees by the court. The merger may be consummated prior to final court approval of the settlement.

 

The memorandum of understanding will not affect the amount of consideration to be paid to the stockholders of Manor Care in connection with the merger.

 

THE MERGER AGREEMENT

 

The merger agreement is the legal document that governs the merger. This section of the proxy statement describes the material provisions of the merger agreement but may not contain all of the information about the merger agreement that is important to you. The merger agreement is included as Annex A to this proxy statement and is incorporated into this proxy statement by reference. We encourage you to read the merger agreement in its entirety. The merger agreement is a commercial document that establishes and governs the legal relations between us and MergerCo with respect to the transactions described in this proxy statement. The representations, warranties and covenants made by us and MergerCo are qualified and subject to important limitations agreed to by us and MergerCo in connection with negotiating the terms of the merger agreement. Furthermore, the representations and warranties may be subject to standards of materiality applicable to us and MergerCo that may be different from those that are applicable to you.

 

Effective Time; The Marketing Period

 

The effective time of the merger will occur at the time that we file a certificate of merger with the Secretary of State of the State of Delaware on the closing date of the merger (or such later time as provided in the certificate of merger). So long as the marketing period has expired, the closing date will occur on the second business day after all of the conditions to the merger set forth in the merger agreement have been satisfied or waived (or such other date as we and MergerCo may agree). In the event that all conditions have been satisfied but the marketing period has not expired, then the parties are not required to effect the closing until the earlier of:

 

 

The “marketing period” is defined in the merger agreement as the first period of 30 consecutive calendar days following July 2, 2007, throughout which:

 

 

If the marketing period would otherwise end on or after August 1, 2007, then the marketing period will commence no earlier than September 6, 2007. If the marketing period would otherwise end on or after December 15, 2007, then the marketing period will commence no earlier than January 7, 2008.

 

The marketing period will be extended until the earlier of February 1, 2008 and the date on which the CMBS deliveries (as defined under “ — Financing Commitments; Cooperation of Manor Care” below beginning on page 60) for properties comprising at least 90% of the aggregate value of all properties securing the CMBS facility have been delivered and until all filings, notices, consents and approvals have been made or obtained without any adverse conditions or restrictions resulting in losses, costs, damages or expenses to MergerCo of more than $20 million.

 

Structure

 

Subject to the terms and conditions of the merger agreement and in accordance with Delaware law, at the effective time of the merger, MergerCo will merge with and into Manor Care. The separate corporate existence of MergerCo will cease, and Manor Care will continue as the surviving corporation, wholly owned by entities sponsored by or co-investors with Carlyle. The surviving corporation will be a privately held corporation and our current stockholders will cease to have any ownership interest in the surviving corporation or rights as our

stockholders. Therefore, such current stockholders will not participate in any future earnings or growth of the surviving corporation and will not benefit from any appreciation in value of the surviving corporation.

 

Treatment of Common Stock and Equity-Based Awards

 

Common Stock

 

At the effective time of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger will automatically be canceled and will cease to exist and will be converted into the right to receive $67.00 in cash, without interest and less applicable withholding taxes, other than shares of our common stock:

 

 

After the effective time of the merger, each of our outstanding stock certificates representing shares of common stock converted in the merger will represent only the right to receive the merger consideration of $67.00 in cash per share, without any interest and less applicable withholding taxes, and any dividends declared with a record date prior to the effective time that remain unpaid at the effective time and that are due with respect to such shares. The merger consideration (and dividends, if any) paid upon surrender of each certificate will be paid in full satisfaction of all rights pertaining to the shares of our common stock represented by that certificate.

 

Equity-Based Awards

 

Except as otherwise agreed between MergerCo and the holder of outstanding equity-based awards, at the effective time of the merger:

 

 

In the case of stock equivalent units outstanding under our deferred compensation plans, at the effective time of the merger, each such stock equivalent unit will cease to represent the right to receive a share of our common stock and instead will be converted into the right to receive $67.00 per unit. Such amounts will be credited under our deferred compensation plans and will be notionally reinvested in the future in accordance with the terms of the applicable plan.

 

Exchange and Payment Procedures

 

At or prior to the effective time of the merger, MergerCo will deposit, or will cause the surviving corporation to deposit, cash in an amount sufficient to pay the merger consideration to each holder of shares of our common stock

and to each holder of our other equity-based interests with a bank or trust company (the “paying agent”) reasonably acceptable to us. Within two business days after the effective time of the merger, the surviving corporation will cause the paying agent to mail a letter of transmittal and instructions to you and the other stockholders. The letter of transmittal and instructions will tell you how to surrender your common stock certificates in exchange for the merger consideration.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a signed letter of transmittal.

 

You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates to the paying agent, together with a duly completed and executed letter of transmittal and any other documents as may reasonably be required by the paying agent. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer. In addition, the person who surrenders such certificate must either pay any fiduciary or surety bonds or any transfer or other similar taxes or establish to the reasonable satisfaction of the surviving corporation that such taxes have been paid or are not applicable.

 

No interest will be paid or will accrue on the cash payable upon surrender of the certificates. The surviving corporation or the paying agent will be entitled to deduct and withhold, and pay to the appropriate taxing authorities, any applicable taxes from the merger consideration, the option amounts and the amounts for other equity-based interests. Any sum which is withheld and paid to a taxing authority by the surviving corporation or the paying agent will be deemed to have been paid to the person with regard to whom it is withheld.

 

At the close of business on the day on which the effective time of the merger occurs, our stock transfer books will be closed, and there will be no further registration of transfers of outstanding shares of our common stock. If, after the close of business on the day on which the effective time of the merger occurs, certificates are presented to the surviving corporation for transfer, they will be canceled and exchanged for the merger consideration.

 

None of Manor Care, the surviving corporation, MergerCo, the sole stockholder of MergerCo or the paying agent will be liable to any person for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any portion of the merger consideration deposited with the paying agent that remains undistributed to the holders of certificates evidencing shares of our common stock for twelve months after the effective time of the merger, will be delivered, upon demand, to the surviving corporation. Holders of certificates who have not surrendered their certificates prior to the delivery of such funds to the surviving corporation may only look to the surviving corporation for, and the surviving corporation shall remain liable for, the payment of the merger consideration. Any portion of the merger consideration that remains unclaimed as of a date that is immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental authority will, to the extent permitted by applicable law, become the property of the surviving corporation free and clear of any claims of interest of any person previously entitled to the merger consideration.

 

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the merger consideration, you will have to make an affidavit of that fact and, if required by the surviving corporation, post a bond or surety in such reasonable amounts as the surviving corporation may direct as indemnity against any claim that may be made against it with respect to that certificate.

 

Representations and Warranties

 

We make various representations and warranties in the merger agreement, including with respect to, among other things:

 

 

 

For the purposes of the merger agreement, “material adverse effect” means any event, circumstance, development, change, effect, occurrence or state of facts that (1) materially impedes, interferes with, hinders or delays beyond March 31, 2008 (or such later date as set forth in the merger agreement) the consummation by Manor Care of the merger or the other transactions contemplated by the merger agreement, or (2) is materially adverse to the business, properties, assets, financial condition or results of operations of us and our subsidiaries.

 

A “material adverse effect” will not have occurred, however, as a result of any change, effect, event, occurrence or state of facts:

 

 

 

The merger agreement also contains various representations and warranties made by MergerCo, including with respect to, among other things:

 

 

The representations and warranties of each of the parties to the merger agreement will expire upon the effective time of the merger. You should be aware that these representations and warranties made by Manor Care to MergerCo or by MergerCo to Manor Care, as the case may be, are subject to important limitations and qualifications agreed to by the parties to the merger agreement, may or may not be accurate as of the date they were made and do not purport to be accurate as of the date of this proxy statement.

 

Conduct of Our Business Pending the Merger

 

Under the merger agreement, we have agreed that, subject to certain exceptions and unless MergerCo gives its prior written consent, between July 2, 2007, and the effective time of the merger, we will, and will cause each of our subsidiaries to:

 

 

We have also agreed that during the same time period, and again subject to certain exceptions or unless MergerCo gives its prior written consent, we will not, and will not permit any of our subsidiaries to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders Meeting

 

The merger agreement requires us, as promptly as reasonably practicable after July 2, 2007, to establish a record date for, duly call, give notice of and hold a meeting of our stockholders to adopt the merger agreement. Subject to limited circumstances contemplated by the merger agreement, our board of directors is required to recommend that our stockholders vote in favor of adoption of the merger agreement.

 

No Solicitation of Transactions

 

We have agreed that we will not, nor will we authorize or permit any of our subsidiaries or any of our or their respective directors, officers or employees to, and we will not authorize our or our subsidiaries’ respective representatives to, directly or indirectly:

 

 

 

A “takeover proposal” means any inquiry, proposal or offer (other than the transactions contemplated by the merger agreement) from any person or group relating to:

 

 

 

 

Prior to adoption of the merger agreement by our stockholders, however, we may (and may authorize and permit our subsidiaries, directors, officers, employees and representatives to), in response to a bona fide written takeover proposal, (1) furnish information with respect to us and our subsidiaries to the person making such takeover proposal and its representatives pursuant to a customary confidentiality agreement containing confidentiality provisions not less favorable in the aggregate to us than those set forth in the confidentiality agreement we previously entered into with an affiliate of MergerCo and containing a standstill provision no less favorable in the aggregate to us, and ending contemporaneously with, the standstill provision set forth in our confidentiality agreement with the affiliate of MergerCo and (2) participate in good faith in discussions and negotiations with such person and its representatives, if, prior to taking any such actions, our board of directors determines:

 

 

For purposes of the merger agreement, “superior proposal” means any written bona fide takeover proposal that:

 

 

Neither our board of directors nor any committee thereof may make an “adverse recommendation change” or approve or recommend, or publicly propose to approve or recommend, or cause or permit us or any of our subsidiaries to execute or enter into, any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement or other similar agreement related to any takeover proposal. At any time

prior to the adoption of the merger agreement by our stockholders, however, our board of directors may (subject to our obligation to pay a termination fee to MergerCo in certain circumstances as described below), if, after consultation with its outside legal counsel, it determines that the failure to take such action would be inconsistent with its fiduciary duties under applicable law, make an adverse recommendation change or, if we have received a takeover proposal that constitutes a superior proposal, cause or permit Manor Care to terminate the merger agreement, but only:

 

 

We have agreed that any amendment to the financial terms of a superior proposal will require a new written notice and a new three-day period.

 

For purposes of the merger agreement, “adverse recommendation change” means any action whereby our board of directors or any committee thereof:

 

 

We have also agreed:

 

 

Employee Benefits

 

Pursuant to the merger agreement, for a period of one year following the completion of the merger, the surviving corporation will either (1) maintain our employee benefit plans and agreements (other than equity-based plans) at the level in effect on the date of the merger agreement or (2)(a) provide each employee with a base salary and bonus opportunity that, taken as a whole, have a value (or potential value, in the case of bonus opportunity) that is not less favorable in the aggregate than the base salary and bonus opportunity provided to such employee on the date of the completion of the merger and (b) provide benefits to each such employee that, taken as a whole, have a value that is not less favorable in the aggregate (excluding any value attributable to equity-based compensation) than the benefits provided to each such employee on date of the completion of the merger.

 

In addition, the surviving corporation has agreed to honor and continue, without amendment or modification (other than any amendment required to comply with applicable law or any amendment adopted with the consent of the affected employee), for a period of one year following the completion of the merger, or, if sooner, until all obligations thereunder have been satisfied, each of our employment, severance, retention, termination and cash incentive compensation plans, policies, programs, agreements and arrangements (including any change in control severance agreement between Manor Care and any employee).

 

The surviving corporation will also, subject to specified limitations, recognize an employee’s service with Manor Care with respect to determining eligibility to participate, level of benefits, vesting, benefit accruals and early retirement subsidies under the surviving corporation’s employee benefit plans, to the extent that such recognition would not result in any duplication of benefits.

 

The surviving corporation will also recognize expenses incurred by employees prior to the completion of the merger during the calendar year in which the merger occurs for purposes of satisfying such year’s deductible and co-payment limitations under such plans. In addition, the surviving corporation will also waive pre-existing condition limitations with respect to the employees under its welfare benefit plans (except to the extent that such pre-existing condition limitations would have been applicable under our employee benefit plans).

 

Agreement to Use Reasonable Best Efforts

 

Upon the terms and subject to the conditions of the merger agreement, each party has agreed to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the merger and the other transactions contemplated by the merger agreement, including using reasonable best efforts to accomplish the following:

 

 

We and our subsidiaries are not required to pay any fee, penalty or other consideration to any person whose consent, approval or waiver under certain contracts and real property leases with respect to the merger is being solicited.

 

We and our board of directors have also agreed to take all action necessary to ensure that no state takeover statute is or becomes applicable to the merger agreement, the merger or any of the transactions contemplated by the merger agreement and if any state takeover statute becomes applicable to the merger agreement, the merger or any of the transactions contemplated by the merger agreement, to take all action necessary to ensure that the merger and

the other transactions contemplated by the merger agreement may be consummated as promptly as practicable on the terms contemplated by the merger agreement and otherwise to minimize the effect of such statute or regulation on the merger agreement, the merger or any of the transactions contemplated by the merger agreement.

 

We have also agreed to retain a nationally recognized investment banking or valuation firm, selected by our board of directors and reasonably acceptable to MergerCo, to render a solvency opinion, customary in scope and substance, as of the closing to our board of directors.

 

Financing Commitments; Cooperation of Manor Care

 

MergerCo has agreed to use, and to use its reasonable best efforts to cause the general partner of its affiliate, Carlyle Partners V, L.P., to use, reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange the financing on the terms and conditions described in the financing commitments, including using its reasonable best efforts:

 

 

In the event any portion of the financing becomes unavailable on the terms and conditions set forth in the financing commitments, MergerCo is required to promptly notify Manor Care, and MergerCo is required to use its reasonable best efforts to obtain, as promptly as practicable, any such portion from alternative sources on terms that will still enable MergerCo to consummate the transactions contemplated by the merger agreement and that are not less favorable to MergerCo with respect to conditions to funding than those contained in the debt financing commitments.

 

MergerCo is required to keep us reasonably informed of any material breach by any party of the financing commitments or any termination of the financing commitments of which it (or its sole stockholder or Carlyle Partners V, L.P.) becomes aware and the status of its efforts to obtain the financing and to provide us with copies of agreements pursuant to which any alternative source shall have committed to provide MergerCo with any portion of the financing.

 

In addition, MergerCo has agreed to refrain from taking, directly or indirectly, any action that would reasonably be expected to result in a failure of any of the conditions contained in the financing commitments or in any definitive agreement related to the financing. MergerCo has also agreed to refrain from agreeing to or permitting any amendment, supplement or other modification of, or waiving any of its rights under, any financing commitments or the definitive agreements relating to the financing if such amendment, supplement or modification:

 

 

in each case, without our prior written consent (not to be unreasonably withheld or delayed).

 

We have agreed to, and have agreed to cause our subsidiaries (and to use our reasonable best efforts to cause our and their respective representatives) to, provide such reasonable cooperation as may be reasonably requested by MergerCo in connection with the arrangement of the debt financing, including:

 

 

 

 

Actions with Respect to Existing Debt

 

If requested by MergerCo, we have agreed to commence a solicitation of the consents of holders of a majority in principal amount of each or any series of our 6.25% senior notes due 2013, our 2.125% convertible senior notes

due April 2023, our 2.125% convertible senior notes due December 2023, our 2.125% convertible senior notes due 2035 and our 2.0% convertible senior notes due 2036 (collectively, the “notes”) to amend the terms of the indentures governing the notes or to waive or amend any registration rights associated therewith and/or to commence a tender offer to purchase all or part of each or any series of notes, in each case on such terms and conditions as may be reasonably proposed by MergerCo. We have also agreed to prepare the consent solicitation and tender offer documents and execute supplemental indentures and amendments to registration rights agreements. MergerCo has agreed to reasonably cooperate with us in connection with such solicitations and tender offers and the preparation of the related documentation.

 

The amendments contained in any such supplemental indenture or registration rights agreement will become effective upon signing, but not operative until the closing of the merger and, if applicable, the acceptance of the applicable tender offer. The closing of any tender offer will be conditioned on the simultaneous occurrence of the closing of the merger. Simultaneously with the closing of the merger and in accordance with the terms of any consent solicitation or tender offer undertaken at MergerCo’s request, MergerCo has agreed to provide Manor Care with the funds reasonably necessary to consummate such tender offer and/or consent solicitation (including the payment of all applicable premiums, consent fees and all related fees and expenses).

 

In addition, we have agreed that prior to the closing of the merger, will take such actions as may be reasonably requested by MergerCo to effect termination or settlement, or any cancellation and payment, of any interest rate swap agreement, warrant, option or other contract or agreement executed in respect of any hedging arrangement entered into by Manor Care in connection with our convertible notes (including any amendment or termination hereof) effective as of the closing date of the merger, in each case as may be permitted by the indenture governing such series of convertible notes.

 

Neither we nor any of our subsidiaries is required to make any monetary payments or concessions or incur any other liability in connection with any consent solicitation, tender offer or termination of a hedging arrangement prior to the effective time of the merger (except to the extent MergerCo agrees to reimburse us for the amount of any such payment). MergerCo has agreed, promptly upon our request, to reimburse Manor Care for all reasonable out-of-pocket costs incurred by us or any of our subsidiaries in connection with any such action and has also agreed to indemnify and hold harmless Manor Care, our subsidiaries and our respective representatives from and against any and all losses, claims damages, liabilities, costs, expenses, judgments, fines and other amounts suffered or incurred by them in connection with any such action

 

CMBS Restructuring

 

In connection with the merger and the financing under the CMBS facility and prior to or upon the closing date, we have agreed to (with the reasonable assistance of MergerCo) use reasonable best efforts to undertake a restructuring of certain of our subsidiaries that own and operate certain skilled nursing and/or assisted living facilities to place the real estate assets for those facilities in a series of special purpose bankruptcy remote entities meeting rating agency criteria (the “real estate SPEs”) and place the business consisting of the managing and operating of those facilities (including holding the related licenses) in another series of special purpose bankruptcy remote entities that will indirectly lease the real estate assets from the real estate SPEs (collectively, the “CMBS restructuring”).

 

The parties to the merger agreement have agreed to use reasonable best efforts to develop the specific steps necessary to implement the CMBS restructuring and to minimize potential incurrence or imposition of cost, expense or taxes as a result of the CMBS restructuring, and to otherwise reduce any material negative effect of the CMBS restructuring on Manor Care and our business and operations; provided, however, that neither party is required to agree to a potential modification to, or more specific plan to effect, the CMBS restructuring if such proposed modification or specific plan results in any materially adverse economic or legal consequences to such party.

 

The parties have agreed that the implementation of the CMBS restructuring will not:

 

 

MergerCo has agreed, promptly upon our request, to reimburse Manor Care for all reasonable out-of-pocket expenses incurred by Manor Care or any of our subsidiaries in connection with actions taken at the request of MergerCo to implement or effect the CMBS restructuring (other than expenses incurred in connection with our cooperation to effect the CMBS restructuring, expenses incurred in responding to MergerCo’s reasonable information requests made in connection with MergerCo’s efforts to develop with Manor Care the specific steps necessary to implement the CMBS restructuring or MergerCo’s effort to minimize the costs of the CMBS restructuring or internal cost allocations) and, in the event the merger is not consummated, has agreed to be responsible for expenses of Manor Care and our subsidiaries in reversing or unwinding (in the event the merger agreement is terminated) the CMBS restructuring that was effected at the request of MergerCo.

 

Other Covenants and Agreements

 

The merger agreement also contains the following additional agreements between Manor Care and MergerCo relating to, among other things:

 

 

Conditions to the Merger

 

The respective obligations of the parties to effect the merger are subject to the satisfaction or (to the extent permitted by law) waiver at or prior to the effective time of the merger of the following mutual conditions:

 

 

 

The obligations of MergerCo to effect the merger are further subject to the satisfaction or (to the extent permitted by law) waiver by MergerCo at or prior to the effective time of the merger of the following conditions:

 

 

Our obligation to effect the merger is further subject to the satisfaction or (to the extent permitted by law) waiver by us at or prior to the effective time of the merger of the following conditions:

 

 

Neither Manor Care nor MergerCo may rely on the failure of any condition to be satisfied if such failure was caused by such party’s failure to perform any of its obligations under the merger agreement, to act in good faith or to use its reasonable best efforts to consummate the merger and the other transactions contemplated by the merger agreement.

 

Termination

 

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after stockholder approval has been obtained, as follows:

 

 

 

 

 

Fees and Expenses

 

Fees Payable by Manor Care

 

We have agreed to pay to MergerCo an aggregate termination fee of $175 million (less the amount of any MergerCo expenses reimbursed by us in certain circumstances described below) if:

 

 

 

 

 

 

 

For purposes of determining whether a termination fee is payable by us, a “takeover proposal” means any inquiry, proposal or offer (other than the transactions contemplated by the merger agreement) from any person or group relating to:

 

 

 

 

 

In the circumstances in which we become obligated to pay the termination fee as the result of a termination of the merger agreement by MergerCo in the event that our board of directors or a committee thereof makes an adverse recommendation change or we, our board of directors or a committee thereof recommends another takeover proposal or enters into, or causes Manor Care or any of our subsidiaries to enter into, a definitive agreement for another takeover proposal, receipt of payment of the termination fee shall be the sole and exclusive remedy of MergerCo and any of its former, current or future general or limited partners, members or stockholders or against any of their respective former, current or future directors, officers, employees, affiliates, general or limited partners, stockholders, managers, members or agents (each, a “specified person”) against Manor Care and any of our specified persons for any loss or damage suffered as a result of the breach of any representation, warranty, covenant or agreement contained in the merger agreement by us or the failure of the merger to be consummated, and upon payment of the termination fee, none of Manor Care or any of our specified persons shall have any further liability or obligation relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement.

 

Expenses Payable by Manor Care

 

We have agreed to pay MergerCo’s and its affiliates’ actual and reasonably documented out-of-pocket fees and expenses actually incurred by MergerCo and its Affiliates (up to $15 million) on or prior to the termination of the merger agreement in connection with the transaction contemplated by the merger agreement if:

 

 

The amount of any MergerCo expenses paid by Manor Care will be credited against any termination fee paid by Manor Care.

 

Fees Payable by MergerCo

 

MergerCo has agreed to pay us a termination fee of $175 million if we terminate the merger agreement in the event that all of the mutual conditions to closing and all of the conditions to MergerCo’s obligations to close have been satisfied (other than those conditions that by their terms may only be satisfied at the closing) and, on or after the last day of the marketing period, neither MergerCo nor the surviving corporation has received the proceeds of the debt financing and MergerCo shall have failed to consummate the merger.

 

In the circumstances in which MergerCo becomes obligated to pay this termination fee, our termination of the merger agreement in these circumstances and receipt of payment of such termination fee shall be our sole and exclusive remedy against MergerCo and any of its specified persons for any loss or damage suffered as a result of the breach of any representation, warranty, covenant or agreement contained in the merger agreement by MergerCo and the failure of the merger to be consummated, and upon payment of such termination fee, none of MergerCo or any of its specified persons shall have any further liability or obligation relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement.

 

Liability Cap

 

The parties have agreed that in no event, whether or not the merger agreement shall have been terminated, shall we and our subsidiaries, as a group, on the one hand, or MergerCo and Carlyle Partners V, L.P., as a group, on the

other hand, be subject to damages in excess of $250 million in the aggregate for each such group, respectively, for all losses and damages (including, in our case, lost stockholder premium) arising from or in connection with breaches by MergerCo, on the one hand, or us, on the other, of their respective representations, warranties, covenants and agreements contained in the merger agreement or arising from any other claim or cause of action, and none of Manor Care, MergerCo, Carlyle Partners V, L.P. or any of their respective specified persons shall have any further liability or obligation to the other parties or otherwise relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement.

 

Sponsor Guarantee

 

Carlyle Partners V, L.P. has guaranteed the payment by MergerCo of its obligations to us arising under, or in connection with, the merger agreement, including the payment of the termination fee, up to the maximum aggregate liability of $250 million. Our rights under the sponsor guarantee constitute our sole and exclusive remedy against Carlyle and its affiliates.

 

Amendment and Waiver

 

The merger agreement may be amended by the written agreement of Manor Care and MergerCo at any time prior to the closing date of the merger, whether before or after the adoption of the merger agreement by our stockholders, provided that after the merger agreement has been adopted by our stockholders, there shall be no amendment that by law would require the further approval of our stockholders without such approval having been obtained.

 

The merger agreement also provides that, at any time prior to the effective time of the merger, any party may, by written agreement:

 

 

APPRAISAL RIGHTS

 

The discussion of the provisions set forth below is not a complete summary regarding your appraisal rights under Delaware law and is qualified in its entirety by reference to the text of the relevant provisions of Delaware law, which are attached to this proxy statement as Annex D. Stockholders intending to exercise appraisal rights should carefully review Annex D. Failure to follow precisely any of the statutory procedures set forth in Annex D may result in a termination or waiver of these rights.

 

If the merger is consummated, dissenting holders of our common stock who follow the procedures specified in Section 262 of the DGCL within the appropriate time periods will be entitled to have their shares of our common stock appraised by a court and to receive the “fair value” of such shares in cash as determined by the Delaware Court of Chancery in lieu of the consideration that such stockholder would otherwise be entitled to receive pursuant to the merger agreement.

 

The following is a brief summary of Section 262, which sets forth the procedures for dissenting from the merger and demanding statutory appraisal rights. Failure to follow the procedures set forth in Section 262 precisely could result in the loss of appraisal rights. This proxy statement constitutes notice to holders of our common stock concerning the availability of appraisal rights under Section 262. A stockholder of record wishing to assert appraisal rights must hold the shares of stock on the date of making a demand for appraisal rights with respect to such shares and must continuously hold such shares through the effective time of the merger.

 

Stockholders who desire to exercise their appraisal rights must satisfy all of the conditions of Section 262. A written demand for appraisal of shares must be filed with us before the special meeting. This written demand for appraisal of shares must be in addition to and separate from a vote against the merger. Stockholders electing to exercise their appraisal rights must not vote “FOR” the merger. Any proxy or vote against the merger will not constitute a demand for appraisal within the meaning of Section 262.

 

A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder’s name appears on the share certificate. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, this demand must be executed by or for the fiduciary. If the shares are owned by or for more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner. A person having a beneficial interest in our common stock held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below and in a timely manner to perfect whatever appraisal rights the beneficial owner may have.

 

A stockholder who elects to exercise appraisal rights should mail or deliver his, her or its written demand to us at our address at 333 N. Summit Street, Toledo, Ohio 43604-2617, Attention: General Counsel. The written demand for appraisal should specify the stockholder’s name and mailing address, and that the stockholder is thereby demanding appraisal of his, her or its share of our common stock. Within ten days after the effective time of the merger, we must provide notice of the effective time of the merger to all of our stockholders who have complied with Section 262 and have not voted for the merger.

 

Within 120 days after the effective time of the merger (but not thereafter), any stockholder who has satisfied the requirements of Section 262 may deliver to us a written demand for a statement listing the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. We, as the surviving corporation in the merger, must mail such written statement to the stockholder no later than the later of 10 days after the stockholder’s request is received by us or 10 days after the latest date for delivery of a demand for appraisal under Section 262.

 

Within 120 days after the effective time of the merger (but not thereafter), either we or any stockholder who has complied with the required conditions of Section 262 and who is otherwise entitled to appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of our common stock owned by stockholders entitled to appraisal rights. We have no present intention to file such a petition if demand for appraisal is made.

 

Upon the filing of any petition by a stockholder in accordance with Section 262, service of a copy must be made upon us. We must, within 20 days after service, file in the office of the Register in Chancery in which the petition was filed, a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom we have not reached agreements as to the value of their shares. If we file a petition, the petition must be accompanied by the verified list. The Register in Chancery, if so ordered by the court, will give notice of the time and place fixed for the hearing of such petition by registered or certified mail to us and to the stockholders shown on the list at the addresses therein stated, and notice will also be given by publishing a notice at least one week before the day of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware, or such publication as the court deems advisable. The forms of the notices by mail and by publication must be approved by the court, and we will bear the costs thereof. The Delaware Court of Chancery may require the stockholders who have demanded an appraisal for their shares (and who hold stock represented by certificates) to submit their stock certificates to the Register in Chancery for notation of the pendency of the appraisal proceedings and the Delaware Court of Chancery may dismiss the proceedings as to any stockholder that fails to comply with such direction.

 

If a petition for an appraisal is filed in a timely fashion, after a hearing on the petition, the court will determine which stockholders are entitled to appraisal rights and will appraise the shares owned by these stockholders, determining the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value.

 

Stockholders considering seeking appraisal of their shares should note that the fair value of their shares determined under Section 262 could be more, the same or less than the consideration they would receive pursuant to the merger agreement if they did not seek appraisal of their shares. Stockholders should also be aware that investment banking opinions as to the fairness, from a financial point of view, of the consideration payable in a merger are not opinions as to fair value under Section 262 of the DGCL. The costs of the appraisal proceeding may be determined by the court and taxed against the parties as the court deems equitable under the circumstances. Upon application of a dissenting stockholder, the court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of a determination or assessment, each party bears his, her or its own expenses. The exchange of shares for cash pursuant to the exercise of appraisal rights generally will be a taxable transaction for United States federal income tax purposes and possibly state, local and foreign income tax purposes as well. See “The Merger — Material United States Federal Income Tax Consequences of the Merger” on page 45.

 

Any stockholder who has duly demanded appraisal in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote for any purpose the shares subject to demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the effective time of the merger.

 

At any time within 60 days after the effective time of the merger, any stockholder will have the right to withdraw his, her or its demand for appraisal and to accept the terms offered in the merger agreement. After this period, a stockholder may withdraw his, her or its demand for appraisal and receive payment for his, her or its shares as provided in the merger agreement only with our consent. If no petition for appraisal is filed with the court within 120 days after the effective time of the merger, stockholders’ rights to appraisal (if available) will cease. Inasmuch as we have no obligation to file such a petition, any stockholder who desires a petition to be filed is advised to file it on a timely basis. No petition timely filed in the court demanding appraisal may be dismissed as to any stockholder without the approval of the court, which approval may be conditioned upon such terms as the court deems just.

 

Failure by any stockholder to comply fully with the procedures of Section 262 of the DGCL (as reproduced in Annex D to this proxy statement) may result in termination of such stockholder’s appraisal rights. In view of the complexity of Section 262, Manor Care stockholders who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisors.