Audit Committee Charter 
 
                                                                          
Manor Care, Inc.                                                            May 2004    


Purpose

The Audit Committee is appointed by the Board of Directors to assist the Board in monitoring (1) the integrity of the financial statements of the company, (2) the compliance by the company with legal and regulatory requirements (3) the independent auditor’s qualifications and independence; and (4) the performance of the company’s internal audit function and independent auditors.

Committee Membership

The Audit Committee shall consist of no fewer than three members. Each member shall meet the independence and financial literacy requirements of the New York Stock Exchange. At least one member of the Committee shall be a “financial expert” as such term is defined under applicable SEC regulations. An Audit Committee member may not, other than in his or her capacity as a member of the Board of Directors or any committee thereof: (1) accept any consulting, advisory or other compensatory fee from the company; (2) be an affiliated person of the company or any subsidiary; or (3) receive any compensation from the company other than director fees.

Committee Authority and Responsibilities

The Audit Committee shall have the authority to retain special legal, accounting or other consultants to advise the Committee. The Audit Committee may request any officer or employee of the company or the company’s outside counsel or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.

The Audit Committee shall make regular reports to the Board. The Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. The Committee shall annually review its own performance.

The Audit Committee shall:

          Financial Statement and Disclosure Obligations

  1. Review the annual audited financial statements with management and the independent auditor including the company’s disclosures in the MD&A, major issues regarding accounting and auditing principles and practices, if any, and the adequacy of internal controls that could significantly affect the company’s financial statements.
     
  2.  Meet with the independent auditor prior to the audit to review the planning and staffing of the audit.
     
  3. Obtain from the independent auditor assurance that Section 10A of the Private Securities Litigation Reform Act of 1995, relating to audit procedures, required response to audit discoveries and the related obligations of the independent auditor, has not been implicated.
     
  4. Discuss with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit.
     
  5. Review with the independent auditor any problems or difficulties the auditor may have encountered and any management letter provided by the auditor and the company’s response to that letter. Such review should include:

    (a) Any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to required information, and any disagreements with management.

    (b) Any changes required in the planned scope of the internal audit.

    (c) The internal audit department responsibilities and staffing.
     
  6. Review a report prepared by the independent auditor, together with any analysis prepared by management, of: (1) all critical accounting policies and practices to be used; (2) all alternative treatments of financial information within GAAP that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the auditor; (3) other written communications between the auditor and management, such as any management letter or schedule of unadjusted differences; and (4) a description of any transactions as to which management obtained SAS 50 letters.
     
  7. Review with management and the independent auditor the effect of regulatory and accounting initiatives on the company’s financial statements, as well as the effect of any off-balance sheet structures.
     
  8. Review with management and the independent auditor the company’s quarterly financial statements prior to the public release of earnings and the filing of the 10-Q, including the results of the independent auditor reviews of the quarterly financial statements, the company’s disclosures in the MD&A and earnings guidance provided to analysts and rating agencies.
     
  9. Meet periodically with management to review the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.
     
  10. Review major changes to the company’s auditing and accounting principles and practices as suggested by the independent auditor, internal auditors or management.
     
  11. Prepare the report required by the rules of the Securities and Exchange Commission to be included in the company’s annual proxy statement.

    Oversight of Relationship with Independent Auditor
     
  12. Appoint the independent auditor, which firm shall report directly to the Audit Committee.  The Audit Committee shall be directly responsible for the compensation, oversight and evaluation of the independent auditor and, if determined to be necessary, shall replace the independent auditor. The Audit Committee shall be responsible for resolving any disagreements between management and the auditor regarding financial reporting.
     
  13. Review the experience and qualifications of the senior members of the independent auditor team and the quality control procedures of the independent auditor. The Committee shall ensure that the independent auditor complies with Section 203 of the Sarbanes-Oxley Act respecting audit partner rotation.
     
  14. Approve all audit and non-audit services provided by the independent auditor.  The following non-audit services (as defined by applicable SEC regulations) are prohibited regardless of approval:

    (a) bookkeeping or other services related to the accounting records or financial statements of the audit client;

    (b) financial information system design and implementation;

    (c) appraisal or evaluation services, fairness opinions or contribution-in-kind reports;

    (d) actuarial services;

    (e) internal audit outsourcing services;

    (f) management functions or human resources;

    (g) broker or dealer, investment adviser or investment banking services;

    (h) legal services and expert services unrelated to the audit;

    (i) expert services; and

    (j) any other service that is impermissible under any statute, rule or regulation.
     
  15. Approve the fees to be paid to the independent auditor for audit and non-audit services.
     
  16. Receive reports as necessary from the independent auditor regarding the auditor’s independence, discuss such reports with the auditor, consider whether the provision of non-audit services is compatible with maintaining the auditor’s independence and take appropriate action, if necessary, to insure the independence of the auditor.
     
  17. Review a report by the independent auditor describing: the independent auditor’s internal quality-control procedures; any material issues raised by the most recent internal quality-control review, or peer review of the independent auditor, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and all relationships between the independent auditor and the company.
     
  18. Establish clear hiring policies for employees or former employees of the independent auditor.

    Oversight of Internal Audit Function
     
  19. Discuss with the senior internal auditing executive the internal audit department responsibilities, budget and staffing and any planned changes in the scope of the internal audit.
     
  20. Review the appointment and replacement of the senior internal auditing executive.
     
  21. Review the significant or material findings by the internal audit department and management’s responses.

    Compliance Oversight
     
  22. Receive disclosures, if any, from the CEO and CFO of all significant deficiencies in internal controls and any fraud whether material or not that involves management or other employees who have a significant role in internal controls.
     
  23. Establish procedures for the receipt, retention and treatment of complaints received by the issuer regarding accounting controls or auditing matters.
     
  24. Establish procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing.
     
  25. Obtain reports from management and the company’s senior internal auditing executive that the company’s subsidiary/foreign affiliated entities are in conformity with applicable legal requirements and the company’s Standards of Business Conduct.
     
  26. Review with management and the independent auditor any correspondence with regulators or government agencies and any employee complaints or published reports which raise material issues regarding the company’s financial statements or accounting policies.
     
  27. Meet annually or more often as necessary with representatives of the company’s Corporate Compliance Committee (“CCC”), discuss activities of the CCC and receive a written report prepared by the CCC regarding compliance with the company’s Standards of Business Conduct and applicable laws and regulations; advise the Board with respect to the company’s policies and procedures regarding compliance with applicable laws and regulations and with the company’s Standards of Business Conduct.
     
  28. Review with the company’s General Counsel legal matters that may have a material impact on the financial statements, the company’s compliance policies and any material reports or inquiries received from regulators or governmental agencies.
     
  29. Meet annually or more often as necessary with the Chief Financial Officer, the senior internal auditing executive and the independent auditor in separate executive sessions.

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor.