EXHIBIT I TO THE SEPARATION AGREEMENT
TAX ALLOCATION AGREEMENT dated as of November 10, 2006 (this “Agreement”), among
EXTENDICARE INC., a Canadian corporation (“Extendicare”), EXTENDICARE HOLDINGS,
INC., a Wisconsin corporation (“EHI”), and ASSISTED LIVING CONCEPTS, INC., a
Nevada corporation (“ALC” and, collectively with EHI and Extendicare, the
“Companies”).
                WHEREAS, as of the date of this Agreement, EHI and ALC belong to
an Affiliated Group that has elected to file consolidated U.S. federal income
Tax Returns;
                WHEREAS, as of the date of this Agreement, EHI is an indirect,
wholly owned subsidiary of Extendicare;
                WHEREAS, as of the date of this Agreement, Extendicare Health
Services Inc. is a direct, wholly owned subsidiary of EHI (EHSI);
                WHEREAS, as of the date of this Agreement, ALC is a direct,
wholly owned subsidiary of EHSI;
                WHEREAS, Extendicare will purchase the stock of ALC from EHSI in
exchange for a note with a face amount equal to the fair market value of ALC
(the “ALC Purchase”);
                WHEREAS, ALC will reorganize its share capital to create two
classes of common shares (the ALC Class A Shares and the ALC Class B Shares)
which will have similar voting rights to the subordinate voting and multiple
voting common shares of Extendicare, respectively;
                WHEREAS, pursuant to the Plan of Arrangement, the existing
subordinate voting shareholders of Extendicare (other than any dissenters) will
exchange each of their shares for one new Extendicare Common Share and one ALC
Class A Share and the existing multiple voting shareholders of Extendicare
(other than any dissenters) will exchange each of their shares for 1.075 new
Extendicare Common Shares and one ALC Class B Share (the “ALC Distribution”);
                WHEREAS, pursuant to the Plan of Arrangement and immediately
after the ALC Distribution, the new Extendicare Common Shares will be
transferred to Newco for Newco Notes or, at the election of certain holders, to
Extendicare Holding Partnership in exchange for units of Extendicare Holding
Partnership, and the Newco Notes will then immediately be transferred to
Extendicare REIT in exchange for REIT Units (the “Conversion” and, together with
the ALC Distribution, the “Separation”); and
                WHEREAS, the Companies desire to allocate the Tax liabilities
and benefits of transactions that occur on or prior to, and that may occur
after, the date on which the Separation occurs (the “Separation Date”) and to
provide for certain other Tax matters.

 

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                NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, the Companies (each on behalf of itself, each of
its Affiliates and its future Affiliates) hereby agree as follows:
ARTICLE I
Definitions
                The following terms shall have the following meanings:
                “Adjustment Request” means any claim or request filed with any
governmental authority for any adjustment of Tax, Refund or change in available
Tax attributes.
                “Affiliate” of any person means any other person that, after the
Separation, controls, is controlled by, or is under common control with such
person. For purposes of this definition, “control” means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a person, whether through ownership of voting
securities, by contract or otherwise.
                “Affiliated Group” means an affiliated group of corporations
within the meaning of Section 1504(a) of the Code, or any analogous concept
under local, state or foreign law for the taxable period in question.
                “Agreement” is defined in the preamble.
                “ALC” is defined in the preamble.
                “ALC Class A Shares” is defined in the Arrangement Agreement.
                “ALC Class B Shares” is defined in the Arrangement Agreement.
                “ALC Distribution” is defined in the recitals.
                “ALC Group” means ALC and its Affiliates.
                “ALC Purchase” is defined in the recitals.
                “Applicable Rate” means the sum of (i) the prime rate of
interest per annum published in the print edition of The Wall Street Journal,
the international daily newspaper published in New York City, and (ii) 2%; each
change in the prime rate shall be effective from and including the date such
change is published in The Wall Street Journal.

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                “Arrangement Agreement” means the Arrangement Agreement, dated
as of September 11, 2006, among Extendicare REIT, Extendicare Trust, Extendicare
Holding General Partner Inc., Extendicare Holding Partnership, Extendicare,
Extendicare Acquisition Inc., Extendicare ULC and ALC.
                “Assumed Liabilities” is defined in the Separation Agreement.
                “Code” means the Internal Revenue Code of 1986, as amended.
                “Companies” is defined in the preamble.
                “Conversion” is defined in the recitals.
                “Due Date” means, with respect to any Tax Return, the date on
which such Tax Return is due to be filed with the appropriate Taxing Authority
pursuant to applicable law, giving effect to any applicable extensions.
                “EHI” is defined in the preamble.
                “EHSI” is defined in the recitals.
                “EHSI Assisted Living Facilities” is defined in the Separation
Agreement.
                “Extendicare” is defined in the preamble.
                “Extendicare Common Shares” is defined in the Plan of
Arrangement.
                “Extendicare Group” means Extendicare and its Affiliates. For
the avoidance of doubt, the Extendicare Group excludes any entity that is a
member of the ALC Group.
                “Extendicare Holding Partnership” means Extendicare Limited
Partnership, a limited partnership existing under the laws of the Province of
Ontario.
                “Extendicare REIT” means Extendicare Real Estate Investment
Trust, a trust established under the laws of the Province of Ontario.
                “Final Determination” means the final resolution of liability
for any Tax for any taxable period by or as a result of: (i) a final and
unappealable decision, judgment, decree or other order by any court of competent
jurisdiction; (ii) a final settlement with the IRS, a closing agreement or
accepted offer in compromise under Code Sections 7121 or 7122 or a comparable
settlement, agreement or accepted offer in compromise under the laws of another
jurisdiction; (iii) any allowance of a Refund, but only after the expiration of
all periods during which such Refund may be recovered by the Taxing Authority
imposing the Tax; or (iv) any other final disposition, including by reason of
the expiration of the applicable statute of limitations.

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                “Group” means the Extendicare Group or the ALC Group, or both,
as the context requires.
                “Indemnifying Party” has the meaning set forth in Section 5.01.
                “Indemnitee” has the meaning set forth in Section 5.01.
                “Intended Tax Treatment” has the meaning set forth in
Section 4.01.
                “IRS” means the United States Internal Revenue Service.
                “Joint Return” means any Return for an Affiliated Group that
includes both a member of the Extendicare Group and a member of the ALC Group.
                “Newco” is defined in the Plan of Arrangement.
                “Newco Notes” is defined in the Plan of Arrangement.
                “Past Practices” has the meaning set forth in Section 3.03.
                “Plan of Arrangement” is defined in the Arrangement Agreement.
                “Pre-Separation Period” means any taxable period (or portion
thereof) ending on or before the Separation Date.
                “Refund” means any cash refund of Tax or reduction of Tax by
means of credit, offset or otherwise.
                “REIT Unit” is defined in the Arrangement Agreement.
                “Separate Return” means (i) in the case of the ALC Group, a Tax
Return of any member of that Group (including any consolidated, combined,
affiliated or unitary Return) that does not include, for all or any portion of
the relevant taxable period, any member of the Extendicare Group and (ii) in the
case of the Extendicare Group, a Tax Return of any member of that Group
(including any consolidated, combined, affiliated or unitary Return) that does
not include, for all or any portion of the relevant taxable period, any member
of the ALC Group.
                “Separation” is defined in the recitals.
                “Separation Agreement” means the Separation Agreement, dated as
of November 10, 2006, between Extendicare and ALC.
                “Separation Date” is defined in the recitals.

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                “Tax” means all forms of taxation, levies or duties imposed, or
required to be collected or withheld, including charges, together with any
related interest, penalties or other additional amounts. For the avoidance of
doubt, Tax includes Canadian employment insurance premiums, Canada or provincial
pension plan contributions, Canadian employee health premiums and Canadian
workers’ compensation premiums imposed by the government of Canada or a province
of Canada.
                “Tax Advisor” means a U.S. tax counsel or other tax advisor of
recognized national standing.
                “Tax Contest” means an audit, review, examination, assessment,
reassessment or any other administrative or judicial proceeding with the purpose
or effect of determining or redetermining Tax (including any administrative or
judicial review of any Adjustment Request).
                “Tax Dispute” means any dispute arising in connection with this
Agreement.
                “Tax Return” or “Return” means any return, filing, report,
questionnaire, information statement, claim for refund, or other document
required or permitted to be filed, including any amendments that may be filed,
for any taxable period with any Taxing Authority (whether or not a payment is
required to be made with respect to such filing).
                “Taxing Authority” means any governmental authority that
imposes, assesses or collects Tax, including the IRS, any U.S. state or local
taxing authority, the Canada Revenue Agency, the Ontario Ministry of Finance and
any other relevant provincial taxing authority.
                “Transaction Agreements” means this Agreement, the Arrangement
Agreement, the Plan of Arrangement and the Separation Agreement.
                “Transactions” means the transactions described on Exhibit A,
including the ALC Purchase, the ALC Distribution and the Conversion, and any
other transactions related thereto or otherwise contemplated by the Transaction
Agreements.

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ARTICLE II
Liability For Tax
                SECTION 2.01. Ordinary Course Tax. (a) Subject to Section 2.02,
ALC shall be liable, and shall indemnify and hold the Extendicare Group
harmless, for all Tax that is attributable to members of the ALC Group for all
periods. The amount of Tax “attributable to” the ALC Group shall be determined
in accordance with the principles described in Exhibit B.
               (b) EHI shall be liable, and shall indemnify and hold the ALC
Group harmless, for all Tax that is attributable to members of the Extendicare
Group for all periods. The amount of Tax “attributable to” members of the
Extendicare Group shall be determined in accordance with the principles
described in Exhibit B.
               (c) For purposes of this Section 2.01, all Tax that is
attributable to each EHSI Assisted Living Facility listed on Schedule 2.01(c)
(i) shall be treated as attributable to the Extendicare Group for all periods
(or portion thereof) ending on the date listed on Schedule 2.01(c) with respect
to such EHSI Assisted Living Facility and (ii) shall be treated as attributable
to the ALC Group for all periods (or portion thereof) beginning on or after the
date listed on Schedule 2.01(c) with respect to such EHSI Assisted Living
Facility.
               (d) EHI and ALC shall agree on a reasonable apportionment between
the Extendicare Group and the ALC Group of any existing limitation under Code
Section 382 that applies to any net operating loss carryforwards in the existing
Extendicare Group, and any comparable limitations under state or local law.
                SECTION 2.02. Transaction Taxes. EHI shall be liable, and shall
indemnify and hold the ALC Group harmless, for any Tax resulting from, or
arising in connection with, the Transactions.
                SECTION 2.03. Refunds. Any Refund attributable to (i) any Tax
for which any member of the ALC Group is responsible under this Article II shall
be for the account of ALC and (ii) any Tax for which any member of the
Extendicare Group is responsible under this Article II shall be for the account
of EHI. To the extent a party receives a Refund that is for the account of the
other party under the preceding sentence,

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the recipient-party shall pay or cause to be paid the amount of the Refund to
the other party. If all or any portion of such Refund is not paid to the other
party within 30 days after receipt, interest shall accrue on the unpaid portion
of such Refund at the Applicable Rate compounded quarterly.
                SECTION 2.04. Tax Sharing Agreements. Except as set forth in
this Agreement, any and all existing Tax sharing agreements, arrangements,
understandings and practices regarding Tax and its payment, allocation or
sharing between any member of the ALC Group and any member of the Extendicare
Group shall be terminated as of the Separation. This Section 2.04 does not
address any Tax sharing agreements solely between members of the ALC Group or
solely between members of the Extendicare Group.
ARTICLE III
Preparation and Filing of Tax Returns
                SECTION 3.01. Extendicare Responsibility. (a) Subject to
paragraph (b), EHI shall make all determinations with respect to, shall have
ultimate control over the preparation of, and shall file all (i) Joint Returns
and (ii) Separate Returns of the Extendicare Group, in each case as it
determines to be mandatory or advisable and for all taxable periods.
                    (b) If, in connection with the preparation of any Joint
Return, EHI modifies any information relating to, or provided in, the pro forma
federal and state income Tax Returns or other information related to members of
the ALC Group prepared by ALC and provided to EHI pursuant to Section 3.02, the
portions of the Joint Returns that include such information shall be submitted
to ALC no later than 15 days prior to the Due Date for such Joint Returns (or if
such Due Date is within 15 days following the Separation Date, as promptly as
practicable following the Separation Date). Within 5 days after delivery of any
such revised portions of any Joint Return, ALC shall provide comments to EHI in
writing where ALC objects to any revisions that could, in its reasonable
discretion, be expected to adversely impact any member of the ALC Group. Such
ALC comments shall be incorporated into the Joint Return.
                SECTION 3.02. ALC Responsibility. (a) ALC shall make all
determinations with respect to, shall have ultimate control over the preparation
of, and shall file all Separate Returns of the ALC Group as it determines to be
mandatory or advisable and for all taxable periods.
                    (b) ALC shall prepare and provide to EHI all federal and
state income Tax Return workpapers and other information related to members of
the ALC Group required to complete any Joint Return, at least 30 days prior to
the Due Date of the relevant Joint Return.

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                SECTION 3.03. Tax Accounting Practices. Any Tax Return for any
Pre-Separation Period shall be prepared in accordance with practices, accounting
methods, elections, conventions and Tax positions used with respect to the Tax
Return in question for periods prior to the Separation (“Past Practices”) and,
in the case of any item the treatment of which is not addressed by Past
Practices, in accordance with generally accepted Tax accounting practices.
Notwithstanding the foregoing, for any Tax Return described in the preceding
sentence, (i) a party will not be required to follow Past Practices with either
the written consent of the other party (not to be unreasonably withheld) or a
“should” level opinion from a Tax Advisor that the proposed method of reporting
is correct and (ii) all Tax Returns shall be filed in a manner consistent with
the Intended Tax Treatment, unless otherwise required by a Final Determination.
                SECTION 3.04. Right to Review Tax Returns. Upon request, each
party shall make available to the other party the portion of Pre-Separation
Period Tax Returns that relates to the ALC Group that the first party is
responsible for preparing under this Article III.
                SECTION 3.05. Payment of Tax. The party responsible under this
Agreement for preparing a Tax Return shall remit, or cause to be remitted, in a
timely manner to the appropriate Taxing Authority all Tax due in connection with
that Tax Return. For the avoidance of doubt, this Section shall not in any way
affect any right of indemnification under this Agreement.
                SECTION 3.06. Adjustment Requests. (a) Except with the written
consent of EHI (not to be unreasonably withheld), ALC will not file any
Adjustment Request with respect to any Joint Return, unless required by law.
Except with the written consent of ALC (not to be unreasonably withheld), EHI
will not file any Adjustment Request with respect to any Joint Return, unless
required by law.
                    (b) Any Adjustment Request made under this Section 3.06
shall be prepared by the party that filed the Tax Return to be adjusted. The
party preparing the Adjustment Request shall be reimbursed for its internal
preparation and filing costs at a rate of $30 per hour, without regard to the
identity of the persons assigned to prepare the Adjustment Request, and, if the
parties engage a third party to prepare the Adjustment Request, the parties
shall bear the out-of-pocket costs of engaging such third party in proportion to
the benefit that each would receive from the proposed adjustment.

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                    (c) ALC agrees to waive its right to carry back any loss
incurred by any member of the ALC Group during any taxable period following
Separation, to the extent permitted by law.
ARTICLE IV
Intended Tax Treatment
                SECTION 4.01. Intended Tax Treatment. Each of Extendicare, EHI
and ALC agree to treat the Transactions for all U.S. Tax purposes as set out in
Exhibit C (the “Intended Tax Treatment”), unless otherwise required by a Final
Determination.
ARTICLE V
Tax Contests; Indemnification; Cooperation
                SECTION 5.01. Notice. As soon as practicable and, in any event,
within 30 days after a party (the “Indemnitee”) becomes aware of the existence
of a Tax Contest that may give rise to an indemnification claim under this
Agreement by it against the other party (the “Indemnifying Party”), the
Indemnitee shall notify the Indemnifying Party of the Tax Contest, and
thereafter shall promptly forward or make available to the Indemnifying Party
copies of notices and communications with a Taxing Authority relating to such
Tax Contest.
                SECTION 5.02. Control of Tax Contests. (a) EHI shall have sole
control over any Tax Contest relating to any Separate Returns of the Extendicare
Group and, except as provided in the following sentence, Tax Contest relating to
any Joint Returns. In the case of any Tax Contest relating to any Joint Returns
for which ALC determines, in its reasonable discretion, that it could be liable
for an amount greater than $10,000 under Article II as a result of such Tax
Contest, ALC may elect to jointly control, and to have the right to equally
participate in, at its own expense, all material activities and decisions
(including strategic decisions) with respect to, any such Tax Contest and EHI
shall not settle any such Tax Contest without ALC’s prior written consent.
                    (b) ALC shall have sole control over any Tax Contest
relating to any Separate Returns of the ALC Group; provided, however, that ALC
shall notify EHI in writing of, and consult EHI in good faith about all material
activities and decisions (including strategic decisions) with respect to, any
such Tax Contest.
                    (c) Where the parties mutually engage a Tax Advisor to
assist them in handling, settling or contesting a Tax Contest, any out-of-pocket
costs shall be borne ratably by the parties based on their ultimate liability
under this Agreement for the Tax to which the Tax Contest relates. In the
absence of such mutual agreement, each party shall be liable for its own
out-of-pocket costs incurred in handling, settling or contesting a Tax Contest.

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                SECTION 5.03. Indemnification Payments. (a) Subject to paragraph
(b), if an Indemnitee has a claim for an indemnification payment from an
Indemnifying Party under this Agreement, the Indemnitee shall promptly provide
to the Indemnifying Party notice of such claim, including a description of such
claim and a detailed calculation of the amount of the indemnification payment
that is claimed; provided, however, that no delay on the part of the Indemnitee
in notifying the Indemnifying Party shall relieve the Indemnifying Party from
any obligation hereunder unless (and then solely to the extent) the Indemnifying
Party is actually and materially prejudiced thereby. The Indemnifying Party
shall make the claimed payment to the Indemnitee within 45 days after receiving
such notice, unless the Indemnifying Party reasonably disputes the amount of, or
its liability for, such payment.
                    (b) No party shall be entitled to receive an indemnification
payment under this Agreement more than 5 days before the Tax (including
estimated Tax, if any) is required to be paid.
                    (c) Payments made prior to the Separation by any member of
the ALC Group to any member of the Extendicare Group with respect to a
particular Tax shall be credited against any indemnity obligation of the ALC
Group in respect of such Tax under this Agreement.
                SECTION 5.04. Interest on Late Payments. Interest shall accrue
with respect to any indemnification payment (including any disputed payment that
is ultimately required to be made), not made when due (as determined under
Section 5.03 and without regard to whether such payment is disputed), at the
Applicable Rate compounded quarterly.
                SECTION 5.05. Treatment of Payments. Indemnification payments
under this Agreement shall not be adjusted to take into account the Tax
treatment of the relevant Indemnitee with respect to such payments or the
indemnified items. Any payments made to one party by another party pursuant to
this Agreement or the Separation Agreement shall be treated for all Tax purposes
as a distribution by, or capital contribution to, ALC, as the case may be, made
immediately prior to the ALC Purchase, except to the extent otherwise required
by a Final Determination.
                SECTION 5.06. Expenses. Except as otherwise provided herein,
each party shall bear its own expenses incurred in connection with preparation
of Tax Returns, Tax Contests and other matters under this Agreement.
                SECTION 5.07. Cooperation. Each member of the Extendicare Group
and the ALC Group shall cooperate fully with all reasonable requests from the
other party in connection with the preparation and filing of Tax Returns and
Adjustment Requests, Tax Contests and other matters covered by this Agreement.

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                    (a) Such cooperation shall include:
          (i) the retention until the expiration of the applicable statute of
limitations, and the provision upon request, of Tax Returns, books, records
(including information regarding ownership and tax basis of property),
documentation and other information relating to the Tax Returns, including
accompanying schedules, related workpapers, and documents relating to rulings or
other determinations by Taxing Authorities;
          (ii) the execution of any document that may be necessary or reasonably
helpful in connection with any Tax Contest, the filing of a Tax Return or
Adjustment Request by a member of the Extendicare Group or the ALC Group,
obtaining a tax opinion, a private letter ruling or an advance tax ruling, or
other matters covered by this Agreement, including certification (provided in
such form as may be required by applicable law or reasonably requested and made
to the best of a party’s knowledge) of the accuracy and completeness of the
information it has supplied;
          (iii) the use of the parties’ commercially reasonable efforts to
obtain any documentation that may be necessary or reasonably helpful in
connection with any of the foregoing;
          (iv) the use of Extendicare Group’s commercially reasonable efforts to
assist the ALC Group in obtaining a waiver from Section 1504(a)(3) of the Code,
including the making of any representations and the obtaining of any private
letter ruling; provided, however, that ALC shall retain sole control over, and
be liable, and indemnify and hold the Extendicare Group harmless, for all costs
incurred in connection with, the obtaining of such waiver;
          (v) the use of the parties’ commercially reasonable efforts to make
the applicable party’s current or former directors, officers, employees, agents
and facilities available on a reasonable and mutually convenient basis in
connection with the foregoing matters; and
          (vi) the reasonable use by ALC of Extendicare Group’s systems,
including any relevant hardware and software, for the preparation and filing of
Returns for all tax periods (or portion thereof) ending on or before the
Separation Date.
                    (b) If a party fails ,without good cause, to comply with any
of its obligations set forth in this Section 5.07 upon reasonable request and
notice by the

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other party, and such failure results in the imposition of additional Tax, the
nonperforming party shall be liable in full and shall indemnify and hold the
other party harmless for such additional Tax.
                SECTION 5.08. Confidentiality. Any information or documents
provided under this Agreement shall be kept confidential by the recipient-party,
except as may otherwise be necessary in connection with the filing of Tax
Returns or with any Tax Contest. In addition, if Extendicare, EHI or ALC
determines that providing such information could be commercially detrimental,
violate any law or agreement or waive any privilege, the parties shall use
commercially reasonable efforts to permit compliance with the obligations under
this Agreement in a manner that avoids any such harm or consequence.
                SECTION 5.09. Retention of Tax Records. If either Extendicare,
EHI or ALC intends to dispose of documentation with respect to any
Pre-Separation Period, including books, records, Tax Returns and all supporting
schedules and information relating thereto (after the expiration of the
applicable statute of limitations), of any member of the other Group, they shall
provide written notice to the other party describing the documentation to be
disposed of 60 days prior to taking such action. The other party may arrange to
take delivery of the documentation described in the notice at its own expense
during the succeeding 60 day period.
ARTICLE VI
Resolution of Disputes
                SECTION 6.01. Tax Disputes. The parties will endeavor to resolve
in an amicable manner all disputes arising in connection with this Agreement.
The parties shall negotiate in good faith to resolve any Tax Dispute for not
less than 45 days. Upon written notice of either party after 45 days, the matter
will be referred to a Tax Advisor acceptable to both parties. The Tax Advisor
may, in its discretion, obtain the services of any third-party necessary to
assist it in resolving the dispute. The Tax Advisor shall provide written notice
to the Companies of its resolution of the dispute as soon as practicable, but in
any event no later than 45 days after its acceptance of the matter for
resolution. Any such resolution by the Tax Advisor will be binding on the
parties and the parties shall take, or cause to be taken, any action necessary
to implement the resolution. All fees and expenses of the Tax Advisor shall be
shared equally by EHI, on the one hand, and ALC, on the other hand. If, having
determined that the dispute must be referred to a Tax Advisor, after 45 days the
parties are unable to find a Tax Advisor willing to adjudicate the dispute in
question and whom the parties in good faith find acceptable, then the dispute
will be resolved pursuant to the procedures described in Section 7.11 of the
Separation Agreement; provided, however, that only an arbitrator that qualifies
as a Tax Advisor shall be selected.

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ARTICLE VII
Miscellaneous and General
                SECTION 7.01. Modification or Amendment. The parties may modify
or amend this Agreement only by written agreement executed and delivered by duly
authorized officers of the respective parties.
                SECTION 7.02. Termination. In the event the Arrangement
Agreement is terminated pursuant to its terms prior to the Separation, this
Agreement shall automatically and simultaneously terminate without the approval
of ALC, EHI, Extendicare or the shareholders of Extendicare. In the event of
such termination, no party shall have any liability to any other party pursuant
to this Agreement, except under Section 5.08. It is understood and agreed that
the consummation of the Transactions shall not constitute a termination of this
Agreement.
                SECTION 7.03. Notices. All notices, requests, claims, demands
and other communications under this Agreement shall be in writing and shall be
deemed given upon receipt by the parties at the following fax numbers (or at
such other address for a party as shall be specified by like notice) of a fax
followed by delivery at the following addresses of such notice by overnight
courier of an international reputation:
If to Extendicare or EHI, to:
Extendicare Inc.
3000 Steeles Avenue East
Markham, Ontario
Canada
L3R 9W2
Attention:
Fax:
with a copy to:
Extendicare Health Services, Inc.
111 West Michigan Street
Milwaukee, Wisconsin 53203
Attention: Tax Department
Fax:

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If to ALC, to:
Assisted Living Concepts, Inc.
111 West Michigan Street
Milwaukee, Wisconsin 53203
Attention:
Fax:
with a copy to:
Attention:
Fax:
                SECTION 7.04. Interpretation. When a reference is made in this
Agreement to a Section, Exhibit, Schedule or party, such reference shall be to a
Section of, or an Exhibit, Schedule or party to, this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words “include”, “includes” or “including” are used in
this Agreement, they shall be deemed to be followed by the words “without
limitation”. The words “hereof”, “herein”, “hereby” and “hereunder” and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. The words “date
hereof” shall refer to the date of this Agreement. The term “or” is not
exclusive. The word “extent” in the phrase “to the extent” shall mean the degree
to which a subject or other thing extends, and such phrase shall not mean simply
“if”. The definitions contained in this Agreement are applicable to the singular
as well as the plural forms of such terms. Any agreement or instrument defined
or referred to herein or in any agreement or instrument that is referred to
herein means such agreement or instrument as from time to time amended, modified
or supplemented. References to a person are also to its permitted successors and
assigns. IF, AND TO THE EXTENT, THE PROVISIONS OF THIS AGREEMENT CONFLICT WITH
THE SEPARATION AGREEMENT, ARRANGEMENT AGREEMENT OR OTHER AGREEMENT BY AND
BETWEEN THE PARTIES TO THIS AGREEMENT, THE PROVISIONS OF THIS AGREEMENT SHALL
CONTROL.
                SECTION 7.05. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any
applicable law, or public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the matters contemplated hereby is not affected
in any manner materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that objectives contemplated hereby are fulfilled
to the extent possible.

14

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                SECTION 7.06. Counterparts. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties. Each party
need not sign the same counterpart.
                SECTION 7.07. Entire Agreement; Third-Party Beneficiaries. This
Agreement, taken together with the other Transaction Agreements, constitutes the
entire agreement, and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the Transactions. Nothing
contained in this Agreement is intended to confer upon any person other than the
parties hereto and their respective successors and permitted assigns, any
benefit, right or remedy under or by reason of this Agreement.
                SECTION 7.08. Certain Obligations. Whenever this Agreement
requires any of the Affiliates of any party to take any action, this Agreement
will be deemed to include an undertaking on the part of such party to cause such
Affiliates to take such action.
                SECTION 7.09. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws.
                SECTION 7.10. Assignment. Subject to Section 4.07 of the
Separation Agreement, neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties without the prior written
consent of the other parties. Any purported assignment without such consent
shall be void. Subject to the preceding sentences, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and assigns.
                SECTION 7.11. Survival. Except with respect to Sections 5.07,
5.08 and 5.09, which shall remain in effect without limitation as to time, the
provisions in this Agreement shall be unconditional and absolute and shall
remain in effect until the expiration of the statute of limitations for all
taxable periods that end before or include December 31 of the calendar year in
which the Separation occurs and, if later, until the resolution of all disputes
under this Agreement that arose during such periods.
                SECTION 7.12. Extension; Waiver. The parties may (a) extend the
time for the performance of any of the obligations or other acts of the other
parties or (b) waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of any party to this Agreement to
assert any of its rights under this Agreement or otherwise shall not constitute
a waiver of such rights.

15

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                IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers as the date first set forth above.

            EXTENDICARE INC.,
        by   /s/ Mel Rhinelander                 Name:   Mel Rhinelander      
Title:   President and Chief Executive Officer       EXTENDICARE HOLDINGS, INC.,
        by   /s/ Mel Rhinelander                 Name:   Mel Rhinelander      
Title:   Chairman and Chief Executive Officer       ASSISTED LIVING CONCEPTS,
INC.,
        by   /s/ Laurie Bebo                 Name:   Laurie Bebo       Title:  
President    

16

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EXHIBIT A
TO THE TAX ALLOCATION AGREEMENT
Transaction Steps1
          In connection with the Separation, the following steps will occur in
the following order:

  Step 1:   ALC and its subsidiaries will acquire each of the EHSI Assisted
Living Facilities (excluding any land component subject to transfer restrictions
(the “Excluded Land”)) from certain direct and indirect subsidiaries of EHSI in
exchange for a note in an amount equal to the fair market value of such facility
(the “Facilities Purchase”).     Step 2:   Each entity that receives a note from
ALC or an ALC subsidiary in the Facilities Purchase will transfer that note to
EHSI in satisfaction of intercompany indebtedness (the “Note Distribution”).    
Step 3:   EHSI will contribute the notes received in the Note Distribution to
ALC (the “Note Contribution”).     Step 4:   EHSI will contribute to ALC cash in
an amount equal to the fair market value of the Excluded Land, if necessary (the
“Purchase Price Contribution”).     Step 5:   ALC will lend the cash received
pursuant to the Purchase Price Contribution to EHSI on arm’s length terms (the
“Loan”).     Step 6:   EHSI will contribute approximately $33 million to ALC
(the “Cash Contribution”). ALC may use a portion of the contributed cash to
satisfy outstanding inter-company indebtedness owed to EHSI, if necessary.    
Step 7:   Extendicare will sell its minority interests in BNN Investments, Ltd.
(12,100 shares of common stock) and MedX Health Corp. (500,622 shares of common
stock) to EHSI for cash in an amount equal to the fair market value of such
interests.

 

1   All terms used but not defined in this Exhibit shall have the meaning set
forth in the Tax Allocation Agreement.

 

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  Step 8:   EHSI will contribute its minority interests in Omnicare Inc. (50,000
shares of common stock) and the shares of BNN Investments, Ltd. and MedX Health
Corp. purchased in step 7 to ALC (the “Stock Contributions” and, together with
the Cash Contribution and Purchase Price Contribution, the “ALC Contributions”).
    Step 9:   The ALC Purchase will occur. In the ALC Purchase, Extendicare will
purchase the stock of ALC from EHSI in exchange for a note with a face amount
equal to the fair market value of ALC (the “Extendicare Note”). The Extendicare
Note shall be repayable on demand and shall, in all other respects, have arms'
length terms and conditions.     Step 10:   ALC shall assume, and agree to pay,
perform, satisfy and discharge when due the Assumed Liabilities, if any, in
accordance with their respective terms.     Step 11:   The Recapitalization will
occur. In the Recapitalization, ALC will reorganize its share capital to create
two classes of common shares (ALC Class A Shares and ALC Class B Shares), which
will have similar voting rights to the subordinate voting and multiple voting
common shares of Extendicare, respectively. The ALC Class B Shares will be
convertible into 1.075 shares of ALC Class A Shares.     Step 12:   The ALC
Distribution will occur. In the ALC Distribution, the existing subordinate
voting shareholders of Extendicare (other than any dissenters) will exchange
each of their shares for one new Extendicare Common Share and one ALC Class A
Share and the existing multiple voting shareholders of Extendicare (other than
any dissenters) will exchange each of their shares for 1.075 new Extendicare
Common Shares and one ALC Class B Share.     Step 13:   The Conversion will
occur. In the Conversion, the new Extendicare Common Shares will be transferred
to Newco for Newco Notes or, at the election of certain holders, to the Holding
Partnership in exchange for units of Holding Partnership. The Newco Notes will
immediately be transferred to Extendicare REIT in exchange for REIT Units.    
Step 14:   In connection with the Conversion, Extendicare REIT will transfer the
Newco Notes to Extendicare Trust in exchange for units and notes of Extendicare
Trust; Extendicare Trust will then contribute the Newco Notes to the Holding
Partnership in exchange for interests in the Holding Partnership; the Holding
Partnership will then transfer the Newco Notes and the Extendicare Common Shares
to Extendicare ULC in exchange for Extendicare ULC interests and notes;
Extendicare ULC will transfer the Extendicare Common Shares and a portion of the
Newco Notes to Newco and the Newco Notes so transferred will be canceled; and
Extendicare and Newco will amalgamate.

 

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  Step 15:   Extendicare may not immediately repay to EHSI the entire amount
owed on the Extendicare Note. As the Extendicare Note is repaid, EHSI may
distribute amounts received to EHI and EHI may then distribute such amounts to
its parent, Extendicare International Inc., to the extent of EHI’s earnings and
profits and Extendicare International Inc.’s tax basis in EHI.     Step 16:  
When the required approvals are obtained, EHSI will transfer cash to ALC in
repayment of the Loan and ALC will use these funds to acquire the Excluded Land
(the “Land Purchase”).

 

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EXHIBIT B
TO THE TAX ALLOCATION AGREEMENT
Principles for Determining Tax Attributable to ALC Group and EHI Group1
Federal Income Tax

1.1   Federal Income Taxes. EHI (on behalf of itself and its Affiliates) (the
“EHI Group”) and ALC (on behalf of itself and other members of the ALC Group)
agree to determine and allocate the U.S. federal income Tax liability of the
Groups among themselves in the following manner:

  (a)   The ALC Group shall be allocated, and ALC shall pay to EHI an amount
equal to, the U.S. federal income Tax liability, if any, including alternative
minimum tax, of the ALC Group. EHI shall be allocated any other U.S. federal
income Tax liability of the Groups.     (b)   Such U.S. federal Tax liability
shall equal the hypothetical separate consolidated return Tax liability of the
ALC Group, as determined in accordance with the provisions of Treasury
Regulations Section 1.1552-1(a)(2)(ii) as if the ALC Group had filed a separate
consolidated federal income Tax Return.

State and Local Income and Franchise Tax
2.1 Separate Company Tax. Separate Company Tax means any Tax computed based on
the income, capital, net worth, loss, apportionment, and other items of one
member and without regard to any such items of any other members. In the case of
any Separate Company Tax:
(a) Separate Company Tax of any member of the EHI Group shall be allocated to
the EHI Group and Separate Company Tax of any member of the ALC Group shall be
allocated to the ALC Group for all Tax periods before and after the Separation
Date.
2.2 Combined State Tax. Combined State Tax means state income, franchise, or
similar Tax computed based on a consolidated, combined, or unitary basis.
(a) The Combined State Tax liability shall be allocated between the ALC Group
and EHI Group in accordance with the method prescribed in Treasury Regulation
1.1552-1(a)(1) determined by aggregating the amounts allocable to the members of
each respective Group into a single amount for each Group, appropriately
reflecting income, apportionment, and other items of members. The allocable
income will be computed by calculating on a state basis the ALC Group numerator
and the EHI Group numerator, and dividing the respective numerators by the
consolidated Group denominator (see the example that follows).
 

1   All terms used but not defined in this Exhibit shall have the meaning set
forth in the Tax Allocation Agreement.

 

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Combined/Consolidated State Tax Allocation
Example

         
Consolidated Taxable Income
  $ 250  
State Apportionment
    40.00 %
 
     
State Taxable Income
  $ 100  
State Tax Rate
    10 %
 
     
State Tax Liability
  $ 10  
 
     

                          Apportionment   Numerator   Denominator  
Apportionment %
EHI Group
  $ 350     $ 1,000       23.33 %
ALC Group
  $ 250     $ 500       16.67 %      
 
                       
Total
  $ 600     $ 1,500       40.00 %      

                                                              Subgroup     Total
            Federal Taxable     State     State     Allocated   Allocation of
Tax   Numerator     Denominator     Percentage     Income     Income     Tax
Rate     Tax Liability        
EHI Group
  $ 350     $ 1,500       23.33 %   $ 250     $ 58       10 %   $ 5.83  
ALC Group
  $ 250     $ 1,500       16.67 %   $ 250     $ 42       10 %   $ 4.17  
 
                                                 
Totals
                    40.00 %           $ 100             $ 10.00  
 
                                                 

 

Note:   The above illustrates the methodology to be used to allocate state tax
liabilities between the EHI subgroup and the ALC subgroup in states where a
combined, consolidated, or unitary return is filed.

 

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EXHIBIT C
TO THE TAX ALLOCATION AGREEMENT
Intended Tax Treatment2
          The following sets forth the Intended Tax Treatment of certain
transactions described in Exhibit A.
       1. The Facilities Purchase, the Note Distribution and the Note
Contribution, taken together, shall be treated as (i) a transfer of the EHSI
Assisted Living Facilities (other than any Excluded Land) by the selling EHSI
subsidiaries to EHSI in satisfaction of intercompany indebtedness, which
transfers shall create deferred inter-company gain under Code Section 1502,
followed by (ii) a contribution of the EHSI Assisted Living Facilities (other
than any Excluded Land) by EHSI to ALC. As a result, EHSI’s basis in its ALC
stock shall be increased by the aggregate fair market value of the EHSI Assisted
Living Facilities transferred and ALC will have a fair market value basis in
those EHSI Assisted Living Facilities.
       2. The ALC Contributions shall be treated as transfer of the cash and
sale of the minority share investments by EHSI to ALC. As a result, EHSI shall
have deferred inter-company gain under Code Section 1502 with respect to the
minority share investments. EHSI’s basis in its ALC stock shall be increased by
the amount of cash and the aggregate fair market value of the shares transferred
and ALC shall have a fair market value basis in the transferred shares.
       3. Upon the ALC Purchase, the EHI Affiliated Group shall recognize
(i) the deferred inter-company gain created by the Facilities Purchase and the
Note Distribution and the ALC Contribution and (ii) any gain in the ALC stock
under Code Section 1001.
       4. The Land Purchase shall be treated as a taxable sale, which shall
subject the vendor (EHSI or one of its subsidiaries, as the case may be) to
taxable gain or loss under Code Section 1001.
 

2   All terms used but not defined in this Exhibit shall have the meaning set
forth in the Tax Allocation Agreement and Exhibit A.

 

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Schedule 2.01
EHSI Transfer of Assets to ALC Real Estate, LLC
Operations Checklist

                                                  Date Operations No.   ST  
Facility   State   Transferred   1.       56    
River Wood Estates (RCAC)
  WI   4/1/2006   2.       405    
Gardens At Clyde
  OH   4/1/2006   3.       14    
Crystal House
  WI   4/1/2006   4.       38    
Tamarack Place
  WI   4/1/2006   5.       42    
Cedar Gardens
  WI   4/1/2006   6.       43    
Wissota Springs
  WI   4/1/2006   7.       105    
Lake View Assisted Living
  WI   4/1/2006   8.       107    
Lake View Estates
  WI   4/1/2006   9.       108    
Country Villa
  MN   4/1/2006   10.       134    
Prairie Springs Assisted Living
  WA   7/1/2006   11.       138    
Mountain View Meadows
  WA   7/1/2006   12.       139    
Oak Gardens
  WI   4/1/2006   13.       148    
Terrace Estates
  WI   4/1/2006   14.       186    
Highlands (The)
  KY   4/1/2006   15.       230    
Bayberry Court
  PA   5/1/2006   16.       257    
Mission Ridge Assisted Living For Independent Seniors
  WA   7/1/2006   17.       258    
West Woods
  WA   7/1/2006   18.       267    
Clairmont Retirement Center
  OR   4/1/2006   19.       269    
Crestview Assisted Living
  TX   4/1/2006   20.       220    
Bell Oaks Terrace
  IN   4/1/2006   21.       238    
Emerald House
  IN   4/1/2006   22.       35    
Willowpark Residence
  WI   4/1/2006   23.       40    
Crest House
  WI   4/1/2006   24.       106    
Brook Gardens
  WI   4/1/2006   25.       137    
Laurel Park Assisted Living
  WA   7/1/2006   26.       213    
Inwood Hills Estates
  IN   4/1/2006   27.       239    
Rockmill Springs
  OH   4/1/2006   28.       404    
Westwood Landing
  OH   4/1/2006   29.       417    
Statesman Woods
  PA   4/1/2006

The above transfer dates were provided by John Stampfl, Manager of Financial
Reporting at EHSI.