##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 Commission File Numbers 333-97293 and 333-116927
 EXTENDICARE HEALTH SERVICES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    111 West Michigan Street
Milwaukee, WI 53203
(Address of principal executive office
including zip code)
    
    98-0066268
(I.R.S. Employer
Identification Number)
 (414) 908-8000
  þ o
  o þ
  o þ




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EXTENDICARE HEALTH SERVICES, INC.
 INDEX
 PagePart I
    
    Financial Information:Item 1
    
    Financial Statements:Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended
September 30, 2005 and 2004
    
    3Condensed Consolidated Balance Sheets, September 30, 2005 and December 31, 2004
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2005 and 2004
    
    5Notes to Condensed Consolidated Financial Statements
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    30Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    67Item 4
    
    Controls and Procedures
    
    68Part II
    
    Other Information:Item 1
    
    Legal Proceedings
    
    69Item 6
    
    Exhibits
    
    69Signatures
    
    70Exhibit Index
    
    71CertificationCertificationCertification
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PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 EXTENDICARE HEALTH SERVICES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 (In thousands)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUES:Nursing and assisted living facilities
    
    $
    288,267
    
    
    $
    229,094
    
    
    $
    869,256
    
    
    $
    661,632Outpatient therapy
    
    
    2,885
    
    
    
    2,847
    
    
    
    8,515
    
    
    
    8,521Other
    
    
    4,252
    
    
    
    4,149
    
    
    
    13,214
    
    
    
    12,664295,404
    
    
    
    236,090
    
    
    
    890,985
    
    
    
    682,817COSTS AND EXPENSES (INCOME):Operating
    
    
    236,205
    
    
    
    188,129
    
    
    
    707,875
    
    
    
    550,430General and administrative
    
    
    9,317
    
    
    
    7,374
    
    
    
    29,054
    
    
    
    22,197Lease costs
    
    
    5,833
    
    
    
    2,218
    
    
    
    16,221
    
    
    
    6,700Depreciation and amortization
    
    
    11,696
    
    
    
    8,351
    
    
    
    33,518
    
    
    
    24,946Interest expense, net
    
    
    9,986
    
    
    
    4,786
    
    
    
    28,085
    
    
    
    15,819Valuation adjustment on interest rate caps
    
    
    (129
    )
    
    
    2,030
    
    
    
    2,108
    
    
    
    6,423Loss (gain) on disposal of assets and
impairment of long-lived assets
    
    
    (9,270
    )
    
    
    4,573
    
    
    
    (10,348
    )
    
    
    1,716Loss on refinancing and retirement of debt
    
    
    
    
    
    
    152
    
    
    
    275
    
    
    
    6,484263,638
    
    
    
    217,613
    
    
    
    806,788
    
    
    
    634,715INCOME BEFORE INCOME TAXES
    
    
    31,766
    
    
    
    18,477
    
    
    
    84,197
    
    
    
    48,102Income tax expense
    
    
    12,808
    
    
    
    6,938
    
    
    
    33,309
    
    
    
    18,068NET INCOME FROM CONTINUING
OPERATIONS
    
    
    18,958
    
    
    
    11,539
    
    
    
    50,888
    
    
    
    30,034Income (loss) from discontinued operations
before income taxes
    
    
    (1,263
    )
    
    
    (1,728
    )
    
    
    (8,820
    )
    
    
    (2,244
    )Income tax
expense (benefit) on
discontinued operations
    
    
    (509
    )
    
    
    (649
    )
    
    
    (3,489
    )
    
    
    (843
    )NET INCOME (LOSS) FROM DISCONTINUED
OPERATIONS
    
    
    (754
    )
    
    
    (1,079
    )
    
    
    (5,331
    )
    
    
    (1,401
    )NET INCOME
    
    $
    18,204
    
    
    $
    10,460
    
    
    $
    45,557
    
    
    $
    28,633
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EXTENDICARE HEALTH SERVICES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(In thousands except share data)
 September30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    23,881
    
    
    $
    29,612Short-term investment
    
    
    9,222
    
    
    
    3⁄4Accounts receivable, less allowances of $13,219 and
$10,594, respectively
    
    
    121,444
    
    
    
    95,973Supplies, inventories and other current assets
    
    
    17,529
    
    
    
    17,751Income taxes receivable
    
    
    3⁄4
    
    
    
    1,654Deferred state income taxes
    
    
    2,929
    
    
    
    2,664Due from shareholder and affiliates:Federal income taxes receivable
    
    
    7,097
    
    
    
    5,231Deferred federal income taxes
    
    
    12,344
    
    
    
    13,258Other
    
    
    
    
    
    
    7,690Total current assets
    
    
    194,446
    
    
    
    173,833Property and equipment, net
    
    
    739,609
    
    
    
    446,085Assets held for sale
    
    
    1,379
    
    
    
    3⁄4Goodwill and other intangible assets, net
    
    
    82,032
    
    
    
    74,554Deferred state income taxes
    
    
    3,724
    
    
    
    3⁄4Other assets
    
    
    33,330
    
    
    
    41,485Total Assets
    
    $
    1,054,520
    
    
    $
    735,957LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt and capital lease
obligations
    
    $
    24,378
    
    
    $
    1,071Accounts payable
    
    
    25,564
    
    
    
    22,297Accrued liabilities
    
    
    120,005
    
    
    
    99,920Current portion of accrual for self-insured liabilities
    
    
    12,500
    
    
    
    18,000Current portion of amounts due to shareholder and affiliates
    
    
    2,976
    
    
    
    2,975Income taxes payable
    
    
    2,516
    
    
    
    3⁄4Total current liabilities
    
    
    187,939
    
    
    
    144,263Accrual for self-insured liabilities
    
    
    21,852
    
    
    
    19,725Long-term debt and capital lease obligations
    
    
    518,199
    
    
    
    290,861Deferred state income taxes
    
    
    3⁄4
    
    
    
    1,833Other long-term liabilities
    
    
    19,756
    
    
    
    12,448Due to shareholder and affiliates:Deferred federal income taxes
    
    
    6,483
    
    
    
    1,853Other
    
    
    4,576
    
    
    
    14,785Total Liabilities
    
    
    758,805
    
    
    
    485,768Shareholders Equity:Common stock, $1 par value, 1,000 shares
authorized, 947 shares issued and outstanding
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    209,532
    
    
    
    209,221Accumulated other comprehensive income
    
    
    3⁄4
    
    
    
    342Retained earnings
    
    
    86,182
    
    
    
    40,625Total Shareholders Equity
    
    
    295,715
    
    
    
    250,189Total Liabilities and Shareholders Equity
    
    $
    1,054,520
    
    
    $
    735,957
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EXTENDICARE HEALTH SERVICES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 (In thousands)
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004OPERATING ACTIVITIES:Net income
    
    $
    45,557
    
    
    $
    28,633Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    34,563
    
    
    
    26,317Amortization of deferred financing costs
    
    
    1,402
    
    
    
    1,252Amortization of purchase accounting adjustments for leases and debt
    
    
    (388
    )
    
    
    Amortization of purchase accounting adjustments for below market
resident leases
    
    
    (1,836
    )
    
    
    Provision for self-insured liabilities
    
    
    6,305
    
    
    
    4,950Payment of self-insured liability claims
    
    
    (10,580
    )
    
    
    (11,386
    )Deferred income taxes
    
    
    4,446
    
    
    
    (12,127
    )Valuation adjustment on interest rate caps
    
    
    2,108
    
    
    
    6,423Loss (gain) on disposal of assets and impairment of long-lived assets
    
    
    (5,833
    )
    
    
    1,716Unrealized gain on trading securities
    
    
    (112
    )
    
    
    Loss on refinancing and retirement of debt
    
    
    275
    
    
    
    6,484Changes in assets and liabilities:Accounts receivable attributable to Indiana and Pennsylvania provider tax
    
    
    (10,856
    )
    
    
    Accounts receivable
    
    
    (11,524
    )
    
    
    (14,179
    )Other assets
    
    
    4,597
    
    
    
    19,795Supplies, inventories and other current assets
    
    
    6,881
    
    
    
    (922
    )Accounts payable
    
    
    437
    
    
    
    1,110Accrued liabilities attributable to Indiana and Pennsylvania provider tax
    
    
    6,394
    
    
    
    Accrued liabilities
    
    
    (3,645
    )
    
    
    17Income taxes payable/receivable
    
    
    2,694
    
    
    
    (196
    )Current due to shareholder and affiliates
    
    
    4,793
    
    
    
    8,905Cash provided by operating activities
    
    
    75,678
    
    
    
    66,792INVESTING ACTIVITIES:Payment for acquisition of Assisted Living Concepts, Inc (ALC)
    
    
    (144,316
    )
    
    
    Cash balances in ALC as of acquisition
    
    
    6,547
    
    
    
    Payments for other acquisitions
    
    
    (8,218
    )
    
    
    (6,454
    )Payments for new construction projects
    
    
    (16,352
    )
    
    
    (9,334
    )Payments for purchases of property and equipment
    
    
    (21,810
    )
    
    
    (17,973
    )Proceeds from repayment of notes receivable
    
    
    
    
    
    
    20,552Proceeds from completion of divestiture agreement
    
    
    
    
    
    
    10,000Proceeds from sales of investments
    
    
    976
    
    
    
    4,894Proceeds from sale of property and equipment
    
    
    1,878
    
    
    
    4,850Proceeds from sale of assets held for sale
    
    
    9,413
    
    
    
    Changes in other non-current assets
    
    
    5,130
    
    
    
    (2,385
    )Cash provided by (used in) investing activities
    
    
    (166,752
    )
    
    
    4,150FINANCING ACTIVITIES:Proceeds from Revolving Credit Facility to finance ALC acquisition
    
    
    60,000
    
    
    
    Proceeds from 6% EHI Term Note to finance ALC acquisition
    
    
    55,000
    
    
    
    Proceeds from issuance of long-term debt
    
    
    96,000
    
    
    
    128,082Payments of long-term debt
    
    
    (56,422
    )
    
    
    (228,862
    )Payments on line of credit
    
    
    (70,000
    )
    
    
    Payment of deferred financing costs
    
    
    (1,067
    )
    
    
    (5,364
    )Payment of interest rate cap fee
    
    
    
    
    
    
    (3,495
    )Payment of tender and call premium and legal expenses
    
    
    
    
    
    
    (6,921
    )Proceeds from termination of interest rate swap and cap
    
    
    
    
    
    
    2,615Advances from shareholder and an affiliate
    
    
    
    
    
    
    22,900Other long-term liabilities
    
    
    1,832
    
    
    
    308Cash provided by (used in) financing activities
    
    
    85,343
    
    
    
    (90,737
    )Decrease in cash and cash equivalents
    
    
    (5,731
    )
    
    
    (19,795
    )Cash and cash equivalents, beginning of period
    
    
    29,612
    
    
    
    48,855Cash and cash equivalents, end of period
    
    $
    23,881
    
    
    $
    29,060
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EXTENDICARE HEALTH SERVICES, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(In thousands)
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004Supplemental schedule of cash flow information:Cash paid during the period for:Interest
    
    $
    26,997
    
    
    $
    21,447Income tax payments, net of refunds
    
    
    24,474
    
    
    
    20,449Supplemental schedule of non-cash investing
and financing activities:The Company acquired all of the capital
stock of Assisted Living Concepts, Inc. for
$144,316. In connection with the
acquisition, liabilities were assumed as
follows:Fair value of assets acquired
    
    $
    316,984
    
    
    $
    Cash paid
    
    
    (144,316
    )
    
    
    Liabilities assumed
    
    $
    172,668
    
    
    $
    Capital lease obligations incurred to
purchase properties  See Notes 7 and 9
    
    $
    12,822
    
    
    $
    
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EXTENDICARE HEALTH SERVICES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
  Basis of Presentation
     2. New Accounting Policies
 a) Accounting for Acquisitions
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b) Resident Relationships
  c) Below (or above) Market Resident Contracts
  3. New Accounting Pronouncements
 a) Exchanges of Non-monetary Assets
  b) Accounting for Conditional Asset Retirement Obligations
  8




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c) Accounting Changes and Error Corrections
  4. Acquisition of Assisted Living Concepts, Inc.
   (in thousands)ASSETS:Cash, net of cash used to finance the acquisition
    
    $
    (22,652
    )Accounts receivable
    
    
    3,003Other current assets
    
    
    8,308Total current assets
    
    
    (11,341
    )Property, plant and equipment
    
    
    284,223Resident relationships intangible
    
    
    6,357Goodwill
    
    
    2,529Other long-term assets
    
    
    6,016Total assets
    
    $
    287,784LIABILITIES:Current maturities of long-term debt
    
    $
    3,418Other current liabilities
    
    
    19,850Total current liabilities
    
    
    23,268Long-term debt:Long-term debt of ALC assumed
    
    
    141,046Proceeds from 6% from EHI Term Loan to finance acquisition
    
    
    55,000Proceeds from revolving credit facility to finance acquisition
    
    
    60,000Total long-term debt
    
    
    256,046Other long term liabilities
    
    
    8,470Total liabilities
    
    $
    287,784
   9




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Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Total revenues
    
    $
    295,404
    
    
    $
    281,662
    
    
    $
    906,095
    
    
    $
    816,078Income before income taxes
    
    
    31,766
    
    
    
    18,778
    
    
    
    83,387
    
    
    
    49,996Net Income
    
    
    18,958
    
    
    
    12,694
    
    
    
    50,395
    
    
    
    33,399
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5. Other Acquisitions and New Construction
 a) Acquisition in Kentucky
  (in thousands)Cash used to finance the acquisition
    
    $
    (8,219
    )Other current assets
    
    
    (4
    )Total current assets
    
    
    (8,223
    )Property, plant and equipment
    
    
    7,360Goodwill and other intangible assets
    
    
    863Total assets
    
    $
    
 b) New Construction
   c) Offer to Purchase in Pennsylvania
  d) 2004 Acquisitions and Developments
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6. Approval of Indiana, Pennsylvania and Washington State Plans and Amendments Relating to
Medicaid Revenues
   7. Property and Equipment, Net
  Nine Months Ended2005
    
    
    2004(in thousands)Balance at beginning of period
    
    $
    446,085
    
    
    $
    448,743Properties and equipment acquired in
acquisition of ALC
    
    
    284,223
    
    
    
    3⁄4Other acquisitions
    
    
    7,360
    
    
    
    5,898Properties acquired under capital leases
 see Note 9
    
    
    12,822
    
    
    
    3⁄4Purchases of properties and equipment
    
    
    21,810
    
    
    
    17,973Payments for new constructions projects
    
    
    16,352
    
    
    
    9,334Depreciation and amortization
    
    
    (32,297
    )
    
    
    (25,464
    )Impairment of long-lived assets
    
    
    (7,761
    )
    
    
    (1,362
    )Reclassification to assets held for sale
    
    
    (1,379
    )
    
    
    3⁄4Disposals and other
    
    
    (7,606
    )
    
    
    (6,422
    )Balance at end of period
    
    $
    739,609
    
    
    $
    448,700
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8. Other Assets
  September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Deferred financing costs, net
    
    $
    11,428
    
    
    $
    11,828Non-current accounts receivable from Medicare and Medicaid
programs
    
    
    5,617
    
    
    
    10,214Non-current accounts receivable from non-affiliated long-term
care operators
    
    
    5,619
    
    
    
    9,469Indemnification escrow
    
    
    3,700
    
    
    
    3,700Funds held under deferred compensation plan
    
    
    2,189
    
    
    
    2,001Debt service and capital expenditure trust funds
    
    
    1,396
    
    
    
    309Cash held by bank as collateral for ALC letters of credit
    
    
    1,032
    
    
    
    3⁄4Prepaid interest rate cap fee
    
    
    381
    
    
    
    984Other
    
    
    1,968
    
    
    
    2,980$
    33,330
    
    
    $
    41,485
 Medicare and Medicaid Settlement Receivables
  September 30,
    
    
    December 31,2005
    
    
    2004(in thousands)Total settlement receivables from Medicare and
Medicaid programs, less contractual allowance of
$6,957
    
    $
    12,588
    
    
    $
    16,954Less: Current portion of Medicare and Medicaid
settlement receivables (included in accounts
receivable)
    
    
    6,971
    
    
    
    6,740Non-current portion of Settlement Accounts Receivable
    
    $
    5,617
    
    
    $
    10,214
  Advances and Amounts Due from Non-Affiliated Long-term Care Operators
  13




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9. Line of Credit and Long-term Debt
 Summary of Long-term Debt
  September 30,
    
    
    December 312005
    
    
    2004(in thousands)9.50% Senior Notes due 2010
    
    $
    149,745
    
    
    $
    149,7146.875% Senior Subordinated Notes due 2014
    
    
    122,195
    
    
    
    122,022Term Loan due 2010, at variable interest rates
    
    
    85,785
    
    
    
    6.00% EHI Term Note due 2010
    
    
    55,000
    
    
    
    6.24% Red Mortgage Capital Note due 2014
    
    
    36,698
    
    
    
    DMG Mortgage notes payable, interest rates ranging from 7.58% to 8.65%, due 2008
    
    
    27,542
    
    
    
    Revenue Bonds, at variable interest rates, maturing through 2018
    
    
    21,150
    
    
    
    Capital lease obligations, interest rates ranging from 2.84% to 13.54%,
maturing through 2009
    
    
    12,309
    
    
    
    11Oregon Trust Deed Notes, interest rates ranging from 0.25% to 10.90%, maturing
from 2020 through 2026
    
    
    9,657
    
    
    
    HUD Insured Mortgages, interest rates ranging from 7.40% to 7.55%, due 2036
    
    
    7,691
    
    
    
    6.00% EI Term Note due 2010
    
    
    8,900
    
    
    
    Other mortgage notes payable, interest rates ranging from 3.0% to 7.25%,
maturing through 2009
    
    
    4,950
    
    
    
    9,730Industrial Development Revenue Bond due 2014
    
    
    
    
    
    
    9,5006.25% Industrial Development Revenue Bond, maturing 2008
    
    
    955
    
    
    
    955Long-term debt before current maturities
    
    
    542,577
    
    
    
    291,932Less current maturities
    
    
    24,378
    
    
    
    1,071Total long-term debt
    
    $
    518,199
    
    
    $
    290,861
  Revolving Credit Facility
  
    
    the credit extended to the Company under the Amended and Restated Credit Facility
includes a term loan for $86.0 million. The principal balance of the term loan is payable
in equal quarterly installments of $215,000 over the first four years of the Amended and
Restated Credit Facility, equal quarterly installments of $20.6 million over the first three
quarters of the last year of the Amended and Restated Credit Facility, and a final principal
installment of $20.6 million due on the maturity date.
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
    
    the revolving credit limit under the Amended and Restated Credit Facility reflects a
reduction by $41.0 million from the $155.0 million limit under the former Revolving Credit
Facility to $114.0 million under the Amended and Restated Credit Facility. Upon notice and
at the option of the participating lenders, the Company may increase the credit extended or
available under the Amended and Restated Credit Facility by up to $15.0 million. The
increase may be in the form of additional term loans or in the form of an increase in the
revolving credit limit.
    
    the maturity date of the Amended and Restated Credit Facility is July 31, 2010,
reflecting an extension of more than one year from the maturity date of the Revolving Credit
Facility.
    
    the interest rate spreads over the Eurodollar rate or the base rate, as applicable,
have been reduced and fixed at 1.75% per annum for Eurodollar rate loans and 0.75% per annum
for base rate loans. Under the Revolving Credit Facility the interest rate spread ranged
from 2.50% per annum to 3.25% per annum for Eurodollar rate loans and from 1.50% per annum
to 2.25% per annum for base rate loans, subject, in each case, to adjustments based on the
Companys senior leverage ratio.
    
    the Amended and Restated Credit Facility includes a $10.0 million swing line
commitment within the $114 million revolving credit limit.
    
    the financial covenants under the Amended and Restated Credit Facility include ALCs
debt and earnings, whereas the financial covenants under the Revolving Credit Facility did
not. The financial covenants are otherwise substantially the same as under the Revolving
Credit Facility.
    
    the Amended and Restated Credit Facility includes procedures for ALC and its
subsidiaries to be designated as restricted subsidiaries and guarantors of the Amended and
Restated Credit Facility over time. As this occurs, these subsidiaries will become subject
to the covenants of the Amended and Restated Credit Facility that apply to the Companys
restricted subsidiaries. Also, the Company is permitted to make investments in these
subsidiaries to the same extent that it is permitted to make investments in its other
restricted subsidiaries that have guaranteed the Amended and Restated Credit Facility.
    
    the Amended and Restated Credit Facility increases the Companys ability to make
investments in unrestricted subsidiaries (the unrestricted subsidiaries being ALC and its
subsidiaries unless and until they have been designated as restricted subsidiaries) such
that the Company and its restricted subsidiaries may have investments in unrestricted
subsidiaries outstanding from time to time up to the sum of the amount of investments in
unrestricted subsidiaries at June 30, 2005 plus $40 million.
    
    the Amended and Restated Credit Facility requires that ALCs debt in connection with
the $22.0 million of Revenue Bonds secured by ALC facilities located in the States of
Washington, Idaho and Ohio be repaid in full within 180 days after the closing of the
Amended and Restated Credit Facility. When that repayment occurs, ALC will become a
restricted subsidiary under the Amended and Restated Credit Facility.
    
    the Amended and Restated Credit Facility increases the Companys ability to make
restricted payments to permit annual dividends up to the lesser of (i) 50% of net income, or
(ii) $25 million plus the unused restricted payment amount for the previous fiscal year, or
(iii) $50 million.
 15




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##### Table of Contents



6.0% EHI Term Note due 2010
  16




---



##### Table of Contents



6.24% Red Mortgage Capital Note due 2014
  GE Capital Term Loan and Credit Facility due 2009
  DMG Mortgage Notes Payable due 2008
  Revenue Bonds
     17




---



##### Table of Contents



Capital Lease Obligations
  Oregon Trust Deed Notes
   HUD Insured Mortgages due 2036
  6.0% EI Term Note due 2010
  Mortgage Notes Payable
  18




---



##### Table of Contents



Industrial Development Revenue Bond due 2014
  10. Accounting for Derivative Instruments and Hedging Activities
 Objectives and Strategies
   Interest Rate Swap and Cap Agreements Entered into in April 2004 and Maturing in 2010 and 2014
    19




---



##### Table of Contents



Quantitative Disclosures
    11. Due to Shareholder and Affiliate
  September 30,
    
    
    December 31,Affiliate
    
    Purpose

    
    2005
    
    
    2004(in thousands)Receivable (payable)Current assets:Extendicare Holdings, Inc.
    
    Federal income taxes receivable
    
    $
    7,097
    
    
    $
    5,231Extendicare Holdings, Inc.
    
    Deferred federal income taxes
    
    
    12,344
    
    
    
    13,258Extendicare Inc.
    
    Working capital advances
    
    
    3⁄4
    
    
    
    7,69019,441
    
    
    
    26,179Current liabilities:Virtual Care Provider, Inc.
    
    Working capital advances
    
    
    (3,000
    )
    
    
    (3,000
    )The Northern Group, Inc.
    
    Intercompany operating expenses
    
    
    15
    
    
    
    19Laurier Indemnity Company,
Ltd.
    
    Intercompany insurance premium
    
    
    6
    
    
    
    3Extendicare Holdings, Inc.
    
    Working capital advances
    
    
    3
    
    
    
    3(2,976
    )
    
    
    (2,975
    )Long-term liabilities:Extendicare Holdings, Inc.
    
    Deferred federal income taxes
    
    
    (6,483
    )
    
    
    (1,853
    )Other:Extendicare Inc.
    
    Advances
    
    
    3⁄4
    
    
    
    (8,900
    )Extendicare Inc.
    
    Advances
    
    
    2,489
    
    
    
    1,218Extendicare Holdings, Inc.
    
    Advances
    
    
    (3,483
    )
    
    
    (3,483
    )Virtual Care Provider, Inc.
    
    Advances
    
    
    (3,582
    )
    
    
    (3,620
    )(4,576
    )
    
    
    (14,785
    )$
    5,406
    
    
    $
    6,566
  20




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##### Table of Contents



12. Loss (Gain) on Disposal of Assets and Impairment of Long-lived Assets
  Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Gain on exercise of Omnicare stock warrant
    
    $
    (9,158
    )
    
    $
    
    
    
    $
    (9,158
    )
    
    $
    Unrealized gain on trading securities
(Omnicare common stock)
    
    
    (112
    )
    
    
    
    
    
    
    (112
    )
    
    
    Gain on sale of MetLife common shares
    
    
    
    
    
    
    
    
    
    
    (630
    )
    
    
    Gain on sale of Maryland property
    
    
    
    
    
    
    
    
    
    
    (448
    )
    
    
    Completion of Divestiture Agreement with
Greystone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,872
    )Loss on write-off of Omnicare warrant
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    4,000Loss on repayment of notes due from Tandem
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266Loss on sale of Arkansas facilities
    
    
    
    
    
    
    573
    
    
    
    
    
    
    
    573Gain on sale of Omnicare shares to Extendicare
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (863
    )Impairment of nursing facility in Indiana
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,612$
    (9,270
    )
    
    $
    4,573
    
    
    $
    (10,348
    )
    
    $
    1,716
 a) Non-monetary exchange of Omnicare Warrant to Omnicare Shares and Cash
  b) MetLife shares
  c) Disposal of Maryland property
  d) 2004 Disposals and Impairments
  21




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##### Table of Contents



e) Reserves for Divested Operations
  Medicare,Medicaid and
    
    
    Resident andSupplier
    
    
    OtherClaims
    
    
    Claims
    
    
    Total(in thousands)Balance December 31, 2003
    
    $
    6,637
    
    
    $
    654
    
    
    $
    7,291Provisions (charges) (1)
    
    
    (3,198
    )
    
    
    
    
    
    
    (3,198
    )Cash Payments
    
    
    (1,410
    )
    
    
    (160
    )
    
    
    (1,570
    )Balance December 31, 2004
    
    
    2,029
    
    
    
    494
    
    
    
    2,523Cash Payments
    
    
    (1,003
    )
    
    
    
    
    
    
    (1,003
    )Balance September 30, 2005
    
    $
    1,026
    
    
    $
    494
    
    
    $
    1,520
 
 (1)
    
    Provisions (charges) for 2004 include a $3.2 million write-off of previously
accrued Medicare claims receivable relating to discontinued operations. 22




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##### Table of Contents



13. Loss on Refinancing and Retirement of Debt
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Loss on early retirement of Mortgage Note
(note 9)
    
    $
    
    
    
    $
    
    
    
    $
    140
    
    
    $
    Loss on early retirement of 2007 Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,280Loss on early retirement of Industrial
Development Revenue Bond(note 9)
    
    
    
    
    
    
    152
    
    
    
    135
    
    
    
    506Gain on termination of interest rate swap and cap
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,302
    )$
    
    
    
    $
    152
    
    
    $
    275
    
    
    $
    6,484
 14. Interest expense, net
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Interest expense
    
    $
    10,438
    
    
    $
    4,974
    
    
    $
    29,174
    
    
    $
    19,832Interest income
    
    
    (452
    )
    
    
    (188
    )
    
    
    (1,089
    )
    
    
    (4,013
    )$
    9,986
    
    
    $
    4,786
    
    
    $
    28,085
    
    
    $
    15,819
 15. Discontinued Operations
   23




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands)Revenues
    
    $
    5,016
    
    
    $
    6,339
    
    
    $
    15,930
    
    
    $
    24,441Costs and expenses (income):Operating
    
    
    7,347
    
    
    
    7,646
    
    
    
    19,416
    
    
    
    25,399Lease costs
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    15Depreciation and amortization
    
    
    259
    
    
    
    454
    
    
    
    1,045
    
    
    
    1,371Interest income
    
    
    (33
    )
    
    
    (36
    )
    
    
    (120
    )
    
    
    (100
    )Loss (gain) on disposal of assets
    
    
    (3,358
    )
    
    
    
    
    
    
    (3,358
    )
    
    
    Loss on impairment of long-lived assets
    
    
    2,061
    
    
    
    
    
    
    
    7,761
    
    
    
    6,279
    
    
    
    8,067
    
    
    
    24,750
    
    
    
    26,685Income (loss) from discontinued operations
before income taxes
    
    
    (1,263
    )
    
    
    (1,728
    )
    
    
    (8,820
    )
    
    
    (2,244
    )Income tax expense (benefit)
    
    
    (509
    )
    
    
    (649
    )
    
    
    (3,489
    )
    
    
    (843
    )Net income (loss) from discontinued operations
    
    $
    (754
    )
    
    $
    (1,079
    )
    
    $
    (5,331
    )
    
    $
    (1,401
    )
  (a) Lakeside Nursing Facility, Wisconsin
   24




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##### Table of Contents



(b) Closure and Disposition of Three Nursing Facilities in Minnesota
  (c) Sale of Florida Properties
  16. Lease Commitments
  Operating
    
    
    CapitalLeases
    
    
    Leases
    
    
    Total(in thousands)Year Ended December 31:2005
    
    $
    5,331
    
    
    $
    282
    
    
    $
    5,6132006
    
    
    18,905
    
    
    
    1,156
    
    
    
    20,0612007
    
    
    17,042
    
    
    
    1,185
    
    
    
    18,2272008
    
    
    17,179
    
    
    
    1,215
    
    
    
    18,3942009
    
    
    16,985
    
    
    
    11,557
    
    
    
    28,542After 2009
    
    
    82,076
    
    
    
    
    
    
    
    82,076Total minimum payments
    
    
    157,518
    
    
    
    15,395
    
    
    
    172,913Less imputed interest
    
    
    
    
    
    
    3,087
    
    
    
    3,087Net minimum lease payments
    
    $
    157,518
    
    
    $
    12,308
    
    
    $
    169,826
 25




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##### Table of Contents



17. Other Commitments and Contingencies
 Capital Expenditures
   Insurance and Self-insured Liabilities
  Litigation
   26




---



##### Table of Contents



Regulatory Risks
   Cash Flow Commitment to Lakeside Health
   Omnicare Preferred Provider Agreement
   27




---



##### Table of Contents



18. Uncertainties and Certain Significant Risks
 Revenues
   Interests in Unrelated Long-Term Care Providers
  Accrual for Self-Insured Liabilities
  28




---



##### Table of Contents



19. Comprehensive Income
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSept. 30, 2005
    
    
    Sept. 30, 2004
    
    
    Sept. 30, 2005
    
    
    Sept. 30, 2004(in thousands)NET INCOME
    
    $
    18,204
    
    
    $
    10,460
    
    
    $
    45,557
    
    
    $
    28,633OTHER COMPREHENSIVE INCOME (LOSS):Unrealized gain (loss) on investments, before tax
    
    
    
    
    
    
    850
    
    
    
    (570
    )
    
    
    (1,281
    )Gain on cash flow hedges, before tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167Other comprehensive income (loss), before tax
    
    
    
    
    
    
    850
    
    
    
    (570
    )
    
    
    (1,114
    )Income tax benefit (provision) related to items of
other comprehensive income
    
    
    
    
    
    
    (340
    )
    
    
    228
    
    
    
    446Other comprehensive income (loss), net of tax
    
    
    
    
    
    
    510
    
    
    
    (342
    )
    
    
    (668
    )COMPREHENSIVE INCOME
    
    $
    18,204
    
    
    $
    10,970
    
    
    $
    45,215
    
    
    $
    27,965
 29




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-Looking Statements
  
    
    Medicare and Medicaid payment levels and reimbursement methodologies and the application
of such methodologies and policies adopted by the government and its fiscal intermediaries;
    
    liabilities and claims asserted against us, such as resident care litigation, including
our exposure for punitive damage claims and increased insurance costs;
    
    national and local economic conditions, including their effect on the ability to hire and
retain qualified staff and employees and the associated costs;
    
    federal and state regulation of our business and change in such regulations, as well as
our compliance with such regulations;
    
    actions by our competitors;
    
    our ability to maintain and increase census levels; and
    
    the successful integration of Assisted Living Concepts, Inc. within our operations.
  30




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##### Table of Contents



Executive Overview
  
    
    provide quality, clinically-based services;
    
    strengthen both Medicare and total average daily census, or ADC;
    
    improve operating cash flow;
    
    expand our asset portfolio through acquisition or internal growth, and actively manage
our asset portfolio, including where appropriate, divesting facilities that fail to meet our
performance goals;
    
    expand non-government based revenue sources, thereby decreasing the level of risk and
reliance on government funding;
    
    diversify within the long-term care industry through growth of facilities under full
management or selected consulting agreements and rehabilitation clinics; and
    
    increase our operating efficiency.
    Revenues
  31




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##### Table of Contents



Nursing and Assisted Living Facilities.
 Percentage of Total Nursing and Assisted Living RevenuesFor Three Months Ended
    
    For Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Medicare
    
    
    27.3
    %
    
    
    30.3
    %
    
    
    28.8
    %
    
    
    31.2
    %Private and other
    
    
    27.7
    %
    
    
    20.8
    %
    
    
    26.7
    %
    
    
    21.0
    %Quality mix
    
    
    55.0
    %
    
    
    51.1
    %
    
    
    55.5
    %
    
    
    52.2
    %Medicaid
    
    
    45.0
    %
    
    
    48.9
    %
    
    
    44.5
    %
    
    
    47.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Nursing Facilities.
 Percentage of Total Nursing RevenuesFor Three Months Ended
    
    For Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Medicare
    
    
    33.9
    %
    
    
    31.7
    %
    
    
    35.2
    %
    
    
    32.7
    %Private and other
    
    
    15.6
    %
    
    
    17.6
    %
    
    
    15.4
    %
    
    
    17.7
    %Quality mix
    
    
    49.5
    %
    
    
    49.3
    %
    
    
    50.6
    %
    
    
    50.4
    %Medicaid
    
    
    50.5
    %
    
    
    50.7
    %
    
    
    49.4
    %
    
    
    49.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Assisted Living Facilities.
 Percentage of Total Assisted Living RevenuesFor Three Months Ended
    
    For Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Private and other
    
    
    77.8
    %
    
    
    91.5
    %
    
    
    78.3
    %
    
    
    92.0
    %Medicaid
    
    
    22.2
    %
    
    
    8.5
    %
    
    
    21.7
    %
    
    
    8.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Other Revenues.
 32




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##### Table of Contents



Legislative Actions Affecting Revenues
 Future Medicare Changes.
   Regulatory Environment Affecting Operations
  33




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##### Table of Contents



Significant Events and Developments
 Events of 2005
 Improvement in Medicare Census.
 Acquisition of ALC.
 (in thousands)ASSETS:Cash, net of cash used to finance the acquisition
    
    $
    (22,652
    )Accounts receivable
    
    
    3,003Other current assets
    
    
    8,308Total current assets
    
    
    (11,341
    )Property, plant and equipment
    
    
    284,223Resident relationships intangible
    
    
    6,357Goodwill
    
    
    2,529Other long-term assets
    
    
    6,016Total assets
    
    $
    287,784LIABILITIES:Current maturities of long-term debt
    
    $
    3,418Other current liabilities
    
    
    19,850Total current liabilities
    
    
    23,268Long-term debt:Long-term debt of ALC assumed
    
    
    141,046Proceeds from 6% from EHI Term Loan to finance acquisition
    
    
    55,000Proceeds from revolving credit facility to finance acquisition
    
    
    60,000Total long-term debt
    
    
    256,046Other long term liabilities
    
    
    8,470Total liabilities
    
    $
    287,784
 34




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##### Table of Contents



Amended and Restated Credit Facility.
 35




---



##### Table of Contents




    
    the credit extended to us under the Amended and Restated Credit Facility includes a
term loan for $86.0 million. The principal balance of the term loan is payable in equal
quarterly installments of $215,000 over the first four years of the Amended and Restated
Credit Facility, equal quarterly installments of $20.6 million over the first three quarters
of the last year of the Amended and Restated Credit Facility, and a final principal
installment of $20.6 million due on the maturity date.
    
    the revolving credit limit under the Amended and Restated Credit Facility reflects a
reduction by $41.0 million from the $155.0 million limit under the former Revolving Credit
Facility to $114.0 million under the Amended and Restated Credit Facility. Upon notice and
at the option of the participating lenders, we may increase the credit extended or available
under the Amended and Restated Credit Facility by up to $15.0 million. The increase may be
in the form of additional term loans or in the form of an increase in the revolving credit
limit.
    
    the maturity date of the Amended and Restated Credit Facility is July 31, 2010,
reflecting an extension of more than one year from the maturity date of the former Revolving
Credit Facility.
    
    the interest rate spreads over the Eurodollar rate or the base rate, as applicable,
have been reduced and fixed at 1.75% per annum for Eurodollar rate loans and 0.75% per annum
for base rate loans. Under the Revolving Credit Facility the interest rate spread ranged
from 2.50% per annum to 3.25% per annum for Eurodollar rate loans and from 1.50% per annum
to 2.25% per annum for base rate loans, subject, in each case, to adjustments based on our
senior leverage ratio.
    
    the Amended and Restated Credit Facility includes a $10.0 million swing line
commitment within the $114 million revolving credit limit.
    
    the financial covenants under the Amended and Restated Credit Facility include ALCs
debt and earnings, whereas the financial covenants under the Revolving Credit Facility did
not. The financial covenants are otherwise substantially the same as under the former
Revolving Credit Facility.
    
    the Amended and Restated Credit Facility includes procedures for ALC and its
subsidiaries to be designated as restricted subsidiaries and guarantors of the Amended and
Restated Credit Facility over time. As this occurs, these subsidiaries will become subject
to the covenants of the Amended and Restated Credit Facility that apply to our restricted
subsidiaries. Also, we are be permitted to make investments in these subsidiaries to the
same extent that it is permitted to make investments in its other restricted subsidiaries
that have guaranteed the Amended and Restated Credit Facility.
    
    the Amended and Restated Credit Facility increases the our ability to make
investments in unrestricted subsidiaries (the unrestricted subsidiaries being ALC and its
subsidiaries unless and until they have been designated as restricted subsidiaries) such
that we and our restricted subsidiaries may have investments in unrestricted subsidiaries
outstanding from time to time up to the sum of the amount of investments in unrestricted
subsidiaries at June 30, 2005 plus $40 million.
    
    the Amended and Restated Credit Facility requires that ALCs debt in connection with
the $22.0 million of Revenue Bonds secured by ALC facilities located in the States of
Washington, Idaho and Ohio be repaid in full within 180 days after the closing of the
Amended and Restated Credit Facility. When that repayment occurs, ALC will become a
restricted subsidiary under the Amended and Restated Credit Facility.
    
    the Amended and Restated Credit Facility increases our ability to make restricted
payments to permit annual dividends up to the lesser of (i) 50% of net income, or (ii) $25
million plus the unused restricted payment amount for the previous fiscal year, or (iii) $50
million.
 36




---



##### Table of Contents



Acquisitions and New Developments.
  Non-monetary exchange of Omnicare Warrant to Omnicare Shares and Cash.
 Medicare Revenues.
 37




---



##### Table of Contents



Medicaid Rates.
   Dispositions and Discontinued Operations.
 38




---



##### Table of Contents



Lakeside, Wisconsin.
 Nursing Facilities in Minnesota.
 Sale of Florida properties.
 Loan Repayments.
 39




---



##### Table of Contents



Amendment to Lease Agreement and Option to Purchase.
 Events prior to 2005
 Improvement in Medicare and Total Census.
 Acquisitions of Nursing Facilities.
 Construction Projects
 Tender Offer/Redemption of 2007 Notes and Sale and Issuance of 2014 Notes.
 Amendment and Restatement of Revolving Credit Facility.
 
    
    a two-year maturity extension to June 28, 2009;
    
    an additional $50.0 million of senior secured financing on a revolving basis,
resulting in total borrowing capacity of $155.0 million;
    
    an interest rate spread which ranges from the Eurodollar rate plus 2.50% per annum
to 3.25% per annum or the base rate plus 1.50% per annum to 2.25% per annum, subject, in
each case, to adjustments based on our senior leverage ratio;
    
    a commitment fee of 0.50% per annum on the undrawn capacity regardless of
utilization;
    
    changes to the collateral securing the facility to permit us to substitute certain
assets with other assets.
  Prepayment of Tandem Notes Receivable.
 40




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##### Table of Contents



Completion of Greystone Divestiture Agreement.
 Settlement of Medicare Receivable Issues.
 Divestitures.
 Income Tax Benefits.
 Key Performance Indicators
  Census
  Average Daily Census
  Occupancy Percentage
  Quality Mix
  Average Revenue Rate by Payor Source
  41




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##### Table of Contents



EBITDA and EBITDA Percentage
  Review of Key Performance Indicators
  42




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##### Table of Contents



Nursing Facilities  ADC and Quality Mix
  Three Months
    
    
    Nine MonthsAll Nursing Facilities
    
    Ended September 30,
    
    
    Ended September 30,Continuing Operations
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Medicare
    
    
    2,256
    
    
    
    2,074
    
    
    
    2,379
    
    
    
    2,109Private and other
    
    
    1,988
    
    
    
    2,148
    
    
    
    1,976
    
    
    
    2,124Quality Mix
    
    
    4,244
    
    
    
    4,222
    
    
    
    4,355
    
    
    
    4,233Medicaid
    
    
    8,537
    
    
    
    8,485
    
    
    
    8,420
    
    
    
    8,286Total
    
    
    12,781
    
    
    
    12,707
    
    
    
    12,775
    
    
    
    12,519
  Three Months Ended September 30,2005
    
    
    2004
    
    
    % ChangeNursing Facilities
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    2005 toSame-Facility
    
    ADC
    
    
    Total
    
    
    ADC
    
    
    Total
    
    
    2004Medicare
    
    
    2,210
    
    
    
    17.7
    %
    
    
    2,046
    
    
    
    16.4
    %
    
    
    8.0
    %Private and other.
    
    
    1,942
    
    
    
    15.6
    %
    
    
    2,102
    
    
    
    16.9
    %
    
    
    (7.6
    %)Quality Mix
    
    
    4,152
    
    
    
    33.3
    %
    
    
    4,148
    
    
    
    33.3
    %
    
    
    0.1
    %Medicaid
    
    
    8,315
    
    
    
    66.7
    %
    
    
    8,302
    
    
    
    66.7
    %
    
    
    0.2
    %Total
    
    
    12,467
    
    
    
    100.0
    %
    
    
    12,450
    
    
    
    100.0
    %
    
    
    0.1
    %
 Nine Months Ended September 30,2005
    
    
    2004
    
    
    % Change% of
    
    
    
    
    
    
    % of
    
    
    2005 toADC
    
    
    Total
    
    
    ADC
    
    
    Total
    
    
    2004Medicare
    
    
    2,340
    
    
    
    18.7
    %
    
    
    2,087
    
    
    
    16.9
    %
    
    
    12.1
    %Private and other
    
    
    1,948
    
    
    
    15.5
    %
    
    
    2,080
    
    
    
    16.8
    %
    
    
    (6.3
    %)Quality Mix
    
    
    4,288
    
    
    
    34.2
    %
    
    
    4,167
    
    
    
    33.7
    %
    
    
    2.9
    %Medicaid
    
    
    8,239
    
    
    
    65.8
    %
    
    
    8,185
    
    
    
    66.3
    %
    
    
    0.7
    %Total
    
    
    12,527
    
    
    
    100.0
    %
    
    
    12,352
    
    
    
    100.0
    %
    
    
    1.4
    %
   43




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##### Table of Contents



Assisted Living Facilities  ADC and Quality Mix
  Three Months
    
    
    Nine MonthsAll Assisted Living
    
    Ended September 30,
    
    
    Ended September 30,Facilities
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Private and other
    
    
    5,235
    
    
    
    1,263
    
    
    
    4,832
    
    
    
    1,310Medicaid
    
    
    2,236
    
    
    
    162
    
    
    
    1,956
    
    
    
    159Total
    
    
    7,471
    
    
    
    1,425
    
    
    
    6,788
    
    
    
    1,469
   Three Months Ended September 30,2005
    
    
    2004
    
    
    % ChangeAssisted Living
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    2005 toSame-Facility
    
    ADC
    
    
    Total
    
    
    ADC
    
    
    Total
    
    
    2004Private and other
    
    
    1,171
    
    
    
    86.3
    %
    
    
    1,133
    
    
    
    87.5
    %
    
    
    3.4
    %Medicaid
    
    
    186
    
    
    
    13.7
    %
    
    
    162
    
    
    
    12.5
    %
    
    
    14.8
    %Total
    
    
    1,357
    
    
    
    100.0
    %
    
    
    1,295
    
    
    
    100.0
    %
    
    
    4.8
    %
 Nine Months Ended September 30,2005
    
    
    2004
    
    
    % Change% of
    
    
    
    
    
    
    % of
    
    
    2005 toADC
    
    
    Total
    
    
    ADC
    
    
    Total
    
    
    2004Private and other
    
    
    1,158
    
    
    
    86.5
    %
    
    
    1,156
    
    
    
    87.9
    %
    
    
    (0.2
    %)Medicaid
    
    
    180
    
    
    
    13.5
    %
    
    
    159
    
    
    
    12.1
    %
    
    
    13.2
    %Total
    
    
    1,338
    
    
    
    100.0
    %
    
    
    1,315
    
    
    
    100.0
    %
    
    
    1.7
    %
 44




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##### Table of Contents



All Nursing and Assisted Living Facilities  Occupancy and Number of Facilities Under Operation
  All Facilities:
  Three Months Ended September 30
    
    Occupancy
    
    
    
    
    
    
    
    
    
    
    Operational ResidentAll Facilities
    
    Percentage
    
    
    ADC
    
    
    CapacityContinuing Operations
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Nursing
    
    
    92.6
    %
    
    
    92.3
    %
    
    
    12,781
    
    
    
    12,707
    
    
    
    13,810
    
    
    
    13,764Assisted Living:Mature facilities
    
    
    85.3
    %
    
    
    84.5
    %
    
    
    1,076
    
    
    
    1,174
    
    
    
    1,261
    
    
    
    1,390Developmental facilities
    
    
    63.3
    %
    
    
    74.6
    %
    
    
    311
    
    
    
    251
    
    
    
    491
    
    
    
    336ALC acquisition (all mature)
    
    
    88.8
    %
    
    
    
    
    
    
    6,084
    
    
    
    
    
    
    
    6,855
    
    
    
    Total Assisted Living
    
    
    86.8
    %
    
    
    82.5
    %
    
    
    7,471
    
    
    
    1,425
    
    
    
    8,607
    
    
    
    1,726Nursing and Assisted Living
    
    
    90.3
    %
    
    
    91.2
    %
    
    
    20,252
    
    
    
    14,132
    
    
    
    22,417
    
    
    
    15,490
   Nine Months Ended September 30
    
    Occupancy
    
    
    
    
    
    
    
    
    
    
    Operational ResidentAll Facilities
    
    Percentage
    
    
    ADC
    
    
    CapacityContinuing Operations
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Nursing
    
    
    92.9
    %
    
    
    91.8
    %
    
    
    12,775
    
    
    
    12,519
    
    
    
    13,758
    
    
    
    13,638Assisted Living:Mature facilities
    
    
    85.3
    %
    
    
    85.5
    %
    
    
    1,077
    
    
    
    1,224
    
    
    
    1,262
    
    
    
    1,432Developmental facilities
    
    
    69.1
    %
    
    
    81.4
    %
    
    
    288
    
    
    
    245
    
    
    
    417
    
    
    
    301ALC acquisition (all mature)
    
    
    89.3
    %
    
    
    
    
    
    
    5,423
    
    
    
    
    
    
    
    6,074
    
    
    
    Total Assisted Living
    
    
    87.6
    %
    
    
    84.8
    %
    
    
    6,788
    
    
    
    1,469
    
    
    
    7,753
    
    
    
    1,733Nursing and Assisted Living
    
    
    90.9
    %
    
    
    91.0
    %
    
    
    19,563
    
    
    
    13,988
    
    
    
    21,511
    
    
    
    15,371
    45




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##### Table of Contents



Same Facility Basis:
  Occupancy
    
    
    
    
    
    
    
    
    
    
    Operational ResidentThree Months Ended September 30
    
    Percentage
    
    
    ADC
    
    
    CapacitySame-Facility Basis
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Nursing
    
    
    92.8
    %
    
    
    92.6
    %
    
    
    12,467
    
    
    
    12,450
    
    
    
    13,437
    
    
    
    13,442Assisted Living:Mature facilities
    
    
    85.3
    %
    
    
    83.5
    %
    
    
    1,076
    
    
    
    1,059
    
    
    
    1,261
    
    
    
    1,268Developmental facilities
    
    
    75.7
    %
    
    
    80.0
    %
    
    
    281
    
    
    
    236
    
    
    
    371
    
    
    
    296Total Assisted Living
    
    
    83.1
    %
    
    
    82.8
    %
    
    
    1,357
    
    
    
    1,295
    
    
    
    1,632
    
    
    
    1,564Nursing and Assisted Living.
    
    
    91.7
    %
    
    
    91.6
    %
    
    
    13,824
    
    
    
    13,745
    
    
    
    15,069
    
    
    
    15,006
  Occupancy
    
    
    
    
    
    
    
    
    
    
    Operational ResidentNine Months Ended September 30
    
    Percentage
    
    
    ADC
    
    
    CapacitySame-Facility Basis
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Nursing
    
    
    93.1
    %
    
    
    91.9
    %
    
    
    12,527
    
    
    
    12,352
    
    
    
    13,455
    
    
    
    13,438Assisted Living:Mature facilities
    
    
    85.3
    %
    
    
    84.8
    %
    
    
    1,077
    
    
    
    1,077
    
    
    
    1,262
    
    
    
    1,270Developmental facilities
    
    
    77.0
    %
    
    
    85.3
    %
    
    
    261
    
    
    
    238
    
    
    
    340
    
    
    
    279Total Assisted Living
    
    
    83.5
    %
    
    
    84.9
    %
    
    
    1,338
    
    
    
    1,315
    
    
    
    1,602
    
    
    
    1,549Nursing and Assisted Living
    
    
    92.1
    %
    
    
    91.1
    %
    
    
    13,865
    
    
    
    13,667
    
    
    
    15,057
    
    
    
    14,987
  46




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##### Table of Contents



Facilities Under Operation and Percent Ownership:
  As of
    
    
    As ofSeptember 30,
    
    
    December 31,2005
    
    
    2004Number of facilities under operation:Nursing
    
    
    141
    
    
    
    141Assisted Living
    
    
    211
    
    
    
    32Total
    
    
    352
    
    
    
    173Number of facilities owned:Nursing
    
    
    132
    
    
    
    132Assisted Living
    
    
    155
    
    
    
    31Total
    
    
    287
    
    
    
    163Number of facilities under capital leases:Assisted Living
    
    
    5
    
    
    
    Percent of facilities:Owned
    
    
    81.5
    %
    
    
    94.2
    %Under capital leases
    
    
    1.4
    %
    
    
    Under operating leases
    
    
    17.1
    %
    
    
    5.8
    %100.0
    %
    
    
    100.0
    %
  Nursing Facilities  Average Revenue per Resident Day by Payor Source
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,All Nursing Facilities
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangeMedicare (Part A and Part B)
    
    $
    379.06
    
    
    $
    356.66
    
    
    
    6.3
    %
    
    $
    373.52
    
    
    $
    354.56
    
    
    
    5.3
    %Private and other
    
    $
    196.80
    
    
    $
    191.54
    
    
    
    2.7
    %
    
    $
    197.29
    
    
    $
    190.50
    
    
    
    3.6
    %Medicaid
    
    $
    148.52
    
    
    $
    139.60
    
    
    
    6.4
    %
    
    $
    148.40
    
    
    $
    138.03
    
    
    
    7.5
    %Total
    
    $
    196.72
    
    
    $
    183.81
    
    
    
    7.0
    %
    
    $
    197.89
    
    
    $
    183.41
    
    
    
    7.9
    %Medicare Part A only
    
    $
    344.65
    
    
    $
    322.99
    
    
    
    6.7
    %
    
    $
    342.17
    
    
    $
    323.10
    
    
    
    5.9
    %
  47




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##### Table of Contents



Assisted Living Facilities  Average Revenue per Resident Day by Payor Source
  Three Months
    
    
    Nine MonthsAll Assisted Living
    
    Ended September 30,
    
    
    Ended September 30,Facilities
    
    2005
    
    
    2004
    
    
    Change
    
    
    2005
    
    
    2004
    
    
    ChangePrivate and other
    
    $
    91.60
    
    
    $
    75.34
    
    
    
    21.6
    %
    
    $
    89.79
    
    
    $
    74.69
    
    
    
    20.2
    %Medicaid
    
    $
    61.26
    
    
    $
    54.19
    
    
    
    13.0
    %
    
    $
    61.64
    
    
    $
    53.32
    
    
    
    15.6
    %Total
    
    $
    82.52
    
    
    $
    72.93
    
    
    
    13.1
    %
    
    $
    81.68
    
    
    $
    72.38
    
    
    
    12.8
    %
  EBITDA and EBITDA Percentage
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)Income before income taxes
    
    $
    31,766
    
    
    $
    18,477
    
    
    $
    84,197
    
    
    $
    48,102Add (deduct):Depreciation and amortization
    
    
    11,696
    
    
    
    8,351
    
    
    
    33,518
    
    
    
    24,946Interest expense, net
    
    
    9,986
    
    
    
    4,786
    
    
    
    28,085
    
    
    
    15,819Valuation adjustment on interest rate caps
    
    
    (129
    )
    
    
    2,030
    
    
    
    2,108
    
    
    
    6,423Loss (gain) on disposal of assets and
impairment of long-lived assets
    
    
    (9,270
    )
    
    
    4,573
    
    
    
    (10,348
    )
    
    
    1,716Loss on refinancing and retirement of debt
    
    
    
    
    
    
    152
    
    
    
    275
    
    
    
    6,484EBITDA
    
    $
    44,049
    
    
    $
    38,369
    
    
    $
    137,835
    
    
    $
    103,490
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)EBITDA
    
    $
    44,049
    
    
    $
    38,369
    
    
    $
    137,835
    
    
    $
    103,490Total Revenues
    
    $
    295,404
    
    
    $
    236,090
    
    
    $
    890,985
    
    
    $
    682,817EBITDA as percentage of total revenues
    
    
    14.9
    %
    
    
    16.3
    %
    
    
    15.5
    %
    
    
    15.2
    %
  48




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##### Table of Contents



Results from Operations
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004RevenuesNursing and assisted living facilities
    
    
    97.6
    %
    
    
    97.0
    %
    
    
    97.6
    %
    
    
    96.9
    %Outpatient therapy
    
    
    1.0
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    1.2Other
    
    
    1.4
    
    
    
    1.8
    
    
    
    1.4
    
    
    
    1.9100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Operating and general and administrative
costs
    
    
    83.1
    
    
    
    82.8
    
    
    
    82.7
    
    
    
    83.9Lease costs, depreciation and
amortization
    
    
    5.9
    
    
    
    4.5
    
    
    
    5.6
    
    
    
    4.6Interest expense, net
    
    
    3.4
    
    
    
    2.0
    
    
    
    3.2
    
    
    
    2.3Valuation adjustment on interest rate cap
    
    
    (0.0
    )
    
    
    0.9
    
    
    
    0.2
    
    
    
    0.9Loss (gain) on disposal of assets and
impairment of long-lived assets
    
    
    (3.1
    )
    
    
    1.9
    
    
    
    (1.1
    )
    
    
    0.3Loss on refinancing and retirement of
debt
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.0
    
    
    
    1.0Income before income taxes
    
    
    10.7
    
    
    
    7.8
    
    
    
    9.4
    
    
    
    7.0Income tax expense
    
    
    4.3
    
    
    
    2.9
    
    
    
    3.7
    
    
    
    2.6Net income from continuing operations
    
    
    6.4
    
    
    
    4.9
    
    
    
    5.7
    
    
    
    4.4Income (loss) from discontinued
operations before income
taxes
    
    
    (0.4
    )
    
    
    (0.8
    )
    
    
    (1.0
    )
    
    
    (0.3
    )Income tax benefit (expense) on
discontinued operations
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (0.4
    )
    
    
    (0.1
    )Net income (loss) from discontinued
operations
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    (0.6
    )
    
    
    (0.2
    )Net income
    
    
    6.2
    %
    
    
    4.4
    %
    
    
    5.1
    %
    
    
    4.2
    %
 2005 September Quarter Compared with 2004 September Quarter
 Revenues
  49




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##### Table of Contents



(in Millions) Indiana and Pennsylvania Medicaid revenues in the 2005 September quarter
attributable to the approval of the state plan amendments and waivers (the related
increase in state assessment expense of $3.4 million is reflected in operating expenses
below)
    
    $
    4.9 Medicare census increasing from 16.4% of total in the 2004 September quarter to 17.7% in
the 2005 September quarter
    
    
    2.5 Medicare revenues due to the 2.8% Medicare Part A rate increase effective October 1, 2004
    
    
    1.8 Medicare revenues due to the improvement in RUGs mix and other factors
    
    
    2.5 Medicaid, private and other nursing rates
    
    
    2.9 assisted living revenues
    
    
    0.815.4Adjustments relating to prior periods: Indiana Medicaid revenues in the 2005 September quarter attributable to the approval of
the state plan amendment and waiver for the period July 1, 2003 through December 31, 2004
    
    
    1.8 Contractual allowance recorded in the 2005 September quarter relating to the recovery of
non-reimbursable Part A co-insurance, based upon audit results up to 2003
    
    
    (2.2
    ) Other prior year settlement adjustments recognized in the 2004 September quarter as
compared to none in the 2005 September quarter
    
    
    (2.0
    ) Medicaid revenues recognized in 2004 September quarter relating to prior 2004 quarters
    
    
    (2.6
    ) Medicaid revenues recognized in 2005 September quarter relating to prior 2005 quarters
    
    
    0.5Total increase in revenues from same facility nursing and assisted living facilities
    
    $
    10.9
 Operating and General and Administrative Costs
  (in Millions) wages, benefits and contracted staffing, which included an average
wage rate increase of 4.3% in nursing home operations
    
    $
    7.4 state assessment taxes, primarily in Indiana and Pennsylvania for 2005
September quarter attributable to the approval of the state plan amendments
and waivers
    
    
    3.6 drug expense due to higher Medicare mix, resident acuity and drug prices
    
    
    1.3 medical equipment leases and supply costs
    
    
    1.3 professional fees
    
    
    1.3 other operating and administrative expenses
    
    
    1.9Total increase in same facility operating and general and administrative costs
    
    $
    16.8
 50




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##### Table of Contents



Lease Costs, Depreciation and Amortization
  Interest Expense, Net
   Valuation Adjustment on Interest Rate Caps
  Loss (Gain) on Disposal of Assets and Impairment of Long-Lived Assets
   Loss on Refinancing and Retirement of Debt
   Income Taxes
  51




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##### Table of Contents



Income from Continuing Operations
  Loss from Discontinued Operations
  Net Income
  Related Party Transactions
   Nine Months Ended September 30, 2005 Compared with Nine Months Ended September 30, 2004
 Revenues
   52




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##### Table of Contents



(in Millions) Indiana and Pennsylvania Medicaid revenues attributable to the approval of the
state plan amendments and waivers (the related increase in state assessment expense of
$10.2 million is reflected in operating expenses below)
    
    $
    14.5 Medicare census increasing from 16.9% of total in the 2004 to 18.7% in the 2005
    
    
    11.6 average daily nursing Medicaid rates, in states other than Indiana and Pennsylvania
    
    
    8.4 Medicare revenues due to the improvement in RUGs mix and other factors
    
    
    6.5 total census increasing from 12,352 in the 2004 to 12,527 in the 2005
    
    
    6.5 Medicare revenues due to the 2.8% Medicare Part A rate increase effective October 1, 2004
    
    
    5.8 an increase in private and other nursing rates
    
    
    3.6 nursing ancillary revenues
    
    
    1.5 nursing revenues due to one less day in 2005 as compared to 2004
    
    
    (2.3
    ) an increase in assisted living revenues
    
    
    1.257.3Adjustments relating to prior years: Indiana and Pennsylvania Medicaid revenues in the 2005 September YTD period
attributable to the approval of the state plan amendments and waivers for the period July
1, 2003 through December 31, 2004 (the related increase in state assessment expense of
$19.6 million is reflected in operating expenses below)
    
    
    28.5 Contractual allowance recorded in the 2005 September YTD period relating to the recovery
of non-reimbursable Part Aco-insurance, based upon audit results up to 2003
    
    
    (2.2
    ) Other prior year settlement adjustments in the 2005 September YTD period as compared to
the 2004 September YTD period
    
    
    (2.7
    )Total increase in revenues from same facility nursing and assisted living facilities
    
    $
    80.9
 Operating and General and Administrative Costs
  (in Millions) wages, benefits and contracted staffing, which included an average
wage rate increase of 3.9% in nursing home operations
    
    $
    29.5 state assessment taxes in Indiana and Pennsylvania for 2005 September YTD
period attributable to the approval of the state plan amendments and waivers
    
    
    10.2 other state assessments and bed taxes
    
    
    2.0 drug expense due to higher resident census, resident acuity and drug prices
    
    
    4.0 medical equipment lease, food and supplies expense
    
    
    3.3 repairs and maintenance, utilities and telephone
    
    
    2.2 professional fees, fines and penalties
    
    
    2.3 other operating and administrative expenses
    
    
    2.956.4Adjustment relating to prior year: state assessment taxes in Indiana and Pennsylvania for the period July 1,
2003 through December 31, 2004 due to final approval of the state plan amendments and waivers
    
    
    19.6Total increase in same facility operating and general and administrative costs
    
    $
    76.0
 53




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##### Table of Contents



Lease Costs, Depreciation and Amortization
  Interest Expense, Net
   Valuation Adjustment on Interest Rate Caps
  Loss (Gain) on Disposal of Assets and Impairment of Long-Lived Assets
   54




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##### Table of Contents



Loss on Refinancing and Retirement of Debt
   Income Taxes
  Net Income from Continuing Operations
  Loss from Discontinued Operations
  Net Income
  Related Party Transactions
   55




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##### Table of Contents



September 30,
    
    
    December 31,Affiliate
    
    Purpose
    
    
    2005
    
    
    2004(in thousands)Receivable (payable)Current assets:Extendicare Holdings, Inc.
    
    Federal income taxes receivable
    
    $
    7,097
    
    
    $
    5,231Extendicare Holdings, Inc.
    
    Deferred federal income taxes
    
    
    12,344
    
    
    
    13,258Extendicare Inc.
    
    Working capital advances
    
    
    
    
    
    
    7,69019,441
    
    
    
    26,179Current liabilities:Virtual Care Provider, Inc.
    
    Working capital advances
    
    
    (3,000
    )
    
    
    (3,000
    )The Northern Group, Inc.
    
    Intercompany operating expenses
    
    
    15
    
    
    
    19Laurier Indemnity Company
    
    Intercompany insurance premium
    
    
    6
    
    
    
    3Extendicare Holdings, Inc.
    
    Working capital advances
    
    
    3
    
    
    
    3(2,976
    )
    
    
    (2,975
    )Long-term liabilities:Extendicare Holdings, Inc.
    
    Deferred federal income taxes
    
    
    (6,483
    )
    
    
    (1,853
    )Other:Extendicare Inc.
    
    Advances
    
    
    
    
    
    
    (8,900
    )Extendicare Inc.
    
    Advances
    
    
    2,489
    
    
    
    1,218Extendicare Holdings, Inc.
    
    Advances
    
    
    (3,483
    )
    
    
    (3,483
    )Virtual Care Provider, Inc.
    
    Advances
    
    
    (3,582
    )
    
    
    (3,620
    )(4,576
    )
    
    
    (14,785
    )$
    5,406
    
    
    $
    6,566
   56




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##### Table of Contents



Liquidity and Capital Resources
 Sources and Uses of Cash
  Nine MonthsEnded September 30,2005
    
    2004(in thousands)Cash provided by operating activities
    
    $
    75,678
    
    
    $
    66,792Cash provided by (used in) investing activities
    
    
    (166,752
    )
    
    
    4,150Cash provided by (used in) financing activities
    
    
    85,343
    
    
    
    (90,737
    )Decrease in cash and cash equivalents
    
    
    (5,731
    )
    
    
    (19,795
    )
     57




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##### Table of Contents



58




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##### Table of Contents



Debt Instruments
 Summary of Long-term Debt
  September 30,
    
    
    December 312005
    
    
    2004(in thousands)9.50% Senior Notes due 2010
    
    $
    149,745
    
    
    $
    149,7146.875% Senior Subordinated Notes due 2014
    
    
    122,195
    
    
    
    122,022Term Loan maturing through 2010, at variable interest rates
    
    
    85,785
    
    
    
    6.00% EHI Term Note due 2010
    
    
    55,000
    
    
    
    6.24% Red Mortgage Capital Note due 2014
    
    
    36,698
    
    
    
    DMG Mortgage notes payable, interest rates ranging from 7.58%
to 8.65%, due 2008
    
    
    27,542
    
    
    
    Revenue Bonds, at variable interest rates, maturing through 2018
    
    
    21,150
    
    
    
    Capital lease obligations, interest rates ranging from 2.84% to
13.54%, maturing through 2009
    
    
    12,309
    
    
    
    11Oregon Trust Deed Notes, interest rates ranging from 0.25% to
10.90%, maturing from 2020 through 2026
    
    
    9,657
    
    
    
    HUD Insured Mortgages, interest rates ranging from 7.40% to
7.55%, due 2036
    
    
    7,691
    
    
    
    6.00% EI Term Note due 2010
    
    
    8,900
    
    
    
    Other mortgage notes payable, interest rates ranging from 3.0%
to 7.25%, maturing through 2009
    
    
    4,950
    
    
    
    9,730Industrial Development Revenue Bond due 2014
    
    
    
    
    
    
    9,5006.25% Industrial Development Revenue Bond, maturing 2008
    
    
    955
    
    
    
    955Long-term debt before current maturities
    
    
    542,577
    
    
    
    291,932Less current maturities
    
    
    24,378
    
    
    
    1,071Total long-term debt
    
    $
    518,199
    
    
    $
    290,861
    9.50% Senior Notes due 2010
  59




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##### Table of Contents



Year
    
    Redemption Price2006
    
    
    104.750
    %2007
    
    
    102.375
    %2008 and thereafter
    
    
    100.000
    %
  6.875% Senior Subordinated Notes due 2014
 .
  60




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##### Table of Contents



Year
    
    Redemption Price2009
    
    
    103.438
    %2010
    
    
    102.292
    %2011
    
    
    101.146
    %2012 and thereafter
    
    
    100.000
    %
 Revolving Credit Facility
      61




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##### Table of Contents



6.0% EHI Term Note due 2010
  6.24% Red Mortgage Capital Note due 2014
  GE Capital Term Loan and Credit Facility due 2009
  DMG Mortgage Notes Payable due 2008
  Revenue Bonds
   62




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##### Table of Contents



Capital Lease Obligations
   Oregon Trust Deed Notes
   HUD Insured Mortgages due 2036
  63




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##### Table of Contents



6.0% EI Term Note due 2010
  Mortgage Notes Payable
  Industrial Development Revenue Bond due 2014
  Credit Ratings
  
    
    Moodys Investors Service assigned a B2 rating to the 2010 Senior Notes.
    
    S&P assigned a B- rating to the 2014 Notes.
    
    S&P assigned a BB- rating to the Revolving Credit Facility.
 Interest Rate Swap and Cap Agreements
     64




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##### Table of Contents



Letters of Credit
  Off Balance Sheet Arrangements
  Cash Management
  Future Liquidity and Capital Resources
   65




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##### Table of Contents



Contractual Obligations
  Payments Due By YearAfterTotal
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2009(dollars in thousands)Long-term debt
    
    $
    542,577
    
    
    $
    22,282
    
    
    $
    3,580
    
    
    $
    6,646
    
    
    $
    26,939
    
    
    $
    12,091
    
    
    $
    471,039Operating lease commitments
    
    
    157,518
    
    
    
    5,331
    
    
    
    18,905
    
    
    
    17,042
    
    
    
    17,179
    
    
    
    16,985
    
    
    
    82,076Total
    
    $
    700,095
    
    
    $
    27,613
    
    
    $
    22,485
    
    
    $
    23,688
    
    
    $
    44,118
    
    
    $
    29,076
    
    
    $
    553,115
  Critical Accounting Policies
  66




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Qualitative Disclosures
     Quantitative Disclosures
  Maturity Date through December 31,EstimatedFair Value ofLiability2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Total
    
    (Asset)(dollars in thousands)LONG-TERM DEBT:Fixed Rate
    
    $
    1,071
    
    
    $
    3,291
    
    
    $
    6,257
    
    
    $
    26,824
    
    
    $
    12,091
    
    
    $
    385,254
    
    
    $
    434,788
    
    
    $
    449,983Average Interest Rate
    
    
    5.07
    %
    
    
    5.63
    %
    
    
    6.37
    %
    
    
    4.84
    %
    
    
    6.27
    %
    
    
    7.68
    %
    
    
    7.42
    %Variable Rate
    
    $
    21,211
    
    
    $
    290
    
    
    $
    389
    
    
    $
    114
    
    
    $
    
    
    
    $
    85,785
    
    
    $
    107,789
    
    
    $
    106,935Average Interest Rate
    
    
    2.63
    %
    
    
    4.94
    %
    
    
    4.94
    %
    
    
    4.94
    %
    
    
    N/A
    
    
    
    5.49
    %
    
    
    4.94
    %INTEREST RATE SWAPS:(fixed to variable)Notional Amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    275,000
    
    
    $
    275,000
    
    
    $
    (2,227
    )Average Pay Rate (variable rate)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.68
    %
    
    
    7.68
    %Average Receive Rate (fixed rate)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.31
    %
    
    
    8.31
    %INTEREST RATE CAPS:Notional Amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    150,000
    
    
    $
    150,000
    
    
    $
    (381
    )Notional Amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    125,000
    
    
    $
    125,000
    
    
    $
    6,034
  67




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls Over Financial Reporting
  68




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##### Table of Contents



PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
  69




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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.
 
 SIGNATURES
  EXTENDICARE HEALTH SERVICES, INC.Date:
November 10, 2005
    
    
    By:

    /s/ Richard L. BertrandRichard L. BertrandSenior Vice President, Chief FinancialOfficer and Treasurer and Director(Principal Accounting Officer)
 70




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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.
 
 EXHIBIT INDEX
 4.1
    
    Third Amended And Restated Credit Agreement, dated as of August 4, 2005, among
Extendicare Holdings, Inc., Extendicare Health Services, Inc., as Borrower,
the several lenders from time to time parties thereto, Lehman Brothers Inc.,
as Arranger, U.S. Bank, National Association, as Syndication Agent, General
Electric Capital Corporation and LaSalle Bank National Association, as
Co-Documentation Agents and Lehman Commercial Paper Inc., as Administrative
Agent (Incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K dated August 4, 2005).31.1
    
    Certifications of Chairman of the Board and Chief Executive Officer.31.2
    
    Certifications of Senior Vice President, Chief Financial Officer and Treasurer.32
    
    Written Statement of Chairman of the Board and Chief Executive Officer and
Senior Vice President, Chief Financial Officer and Treasurer pursuant to 18
U.S.C. Section 1350.
 71