##### 



Exhibit 99.2




---



##### 



Financial
Highlights
 (thousands of dollars unless otherwise noted)
    
    2005
    
    
    

    2004
    
    
    
    2003Revenue
    
    
    1,971,768
    
    
    
    1,708,122
    
    
    
    1,671,344EBITDA(1)
    
    
    267,345
    
    
    
    229,920
    
    
    
    184,897Earnings from continuing health care operations before
undernoted(1)
    
    
    93,138
    
    
    
    86,782
    
    
    
    41,247Valuation adjustment on interest rate caps, net of income tax
    
    
    (1,366
    )
    
    
    (6,396
    )
    
    
    Gain (loss) from asset disposals and other items, net of income tax
    
    
    6,565
    
    
    
    7,560
    
    
    
    905Prior year tax benefit
    
    
    
    
    
    
    38,968
    
    
    
    Earnings from continuing health care operations
    
    
    98,337
    
    
    
    126,914
    
    
    
    42,152Share of equity accounted earnings
    
    
    3,928
    
    
    
    9,375
    
    
    
    18,884Earnings from continuing operations
    
    
    102,265
    
    
    
    136,289
    
    
    
    61,036Loss from discontinued operations, net of income taxes
    
    
    (7,160
    )
    
    
    (11,088
    )
    
    
    (362
    )Net earnings
    
    
    95,105
    
    
    
    125,201
    
    
    
    60,674Components of Diluted Earnings (Loss) per Share ($)Continuing health care operations before undernoted and after
preferred share dividends
    
    
    1.33
    
    
    
    1.23
    
    
    
    0.58Valuation adjustment on interest rate caps
    
    
    (0.02
    )
    
    
    (0.09
    )
    
    
    Gain from asset disposals, impairment and other items
    
    
    0.09
    
    
    
    0.10
    
    
    
    0.01Prior year tax benefit
    
    
    
    
    
    
    0.56
    
    
    
    Earnings from continuing health care operations
    
    
    1.40
    
    
    
    1.80
    
    
    
    0.59Share of equity accounted earnings
    
    
    0.06
    
    
    
    0.14
    
    
    
    0.27Earnings from continuing operations
    
    
    1.46
    
    
    
    1.94
    
    
    
    0.86Loss from discontinued operations, net of income taxes
    
    
    (0.10
    )
    
    
    (0.16
    )
    
    
    Net earnings
    
    
    1.36
    
    
    
    1.78
    
    
    
    0.86Cash provided by operations
    
    
    136,177
    
    
    
    223,962
    
    
    
    100,679Property and equipment capital expenditures
    
    
    81,212
    
    
    
    69,122
    
    
    
    64,347Acquisition expenditures
    
    
    190,527
    
    
    
    8,750
    
    
    
    5,346Total assets
    
    
    1,698,094
    
    
    
    1,426,331
    
    
    
    1,593,417Shareholders equity
    
    
    497,306
    
    
    
    456,987
    
    
    
    356,433Book value per share
    
    
    7.04
    
    
    
    6.36
    
    
    
    4.90Number of Subordinate Voting Shares and Multiple Voting Shares
purchased for cancellation
    
    
    1,505,900
    
    
    
    463,800
    
    
    
    1,540,700
 (1)
    
    Refer to discussion of non-GAAP measures on page 25.
 Extendicare 2005 Annual Report
    
    
    
    Financial Highlights




---



##### 



Corporate
Profile
     Extendicare Facilities
 Assisted Living andNursing Centres
    
    
    Retirement Centres
    
    
    
    
    
    
    TotalNumber of
    
    
    Resident
    
    
    Number of
    
    
    Resident
    
    
    Number of
    
    
    Residentat December 31, 2005
    
    Facilities
    
    
    Capacity
    
    
    Facilities
    
    
    Capacity
    
    
    Facilities
    
    
    CapacityUnited StatesOwned
    
    
    130
    
    
    
    12,915
    
    
    
    155
    
    
    
    6,506
    
    
    
    285
    
    
    
    19,421Leased
    
    
    9
    
    
    
    1,019
    
    
    
    56
    
    
    
    2,167
    
    
    
    65
    
    
    
    3,186Managed
    
    
    7
    
    
    
    813
    
    
    
    5
    
    
    
    155
    
    
    
    12
    
    
    
    968Total
    
    
    146
    
    
    
    14,747
    
    
    
    216
    
    
    
    8,828
    
    
    
    362
    
    
    
    23,575CanadaOwned
    
    
    45
    
    
    
    6,086
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    6,086Leased
    
    
    9
    
    
    
    1,155
    
    
    
    
    
    
    
    76
    
    
    
    9
    
    
    
    1,231Managed
    
    
    22
    
    
    
    3,186
    
    
    
    1
    
    
    
    417
    
    
    
    23
    
    
    
    3,603Total
    
    
    76
    
    
    
    10,427
    
    
    
    1
    
    
    
    493
    
    
    
    77
    
    
    
    10,920Total
    
    
    222
    
    
    
    25,174
    
    
    
    217
    
    
    
    9,321
    
    
    
    439
    
    
    
    34,495
 Extendicare 2005 Annual Report
    
    
    1
    
    
    Corporate Profile




---



##### 



2005
Message to Shareholders
  Record Financial Results
    Strategic Initiatives
   Extendicare 2005 Annual Report
    
    
    2
    
    
    Message to Shareholders




---



##### 



Extendicare Health Services, Inc.
   Assisted Living Concepts, Inc.
    Extendicare (Canada) Inc.
   Extendicare 2005 Annual Report
    
    
    3
    
    
    Message to Shareholders




---



##### 



Focused Management Team
  Corporate Governance
   Acknowledgements
    President and Chief Executive Officer
 Extendicare 2005 Annual Report
    
    
    4
    
    
    Message to Shareholders




---



##### 



Managements Discussion and Analysis
    
    
    6Managements Responsibility for Financial Statements
    
    
    58Auditors Report
    
    
    59Consolidated Financial Statements
    
    
    60Notes to Consolidated Financial Statements
    
    
    64Financial and Statistical Information
    
    
    114Board of Directors
    
    
    115Officers
    
    
    116Shareholder Information
    
    
    ibc
 Extendicare 2005 Annual Report




---



##### 



Managements
Discussion and Analysis
 February 22, 2006
 Basis of Presentation
   Executive Overview
     Extendicare 2005 Annual Report
    
    
    6
    
    
    Managements Discussion and Analysis




---



##### 



Extendicare 2005 Annual Report
    
    
    7
    
    
    Managements Discussion and Analysis




---



##### 



First Quarter
    
    
    
    Second Quarter
    
    
    
    Third Quarter
    
    
    
    Fourth Quarter2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004Medicare ADC
    
    
    2,400
    
    
    
    2,151
    
    
    
    
    2,411
    
    
    
    2,065
    
    
    
    
    2,210
    
    
    
    2,046
    
    
    
    
    2,189
    
    
    
    2,111Total ADC
    
    
    12,628
    
    
    
    12,281
    
    
    
    
    12,487
    
    
    
    12,324
    
    
    
    
    12,467
    
    
    
    12,450
    
    
    
    
    12,458
    
    
    
    12,500
    Significant Developments in 2005 and 2004
 Update of U.S. Legislative Actions Affecting Revenue
  Extendicare 2005 Annual Report
    
    
    8
    
    
    Managements Discussion and Analysis




---



##### 



First Quarter
    
    
    
    Second Quarter
    
    
    
    Third Quarter
    
    
    
    Fourth Quarter2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004Medicare
    
    
    30.7
    %
    
    
    32.2
    %
    
    
    
    28.9
    %
    
    
    31.3
    %
    
    
    
    27.3
    %
    
    
    30.3
    %
    
    
    
    28.0
    %
    
    
    31.8
    %Private/other
    
    
    24.8
    
    
    
    21.2
    
    
    
    
    27.7
    
    
    
    21.1
    
    
    
    
    27.8
    
    
    
    20.8
    
    
    
    
    27.6
    
    
    
    19.6Quality Mix
    
    
    55.5
    
    
    
    53.4
    
    
    
    
    56.6
    
    
    
    52.4
    
    
    
    
    55.1
    
    
    
    51.1
    
    
    
    
    55.6
    
    
    
    51.4Medicaid
    
    
    44.5
    
    
    
    46.6
    
    
    
    
    43.4
    
    
    
    47.6
    
    
    
    
    44.9
    
    
    
    48.9
    
    
    
    
    44.4
    
    
    
    48.6
  Medicare Funding
   Extendicare 2005 Annual Report
    
    
    9
    
    
    Managements Discussion and Analysis




---



##### 



Extendicare 2005 Annual Report
    
    
    10
    
    
    Managements Discussion and Analysis




---



##### 



Medicaid Rates
 st
    Extendicare 2005 Annual Report
    
    
    11
    
    
    Managements Discussion and Analysis




---



##### 



Extendicare 2005 Annual Report
    
    
    12
    
    
    Managements Discussion and Analysis




---



##### 



Update of Canadian Legislative Actions Affecting Revenue
  Ontario Long-term Care Legislation
  Ontario Long-term Care Funding
   Extendicare 2005 Annual Report
    
    
    13
    
    
    Managements Discussion and Analysis




---



##### 



Ontario Property Tax Funding
  Alberta Long-term Care Funding
  Ontario Home Care Funding
   Extendicare 2005 Annual Report
    
    
    14
    
    
    Managements Discussion and Analysis




---



##### 



Acquisition of Assisted Living Concepts, Inc. and Related Lease Arrangements
 note 2
   Extendicare 2005 Annual Report
    
    
    15
    
    
    Managements Discussion and Analysis




---



##### 



Amended and Restated U.S. Credit Facility
  note 10
 U.S. Issuance and Retirement of Long-term Debt
  Extendicare 2005 Annual Report
    
    
    16
    
    
    Managements Discussion and Analysis




---



##### 



Other Acquisitions and Construction
        Extendicare 2005 Annual Report
    
    
    17
    
    
    Managements Discussion and Analysis




---



##### 



Valuation Adjustment on Interest Rate Caps
  Loss (Gain) from Asset Disposals, Impairment and Other Items
  (millions of dollars)
    
    2005
    
    
    
    2004Loss (gain) on investment
    
    
    (13.9
    )
    
    
    
    5.0Provision against U.S. advances
    
    
    5.2
    
    
    
    
    U.S. provision for impairment of long-lived assets
    
    
    0.3
    
    
    
    
    2.1U.S. prepayment of notes receivable
    
    
    
    
    
    
    
    1.7Loss (gain) from dispositionsCompletion of divestiture  settlement of Greystone
    
    
    
    
    
    
    
    (6.6
    )Sale of U.S. nursing and assisted living facilities
    
    
    
    
    
    
    
    0.8Sale of three Canadian nursing and retirement homes
    
    
    
    
    
    
    
    (13.5
    )U.S. issuance and retirement of long-term debt
    
    
    
    
    
    
    
    6.9Other
    
    
    (1.2
    )
    
    
    
    0.5(9.6
    )
    
    
    
    (3.1
    )
 Loss (Gain) on Investment
    Extendicare 2005 Annual Report
    
    
    18
    
    
    Managements Discussion and Analysis




---



##### 



Provision Against U.S. Advances
  U.S. Provision for Impairment of Long-lived Assets
    U.S. Prepayment of Notes Receivable
  Completion of Divestiture  Settlement of Greystone Transaction
  Sale of U.S.Nursing and Assisted Living Facilities
  Extendicare 2005 Annual Report
    
    
    19
    
    
    Managements Discussion and Analysis




---



##### 



Sale of Three Canadian Nursing and Retirement Homes
  U.S. Issuance and Retirement of Long-term Debt
  Other
   Discontinued Operations
 note 4
 Extendicare 2005 Annual Report
    
    
    20
    
    
    Managements Discussion and Analysis




---



##### 



Sale of Florida Leased Properties
  Nursing Facilities in Minnesota
  Lakeside,Wisconsin
   Investment in Crown Life Insurance Company
  Extendicare 2005 Annual Report
    
    
    21
    
    
    Managements Discussion and Analysis




---



##### 



Medicare and Medicaid Settlement Receivables
      Extendicare 2005 Annual Report
    
    
    22
    
    
    Managements Discussion and Analysis




---



##### 



Other
  Subsequent Events
   Extendicare 2005 Annual Report
    
    
    23
    
    
    Managements Discussion and Analysis




---



##### 



Summary of Quarterly Results
  (thousands of dollars unless otherwise noted)
    
    
    First Quarter
    
    
    
    Second Quarter
    
    
    
    Third Quarter
    
    
    
    Fourth Quarter2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004Revenue
    
    
    481,503
    
    
    
    417,860
    
    
    
    
    512,019
    
    
    
    433,123
    
    
    
    
    487,794
    
    
    
    437,371
    
    
    
    
    490,452
    
    
    
    419,768EBITDA(1)
    
    
    60,352
    
    
    
    50,714
    
    
    
    
    79,803
    
    
    
    58,869
    
    
    
    
    67,550
    
    
    
    64,309
    
    
    
    
    59,640
    
    
    
    56,028Earnings from
continuing health
care operations
before undernoted(1)
    
    
    19,391
    
    
    
    15,351
    
    
    
    
    28,470
    
    
    
    21,933
    
    
    
    
    21,577
    
    
    
    24,691
    
    
    
    
    23,700
    
    
    
    24,807Valuation adjustment
on interest rate
caps, net of income
tax
    
    
    (968
    )
    
    
    
    
    
    
    
    (708
    )
    
    
    (3,661
    )
    
    
    
    89
    
    
    
    (1,592
    )
    
    
    
    221
    
    
    
    (1,143
    )Gain (loss) from
asset disposals,
impairment and other
items,
net of income tax
    
    
    127
    
    
    
    10,722
    
    
    
    
    475
    
    
    
    (269
    )
    
    
    
    7,474
    
    
    
    (3,141
    )
    
    
    
    (1,511
    )
    
    
    248Prior year tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,968Share of equity
accounted earnings
    
    
    606
    
    
    
    2,452
    
    
    
    
    1,683
    
    
    
    584
    
    
    
    
    764
    
    
    
    1,083
    
    
    
    
    875
    
    
    
    5,256Earnings from
continuing operations
    
    
    19,156
    
    
    
    28,525
    
    
    
    
    29,920
    
    
    
    18,587
    
    
    
    
    29,904
    
    
    
    21,041
    
    
    
    
    23,285
    
    
    
    68,136Loss from discontinued
operations, net of
income taxes
    
    
    (993
    )
    
    
    (186
    )
    
    
    
    (4,677
    )
    
    
    (245
    )
    
    
    
    (928
    )
    
    
    (1,429
    )
    
    
    
    (562
    )
    
    
    (9,228
    )Net earnings
    
    
    18,163
    
    
    
    28,339
    
    
    
    
    25,243
    
    
    
    18,342
    
    
    
    
    28,976
    
    
    
    19,612
    
    
    
    
    22,723
    
    
    
    58,908Components of Diluted
Earnings (Loss) per
Share ($)(2)Continuing health
care operations
before undernoted
    
    
    0.27
    
    
    
    0.21
    
    
    
    
    0.41
    
    
    
    0.32
    
    
    
    
    0.31
    
    
    
    0.35
    
    
    
    
    0.34
    
    
    
    0.35Valuation adjustment
on interest rate caps
    
    
    (0.01
    )
    
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.05
    )
    
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    
    (0.01
    )Gain (loss) from
asset disposals,
impairment and other
items
    
    
    
    
    
    
    0.16
    
    
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    
    0.10
    
    
    
    (0.04
    )
    
    
    
    (0.02
    )
    
    
    (0.01
    )Prior year tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.56Share of equity
accounted earnings
    
    
    0.01
    
    
    
    0.03
    
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    
    0.01
    
    
    
    0.02
    
    
    
    
    0.02
    
    
    
    0.080.27
    
    
    
    0.40
    
    
    
    
    0.43
    
    
    
    0.27
    
    
    
    
    0.42
    
    
    
    0.30
    
    
    
    
    0.34
    
    
    
    0.97Loss from discontinued
operations, net of
income taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    
    (0.07
    )
    
    
    (0.01
    )
    
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    
    (0.01
    )
    
    
    (0.13
    )Net earnings
    
    
    0.26
    
    
    
    0.40
    
    
    
    
    0.36
    
    
    
    0.26
    
    
    
    
    0.41
    
    
    
    0.28
    
    
    
    
    0.33
    
    
    
    0.84
 (1)
    
    Refer to discussion of non-GAAP measures.(2)
    
    Diluted earnings per common share prior to the Subordinate
Voting Share preferential dividend.
 Extendicare 2005 Annual Report
    
    
    24
    
    
    Managements Discussion and Analysis




---



##### 



Non-GAAP Measures
    Extendicare 2005 Annual Report
    
    
    25
    
    
    Managements Discussion and Analysis




---



##### 



(millions of dollars)
    
    First Quarter
    
    
    
    Second Quarter
    
    
    
    Third Quarter
    
    
    
    Fourth Quarter2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004Earnings from continuing
health care operations
before income taxes
    
    
    30.4
    
    
    
    34.4
    
    
    
    
    45.4
    
    
    
    27.4
    
    
    
    
    46.2
    
    
    
    31.5
    
    
    
    
    26.0
    
    
    
    34.7Add (deduct)Depreciation and
amortization
    
    
    14.7
    
    
    
    13.5
    
    
    
    
    18.0
    
    
    
    14.1
    
    
    
    
    17.5
    
    
    
    13.5
    
    
    
    
    16.7
    
    
    
    13.3Interest, net
    
    
    13.9
    
    
    
    12.9
    
    
    
    
    16.0
    
    
    
    9.7
    
    
    
    
    15.9
    
    
    
    11.3
    
    
    
    
    13.9
    
    
    
    6.3Valuation adjustment
on interest rate caps
    
    
    1.6
    
    
    
    
    
    
    
    
    1.2
    
    
    
    5.9
    
    
    
    
    (0.2
    )
    
    
    2.6
    
    
    
    
    (0.3
    )
    
    
    1.9Loss (gain) from asset
disposals, impairment
and other items
    
    
    (0.2
    )
    
    
    (10.1
    )
    
    
    
    (0.8
    )
    
    
    1.8
    
    
    
    
    (11.9
    )
    
    
    5.4
    
    
    
    
    3.3
    
    
    
    (0.2
    )EBITDA
    
    
    60.4
    
    
    
    50.7
    
    
    
    
    79.8
    
    
    
    58.9
    
    
    
    
    67.5
    
    
    
    64.3
    
    
    
    
    59.6
    
    
    
    56.0
 Impact of Foreign Currency Translation
   2005
    
    
    
    2004Average US/Canadian dollar exchange rate
    
    
    1.2116
    
    
    
    
    1.3015
 (millions of dollars)
    
    2005 vs 2004Revenue
    
    
    (107.8
    )EBITDA
    
    
    (16.3
    )Net earnings
    
    
    (3.2
    )
 Fourth Quarter Results
  Extendicare 2005 Annual Report
    
    
    26
    
    
    Managements Discussion and Analysis




---



##### 



Extendicare 2005 Annual Report
    
    
    27
    
    
    Managements Discussion and Analysis




---



##### 



Summary of Annual Results
  (thousands of dollars unless otherwise noted) Years ended December 31
    
    2005
    
    
    
    2004
    
    
    2003Income Statement DataRevenue
    
    
    1,971,768
    
    
    
    
    1,708,122
    
    
    
    1,671,344EBITDA
    
    
    267,345
    
    
    
    
    229,920
    
    
    
    184,897Depreciation and amortization
    
    
    66,886
    
    
    
    
    54,490
    
    
    
    61,105Interest, net
    
    
    59,725
    
    
    
    
    40,171
    
    
    
    57,923Valuation adjustment on interest rate caps
    
    
    2,248
    
    
    
    
    10,379
    
    
    
    Loss (gain) from asset disposals, impairment and other items
    
    
    (9,582
    )
    
    
    
    (3,105
    )
    
    
    (905
    )Earnings from continuing health care operations before income taxes
    
    
    148,068
    
    
    
    
    127,985
    
    
    
    66,774Income taxes
    
    
    49,731
    
    
    
    
    1,071
    
    
    
    24,622Earnings from continuing health care operations
    
    
    98,337
    
    
    
    
    126,914
    
    
    
    42,152Share of equity accounted earnings
    
    
    3,928
    
    
    
    
    9,375
    
    
    
    18,884Earnings from continuing operations
    
    
    102,265
    
    
    
    
    136,289
    
    
    
    61,036Loss from discontinued operations, net of income taxes
    
    
    (7,160
    )
    
    
    
    (11,088
    )
    
    
    (362
    )Net earnings
    
    
    95,105
    
    
    
    
    125,201
    
    
    
    60,674Earnings per Subordinate Voting Share ($)BasicEarnings from continuing operations
    
    
    1.50
    
    
    
    
    1.97
    
    
    
    0.88Net earnings
    
    
    1.39
    
    
    
    
    1.81
    
    
    
    0.87DilutedEarnings from continuing operations
    
    
    1.48
    
    
    
    
    1.94
    
    
    
    0.87Net earnings
    
    
    1.37
    
    
    
    
    1.78
    
    
    
    0.86Earnings per Multiple Voting Share ($)BasicEarnings from continuing operations
    
    
    1.40
    
    
    
    
    1.97
    
    
    
    0.88Net earnings
    
    
    1.29
    
    
    
    
    1.81
    
    
    
    0.87DilutedEarnings from continuing operations
    
    
    1.38
    
    
    
    
    1.94
    
    
    
    0.87Net earnings
    
    
    1.27
    
    
    
    
    1.78
    
    
    
    0.86Average US/Canadian dollar exchange rate
    
    
    1.2116
    
    
    
    
    1.3015
    
    
    
    1.4015Balance Sheet Data (at period end)Health care assets
    
    
    1,625,649
    
    
    
    
    1,357,800
    
    
    
    1,451,638Equity accounted investments
    
    
    72,445
    
    
    
    
    68,531
    
    
    
    141,779Total assets
    
    
    1,698,094
    
    
    
    
    1,426,331
    
    
    
    1,593,417Long-term debt
    
    
    775,243
    
    
    
    
    613,651
    
    
    
    750,094US/Canadian dollar exchange rate
    
    
    1.1630
    
    
    
    
    1.2020
    
    
    
    1.2965Cash Dividends Declared per Share ($)Multiple Voting
    
    
    0.1000
    
    
    
    
    
    
    
    
    Subordinate Voting
    
    
    0.2000
    
    
    
    
    
    
    
    
    Class I, Series 2
    
    
    0.7802
    
    
    
    
    0.7109
    
    
    
    0.8320Class I, Series 3
    
    
    0.9900
    
    
    
    
    0.9900
    
    
    
    0.9900Class I, Series 4
    
    
    0.7913
    
    
    
    
    0.7208
    
    
    
    0.8438Class II, Series 1
    
    
    0.8720
    
    
    
    
    0.8080
    
    
    
    0.9360
 Note:
    
    Certain comparative figures have been reclassified in order to conform to the presentation adopted in
2005.
 Extendicare 2005 Annual Report
    
    
    28
    
    
    Managements Discussion and Analysis




---



##### 



(millions of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Earnings from continuing health care operations before
income taxes
    
    
    148.1
    
    
    
    
    128.0
    
    
    
    66.8Add (deduct):Depreciation and amortization
    
    
    66.9
    
    
    
    
    54.5
    
    
    
    61.1Interest, net
    
    
    59.7
    
    
    
    
    40.2
    
    
    
    57.9Valuation adjustment on interest rate caps
    
    
    2.2
    
    
    
    
    10.4
    
    
    
    Loss
(gain) from asset disposals, impairment and other items
    
    
    (9.6
    )
    
    
    
    (3.1
    )
    
    
    (0.9
    )EBITDA
    
    
    267.3
    
    
    
    
    229.9
    (1)
    
    
    184.9
 (1)Does not add due to rounding.
 Fiscal Year 2005 Compared with 2004
  Discontinued Operations
 note 4
 Extendicare 2005 Annual Report
    
    29
    
    Managements Discussion and Analysis




---



##### 



(millions of dollars unless otherwise noted)
    
    2005
    
    
    
    2004
    
    
    ChangeEarnings from Continuing Health Care OperationsU.S. operations in its functional currency (US$)
    
    
    65.4
    
    
    
    
    78.2
    
    
    
    (12.8
    )Translation to Canadian dollars
    
    
    13.8
    
    
    
    
    20.8U.S. operations (C$)
    
    
    79.2
    
    
    
    
    99.0
    
    
    
    (19.8
    )Canadian operations
    
    
    19.1
    
    
    
    
    27.9
    
    
    
    (8.8
    )98.3
    
    
    
    
    126.9
    
    
    
    (28.6
    )Share of equity accounted earnings
    
    
    3.9
    
    
    
    
    9.4
    
    
    
    (5.5
    )Earnings from continuing operations
    
    
    102.3
    (1)
    
    
    
    136.3
    
    
    
    (34.0
    )(1)Loss from discontinued operations,net of income taxes
    
    
    (7.2
    )
    
    
    
    (11.1
    )
    
    
    3.9Net earnings
    
    
    95.1
    
    
    
    
    125.2
    
    
    
    (30.1
    )Diluted Earnings per Subordinate Voting Share ($)Earnings from continuing operations
    
    
    1.48
    
    
    
    
    1.94Net earnings
    
    
    1.37
    
    
    
    
    1.78Average US/Canadian dollar exchange rate
    
    
    1.2116
    
    
    
    
    1.3015
 (1)Does not add due to rounding.
  Revenue
  (millions of dollars unless otherwise noted)
    
    2005
    
    
    
    2004
    
    
    Change
    
    
    Change (%)RevenueU.S. operations in its functional currency (US$)
    
    
    1,199.1
    
    
    
    
    926.8
    
    
    
    272.3
    
    
    
    29.4Translation to Canadian dollars
    
    
    253.7
    
    
    
    
    279.4U.S. operations (C$)
    
    
    1,452.8
    
    
    
    
    1,206.2
    
    
    
    246.6
    
    
    
    20.4Canadian operations
    
    
    519.0
    
    
    
    
    501.9
    
    
    
    17.1
    
    
    
    3.41,971.8
    
    
    
    
    1,708.1
    
    
    
    263.7
    
    
    
    15.4
 Extendicare 2005 Annual Report
    
    30
    
    Managements Discussion and Analysis




---



##### 



Revenue
 U.S. Operations
   (US$ millions)49.9
    
    
    
    increase in average nursing home
rates (Medicaid $27.5 million, Medicare $17.2 million, and
private/other $5.2 million);23.2
    
    
    
    favourable prior year revenue adjustments ($26.9 million in 2005 compared to $3.7 million in 2004);18.7
    
    
    
    increase (decrease) in nursing
home resident census (Medicare $25.0 million, Medicaid $2.1 million,
and private/other $(8.4) million);1.9
    
    
    
    increase in nursing home resident
ancillary services, primarily therapy and rehabilitative services;1.8
    
    
    
    increase in assisted living
revenue, primarily due to higher rates;(2.3
    )
    
    
    decrease due to one less day in
2005 compared to 2004; and1.8
    
    
    
    increase in other revenue.
  U.S.Nursing Home Operating Statistics
    
    2005
    
    
    
    2004
    
    
    Change (%)Average daily census (same-facility basis)Medicare
    
    
    2,302
    
    
    
    
    2,093
    
    
    
    10.0Private/other
    
    
    1,951
    
    
    
    
    2,081
    
    
    
    (6.2
    )Medicaid
    
    
    8,257
    
    
    
    
    8,215
    
    
    
    0.5Total
    
    
    12,510
    
    
    
    
    12,389
    
    
    
    1.0Medicare as a percent of total census (same-facility basis)
    
    
    18.4
    
    
    
    
    16.9Medicaid as a percent of total census (same-facility basis)
    
    
    66.0
    
    
    
    
    66.3Average percentage occupancy (same-facility basis)
    
    
    93.0
    
    
    
    
    92.1Average revenue rate by payor source (US$)(1)Medicare Part A and B
    
    
    378.96
    
    
    
    
    358.54
    
    
    
    5.7Private/other
    
    
    197.61
    
    
    
    
    190.22
    
    
    
    3.9Medicaid
    
    
    148.35
    
    
    
    
    138.93
    
    
    
    6.8Medicare Part A
    
    
    347.14
    
    
    
    
    326.82
    
    
    
    6.2
 (1)Excludes prior period settlement adjustments.
 Extendicare 2005 Annual Report
    
    31
    
    Managements Discussion and Analysis




---



##### 



Revenue  Canadian Operations
  Extendicare 2005 Annual Report
    
    32
    
    Managements Discussion and Analysis




---



##### 



EBITDA
  % of
    
    
    
    
    
    
    
    % of(millions of dollars unless otherwise noted)
    
    2005
    
    
    Revenue
    
    
    
    2004
    
    
    Revenue
    
    
    Change
    
    
    Change (%)EBITDAU.S. operations in its functional currency
(US$)
    
    
    181.4
    
    
    
    15.1
    
    
    
    
    140.0
    
    
    
    15.1
    
    
    
    41.4
    
    
    
    29.6Translation to Canadian dollars
    
    
    38.4
    
    
    
    
    
    
    
    
    42.2U.S. operations (C$)
    
    
    219.8
    
    
    
    15.1
    
    
    
    
    182.2
    
    
    
    15.1
    
    
    
    37.6
    
    
    
    20.6Canadian operations
    
    
    47.5
    
    
    
    9.2
    
    
    
    
    47.7
    
    
    
    9.5
    
    
    
    (0.2
    )
    
    
    (0.4
    )267.3
    
    
    
    13.6
    
    
    
    
    229.9
    
    
    
    13.5
    
    
    
    37.4
    
    
    
    16.3Average US/Canadian dollar exchange rate
    
    
    1.2116
    
    
    
    
    
    
    
    
    1.3015
 EBITDA
 U.S. Operations
  (US$ millions)36.9
    
    
    
    rise in labour-related costs of
6.7%, which included an average wage rate increase of 3.9% in nursing
home operations;35.5
    
    
    
    higher state assessments and bed taxes imposed in association with the Medicaid funding changes,
of which $19.6 million was for prior period settlement adjustments;6.9
    
    
    
    rise in drug costs due to higher
resident census, resident acuity and drug prices;4.5
    
    
    
    higher costs for professional fees, fines and penalties;4.4
    
    
    
    increase in costs for medical
equipment leases, food and supplies;3.5
    
    
    
    increase in costs for repairs and
maintenance, utilities and telephone;2.8
    
    
    
    increase in provisions for bad debts;(4.5
    )
    
    
    release of resident care
liabilities; and4.0
    
    
    
    rise in other costs.
  Extendicare
2005 Annual Report
    
    33
    
    Managements Discussion and Analysis




---



##### 



EBITDA  Canadian Operations
  Depreciation and Amortization
  Interest
  Income Taxes
  Share of Equity Accounted Earnings
  Extendicare 2005 Annual Report
    
    34
    
    Managements Discussion and Analysis




---



##### 



Fiscal Year 2004 Compared with 2003
   (millions of dollars except per share amounts)
    
    2004
    
    
    
    2003
    
    
    ChangeEarnings from Continuing Health Care OperationsU.S. operations in its functional currency (US$)
    
    
    78.2
    
    
    
    
    20.3
    
    
    
    57.9Translation to Canadian dollars
    
    
    20.8
    
    
    
    
    8.1
    
    
    
    12.7U.S. operations (C$)
    
    
    99.0
    
    
    
    
    28.4
    
    
    
    70.6Canadian operations
    
    
    27.9
    
    
    
    
    13.8
    
    
    
    14.1126.9
    
    
    
    
    42.2
    
    
    
    84.7Share of equity accounted earnings
    
    
    9.4
    
    
    
    
    18.9
    
    
    
    (9.5
    )Earnings from continuing operations
    
    
    136.3
    
    
    
    
    61.1
    
    
    
    75.2Loss from
discontinued operations, net of income taxes
    
    
    (11.1
    )
    
    
    
    (0.4
    )
    
    
    (10.7
    )Net earnings
    
    
    125.2
    
    
    
    
    60.7
    
    
    
    64.5Diluted Earnings per Subordinate Voting Share ($)Earnings from continuing operations
    
    
    1.94
    
    
    
    
    0.87Net earnings
    
    
    1.78
    
    
    
    
    0.86Average US/Canadian dollar exchange rate
    
    
    1.3015
    
    
    
    
    1.4015
  Extendicare 2005 Annual Report
    
    35
    
    Managements Discussion and Analysis




---



##### 



Revenue
  (millions of dollars unless otherwise noted)
    
    2004
    
    
    
    2003
    
    
    Change
    
    
    Change (%)RevenueU.S. operations in its functional currency (US$)
    
    
    926.8
    
    
    
    
    840.1
    
    
    
    86.7
    
    
    
    10.3Translation to Canadian dollars
    
    
    279.4
    
    
    
    
    337.3U.S. operations (C$)
    
    
    1,206.2
    
    
    
    
    1,177.4
    
    
    
    28.8
    
    
    
    2.4Canadian operations
    
    
    501.9
    
    
    
    
    493.9
    
    
    
    8.0
    
    
    
    1.61,708.1
    
    
    
    
    1,671.3
    
    
    
    36.8
    
    
    
    2.2Average US/Canadian dollar exchange rate
    
    
    1.3015
    
    
    
    
    1.4015
 Revenue  U.S.Operations
   (US$ millions)47.7
    
    
    
    increase in average nursing home
rates (Medicaid $22.9 million, Medicare $20.3 million, and
private/other $4.5 million);16.1
    
    
    
    increase (decrease) in nursing
home resident census (Medicare $18.7 million, Medicaid $(1.0) million
and private/other $(1.6) million);6.0
    
    
    
    increase in nursing home resident
ancillary services, primarily therapy and rehabilitative services;2.0
    
    
    
    increase due to one additional day in 2004;1.1
    
    
    
    improvement in assisted living
operations due to higher rates, partially offset by start-up of new additions;1.0
    
    
    
    favourable prior year revenue
adjustments ($3.7 million for 2004 compared to $2.7 million for 2003); and2.0
    
    
    
    increase in other revenue.
 Extendicare 2005 Annual Report
    
    36
    
    Managements Discussion and Analysis




---



##### 



U.S.Nursing Home Operating Statistics
    
    2004
    
    
    
    2003
    
    
    Change (%)Average daily census (same-facility basis)Medicare
    
    
    2,073
    
    
    
    
    1,902
    
    
    
    9.0Private/other
    
    
    2,065
    
    
    
    
    2,091
    
    
    
    (1.2
    )Medicaid
    
    
    8,154
    
    
    
    
    8,175
    
    
    
    (0.3
    )Total
    
    
    12,292
    
    
    
    
    12,168
    
    
    
    1.0Medicare as a percent of total census (same-facility basis)
    
    
    16.9
    
    
    
    
    15.6Medicaid as a percent of total census (same-facility basis)
    
    
    66.3
    
    
    
    
    67.2Average percentage occupancy (same-facility basis)
    
    
    92.1
    
    
    
    
    91.3Average revenue rate by payor source (US$)(1)Medicare Part A and B
    
    
    358.54
    
    
    
    
    327.78
    
    
    
    9.4Private/other
    
    
    190.22
    
    
    
    
    183.00
    
    
    
    3.9Medicaid
    
    
    138.93
    
    
    
    
    131.53
    
    
    
    5.6Medicare Part A
    
    
    326.82
    
    
    
    
    299.89
    
    
    
    9.0
 (1)Excludes prior period settlement adjustments.
     Extendicare 2005 Annual Report
    
    37
    
    Managements Discussion and Analysis




---



##### 



Revenue  Canadian Operations
    EBITDA
  % of
    
    
    
    
    
    
    
    % of(millions of dollars unless otherwise noted)
    
    2004
    
    
    Revenue
    
    
    
    2003
    
    
    Revenue
    
    
    Change
    
    
    Change (%)EBITDAU.S. operations in its functional currency (US$)
    
    
    140.0
    
    
    
    15.1
    
    
    
    
    98.9
    
    
    
    11.8
    
    
    
    41.1
    
    
    
    41.6Translation to Canadian dollars
    
    
    42.2
    
    
    
    
    
    
    
    
    39.7U.S. operations (C$)
    
    
    182.2
    
    
    
    15.1
    
    
    
    
    138.7
    (1)
    
    
    11.8
    
    
    
    43.5
    
    
    
    31.4Canadian operations
    
    
    47.7
    
    
    
    9.5
    
    
    
    
    46.2
    
    
    
    9.4
    
    
    
    1.5
    
    
    
    3.2229.9
    
    
    
    13.5
    
    
    
    
    184.9
    
    
    
    11.1
    
    
    
    45.0
    
    
    
    24.3Average US/Canadian dollar exchange rate
    
    
    1.3015
    
    
    
    
    
    
    
    
    1.4015
 (1)Does not add due to rounding.
 Extendicare 2005 Annual Report
    
    38
    
    Managements Discussion and Analysis




---



##### 



EBITDA
 U.S. Operations
  (US$ millions)26.3
    
    
    
    rise in labour-related costs of 5.0%,which included an average wage rate increase of 3.0% in nursing
home operations;5.4
    
    
    
    higher state assessments and bed taxes imposed in association with the Medicaid funding changes;3.1
    
    
    
    rise in drug costs due to higher
resident census, Medicare mix and prices;1.6
    
    
    
    increase in equipment costs; and0.5
    
    
    
    rise in other costs.
 EBITDA  Canadian Operations
  Depreciation and Amortization
  Interest
  Extendicare 2005 Annual Report
    
    39
    
    Managements Discussion and Analysis




---



##### 



Income Taxes
  Share of Equity Accounted Earnings
  Liquidity and Capital Resources
 Sources and Uses of Cash
    Extendicare 2005 Annual Report
    
    40
    
    Managements Discussion and Analysis




---



##### 



Capital Structure
 (millions of dollars unless otherwise noted) December 31
    
    2005
    
    
    
    2004
    
    
    2003Share capital (including contributed surplus)Multiple Voting and Subordinate Voting shares
    
    
    292.0
    
    
    
    
    295.5
    
    
    
    294.6Preferred shares
    
    
    16.9
    
    
    
    
    17.2
    
    
    
    17.7308.9
    
    
    
    
    312.7
    
    
    
    312.3Retained earnings
    
    
    213.8
    
    
    
    
    151.9
    
    
    
    32.0Foreign currency translation adjustment account
    
    
    (25.4
    )
    
    
    
    (7.6
    )
    
    
    12.1Shareholdersequity
    
    
    497.3
    
    
    
    
    457.0
    
    
    
    356.4Long-term
debt, including current portion
    
    
    796.4
    
    
    
    
    620.9
    
    
    
    757.5Long-term debt to equity (ratio)
    
    
    1.60:1
    
    
    
    
    1.36:1
    
    
    
    2.13:1Subordinate Voting Shares (number at period end)
    
    
    56,018,395
    
    
    
    
    56,687,086
    
    
    
    56,575,211Multiple Voting Shares (number at period end)
    
    
    11,791,433
    
    
    
    
    11,904,992
    
    
    
    11,912,692US/Canadian dollar exchange rate (at period end)
    
    
    1.1630
    
    
    
    
    1.2020
    
    
    
    1.2965
 Number ofTSX
    
    Shares
    
    
    ClosingShare Information(at January
31, 2006)
    
    Stock Symbol
    
    Outstanding
    
    
    Market Value(1)Subordinate Voting Shares
    
    EXE.SV
    
    
    56,059,020
    
    
    $
    17.55Multiple Voting Shares
    
    EXE.MV
    
    
    11,778,433
    
    
    
    17.80Class I Preferred SharesCumulative
Redeemable, Series 2
    
    EXE.PR.B
    
    
    88,205
    
    
    
    24.75Adjustable
Dividend, Series 3
    
    EXE.PR.C
    
    
    93,310
    
    
    
    21.00Adjustable
Dividend, Series 4
    
    EXE.PR.D
    
    
    241,240
    
    
    
    24.00Class II Preferred Shares, Series 1
    
    EXE.PR.E
    
    
    382,979
    
    
    
    21.45
 (1)Per the Toronto Stock Exchange.
 Extendicare 2005 Annual Report
    
    41
    
    Managements Discussion and Analysis




---



##### 



Long-term Debt
 note 10
    note 10
 Extendicare 2005 Annual Report
    
    42
    
    Managements Discussion and Analysis




---



##### 



Credit Ratings
  S&P
    
    Moodys2010 Notes
    
    B+
    
    B12014 Notes
    
    B
    
    B2Credit Facility and Term Loan
    
    BB
    
    Ba2
 Interest Rate Swap and Cap Arrangements
   Normal Course Issuer Bid and Purchase Obligation
   Extendicare 2005 Annual Report
    
    43
    
    Managements Discussion and Analysis




---



##### 



Stock Option Plan
  Future Liquidity and Capital Resources
     Extendicare 2005 Annual Report
    
    44
    
    Managements Discussion and Analysis




---



##### 



Contractual Obligations
  To the end
    
    
    2007
    
    
    2009
    
    
    After(millions of dollars)
    
    Total
    
    
    of 2006
    
    
    2008
    
    
    2010
    
    
    2010Canadian OperationsLong-term debt
    
    
    133.1
    
    
    
    13.9
    
    
    
    19.0
    
    
    
    15.1
    
    
    
    85.1Capital lease obligations
    
    
    277.3
    
    
    
    13.0
    
    
    
    25.9
    
    
    
    25.9
    
    
    
    212.5Operating lease obligations
    
    
    5.8
    
    
    
    1.5
    
    
    
    2.0
    
    
    
    1.6
    
    
    
    0.7Purchase obligations
    
    
    1.6
    
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    United States OperationsLong-term debt
    
    
    515.3
    
    
    
    4.3
    
    
    
    39.4
    
    
    
    273.6
    
    
    
    198.0Capital lease obligations
    
    
    17.5
    
    
    
    1.3
    
    
    
    2.8
    
    
    
    13.4
    
    
    
    Operating lease obligations
    
    
    190.8
    
    
    
    24.4
    
    
    
    45.3
    
    
    
    45.1
    
    
    
    76.0Purchase obligations
    
    
    21.7
    
    
    
    21.7
    
    
    
    
    
    
    
    
    
    
    
    
   Accrual for Self-insured Liabilities
  Extendicare 2005 Annual Report
    
    45
    
    Managements Discussion and Analysis




---



##### 



Related Party Transactions
  Off-balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Extendicare 2005 Annual Report
    
    46
    
    Managements Discussion and Analysis




---



##### 



Revenue Recognition and Accounts Receivable
     Extendicare 2005 Annual Report
    
    47
    
    Managements Discussion and Analysis




---



##### 



Medicare and Medicaid Settlement Receivables
  Measurement of Acquired Assets and Liabilities in Business Combinations
   Extendicare 2005 Annual Report
    
    48
    
    Managements Discussion and Analysis




---



##### 



Valuation of Assets and Asset Impairment
   note 3
 Self-insured Liabilities
  Extendicare 2005 Annual Report
    
    49
    
    Managements Discussion and Analysis




---



##### 



Future Tax Assets and Liabilities
  Risks and Uncertainties
 Foreign Currency Translation
  Extendicare 2005 Annual Report
    
    50
    
    Managements Discussion and Analysis




---



##### 



Government Funding
  Regulatory Risks
    Assets,
Liabilities
and Contingencies Resulting from U.S. Divestiture Program
  Extendicare 2005 Annual Report
    
    51
    
    Managements Discussion and Analysis




---



##### 



Self-insured General and Professional Liabilities
  Future Tax Assets and Liabilities
  Debt Covenants
  Other
  Extendicare 2005 Annual Report
    
    52
    
    Managements Discussion and Analysis




---



##### 



Credit and Interest Rates
     Extendicare 2005 Annual Report
    
    53
    
    Managements Discussion and Analysis




---



##### 



After
    
    
    
    
    
    
    Fair(thousands of dollars unless otherwise noted)
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010
    
    
    Total
    
    
    ValueCanadian OperationsLong-term debtFixed rate
    
    
    13,884
    
    
    
    4,219
    
    
    
    14,764
    
    
    
    10,350
    
    
    
    4,763
    
    
    
    85,143
    
    
    
    133,123
    
    
    
    161,829Average interest rate
    
    
    8.55
    %
    
    
    9.23
    %
    
    
    7.08
    %
    
    
    7.48
    %
    
    
    9.81
    %
    
    
    9.81
    %
    
    
    9.18
    %
    
    
    Capital lease obligations
(fixed rate)
    
    
    2,450
    
    
    
    2,651
    
    
    
    2,869
    
    
    
    3,103
    
    
    
    3,359
    
    
    
    119,295
    
    
    
    133,727
    
    
    
    143,933Average interest rate
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    United States OperationsLong-term debtFixed rate
    
    
    3,363
    
    
    
    6,753
    
    
    
    30,607
    
    
    
    1,405
    
    
    
    175,666
    
    
    
    198,018
    
    
    
    415,812
    
    
    
    428,621Average interest rate
    
    
    6.28
    %
    
    
    6.75
    %
    
    
    6.06
    %
    
    
    6.56
    %
    
    
    9.52
    %
    
    
    7.06
    %
    
    
    8.01
    %
    
    
    Variable rate
    
    
    1,000
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    48,509
    
    
    
    48,009
    
    
    
    
    
    
    
    99,518
    
    
    
    99,518Average interest rate
    
    
    6.02
    %
    
    
    6.02
    %
    
    
    6.02
    %
    
    
    6.02
    %
    
    
    6.02
    %
    
    
    
    
    
    
    6.02
    %
    
    
    Capital lease obligations
(fixed rate)
    
    
    454
    
    
    
    517
    
    
    
    587
    
    
    
    12,656
    
    
    
    
    
    
    
    
    
    
    
    14,214
    
    
    
    14,214Average interest rate
    
    
    6.17
    %
    
    
    6.32
    %
    
    
    6.46
    %
    
    
    6.36
    %
    
    
    
    
    
    
    
    
    
    
    6.36
    %
    
    
    Interest rate swaps
(fixed to variable)Notional amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,825
    
    
    
    319,825
    
    
    
    6,267Average pay rate
(variable rate)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.15
    %
    
    
    8.15
    %
    
    
    Average receive rate
(fixed rate)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.31
    %
    
    
    8.31
    %
    
    
    Interest rate capsNotional amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,825
    
    
    
    319,825
    
    
    
    5,942
 Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
 
 Changes in Internal Control
  Extendicare 2005 Annual Report
    
    54
    
    Managements Discussion and Analysis




---



##### 



Changes in Accounting Policies
 note 1
 Non-Monetary Transactions
  New Accounting Policies
  Financial Instruments, Hedges and Comprehensive Income
   Extendicare 2005 Annual Report
    
    55
    
    Managements Discussion and Analysis




---



##### 



Conditional Asset Retirement Obligations
      Additional Information
  Extendicare 2005 Annual Report
    
    56
    
    Managements Discussion and Analysis




---



##### 



Forward-looking Statements
 
   Extendicare 2005 Annual Report
    
    57
    
    Managements Discussion and Analysis




---



##### 



Managements Responsibility for Financial Statements
    llp
 Mel Rhinelander (signed)
    
    Richard L. Bertrand (signed)President and Chief Executive Officer
    
    Senior Vice-President and Chief Financial OfficerFebruary 22, 2006
 Extendicare 2005 Annual Report
    
    58
    
    Managements Responsibility




---



##### 



Auditors Report
 To the Shareholders of Extendicare Inc.
    Toronto, Canada
    
    KPMG llp (signed)February 22, 2006
    
    Chartered Accountants
 Extendicare 2005 Annual Report
    
    
    59
    
    
    Auditors Report




---



##### 



Consolidated Balance Sheets  Extendicare Inc.
 (thousands of dollars) December 31
    
    2005
    
    
    
    2004AssetsCurrent assetsCash and short-term investments
    
    
    38,255
    
    
    
    
    156,193Marketable securities (market value $6,655)
    
    
    6,460
    
    
    
    
    Accounts
receivable, less allowances of $17,320 and $13,713, respectively
    
    
    170,649
    
    
    
    
    140,761Income taxes recoverable
    
    
    11,711
    
    
    
    
    2,916Future income tax assets (note 15)
    
    
    24,437
    
    
    
    
    19,296Inventories, supplies and prepaid expenses
    
    
    22,620
    
    
    
    
    13,312274,132
    
    
    
    
    332,478Property and equipment (note 5)
    
    
    1,108,739
    
    
    
    
    767,401Goodwill and other intangible assets (note 6)
    
    
    99,451
    
    
    
    
    89,683Other assets (note 7)
    
    
    143,327
    
    
    
    
    168,2381,625,649
    
    
    
    
    1,357,800Equity accounted investments (note 8)
    
    
    72,445
    
    
    
    
    68,5311,698,094
    
    
    
    
    1,426,331Liabilities and Shareholders EquityCurrent liabilitiesOutstanding cheques in excess of bank balance
    
    
    15,646
    
    
    
    
    Accounts payable
    
    
    38,394
    
    
    
    
    30,611Accrued liabilities
    
    
    206,079
    
    
    
    
    184,235Accrual for self-insured liabilities (note 9)
    
    
    22,679
    
    
    
    
    30,050Current maturities of long-term debt (note 10)
    
    
    21,151
    
    
    
    
    7,251303,949
    
    
    
    
    252,147Accrual for self-insured liabilities (note 9)
    
    
    43,986
    
    
    
    
    48,487Long-term debt (note 10)
    
    
    775,243
    
    
    
    
    613,651Other long-term liabilities (note 12)
    
    
    46,629
    
    
    
    
    34,879Future income tax liabilities (note 15)
    
    
    30,981
    
    
    
    
    20,1801,200,788
    
    
    
    
    969,344Shareholders equity
    
    
    497,306
    
    
    
    
    456,9871,698,094
    
    
    
    
    1,426,331
 Approved by the BoardDavid
J. Hennigar (signed)
    
    Mel Rhinelander(signed)Chairman
    
    President and Chief Executive Officer
 Extendicare 2005 Annual Report
    
    
    60
    
    
    Consolidated Statements




---



##### 



Consolidated
Statements of Earnings  Extendicare Inc.
 (thousands of dollars except per share amounts) Years ended December 31
    
    2005
    
    
    
    2004
        
    2003Revenue(note 14)Nursing and assisted living centresUnited States
    
    
    1,406,821
    
    
    
    
    1,159,042
    
    
    
    1,129,253Canada
    
    
    382,377
    
    
    
    
    366,863
    
    
    
    351,981Outpatient
therapy  United States
    
    
    13,644
    
    
    
    
    14,300
    
    
    
    16,151Home health
 Canada
    
    
    128,144
    
    
    
    
    127,971
    
    
    
    134,921Other
    
    
    40,782
    
    
    
    
    39,946
    
    
    
    39,0381,971,768
    
    
    
    
    1,708,122
    
    
    
    1,671,344Operating and administrative costs
    
    
    1,673,775
    
    
    
    
    1,461,972
    
    
    
    1,468,230Earnings before undernoted
    
    
    297,993
    
    
    
    
    246,150
    
    
    
    203,114Lease costs
    
    
    30,648
    
    
    
    
    16,230
    
    
    
    18,217Depreciation and amortization
    
    
    66,886
    
    
    
    
    54,490
    
    
    
    61,105Interest,net
    
    
    59,725
    
    
    
    
    40,171
    
    
    
    57,923Valuation adjustment on interest rate caps
    
    
    2,248
    
    
    
    
    10,379
    
    
    
    Loss (gain) from asset disposals,impairment and other items (note 3)
    
    
    (9,582
    )
    
    
    
    (3,105
    )
    
    
    (905
    )Earnings from continuing health care operations before income taxes
    
    
    148,068
    
    
    
    
    127,985
    
    
    
    66,774Income taxes(note 15)Current
    
    
    44,209
    
    
    
    
    38,523
    
    
    
    19,162Future (reduction)
    
    
    5,522
    
    
    
    
    (37,452
    )
    
    
    5,46049,731
    
    
    
    
    1,071
    
    
    
    24,622Earnings from continuing health care operations
    
    
    98,337
    
    
    
    
    126,914
    
    
    
    42,152Share of equity accounted earnings(note 8)
    
    
    3,928
    
    
    
    
    9,375
    
    
    
    18,884Earnings from continuing operations
    
    
    102,265
    
    
    
    
    136,289
    
    
    
    61,036Loss from
discontinued operations, net of income taxes(note 4)
    
    
    (7,160
    )
    
    
    
    (11,088
    )
    
    
    (362
    )Net earnings
    
    
    95,105
    
    
    
    
    125,201
    
    
    
    60,674Earnings per Subordinate Voting Share(note 16)BasicEarnings from continuing operations
    
    
    1.50
    
    
    
    
    1.97
    
    
    
    0.88Net earnings
    
    
    1.39
    
    
    
    
    1.81
    
    
    
    0.87DilutedEarnings from continuing operations
    
    
    1.48
    
    
    
    
    1.94
    
    
    
    0.87Net earnings
    
    
    1.37
    
    
    
    
    1.78
    
    
    
    0.86Earnings per Multiple Voting Share(note 16)BasicEarnings from continuing operations
    
    
    1.40
    
    
    
    
    1.97
    
    
    
    0.88Net earnings
    
    
    1.29
    
    
    
    
    1.81
    
    
    
    0.87DilutedEarnings from continuing operations
    
    
    1.38
    
    
    
    
    1.94
    
    
    
    0.87Net earnings
    
    
    1.27
    
    
    
    
    1.78
    
    
    
    0.86
 Extendicare 2005 Annual Report
    
    
    61
    
    
    Consolidated Statements




---



##### 



Consolidated
Statements of Cash Flows  Extendicare Inc.
 (thousands of dollars) Years ended December 31
    
    2005
    
    
        
    2004
        
    2003Cash Provided by (Used in) OperationsNet earnings
    
    
    95,105
    
    
    
    
    125,201
    
    
    
    60,674Adjustments for:Depreciation and amortization
    
    
    68,152
    
    
    
    
    56,873
    
    
    
    63,657Provision for self-insured liabilities
    
    
    9,866
    
    
    
    
    13,762
    
    
    
    13,010Payments for self-insured liabilities
    
    
    (20,675
    )
    
    
    
    (24,494
    )
    
    
    (31,545
    )Future income taxes (note 15)
    
    
    4,839
    
    
    
    
    (40,789
    )
    
    
    5,460Undistributed share of earnings from equity investments,
net of dividends received
    
    
    (3,928
    )
    
    
    
    58,919
    
    
    
    (18,884
    )Valuation adjustment on interest rate caps
    
    
    2,248
    
    
    
    
    10,379
    
    
    
    Loss (gain) from asset disposals,impairment and other items (note 3)
    
    
    (5,055
    )
    
    
    
    5,240
    
    
    
    (905
    )Other
    
    
    (1,049
    )
    
    
    
    2,664
    
    
    
    1,309149,503
    
    
    
    
    207,755
    
    
    
    92,776Net change in operating assets and liabilitiesAccounts receivable
    
    
    (18,170
    )
    
    
    
    10,861
    
    
    
    4,724Inventories, supplies and prepaid expenses
    
    
    (1,684
    )
    
    
    
    (541
    )
    
    
    (225
    )Accounts payable and accrued liabilities
    
    
    17,282
    
    
    
    
    (40
    )
    
    
    (128
    )Income taxes
    
    
    (10,754
    )
    
    
    
    5,927
    
    
    
    3,532136,177
    
    
    
    
    223,962
    
    
    
    100,679Cash Provided by (Used in) Investment ActivitiesProperty and equipment
    
    
    (81,212
    )
    
    
    
    (69,122
    )
    
    
    (64,347
    )Acquisitions, net of cash acquired (note 2)
    
    
    (190,527
    )
    
    
    
    (8,750
    )
    
    
    (5,346
    )Net proceeds from dispositions (note 3)
    
    
    12,522
    
    
    
    
    42,496
    
    
    
    2,047Return of equity investment
    
    
    
    
    
    
    
    14,119
    
    
    
    Other assets
    
    
    19,817
    
    
    
    
    25,190
    
    
    
    1,869(239,400
    )
    
    
    
    3,933
    
    
    
    (65,777
    )Cash Provided by (Used in) Financing ActivitiesIssue of long-term debt
    
    
    104,748
    
    
    
    
    170,480
    
    
    
    11,021Repayment of long-term debt
    
    
    (101,406
    )
    
    
    
    (283,067
    )
    
    
    (14,320
    )Decrease (increase) in investments held for self-insured liabilities
    
    
    (1,898
    )
    
    
    
    (12,082
    )
    
    
    5,626Purchase of shares for cancellation
    
    
    (27,143
    )
    
    
    
    (7,294
    )
    
    
    (8,093
    )Dividends paid
    
    
    (10,108
    )
    
    
    
    (665
    )
    
    
    (766
    )Financing costs
    
    
    (1,387
    )
    
    
    
    (16,494
    )
    
    
    (186
    )Other
    
    
    6,575
    
    
    
    
    5,328
    
    
    
    3,843(30,619
    )
    
    
    
    (143,794
    )
    
    
    (2,875
    )Foreign exchange gain (loss) on cash held in foreign currency
    
    
    258
    
    
    
    
    (2,754
    )
    
    
    (9,805
    )Increase (decrease) in cash and cash equivalents
    
    
    (133,584
    )
    
    
    
    81,347
    
    
    
    22,222Cash and cash equivalents at beginning of year
    
    
    156,193
    
    
    
    
    74,846
    
    
    
    52,624Cash and cash equivalents at end of year
    
    
    22,609
    
    
    
    
    156,193
    
    
    
    74,846Cash and Cash EquivalentsCash and short-term investments
    
    
    38,255
    
    
    
    
    156,193
    
    
    
    74,846Outstanding cheques in excess of bank balance
    
    
    15,646
    
    
    
    
    
    
    
    
    22,609
    
    
    
    
    156,193
    
    
    
    74,846
 Extendicare 2005 Annual Report
    
    
    62
    
    
    Consolidated Statements




---



##### 



Consolidated
Statements of Shareholders Equity  Extendicare Inc.
 (thousands of dollars for amounts) Years ended December 31
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    2004

    
    
    
    
    
    2003Number
        
    Amount
    
    
    
    Number
        
    Amount
        
    Number
        
    AmountShare Capital(note 13)Class I Preferred SharesCumulative
Redeemable, Series 2Issued and outstanding
at beginning of year
    
    
    100,305
    
    
    
    2,507
    
    
    
    
    122,205
    
    
    
    3,054
    
    
    
    139,705
    
    
    
    3,492Purchased pursuant to obligation
    
    
    (11,500
    )
    
    
    (288
    )
    
    
    
    (21,900
    )
    
    
    (547
    )
    
    
    (17,500
    )
    
    
    (438
    )Issued and outstanding at
end of year
    
    
    88,805
    
    
    
    2,219
    
    
    
    
    100,305
    
    
    
    2,507
    
    
    
    122,205
    
    
    
    3,054Adjustable
Dividend, Series 3
    
    
    93,310
    
    
    
    2,333
    
    
    
    
    93,310
    
    
    
    2,333
    
    
    
    93,310
    
    
    
    2,333Adjustable
Dividend, Series 4
    
    
    241,240
    
    
    
    6,031
    
    
    
    
    241,240
    
    
    
    6,031
    
    
    
    241,240
    
    
    
    6,031Class II Preferred Shares, Series 1
    
    
    382,979
    
    
    
    6,319
    
    
    
    
    382,979
    
    
    
    6,319
    
    
    
    382,979
    
    
    
    6,319Class I and II Preferred Shares issued
and outstanding at end of year
    
    
    
    
    
    
    16,902
    
    
    
    
    
    
    
    
    17,190
    
    
    
    
    
    
    
    17,737Subordinate Voting SharesIssued and outstanding
at beginning of year
    
    
    56,687,086
    
    
    
    265,576
    
    
    
    
    56,575,211
    
    
    
    264,805
    
    
    
    57,107,011
    
    
    
    267,894Purchased pursuant to issuer bid
    
    
    (1,430,000
    )
    
    
    (6,655
    )
    
    
    
    (456,100
    )
    
    
    (2,125
    )
    
    
    (1,107,000
    )
    
    
    (5,170
    )Issued on conversion of Multiple
Voting Shares
    
    
    37,659
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    210,700
    
    
    
    524Issued pursuant to options
    
    
    723,650
    
    
    
    3,243
    
    
    
    
    567,975
    
    
    
    2,896
    
    
    
    364,500
    
    
    
    1,557Issued and outstanding at end of year
    
    
    56,018,395
    
    
    
    262,258
    
    
    
    
    56,687,086
    
    
    
    265,576
    
    
    
    56,575,211
    
    
    
    264,805Multiple Voting SharesIssued and outstanding
at beginning of year
    
    
    11,904,992
    
    
    
    29,623
    
    
    
    
    11,912,692
    
    
    
    29,642
    
    
    
    12,557,092
    
    
    
    31,245Purchased pursuant to issuer bid
    
    
    (75,900
    )
    
    
    (189
    )
    
    
    
    (7,700
    )
    
    
    (19
    )
    
    
    (433,700
    )
    
    
    (1,079
    )Converted to Subordinate
Voting Shares
    
    
    (37,659
    )
    
    
    (94
    )
    
    
    
    
    
    
    
    
    
    
    
    (210,700
    )
    
    
    (524
    )Issued and outstanding at end of year
    
    
    11,791,433
    
    
    
    29,340
    
    
    
    
    11,904,992
    
    
    
    29,623
    
    
    
    11,912,692
    
    
    
    29,642Share capital
    
    
    
    
    
    
    308,500
    
    
    
    
    
    
    
    
    312,389
    
    
    
    
    
    
    
    312,184Contributed surplus  fair value
of stock options
    
    
    
    
    
    
    391
    
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    144Retained Earnings (Deficit)Balance at beginning of year
    
    
    
    
    
    
    151,903
    
    
    
    
    
    
    
    
    31,959
    
    
    
    
    
    
    
    (26,545
    )Earnings for the year
    
    
    
    
    
    
    95,105
    
    
    
    
    
    
    
    
    125,201
    
    
    
    
    
    
    
    60,674Purchase of shares in excess of book,
net (note 13)
    
    
    
    
    
    
    (20,012
    )
    
    
    
    
    
    
    
    (4,602
    )
    
    
    
    
    
    
    (1,407
    )Dividends
    
    
    
    
    
    
    (13,214
    )
    
    
    
    
    
    
    
    (655
    )
    
    
    
    
    
    
    (763
    )Balance at end of year
    
    
    
    
    
    
    213,782
    
    
    
    
    
    
    
    
    151,903
    
    
    
    
    
    
    
    31,959Foreign currency translation
adjustment account
    
    
    
    
    
    
    (25,367
    )
    
    
    
    
    
    
    
    (7,623
    )
    
    
    
    
    
    
    12,146497,306
    
    
    
    
    
    
    
    
    456,987
    
    
    
    
    
    
    
    356,433
 Extendicare 2005 Annual Report
    
    
    63
    
    
    Consolidated Statements




---



##### 



Notes
to Consolidated Financial Statements  Years ended December 31, 2005, 2004 and 2003
 1. Summary of Significant Accounting Policies
 (a)
    
    Basis of PresentationThe consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles (GAAP) and include the accounts of Extendicare
Inc. and its subsidiaries (Extendicareor the
Company). Health care operations are
conducted through wholly owned subsidiaries Extendicare Health
Services, Inc. (EHSI) in the
United States, and Extendicare (Canada) Inc. (ECI) in Canada, and their subsidiaries.The equity method is used to account for the Companys 34.8% ownership interest in Crown
Life Insurance Company (Crown Life).Certain comparative figures have been reclassified in order to conform to the presentation
adopted in 2005.(b)
    
    Change in Accounting PoliciesThe Company adopted the following new accounting recommendation of the Canadian
Institute of Chartered Accountants (CICA) in 2005.Non-Monetary TransactionsEffective July 1, 2005, the Company elected early adoption of the new Handbook Section 3831
Non-Monetary Transactions, which the CICA issued in
June 2005. The revised standards are
effective for non-monetary transactions initiated in fiscal periods beginning on or after
January 1, 2006, and early adoption is permitted as of the beginning of a fiscal or interim
period on or after July 1, 2005. The standard requires that all non-monetary transactions be
measured at fair value unless: the transaction lacks commercial
substance; the transaction is
an exchange of a product or property held for sale in the ordinary course of business for a
product or property to be sold in the same line of business to facilitate sales to
customers other than the parties to the exchange; neither the fair value of the assets or
services received nor the fair value of the assets or services given up is reliably
measurable; or the transaction is a non-monetary, non-reciprocal transfer to owners that
represents a spin-off or other form of restructuring or liquidation. A non-monetary
transaction has commercial substance when an entitys future cash flows are expected to
change significantly as a result of the transaction. In the third quarter the Company had a
non-monetary transaction that resulted in a pre-tax gain of $10,784,000 (note 3).(c)
    
    Use of EstimatesThe preparation of financial statements in conformity with Canadian GAAP requires
management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. The more subjective of such estimates are
revenue rate settlements, accrual for self-insured liabilities, impairment of long-lived
assets and goodwill, and valuation allowances for future tax assets. The recorded amounts
for such items are based on managements best information and judgement and
accordingly, actual results could differ from estimates.
 Extendicare 2005 Annual Report
    
    
    64
    
    
    Notes to Consolidated Statements




---



##### 



(d)
    
    Foreign Currency TranslationForeign operations and foreign currency denominated items are translated to Canadian
dollars.Revenues and expenses of self-sustaining foreign operations are translated at average rates
of exchange in effect during the period. Assets and liabilities are translated at the
exchange rates in effect at the balance sheet date. Unrealized exchange gains or losses
arising on translation are deferred and included in
shareholders equity in the foreign
currency translation adjustment account.Monetary items denominated in foreign currency are translated to Canadian dollars at
exchange rates in effect at the balance sheet date and non-monetary items are translated at
rates of exchange in effect when the assets were acquired or
obligations incurred. Revenues
and expenses are translated at rates in effect at the time of the
transactions. Foreign
exchange gains and losses are included in earnings.(e)
    
    Cash and Cash EquivalentsCash and cash equivalents include unrestricted cash and short-term investments less
bank overdraft and outstanding cheques. Short-term investments, comprised of money market
instruments, have a maturity of 90 days or less from their date of purchase and are stated
at cost, which approximates net realizable value.(f)
    
    Property and EquipmentProperty and equipment is stated at cost less accumulated depreciation and
amortization. Provisions for depreciation and amortization are computed by the straight-line
method at rates based on the following estimated life expectancies.
 Buildings
    
    20 to 40 yearsBuilding improvements
    
    5 to 30 yearsFurniture and equipment
    
    varying periods not exceeding 15 yearsLand
improvements
    
    10 to 25 yearsLeasehold improvements
    
    the shorter of the useful life of the improvements or the
initial term of the lease
 Nursing home assets leased to unrelated operators under operating lease arrangements
are stated at cost less accumulated depreciation. Provisions for depreciation are computed
as outlined above.Construction in progress includes pre-acquisition costs and other direct costs related to
acquisition, development and construction of properties, including
interest, which are
capitalized until the facility is opened. Depreciation of the
facility, including interest
capitalized, is commenced the month after the facility is opened based upon the useful life
of the asset, as outlined above.Government grants funded over extended periods to construct facilities are present valued
and recorded as long-term receivables, with an offset to the cost of construction, once all
conditions of the grant have been met.
 Extendicare 2005 Annual Report
    
    
    65
    
    
    Notes to Consolidated Statements




---



##### 



(g)
    
    LeasesLeases that substantially transfer all of the benefits and risks of ownership of
property to the Company, or otherwise meet the criteria for capitalizing a lease under
accounting principles generally accepted, are accounted for as capital leases. An asset is
recorded at the time a capital lease is entered into together with its related long-term
obligation to reflect its purchase and financing. Property and equipment recorded under
capital leases are depreciated on the same basis as described in note 1(f ). Rental payments
under operating leases are expensed as incurred.(h)
    
    Deferred ChargesCosts associated with obtaining financing are deferred and amortized over the life of
the related debt. The costs of acquiring leasehold rights are deferred and amortized over
the term of the lease including renewal options. Deferred charges are stated at cost less
accumulated amortization and are included in other assets in the consolidated balance
sheets.(i)
    
    AcquisitionsThe Company accounts for acquisitions of businesses using the
purchase method. This
involves allocating the purchase price paid for a business to the
assets acquired, including
identifiable intangible assets, and the liabilities assumed, based on their fair value at the
date of acquisition. Any excess is then recorded as goodwill.In allocating the purchase price to identifiable intangible assets in its acquisitions, the
Company assigns values to resident relationships as described in note 1(j).Also, in the allocation of the purchase price the Company determines a value for below (or
above) market resident contracts. Below (or above) market resident contracts represent the
value of the difference between amounts to be paid pursuant to the in-place resident
contracts and managements estimate of the fair market value
rate, measured over a period of
either the average resident stay in the facility, or the period under which the Company can
change the current contract rates to market. This value may be set up as a deferred credit
in accrued liabilities or a deferred asset and is amortized. In the case of the acquisition
of Assisted Living Concepts, Inc., the below market resident contract value was set up as a
deferred credit in accrued liabilities, which is being amortized over a 24-month period
based upon the Companys estimate of the period over which the customer rates will be
increased to market rates. The amortization of below (or above) market resident contracts is
included in revenue in the statement of earnings.(j)
    
    Goodwill and Other Intangible AssetsGoodwill represents the cost of acquired net assets in excess of their fair market
values. Goodwill and other intangible assets with indefinite useful lives are not
amortized, but are tested for impairment at least annually. Goodwill is allocated to
reporting units and any potential goodwill impairment is identified by comparing the
carrying value of a reporting unit with its fair value. If any potential impairment is
indicated, then it is quantified by comparing the carrying value of goodwill to its fair
value, based on the fair value of the assets and liabilities of the reporting unit.
 Extendicare 2005 Annual Report
    
    
    66
    
    
    Notes to Consolidated Statements




---



##### 



Other intangible assets with definite useful lives are amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for impairment by
assessing the recoverability of the carrying values. Other intangible assets include
leasehold rights, which are amortized over the term of the lease including renewal options.Resident relationships acquired through the acquisition of facilities are another component
of other intangible assets. Resident relationships acquired for existing residents avoid the
cost of obtaining new residents and also include a value of lost net resident revenue over
the estimated lease-up period of the property. Resident relationships intangible assets are
amortized on a straight-line basis, based upon a review of the residents average length of
stay. The Company generally amortizes the resident relationships asset over a 36-month
period for assisted living facilities, and an 18-month period for
nursing facilities. The
amortization period is subject to evaluation upon each acquisition. Amortization of the
resident relationships asset is included within amortization expense in the statement of
earnings.(k)
    
    Impairment of Long-lived AssetsThe Company periodically assesses the recoverability of long-lived assets when there
are indications of potential impairment. In performing this analysis, management considers
such factors as current results, trends and future prospects, in addition to other economic
and regulatory factors. The amount of any impairment is determined as the excess of the
assets net carrying value over its fair value, as determined by its estimated future cash
flows discounted using a risk adjusted interest rate or current
market value, as
appropriate.(l)
    
    Self-insured LiabilitiesThe Company self-insures certain risks related to general and professional
liability. The accrual for self-insured liabilities includes estimates of the costs of both
reported claims and claims incurred but not reported and is based on estimates of loss
based on assumptions made by management, including consideration of actuarial projections.The Company invests funds to support the accrual for self-insured liabilities. These funds
are investment grade, are carried at cost or amortized cost and are classified in other
assets as investments held for self-insured liabilities.The Company also self-insures certain risks related to auto liability, health benefits,
employers liability and workerscompensation and accruals for these self-insured risks are
included in accounts payable and accrued liabilities.(m)
    
    RevenueIn the United States, nursing centre revenue results from the payment for services and
products from various federal and state medical assistance programs as well as private-pay
residents. Revenue is recorded in the period in which services and products are provided at
established rates less contractual adjustments. Contractual adjustments include differences
between established billing rates and amounts estimated by management as reimbursable under
various reimbursement formulas or contracts in effect. Differences between final settlements
and amounts recorded in previous years are reported as adjustments to revenue in the period
such settlements are determined.
 Extendicare 2005 Annual Report
    
    
    67
    
    
    Notes to Consolidated Statements




---



##### 



Also in the United States, the Company derives outpatient therapy revenue by providing
rehabilitation therapy services to outside third parties at its
clinics. This revenue source
is primarily from Health Maintenance Organizations (HMOs) and commercial insurance,
workers compensation, self-pay clients and partly from Medicare and Medicaid.In Canada fees charged for its nursing centres and home care services are regulated by
provincial authorities. Provincial programs fund a substantial
portion of these fees. Revenue
is recorded in the period in which services and products are provided.Assisted living facility revenue is primarily derived from private-pay residents in the
period in which the services are provided and at rates established by the Company based
upon the services provided and market conditions in the area of operation.(n)
    
    Income TaxesThe Company follows the asset and liability method of tax
allocation, which is based on
differences between financial reporting and tax bases of assets and liabilities. Future
income tax liabilities or assets are calculated using tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse. The income tax rates used to
measure income tax assets and liabilities are those rates enacted or substantially enacted
at the balance sheet date. Realization of future tax assets is dependent on the
availability of taxable income of similar character.(o)
    
    Employee Future BenefitsThe costs of the Companys defined benefit pension plans
are accrued as earned, based
on actuarial valuations. The Companys pension fund assets are valued at market values and
the net actuarial gain or loss in excess of 10% of the greater of the benefit obligations
and the market value of plan assets is amortized over the average remaining service periods
of active employees. Employee future benefit obligations are measured using market interest
rates for high quality debt instruments.(p)
    
    Hedging DerivativesThe Company enters into derivative contracts in the form of interest rate swaps to
hedge its fixed-rate U.S. debt obligations and interest rate caps to offset possible
increases in variable-rate payments under its interest rate swaps related to increases in
market interest rates. In order for a derivative to qualify as a hedge, the hedge
relationship must be designated and formally documented at its
inception, detailing the
particular risk management objective and the strategy for the hedge and the specific asset,
liability or cash flow being hedged, as well as how effectiveness is being assessed. Changes
in the fair value of the derivative must be highly effective in offsetting either changes in
the fair value of on-balance sheet items or changes in the amount of
future cash flows. Hedge
effectiveness is evaluated at the inception of the hedge relationship and on an ongoing
basis. The Company discontinues hedge accounting prospectively when it is determined that
the derivative is no longer effective in offsetting changes in the fair value or cash flows
of the hedged item, the derivative expires or is sold, terminated, or exercised, or because
management determines that designation of the derivative as a hedging instrument is no
longer appropriate. When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair-value hedge, the Company continues to
carry the derivative on the balance sheet at its fair value, and changes in fair value are
reported in the statement of earnings.
 Extendicare 2005 Annual Report
    
    
    68
    
    
    Notes to Consolidated Statements




---



##### 



(q)
    
    Stock-based Compensation PlanThe Company has a stock-based compensation plan, which is described in note 13and
recognizes compensation expense for option awards using the fair value method of
accounting. The Company adopted the fair value method of accounting
prospectively, applied to
awards granted under the plan beginning January 1, 2003. For awards granted under the plan
prior to January 1, 2003, the Company applies the settlement method, whereby no compensation
cost is recorded, and consideration paid by employees on the exercise of stock options is
treated as share capital.In May 2004 the Company amended its stock option plan to add the ability to grant tandem
share appreciation rights with option grants. For awards under its stock option plan that
include tandem share appreciation rights, the Company accrues compensation expense on a
graded vesting basis in the amount by which the quoted market value of the Subordinate
Voting Shares exceeds the option price. Changes, either increases or
decreases, in the quoted
market value of the Subordinate Voting Shares between the date of grant and the reporting
period date result in a change in the measure of compensation for the award.
 2.
    
    AcquisitionsOn January 31, 2005, the shareholders of Assisted Living
Concepts, Inc. (ALC) approved the
merger and acquisition agreement with EHSI and EHSI completed the acquisition for cash of
$179,450,000 (US$144,578,000). On January 31, 2005, ALC had a portfolio of 177 assisted living
properties, which were comprised of 122 owned properties and 55 leased facilities representing
6,838 units located in 14 states, many in markets where EHSI
operated. The Company financed the
acquisition by drawing US$60,000,000 on EHSIs revolver loan, using US$29,578,000 of EHSIs
cash on hand, and using US$55,000,000 of cash from Extendicare. ALC had operating cash on hand
of $8,095,000 (US$6,522,000) at the date of acquisition. ALCs financial results for the 11
months ended December 31, 2005, are included in the consolidated results of the Company for the
year ended December 31, 2005. The acquisition was accounted for as a purchase
transaction. Included in the following table is the impact of the acquisition and the allocation
of the purchase price on the Companys financial statements at
January 31, 2005. As part of the
allocation of the purchase price, a value of $7,890,000 (US$6,357,000) was assigned to resident
relationships and classified as intangible assets. The Company completed in December 2005 the
valuation of ALCs net assets acquired and the changes to the allocation previously reported
for the interim reporting period as at September 30, 2005, were mainly due to future income
taxes and goodwill. Future tax assets of $5,585,000 changed to a future tax liability of
$755,000, and goodwill increased by $3,757,000 and other assets and liabilities changed by
immaterial amounts. Total assets and total liabilities changed by approximately $1,800,000.On December 1, 2005, EHSI acquired a 126-bed nursing home in Pennsylvania for cash of $8,856,000
(US$7,590,000). Also, on June 1, 2005, EHSI acquired a 127-bed nursing home in Kentucky for cash of
$10,316,000 (US$8,219,000). The net assets acquired in these two transactions and the final
allocation of the purchase price is also included in the following table.
 Extendicare 2005 Annual Report
    
    
    69
    
    
    Notes to Consolidated Statements




---



##### 



(thousands of dollars)
    
    ALC Acquisition


 
Nursing
Homes Acquired
    
    
    TotalUS$
    
    
    
    
    
    
    
    US$AssetsCash
    
    
    6,522
    
    
    
    8,095
    
    
    
    
    
    
    
    
    
    
    
    
    8,095Other current assets
    
    
    12,024
    
    
    
    14,925
    
    
    
    
    28
    
    
    
    32
    
    
    
    14,957Property and equipment
    
    
    283,686
    
    
    
    352,111
    
    
    
    
    13,960
    
    
    
    16,939
    
    
    
    369,050Goodwill
    
    
    5,556
    
    
    
    6,896
    
    
    
    
    2,018
    
    
    
    2,427
    
    
    
    9,323Other intangible assets (resident relationships)
    
    
    6,357
    
    
    
    7,890
    
    
    
    
    95
    
    
    
    115
    
    
    
    8,005Other long-term assets
    
    
    1,459
    
    
    
    1,811
    
    
    
    
    
    
    
    
    
    
    
    
    1,811Total assets
    
    
    315,604
    
    
    
    391,728
    
    
    
    
    16,101
    
    
    
    19,513
    
    
    
    411,241LiabilitiesCurrent maturities of long-term debt
    
    
    3,418
    
    
    
    4,242
    
    
    
    
    
    
    
    
    
    
    
    
    4,242Unfavourable leases as lessor
    
    
    3,715
    
    
    
    4,611
    
    
    
    
    
    
    
    
    
    
    
    
    4,611Other current liabilities
    
    
    18,318
    
    
    
    22,737
    
    
    
    
    292
    
    
    
    341
    
    
    
    23,078Long-term debt
    
    
    140,212
    
    
    
    174,031
    
    
    
    
    
    
    
    
    
    
    
    
    174,031Future income taxes
    
    
    608
    
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    
    755Other long-term liabilities
    
    
    4,755
    
    
    
    5,902
    
    
    
    
    
    
    
    
    
    
    
    
    5,902Total liabilities
    
    
    171,026
    
    
    
    212,278
    
    
    
    
    292
    
    
    
    341
    
    
    
    212,619Purchase price
    
    
    144,578
    
    
    
    179,450
    
    
    
    
    15,809
    
    
    
    19,172
    
    
    
    198,622
    Extendicare 2005 Annual Report
    
    
    70
    
    
    Notes to Consolidated Statements




---



##### 



3.
    
    Loss (Gain) from Asset Disposals, Impairment and Other ItemsThe following summarizes the components of the loss (gain) from asset disposals,
impairment and other items.
 (thousands of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Loss (gain) from dispositionsCompletion
of U.S. divestiture
    
    
    
    
    
    
    
    (6,616
    )
    
    
    Sale of U.S. nursing and assisted living facilities
    
    
    
    
    
    
    
    753
    
    
    
    Sale of Canadian nursing and retirement facilities
    
    
    
    
    
    
    
    (13,504
    )
    
    
    189
    
    
    
    
    (19,367
    )
    
    
    189Issuance and retirement of debtTender and call premiums
    
    
    
    
    
    
    
    7,805
    
    
    
    Legal expenses
    
    
    
    
    
    
    
    390
    
    
    
    Write-off of deferred financing costs
    
    
    
    
    
    
    
    3,167
    
    
    
    Bond discount and foreign exchange
    
    
    
    
    
    
    
    (771
    )
    
    
    Termination of interest rate swap and cap
    
    
    
    
    
    
    
    (3,661
    )
    
    
    Loss (gain) on investment in Omnicare
    
    
    (13,899
    )
    
    
    
    5,046
    
    
    
    Provision
against U.S. advances
    
    
    5,225
    
    
    
    
    
    
    
    
    Loss on repayment of notes due from Tandem
    
    
    
    
    
    
    
    1,720
    
    
    
    Provision
for impairment of U.S. long-lived assets
    
    
    305
    
    
    
    
    2,125
    
    
    
    Gain on sale of non-core assets
    
    
    (1,550
    )
    
    
    
    
    
    
    
    (1,081
    )Other
    
    
    337
    
    
    
    
    441
    
    
    
    (13
    )(9,582
    )
    
    
    
    (3,105
    )
    
    
    (905
    )
  (thousands of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Reconciliation of loss (gain) from asset disposals,
impairment and other itemsContinuing operations
    
    
    (9,582
    )
    
    
    
    (3,105
    )
    
    
    (905
    )Discontinued operations (note 4)
    
    
    4,527
    
    
    
    
    8,345
    
    
    
    (5,055
    )
    
    
    
    5,240
    
    
    
    (905
    )
 (thousands of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Reconciliation of net proceeds from dispositionsContinuing operations
    
    
    
    
    
    
    
    43,675
    
    
    
    2,047Notes receivable
    
    
    
    
    
    
    
    (1,179
    )
    
    
    Discontinued operations (note 4)
    
    
    12,522
    
    
    
    
    
    
    
    
    12,522
    
    
    
    
    42,496
    
    
    
    2,047
 Extendicare 2005 Annual Report
    
    
    71
    
    
    Notes to Consolidated Statements




---



##### 



2005
 th (note 7)
 th
     Extendicare 2005 Annual Report
    
    
    72
    
    
    Notes to Consolidated Statements




---



##### 



2004
        Extendicare 2005 Annual Report
    
    
    73
    
    
    Notes to Consolidated Statements




---



##### 



2003
  4.
    
    Discontinued OperationsIn the last half of 2005, EHSI sold six Florida nursing properties formerly leased to
Senior Health Properties South, Inc. (Senior Health  South). EHSI also sold the Lakeside,
Wisconsin nursing property formerly leased to Lakeside Health L.L.C. (Lakeside Health) and
commenced plans to dispose of three nursing facilities in Minnesota. The Company has reported
results of all of these operations and the related pre-tax gains (or losses) from impairment
charges and dispositions as discontinued operations and has restated prior years. As of
December 31, 2005, EHSI had assets held for sale of $1,548,000 (US$1,331,000) for the Minnesota
properties, which are included in other assets (note 7).The Company has two geographic segments for reporting purposes, and the discontinued operations
were part of its United States segment. The Company has adjusted its disclosure of segmented
reporting to reflect these discontinued operations.The following is a summary of the discontinued operations.
 (thousands of dollars except per share amounts) Years ended December 31
    
    2005
    
    
    
    2004
    
    
    2003Revenue
    
    
    22,109
    
    
    
    
    38,678
    
    
    
    53,270Operating costs
    
    
    28,485
    
    
    
    
    44,006
    
    
    
    51,337Depreciation
    
    
    1,266
    
    
    
    
    2,383
    
    
    
    2,552Interest income
    
    
    (145
    )
    
    
    
    (180
    )
    
    
    (174
    )Loss before the undernoted
    
    
    (7,497
    )
    
    
    
    (7,531
    )
    
    
    (445
    )Impairment charge on assets held for sale
    
    
    (9,496
    )
    
    
    
    (8,345
    )
    
    
    Gain on sale of Florida leased and Lakeside facilities
    
    
    4,969
    
    
    
    
    
    
    
    
    Loss from discontinued operations before income taxes
    
    
    (12,024
    )
    
    
    
    (15,876
    )
    
    
    (445
    )Income tax recovery
    
    
    4,864
    
    
    
    
    4,788
    
    
    
    83Loss from discontinued operations
    
    
    (7,160
    )
    
    
    
    (11,088
    )
    
    
    (362
    )Loss per Subordinate Voting ShareBasic
    
    
    (0.11
    )
    
    
    
    (0.16
    )
    
    
    (0.01
    )Diluted
    
    
    (0.11
    )
    
    
    
    (0.16
    )
    
    
    (0.01
    )Loss per Multiple Voting ShareBasic
    
    
    (0.11
    )
    
    
    
    (0.16
    )
    
    
    (0.01
    )Diluted
    
    
    (0.11
    )
    
    
    
    (0.16
    )
    
    
    (0.01
    )
 Sale of Florida Leased Properties
  Extendicare 2005 Annual Report
    
    
    74
    
    
    Notes to Consolidated Statements




---



##### 



Lakeside Nursing Facility of Wisconsin
   Minnesota Nursing Properties
  Extendicare 2005 Annual Report
    
    
    75
    
    
    Notes to Consolidated Statements




---



##### 



5. Property and Equipment
 (thousands of dollars)
    
    
    
    
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    2004Accumulated
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedDepreciation and
    
    
    Net Book
    
    
    
    
    
    
    
    Depreciation and
    
    
    Net BookCost
    
    
    Amortization
    
    
    Value
    
    
    
    Cost
    
    
    Amortization
    
    
    ValueLand and land
improvements
    
    
    89,594
    
    
    
    4,062
    
    
    
    85,532
    
    
    
    
    68,247
    
    
    
    5,124
    
    
    
    63,123Buildings
    
    
    1,289,405
    
    
    
    359,016
    
    
    
    930,389
    
    
    
    
    967,459
    
    
    
    352,566
    
    
    
    614,893Furniture and equipment
    
    
    134,157
    
    
    
    58,450
    
    
    
    75,707
    
    
    
    
    130,168
    
    
    
    63,402
    
    
    
    66,766Leasehold improvements
    
    
    17,359
    
    
    
    7,208
    
    
    
    10,151
    
    
    
    
    15,566
    
    
    
    7,208
    
    
    
    8,358Construction in progress
    
    
    6,960
    
    
    
    
    
    
    
    6,960
    
    
    
    
    14,261
    
    
    
    
    
    
    
    14,2611,537,475
    
    
    
    428,736
    
    
    
    1,108,739
    
    
    
    
    1,195,701
    
    
    
    428,300
    
    
    
    767,401
 note 10
   6. Goodwill and Other Intangible Assets
 (thousands of dollars)
    
    
    
    
    
    
    
    
    
    2005
    
    
    2004GoodwillBalance at beginning of year
    
    
    
    
    
    
    
    
    
    
    87,364
    
    
    
    
    93,583Additions in the year
    
    
    
    
    
    
    
    
    
    
    9,323
    
    
    
    
    646Disposals in the year
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    
    Foreign exchange
    
    
    
    
    
    
    
    
    
    
    (3,347
    )
    
    
    
    (6,865
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    93,313
    
    
    
    
    87,364Leasehold
    
    ResidentRights
    
    RelationshipsOther intangible assetsGross carrying value at beginning of year
    
    
    12,039
    
    
    
    
    
    
    
    12,039
    
    
    
    
    12,985Additions in the year
    
    
    
    
    
    
    8,005
    
    
    
    8,005
    
    
    
    
    Foreign exchange
    
    
    (390
    )
    
    
    (502
    )
    
    
    (892
    )
    
    
    
    (946
    )Gross carrying value at end of year
    
    
    11,649
    
    
    
    7,503
    
    
    
    19,152
    
    
    
    
    12,039Accumulated amortization at beginning of year
    
    
    (9,720
    )
    
    
    
    
    
    
    (9,720
    )
    
    
    
    (9,010
    )Amortization
    
    
    (1,377
    )
    
    
    (2,383
    )
    
    
    (3,760
    )
    
    
    
    (1,480
    )Foreign exchange
    
    
    370
    
    
    
    96
    
    
    
    466
    
    
    
    
    770Accumulated amortization at end of year
    
    
    (10,727
    )
    
    
    (2,287
    )
    
    
    (13,014
    )
    
    
    
    (9,720
    )Net carrying value
    
    
    922
    
    
    
    5,216
    
    
    
    6,138
    
    
    
    
    2,31999,451
    
    
    
    
    89,683
 Extendicare 2005 Annual Report
    
    
    76
    
    
    Notes to Consolidated Statements




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##### 



7. Other Assets
 (thousands of dollars)
    
    2005
 
    
    
    2004Investments held for self-insured liabilities
    
    
    49,031
    
    
    
    
    48,920Notes, mortgages and amounts receivable
    
    
    70,135
    
    
    
    
    70,513Other long-term receivables, less allowance of nil (2004  $3,599)
    
    
    6,531
    
    
    
    
    12,278Deferred charges
    
    
    15,898
    
    
    
    
    19,009Assets held for sale
    
    
    1,548
    
    
    
    
    Other investments
    
    
    184
    
    
    
    
    6,136Long-term accounts receivable from consulting agreements
    
    
    
    
    
    
    
    11,382143,327
    
    
    
    
    168,238
 Investments Held for Self-insured Liabilities
  (thousands of dollars)
    
    2005
 
    
    
    2004Fixed income securities, with maturities dueIn one year or less
    
    
    4,422
    
    
    
    
    1,083After 1 year through 5 years
    
    
    7,240
    
    
    
    
    12,782After 5 years through 10 years
    
    
    7,302
    
    
    
    
    4,69118,964
    
    
    
    
    18,556Cash and money market funds
    
    
    25,243
    
    
    
    
    27,093Equities
    
    
    4,824
    
    
    
    
    3,27149,031
    
    
    
    
    48,920
 Notes, Mortgages and Amounts Receivable
  Extendicare 2005 Annual Report
    
    
    77
    
    
    Notes to Consolidated Statements




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##### 



Other Long-term Receivables
       Extendicare 2005 Annual Report
    
    
    78
    
    
    Notes to Consolidated Statements




---



##### 



claims against Arbor, and were also reserved for within provisions for divested
operations. EHSIs escrow funds of US$3,700,000 remain on deposit with a trustee. Upon
settlement of these Medicare matters, EHSI is confident that there are no further outstanding
claims in respect of Arbor. However, there can be no assurance that other claims will not be
made until the expiry of the warranty period with Tandem in 2007. As a result of the
settlement, EHSI applied the US$3,700,000 of other long-term liabilities and US$3,200,000 of
accrued liabilities for divested operations against the balance of the unrecoverable Medicare
settlement receivable. As a result, there was no gain or loss recognized on settlement of this
issue.In September 2004 EHSI reached a settlement with a fiscal intermediary with respect to a
Director of Nursing staff cost issue amounting to $3,912,000 (US$3,200,000), of which
$3,423,000 (US$2,800,000) was received in the fourth quarter of 2004 and the balance will be
received in 2006. There was no gain or loss recognized on settlement of this issue.Other InvestmentsIn September 2004 EHSI wrote off its carrying value of $5,046,000 (US$4,000,000) of an
investment in a warrant to acquire 1,500,000 shares of Omnicare that it held pursuant to the
divestiture of the pharmacy operations to Omnicare in 1998.8.
    
    Equity Accounted InvestmentsCrown Life Insurance CompanyExtendicare holds a 34.8% (1,113,690 shares) common equity interest in Crown Life,
with a carrying value of $73,805,000 at December 31, 2005. Extendicares share of Crown
Lifes earnings for the years ended December 31, 2005 and 2004 was $5,288,000 and
$11,998,000, respectively. Extendicare received no dividends from Crown Life in 2005 and in
2004 received dividends of $82,413,000; $15,592,000 on June 15, 2004, or $14.00 per share,
and $66,821,000 on December 15, 2004, or $60.00 per share.In 1999 substantially all of Crown Lifes insurance business was sold or indemnity reinsured
to The Canada Life Assurance Company (Canada Life). The resulting comprehensive agreement
between Crown Life and its principal shareholders, HARO Financial Company and Extendicare,
provides that at any time after January 1, 2004, Canada Life may either acquire substantially
all of the balance of Crown Lifes insurance business or, at the election of Canada Life or
Crown Lifes principal shareholders, make an offer for all of the common shares of Crown Life.
In July 2003 Great-West Lifeco Inc. acquired Canada Life, which has resulted in a delay in the
start of negotiations with Crown Life on the final settlement of the Canada Life transaction.Crown Life has voided certain reinsurance contracts and continues to investigate the validity
of the claims arising from other reinsurance contracts. It is not possible to estimate the
ultimate costs, if any, that may result.Crown Life is a defendant in a number of lawsuits. It is not possible to predict the outcome
of outstanding litigation, or to estimate any costs that might arise.
 Extendicare 2005 Annual Report
    
    
    79
    
    
    Notes to Consolidated Statements




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##### 



Salumatics Inc.The Companys share of Salumatics Inc.s (Salumatics) loss for year ended December 31,
2005, was $1,360,000, after applying amounts previously reserved. Extendicares carrying value
of its investment in Salumatics, a provider of electronic health information and record
management services, was reduced to nil from $2,623,000 at December 31, 2004, as a result of
losses of Salumatics and a provision against the remaining carrying value (note 21).9.
    
    Self-insured Liabilities and Measurement UncertaintyThe accrual for self-insured liabilities is based on managements best estimate of the
ultimate cost to settle claims. Management regularly evaluates the appropriateness of the
carrying value of this liability. General and professional liability claims are the most
volatile and significant of the risks for which the Company self-insures.Managements estimate of the accrual for general and professional liability costs is
significantly influenced by assumptions, which are limited by the uncertainty of predictions
concerning future events and assessments regarding expectations of several factors. Such
factors include, but are not limited to: the frequency and severity of claims, which can
differ materially by jurisdiction in which the Company operates; coverage limits of
third-party reinsurance; the effectiveness of the claims management process; and uncertainty
regarding the outcome of litigation.As a result of the adverse development of claims experienced by the Company and the long-term
care industry as a whole, the Companys per claim retained risk increased significantly in
2000.This was mainly due to risk levels associated with the Florida and Texas operations. The
Company exited the nursing home markets of these two highly litigious states in 2000 and 2001,
respectively, thereby limiting future exposure to general liability claims. However, changes
in the Companys level of retained risk, and other significant assumptions that underlie
managements estimates of self-insured liabilities, could have a material effect on the future
carrying value of the self-insured liabilities, as well as on the Companys operating results
and liquidity.Payments made for resident care liability claims have been in excess of the current accrual
levels because the Company is still settling claims related to its ceased operations, for
which provisions were previously recorded. Payments made for resident care liability have
tapered off, reflecting the wind-down of claims associated with the Florida and Texas disposed
operations. Management anticipates that all claims associated with the past Florida and Texas
operations will be settled by the end of 2006. Exclusive of claims pertaining to these
disposed operations, the growth of claims has increased, but within managements projections.
General and professional liability claim payments for any one-policy year occur over a period
of several years. However, the Company estimates and allocates a current portion of the
professional liability claim payments on its balance sheet.The Company invests funds to support the accrual for self-insured liabilities and believes
that it has sufficient cash resources to meet its estimated current claims payment
obligations.
 Extendicare 2005 Annual Report
    
    
    80
    
    
    Notes to Consolidated Statements




---



##### 



10.
    
    Long-term Debt
 (thousands of dollars)
    
    
    
    
    
    2005
    
    
    
    
    
    
    
    2004Payable in United States dollars
    
    US$
    
    
    
    
    
    
    
    US$EHSISenior Subordinated Notes at 6.875%, due 2014
    
    
    122,255
    
    
    
    142,183
    
    
    
    
    122,022
    
    
    
    146,669Senior Notes at 9.50%, due 2010
    
    
    149,756
    
    
    
    174,166
    
    
    
    
    149,714
    
    
    
    179,956Term Loan at variable rates, due 2010
    
    
    85,570
    
    
    
    99,518Mortgages and Industrial Development Revenue Bonds
6.25% to 13.61%, maturing through to 2008
    
    
    3,923
    
    
    
    4,562
    
    
    
    
    4,345
    
    
    
    5,223At varying rates, due 2014
    
    
    
    
    
    
    
    
    
    
    
    9,500
    
    
    
    11,419Notes payable, 3% to 8%, maturing through to 2008
    
    
    648
    
    
    
    754
    
    
    
    
    6,340
    
    
    
    7,621Obligations under capital leases
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    13362,152
    
    
    
    421,183
    
    
    
    
    291,932
    
    
    
    350,901ALCRed Mortgage Capital Note at 6.24%, due 2014
    
    
    36,533
    
    
    
    42,487DMG Mortgage notes payable,
7.58% to 8.65%, due 2008
    
    
    27,263
    
    
    
    31,707Oregon Trust Deed Notes, 0.25% to
10.90%, maturing 2020 through to 2026
    
    
    9,483
    
    
    
    11,029HUD Insured Mortgages, 7.40% to 7.55%, due 2036
    
    
    7,673
    
    
    
    8,924Capital lease obligations, 2.84%
to 13.54%, maturing through to 2009
    
    
    12,222
    
    
    
    14,21493,174
    
    
    
    108,361Payable in Canadian dollarsExtendicare Inc. and Canadian SubsidiariesMortgages, 5.81% to 9.81%, maturing through to 2013
    
    
    
    
    
    
    133,123
    
    
    
    
    
    
    
    
    136,822Obligations under capital leases, 7.28% to 8%, maturing
through to 2028
    
    
    
    
    
    
    133,727
    
    
    
    
    
    
    
    
    133,179266,850
    
    
    
    
    
    
    
    
    270,001796,394
    
    
    
    
    
    
    
    
    620,902Less due within one year and included in current liabilities
    
    
    
    
    
    
    21,151
    
    
    
    
    
    
    
    
    7,251775,243
    
    
    
    
    
    
    
    
    613,651
 The acquisition of ALC by EHSI on January 31, 2005, resulted in EHSI assuming long-term
debt of ALC, including current maturities of long-term debt, of US$143,630,000 and borrowings
of US$60,000,000 under its former credit facility to finance the transaction. In August 2004
EHSI amended and restated its former credit facility to refinance and pay certain of its debt
instruments. Specific information related to the Companys long-term debt, including changes
to EHSIs long-term debt and its credit facility and ALCs long-term debt acquired are
outlined in the descriptions that follow.
 Extendicare 2005 Annual Report
    
    
    81
    
    
    Notes to Consolidated Statements




---



##### 



EHSI DebtSenior Subordinated Notes Due 2014In April 2004 EHSI issued US$125,000,000 aggregate principal amount of 6.875% Senior
Subordinated Notes due May 1, 2014 (the 2014 Notes) at a price of 97.5001% of par to yield
7.23%, and amended and restated its credit facility. The net proceeds from the 2014 Notes were
approximately US$117,400,000, and were used, together with cash on hand and new borrowing
capacity, to purchase for cash all of EHSIs outstanding US$200,000,000 aggregate principal
amount of the 2007 Notes. On April 5, 2004, EHSI commenced a tender offer for the 2007 Notes,
for which 61%, excluding those held by Extendicare Inc., were tendered and US$104,900,000
aggregate principal was repaid on April 22, 2004. The remaining US$95,100,000 of 2007 Notes
not tendered were redeemed and paid for on May 24, 2004, including the US$27,900,000 held by
Extendicare Inc.In August 2004 EHSI completed its offer to exchange new 6.875% Senior Subordinated Notes due
2014 that had been registered under the Securities Act of 1933 for the Senior Subordinated
Notes issued in April 2004 pursuant to Rule 144A and Regulation S under the Securities Act of
1933, as amended. The terms of the new 2014 Notes are identical to the terms of the 2014 Notes
issued in April 2004.The 2014 Notes are fully and unconditionally guaranteed on a senior subordinated unsecured
basis, jointly and severally, except for ALCs unrestricted subsidiaries, by all of EHSIs
existing and future significant U.S. domestic subsidiaries, by all of its existing and future
U.S. domestic subsidiaries that guarantee or incur any indebtedness and by any other existing
and future significant subsidiaries or restricted subsidiaries that guarantee or otherwise
provide direct credit support for indebtedness of EHSI or any of its U.S. domestic
subsidiaries. The 2014 Notes and guarantees are general unsecured obligations of EHSI and its
subsidiaries.Senior Notes Due 2010On June 28, 2002, EHSI completed a private placement of US$150,000,000 of 9.5% Senior Notes
due July 1, 2010 (the 2010 Notes), which were issued at a discount of 0.25% of par to yield
9.54%. In January 2003 EHSI completed an offer to exchange new 9.5% Senior Notes due 2010 that
had been registered under the Securities Act of 1933 for the Senior Notes issued in June 2002.
The terms of the new Senior Notes are identical to the terms of the 2010 Notes issued in June
2002 and are guaranteed by all existing and future active subsidiaries of EHSI except for
ALCs unrestricted subsidiaries.On April 22, 2004, EHSI entered into interest rate swap and cap agreements to convert the
fixed-rate debt on the 2014 Notes and the 2010 Notes to variable rates, subject to the
interest rate cap (note 11).
 Extendicare 2005 Annual Report
    
    
    82
    
    
    Notes to Consolidated Statements




---



##### 



The 2010 Notes and the 2014 Notes are redeemable at EHSIs option starting on July 1, 2006,
and May 1, 2009, respectively. The redemption prices, if redeemed during the 12-month period
indicated, are as follows:
 Senior Notes, due 2010Year (starting July 1)2006
    
    
    104.750
    %2007
    
    
    102.375
    %2008 and thereafter
    
    
    100.000
    %
 Senior Subordinated Notes, due 2014Year (starting May 1)2009
    
    
    103.438
    %2010
    
    
    102.292
    %2011
    
    
    101.146
    %2012 and thereafter
    
    
    100.000
    %
 Term Loan and Revolving Credit FacilityOn August 4, 2005, EHSI amended and restated its former credit facility to: increase the total
borrowing capacity from US$155,000,000 to US$200,000,000, comprised of an US$86,000,000 term
loan (the Term Loan) and a US$114,000,000 revolving credit facility (the Credit Facility);
reduce the cost of borrowing; and provide increased financial flexibility.As a result of this, on August 4, 2005, EHSI borrowed US$86,000,000 under the Term Loan and
US$13,900,000 under the revolving portion of the Credit Facility, repaid in full US$64,000,000
under the former credit facility and terminated and repaid in full ALCs US$34,016,000 of
borrowings under ALCs GE Capital Term Loan and ALCs Credit Facility.The terms of EHSIs Term Loan and Credit Facility included, among other things, the following
changes from its former credit facility:
    
    a Term Loan for US$86,000,000 with the principal balance payable in equal quarterly
instalments of US$215,000 over the first four years, equal quarterly instalments of
US$20,600,000 over the first three quarters of the last year, and a final principal
instalment of US$20,600,000 on the maturity date;
    
    a reduction in the revolving credit limit by US$41,000,000 to US$114,000,000 from the
US$155,000,000 limit under the former credit facility. EHSI may request an increase in the
credit extended or available by up to US$15,000,000, subject to the approval by one or
more of the participating lenders. This increase may be in the form of additional term
loans or an increase in the revolving credit limit;
    
    a maturity date of July 31, 2010, reflecting an extension of just over one year from
the maturity date of the former 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 former 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 EHSIs senior leverage ratio;
    
    a provision for a US$10,000,000 swing line commitment within the US$114,000,000
revolving credit limit;
    
    the financial covenants will include ALCs debt and earnings, whereas the financial
covenants under the former credit facility did not.The financial covenants are otherwise
substantially the same as under the former credit facility;
 Extendicare 2005 Annual Report
    
    
    83
    
    
    Notes to Consolidated Statements




---



##### 




    
    included procedures for ALC and its subsidiaries to be designated as restricted subsidiaries
and guarantors over time. As this occurs, these subsidiaries will become subject to the
covenants of the Term Loan and Credit Facility that apply to EHSIs restricted subsidiaries.
Also, EHSI 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 Term
Loan and Credit Facility;
    
    increased EHSI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 EHSI 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 US$40,000,000;
    
    a requirement that ALCs debt in connection with the US$22,000,000 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 Term Loan and Credit Facility. These Revenue Bonds were prepaid in
December 2005 for the amount of US$21,100,000 and as a result of the repayment ALC became a
restricted subsidiary under the Term Loan and Credit Facility; and
    
    increased EHSIs ability to make restricted payments to permit annual dividends up to the
lesser of (i) 50% of its net income, (ii) US$25,000,000 plus the unused restricted payment
amount for the previous fiscal year, or (iii) US$50,000,000.In January 2005 EHSI had amended its former revolving credit facility to permit a loan from
its U.S. parent, Extendicare Holdings, Inc. (EHI) and to partially finance the acquisition of
ALC. The ALC debt that EHSI assumed in the acquisition was non-recourse to EHSI and its
subsidiaries that existed prior to the acquisition of ALC. ALCs debt and earnings were
excluded from existing financial covenants under EHSIs former credit facility and certain
restrictions in EHSIs former credit facility did not apply to ALC and its subsidiaries. EHSI
was restricted from borrowing further under its former credit facility, or with limited
exceptions otherwise making investments, to support ALC and its subsidiaries, and all cash
flow from ALC was retained within the ALC operation.The Credit Facility is used to back letters of credit and for general corporate purposes. The
Term Loan and Credit Facility is guaranteed by EHI and EHSIs material domestic subsidiaries,
excluding ALCs unrestricted subsidiaries. The collective group of ALC subsidiaries that are
non-guarantors to the lenders of the Term Loan and Credit Facility have been determined to be
minor. The Term Loan and Credit Facility is secured by certain tangible and intangible assets
of EHI, EHSI and the subsidiary guarantors (other than ALCs unrestricted subsidiaries),
including certain real property and, with certain exceptions, substantially all of the
personal property of EHI, EHSI and the subsidiary guarantors (other than ALCs unrestricted
subsidiaries). The Term Loan and Credit Facility is also secured by a pledge of 65% of the
voting stock of EHSIs foreign subsidiaries, including its subsidiary guarantors foreign
subsidiaries, if any. As a result, the Term Loan and Credit Facility is secured by the same
assets that secured the former revolving credit facility; however, it provides for additional
security consisting of 45 of ALCs assisted living facilities, formerly financed under ALCs
GE Capital Term Loan and Credit Facility and Revenue Bonds, and one nursing facility located
in Kentucky that was acquired in June 2005. Further guarantees and collateral may be provided
as additional subsidiaries of ALC become restricted subsidiaries. As subsidiaries
 Extendicare 2005 Annual Report
    
    
    84
    
    
    Notes to Consolidated Statements




---



##### 



of ALC guarantee or otherwise provide credit support for the Term Loan and Credit Facility,
EHSI will be required to cause such subsidiaries to guarantee the 2010 Notes and the 2014
Notes on the same basis as the existing guarantors of the respective notes have guaranteed
such notes.Like the former credit facility, the Term Loan and Credit Facility contain customary covenants
and events of default and are subject to various mandatory prepayment and commitment
reductions. If an event of default occurs, the lenders may accelerate the maturity of the
loans under the Term Loan and Credit Facility, charge a default rate of interest, and/or
foreclose on the mortgages and other collateral securing the Term Loan and Credit Facility.
EHSI is permitted to make voluntary prepayments at any time under the Term Loan and Credit
Facility.As of December 31, 2005, EHSI had borrowings of $99,518,000 (US$85,570,000) under the Term
Loan, and no borrowings under its Credit Facility. The unused portion of the Credit Facility
that was available for working capital and corporate purposes, after reduction for outstanding
letters of credit of US$18,200,000, was US$95,800,000 as of December 31, 2005.The Term Loan and Credit Facility require that EHSI comply with various financial covenants,
including fixed charge coverage, debt leverage and tangible net worth ratios. EHSI is in
compliance with all of its financial covenants as of December 31, 2005.Mortgages, Industrial Development Revenue Bonds and Notes PayableIn January 2005 EHSI prepaid in full a US$9,500,000 variable rate Industrial Development
Revenue Bond, due 2014 and also, in February 2005 EHSI prepaid in full mortgage notes payable
totalling US$5,317,000. These prepayments resulted in a charge of $337,000 (US$275,000) to
write off deferred financing costs, which is included in earnings as part of loss (gain) from
asset disposals, impairment and other items.During the first and third quarters of 2004, EHSI prepaid in full $16,900,000 (US$13,000,000)
and $12,400,000 (US$9,500,000), respectively, of Industrial Development Revenue Bonds,
resulting in the write-off of $663,000 (US$506,000) of deferred financing costs, which have
been reported in loss (gain) from asset disposals, impairment and other items in the statement
of earnings.ALC DebtRed Mortgage Capital Note 6.24% Due 2014The Red Mortgage Capital Note has a fixed interest rate of 6.24%, has a 25-year principal
amortization and is secured by 24 assisted living facilities within ALC. The Red Mortgage
Capital Note was entered into by subsidiaries of ALC and is non-recourse to EHSI and its
subsidiaries that existed prior to the ALC acquisition, but subject to a limited guarantee by
ALC.DMG Mortgage Notes Payable Due 2008DMG Mortgage notes payable include three fixed-rate notes that are secured by 13 ALC assisted
living facilities located in Texas, Oregon and New Jersey. These notes were entered into by
subsidiaries of ALC and are non-recourse to EHSI and its subsidiaries that existed prior to
the ALC acquisition, but subject to a limited guarantee by ALC. These notes collectively
require monthly principal and interest payments of US$230,000, with balloon payments of
US$11,800,000, US$5,300,000 and US$7,200,000 due at maturity in May, August and September
2008, respectively.These loans bear interest at fixed rates ranging from 7.6% to 8.7%.
 Extendicare 2005 Annual Report
    
    
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    Notes to Consolidated Statements




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Oregon Trust Deed NotesThe Oregon Trust Deed Notes, which mature 2020 through 2026, are secured by buildings, land,
and furniture and fixtures of six ALC assisted living facilities in Oregon. The Notes are
payable in monthly instalments including interest at effective rates ranging from 7.4% to
9.0%. Under debt agreements relating to the Oregon Trust Deed Notes, ALC is required to comply
with terms of certain regulatory agreements until the scheduled maturity dates of the related
Revenue Bonds issued by the State of Oregon to partially fund the Trust Deed Notes as
described in note 17regarding Revenue Bonds commitments. ALC is also required to maintain a
capital replacement escrow account to cover future expected capital expenditure requirements
for the leased properties.HUD Insured Mortgage Due 2036The Housing and Urban Development (HUD) insured mortgages include three separate loan
agreements entered into in 2001. The mortgages are each secured by a separate ALC assisted
living facility located in Texas. These loans mature between July 1, 2036 and August 1, 2036,
and collectively require monthly principal and interest payments. The loans bear interest at
fixed rates ranging from 7.40% to 7.55%.Capital Lease ObligationsIn March 2005 ALC amended its lease agreements with Assisted Living Facilities, Inc., an
unrelated party, relating to five of its assisted living facilities located in Oregon, which
provided ALC with an option to purchase the facilities in 2009 at a fixed price. The option to
purchase was determined to be a bargain purchase price, requiring that the classification of
these leases be changed from operating to capital. As a result, a capital lease obligation of
US$12,822,000 was recorded, which represented the estimated market value of the properties as
of the lease amendment date, and also approximated the present value of future payments due
under the lease agreements, including the purchase option payment. The option to purchase must
be exercised prior to July 1, 2009, with closing on or about December 31, 2009.Canadian DebtMortgagesThe Company and its Canadian subsidiaries have various mortgages with several Canadian
financial institutions at rates ranging from 5.81% to 9.81% with maturity dates through to
2013.Capital Lease ObligationsECI obtained financing of $125,400,000 in 2001 at a financing cost of approximately 8.0% from
BCP Long-Term Care Facilities Inc. (BCP) to build eight Ontario nursing facilities and entered
into another arrangement in 2003 with BCP for $14,400,000 of financing for an additional
Ontario nursing home at a borrowing rate of 7.28%. ECI is operating the facilities for BCP
under 25-year capital lease arrangements.During the first quarter of 2005, ECI amended its 2001 agreement with BCP covering financing
for eight of ECIs new Ontario nursing homes under 25-year capital lease arrangements. The
amendment altered the $5,000,000 security for a debt service reserve to be entered into after
construction and for the duration of the term of the leases, from a letter of credit to a
charge on an Ontario nursing home owned and operated by the Company.
 Extendicare 2005 Annual Report
    
    
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##### 



OtherLetters of CreditAs of December 31, 2005, the Company had issued letters of credit totalling US$21,900,000
through EHSI and ALC. EHSI had issued US$2,200,000 in letters of credit (of which US$800,000
pertained to ALCs assisted living facilities) as security for landlords of leased properties.
These letters of credit are renewed annually and have maturity dates ranging from January 2006
to December 2006. EHSI also had issued US$19,600,000 in letters of credit (of which
US$2,900,000 pertained to ALC) to outside third-party insurers and the Ohio Bureau of Workers
Compensation as security for workers compensation claims. These letters of credit are renewed
annually and have maturity dates ranging from January 2006 to March 2007. ALCs letters of
credit are secured with cash held as collateral whereas EHSIs letters of credit are secured
by the Credit Facility.In the second quarter of 2005, the Company amended its Canadian bank line of credit to
increase availability to $50,000,000 from $40,000,000. There were no borrowings under the
Canadian line of credit at December 31, 2005. The Company had $10,200,000 available under its
Canadian line of credit at December 31, 2005, after reduction for outstanding letters of
credit of $39,800,000, primarily to secure pension obligations.Principal RepaymentsPrincipal repayments on long-term debt due within the next five fiscal years, exclusive of
obligations under capital leases as described in note 17, after giving effect to renewal
privileges, are as follows:
 Year
    
    (thousands of dollars)2006
    
    
    18,2472007
    
    
    11,9722008
    
    
    46,3722009
    
    
    60,2632010
    
    
    228,438
 GeneralAfter taking into account interest rate swap agreements, the weighted average interest rate of
all long-term debt at December 31, 2005, 2004 and 2003 was approximately 8.1%, 7.3% and 7.8%,
respectively. In addition, after considering swap agreements in place to convert fixed-rate
debt to floating rates, 47.8% of the long-term debt was effectively at fixed rates.Interest paid in 2005, 2004 and 2003 was $61,938,000, $53,095,000 and $66,094,000, respectively.11.
    
    Interest Rate Swap and Cap AgreementsEHSI entered into an interest rate swap agreement and an interest rate cap agreement
in 2002. The swap arrangement was used to hedge a notional US$150,000,000 of EHSIs
fixed-rate 9.35% 2007 Notes and was to mature in December 2007. The interest rate cap
agreement covered a notional amount of US$150,000,000 and also matured in December 2007.On April 19, 2004, coterminous with the redemption of its 2007 Notes, EHSI terminated its
related interest rate swap and cap agreements for an aggregate gain of $4,433,000
(US$3,302,000), which was recognized in the second quarter of 2004. In addition, to hedge its
exposure to fluctuations in market value, on April 22, 2004, EHSI entered into two new
interest rate swap agreements and two new interest rate cap agreements relating to EHSIs 2010
Notes and 2014 Notes.
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With respect to the 2010 Notes, EHSI entered into an interest rate swap agreement expiring
July 1, 2010, with a notional amount of US$150,000,000. This agreement effectively converted
up to US$150,000,000 of fixed-rate indebtedness into variable-rate indebtedness. Under the
terms of this interest rate swap agreement, the counterparty can call the swap at any time on
or after July 1, 2006, with payments as determined under the agreement. This call option is a
mirror image of the embedded call option in the debt instrument. EHSI also entered into an
interest rate cap agreement expiring July 1, 2010, with a notional amount of US$150,000,000
(the 2010 Cap). Under the terms of the 2010 Cap, EHSI paid on April 22, 2004, an upfront fee
of US$3,500,000 to the counterparty, and the change in fair value of this fee is recorded in
the statement of earnings. EHSI will receive a variable rate of interest equal to the excess,
if any, of the six-month LIBOR, adjusted semi-annually, over the cap rate of 7%. EHSI uses the
interest rate cap to offset possible increases in interest payments under the interest rate
swap agreement expiring July 1, 2010, caused by increases in market interest rates over a
certain level. Under the terms of the 2010 Cap, the counterparty can call the cap if the
interest rate swap agreement expiring July 1, 2010, is terminated.With respect to the 2014 Notes, on April 22, 2004, EHSI entered into an interest rate swap
agreement expiring May 1, 2014, with a notional amount of US$125,000,000. This agreement
effectively converted up to US$125,000,000 of fixed-rate indebtedness into variable-rate
indebtedness. Under the terms of this interest rate swap agreement, the counterparty can call
the swap at any time on or after May 1, 2009, with payments as determined under the agreement.
This call option is a mirror image of the embedded call option in the debt instrument. EHSI
also entered into an interest rate cap agreement expiring May 1, 2014, with a notional amount
of US$125,000,000 (the 2014 Cap). Under the terms of the 2014 Cap, EHSI pays a fixed rate of
interest equal to 0.75% to the counterparty and receives a variable rate of interest equal to
the excess, if any, of the six-month LIBOR, adjusted semi-annually, over the cap rate of 7%.
EHSI uses the interest rate cap to offset possible increases in interest payments under the
interest rate swap agreement expiring May 1, 2014, caused by increases in market interest
rates over a certain level. Under the terms of the interest rate cap agreement, the
counterparty can call the cap if the interest rate swap agreement expiring May 1, 2014, is
terminated.The interest rate swaps maturing in 2010 and 2014 are designated as highly effective fair
value hedges, and as a result, changes in market value of the swaps are offset by changes in
market value of the hedged debt instruments. As of December 31, 2005, the fair value of the
interest rate swaps designated as fair value hedges is a liability of $6,267,000
(US$5,389,000) and is offset by a corresponding change in the fair value of the hedged
long-term debt obligation, both of which are off-balance sheet amounts.The interest rate caps maturing in 2010 and 2014 are not designated as hedges and the change
in fair value of these caps are reported in the statement of earnings. As of December 31,
2005, the fair value of the 2010 Cap is an asset of $450,000 (US$387,000) and the fair value
of the 2014 Cap is a liability of $6,392,000 (US$5,496,000). The asset is included in the
balance sheet as other assets and the liability is included in other long-term liabilities
(note 12). The fair values of EHSIs interest rate caps are dependent on projected six-month
LIBOR, which is influenced by long-term rates, and the volatility of these rates. The value of
EHSIs interest rate caps declined in 2005 and resulted in a valuation adjustment loss of
$2,248,000 (US$1,803,000) for the year ended December 31, 2005.
 Extendicare 2005 Annual Report
    
    
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##### 



12.
    
    Other Long-term Liabilities
 (thousands of dollars)
    
    2005
    
    
    
    2004Accrued
pension plan obligation (note 19)
    
    
    21,815
    
    
    
    
    19,734Deferred compensation
    
    
    9,738
    
    
    
    
    8,663Unfavourable lease adjustments as lessee
    
    
    4,457
    
    
    
    
    Future lease commitments
    
    
    2,485
    
    
    
    
    Market value of interest rate caps
    
    
    6,392
    
    
    
    
    6,299Other
    
    
    1,742
    
    
    
    
    18346,629
    
    
    
    
    34,879
 Accrued Pension Plan ObligationThe Company provides a defined benefit pension plan and supplementary plan, which is an
unfunded defined benefit pension arrangement, for certain of its executives.Deferred CompensationEHSI maintains an unfunded deferred compensation plan offered to all corporate employees
defined as highly compensated by the U.S. Internal Revenue Service Code in which participants
may defer up to 10% of their base salary. EHSI will match up to 50%
of the amount deferred. The
Company also maintains non-qualified deferred compensation plans covering certain executive
employees.Unfavourable Lease Adjustment as LesseeEHSI evaluated the ALC leases in existence at the date of the acquisition and determined,
based upon future discounted lease payments over the remaining term of the lease, an excess
was to be paid, as compared to the market, based upon the operating cash flows of the leased
facilities. The unfavourable lease liability upon acquisition was $4,879,000 (US$3,931,000),
and is amortized on a straight-line basis, as an offset to lease expense, over the term of the
lease agreements. The amount of unfavourable lease amortization for the 11-month period ended
December 31, 2005 was $119,000 (US$99,000).13.
    
    Share CapitalThe authorized capital of the Company consists of an unlimited number of:Class I preferred shares, issuable in series; Class II preferred shares, issuable in series;
Subordinate Voting Shares; and Multiple Voting Shares, convertible on the basis of one
Subordinate Voting Share for each Multiple Voting Share. All preferred shares are redeemable
at $25.00 per share at the option of the Company.Class I Preferred SharesCumulative Redeemable Preferred Shares, Series 2are entitled to receive quarterly
cumulative preferential cash dividends in an amount determined by applying $25.00 to
one-quarter of 71% of the average Canadian prime rate of interest for the quarter ended
immediately before the relevant dividend payment date. The provisions of these shares contain
an annual purchase obligation, whereby the Company is obliged to make its best efforts to
acquire 71,637 of these shares annually on the open market.
 Extendicare 2005 Annual Report
    
    
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    Notes to Consolidated Statements




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##### 



Adjustable Dividend Preferred Shares, Series 3are entitled to receive quarterly cumulative
preferential cash dividends in an amount determined by applying $25.00 to one-quarter of 72%
of an interest rate to be determined every five years by reference to yields on selected
Government of Canada bonds. The annual dividend rate was 3.96% for the period commencing
February 16, 2001 and ending February 15, 2006. The annual dividend rate is 2.84% for the
period commencing February 16, 2006 and ending February 15, 2011. The Series 3 Preferred
Shares were convertible into Adjustable Dividend Preferred Shares, Series 4 on a
share-for-share basis on February 16, 2006, and are convertible on each fifth anniversary
thereof. On February 16, 2006, under the above conversion privileges, 3,400 Series 3 Preferred
Shares were converted into an equal number of Series 4 Preferred Shares.Adjustable Dividend Preferred Shares, Series 4are entitled to receive quarterly cumulative
preferential cash dividends in an amount determined by applying $25.00 to one-quarter of 72%
of the average Canadian prime rate of interest for the quarter ended immediately before the
relevant dividend payment date. The Series 4 Preferred Shares were convertible into Series 3
Preferred Shares on a share-for-share basis on February 16, 2006, and are convertible on each
fifth anniversary thereof. There were no Series 4 Preferred Shares converted on February 16,
2006.Class II Preferred SharesPreferred Shares, Series 1are entitled to receive monthly cumulative cash dividends in
an amount determined by applying $25.00 to one-twelfth of the defined Annual Dividend Rate
applicable to that calendar month. The Annual Dividend Rate for a calendar month is calculated
with reference to the Canadian prime rate of interest and the defined Calculated Trading Price
of the Class II Preferred Shares, Series 1.Subordinate Voting Shares and Multiple Voting SharesSubordinate Voting Sharesare entitled to one vote for each share held at any meeting of
shareholders of the Company. The Subordinate Voting Shares entitle the holders thereof to
quarterly preferential dividends, cumulative within each financial year, aggregating $0.025
per share in each financial quarter, after which each Multiple Voting Share and Subordinate
Voting Share participates equally in all further dividends.Multiple Voting Sharesare entitled to 10 votes for each share held at any meeting of shareholders.Normal Course Issuer Bid and Purchase ObligationDuring 2005, pursuant to normal course issuer bids, the Company purchased for
cancellation 1,430,000 Subordinate Voting Shares at a cost of $25,489,000 (2004  456,100
shares at a cost of $6,623,000) and 75,900 Multiple Voting Shares at a cost of $1,351,000
(2004  7,700 shares at a cost of $120,000). The shares purchased and cancelled during 2005
included 669,900 Subordinate Voting Shares and 52,100 Multiple Voting Shares purchased under
the current bid at a total cost of $13,088,000. The current bid, which commenced November 29,
2005, will terminate for each class of shares on the earlier of November 28, 2006, and the
dates on which a total of 2,800,000 Subordinate Voting Shares, 590,000 Multiple Voting Shares
and 19,000 Class II Preferred Shares, Series 1, have been purchased and cancelled by the
Company pursuant to the bid.
 Extendicare 2005 Annual Report
    
    
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    Notes to Consolidated Statements




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##### 



During 2005 the Company purchased 11,500 Class I Preferred Shares, Series 2 for $286,000
pursuant to the purchase obligation (2004  21,900 shares for $544,000).The purchase of shares for cancellation resulted in a direct charge to retained earnings in
2005 of $20,012,000 (2004  $4,602,000), for the net cost of the shares in excess of, or
below, their carrying values.Stock Option PlanThe Companys Amended and Restated Subordinate Voting Share Option and Tandem SAR Plan
(the Stock Option Plan) provides directors and employees of the Company and its affiliates
with an incentive to enhance shareholder value by providing such persons with the opportunity
to participate in an increase in the equity value of the Companys Subordinate Voting Shares.
Options are granted at the discretion of the Board of Directors, upon recommendation by the
Human Resources Committee. Any director, officer or employee of the Extendicare group of
companies is eligible to participate.In May 2004 the Companys Board of Directors, with the approval of the Toronto Stock Exchange
(TSX), amended the Stock Option Plan to add the ability to grant tandem share appreciation
rights (SARs) with option grants. The Board may grant SARs in tandem with each stock option
grant. If the stock option has a tandem SAR attached, participants have the right to choose to
exercise a SAR instead of the corresponding option. When a SAR is exercised the participant
receives, at the election of the Board of Directors, either a payment in cash or equivalent
value of Subordinate Voting Shares acquired on the open market, equal to the difference
between the closing price of the Subordinate Voting Shares and the exercise price of the
option. To the extent that awards pursuant to the Stock Option Plan result in the exercise of
SARs, the equivalent number of Subordinate Voting Shares will be reduced from the number
reserved and available under the Stock Option Plan for future grants. Awards pursuant to the
Stock Option Plan are exercisable only to the extent that the option has vested, such period
not to exceed 10 years, as determined by the Board of Directors at the time of granting.The Companys Stock Option Plan provides that the exercise price of any option granted shall
not be less than the closing price (or, if there is no closing price, the simple average of
the bid and ask price) for the Subordinate Voting Shares as quoted on the TSX on the trading
day prior to the date of grant. The Stock Option Plan contains provisions for appropriate
adjustments in the event of a corporate reorganization, including an amalgamation or merger of
the Company with or into another company, or in the event of a fundamental change (as
defined). Upon termination of employment, for any reason other than retirement or death,
options that have not vested are forfeited, and vested options must be exercised within the
90-day period following the date of termination. In the case of death, options that have
vested, including those that vest during the next 270 days, must be exercised within the
270-day period following the date of death. In the case of normal retirement, options continue
to vest and are exercisable in accordance with the terms of their original grant.As at December 31, 2005, 3,084,225 Subordinate Voting Shares have been reserved under the
Stock Option Plan, of which a total of 1,868,375 Subordinate Voting Shares have been granted.
All options granted prior to 2004 vest equally over the first four years, and expire five
years from the date of grant. All options granted after 2003 included tandem SARs, vest
equally over the first four years, and expire 10 years from the date of grant. The options
granted have exercise prices ranging from $3.45 to $18.40, and expire between February 21,
2006, and December 19, 2015.
 Extendicare 2005 Annual Report
    
    
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    Notes to Consolidated Statements




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##### 



On December 15, 2005, the Board of Directors, with the conditional approval of the TSX and
subject to approval of the shareholders, resolved to increase the maximum number of
Subordinate Voting Shares issuable under the Stock Option Plan by 3,400,000 Subordinate Voting
Shares. If the proposed increase is approved, 6,484,225 Subordinate Voting Shares,
representing 9.56% of the outstanding Subordinate Voting Shares and Multiple Voting Shares as
at December 31, 2005, will be issuable under the Stock Option Plan.A summary of the status of the Companys stock options/SARs as of December 31, 2005, 2004 and
2003, and changes during the years ending on those dates, is presented below:
 2005
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003Weighted-
    
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    average
    
    
    
    Number
    
    
    average
    
    
    Number
    
    
    averageof Stock
    
    
    Exercise
    
    
    
    of Stock
    
    
    Exercise
    
    
    of Stock
    
    
    ExerciseOptions
    
    
    Price ($)
    
    
    
    Options
    
    
    Price ($)
    
    
    Options
    
    
    Price ($)Outstanding at beginning of year
    
    
    2,122,775
    
    
    
    6.01
    
    
    
    
    2,297,250
    
    
    
    3.86
    
    
    
    2,514,750
    
    
    
    4.14Granted
    
    
    561,000
    
    
    
    18.00
    
    
    
    
    440,000
    
    
    
    14.57
    
    
    
    458,000
    
    
    
    3.45Exercised
    
    
    (730,775
    )
    
    
    3.57
    
    
    
    
    (567,975
    )
    
    
    4.07
    
    
    
    (364,500
    )
    
    
    4.27Cancelled
    
    
    (84,625
    )
    
    
    11.85
    
    
    
    
    (46,500
    )
    
    
    4.17
    
    
    
    (311,000
    )
    
    
    5.09Outstanding at end of year
    
    
    1,868,375
    
    
    
    10.30
    
    
    
    
    2,122,775
    
    
    
    6.01
    
    
    
    2,297,250
    
    
    
    3.86Options exercisable at year-end
    
    
    643,125
    
    
    
    5.79
    
    
    
    
    893,900
    
    
    
    3.62
    
    
    
    944,875
    
    
    
    3.85
 The following table summarizes information about stock options/SARs outstanding at December 31, 2005.
 Options Outstanding
    
    
    Options ExercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    Remaining
    
    
    average
    
    
    Number
    
    
    averageof Stock
    
    
    Contractual
    
    
    Exercise
    
    
    of Stock
    
    
    ExerciseRange of Exercise Price ($)
    
    Options
    
    
    Life
    
    
    Price ($)
    
    
    Options
    
    
    Price ($)Stock options3.45 to 3.70
    
    
    395,500
    
    
    2.2
    years
    
    
    
    3.47
    
    
    
    171,500
    
    
    
    3.504.36 to 7.01
    
    
    529,000
    
    
    1.0
    
    
    
    
    4.44
    
    
    
    371,250
    
    
    
    4.47Options/SARs14.50 to 14.82
    
    
    422,875
    
    
    8.5
    
    
    
    
    14.57
    
    
    
    100,375
    
    
    
    14.5817.20 to 18.40
    
    
    521,000
    
    
    9.2
    
    
    
    
    17.98
    
    
    
    
    
    
    
    
 For awards under the Stock Option Plan that included tandem SARs, the Company accrues
compensation expense on a graded vesting basis in an amount by which the quoted market value
of the Subordinate Voting Shares exceeds the option price. Changes in the quoted market value
of the Subordinate Voting Shares between the date of grant and the reporting period date
result in a change in the measure of compensation for the award. During 2005 the Company
recorded compensation expense of $1,029,000 (2004  $90,000) associated with the tandem SARs
granted.
 Extendicare 2005 Annual Report
    
    
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    Notes to Consolidated Statements




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##### 



The Company elected to adopt the fair value based method of accounting for stock-based
compensation on a prospective basis, applied to awards granted under the Stock Option Plan
beginning January 1, 2003. For awards granted under the Stock Option Plan prior to January 1,
2003, the Company applies the settlement method, in that no compensation expense is recorded,
and when the options are exercised, share capital is increased in the amount of the proceeds
received. For stock options granted subsequent to December 31, 2002, which did not include
tandem SARs, the Company recorded compensation expense in 2005 of $154,000 (2004  $192,000;
2003  $144,000). Contributed surplus increased by $73,000 to $391,000 at the end of 2005
(2004  increased by $174,000 to $318,000 at the end of 2004), after $80,000 (2004  $18,000)
of adjustments for a portion of the stock options that were exercised.Had stock options granted under the Stock Option Plan prior to January 1, 2003, been accounted
for using the fair value based method of accounting for stock-based compensation, the
Companys consolidated net earnings and related per share amounts would have been reduced to
the pro forma amounts indicated below:
 (thousands of dollars except per share amounts)
    
    2005
    
    
    
    2004
    
    
    2003Net earningsAs reported
    
    
    95,105
    
    
    
    
    125,201
    
    
    
    60,674Compensation expense related to fair value
of stock options, after taxes of nil
    
    
    (118
    )
    
    
    
    (338
    )
    
    
    (582
    )Pro forma
    
    
    94,987
    
    
    
    
    124,863
    
    
    
    60,092Earnings per Subordinate Voting Share, reportedBasic
    
    
    1.39
    
    
    
    
    1.81
    
    
    
    0.87Diluted
    
    
    1.37
    
    
    
    
    1.78
    
    
    
    0.86Earnings per Subordinate Voting Share, pro formaBasic
    
    
    1.39
    
    
    
    
    1.81
    
    
    
    0.86Diluted
    
    
    1.37
    
    
    
    
    1.77
    
    
    
    0.85Earnings per Multiple Voting Share, reportedBasic
    
    
    1.29
    
    
    
    
    1.81
    
    
    
    0.87Diluted
    
    
    1.27
    
    
    
    
    1.78
    
    
    
    0.86Earnings per Multiple Voting Share, pro formaBasic
    
    
    1.29
    
    
    
    
    1.81
    
    
    
    0.86Diluted
    
    
    1.27
    
    
    
    
    1.77
    
    
    
    0.85
 The weighted average fair value of options granted during the year ended December 31,
2003, was $1.49. The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average assumptions:
dividend yield  nil; expected share price volatility  44.6%; risk-free rate of return 
4.0%; and expected period until exercise  4.7 years.14.
    
    RevenueThe Company derived approximately 72%, 77% and 76% of its United States revenue in
2005, 2004 and 2003, respectively, from services provided under the federal (Medicare) and
state (Medicaid) programs. The Medicare program pays each participating facility a
prospectively set rate for each resident, which is based on the residents acuity. Most
Medicaid programs fund participating facilities using a case-mix based system, paying
prospectively set rates.
 Extendicare 2005 Annual Report
    
    
    93
    
    
    Notes to Consolidated Statements




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##### 



Subsequent to the acquisition of ALC, in the United States EHSI derived approximately 78% of
its assisted living facility revenue in 2005 from private-pay residents in the period in which
EHSI provides service and at rates it establishes based upon the services provided and market
conditions in the area of operation. The remaining revenue is derived from state medical
assistance programs whose rates are established for the facility or facilities in the state
and are subject to periodic, but not retrospective, adjustments.EHSI also derives outpatient therapy revenue by providing rehabilitation therapy services to
outside third parties at its clinics. The revenue sources are primarily HMOs and commercial
insurance (46%), workers compensation (23%), Medicare (22%), Medicaid (4%) and other sources,
including self-pay customers (5%).In respect of Medicare cost reporting periods prior to the implementation of PPS, EHSI has
ongoing discussions with its fiscal intermediaries regarding the treatment of various items
related to prior years cost reports. Normally items are resolved during the audit process and
no provision is required. Differences of opinion regarding cost reporting methods between EHSI
and its fiscal intermediaries can be settled through a formal appeal process. Should this
occur, a general provision for Medicare receivables may be recorded for disagreements that
result in EHSI filing an appeal with the Provider Reimbursement Review Board of the Centers
for Medicare & Medicaid Services (CMS).With respect to Medicaid in states that utilize retrospective reimbursement systems, nursing
facilities are paid on an interim basis for services provided, subject to adjustments based
upon allowable costs, which are generally submitted in cost reports on an annual basis. In
these states, revenue is subject to adjustments as a result of cost report settlements with
the state.At December 31, 2004, the States of Pennsylvania, Indiana and Washington had proposed state
plan amendments and waivers pertaining to the fiscal year commencing July 1, 2003, which were
awaiting review and approval by CMS.In June 2005 CMS and the State of Indiana announced the approval of a state plan amendment and
waiver that increased federal funding to the Medicaid program retroactively to July 1, 2003.
As a result, EHSI recognized incremental revenue of $13,530,000 (US$10,952,000) and provider
tax expense of $7,752,000 (US$6,275,000) pertaining to the period July 1, 2003 to December 31,
2004 in the second quarter of 2005 and a final adjustment in the third quarter to revenue of
$2,231,000 (US$1,823,000) as final revenue rates were released by Indiana. As of December 31,
2005, all revenue has been received except for $465,000 (US$400,000), which is included in
accounts receivable, and all provider taxes have been paid except for $116,000 (US$100,000),
which is included in accrued liabilities.In January 2005 the States of Pennsylvania and Washington received approval from CMS for state
plan amendments and waivers that increased federal funding for their Medicaid programs and
provided nursing facilities with revenue rate increases to offset new state provider taxes.
The Washington approval had no impact on EHSIs income. In March 2005 the State of
Pennsylvania officially approved and committed to the state plan amendment and waiver
resulting in EHSI recording incremental revenue of $20,220,000 (US$16,483,000) and provider
tax expense of $16,356,000 (US$13,333,000) pertaining to the period July 1, 2003 to December
31, 2004. Offsetting this increase in revenue, the State of Pennsylvania published its final
Medicaid rates for the year commencing July 1, 2004, which resulted in a reduction in the last
half of 2005 of $848,000 (US$700,000) of revenue recorded in the first quarter. As of December
31, 2005, all revenue was received except for $4,768,000 (US$4,100,000), which is included in
accounts receivable, and all provider taxes have been paid except for $5,001,000
(US$4,300,000), which is included in accrued liabilities.
 Extendicare 2005 Annual Report
    
    
    94
    
    
    Notes to Consolidated Statements




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##### 



15.
    
    Income TaxesThe major factors that caused variations from the expected combined Canadian federal
and provincial statutory income tax rates were the following:
 (thousands of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Earnings from continuing health care operations before income taxes
    
    
    148,068
    
    
    
    
    127,985
    
    
    
    66,774Income taxes at statutory rates of 36.12%
(2004  36.12%; 2003  36.62%)
    
    
    53,482
    
    
    
    
    46,229
    
    
    
    24,453Income tax effect relating to the following itemsTax rate variance of foreign subsidiaries
    
    
    3,630
    
    
    
    
    4,595
    
    
    
    2,814Recovery of prior year taxes re loss on sale of subsidiary stock
    
    
    
    
    
    
    
    (38,968
    )
    
    
    IRS audit settlement and other items
    
    
    
    
    
    
    
    (2,103
    )
    
    
    Benefit of other operating and capital loss utilization
    
    
    (4,297
    )
    
    
    
    (5,312
    )
    
    
    (2,744
    )Non-taxable income
    
    
    (302
    )
    
    
    
    (3,256
    )
    
    
    (410
    )Other items
    
    
    (2,782
    )
    
    
    
    (114
    )
    
    
    50949,731
    
    
    
    
    1,071
    
    
    
    24,622
 Income taxes for 2004 included a tax benefit of $41,071,000 (US$33,596,000) recorded in
December 2004 resulting from two events. EHSI recorded a cumulative tax benefit of $38,968,000
(US$31,876,000) for an additional loss claimed from the December 1999 sale of Arbor, its
former subsidiary, to Tandem. This additional loss was allowed primarily due to the issuance
of additional guidance by the U.S. Internal Revenue Service (IRS), regarding the allowable
method to calculate the loss on the sale of subsidiary stock, and partially due to the
settlement of an IRS audit for the tax years ending December 1997 through December 2002. In
addition, EHSI recorded a tax benefit of $2,103,000 (US$1,720,000) relating to this audit and
other issues.Cash taxes paid in 2005, 2004 and 2003 were $50,782,000, $29,677,000 and $15,547,000, respectively.At December 31, 2005, the Company had net operating loss carryforwards available for U.S.
state income tax financial reporting purposes of $33,070,000 (US$28,435,000), which expire in
2006 through 2025. In addition, the Company had $7,832,000 net operating loss carryforwards
available for Canadian income tax purposes, which expire in 2007 through 2015. To the extent
the realization of these losses is uncertain, a valuation allowance has been established.ALC has $64,198,000 (US$55,200,000) of net operating losses available for federal income tax
purposes, which will expire between 2009 and 2025. These net operating losses were partially
generated prior to ALCs emergence from bankruptcy on January 1, 2002 and partially generated
subsequent to ALCs emergence from bankruptcy. ALCs emergence from bankruptcy created an
ownership change as defined by the IRS. Internal Revenue Code Section 382 of the IRS imposes
limitations on the utilization of the loss carryforwards and built-in losses after certain
ownership changes of a loss company. ALC was deemed to be a loss company for these purposes.
Under these provisions, EHSIs ability to utilize ALC loss carryforwards generated prior to
ALCs emergence from bankruptcy and built-in losses in the future will generally be subject to
an annual limitation of approximately $1,860,000 (US$1,600,000). Any unused amount is added to
and increases the limitation in the succeeding year. ALCs net unrealized built-in losses were
$44,427,000 (US$38,200,000) as of December 31, 2005. The deferred tax assets include loss
carryforwards and built-in losses and their related tax benefit available to EHSI to reduce
future taxable income within the allowable IRS carryover period.
 Extendicare 2005 Annual Report
    
    
    95
    
    
    Notes to Consolidated Statements




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##### 



EHSIs acquisition of ALC also created an ownership change as defined under Section 382 of the
Internal Revenue Code. ALCs loss carryforwards generated subsequent to its emergence from
bankruptcy are available to EHSI subject to an annual limitation of approximately $6,397,000
(US$5,500,000). Any unused amount is added to and increases the limitation in the succeeding
year.In addition to ALCs net operating loss carryforwards, the Company had $5,095,000
(US$4,381,000) net operating loss carryforwards available for U.S. federal income tax, which
expire in 2016 through 2023. To the extent the realization of these losses is uncertain, a
valuation allowance has been established.At December 31, 2005, there were capital losses available for Canadian income tax purposes of
$54,424,000 (2004  $55,222,000) that can be carried forward indefinitely to apply against
future capital gains. The future tax benefit of the capital losses of $9,829,000 (2004 
$9,973,000) has been fully offset in the valuation allowance for future tax assets. At
December 31, 2003, the Company had capital losses available for U.S. state tax purposes of
$212,626,000 (US$164,000,000) with a related future tax asset balance of $17,542,000
(US$13,530,000). These losses, which had been fully offset with a valuation allowance, expired
during 2004, and the future tax asset was written off against the valuation allowance.The valuation allowance for future tax assets as of December 31, 2005 and 2004 was $16,017,000
and $21,690,000, respectively. The net change in the total valuation allowance for 2005 and
2004 was a decrease of $5,673,000 and $24,130,000, respectively. In assessing the
realizability of future tax assets, management considers whether it is more likely than not
that some portion or all of the future tax assets will not be realized. The ultimate
realization of future tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of future tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Management believes it is more likely
than not the Company will realize the benefits of these deductible differences, net of the
valuation allowances.
 Extendicare 2005 Annual Report
    
    
    96
    
    
    Notes to Consolidated Statements




---



##### 



Future income taxes are provided for temporary differences. The significant components of
future income tax assets and liabilities are as follows:
 (thousands of dollars)
    
    2005
    
    
    
    2004Future income tax assetsSelf-insurance reserves
    
    
    29,202
    
    
    
    
    28,677Employee benefit accruals
    
    
    21,021
    
    
    
    
    18,165Operating loss carryforwards
    
    
    23,274
    
    
    
    
    10,774Alternative minimum tax credit carryforwards
    
    
    3,238
    
    
    
    
    10,886Work opportunity tax credit carryforwards
    
    
    
    
    
    
    
    5,779Net capital loss carryforwards
    
    
    10,009
    
    
    
    
    9,973Deferred revenue
    
    
    5,145
    
    
    
    
    4,827Investment in Crown Life
    
    
    2,735
    
    
    
    
    3,688Goodwill
    
    
    1,064
    
    
    
    
    1,586Accounts receivable reserves
    
    
    6,095
    
    
    
    
    1,566Operating reserves
    
    
    567
    
    
    
    
    586Other
    
    
    18,679
    
    
    
    
    8,368121,029
    
    
    
    
    104,875Less valuation allowance
    
    
    16,017
    
    
    
    
    21,690105,012
    
    
    
    
    83,185Future income tax liabilitiesProperty and equipment
    
    
    98,835
    
    
    
    
    71,596Leasehold rights
    
    
    528
    
    
    
    
    953Other
    
    
    12,193
    
    
    
    
    11,520111,556
    
    
    
    
    84,069Future income tax liabilities, net
    
    
    6,544
    
    
    
    
    884Less current portion of future income tax assets, net
    
    
    24,437
    
    
    
    
    19,296Long-term future income tax liabilities, net
    
    
    30,981
    
    
    
    
    20,180
 16.
    
    Earnings per ShareThe calculation of earnings per share is based on net earnings reduced by dividends on
preferred shares, and reflects the quarterly preferential dividend of $0.025 per share paid
to holders of Subordinate Voting Shares. Net earnings remaining after these items is
allocated equally to the Subordinate Voting Shares and Multiple Voting Shares. Diluted
earnings per share, using the treasury stock method, assumes outstanding stock options are
exercised at the beginning of the year and common shares are purchased at the average
market price during the period from the funds derived on the exercise of these outstanding
options. Stock options with a strike price above the average market price for the period
are excluded from the calculation of diluted earnings per share as to include them would
increase earnings per share.
 Extendicare 2005 Annual Report
    
    
    97
    
    
    Notes to Consolidated Statements




---



##### 



The following table reconciles the numerator and denominator of the basic and diluted earnings
per share computation.
 (thousands of dollars unless otherwise noted)
    
    2005
    
    
    
    2004
    
    
    2003Numerator for Basic and Diluted Earnings per ShareNet earningsNet earnings for the period
    
    
    95,105
    
    
    
    
    125,201
    
    
    
    60,674Dividends on preferred shares
    
    
    (687
    )
    
    
    
    (659
    )
    
    
    (764
    )Net earnings after preferred share dividends
    
    
    94,418
    
    
    
    
    124,542
    
    
    
    59,910Subordinate Voting Share preferential dividend
    
    
    (5,683
    )
    
    
    
    
    
    
    
    Total for basic earnings per share
    
    
    88,735
    
    
    
    
    124,542
    
    
    
    59,910Dilutive Subordinate Voting Share preferential dividend
    
    
    (87
    )
    
    
    
    
    
    
    
    Total for diluted earnings per share
    
    
    88,648
    
    
    
    
    124,542
    
    
    
    59,910Earnings from continuing operationsTotal of net earnings for basic earnings per share
    
    
    88,735
    
    
    
    
    124,542
    
    
    
    59,910Add back: loss from discontinued operations, net of tax
    
    
    7,160
    
    
    
    
    11,088
    
    
    
    362Total from continuing operations for basic earnings per share
    
    
    95,895
    
    
    
    
    135,630
    
    
    
    60,272Dilutive Subordinate Voting Share preferential dividend
    
    
    (87
    )
    
    
    
    
    
    
    
    Total from continuing operations for diluted earnings per share
    
    
    95,808
    
    
    
    
    135,630
    
    
    
    60,272Denominator for Basic and Diluted Earnings per ShareWeighted average number of sharesSubordinate Voting
    
    
    56,830,320
    
    
    
    
    56,807,452
    
    
    
    56,583,900Multiple Voting
    
    
    11,868,765
    
    
    
    
    11,911,614
    
    
    
    12,255,140Total for basic earnings per share
    
    
    68,699,085
    
    
    
    
    68,719,066
    
    
    
    68,839,040Dilutive Subordinate Voting Share stock options(1)
    
    
    870,370
    
    
    
    
    1,375,956
    
    
    
    722,599Total for diluted earnings per share
    
    
    69,569,455
    
    
    
    
    70,095,022
    
    
    
    69,561,639Net Earnings per Share(dollars)(2)Subordinate VotingBasic
    
    
    1.39
    
    
    
    
    1.81
    
    
    
    0.87Diluted
    
    
    1.37
    
    
    
    
    1.78
    
    
    
    0.86Multiple VotingBasic
    
    
    1.29
    
    
    
    
    1.81
    
    
    
    0.87Diluted
    
    
    1.27
    
    
    
    
    1.78
    
    
    
    0.86Earnings from Continuing Operations per Share(dollars)(2)Subordinate VotingBasic
    
    
    1.50
    
    
    
    
    1.97
    
    
    
    0.88Diluted
    
    
    1.48
    
    
    
    
    1.94
    
    
    
    0.87Multiple VotingBasic
    
    
    1.40
    
    
    
    
    1.97
    
    
    
    0.88Diluted
    
    
    1.38
    
    
    
    
    1.94
    
    
    
    0.87
 (1)There were no stock options excluded from this calculation for 2005 and 2004.(2)After giving effect to the Subordinate Voting Share preferential dividend of $0.10
per share for 2005, and nil in 2004.
 Extendicare 2005 Annual Report
    
    
    98
    
    
    Notes to Consolidated Statements




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##### 



17.
    
    Other Commitments
 At December 31, 2005, the Company was committed under non-cancellable leases requiring
future minimum rentals as follows:
 Capital
    
    
    Operating(thousands of dollars)
    
    Leases
    
    
    Leases
    
    
    Total2006
    
    
    14,295
    
    
    
    25,894
    
    
    
    40,1892007
    
    
    14,329
    
    
    
    23,648
    
    
    
    37,9772008
    
    
    14,364
    
    
    
    23,653
    
    
    
    38,0172009
    
    
    26,393
    
    
    
    23,350
    
    
    
    49,7432010
    
    
    12,951
    
    
    
    23,366
    
    
    
    36,317Thereafter
    
    
    212,517
    
    
    
    76,731
    
    
    
    289,248Total minimum payments
    
    
    294,849
    
    
    
    196,642
    
    
    
    491,491Less amount representing interest
    
    
    146,908Obligations under capital leases
    
    
    147,941
 In addition to the operating lease amounts included in the table above, EHSI has made
guarantees to Triple S Investment Company (Triple S) for the payment of operating leases by
Senior Health  Texas. As at December 31, 2005, as a lessor, EHSI leases four owned nursing
properties (475 beds) to Senior Health  Texas, an unrelated long-term care operator for a term
that expires in September 2006, and subleases another 12 properties until February 2012, all in
Texas. Triple S is the owner of all of the properties that are subleased by EHSI to Senior
Health  Texas. Pursuant to the terms of EHSIs agreement with Triple S, EHSI is liable to
Triple S should there be any default in the lease payments by Senior Health  Texas. The annual
lease commitment is US$2,100,000 in 2006 and US$400,000 for the first two-month period of 2007.
Effective March 1, 2007 and thereafter, the lease payments are to be adjusted to an amount,
subject to negotiation, that provides Triple S with the fair market value for the rental of the
properties. The lease payment determined at March 2007 will apply for the balance of the term
of the lease, being to February 28, 2012.
 At December 31, 2005, outstanding capital expenditure commitments for ECI totalled $1,639,000,
and for EHSI, totalled $21,748,000 (US$18,700,000). Included in EHSIs outstanding commitments
was US$7,200,000 related to expansion projects estimated to cost US$36,800,000, of which
US$3,000,000 was spent through 2005, and the remaining US$26,600,000 was uncommitted at
year-end.
 In addition, five properties EHSI leases from ALF in Oregon and five properties it leases from
LTC in Washington were financed through the sale of Revenue Bonds and contain certain terms
and conditions within the debt agreements. As described in the long-term debt note under
Oregon Trust Deed Notes and Revenue Bonds, ALC must comply with certain regulatory terms and
conditions. Failure to adhere to those terms and conditions may result in an event of default
to the lessor and termination of the lease. Pursuant to the lease agreements with ALF and LTC,
ALC must comply with the terms and conditions of the underlying trust deed relating to the
debt agreement and report on a periodic basis to the State of Oregon, Housing and Community
Services Department (OHCS), for the ALF leases, and the Washington State Housing Finance
Commission (WSHFC), for the LTC leases.
 Extendicare 2005 Annual Report
    
    99
    
    Notes to Consolidated Statements




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##### 



The Revenue Bonds that were prepaid in December 2005 by EHSI formerly financed and were
secured by 15 of ALCs assisted living facilities located in the States of Washington, Idaho
and Ohio. However, despite this prepayment, under the terms and conditions of the debt
agreements, ALC is required to continue to comply with the terms of the regulatory agreement
until the original scheduled maturity dates of the Revenue Bonds, which is 2018 for the
Washington and Ohio Revenue Bonds and 2017 for the Idaho Revenue Bonds.
 Under the terms of the Trust Deed Notes and debt agreements relating to the Revenue Bonds, ALC
is required to comply with the terms of certain regulatory agreements, which provide among
other things, that in order to preserve the federal income tax exempt status of the Trust Deed
Notes and Revenue Bonds, ALC is required to lease at least 20% of the units of the projects to
low or moderate income persons as defined in Section 142(d) of the U.S. Internal Revenue Code.
There are additional requirements as to the age and physical condition of the residents with
which ALC must also comply. ALC must also comply with the terms and conditions of the
underlying trust deed related to the debt agreement and report on a periodic basis to the
OHCS, the WSHFC, the Ohio Housing Finance Commission and Idaho Housing & Community Services
for the applicable Trust Deed Notes and Revenue Bonds. Non-compliance with these restrictions
may result in an event of default and cause fines and other financial costs.
 ECI has been selected by the local Regional Health Authority (David Thompson Health Region) to
construct a 220-bed continuing care centre in the city of Red Deer, Alberta, which ECI will
own and operate. The project is expandable to add 60 assisted/supportive living beds. The
centre will be part of a seniors community to include an independent living housing complex
being developed by a third party. The estimated cost of the 220-bed project, net of government
grants, is approximately $25,000,000. ECI has currently entered into a Memorandum of
Understanding with the Health Authority, and is in the process of finalizing the arrangements,
as well as seeking financing for the project.
 Extendicare 2005 Annual Report
    
    100
    
    Notes to Consolidated Statements




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##### 



18.
    
    Contingent Liabilities
 The Company and its consolidated subsidiaries are defendants in actions brought against
them from time to time in connection with their operations. It is not possible to predict the
ultimate outcome of the various proceedings at this time or to estimate additional costs that
may result.
 The U.S. Department of Justice and other federal agencies have increased their resources
dedicated to regulatory investigations and compliance audits of health care providers. The
Company is diligent to address these regulatory efforts. U.S. federal law requires each state
to have a Medicaid Fraud Control Unit, which is responsible for investigating provider fraud
and resident abuse in Medicaid-funded facilities. EHSI has had previous investigations by these
Medicaid Fraud Control Units but at this time is not aware of any potential costs related to
investigations.
 EHSI entered into a preferred provider agreement with Omnicare pursuant to the divestiture of
its pharmacy operations in 1998. In connection with its agreement to provide pharmacy services,
Omnicare has requested arbitration for an alleged lost profits claim related to EHSIs
disposition of assets, primarily in Florida. Damage amounts, if any, cannot be reasonably
estimated based on information available at this time. An arbitration hearing has not yet been
scheduled. Management believes it has interpreted correctly and complied with the terms of the
preferred provider agreement; however, there can be no assurance that this claim will not be
successful or that other claims will not be made with respect to the agreement.There has been
no change in the status of the claim from December 31, 2004. Also, EHSI and Omnicare continue
to negotiate the pricing of drugs for Medicare residents for the years 2001 and 2002 and should
this matter not be settled, it will be taken to arbitration.
 19.
    
    Employee Future Benefits
 Retirement compensation arrangements, including defined benefit plans, are maintained with
certain employee groups.
 The Company provides a defined benefit pension plan and a supplementary plan, which is an
unfunded defined benefit pension arrangement for certain of its executives.The Company measures
its accrued benefit obligations and the fair value of plan assets for accounting purposes at
September 30 of each year. A discount rate of 6% was used to determine the benefit expense in
2005 and a discount rate of 5% was used to calculate the accrued benefit obligation at the end
of 2005. Actuarial valuation reports of the defined benefit pension plan are completed every
three years with the last one completed on October 1, 2003. Additional information for these
benefit plans is provided in the tables on the following page.
 The Company also maintains defined contribution retirement 401(K) savings plans in its United
States operations, which are made available to substantially all of the Companys United States
employees. EHSI pays a matching contribution of 25% of every qualifying dollar contributed by
plan participants, net of any forfeitures. The Company incurred expenses and made cash payments
related to the 401(K) savings plans of $1,454,000, $1,692,000 and $1,121,000 in 2005, 2004 and
2003, respectively.
 Extendicare 2005 Annual Report
    
    101
    
    Notes to Consolidated Statements




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##### 



(thousands of dollars unless otherwise noted)
    
    2005
    
    
    
    2004Accrued benefit obligationsBalance at beginning of year
    
    
    33,393
    
    
    
    
    33,949Current service cost
    
    
    688
    
    
    
    
    720Benefits paid
    
    
    (1,434
    )
    
    
    
    (1,434
    )Interest costs
    
    
    2,068
    
    
    
    
    2,037Actuarial (gains) losses
    
    
    3,687
    
    
    
    
    (1,879
    )Plan amendments
    
    
    1,109
    
    
    
    
    Balance at end of year
    
    
    39,511
    
    
    
    
    33,393Plan assetsFair value at beginning of year
    
    
    5,873
    
    
    
    
    5,409Employer contributions
    
    
    1,257
    
    
    
    
    1,257Actual return on plan assets
    
    
    932
    
    
    
    
    641Benefits paid
    
    
    (1,434
    )
    
    
    
    (1,434
    )Fair value at end of year
    
    
    6,628
    
    
    
    
    5,873Funded status  plan deficit
    
    
    32,883
    
    
    
    
    27,520Unrecognized net experience losses
    
    
    (8,943
    )
    
    
    
    (6,215
    )Unrecognized prior service cost
    
    
    (554
    )
    
    
    
    Other
    
    
    (314
    )
    
    
    
    (314
    )Accrued benefit liability
    
    
    23,072
    
    
    
    
    20,991Annual benefit plan expenseCurrent period service costs
    
    
    688
    
    
    
    
    720Interest cost
    
    
    2,068
    
    
    
    
    2,037Actual return on plan assets
    
    
    (932
    )
    
    
    
    (641
    )Plan amendments
    
    
    1,109
    
    
    
    
    Actuarial (gains) losses
    
    
    3,687
    
    
    
    
    (1,879
    )Plan benefit cost before adjustments to recognize
long-term nature of plan benefit cost
    
    
    6,620
    
    
    
    
    237Adjustments to recognize the long-term nature of plan benefit costsDifference between expected and actual return on plan assets
    
    
    498
    
    
    
    
    242Difference between actuarial loss (gain) recognized and actual actuarial
loss (gain) on accrued benefit obligation
    
    
    (3,226
    )
    
    
    
    2,703Difference between amortization of past service costs for year and actual
plan amendments for year
    
    
    (554
    )
    
    
    
    Plan benefit expense recognized in the period
    
    
    3,338
    
    
    
    
    3,182Reconciliation of funded status to amounts in financial statementsAccrued benefit liability at beginning of the year
    
    
    20,991
    
    
    
    
    19,066Pension expense
    
    
    3,338
    
    
    
    
    3,182Employer contributions
    
    
    (1,257
    )
    
    
    
    (1,257
    )Accrued benefit liability at end of the year
    
    
    23,072
    
    
    
    
    20,991Reported in the Companys balance sheet as:Current accrued liabilities
    
    
    1,257
    
    
    
    
    1,257Other long-term liabilities
    
    
    21,815
    
    
    
    
    19,734Accrued benefit liability at end of year
    
    
    23,072
    
    
    
    
    20,991Percentage of plan assetsEquities
    
    
    64
    %
    
    
    
    61
    %Fixed income securities
    
    
    28
    %
    
    
    
    31
    %Cash and short-term investments
    
    
    8
    %
    
    
    
    8
    %100
    %
    
    
    
    100
    %Significant assumptionsDiscount rate
    
    
    5.0
    %
    
    
    
    6.0
    %Expected long-term rate of return on plan assets
    
    
    7.5
    %
    
    
    
    7.5
    %Rate of compensation increase
    
    
    5.0
    %
    
    
    
    5.0
    %Average remaining service years of active employees
    
    
    6
    
    
    
    
    7
 Extendicare 2005 Annual Report
    
    102
    
    Notes to Consolidated Statements




---



##### 



20.
    
    Financial Instruments
 With the exception of the following, the fair values of financial instruments approximate
their recorded values.
 (thousands of dollars)
    
    2005
    
    
    
    2004Carrying
    
    
    Fair
    
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    
    Amount
    
    
    ValueMarketable securities
    
    
    6,460
    
    
    
    6,655
    
    
    
    
    
    
    
    
    Accounts receivable, less allowance
    
    
    173,686
    
    
    
    172,985
    
    
    
    
    161,119
    
    
    
    160,061Notes, mortgages and amounts receivable,
including current portion
    
    
    73,629
    
    
    
    79,717
    
    
    
    
    79,350
    
    
    
    82,779Other investments
    
    
    184
    
    
    
    184
    
    
    
    
    601
    
    
    
    1,285Investments held for self-insured liabilities
    
    
    49,031
    
    
    
    49,083
    
    
    
    
    48,920
    
    
    
    49,224Long-term debt, including current portion
    
    
    796,394
    
    
    
    848,115
    
    
    
    
    620,902
    
    
    
    696,388Interest rate cap (asset)
    
    
    (450
    )
    
    
    (450
    )
    
    
    
    (1,184
    )
    
    
    (1,184
    )Interest rate cap liability
    
    
    6,392
    
    
    
    6,392
    
    
    
    
    6,300
    
    
    
    6,300
 The fair value of marketable securities is based upon quoted market prices.
 Accounts receivable, including other long-term receivables, are recorded at the net realizable
value expected to be received from government assistance programs, other third-party payors or
individual patients. The carrying values of accounts receivable approximate fair values due to
their short maturities, with the exception of certain settlement receivables from third-party
payors that are anticipated to be collected beyond one year. The fair values of these
settlement receivables are estimated based on discounted cash flows at current borrowing
rates.
 Notes and mortgages receivable primarily consist of notes and amounts receivable from
government agencies, and third-party notes on the sale of assets. The fair values for these
instruments are based on the amount of future cash flows associated with each instrument,
discounted using current applicable rates for similar instruments of comparable maturity and
credit quality.
 Receivables from government agencies represent the only concentrated group of credit risks for
the Company. Management does not believe that there is any credit risk associated with these
government agencies other than possible funding delays. Receivables other than from government
agencies consist of receivables from various payors and do not represent any concentrated
credit risks to the Company. Furthermore, management continually monitors and adjusts its
allowances associated with these receivables.
 Other investments consist of investments in stocks, the fair values of which are based on quoted
market prices.
 The fair values for investments held for self-insured liabilities are based on quoted market
prices. The securities within the investments held for self-insured liabilities are all
considered to be available for sale.
 The Company has determined that it is not reasonable or meaningful to calculate a fair value
for the accrual for self-insured liabilities.
 The fair values for long-term debt are based on the amount of future cash flows associated with
each instrument discounted using current applicable rates for similar instruments of comparable
maturity and credit quality.
 Extendicare 2005 Annual Report
    
    103
    
    Notes to Consolidated Statements




---



##### 



The fair values of the interest rate swaps and interest rate caps are based on the quoted
market prices as provided by the financial institutions that are counterparty to the
arrangements. As of December 31, 2005, the fair value of the interest rate swaps designated as
fair value hedges is a liability of $6,267,000 (2004  an asset of $370,000) and is offset by a
corresponding change in the fair value of the hedged long-term debt obligation, both of which
are off-balance sheet amounts.
 21.
    
    Related Party Transactions
 The Company made an investment in Salumatics of $122,000 in 2004 and $2,501,000 in 2003.
The Chairman and one other Director of Extendicare are board members of Salumatics, and three
Directors of Extendicare are either direct or indirect shareholders of Salumatics. In addition,
the Chairman of Extendicare serves as Chairman and Chief Executive Officer of a company that
holds an equity interest in Salumatics and has a contract to provide management services to
Salumatics.
 Extendicare paid rent to Crown Life for rental of certain office premises up until June 2004.
For the first six months ended June 30, 2004, the rent paid amounted to $694,000 and for the
year 2003 was $1,319,000.
 22.
    
    Segmented Information
 During 2005 Extendicare had two reportable operating segments: United States operations
and Canadian operations. The Companys operations are managed independently of each other
because of their geographic areas and regulatory environments. Each operation retains its own
management team and is responsible for compiling its own financial information.
 The Company, through its subsidiaries, operates long-term care facilities in the United States
and Canada. Also offered in the United States are medical specialty services, such as subacute
care and rehabilitative therapy services, while home health care services are provided in
Canada.
 Substantial portions of the Companys revenue are funded by various federal, state, provincial
and local government programs. The funding programs from which Extendicare receives 10% or more
of its continuing operations revenue are: the United States federal Medicare program,
representing revenue of $390,816,000, $361,453,000 and $322,154,000 in 2005, 2004 and 2003,
respectively; and the Ontario provincial government, representing revenue of $281,247,000,
$267,885,000 and $261,919,000 in 2005, 2004 and 2003, respectively.
 Extendicare 2005 Annual Report
    
    104
    
    Notes to Consolidated Statements




---



##### 



The significant accounting policies of the reportable operating segments are the same as those
described in note 1. Information about the Companys segments and a reconciliation of segment
profit to net earnings are as follows:
 (thousands of dollars)
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005United States
    
    
    Canada
    
    
    Other
    
    
    TotalRevenueNursing and assisted living centres
    
    
    1,406,821
    
    
    
    382,377
    
    
    
    
    
    
    
    1,789,198Outpatient therapy
    
    
    13,644
    
    
    
    
    
    
    
    
    
    
    
    13,644Home health
    
    
    
    
    
    
    128,144
    
    
    
    
    
    
    
    128,144Other
    
    
    32,317
    
    
    
    8,465
    
    
    
    
    
    
    
    40,7821,452,782
    
    
    
    518,986
    
    
    
    
    
    
    
    1,971,768Earnings before undernoted
    
    
    247,050
    
    
    
    50,943
    
    
    
    
    
    
    
    297,993Lease costs
    
    
    27,207
    
    
    
    3,441
    
    
    
    
    
    
    
    30,648Depreciation and amortization
    
    
    56,065
    
    
    
    10,821
    
    
    
    
    
    
    
    66,886Interest expense
    
    
    44,188
    
    
    
    23,394
    
    
    
    
    
    
    
    67,582Interest revenue
    
    
    (3,800
    )
    
    
    (4,057
    )
    
    
    
    
    
    
    (7,857
    )Intersegment interest expense (revenue)
    
    
    4,253
    
    
    
    (4,253
    )
    
    
    
    
    
    
    Valuation adjustment of interest rate caps
    
    
    2,248
    
    
    
    
    
    
    
    
    
    
    
    2,248Loss (gain) from asset disposals,
impairment and other items
    
    
    (6,725
    )
    
    
    (2,857
    )
    
    
    
    
    
    
    (9,582
    )Earnings from continuing health care
operations before income taxes
    
    
    123,614
    
    
    
    24,454
    
    
    
    
    
    
    
    148,068Income taxesCurrent
    
    
    34,592
    
    
    
    9,617
    
    
    
    
    
    
    
    44,209Future (reduction)
    
    
    9,784
    
    
    
    (4,262
    )
    
    
    
    
    
    
    5,522Earnings from continuing health care operations
    
    
    79,238
    
    
    
    19,099
    
    
    
    
    
    
    
    98,337Share of equity accounted earnings
    
    
    
    
    
    
    
    
    
    
    3,928
    
    
    
    3,928Earnings from continuing operations
    
    
    79,238
    
    
    
    19,099
    
    
    
    3,928
    
    
    
    102,265Loss from discontinued operations, net of income taxes
    
    
    (7,160
    )
    
    
    
    
    
    
    
    
    
    
    (7,160
    )Net earnings
    
    
    72,078
    
    
    
    19,099
    
    
    
    3,928
    
    
    
    95,105Cash used in property and equipment
    
    
    66,119
    
    
    
    15,093
    
    
    
    
    
    
    
    81,212Balance sheetProperty and equipment
    
    
    875,510
    
    
    
    233,229
    
    
    
    
    
    
    
    1,108,739Goodwill
    
    
    93,270
    
    
    
    43
    
    
    
    
    
    
    
    93,313Identifiable intangible assets
    
    
    6,138
    
    
    
    
    
    
    
    
    
    
    
    6,138Assets before undernoted
    
    
    1,282,368
    
    
    
    343,281
    
    
    
    
    
    
    
    1,625,649Equity accounted investments
    
    
    
    
    
    
    
    
    
    
    72,445
    
    
    
    72,445Total consolidated assets
    
    
    1,282,368
    
    
    
    343,281
    
    
    
    72,445
    
    
    
    1,698,094
 Extendicare 2005 Annual Report
    
    105
    
    Notes to Consolidated Statements




---



##### 



(thousands of dollars)
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004United States
    
    
    Canada
    
    
    Other
    
    
    TotalRevenueNursing and assisted living centres
    
    
    1,159,042
    
    
    
    366,863
    
    
    
    
    
    
    
    1,525,905Outpatient therapy
    
    
    14,300
    
    
    
    
    
    
    
    
    
    
    
    14,300Home health
    
    
    
    
    
    
    127,971
    
    
    
    
    
    
    
    127,971Other
    
    
    32,926
    
    
    
    7,020
    
    
    
    
    
    
    
    39,9461,206,268
    
    
    
    501,854
    
    
    
    
    
    
    
    1,708,122Earnings before undernoted
    
    
    194,815
    
    
    
    51,335
    
    
    
    
    
    
    
    246,150Lease costs
    
    
    12,548
    
    
    
    3,682
    
    
    
    
    
    
    
    16,230Depreciation and amortization
    
    
    44,557
    
    
    
    9,933
    
    
    
    
    
    
    
    54,490Interest expense
    
    
    31,659
    
    
    
    23,819
    
    
    
    
    
    
    
    55,478Interest revenue
    
    
    (10,365
    )
    
    
    (4,942
    )
    
    
    
    
    
    
    (15,307
    )Intersegment interest expense (revenue)
    
    
    1,390
    
    
    
    (1,390
    )
    
    
    
    
    
    
    Valuation adjustment of interest rate caps
    
    
    10,379
    
    
    
    
    
    
    
    
    
    
    
    10,379Loss (gain) from asset disposals,
impairment and other items
    
    
    12,586
    
    
    
    (15,691
    )
    
    
    
    
    
    
    (3,105
    )Earnings from continuing health care
operations before income taxes
    
    
    92,061
    
    
    
    35,924
    
    
    
    
    
    
    
    127,985Income taxesCurrent
    
    
    28,685
    
    
    
    9,838
    
    
    
    
    
    
    
    38,523Future (reduction)
    
    
    (35,634
    )
    
    
    (1,818
    )
    
    
    
    
    
    
    (37,452
    )Earnings from continuing health care operations
    
    
    99,010
    
    
    
    27,904
    
    
    
    
    
    
    
    126,914Share of equity accounted earnings
    
    
    
    
    
    
    
    
    
    
    9,375
    
    
    
    9,375Earnings from continuing operations
    
    
    99,010
    
    
    
    27,904
    
    
    
    9,375
    
    
    
    136,289Loss from discontinued operations, net of income taxes
    
    
    (11,088
    )
    
    
    
    
    
    
    
    
    
    
    (11,088
    )Net earnings
    
    
    87,922
    
    
    
    27,904
    
    
    
    9,375
    
    
    
    125,201Cash used in property and equipment
    
    
    53,771
    
    
    
    15,351
    
    
    
    
    
    
    
    69,122Balance sheetProperty and equipment
    
    
    539,790
    
    
    
    227,611
    
    
    
    
    
    
    
    767,401Goodwill
    
    
    87,294
    
    
    
    70
    
    
    
    
    
    
    
    87,364Leasehold rights
    
    
    2,319
    
    
    
    
    
    
    
    
    
    
    
    2,319Assets before undernoted
    
    
    921,593
    
    
    
    436,207
    
    
    
    
    
    
    
    1,357,800Equity accounted investments
    
    
    
    
    
    
    
    
    
    
    68,531
    
    
    
    68,531Total consolidated assets
    
    
    921,593
    
    
    
    436,207
    
    
    
    68,531
    
    
    
    1,426,331
 Extendicare 2005 Annual Report
    
    106
    
    Notes to Consolidated Statements




---



##### 



(thousands of dollars)
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003United States
    
    
    Canada
    
    
    Other
    
    
    TotalRevenueNursing and assisted living centres
    
    
    1,129,253
    
    
    
    351,981
    
    
    
    
    
    
    
    1,481,234Outpatient therapy
    
    
    16,151
    
    
    
    
    
    
    
    
    
    
    
    16,151Home health
    
    
    
    
    
    
    134,921
    
    
    
    
    
    
    
    134,921Other
    
    
    32,065
    
    
    
    6,973
    
    
    
    
    
    
    
    39,0381,177,469
    
    
    
    493,875
    
    
    
    
    
    
    
    1,671,344Earnings before undernoted
    
    
    153,131
    
    
    
    49,983
    
    
    
    
    
    
    
    203,114Lease costs
    
    
    14,469
    
    
    
    3,748
    
    
    
    
    
    
    
    18,217Depreciation and amortization
    
    
    51,441
    
    
    
    9,664
    
    
    
    
    
    
    
    61,105Interest expense
    
    
    43,970
    
    
    
    23,306
    
    
    
    
    
    
    
    67,276Interest revenue
    
    
    (5,498
    )
    
    
    (3,855
    )
    
    
    
    
    
    
    (9,353
    )Intersegment interest expense (revenue)
    
    
    3,655
    
    
    
    (3,655
    )
    
    
    
    
    
    
    Loss (gain) from asset disposals and other items
    
    
    
    
    
    
    (905
    )
    
    
    
    
    
    
    (905
    )Earnings from continuing health care
operations before income taxes
    
    
    45,094
    
    
    
    21,680
    
    
    
    
    
    
    
    66,774Income taxesCurrent
    
    
    14,313
    
    
    
    4,849
    
    
    
    
    
    
    
    19,162Future
    
    
    2,416
    
    
    
    3,044
    
    
    
    
    
    
    
    5,460Earnings from continuing health care operations
    
    
    28,365
    
    
    
    13,787
    
    
    
    
    
    
    
    42,152Share of equity accounted earnings
    
    
    
    
    
    
    
    
    
    
    18,884
    
    
    
    18,884Earnings from continuing operations
    
    
    28,365
    
    
    
    13,787
    
    
    
    18,884
    
    
    
    61,036Loss from discontinued operations, net of income taxes
    
    
    (362
    )
    
    
    
    
    
    
    
    
    
    
    (362
    )Net earnings
    
    
    28,003
    
    
    
    13,787
    
    
    
    18,884
    
    
    
    60,674Cash used in property and equipment
    
    
    37,231
    
    
    
    27,116
    
    
    
    
    
    
    
    64,347Balance sheetProperty and equipment
    
    
    584,953
    
    
    
    236,729
    
    
    
    
    
    
    
    821,682Goodwill
    
    
    93,513
    
    
    
    70
    
    
    
    
    
    
    
    93,583Leasehold rights
    
    
    3,975
    
    
    
    
    
    
    
    
    
    
    
    3,975Assets before undernoted
    
    
    1,119,081
    
    
    
    332,557
    
    
    
    
    
    
    
    1,451,638Equity accounted investment
    
    
    
    
    
    
    
    
    
    
    141,779
    
    
    
    141,779Total consolidated assets
    
    
    1,119,081
    
    
    
    332,557
    
    
    
    141,779
    
    
    
    1,593,417
 23.
    
    Reconciliation of Canadian and United States GAAP
 The consolidated financial statements of the Company have been prepared in accordance with
Canadian GAAP. The areas of material difference between Canadian and U.S. GAAP and their impact
on the consolidated financial statements of the Company are described below. The 2004 and 2003
comparative figures have been restated to reflect discontinued operations (note 4).
 Extendicare 2005 Annual Report
    
    107
    
    Notes to Consolidated Statements




---



##### 



The application of U.S. GAAP would have the following effect on the net earnings as reported:
 (thousands of dollars except per share amounts)
    
    2005
    
    
    
    2004
    
    
    2003Earnings from continuing health care operations
as reported in accordance with Canadian GAAP
    
    
    98,337
    
    
    
    
    126,914
    
    
    
    42,152Application of accounting for trading securities (c)
    
    
    124
    
    
    
    
    
    
    
    
    Application of hedge accounting for derivatives,
net of income taxes (d)
    
    
    
    
    
    
    
    431
    
    
    
    108Earnings from continuing health care operations
as reported in accordance with U.S. GAAP
    
    
    98,461
    
    
    
    
    127,345
    
    
    
    42,260Share of equity accounted earnings as reported
in accordance with Canadian GAAP
    
    
    3,928
    
    
    
    
    9,375
    
    
    
    18,884Application of U.S. GAAP (a)
    
    
    (2,257
    )
    
    
    
    235
    
    
    
    (7,060
    )Share of equity accounted earnings as reported
in accordance with U.S. GAAP
    
    
    1,671
    
    
    
    
    9,610
    
    
    
    11,824Earnings from continuing operations as reported
in accordance with U.S. GAAP
    
    
    100,132
    
    
    
    
    136,955
    
    
    
    54,084Loss from discontinued operations, net of income taxes
    
    
    (7,160
    )
    
    
    
    (11,088
    )
    
    
    (362
    )Earnings before cumulative effect of change in accounting principle
    
    
    92,972
    
    
    
    
    125,867
    
    
    
    53,722Application of cumulative effect of change
in accounting principle, net of income taxes (f )
    
    
    (11,081
    )
    
    
    
    
    
    
    
    Net earnings for the year as reported in accordance with U.S. GAAP
    
    
    81,891
    
    
    
    
    125,867
    
    
    
    53,722Other comprehensive income (loss), net of tax (b):Foreign currency translation adjustments
    
    
    (17,421
    )
    
    
    
    (19,479
    )
    
    
    (53,621
    )Unrealized gains (losses) on invested assets (c)
    
    
    (245
    )
    
    
    
    (1,610
    )
    
    
    5,197Net current period change in derivative gains (losses) (d)
    
    
    
    
    
    
    
    128
    
    
    
    45Minimum pension liability adjustments (e)
    
    
    (1,417
    )
    
    
    
    1,643
    
    
    
    (3,277
    )Share of comprehensive income (loss)
of equity accounted investments (a)
    
    
    1,275
    
    
    
    
    (3,627
    )
    
    
    (1,262
    )Other comprehensive income (loss)
    
    
    (17,808
    )
    
    
    
    (22,945
    )
    
    
    (52,918
    )Comprehensive earnings (loss) as reported
in accordance with U.S. GAAP
    
    
    64,083
    
    
    
    
    102,922
    
    
    
    804Earnings per Subordinate Voting ShareBasicEarnings from continuing operations before cumulative
effect of change in accounting principle
    
    
    1.46
    
    
    
    
    1.98
    
    
    
    0.78Net earnings
    
    
    1.20
    
    
    
    
    1.82
    
    
    
    0.77DilutedEarnings from continuing operations before cumulative
effect of change in accounting principle
    
    
    1.45
    
    
    
    
    1.95
    
    
    
    0.77Net earnings
    
    
    1.19
    
    
    
    
    1.79
    
    
    
    0.76Earnings per Multiple Voting ShareBasicEarnings from continuing operations before cumulative
effect of change in accounting principle
    
    
    1.36
    
    
    
    
    1.98
    
    
    
    0.78Net earnings
    
    
    1.10
    
    
    
    
    1.82
    
    
    
    0.77DilutedEarnings from continuing operations before cumulative
effect of change in accounting principle
    
    
    1.35
    
    
    
    
    1.95
    
    
    
    0.77Net earnings
    
    
    1.09
    
    
    
    
    1.79
    
    
    
    0.76
 Extendicare 2005 Annual Report
    
    108
    
    Notes to Consolidated Statements




---



##### 



The cumulative effect of these adjustments on shareholders equity is as follows:
 (thousands of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Shareholders equity in accordance with Canadian GAAP
    
    
    497,306
    
    
    
    
    456,987
    
    
    
    356,433Unrealized gains (losses) on invested assets, net of tax (c)
    
    
    34
    
    
    
    
    276
    
    
    
    1,929Unrealized gains (losses) on trading securities, net of tax (c)
    
    
    119
    
    
    
    
    
    
    
    
    Application of hedge accounting for derivatives, net of tax (d)
    
    
    
    
    
    
    
    
    
    
    
    (432
    )Unrealized gains (losses) on cash flow hedges, net of tax (d)
    
    
    
    
    
    
    
    
    
    
    
    (128
    )Minimum pension liability adjustments, net of tax (e)
    
    
    (5,567
    )
    
    
    
    (4,150
    )
    
    
    (5,793
    )Conditional asset retirement obligation (f )
    
    
    (10,770
    )
    
    
    
    
    
    
    
    Change in carrying value of equity accounted investments (a)
    
    
    9,298
    
    
    
    
    10,266
    
    
    
    13,326Shareholders equity in accordance with U.S. GAAP
    
    
    490,420
    
    
    
    
    463,379
    
    
    
    365,335
 Summary of Accounting Policy Differences
 (a)
    
    Equity Accounted Investments
 The following table provides the areas of material difference between Canadian and U.S.
GAAP of the Companys share of earnings and other comprehensive income (increase
(decrease)) of its equity accounted investments, specifically as they relate to its
investment in Crown Life. The 2004 comparative figures have been restated for the
allocation of the components of the change in other comprehensive income.
 (thousands of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Share of earnings (loss)Policy liabilities
    
    
    (532
    )
    
    
    
    900
    
    
    
    (884
    )Investment income
    
    
    (1,725
    )
    
    
    
    (665
    )
    
    
    (5,120
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    
    (1,056
    )(2,257
    )
    
    
    
    235
    
    
    
    (7,060
    )Other comprehensive incomeForeign currency translation adjustments
    
    
    (102
    )
    
    
    
    (1,832
    )
    
    
    (910
    )Unrealized gains (losses) on invested assets
    
    
    1,377
    
    
    
    
    (1,795
    )
    
    
    (352
    )1,275
    
    
    
    
    (3,627
    )
    
    
    (1,262
    )
 The following table provides the cumulative effect between Canadian GAAP and U.S.
GAAP on the Companys carrying value of its equity accounted investments.
 (thousands of dollars)
    
    2005
    
    
    
    2004
    
    
    2003Equity accounted investments in accordance
with Canadian GAAP
    
    
    72,445
    
    
    
    
    68,531
    
    
    
    141,779Policy liabilities
    
    
    1,662
    
    
    
    
    2,223
    
    
    
    1,470Invested assets
    
    
    10,454
    
    
    
    
    10,120
    
    
    
    14,922Income taxes
    
    
    (2,818
    )
    
    
    
    (2,077
    )
    
    
    (3,066
    )9,298
    
    
    
    
    10,266
    
    
    
    13,326Equity accounted investments in
accordance with U.S. GAAP
    
    
    81,743
    
    
    
    
    78,797
    
    
    
    155,105
 Extendicare 2005 Annual Report
    
    109
    
    Notes to Consolidated Statements




---



##### 



Policy Liabilities and Deferred Acquisition Costs.Under Canadian GAAP policy
liabilities of Crown Life are calculated using the Canadian asset liability method under
which assumptions are adjusted annually based on the expected future experience of the
company. Under U.S. GAAP liabilities for traditional life insurance products are calculated
using assumptions as to future experience, which are set at the time of policy issue. These
assumptions are not adjusted unless experience is sufficiently adverse that an overall loss
on a block of business is expected over the future duration of the business. Universal life
or investment type products are accounted for by the retrospective deposit method under
which assumptions are updated at least annually. Under U.S. GAAP costs that vary with and
are primarily related to the acquisition of insurance products are capitalized separately
as assets on the balance sheet. For traditional life products, these costs are charged to
expense in future years in proportion to the premium revenue recognized. For universal life
or investment type products, these costs are charged to expense in future years in
proportion to the emergence of margins expected to be realized over the duration of the
block of business.
 Invested Assets.Under Canadian GAAP gains and losses on invested assets of Crown Life are
amortized into income. Under U.S. GAAP gains and losses on sales of invested assets are
included in income when realized. Invested assets that are marketable securities, all of
which are considered to be available for sale, are carried at market value with unrealized
gains or losses, net of applicable taxes, included in shareholders equity. The non-land
component of investment real estate is amortized over its expected useful life.
 (b) Comprehensive Income
 U.S. GAAP Statement of Financial Accounting Standard No. 130, Reporting Comprehensive
Income (FAS 130) establishes rules for the reporting and display of comprehensive income
and its components. Comprehensive income is net income, plus certain other items that are
recorded directly to shareholders equity. The Company has reported as other comprehensive
income, foreign currency translation adjustments, and unrealized gains (losses) on
invested assets and hedging activities. The amounts reported as unrealized gains (losses)
on invested assets and hedging activities are net of tax; income tax expense (recovery)
included therein amounted to $1,164,000, $(163,000) and $(930,000) for 2005, 2004 and
2003, respectively.
 (c)
    
    Securities Available for Sale and Trading Securities
 U.S. GAAP requires that non-current marketable securities that are available for sale be
reported at fair value and the net unrealized holding gain or loss, net of applicable
taxes, be reported as a separate component of shareholders equity. Under Canadian GAAP
fixed term securities are carried at amortized cost and marketable equity securities are
carried at cost, less any loss in value that is other than temporary. The non-current
marketable securities within the Investments held for self-insured liabilities and
Other investments captions are all considered to be available for sale. The fair value
of these non-current marketable securities in excess of their carrying values at December
31, 2005, was $53,000, or $34,000 net of tax (December 31, 2004  $656,000 in excess of
their carrying values, or $276,000 net of tax).The amount reported to other comprehensive
income for 2005 was an after-tax loss of $245,000 (2004  an after-tax loss of $1,610,000;
2003  an after-tax gain of $5,197,000).
 Extendicare 2005 Annual Report
    
    110
    
    Notes to Consolidated Statements




---



##### 



In addition, U.S. GAAP requires that securities held principally for the purpose of selling
them in the near term are classified as trading securities and reported at fair value, with
unrealized gains or losses included in earnings. Under Canadian GAAP temporary investments
are carried at the lower of cost or market value. The Companys trading securities within
the caption Marketable securities had a fair value of $6,655,000 compared to their
carrying value of $6,460,000 on a Canadian GAAP basis at December 31, 2005. On a U.S. GAAP
basis, the amount reported to earnings for 2005, to reflect their fair value, was pre-tax
$202,000, or $124,000 after tax.
 (d) Derivative Instruments and Hedging Activities
 Prior to the Companys adoption of CICA Accounting Guideline 13, Hedging Relationships
(AG 13) effective January 1, 2004, and the termination of certain derivative contracts in
connection with the retirement of the related long-term debt during 2004, the Company had
differences in accounting for its derivative instruments between Canadian and U.S. GAAP.
This related to an interest rate cap, of which a portion qualified as a highly effective
cash flow hedge and the remainder did not. Under U.S. GAAP changes in the fair value of a
derivative that is highly effective and is designated and qualifies as a cash flow hedge
are recorded in Accumulated Other Comprehensive Income (AOCI) until earnings are affected
by the variability in cash flows of the designated hedged item. Changes in the fair value
of a derivative that is not designated as a hedge are reported in earnings. Prior to the
implementation of AG 13, derivative instruments under Canadian GAAP were not fair valued.
 At December 31, 2003, the fair value of the portion of the interest rate cap not
designated as a hedging instrument was a liability of $796,000 ($431,000 net of tax). Upon
termination of this interest rate cap during 2004, the Company realized the after-tax gain
in earnings of $431,000. In 2003 the change in fair value of the cap resulted in an
after-tax gain of $108,000.
 At December 31, 2003, the portion of the interest rate cap that qualified as a hedging
instrument was a fair value liability of $215,000 ($128,000 net of tax). Upon termination
of the interest rate cap in 2004, the after-tax gain was realized in earnings and
therefore, other comprehensive income was debited by $128,000 net of tax. In 2003 the
after-tax gain credited to other comprehensive income was $45,000.
 (e)
    
    Minimum Pension Liability
 Under U.S. GAAP Statement of Financial Accounting Standard No. 87, Employers Accounting
for Pensions, the Company is required to record a minimum pension liability for pension
plans representing the amount by which the accumulated benefit obligation less the fair
value of the plan assets is greater than the associated liability recognized in the
financial statements for these plans. Under U.S. GAAP these charges are recorded as a
reduction to shareholders equity, representing a component of AOCI. The impact on other
comprehensive income in 2004 was a charge to earnings resulting from an increase in the
minimum liability by $2,218,000, or $1,417,000 net of tax (2004  earnings of $2,573,000,
or $1,643,000 net of tax; 2003  a charge of $5,390,000, or $3,277,000 net of tax).The
balance of the minimum pension liability in AOCI at December 31, 2005, was a liability of
$8,714,000, or $5,567,000 net of tax (2004  $6,496,000 or
$4,150,000 net of tax; 2003 
$9,069,000, or $5,793,000 net of tax).
 Extendicare 2005 Annual Report
    
    111
    
    Notes to Consolidated Statements




---



##### 



(f)
    
    Conditional Asset Retirement Obligations
 Under U.S. GAAP in March 2005 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47).
FIN 47 clarified that the term conditional asset retirement obligation as used in
Statement of Financial Accounting Standards, or SFAS, No. 143, Accounting for Asset
Retirement Obligations, refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional on a future event
that may or may not be within the control of the entity. FIN 47 requires that either a
liability be recognized for the fair value of a legal obligation to perform asset
retirement activities that are conditional on a future event if the amount can be
reasonably estimated, or where it cannot, that disclosure of the liability exists, but has
not been recognized and the reasons why a reasonable estimate cannot be made. FIN 47 became
effective for interim or annual periods ending after December 15, 2005. Under Canadian GAAP
on December 6, 2005, the CICA Emerging Issues Committee (EIC) issued Abstract EIC-159,
which conforms the accounting standards for conditional asset retirement obligations to
U.S. GAAP, but is only effective for interim and annual financial statements for fiscal
years ending after March 31, 2006.
 Management has determined that an asset retirement obligation exists in the Companys
pre-1980 constructed facilities for possible asbestos remediation. Though asbestos is not
currently a health hazard in any of these facilities, appropriate remediation procedures
may be required to remove potential asbestos-containing materials, consisting primarily of
floor and ceiling tiles, upon any major renovation or demolition.
 The fair value of the conditional asset retirement obligation was estimated by computing
the present value of the estimated future costs of remediation based on estimated expected
dates of remediation. The computation is based on a number of assumptions, which may
change in the future depending upon the availability of new information, technology
changes, changes in costs of remediation, and other factors.
 The adoption of FIN 47 under U.S. GAAP in 2005 was recorded as a change in accounting
principle by reporting the cumulative effect of the change through to December 31, 2005.
The cumulative non-cash charge to earnings for the asset obligation as of December 31,
2005, was $18,134,000 before tax and $11,081,000 after tax, representing a $0.16 loss per
basic and diluted share. The charges to the earnings statement included accumulated
accretion of the asset retirement obligation and accumulated depreciation on the related
capital cost of the assets from the estimated date the liability was incurred through to
December 31, 2005. The impact on the balance sheet for the conditional asset retirement
obligation as at December 31, 2005, was: a long-term accrued liability of $19,983,000;
property and equipment of $2,369,000, net of accumulated depreciation; a long-term future
tax asset of $6,844,000; and an increase to the currency translation account of $311,000.
 Extendicare 2005 Annual Report
    
    112
    
    Notes to Consolidated Statements




---



##### 



(g)
    
    New Accounting StandardsIn December 2004 the FASB issued Statement No. 123 (revised 2004), Share-Based Payment,
which is a revision of Statement No. 123 (Statement 123R). Statement 123R replaces APB
Opinion No. 25 and amends Statement No. 95, Statement of Cash Flows. Statement 123R
requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair value. The pro forma
footnote disclosure is no longer an alternative to financial statement recognition.
Statement 123R is effective for the Company beginning January 1, 2006, but early adoption
is permitted in periods in which financial statements have not been issued. There are two
transition alternatives, modified-prospective and modified-retrospective. Under the
modified-prospective method, the Company will be required to recognize compensation cost in
the financial statements on the date of adoption. Under the modified-retrospective method,
the Company will be required to restate prior periods by recognizing in the financial
statements the same amount of compensation cost as previously reported in the pro forma
footnote disclosures under Statement 123. The Company will be permitted to apply the
modified-retrospective method either to all periods presented or to the start of the fiscal
year in which Statement 123R is adopted.In addition, Statement 123R requires awards classified as liabilities (such as cash-settled
stock appreciation rights) to be measured at fair value at each reporting date versus
measured at intrinsic value under Statement 123. The time value of the liability will be
recognized as compensation cost, but then be reversed as the settlement date approaches. At
expiration total compensation cost will not differ from that which would result under the
intrinsic-value method. Management expects to adopt this Statement on January 1, 2006,
under the modified-prospective-transition method. As of December 31, 2005, substantially
all of the Companys options are vested, and the pre-tax expense expected to be recorded in
2006 related to stock options outstanding at December 31, 2005, is approximately $14,000.
Management has not determined the impact of adoption of cash-settled stock appreciation
rights.
 24.
    
    Subsequent Events
 EHSI has signed purchase agreements for the acquisition of two nursing facilities (417
beds) in Pennsylvania for cash of US$24,000,000 and a nursing facility (150 beds) in Ohio for
cash of US$9,000,000. It is anticipated that the Pennsylvania transaction will be completed in
March 2006 and the Ohio transaction in the second quarter of 2006.
 At their February 2006 meeting, the Companys Board of Directors appointed a committee of
independent directors to review and consider various structures and options that would provide
value to shareholders. A sale or reorganization of all or part of the Company are among the
alternatives being explored. Extendicare has appointed Lehman Brothers Inc., to be the
Companys advisor. While Extendicare gives no assurance that a transaction will be concluded,
its Board feels it prudent to pursue these initiatives at this time.
 Extendicare 2005 Annual Report
    
    113
    
    Notes to Consolidated Statements




---



##### 



Financial and Statistical Information
 (unaudited) (thousands of dollars unless otherwise noted)
    
    2005
    
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Financial PositionProperty and equipment
    
    
    1,108,739
    
    
    
    
    767,401
    
    
    
    821,682
    
    
    
    953,591
    
    
    
    968,202Health care assets
    
    
    1,625,649
    
    
    
    
    1,357,800
    
    
    
    1,451,638
    
    
    
    1,684,137
    
    
    
    1,603,360Equity accounted investments
    
    
    72,445
    
    
    
    
    68,531
    
    
    
    141,779
    
    
    
    121,508
    
    
    
    135,944Long-term debt
    
    
    775,243
    
    
    
    
    613,651
    
    
    
    750,094
    
    
    
    846,734
    
    
    
    788,354Shareholders equity
    
    
    497,306
    
    
    
    
    456,987
    
    
    
    356,433
    
    
    
    358,062
    
    
    
    350,696Financial ResultsRevenueNursing and assisted living centresUnited States
    
    
    1,406,821
    
    
    
    
    1,159,042
    
    
    
    1,129,253
    
    
    
    1,180,119
    
    
    
    1,136,343Canada
    
    
    382,377
    
    
    
    
    366,863
    
    
    
    351,981
    
    
    
    315,907
    
    
    
    279,559Outpatient
therapy  United States
    
    
    13,644
    
    
    
    
    14,300
    
    
    
    16,151
    
    
    
    16,144
    
    
    
    14,733Home health
 Canada
    
    
    128,144
    
    
    
    
    127,971
    
    
    
    134,921
    
    
    
    146,034
    
    
    
    171,809Other
    
    
    40,782
    
    
    
    
    39,946
    
    
    
    39,038
    
    
    
    43,314
    
    
    
    50,1401,971,768
    
    
    
    
    1,708,122
    
    
    
    1,671,344
    
    
    
    1,701,518
    
    
    
    1,652,584EBITDA(1)
    
    
    267,345
    
    
    
    
    229,920
    
    
    
    184,897
    
    
    
    154,621
    
    
    
    122,476Earnings (loss) from continuing health care
    
    
    98,337
    
    
    
    
    126,914
    
    
    
    42,152
    
    
    
    9,528
    
    
    
    (45,526
    )Share of equity accounted earnings
    
    
    3,928
    
    
    
    
    9,375
    
    
    
    18,884
    
    
    
    7,520
    
    
    
    10,738Net earnings (loss)
    
    
    95,105
    
    
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934
    
    
    
    (36,406
    )Components of Diluted Earnings
(Loss) per Share ($)Continuing health care operations
before undernoted
    
    
    1.33
    
    
    
    
    1.23
    
    
    
    0.58
    
    
    
    0.18
    
    
    
    (0.19
    )Valuation adjustments on interest rate caps
    
    
    (0.02
    )
    
    
    
    (0.09
    )
    
    
    
    
    
    
    
    
    
    
    Gain (loss) from asset disposals,
impairment and other items
    
    
    0.09
    
    
    
    
    0.10
    
    
    
    0.01
    
    
    
    (0.05
    )
    
    
    (0.46
    )Prior year tax benefit
    
    
    
    
    
    
    
    0.56
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) from continuing
health care operations
    
    
    1.40
    
    
    
    
    1.80
    
    
    
    0.59
    
    
    
    0.13
    
    
    
    (0.65
    )Share of equity accounted earnings
    
    
    0.06
    
    
    
    
    0.14
    
    
    
    0.27
    
    
    
    0.10
    
    
    
    0.15Earnings (loss) from continuing operations
    
    
    1.46
    
    
    
    
    1.94
    
    
    
    0.86
    
    
    
    0.23
    
    
    
    (0.50
    )Loss from discontinued operations,
net of income taxes
    
    
    (0.10
    )
    
    
    
    (0.16
    )
    
    
    
    
    
    
    0.03
    
    
    
    (0.02
    )Net earnings (loss)
    
    
    1.36
    
    
    
    
    1.78
    
    
    
    0.86
    
    
    
    0.26
    
    
    
    (0.52
    )Other InformationNumber of facilities (period end)United States
    
    
    362
    
    
    
    
    185
    
    
    
    193
    
    
    
    197
    
    
    
    198Canada
    
    
    77
    
    
    
    
    78
    
    
    
    82
    
    
    
    80
    
    
    
    63439
    
    
    
    
    263
    
    
    
    275
    
    
    
    277
    
    
    
    261Operational resident capacity (period end)United States
    
    
    23,575
    
    
    
    
    16,642
    
    
    
    17,810
    
    
    
    18,269
    
    
    
    18,402Canada
    
    
    10,920
    
    
    
    
    10,973
    
    
    
    11,120
    
    
    
    10,906
    
    
    
    7,93734,495
    
    
    
    
    27,615
    
    
    
    28,930
    
    
    
    29,175
    
    
    
    26,339Extendicare Health Services, Inc.Average nursing home occupancy (%)
    
    
    92.8
    
    
    
    
    92.0
    
    
    
    91.3
    
    
    
    90.0
    
    
    
    87.3Medicare nursing home patient days (%)
    
    
    18.4
    
    
    
    
    16.8
    
    
    
    15.6
    
    
    
    13.4
    
    
    
    11.6Total revenue by payor source (%)Medicare
    
    
    27.1
    
    
    
    
    30.2
    
    
    
    27.6
    
    
    
    25.5
    
    
    
    23.5Private
    
    
    28.0
    
    
    
    
    22.9
    
    
    
    24.1
    
    
    
    25.1
    
    
    
    26.1Medicaid
    
    
    44.9
    
    
    
    
    46.9
    
    
    
    48.3
    
    
    
    49.4
    
    
    
    50.4Average occupancy (%)
    
    
    92.5
    
    
    
    
    93.2
    
    
    
    92.8
    
    
    
    91.9
    
    
    
    90.1ParaMed home health care hours of service
    
    
    4,532,000
    
    
    
    
    4,593,000
    
    
    
    4,956,000
    
    
    
    5,433,000
    
    
    
    6,868,000Number of employees (period end)
    
    
    37,600
    
    
    
    
    34,600
    
    
    
    35,800
    
    
    
    37,600
    
    
    
    36,700Number of shares outstanding (period end)Subordinate Voting Shares
    
    
    56,018,395
    
    
    
    
    56,687,086
    
    
    
    56,575,211
    
    
    
    57,107,011
    
    
    
    58,544,511Multiple Voting Shares
    
    
    11,791,433
    
    
    
    
    11,904,992
    
    
    
    11,912,692
    
    
    
    12,557,092
    
    
    
    12,775,917
 (1)
    
    Refer to discussion of non-GAAP measures on page 25.
 Extendicare 2005 Annual Report
    
    114
    
    Financial and Statistical Information




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##### 



Board of Directors
 of Extendicare Inc.
 David J. Hennigar (CG)(F)  Chairman
 H. Michael Burns (CG)(IS)  Deputy Chairman
 Frederick B. Ladly (CG)(HR)(QS)  Deputy Chairman
 Mel Rhinelander  President and Chief Executive Officer
 Derek H. L. Buntain (A)(F)(HR)(IS)
 Sir Graham Day (CG)(F)(HR)
 David M. Dunlap (A)(HR)(QS)
 George A. Fierheller (A)(IS)
 Dr. Seth B. Goldsmith (CG)(QS)
 Michael J. L. Kirby (CG)(HR)(QS)
 Alvin G. Libin (A)(F)
 J. Thomas MacQuarrie, Q.C. (A)(F)(HR)
 Malen S. Ng (A)(IS)
 Charles H. Roadman II, MD (QS)
 Honorary Directors  Marsh A. Cooper
 George S. Dembroski
 John J. Jodrey
 Derril G. McLeod, Q.C.
 Further information on the Directors of Extendicare Inc. and a description of the Companys
Corporate Governance practices may be found in the Companys Management Information and Proxy
Circular, dated March 3, 2006, as filed with SEDAR at www.sedar.com, the United States Securities
and Exchange Commissions website at www.sec.gov, and on the Companys website at
www.extendicare.com.
  (A)
    
    Audit Committee(CG)
    
    Corporate Governance and Nominating Committee(F)
    
    Finance Committee(HR)
    
    Human Resources Committee(IS)
    
    Information Systems Committee(QS)
    
    Quality Standards Committee
 Extendicare 2005 Annual Report
    
    115
    
    Board of Directors




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##### 



Officers
 Extendicare Inc.
3000 Steeles Avenue East
Markham, Ontario 
Canada L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588

David J. HennigarChairmanH. Michael BurnsDeputy ChairmanFrederick B. LadlyDeputy Chairman

Mel RhinelanderPresident and Chief Executive Officer
Richard L. BertrandSenior Vice-President and
 Chief Financial Officer
Jillian E. FountainCorporate SecretaryExtendicare Health Services, Inc.
111 West Michigan Street
Milwaukee, Wisconsin
United States 53203-2903
Tel: (414) 908-8000
        (800) 395-5000
Fax: (414) 908-8059

Mel RhinelanderChairman and Chief Executive Officer
Philip W. SmallPresident and Chief Operating Officer
Richard L. BertrandSenior Vice-President, Chief Financial Officer and Treasurer


Roch CarterVice-President, General Counsel and Assistant Secretary
Douglas J. HarrisVice-President and Controller
L. William WagnerVice-President, Human Resources
Jillian E. FountainCorporate SecretaryExtendicare (Canada) Inc.
3000 Steeles Avenue East Markham, Ontario Canada L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588

Mel RhinelanderChairman and Chief Executive Officer
Paul TuttlePresident

Richard L. BertrandSenior Vice-President and
 Chief Financial Officer
Stephen R. HaasVice-President,
ParaMed Home Health Care

Len G. KoroneosVice-President, Business Development and Privacy Officer


Paul RushforthVice-President, Western Operations
Susan C. CullenVice-President, Eastern Operations
Elaine E. EversonVice-President and Controller
Christina L. McKeyVice-President, Human Resources
R. Gordon SpearVice-President, Administration
Jillian E. FountainCorporate SecretaryAssisted Living Concepts, Inc.
111 West Michigan Street
Milwaukee, Wisconsin
United States 53203-2903
Tel: (414) 908-8000
        (800) 395-5000
Fax: (414) 908-8059

Mel RhinelanderChairman and Chief Executive Officer
Laurie A. BeboPresident and Chief Operating Officer
Richard L. BertrandSenior Vice-President, Chief Financial Officer and Treasurer

Roch CarterVice-President, General Counsel and Corporate Secretary
Walter A. LevonowichVice-President and Controller
  Extendicare 2005 Annual Report
    
    116
    
    Officers




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##### 



Shareholder Information
 Extendicare Inc.
 Shareholder Inquiries
 Investor Relations
 Transfer Agent
 Annual Meeting
 Corporate Information
 Stock Exchange Listings   (See table below)
 (Subordinate Voting only  EXE)
 Share Information
 TSX
    
    
    Shares Outstanding at
    
    

Year-end
Closing Market Price on the TSXShares
    
    Stock Symbol
    
    
    December 31, 2005
    
    
    2005
    
    
    
    2004
    
    
    2003Multiple Voting Shares
    
    
    EXE.MV
    
    
    11,791,433
    
    
    $
    18.20
    
    
    
    $
    15.95
    
    
    $
    13.40Subordinate Voting Shares
    
    
    EXE.SV
    
    
    56,018,395
    
    
    
    18.30
    
    
    
    
    15.45
    
    
    
    13.25Class I Preferred SharesCumulative Redeemable, Series 2
    
    
    EXE.PR.B
    
    
    88,805
    
    
    
    24.75
    
    
    
    
    24.75
    
    
    
    24.00Adjustable Dividend, Series 3
    
    
    EXE.PR.C
    
    
    93,310
    
    
    
    19.40
    
    
    
    
    20.00
    
    
    
    20.25Adjustable Dividend, Series 4
    
    
    EXE.PR.D
    
    
    241,240
    
    
    
    24.00
    
    
    
    
    23.85
    
    
    
    22.75Class II Preferred Shares, Series 1
    
    
    EXE.PR.E
    
    
    382,979
    
    
    
    19.92
    
    
    
    
    20.25
    
    
    
    18.88
 Quarterly Price Ranges of Subordinate Voting
Shares (EXE.SV ) on the TSX
 1st
    
    
    2nd
    
    
    3rd
    
    
    4th2005: High
    
    $
    20.00
    
    
    $
    19.93
    
    
    $
    21.25
    
    
    $
    20.98Low
    
    
    15.18
    
    
    
    15.62
    
    
    
    17.50
    
    
    
    17.502004: High
    
    $
    15.98
    
    
    $
    16.33
    
    
    $
    17.09
    
    
    $
    17.40Low
    
    
    12.20
    
    
    
    13.83
    
    
    
    13.75
    
    
    
    14.752003: High
    
    $
    4.70
    
    
    $
    4.59
    
    
    $
    8.10
    
    
    $
    13.90Low
    
    
    2.65
    
    
    
    2.65
    
    
    
    4.33
    
    
    
    7.65
 Trading Price of Subordinate Voting Shares
(EXE.SV ) on the TSX
 
 Extendicare 2005 Annual Report
    
    Shareholder Information




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##### 



Core Values
        Success means embracing these values.
They define Extendicare.