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Exhibit 99.1 (EXTENDICARE LOGO) 2003 Annual
Information Form  Health Care is Our Business 
    
    May 14, 2004




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TABLE OF CONTENTS PageDocuments Incorporated by Reference
    
    
    1Cautionary Notice Regarding Forward-looking Statements
    
    
    1Incorporation and Reorganization
    
    
    2Corporate Overview
    
    
    2Subsidiary Companies
    
    
    2Business of the Company
    
    
    3General
    
    
    3Long-term Care Industry Overview
    
    
    4Competitive Strengths
    
    
    5Business Strategy
    
    
    8Operations
    
    
    10Quality of Care
    
    
    13Marketing
    
    
    14Competition
    
    
    15Management, Financial Controls and Cost Controls
    
    
    15Insurance
    
    
    16Sources of Revenue
    
    
    16Properties
    
    
    21Government Regulations
    
    
    22Employees
    
    
    28Investment in Crown Life Insurance Company
    
    
    28Selected Financial Information
    
    
    29Comparability of Selected Financial Information
    
    
    30Acquisitions
    
    
    30Construction
    
    
    30Asset Disposals, Impairment and Other Items
    
    
    31Share Capital Transactions
    
    
    34Dividend Record
    
    
    34Market for Securities
    
    
    34Additional Information
    
    
    35Directors and Officers
    
    
    36Supplementary Information  Reconciliation of Canadian and United StatesGenerally Accepted Accounting Principles
    
    
    A-1




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DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference in this Extendicare Inc. 2003 Annual Information Form:  
    
    the Management Information and Proxy Circular of Extendicare Inc. dated March 12, 2004;  
    
    the Managements Discussion and Analysis, found on pages 14 through 39 of the 2003
Annual Report of Extendicare Inc., including a discussion of Risks and Uncertainties
on page 34; and  
    
    the Consolidated Financial Statements and Auditors Report to the Shareholders of
Extendicare Inc., found on pages 40 through 66 of the 2003 Annual Report of
Extendicare Inc. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS Information provided by the Company from time to time, including this Annual
Information Form and the documents incorporated herein by reference, contains
or may contain forward-looking statements concerning the Companys operations,
economic performance and financial condition, including the Companys business
strategy. Forward-looking statements can be identified because they generally
contain the words anticipate, believe, estimate, expect, objective,
project, or a similar expression. Forward-looking statements reflect managements beliefs and assumptions and are
based on information currently available to the Company. They are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to differ materially from those expressed or
implied in the statements. In addition to the assumptions and other factors
referred to specifically in connection with these statements, such factors are
identified in the Companys public filings with Canadian and United States
securities regulators and include, but are not limited to, the following:
changes in the health care industry in general and the long-term care industry
in particular because of political and economic influences; changes in
regulations governing the industry and the Companys compliance with such
regulations; changes in government funding levels for health care services;
liabilities and other claims asserted against the Company; the Companys
ability to attract and retain qualified personnel; the availability and terms
of capital to fund the Companys capital expenditures; changes in competition;
and demographic changes. Given these risks and uncertainties, readers are cautioned not to place undue
reliance on the Companys forward-looking statements. Extendicare 2003 Annual Information Form 1




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INCORPORATION AND REORGANIZATION In this Annual Information Form, unless the context indicates otherwise, a
reference to Extendicare or the Company means Extendicare Inc. and its
subsidiaries. The Extendicare Inc. legal entity is not itself a provider of
services or products. Extendicare Inc., which commenced operations in 1968, was
continued under the Canada Business Corporations Act by Articles of Continuance
that have been amended to change the capital structure and the name of the
Company. The registered and principal office of Extendicare Inc. is located at
3000 Steeles Avenue East, Markham, Ontario, Canada L3R 9W2. CORPORATE OVERVIEW EXTENDICARE INC. EXTENDICARE HEALTH SERVICES, INC.
    
    (100%) (UNITED STATES)nursing, assisted living and retirement centres; rehabilitative therapy and group purchasing servicesEXTENDICARE (CANADA) INC.
    
    (100%) (CANADA)nursing and retirement centres; home health care through ParaMed Home Health Care and management of a chronic care unitLAURIER INDEMNITY COMPANY, LTD.
    
    (100%) (BERMUDA)LAURIER INDEMNITY COMPANY
    
    (100%) (UNITED STATES)property and casualty insurance for United States health care operations
 SUBSIDIARY COMPANIES The following is a list of the material direct and indirect subsidiaries of
Extendicare Inc.: Jurisdiction
    
    Percentage of Voting Securitiesof
    
    Owned Directly or IndirectlyName
    
    Incorporation
    
    by ExtendicareExtendicare (Canada) Inc.
    
    Canada
    
    
    100159524 Canada Inc. (note)
    
    Canada
    
    
    100New Orchard Lodge Limited
    
    Canada
    
    
    100Extendicare of Indiana, Inc.
    
    Delaware
    
    
    100Extendicare Health Facilities Holdings, Inc.
    
    Delaware
    
    
    100Extendicare Health Services, Inc.
    
    Delaware
    
    
    100Extendicare Homes, Inc.
    
    Delaware
    
    
    100Northern Health Facilities, Inc.
    
    Delaware
    
    
    100Fir Lane Terrace Convalescent Center, Inc.
    
    Washington
    
    
    100Arbors at Toledo, Inc.
    
    Ohio
    
    
    100Laurier Indemnity Company
    
    Georgia
    
    
    100Laurier Indemnity Company, Ltd.
    
    Bermuda
    
    
    100
 Note: Extendicare Inc., through 159524 Canada Inc., owned a 34.8% common
equity interest in Crown Life Insurance Company at December 31, 2003. Extendicare 2003 Annual Information Form 2




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BUSINESS OF THE COMPANY General Extendicare Inc., through its subsidiaries, operated 275 long-term care
facilities in North America, with capacity for 28,930 residents as of December
31, 2003. As well, through its operations in the United States, Extendicare
offers medical specialty services, such as subacute care and rehabilitative
therapy services, while home health care services are provided in Canada. Of
the Companys total revenue of $1.7 billion in 2003, 71.4% was derived from
operations in the United States. The Company employed 35,800 people at December
31, 2003. In the United States the Companys wholly owned subsidiary, Extendicare Health
Services, Inc. and its subsidiaries (EHSI), operate long-term care and assisted
living facilities in 14 states. In Canada the Companys wholly owned
subsidiary, Extendicare (Canada) Inc. and its subsidiaries (ECI), operate
nursing and retirement centres in five provinces, manage a chronic care
hospital unit in Ontario and is a major provider of home health care. The
Company has a significant presence in three states in the United States, namely
Pennsylvania, Wisconsin and Ohio as well as in the Province of Ontario, Canada
(more than 10% of its long-term facilities in each of these jurisdictions). The
Companys average occupancy levels for 2003 and 2002 were 92.9% and 92.0%,
respectively. The Companys nursing and assisted living facilities are located in groups
within geographic proximity of each other, thereby allowing for regional
development of ancillary businesses, cost-effective management control and
reduced travel costs. The operations are organized regionally and have
management that is experienced and knowledgeable with respect to each countrys
long-term health care environment. The Company operates in a competitive marketplace and depends substantially on
revenue derived from government third-party payors, with the remaining revenue
derived from commercial insurers, managed care plans and private individuals.
The ongoing pressures from government programs, along with other payors seeking
to control costs and/or limit reimbursement rates for medical services are a
risk the Company faces. The Company also operates in a heavily regulated
industry, subject to the scrutiny of federal and state/provincial regulators.
Each of EHSIs and ECIs nursing homes must comply with regulations regarding
staffing levels, resident care standards, occupational health and safety,
resident confidentiality, billing and reimbursement, along with environmental,
biological and other standards. Government agencies have steadily increased
their enforcement activity over the past several years. The Company continually
allocates increased resources to ensure compliance with and respond to
inspections, investigations and/or enforcement actions, and to improve the
quality of services provided to its residents. The following table identifies the number of nursing centres, assisted living
and retirement centres, and chronic care units operated by Extendicares
subsidiaries at December 31, 2003: United States
    
    Canada
    
    TotalNo. of
    
    Resident
    
    No. of
    
    Resident
    
    No. of
    
    ResidentFacilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    CapacityNursing centres
    
    
    154
    
    
    
    15,945
    
    
    
    76
    
    
    
    10,259
    
    
    
    230
    
    
    
    26,204Assisted living and
retirement centres
    
    
    39
    
    
    
    1,865
    
    
    
    5
    
    
    
    741
    
    
    
    44
    
    
    
    2,606Chronic care units
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    120
    
    
    
    1
    
    
    
    120Total
    
    
    193
    
    
    
    17,810
    
    
    
    82
    
    
    
    11,120
    
    
    
    275
    
    
    
    28,930
 Extendicare 2003 Annual Information Form 3




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Long-term Care Industry Overview Extendicare believes that in North America the long-term care industry is
changing as a result of several fundamental factors, which it believes it can
capitalize on. These factors include: Aging Population The aging of the population is a leading driver of demand for long-term care
services. According to the 2000 census conducted by the U.S. Census Bureau,
there were approximately 34.4 million Americans aged 65 or older, representing
12.6% of the total U.S. population. The U.S. Census Bureau has forecasted that
the population of Americans aged 65 or older will increase to 53.2 million by
2020, and to 78.8 million by 2050, representing 16.4% and 20%, respectively of
the total U.S. population. Based upon these projections, the annual growth rate
for persons over 65 will be 2.6%, through 2020 and 1.8% through 2050 whereas,
the annual growth rate for persons over 85, will be 2.6%, through 2020 and 6.6%
through 2050. Also, according to the MetLife Market Survey of Nursing Home report (MetLife
Report) in August 2003, in the United States approximately 1.6 million or 4.5%
of all persons aged 65 and over were living in a nursing facility in 2000 and
this number will increase to approximately 6.6 million, or 8.4% of all persons
aged 65 by the year 2050. In Canada, according to Statistics Canada, the population of seniors (persons
over 80 years of age) is expected to increase at a greater rate than the
general Canadian population over the period between 2001 and 2026 (an average
increase of 3.7% per annum for seniors versus 0.7% for the general population).
This result is believed to be due to several factors including the progression
of the baby boom generation through the demographic cycle and longer life
spans. The average age of nursing home residents is in the low to mid-eighties. Supply/Demand Imbalance Acquisition and construction of additional nursing facilities are subject to
certain restrictions on supply, including government legislated moratoriums on
new capacity or licensing restrictions limiting the growth of services.
Governments limit new supply in order to maintain the financial health of the
industry and to ensure funding costs are kept under control. Such restrictions
on supply, coupled with an aging population, cause a decline in the
availability of long-term beds for persons 85 years of age or older. In Canada there are estimated to be approximately 291,000 senior housing beds
in the six largest provinces (Source: Seniors Housing Industry in Canada -
Demand and Supply), of which approximately 183,000 are regulated long-term care
beds, to serve an over-75 population of approximately 1.6 million (Source:
Statistics Canada, 2001). To maintain the current ratio of senior housing beds
to seniors in the six largest provinces, there will have to be an increase in
the number of facilities. There has been a shift to awarding new beds in order
to meet the increasing demand, particularly in Ontario where a program was
implemented to add 20,000 long-term care beds between 1998 and 2004. While
these new beds may create a temporary oversupply in some markets, it is
expected the continued growth in demand will see these beds absorbed. Advances in medical technology are enabling the treatment of certain medical
conditions outside the hospital setting. As a result, patients requiring a
higher degree of monitoring, more intensive and specialized medical care,
24-hour per day nursing, and a comprehensive array of rehabilitative therapies
are increasing. Extendicare believes that such specialty care can be provided
in long-term care facilities at a significantly lower cost than in traditional
acute care and rehabilitation hospitals. Extendicare 2003 Annual Information Form 4




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Cost Containment Pressures According to the MetLife Report, the remaining life expectancy of a male aged
65 years has increased to 16.3 years in 2002 from 12.7 years in 1942, while for
a female aged 65, this expectancy has increased to 19.2 years from 14.7 years
for the same period. As the number of people aged 65 continues to grow and as
advances in medicine and technology continue to increase life expectancies,
health care costs are expected to rise faster than the availability of
resources from government-sponsored health care programs. In response to such
rising costs, governmental and private pay sources have adopted cost
containment measures that encourage reduced lengths of stay in acute care
hospitals. As a result, many patients are discharged despite a continuing need
for nursing or specialty health care services, including therapy. This trend
has increased demand for skilled nursing care, home health care, outpatient
therapy, hospices and assisted living facilities. Extendicare believes that
long-term care companies that have information systems to process clinical and
financial data, possess an integrated network and that are capable of providing
a broad range of services, will be in a good position to contract with managed
care or other payors. Changing Family Dynamics As a result of the growing number of two-income families, the immediate family
has become less of a primary source of care giving for the elderly. At the same
time, two-income families are better able to provide financial support for
elderly parents to receive the care they need in a nursing or assisted living
facility. In the United States for example, the parent support ratio (the ratio
of individuals over 85 to those 50 to 64 years of age) has increased from 3 to
100 in 1950 to 10 to 100 in 2000, and is expected to reach 29 to 100 by the
year 2050. The expected increase is partly due to the fact that, by 1990,
approximately 26% of the baby boom was childless. Competitive Strengths Management believes the Companys major competitive strengths are: Leading Provider of Long-term Care Services Extendicare is among the largest providers of long-term care services in North
America, based upon the number of beds operated. EHSI is among the 10 largest
long-term care operators in the United States. In Canada, ECI is the second
largest private-sector operator of long-term nursing care facilities and
through ParaMed Home Health Care, is the largest private-sector provider of
home health care services. The long-term care industry is highly fragmented.
For instance, according to the U.S. Centers for Medicare and Medicaid Services
(CMS) the 10 largest nursing facility companies account for 15.5% of the total
facility beds in the United States as of April 2003. In Ontario, ECIs largest
market, the Company operates approximately 11% of the long-term care beds. The scope of the Companys operations allows it to achieve economies of scale
and to pass these savings on to third parties, through the provision of
purchasing and information technology support services. Significant Facility Ownership Extendicare owns rather than leases a majority of its properties, unlike a
number of other long-term care providers. As of December 31, 2003, Extendicare
owned or operated under capital lease arrangements 219 facilities, or 95.2% of
the facilities the Company operated, excluding those it managed. The Company
believes that ownership increases its operating flexibility by allowing the
Company to: refurbish facilities to meet changing consumer demands; add
assisted living and retirement facilities adjacent to its nursing facilities;
adjust licensed capacity to avoid occupancy-based rate penalties; divest
facilities and exit markets at its discretion; and more directly control its
occupancy costs. Extendicare 2003 Annual Information Form 5




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The following table depicts ownership and management of facilities operated by
EHSI and ECI at December 31, 2003: United States
    
    Canada
    
    TotalNo. of
    
    Resident
    
    No. of
    
    Resident
    
    No. of
    
    ResidentFacilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    CapacityOwned
    
    
    163
    
    
    
    14,807
    
    
    
    47
    
    
    
    6,301
    
    
    
    210
    
    
    
    21,108Leased(1)
(2)
    
    
    11
    
    
    
    1,158
    
    
    
    9
    
    
    
    1,231
    
    
    
    20
    
    
    
    2,389Managed
    
    
    19
    
    
    
    1,845
    
    
    
    26
    
    
    
    3,588
    
    
    
    45
    
    
    
    5,433Total
    
    
    193
    
    
    
    17,810
    
    
    
    82
    
    
    
    11,120
    
    
    
    275
    
    
    
    28,930
  (1)
    
    In the United States the average remaining life of the leases, including
renewal options exercisable solely by EHSI, ranges from one to nine years,
the average being four years. EHSI retains an option to purchase the
leased property for five of the 11 leased facilities.  (2)
    
    The nine leased facilities in Canada are operated by ECI under a 25-year
capital lease arrangement. Focus on Core Business The Company focuses on its core skilled nursing facility operations, while
continuing to grow its complementary long-term care services. Nursing and
assisted living centre revenue represents 88.9% of total revenue of the Company
for the year 2003. Over the past several years, Extendicare has successfully identified and
disposed of business segments that did not fit within its core business and
facilities located in states with unacceptable litigation risks. The Company
intends to continue to focus on owning and managing long-term care facilities.
In addition, management will continue to review the performance of its current
facilities and exit markets or sell facilities that do not meet its performance
goals. At the present time, the Company has no significant divestiture plans. In April 2001 EHSI sold two of its leased facilities in Florida to the lessee,
who had an option to purchase the homes. In October 2001 in order to further reduce its exposure to excessive general
and professional liability claims and litigation, EHSI ceased its nursing home
operations in Texas by leasing four owned facilities and subleasing the
remaining 13 facilities to a third-party operator. In December 2001 ECI sold its investment in Accident Injury Management Clinics
Inc. (AIM), a rehabilitation therapy business operating in Ontario. In April 2003 ECI sold an under-performing nursing home in Alberta and in March
2003 the Company sold non-core assets, which had been written off, in prior
years. In February 2004 the Company sold a nursing home and an adjacent retirement
home in Ontario, representing 275 beds. Geographic Diversity In the United States, EHSI operates or manages facilities located in specific
markets across 14 states throughout the Northeast, Midwest, and Northwest
regions. No state contains more than 19% of EHSIs facilities or 20% of its
beds. Each state is unique in terms of its competitive dynamics as well as
political and regulatory environment. Each state administers its own Medicaid
program, which constitutes a significant portion of EHSIs revenue. EHSIs
diversified market scope limits its exposure to events or trends that may occur
in any one individual state, including changes in any states Medicaid
reimbursement program and in regional and local economic conditions and
demographics. Extendicare 2003 Annual Information Form 6




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ECI operates in five provinces across Canada. A substantial portion of ECIs
revenue is government funded, and each province administers its own health care
programs. Ontario represents ECIs largest market, accounting for 75.7% of the
nursing home and assisted living beds operated at year-end, and 92.9% of
ParaMeds home health care hours provided in 2003. Management Focus on Key Performance Drivers The Company believes that its senior management, as well as its field
personnel, are proficient at focusing on the key areas that drive revenue,
profits and cash flows. Extendicares senior management have identified four
critical drivers of operating and financial performance, which are: improving
census, particularly increasing U.S. Medicare census; increasing cash flow from
operations through expediting billing and collections and other initiatives;
controlling labour and other costs; and diversification within the long-term
care industry through expansion of facilities under management and consulting
agreements and the expansion of rehabilitation clinics. In the United States, EHSIs average occupancy rate for skilled nursing
facilities improved to 91.5% in 2003 from a 90.3% occupancy rate for 2002 and
87.5% in 2001. The percentage of EHSIs Medicare residents to total nursing
home residents was 15.5% in 2003, which was an improvement from 13.4% for 2002
and 11.3% for 2001. Through consistent emphasis on admissions protocols, attention to older and
larger account balances and proactive collection efforts at regional and head
offices, Extendicare has continued to improve its accounts receivable
management. Days of revenue outstanding have dropped from approximately 45 days
in 2001 to 35 days as of December 31, 2003. In Canada, where the supply of long-term care beds historically has been very
restricted, nursing home operators typically enjoy higher occupancy levels than
in the United States. ECIs average occupancy, excluding the impact of filling
new homes, was 98.0% in 2003, 98.3% in 2002 and 98.2% in 2001. Dual U.S. Medicare and Medicaid Certification Extendicare has certified substantially all of its beds in the United States
for the provision of care to both Medicare and Medicaid patients. Management
believes that dual certification increases the likelihood of higher occupancy
rates by increasing the availability of beds to patients who require a specific
bed certification. In addition, dual certification allows EHSIs facilities to
easily shift patients from one level of care and reimbursement to another
without physically moving the patient. Experienced and Proven Management Team Extendicares management team has demonstrated competency in dealing with
significant changes, particularly with regards to the challenging U.S.
environment, where the Medicare program shifted to a prospective payment
system, or PPS, which significantly reduced funding levels. Management
identified early on, and successfully implemented strategies to exit the
Florida and Texas nursing home markets in light of the extremely litigious
environments in those states. During 2002 management was successful in issuing
new debt in the U.S. enabling the Company to refinance its U.S. senior bank
debt. In Ontario, where the government introduced a program to add 20,000 new
long-term care beds by 2004, management submitted successful bids, resulting in
Extendicare being one of the top contenders. During these challenging times,
the Company has been successful in recruiting experienced management staff from
the competition, further strengthening its already experienced executive and
operating management team. Extendicare 2003 Annual Information Form 7




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Business Strategy United States Provide Quality, Clinically Based Services EHSI, through its corporate clinical services group, monitors quality of care
indicators and survey results, and drives continuous quality improvement
processes at the facility and regional levels. Focus review meetings are held
on a regular basis to monitor trends in facilities and to communicate new
protocols and issues within the industry. The corporate clinical services group
directs an internal team of field-based quality validation specialists who are
responsible for mirroring the regulatory survey process and regularly
communicating with its outcomes management specialists in corporate office.
On-site data is integrated with clinical indicators, facility human resource
data and state regulatory outcomes to provide a detailed picture of problems,
challenges and successes in achieving performance at all levels of the
organization. This information pool allows management to determine best
practices for duplication in similarly situated facilities. EHSI emphasizes
these programs when marketing its services to acute care providers, community
organizations and physicians in the communities it serves. Increase Medicare Census EHSI continues to develop and implement strategies and capabilities to attract
residents, with a focus on increasing Medicare census. For 2003, Medicare
payments represented 27.4% of its total net revenue, up from 25.7% in 2002 and
23.8% in 2001. Senior management continually works with its regional and local
management teams to develop strategies to continue to increase this percentage.
Strategies, such as focused marketing efforts, standardized admissions
protocols, streamlined admitting procedures, dual certification of beds and
improved management communication have driven this improvement. In addition to
increasing the profitability of nursing facilities, higher Medicare census
expands the market for ancillary services, such as therapy. Leverage Presence in Small Urban Markets EHSI geographically clusters its long-term care facilities and services in
small urban markets in order to improve operating efficiencies and to offer its
customers a broad range of long-term care and related health services,
including assisted living services. It is anticipated that future expansion of
owned nursing facilities will come from the selective acquisition and
construction of facilities in areas that are in close proximity to existing
facilities, where management is experienced in dealing with the regulatory and
reimbursement environments, where the facility can participate as an active
member of the nursing facility association and where the facilitys reputation
is established. Actively Manage the Asset Portfolio EHSI continually reviews its asset portfolio for physical condition, whether
the assets are meeting the needs of the marketplace, financial performance and
their long-term outlook. When facilities do not meet EHSIs performance
criteria, risks within the marketplace increase or litigation risk increases
beyond acceptable limits; EHSI exits the marketplace or sells these facilities.
Over the past four years, EHSI has disposed of a number of facilities and
exited two states, while improving the performance of the balance of its asset
portfolio. EHSI also seeks to expand its portfolio of nursing and assisted living
facilities in states where it currently operates or that offer attractive
reimbursement systems. EHSI plans to expand through both acquisitions and
internal growth. Opportunities exist to expand existing facilities, and to
develop new assisted living facilities in locations close to existing nursing
facilities. EHSI currently employs a very experienced internal design and
development team that is well positioned for the design and construction of new
facilities. Extendicare 2003 Annual Information Form 8




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Increase Management and Consulting Services Agreements and Rehabilitation
Clinics EHSI seeks to increase the number of management and consulting contracts with
third parties. EHSI has knowledge and expertise in both the operational and
administrative aspects of the long-term care sector. Management believes that
the increasingly complex and administratively burdensome nature of the
long-term care sector, coupled with EHSIs commitment and reputation as a
leading quality operator, will result in a demand for new contracts. Management
believes this strategy is a logical extension of EHSIs business model and
competencies and will drive growth without requiring substantial capital
expenditures. In 2003 EHSI continued to increase the number of facilities under
management or consulting service agreements and raised the number to 82
compared to 58 in 2001. EHSI also opened two new rehabilitation clinics in
2003, raising the total it operated to 24 at December 31, 2003. Increase Operating Efficiency EHSI is focused on reducing operating costs by improving its communications
systems, streamlining documentation and strengthening the expenditure approval
process. EHSI has reduced the duplication of roles at the corporate and
regional levels. EHSI continuously seeks to improve its utilization of regional
resources by adding management and consulting contracts to its existing
regions, thereby enabling the Company to spread the costs of its regional
structure over a wider base of operations. Canada In Canada the Companys strategy has been to expand long-term care operations
through construction of facilities and to increase contracts for the
development and management of facilities for third parties. In 1998 the Ontario
Government launched a program to add 20,000 new nursing home beds in the
province. As a result of new beds awarded through the first phase of this
program, ECI opened eight new facilities in Ontario with capacity for 1,101
residents. This total included 905 new long-term care beds, 120 beds
transferred from existing ECI facilities and 76 assisted living units attached
to two of the new facilities. Four of the facilities opened in 2001, two in
2002, and the remaining two in February 2003. In 2001 ECI obtained, from
Borealis Long-Term Care Facilities Inc., financing of $125.4 million to build
the eight new facilities. ECI is operating the facilities for Borealis during
the 25-year capital lease arrangement at a financing cost of approximately
8.0%. Subsequent to 1998 ECI was awarded further long-term care beds by the Ontario
Government for three new nursing homes with capacity for 386 residents,
including 34 beds transferred from an existing ECI facility. ECI completed
these projects with the opening of a new nursing home in each of May and August
of 2003, and the final one in March 2004. In June 2003 ECI entered into a
25-year capital lease with Borealis that provided $14.4 million in financing at
a borrowing rate of 7.28% for one of the projects. Under its expansion program, the Ontario Government is funding a portion of the
construction costs over a 20-year period. Approximately $101.0 million will be
received by ECI for the new long-term care beds and redevelopment of certain
existing ECI beds. ECI had one of the highest success rates in winning awards to own or manage new
nursing home beds under the multi-year Ontario Government program. In Canada,
comparing 2003 with 1998 at December 31, the total number of long-term care
beds that Extendicare owned and leased has increased from 6,363 beds to 7,532
beds. Also subsequent to 1998, under the second phase of Ontarios new long-term bed
program, ECI, in partnership with the Halton Healthcare Services Corporation,
was selected to build a 128-bed long-term care facility located in Oakville.
Extendicare successfully developed and constructed the new facility in 2003 and
is operating it under a long-term management agreement. In addition, 199 new beds were awarded to others with whom ECI has partnered,
whereby ECI is developing and will manage a 128-bed facility that is scheduled
for completion in 2004 and the remaining 71 beds have been or will be added to
facilities that ECI already manages. Extendicare 2003 Annual Information Form 9




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ECI is continuing to capitalize on its expertise in the development and
management of long-term care facilities. The Company has a wide range of health
care partnership opportunities, involving public, private and not-for-profit
organizations through the provision of management and consulting contracts. ECI
increased these contracts for third parties in Ontario in 2002 by 17 facilities
and 2,844 beds including: a long-term contract to manage a 200-bed facility
developed in partnership with the West Park Healthcare Centre, a hospital; a
development contract to add 55 new beds to an existing managed 105-bed facility
(subsequently the contract was expanded to include redevelopment of more of the
existing 105 beds), a new contract to manage another hospitals existing
150-bed facility and the redevelopment of the building, including 42 new beds;
an appointment by the Ministry of Health and Long Term Care (MOHLTC) to manage
a 206-bed nursing home; and an appointment by a trustee in bankruptcy to manage
14 nursing and retirement facilities with a capacity of 2,191 beds. ECI also
added a management contract for three nursing facilities with 304 beds in
Manitoba. In 2003 as result of the sale of a retirement facility managed for the
receiver, the closure of the nursing home managed for the MOHLTC and the
commencement of the management contract for the Oakville nursing facility,
management contracts declined on a net basis, by one facility and 237 beds. At
December 31, 2003, ECI managed 3,588 beds representing six public-sector
facilities and 20 facilities for private owners, including 13 for a receiver.
ECI is the largest private health care organization in Canada with partnerships
involving the public hospital sector. Operations United States Organizational Structure Although the U.S operations are organized into a number of direct and indirect
wholly owned subsidiaries primarily for legal and tax purposes, EHSI manages
its operations as a single unit. Operating policies and procedures are
substantially the same in each subsidiary. Several of EHSIs subsidiaries own
and operate a significant number of its total portfolio of facilities. EHSIs
nursing home operations represent the largest portion of its business,
comprising more than 92% of its revenue. EHSI has centralized various functions provided from its corporate office, and
directs its operations through five regional offices located in close proximity
to its facilities. The regional office staffs are responsible for overseeing
all operational aspects of EHSIs facilities, including resident care,
rehabilitative services, recruitment and personnel matters, compliance with
state regulatory requirements, marketing and sales activities, internal
controls, accounting support and, participation in state associations.
Corporate office staff members are responsible for the development and
implementation of corporate-wide policies pertaining to: resident care;
employee hiring; training and retention; marketing initiatives and strategies;
accounting and finance functions, including billing and collection, accounts
payable, payroll, general finance and accounting, tax planning and compliance;
and providing overall strategic direction. Outlined below is a summary of each of EHSIs business operations. Nursing Care EHSI provides a broad range of long-term nursing care, including skilled
nursing services, subacute care and rehabilitative therapy services assisting
patients recovering from acute illness or injury. EHSI also provides nursing
care and therapy services to persons who do not require the more extensive and
specialized services of a hospital. The Companys nursing home facilities
employ registered nurses, licensed practical nurses, therapists, certified
nursing assistants and qualified health care aides who provide care as
prescribed by each residents attending physician. All nursing home facilities
provide daily dietary services, social services and recreational activities, as
well as basic services such as housekeeping and laundry. Extendicare 2003 Annual Information Form 10




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Assisted Living and Retirement Centres Assisted living care encompasses a broad spectrum of senior living services and
care options, which include independent living, assisted living and different
levels of skilled nursing care. Independent living is designed to meet the
needs of seniors who choose to live in an environment surrounded by their
peers, where they may receive such services as housekeeping, meals and
activities, but are not reliant on assistance with daily living activities such
as bathing, eating and dressing. Whereas, assisted living meets the needs of
seniors seeking accommodations with supportive care and services or who require
rehabilitative services. EHSI offers independent living and assisted living
services in its assisted living facilities. In its assisted living facilities, EHSI provides residential accommodations,
activities, meals, security, housekeeping, and assistance in the activities of
daily living to seniors who require some support, but not the level of nursing
care provided in a nursing facility. An assisted living facility enhances the
value of an existing nursing facility where the two facilities operate side by
side. This allows EHSI to better serve the communities in which it operates by
providing a broader continuum of services. Most of EHSIs assisted living
facilities are within close proximity to its nursing facilities. Additionally,
EHSIs retirement centres provide activities, security, transportation, special
amenities, comfortable apartments, housekeeping services and meals. Management and Selected Consulting Services EHSI uses its long-term care operating expertise to provide third parties with
either full management services through Partners Health Group, LLC, or selected
consulting services through Fiscal Services Group, LLC, two wholly owned
subsidiaries of EHSI. Contracts are structured on a fee-for-service basis and
generally have terms ranging from one to five years. Such services are
available because EHSI employs experienced professionals who have considerable
expertise in both the operational and administrative aspects of the long-term
care industry. On a regional level, EHSI provides consultants in the areas of
nursing, dietary, laundry and housekeeping to long-term care operators under a
consulting or full management services basis. Equally, through its head office
support group, EHSI can provide professionals to assist other operators in the
areas of cost reimbursement and accounting services. In addition, Virtual Care Provider, Inc. (VCP), a wholly owned subsidiary of
Extendicare, provides information technology services on a fee-for-service
basis to third parties, in conjunction with EHSIs management and consulting
services. Group Purchasing Extendicare Health Network, Inc., a wholly owned subsidiary of EHSI, provides
purchasing services for nursing facilities in numerous states in addition to
the facilities owned and managed by EHSI. The purchasing group offers
substantial cost reductions for its members through contractual volume-based
arrangements made with a variety of industry suppliers for food, supplies and
capital equipment. Rehabilitative Therapy - Outpatient and Inpatient Services EHSI operates rehabilitative therapy clinics within its wholly owned
subsidiaries, The Progressive Step Corporation (ProStep), Health Poconos, Inc.
and Adult Services Unlimited, Inc. As of December 31, 2003, EHSI operated 24
clinics: twelve in Pennsylvania, one in Ohio, two in Texas and nine in
Wisconsin. These clinics provide services to outpatients requiring physical,
occupational and/or speech-language therapy. In addition, the Pennsylvania
clinics provide respiratory, psychological and social services. EHSI provides rehabilitative therapy services on an inpatient and outpatient
basis. EHSI has expanded all of its nursing facilities therapy units, with
some facilities offering from 1,500 to 5,000 square feet of therapy space.
These programs provide patient-centred, outcome-oriented subacute and
rehabilitative care. At the majority of its facilities, EHSI employs physical,
occupational and/or speech-language therapists. Extendicare 2003 Annual Information Form 11




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Expansion Plans for expanding EHSIs operations are developed from sources such as:
personal contacts in the long-term care industry; information made available
through state and nationally based associations; and investment and financing
firms and brokers. All acquisitions and the undertaking of new contracts for
management and consulting services involve a process of due diligence in which
the operational, building and financial aspects of the undertaking are
investigated. Canada Extendicares Canadian health care operations are conducted through ECI and its
subsidiaries. ECI is the second largest private-sector operator of nursing
facilities and the largest private-sector provider of home health care services
in Canada. It operates nursing and retirement centres in Ontario and four of
the Western Provinces, manages an Ontario hospital chronic-care unit and
provides a wide range of related services to the residents of these facilities.
ECIs home health care operations are in Ontario and Alberta. Nursing and Assisted Living and Retirement Care Services ECIs nursing centres are designed for individuals who cannot be cared for at
home or in another setting, due to frailty or other physical limitations. In
addition to providing accommodation and meals, residents receive assistance
with activities of daily living and continuing care. Programs and services are
offered for those with behavioural needs. At December 31, 2003, ECI operated
for itself 55 nursing centres providing care to 7,383 residents in five
provinces. ECIs 46 owned nursing centres (6,228 beds) built prior to 2001 and
three of its new nursing centres (233 beds) qualify for accreditation funding.
ECI is in the process of seeking accreditation for its remaining new nursing
facilities. Assisted living care, in comfortable private accommodations, provides staff to
support activities of daily living, such as personal care, meals, reminders to
take medication, and housekeeping. ECI operated for itself two 38-unit assisted
living wings attached to its nursing centres. Retirement centres provide comfortable suites, housekeeping services, meals,
activities, security, transportation and special amenities. Residents are
typically very active and live independently. In 2003 ECI owned and operated
for itself one 73-unit retirement centre, which was sold in February 2004. Management and Consulting ECI manages long-term care centres and a hospital chronic-care unit for
not-for-profit boards and private organizations seeking to improve management
practices, levels of care and operating efficiencies. Most of these contracts
include management, accounting and purchasing services, staff training,
reimbursement assistance, and where applicable, the implementation of ECIs
policies and procedures. ECI also is experienced in overseeing the design,
construction, development and management of long-term care and chronic care
centres. As a skilled manager and operator of long-term care facilities for third
parties, at December 31, 2003, ECIs managed portfolio consisted of 26
facilities and 3,588 beds. This portfolio was made up of one publicly owned
hospital unit (120 beds), one municipally owned home for the aged (80 beds),
and four nursing facilities owned by hospitals (594 beds). ECI also managed 16
nursing centres (2,202 beds), and four retirement centres (592 units), which
are privately owned (including 10 nursing facilities and three retirement
centres for a receiver as part of a bankruptcy action). ECI believes there will
continue to be more opportunities to provide facility management and consulting
services to the public and private sectors. Home Health Care Services Through ParaMed Home Health Care (ParaMed), ECI is the largest private-sector
home health care company in Canada, providing almost 4.9 million hours of care
and support services during 2003 to clients of all ages through 27 branch
offices located in Alberta, and Ontario. ParaMeds professional and
para-professional staffs are skilled in providing complex nursing care,
occupational, physical and speech therapy, and home support. Extendicare 2003 Annual Information Form 12




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As a result of softening funding levels and hours of service in the British
Columbia home health care market, ParaMed exited that province by selling its
Vancouver operation to another service provider in January 2003 and closing its
other four B.C. branches by March 2003. Ontario is ParaMeds largest market, representing almost 94% of its revenue in
2003. In Ontario, ParaMed Home Health Care contracts the majority of its
services with the Community Care Access Centres (CCACs). During 2002 CCACs
restricted the number of home care hours to all providers in response to budget
constraints. While this did not affect the number of contracts awarded to
ParaMed, it did affect the hours provided under such contracts. ParaMeds
Ontario volumes in 2003 continued to be impacted by CCAC budget constraints but
did increase by 4.5% over 2002 levels. The Ontario volumes for the year to date
2004 are slightly below 2003 levels. ParaMed has operated successfully under the competitive Request for Proposal
(RFP) process put in place in 1997 for all government-funded service volumes
and expects to remain competitive in the bidding for future contracts while
maintaining the quality of its service, despite pricing pressures from awarding
agencies. In its ongoing steps to continually improve the quality of care,
ParaMed introduced a program of Outcome Based Care in early 2003, which
involves establishing goals at the outset of each patients care and monitoring
progress throughout treatment. Also, ParaMed has taken steps to have its
operations accredited by the Canadian Council of Health Services Accreditation
and completed a review in March 2004 by this external agency with the results
expected soon. With both the Romanow and Kirby reports completed for the federal government in
2002, home care is expected to play a growing role in shaping the delivery of
health care to Canadians in the coming years. As the largest private-sector
home care provider in Canada, ParaMed is uniquely positioned to capitalize on
any new government initiatives. Group Purchasing Services Through its LTC Group Purchasing division (LTC), ECI offers cost-effective
purchasing contracts for food, capital equipment, furnishings, cleaning and
nursing supplies, and office products. LTC clients also receive rotating menus,
including therapeutic modifications as well as monthly educational packages.
Including the Companys Canadian facilities, LTC provides purchasing services
to facilities housing more than 25,000 residents in Canada. Quality of Care Commitment to Care Extendicares commitment to excellence emphasizes the corporate philosophy of
treating residents with dignity and respect, a philosophy that is implemented
and monitored through rigorous standards that management and staff at all
levels periodically assess and update. Extendicare has always strived to
maintain quality standards above government regulations. The Company is
launching a new and heightened series of quality initiatives, some of which are
already in place at facilities across the United States and are supported and
appreciated by residents, their families and the staff. In rolling out this
program in Canada, the Company aims to remain a destination of choice for those
requiring nursing home care. The Company has also initiated a capital
improvement project to ensure all of its nursing facilities are retrofitted
with modern sprinkler systems to protect the health and safety of the
residents. In the United States EHSI has established a medical advisory board, which
includes a medical director representing each of EHSIs regions. The medical
advisory boards role is to review and attest to the Companys key clinical
protocols, review and clarify roles, responsibilities and communication of
medical directors with the facilities. Additionally, EHSIs corporate clinical
services department establishes nursing and quality of life standards, monitors
issues and trends in the industry, implements its policies and procedures, and
conducts periodic pre and post survey reviews. Training programs are developed
at the corporate level and implemented in the Company as required. Extendicare 2003 Annual Information Form 13




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At the regional level, EHSIs area directors of care management lead a
department that is primarily responsible for implementing care and service
standards, policies and procedures, auditing care and service delivery systems,
and for providing direction and training for all levels of staff within the
nursing and assisted living facilities. The area directors of care management
are responsible for developing these programs and standards for all
professional disciplines and services provided to EHSIs customers, including
nursing, dietary, social services, activities, ethical practices, mental health
services, behaviour management, quality validation and continuous quality
improvement. On a national level, EHSI participates in a Quality First Initiative program,
which is a voluntary program whose members include major long-term care
providers. The objectives of the program are to discuss and promote awareness
to enable members to adhere to current regulations, promote clinical outcomes,
improve consumer satisfaction and demonstrate to the public a commitment to
quality care. In Canada each nursing centre has an advisory board composed of family members
of residents. These boards work with administrators to develop ideas on how to
provide for the needs of residents. In addition, regional directors are
primarily responsible for implementing care and service standards, policies and
procedures, auditing care and service delivery systems, and providing direction
and training for all levels of the staff within the nursing and assisted living
facilities. Continuous Quality Improvement programs ensure that quality of care
and services are adhered to in all aspects of resident care. ECIs launch in 2004 of an enhanced quality control initiative is aimed at
ensuring that seniors continue to receive the highest quality of care from its
facilities. These new Canadian care initiatives include consumer satisfaction
surveys, compliance hot-lines for employees, residents and their families and
an enhanced communication plan called Health Trac aimed at keeping families
informed of the residents progress. Employee Training Training of employees at all levels is an integral part of the Companys
ongoing efforts to improve and maintain quality services. In the United States,
each newly employed nursing facility administrator, assisted living facility
manager, and director of nursing are required to attend a week of
company-provided training to ensure that person has an understanding of all
aspects of nursing facility operations, including clinical, management and
business operations. EHSI conducts additional training for these individuals
and all other staff on a regional or local basis. In Canada, each new facility
administrator participates in an extensive orientation program covering nursing
centre management. Marketing United States Most of EHSIs long-term care facilities are located in smaller urban
communities. EHSI aims to be the provider of choice in the communities it
serves. EHSI focuses its marketing efforts predominantly at the local level,
believing that the selection of a long-term care facility is strongly
influenced by word-of-mouth and referrals from physicians, hospital discharge
planners, community leaders, neighbours and family members. The administrator
of each long-term care facility is therefore, a key element of EHSIs marketing
strategy and is responsible for developing relationships with potential
referral sources. They are supported by a regional team of marketing personnel,
who establish the overall marketing strategy, develop relationships with health
maintenance organizations (HMO) and preferred provider organizations (PPO), and
provide marketing direction with training and community-specific promotional
materials. EHSIs same-facility nursing home average occupancy increased to
91.5% from the 2002 level of 90.3% and 87.8% in 2001. Medicare census improved
to 15.5% of total nursing census in 2003 from 13.4% in 2002 and 11.4% in 2001. Extendicare 2003 Annual Information Form 14




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Canada Under the Government of Ontarios 1998 program to open 20,000 new long-term
care beds, Ontario has opened approximately 15,000 new nursing home beds and it
is expected that the remainder will be operational in communities throughout
the Province by the end of 2004. In order to maintain its current occupancy
levels with the influx of these new beds, ECI continues major upgrades for some
of its facilities that are located in markets with new bed openings as well as
regular maintenance programs at all its owned facilities. Also, in conjunction
with its Director of Sales and Marketing, ECI continually develops strategies
to market its long-term care facilities in each community. The management team
at each facility is responsible for marketing the facility locally and is
supported by a regional team and the Director of Sales and Marketing.
Additionally, ECI has a customer service training program that it is rolling
out to its operations with the intent to train all front line workers on how
they can contribute to the marketing program of managing customer service
expectations in this very competitive market. Occupancy remained strong in
ECIs Canadian facilities and excluding new facility openings, averaged 98.0%
for 2003, 98.3% for 2002 and 98.2% for 2001. Competition United States The long-term care industry in the United States is highly competitive with
companies offering a variety of similar services. EHSI faces competition both
locally and regionally from other health care providers, including for-profit
and not-for-profit organizations, hospital-based long-term care units,
rehabilitation hospitals, home health agencies, medical supplies and services
agencies and rehabilitative therapy providers. Significant competitive factors,
which determine the placement of residents in nursing and assisted living
centres, include quality of care, services offered, reputation, physical
appearance, location and, in the case of private-pay residents, cost of the
services. The newer assisted living facilities may attract potential and
existing residents. EHSIs group purchasing and management and consulting groups compete with other
similar operations in the long-term care industry. EHSI also competes with other providers in the acquisition and development of
additional facilities. Some of these competitors may accept a lower rate of
return and therefore, present significant price competition. Also, tax-exempt
not-for-profit organizations may finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions that are unavailable
to EHSI. Canada ECIs competitors in the long-term care industry include private and
public-sector operators. In 2003 one other publicly traded operator commenced
operation, increasing the number of publicly traded operators to three in
Canada. The ten largest participants in the Canadian seniors housing industry
account for approximately 16% of long-term care beds and approximately 34% of
retirement home and independent living suites currently operating or in
development in the six largest provinces. (Source: Care Planning Partners Inc.
estimates and publicly available information as of September 5, 2003).
Extendicare is the second largest private-sector operator of owned and managed
nursing facilities. The home health care sector has both for-profit and
not-for-profit providers, with ParaMed being the largest private-sector
operator. Management, Financial Controls and Cost Controls Extendicare believes that strong management is essential to its success. Its
senior officers, including the senior officers of ECI and EHSI, have on average
24 years of experience in the health care industry and 16 years of service with
the Company. The members of its Board of Directors have served Extendicare on
average more than 16 years. The financial controls of Extendicare are centralized in Milwaukee, Wisconsin
for the United States and Markham, Ontario for Canada. Within each country,
supervision is provided through regional offices. Extendicare 2003 Annual Information Form 15




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Centralized accounting systems record each nursing centres results. Costs are
shown on a per patient day basis, along with comparisons to budgets. Senior
operating and financial management monitor costs on a monthly basis. Insurance Insurance coverage for resident care liability and other risks has been
increasingly difficult to obtain or is available at excessive premiums or
deductibles. Therefore, the Company self-insures for certain risks related to
general and professional liability, auto liability, employers liability,
health benefits and in certain states, workers compensation for its United
States operations. The Company obtains reinsurance coverage in amounts and with
such coverage and deductibles as management deems appropriate, based on the
nature and risks of its business, historical experiences, availability and
industry standards. Of the risks that the Company self-insures, general and professional liability
claims are the most volatile and significant. The Company self-insures its
general and professional liability risks through Laurier Indemnity Company,
Ltd., which is domiciled in Bermuda, and Laurier Indemnity Company, which is
domiciled in the United States. The Company has experienced in past years,
adverse claims development. Consequently, as of January 1, 2000 the Companys
per claim retained risk increased significantly for resident care liability
costs, mainly due to the level of risk associated with the Florida and Texas
operations. Since the beginning of 2001, EHSI no longer operates in the State
of Florida and as of October 1, 2001 ceased nursing home operations in the
State of Texas, thereby reducing the level of exposure to future litigation in
these litigious states. 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 the Companys operating
results and liquidity. The accrual for self-insured liabilities includes estimates of the cost of
reported claims and claims incurred but not reported and also reflects
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 and believes that it has sufficient
cash resources to meet its estimated current claims payment obligations. Sources of Revenue United States Overview EHSI derives revenue by providing routine and ancillary health care services to
residents in its network of facilities, including long-term care services
covering nursing care, assisted living and related medical services such as
subacute care and rehabilitative therapy. EHSI also derives revenue by
providing rehabilitative therapy to outside third parties at its clinics and
earns management and consulting revenue from other long-term care
organizations. EHSI generates its revenue from Medicare, Medicaid and private pay sources. The
Medicare and Medicaid payors set maximum reimbursement levels for payments for
nursing services and products. The health care policies and programs of these
agencies have been subject to changes in payment methodologies during the past
several years. There can be no assurance that future changes will not reduce
reimbursement for nursing services from these sources. The following table sets forth the sources of revenue by percentage of total
revenue. Years ended December 312003
    
    2002
    
    2001(%)Private pay
    
    
    23.9
    
    
    
    24.5
    
    
    
    25.3Medicare
    
    
    27.4
    
    
    
    25.7
    
    
    
    23.8Medicaid
    
    
    48.7
    
    
    
    49.8
    
    
    
    50.9
 Extendicare 2003 Annual Information Form 16




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Medicare, Including Legislative Actions Affecting Revenue Medicare is a federally funded health-insurance program providing coverage for
persons aged 65 or older, disabled persons who have been disabled for at least
two consecutive years, and persons who have end-stage renal disease. The
Medicare program provides reimbursement in two parts, being Part A and Part B. Firstly, hospital insurance provides for reimbursement for inpatient services
for hospitals, skilled nursing facilities and certain other health care
providers and patients requiring daily professional skilled nursing and other
rehabilitative care (Part A Medicare). Coverage in a skilled nursing facility
is limited to a period of up to 100 days, if medically necessary, after a
qualifying three-day hospital stay. Medicare pays for the first 20 days of stay
in a skilled nursing facility in full and the next 80 days above a daily
coinsurance amount. Secondly, the Medicare program provides reimbursement for supplemental
insurance which requires the beneficiary to pay premiums and, covers physician
services and other outpatient services, such as physical, occupational, speech
therapy services, enternal nutrition, certain medical items, and X-ray services
received outside of a Part A covered inpatient stay (Part B Medicare). Under Part A Medicare, the nursing facility is reimbursed based upon the acuity
level of the Medicare resident. Acuity is determined by classifying the
resident into one of 44 Resource Utilization Groupings, or RUGs categories,
based upon the nature of the residents condition and services needed. CMS
adjusts the Medicare rates for the 44 RUGs categories October 1st of each year,
and inflates the RUGs rates based upon an inflation factor referred to as the
market basket. Under Part B Medicare, the nursing facility is reimbursed
based upon defined rates established by CMS. Prior to October 1, 2002, the incremental Medicare relief packages received
from the Balanced Budget Refinement Act and the Benefits Improvement and
Protection Act provided a total of US$2.7 billion in temporary Medicare funding
enhancements to the long-term care industry. These funding enhancements fell
into two categories. The first was Legislative Add-ons, which included a
16.66% add-on to the nursing component of the RUGs rate and the 4% base
adjustment. The second category was RUGs Refinements, which involved an
initial 20% add-on for 15 RUGs categories identified as having high intensity,
non-therapy ancillary services. The 20% add-on from three RUGs categories was
subsequently redistributed to 14 rehabilitation categories at an add-on rate of
6.7% each. The Legislative Add-ons expired on September 30, 2002 (referred to as the
Medicare Cliff) resulting in a reduction of Medicare funding for skilled
nursing facility operators, including EHSI. Based upon the Medicare case mix
and patient days over the nine-month period ended September 30, 2002, EHSI
estimates that it received an average of US$31.22 per patient day related to
the Legislative Add-ons. The loss of this funding was partially offset by a
2.6% market basket increase in Medicare rates received by long-term care
providers beginning on October 1, 2002. The combined impact of these changes
was a net decline in EHSIs average daily rate of US$23.64 per patient, which
based upon the Medicare case mix and patient days for the three months ended
December 31, 2002, reduced EHSIs revenue by $6.2 million (US$3.9 million).
This reduced rate impacted EHSIs revenues for the first nine months of 2003 by
an estimated $18.3 million (US$12.8 million), based on the Medicare case mix
and patient days during that period. Effective October 1, 2003, the Centers for Medicare and Medicaid Services, or
CMS, increased Medicare rates by 6.26% reflecting: (1) a cumulative forecast
correction (Administrative Fix) to correct past years under-funded rate
increases, which increased the federal base payment rates by 3.26%; and (2) the
annual market basket increase of 3.0%. EHSI estimates that based on the
Medicare case mix for the nine-month period ended September 30, 2003, these
Medicare rate increases added approximately US$18.45 per patient day. Based
upon the Medicare case mix and census in the fourth quarter of 2003, this
increase resulted in $4.6 million (US$3.5 million) of additional revenue.
Taking the Medicare case mix and patient days earned for the 2003 year, this
represents additional annualized revenue of approximately $18.8 million
(US$13.4 million) going forward. However, this will be tempered by higher
labour and other operating costs. In order to maintain their commitment to
Senator Grassley and CMS in providing the Administrative Fix, EHSI and its
peers in the Alliance for Quality Nursing Home Care along with the American
Health Care Association (AHCA) pledged their support to spend the
Administrative Fix over the next fiscal period on direct care and services for
its residents. In October 2003 CMS published a notice to skilled
nursing facilities that within future cost reports, it will require
confirmation that the Administrative Fix funding was spent on direct patient
care and related expenses. Extendicare 2003 Annual Information Form 17




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With respect to the RUGs Refinements, in April 2002 CMS announced that it would
delay the refinement of the RUGs categories, thereby extending related funding
enhancements until September 30, 2003. In May 2003 CMS released a rule to
maintain the current RUGs classification until October 1, 2004. Further to, but
independent of this, U.S. Congress enacted legislation directing CMS to conduct
a study on the RUGs classification system and report its recommendations by
January 2005. EHSI estimates that it received an average of US$24.12 per
patient day in 2003 related to the RUGs Refinements, for revenue of $24.6
million (US$17.6 million), based on the Medicare case mix and patient days for
the year. A decision to discontinue all or part of the enhancements could have
a significant adverse effect on the Company. The moratorium on implementing payment caps for outpatient Part B therapy
services, which was scheduled to take effect on January 1, 2003, was extended
until September 1, 2003. The therapy caps were in effect from September 1,
2003, until December 8, 2003, when, as a result of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, the moratorium was reinstated
for a two-year period until December 2005. The impact of a payment cap cannot
be reasonably estimated based on the information available at this time.
However, such a cap would reduce EHSIs therapy revenue. In February 2003 CMS announced a plan to reduce its level of reimbursement for
uncollectible Part A co-insurance. CMS did not implement the rule change as
planned on October 1, 2003, and continues to review the proposed plan. Under
current law, skilled nursing facilities are reimbursed 100% for any bad debts
incurred. The plan was to reduce the reimbursement levels from the current 100%
to: 90% beginning October 1, 2003; 80% beginning October 2004; and 70%
beginning October 2005. This is consistent with the Part A co-insurance
reimbursement plan applicable to hospitals. EHSI estimates that should this
plan be implemented, the negative impact to net earnings would be $1.8 million
(US$1.3 million) in 2004, increasing to $4.6 million (US$3.3 million) in 2006. Medicaid Medicaid is a state-administered program financed by state funds and matching
federal funds, providing health insurance coverage for certain persons in
financial need, regardless of age, and which may supplement Medicare benefits
for financially needy persons aged 65 or older. Medicaid reimbursement formulas
are established by each state with the approval of the federal government in
accordance with federal guidelines. Generally, 50% of the funds available under
these programs are provided by the federal government under a matching program.
Medicaid programs currently exist in all the states in which EHSI operates its
nursing homes. Under the Budget Act of 1997 the authority of states was broadened to develop
their own standards for the establishment of rates. The law requires each to
use a public process for establishing proposed rates, whereby the methodology
and justification of rates used are available for public review and comment.
Many states have had to restrain their budgets of which Medicaid represents a
significant portion, since the economic slowdown and costs related to post
September 11, 2001. The states in which EHSI operates currently use cost-based or price-based
reimbursement systems. Under cost-based reimbursement systems, the facility is
reimbursed for the reasonable direct and indirect allowable costs it incurs in
providing routine resident care services as defined by the program. In certain
states, efficiency incentives are provided and facilities may be subject to
cost ceilings. Reasonable costs normally include certain allowances for
administrative and general costs, as well as the cost of capital or investment
in the facility, which may be transformed into a fair rental or cost of capital
charge for property and equipment. The price-based or modified price-based
systems pay a provider at a certain payment rate irrespective of the providers
cost to deliver the care. Price-based or modified price-based systems may use
various methods, such as state averages from a specific base year, to determine
the base cost, which could be subject to inflationary increases. Extendicare 2003 Annual Information Form 18




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The reimbursement formulas employed by the state may be categorized as
prospective or retrospective in nature. Under a prospective cost-based system,
per diem rates are established based upon the historical cost of providing
services during a prior year, adjusted to reflect factors such as inflation and
any additional service required to be performed. Many of the prospective
payment systems under which EHSI operates contain an acuity measurement system,
which adjusts rates based on the care needs of the resident. Retrospective
systems operate similar to the pre-PPS Medicare program where nursing
facilities are paid on an interim basis for services provided, subject to
adjustments based on allowable costs, which are generally submitted on an
annual basis. For some of the states in which EHSI operates, namely Pennsylvania, Indiana,
Oregon, and Washington, CMS is reviewing proposed plan amendments and waivers
pertaining to the fiscal year commencing July 1, 2003. The retrospective plan
amendments and waivers seek to increase the level of federal funding for the
Medicaid programs and would result in providing nursing facilities with revenue
rate increases to offset new or increased provider taxes. As the plan
amendments and waivers have not been approved, EHSI has recorded amounts based
on revenue received and provider taxes paid. Based on the final CMS approved
state plan amendments and waivers, changes in the Medicaid rates and any
associated provider taxes could result in adjustments to earnings from July 1,
2003 to the finalization dates of these state plan amendments and waivers. Private Pay Private pay revenue consists of revenue from individuals, private insurance
companies, HMOs, PPOs, other charge-based payment sources, HMO Medicare risk
plans, Blue Cross and the Department of Veterans Affairs. Assisted Living Facilities Assisted living facility revenue is primarily derived from private-pay
residents at rates EHSI establishes based upon the services it provides and
market conditions in the area of operation. Approximately 40 states provide or
have approval to provide Medicaid reimbursement for services in assisted living
facilities covering board and care. Canada The fees charged by ECI for its nursing centres are regulated by provincial
authorities, which often set the rates following consultation with the
applicable provinces long-term care association. Provincial programs fund a
substantial portion of these fees, with the remainder paid by individuals. In
some provinces, the government has delegated authority with respect to funding
to regional health authorities, as is the case in Alberta, Saskatchewan,
Manitoba and British Columbia. Ontario is ECIs largest market for both its long-term care and home health
care services. Their combined revenue represented approximately 75% of ECIs
total revenue in 2003. Funding for Ontario nursing centres is based on
reimbursement for the level of care provided. The provincial government
allocates funds, or envelopes, for services such as nursing, programs, food
and accommodation. The cost of providing nursing, programs and food is
reimbursed in accordance with scheduled rates. Any deviation in actual costs
from scheduled rates is either at ECIs cost (if actual costs exceed scheduled
rates) or is returned to the government (if actual costs are below scheduled
rates). ECI receives a fixed amount per resident day for standard accommodation
and may retain any excess over costs incurred. Similar to other nursing home
providers, ECI is also allowed to bill and retain monies from residents in
preferred accommodation; $8.00 per day for a semi-private room and $18.00 per
day for a private room. Operators are permitted to allocate up to 60% of the
facilitys capacity for preferred accommodation. Supplemental funds are also
available to nursing centres that are accredited by the Canadian Council on
Health Services Accreditation. All of ECIs owned nursing centres built prior
to 2001 qualify for the accreditation funding. Three of ECIs newly built
facilities have been accredited and the remaining eight will be shortly. Extendicare 2003 Annual Information Form 19




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In April 2004 the Ontario government announced that funding to long-term care
providers for property taxes for the 2003 calendar year would be reduced from
90% to 73%, and that the estimated funding for 2004 would be reduced to 50%.
This was due to the influx of 20,000 new beds coming on stream, which has put a
strain on the governments allocated pool of funds. As a result, ECI booked a
$2.0 million provision in the 2004 first quarter, comprised of $1.3 million for
the claw back of 2003 funding, and an estimated $0.7 million for reduced
funding for the first three months of 2004. Subsequently, in May the government
indicated its commitment to provide additional funding for the 2003 property
taxes, and to pursue a process in the near future to attempt to resolve the
issue for 2004 and beyond. Therefore, ECI will reverse the $1.3 million
provision in the second quarter of 2004, and adjust for the 2004 property tax
funding when it is resolved. In May 2003 the Government of Ontario announced a funding increase of $100.0
million, in addition to the normal annual inflationary increase, to enhance the
delivery of nursing and personal care services in the Province. Beginning July
1, 2003, Ontario long-term care providers received a funding increase of $4.80
per resident day, based on a case mix index of 100. The case mix index (CMI) is
a measure determined by the Ministry of Health to calculate the amount of
funding for each facility based on the level of care required by the resident
population of the facility. A CMI of 100 is the benchmark index across the
Province. Each facilitys CMI is assessed annually and those with residents
requiring a greater level of care than the Ontario average will have a higher
CMI, and conversely those with residents requiring a lower level of care than
the average will have a lower CMI. In June 2003 the Government of Alberta announced long-term care rate increases
in accommodation fees ranging from $11 to $16 per resident day, which took
effect on August 1, 2003. Based on the number of beds operated by Extendicare in Ontario on July 1, 2003
and in Alberta on August 1, 2003, these funding changes represented annualized
revenue of about $13.5 million, of which approximately $6.4 million would have
impacted revenue for 2003. Approximately half of this funding was specified as
flow-through funding, meaning it was directed to incremental costs for enhanced
resident care, such as additional nursing staff, supplies and programs directed
at the residents, and accordingly would not be available to increase earnings.
The remainder could impact earnings to the extent it is not offset by
additional nursing home operating costs, whether due to added programs, quality
measures, staffing changes, wage rate increases or increased costs due to
inflation. In 2002 the Government of Ontario provided $100.0 million of additional funding
to enhance the delivery of nursing and personal care services. On August 1,
2002, Ontario long-term care providers received a funding increase of $7.20 per
resident day, based on a CMI of 100. The increase included $6.33 per resident
day of flow-through funding for enhanced resident care through additional
nursing staff and other measures, and would not affect earnings levels. The
remaining inflationary increase of $0.87 per resident day is available to
contribute to earnings to the extent that it is not offset by increased
operating costs. Based on the level of ECIs Ontario operations at the end of
2002, this funding increase represented annual revenue of about $11.5 million,
of which approximately $10.0 million was flow-through funding specified for
incremental nursing staff and related costs. Effective for April 1, 1998, the MOHLTC implemented a new funding policy to
support the costs of construction of new long-term care facilities (nursing
homes and homes for the aged) and the renovation of existing long-term care
facilities. Implementation of the construction funding policy coincided with
the implementation of new mandatory design standards for long-term care
facilities and replaced the previous standards in effect since 1972. A review
board of the Ministry ranked all existing long-term care facilities into four
categories being A through to D. The classifications are defined as: A
facilities that meet or exceed the new design standards; B facilities that
exceed the original 1972 standards but fall short of the new design standards;
C facilities that meet the original 1972 structural standards; and D
facilities that fail to meet the 1972 standards. Under this new funding policy,
in order to encourage renovations that would improve the structural standards
for the existing long-term care facilities, the MOHLTC provides compliance
funding incentives to operators on a per resident day basis equal to $5.00 for
A facilities, $2.50 for B facilities, $1.00 for C facilities and nothing
for D facilities. Under certain conditions, replacement of category D
facilities may qualify for up to $10.35 funding per bed per day and operators
have until 2006 to upgrade D facilities to the new standards. ECI does not
have any D facilities and with respect to ECIs facilities built prior to
1998, all are receiving compliance funding at the $1.00 per bed per day level. Extendicare 2003 Annual Information Form 20




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Additionally, the new funding policy provided for up to $10.35 per bed per day
for a 20-year period for each new long-term care facility built as part of the
new beds awarded under the MOHLTC new bed program. ECIs post-1998 newly
constructed nursing centres are receiving construction funding of $10.35 per
bed per day. As each facility opens, a receivable from the government is
recorded, which is applied to reduce the cost of construction. Provincial funding for ECIs nursing centres in Alberta, the next highest
revenue source province for ECI, is based on a funding system similar to that
in Ontario. In the three other Western Provinces in which ECI operates,
Manitoba and British Columbia set funding on a per patient day basis with
annual adjustments and Saskatchewan funds on a monthly rate per resident basis. Extendicares Canadian home health care operations, conducted through ParaMed,
received approximately 91% of its revenue in 2003 from contracts tendered by
locally administered provincial agencies. The remainder of the 2003 revenue was
received from private-pay clients. Properties The following table lists by state and province the nursing centres, assisted
living and retirement centres, and chronic care units owned, leased and managed
by ECI and EHSI at December 31, 2003: Assisted Living &Nursing Centres
    
    Retirement Centres
    
    Chronic Care Units
    
    TotalNo. of
    
    Resident
    
    No. of
    
    Resident
    
    No. of
    
    Resident
    
    No. of
    
    ResidentState/Province
    
    Facilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    CapacityPennsylvania
    
    
    27
    
    
    
    3,165
    
    
    
    8
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    3,463Massachusetts
    
    
    5
    
    
    
    606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    606Delaware
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    120Ohio
    
    
    29
    
    
    
    3,065
    
    
    
    2
    
    
    
    146
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    3,211West Virginia
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    120Wisconsin
    
    
    25
    
    
    
    2,360
    
    
    
    10
    
    
    
    442
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    2,802Minnesota
    
    
    10
    
    
    
    1,274
    
    
    
    1
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    1,334Indiana
    
    
    17
    
    
    
    1,726
    
    
    
    2
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    1,835Kentucky
    
    
    18
    
    
    
    1,506
    
    
    
    1
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    1,545Washington
    
    
    15
    
    
    
    1,523
    
    
    
    8
    
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    1,902Oregon
    
    
    3
    
    
    
    193
    
    
    
    2
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    294Idaho
    
    
    2
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    191Arkansas
    
    
    1
    
    
    
    96
    
    
    
    3
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    277Texas
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    110Total United States
    
    
    154
    
    
    
    15,945
    
    
    
    39
    
    
    
    1,865
    
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    17,810Ontario
    
    
    51
    
    
    
    7,585
    
    
    
    5
    
    
    
    741
    
    
    
    1
    
    
    
    120
    
    
    
    57
    
    
    
    8,446Alberta
    
    
    14
    
    
    
    1,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    1,183Saskatchewan
    
    
    5
    
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    654Manitoba
    
    
    5
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    762British Columbia
    
    
    1
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    75Total Canada
    
    
    76
    
    
    
    10,259
    
    
    
    5
    
    
    
    741
    
    
    
    1
    
    
    
    120
    
    
    
    82
    
    
    
    11,120Total
    
    
    230
    
    
    
    26,204
    
    
    
    44
    
    
    
    2,606
    
    
    
    1
    
    
    
    120
    
    
    
    275
    
    
    
    28,930
 In addition: EHSI operated 24 rehabilitative clinics as follows: Pennsylvania  12;
Wisconsin  9; Texas  2; and Ohio  1; and
ParaMed provided its services through 27 locations, substantially all of which
were leased, as follows: Ontario  25; and Alberta  2. Extendicare 2003 Annual Information Form 21




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Government Regulations United States The provision of institutional care and health care services is subject to
regulation by various federal, state and local government authorities in the
United States. Although EHSI believes its operations comply with the laws
governing its industry, EHSI cannot guarantee that it will be in absolute
compliance with all regulations at all times. Failure to comply may result in
significant penalties, including exclusion from the Medicare and Medicaid
programs, which could have a material adverse effect on EHSIs business.
Management cannot give assurance that governmental authorities will not impose
additional restrictions on EHSIs activities that might adversely affect its
business. General Regulatory Requirements Nursing facilities, assisted living facilities, and other health care
businesses are subject to licensure and other state and local regulatory
requirements. In addition, in order for a nursing facility to be approved for
payment under the Medicare and Medicaid reimbursement programs, it must meet
the participation requirements of the Social Security Act and related
regulations. The regulatory requirements for nursing facility licensure and
participation in Medicare and Medicaid generally prescribe standards relating
to provision of services, resident rights, staffing, employee training,
physical environment and administration. Nursing and assisted living facilities
generally are subject to unannounced annual inspections by state or local
authorities for purposes of licensure and in the case of nursing facilities for
purposes of certification under Medicare and Medicaid. These surveys will also
confirm whether a nursing facility continues to meet Medicare and Medicaid
participation standards. As at December 31, 2003, all of EHSIs nursing
facilities are licensed under applicable state laws and are certified to
participate in either the Medicare program or the Medicaid program, or both. Nursing Facility Regulation CMS has established regulations to implement survey, certification and
enforcement procedures. The survey process is intended to review the actual
provision of care and services, with an emphasis on resident outcomes to
determine whether the care provided meets the assessed needs of the individual
residents. State agencies conduct the surveys and assess remedies for any cited
deficiencies based upon scope and severity. The regulations specify that the
remedies are intended to motivate facilities to return to compliance and to
facilitate the removal of chronically poor-performing facilities from the
Medicare or Medicaid programs. Remedies range from: directed plans of
correction, in-service training and state monitoring for minor deficiencies;
denial of Medicare or Medicaid reimbursement for existing residents or new
admissions and civil monetary penalties of up to US$3,000 per day for
deficiencies that do not immediately jeopardize resident health and safety;
and, appointment of temporary management, termination from the program and
civil monetary penalties of up to US$10,000 for one or more deficiencies that
immediately jeopardize resident health or safety. The regulations allow state
survey agencies to identify alternative remedies that must be approved by CMS
prior to implementation. Facilities with acceptable regulatory histories generally are given an
opportunity to correct deficiencies by a date certain, usually within six
months. CMS will continue payments and refrain from imposing sanctions within
the correction period, unless the facility does not return to compliance within
the specified period of time. Facilities with deficiencies that immediately
jeopardize resident health and safety and those that are classified as
poor-performing facilities are not given an opportunity to correct their
deficiencies prior to the assessment of remedies. From time to time, EHSI
receives notices from federal and state regulatory agencies alleging
deficiencies for failing to comply with all components of the regulations.
While EHSI does not always agree with the positions taken by the agencies, it
reviews all such notices and takes corrective action when appropriate. Due to
the fact that the regulatory process provides EHSI with limited appeal rights,
many alleged deficiencies are not challenged even if EHSI does not agree with
the allegation. While EHSI tries to comply with all applicable regulatory requirements, from
time to time some of its nursing facilities have been sanctioned as a result of
deficiencies alleged by CMS or state survey agencies. EHSI cannot give
assurance that it will not be sanctioned and penalized in the future. Extendicare 2003 Annual Information Form 22




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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 is aware of investigations by these units involving one
facility each in Kentucky and in Wisconsin. The investigations have not been
sufficiently developed for management to predict an outcome. In 2002 CMS launched the Nursing Home Quality Initiative to provide consumers
with comparative information about nursing home quality measures, which rates
every nursing facility in the U.S. on nine quality of care indicators. These
quality of care indicators include such measures as percentages of patients
with infections, bedsores and unplanned weight loss and this comparative data
is available to the public on the CMS web site. EHSI believes that, though the
information is important to share with the public and can drive improvements in
quality of care in the long-term care industry, the data may be influenced by
the level and quality of care and the nature of admissions to a particular
facility. Restrictions on Acquisitions and Construction The acquisition or construction of nursing facilities is subject to state
regulation and most of the states in which EHSI currently operates have adopted
laws to regulate expansion of skilled nursing facilities. Certificate of need
laws generally require that a state agency approve certain acquisitions or
physical plant changes and determine that a need exists prior to the addition
of beds or services, the implementation of the physical plant changes or the
incurrence of capital expenditures exceeding a prescribed amount. Some states
also prohibit, restrict or delay the issuance of certificates of need, or have
moratoriums on increases in licensed bed capacity. Additionally, in most states
the reduction of beds or the closure of a facility requires appropriate state
regulatory agency approval. EHSIs nursing facility expansions comply with all
state regulations. Prior to engaging in any regulated expansion project, EHSI
obtains certificates of need, where required. If there is a delay or inability
to obtain a required certificate of need or other necessary approval, EHSIs
expansion proposals could be adversely affected. The acquisition, construction or operation of assisted living facilities is
subject to less stringent regulation than nursing facilities and, in the
absence of uniform federal regulations, states develop their own regulations.
The majority of states have implemented regulations regarding the acquisition,
construction and operation of assisted living facilities. Virtually every state
has a licensure process, registration process or some other form of regulation
that may apply to assisted living providers. Depending on the level of services
that an assisted living provider supplies, the provider may be required to
obtain a license. Licensure regulations may be based on admission and discharge
criteria and the variety and type of services provided. Many states require
that potential operators submit building plans and receive state approval prior
to construction of an assisted living facility. The approval process when
certificates of need are involved is more of a clearance process; however,
assisted living facilities must meet a stringent set of building construction
and design regulations including the Life Safety Code (NFPA101). State
regulators conduct periodic inspections of assisted living facilities that are
similar in most cases to their inspections of nursing facilities. As of
December 31, 2003, EHSIs assisted living facilities are compliant in all
material respects with applicable state licensure, building construction and
design regulations. Regulation of Fraud and Related Matters EHSI participates in federal and state health care programs and therefore it is
subject to a variety of federal and state laws that are intended to prevent
health care fraud and abuse. These laws are punishable by criminal and/or civil
sanctions, including, in some instances, exclusion from participation in
federal health programs, including Medicare, Medicaid and Department of
Veterans Affairs health programs. These laws, which include, but are not
limited to, anti-kickback laws, false claims laws, physician self-referral laws
and federal criminal health care fraud laws, are discussed in further detail
below. Management believes that EHSI and its subsidiaries have been and
continue to be in substantial compliance with all of these laws as they apply
to its companies. Extendicare 2003 Annual Information Form 23




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EHSI believes its billing practices, operations and compensation and
financial arrangements with referral sources and others materially comply with
applicable federal and state requirements. However, EHSI cannot give assurance
that a governmental authority will not interpret such requirements in a manner
inconsistent with EHSIs interpretation and application. If EHSI fails to
comply, even inadvertently, with any of these requirements, it could be
required to alter its operations and/or refund payments to the government. In
addition, EHSI could be subject to significant penalties. Even if EHSI
successfully defends any action against it for violating these laws or
regulations, EHSI would likely be forced to incur significant legal expenses
and divert managements attention from the operation of its business. EHSI
cannot reasonably predict whether enforcement activities will increase at the
federal or state level or the effect of such on its business and its financial
results. The illegal remuneration provisions of the Social Security Act make it a felony
to solicit, receive, offer to pay or pay any kickback, bribe or rebate in
return for referring a resident for any item or service or in return for
purchasing, leasing, ordering, recommending or arranging for any good,
facility, service or item, for which payment may be made under the federal
health care programs. A violation of the illegal remuneration statute may
result in the imposition of criminal penalties, including imprisonment for up
to five years, the imposition of a fine of up to US$25,000, civil penalties and
exclusion from participating in federal health programs. Recognizing that the law is broad and may technically prohibit beneficial
arrangements, the Office of Inspector General of the Department of Health and
Human Services developed regulations addressing those types of business
arrangements that will not be subject to scrutiny under the law. These safe
harbours describe activities that may technically violate the act, but which
are not to be considered illegal when carried on in conformance with the
regulations. For example, the safe harbours cover activities such as
contracting with physicians or other individuals that have the potential to
refer business to EHSI that would ultimately be billed to a federal health
program. Failure to qualify for safe harbour protection does not mean that an
arrangement is illegal. Rather, the arrangement must be analyzed under the
anti-kickback statute to determine whether there is intent to pay or receive
remuneration in return for referrals. Conduct and business arrangements that do
not fully satisfy one of the safe harbours may result in increased scrutiny by
government enforcement authorities. In addition, some states have anti-kickback
laws that may apply regardless of whether a federal health care program is
involved. Although EHSIs business arrangements may not always satisfy all the
criteria of a safe harbour, EHSI believes that as of December 31, 2003, its
operations are in material compliance with federal and state anti-kickback
laws. Under the federal Stark II law, physicians are prohibited from making a
referral to an entity for the furnishing of designated health services,
including therapy services, for which Medicare or Medicaid may pay, if the
physician, or an immediate family member of the physician, has a financial
relationship, including ownership interests and compensation arrangements, with
that entity, and the relationship fails to meet a statutory or regulatory
exception to the rule. The penalties for violating this act include denial of
payment, additional financial penalties and exclusion from participating in
federal health programs. In addition, a number of states have enacted their own
versions of self-referral laws. The Federal False Claims Act and similar state statutes prohibit presenting a
false or misleading claim for payment under a federal program. Violations may
result in significant civil penalties, treble damages and exclusion from
participation in federal programs. Liability arises, primarily, when an entity
knowingly submits a false claim for reimbursement to the federal government.
However, enforcement over the past few years has expanded the traditional scope
of this act to cover quality of care issues, especially in the skilled nursing
facility industry. In addition to the civil provisions of the False Claims Act,
the federal government can use several other criminal statutes to prosecute
persons who submit false or fraudulent claims for payment to the federal
government. Extendicare 2003 Annual Information Form 24




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Federal law provides that practitioners, providers and related persons may not
participate in most federal health care programs, including the Medicare and
Medicaid programs, if the individual or entity has been convicted of a criminal
offence related to the delivery of an item or service under these programs or
if the individual or entity has been convicted, under state or federal law, of
a criminal offence relating to neglect or abuse of residents in connection with
the delivery of a health care item or service. Other individuals or entities
may be, but are not required to be, excluded from such programs under certain
circumstances, including the following: a conviction related to fraud,
obstruction of an investigation or related to a controlled substance; licensure
revocation or suspension; exclusion or suspension from state or federal health
care programs; filing claims for excessive charges or unnecessary services or
failure to furnish medically necessary services; ownership or control by an
individual who has been excluded from the Medicaid or Medicare programs,
against whom a civil monetary penalty related to the Medicaid or Medicare
programs has been assessed or who has been convicted of the crimes; and the
transfer of ownership or control interest in an entity to an immediate family
or household member in anticipation of, or following, a conviction, assessment
or exclusion from Medicare or Medicaid programs. Office of the Inspector General The Office of Inspector General (OIG) among its other priorities identifies and
eliminates fraud, abuse and waste in certain federal health care programs. The
OIG has implemented a nationwide program of audits, inspections and
investigations and from time to time issues fraud alerts to segments of the
health care industry on particular practices that are vulnerable to abuse. The
fraud alerts inform health care providers of potentially abusive practices or
transactions that are subject to criminal activity and reportable to the OIG. An increasing level of resources have been devoted to investigation of
allegations of fraud and abuse in the Medicare and Medicaid programs, and
federal and state regulatory authorities are taking an increasingly strict view
of the requirements imposed on health care providers by the Social Security Act
and Medicare and Medicaid programs. One anti-fraud project OIG launched several
years ago, Operation Restore Trust, guaranteed funding for the investigation
of fraud and abuse activities and coordinated efforts among multiple federal
and state agencies. A primary purpose of the operation is to scrutinize the
activities of health care providers who are reimbursed under the Medicare and
Medicaid programs. While EHSI does not believe that it is the target of any
investigation under this operation, there can be no assurance that substantial
amounts will not be expended by EHSI to cooperate with any such investigation
or to defend allegations that may arise from an investigation. If a government
agency finds that any of EHSIs practices failed to comply with the anti-fraud
provisions, EHSIs business could be materially adversely affected. Cross Decertification and De-Licensure In some circumstances, if one facility is convicted of abusive or fraudulent
behaviour, then other facilities under common control or ownership may be
decertified from participating in Medicaid or Medicare programs. Executive
Order 12549 prohibits any corporation or facility from participating in federal
contracts if it or its principals have been barred, suspended or are
ineligible or have been voluntarily excluded from participating in federal
contracts. In addition, some state regulations provide that all facilities
under common control or ownership licensed within a state may be de-licensed if
any one or more of the facilities are de-licensed. To date, none of the
facilities of either EHSI or its subsidiaries have experienced any
cross-decertification or de-licensure. Ongoing Initiatives There are ongoing initiatives at the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services.
Aspects of some of these health care initiatives, such as the termination of
Medicare funding improvements and limitations on Medicare coverage, other
pressures to contain health care costs by Medicare, Medicaid and other payors,
as well as increased operational requirements in the administration of
Medicaid, could adversely affect EHSI. EHSI cannot predict the ultimate
content, timing or effect of any health care reform legislation, nor can it
estimate the impact of potential legislation on the Company. Extendicare 2003 Annual Information Form 25




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Environmental Laws and Regulations Some federal and state laws govern the handling and disposal of medical,
infectious and hazardous waste. If an entity fails to comply with these laws or
the related regulations, the entity could be subject to fines, criminal
penalties and other enforcement actions. EHSI has developed policies for the
handling and disposal of medical, infectious and hazardous waste to assure that
each of its facilities complies with those laws and regulations. EHSI incurs
ongoing operational costs and capital expenditures to remain in compliance with
these laws and regulations; however, the capital expenditures to remain in
compliance have not been material to EHSI. EHSI believes that it substantially
complies with applicable laws and regulations governing these requirements. Federal regulations established by the Occupational Safety and Health
Administration imposes additional requirements on EHSI with regard to
protecting employees from exposure to blood borne pathogens. EHSI believes that
it has policies and procedures in place to preclude valid, material actions by
this regulatory body. As a result of fires in long-term care facilities in recent years, states are
reconsidering the laws governing the requirement for facilities to have
sprinklers systems. In February 2004, the AHCA reaffirmed its position that
nursing facilities nationwide be required to implement sprinkler systems,
provided that federal funding and/or low-cost financing is made available for
the installation of such systems. EHSI currently has approximately 20
facilities without sprinkler systems and intends to implement sprinkler systems
in all of its facilities by December 2005 at an estimated cost of US$3.0
million. Health Insurance Portability and Accountability Act The Health Insurance Portability and Accountability Act (HIPAA), requires EHSI
to comply with standards for the exchange of health information within EHSI and
with third parties and to protect the confidentiality and security of health
data. Specifically, HIPAA standards require: standardization of electronic
patient health, administrative and financial data; unique health identifiers
for individuals, employers, health plans and health care providers; protection
of the privacy of individually identifiable health information; and security
standards for protecting the confidentiality and integrity of individually
identifiable health information. The Department of Health and Human Services has three rules mandating the use
of new standards with respect to certain health care transactions and health
information. The first rule established privacy standards and most entities
covered under HIPAA were required to implement the privacy standards by April
2003. The privacy standards are designed to protect the privacy of certain
individually identifiable health information. As a result, EHSI has updated its
policies and procedures, conducted training for its employees on the new
standards and implemented procedures to report violations of the new policies.
EHSI believes it is in compliance with the privacy standards. The second rule established standards for electronic data transactions and code
sets. These standards are designed to allow entities to exchange medical,
billing and other information and to process transactions in a more effective
manner electronically. Originally, the new transactions and code sets standards
were required to be implemented in October 2002; however, for providers filing
an extension, the implementation date was October 2003. Due to a number of
fiscal intermediaries and states not being ready to implement the rule, CMS
announced in September 2003 that providers could have a further extension to
the implementation date, provided that they were working toward implementation,
and directed all fiscal intermediaries and states not to impair the processing
of claims and payments to health care providers working toward the directive.
EHSI has implemented the new transaction and code sets with fiscal
intermediaries and the states, which are currently ready to accept the new
transaction and code sets. In the states where EHSI has not implemented the new
transaction and code sets, it is currently in the testing stages and continues
to process and receive payments on a timely basis. EHSI believes it is in
compliance with the transaction and code sets standards. Extendicare 2003 Annual Information Form 26




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The third rule governs the security of health information. Compliance with the
security regulations is required by April 21, 2005. The security regulations
apply only to electronic protected health information, and have four main
objectives to: ensure the confidentiality, integrity and availability of
protected health information that a covered entity creates, receives, maintains
or transmits electronically; protect against any reasonably anticipated hazards
that might threaten the security or integrity of electronic protected health
information; protect against any unauthorized use or disclosure of electronic
protected health information that can be reasonably anticipated; and ensure
that the covered entitys workforce complies with the full range of security
measures. Although HIPAA was intended to ultimately reduce administrative expenses and
burdens faced within the health care industry, it is generally agreed that the
implementation of this law will result in additional costs to all health care
organizations in the short term. EHSI established a HIPAA task force consisting
of clinical, legal, financial and information services professionals to work on
the project, and monitor the implementation and compliance to the standards and
procedural changes within the organization. At this time, EHSI believes it
fully complies with the HIPAA privacy and transactions standards and will be
successful in the implementation of the security rules by the required
implementation dates. Corporate Compliance Program EHSIs Corporate Compliance Program was developed to assure that EHSI achieved
its goal of providing a high level of care and service in a manner consistent
with all applicable state and federal laws and regulations, and EHSIs internal
standards of conduct. EHSIs Corporate Compliance Program incorporates the
elements included in the guidance issued by the OIG. EHSIs employees must
acknowledge their responsibility to comply with relevant laws, regulations and
policies, including its compliance program. EHSI has a Corporate Compliance
Officer responsible for administering the Corporate Compliance Program who
reports to the Board of Extendicare and EHSIs Chief Executive Officer. Canada Provincial legislation and regulations closely control all aspects of operation
and funding of nursing facilities in Canada, including the fee structure, the
adequacy of physical facilities, standards of care and accommodation, equipment
and personnel. In some provinces, the government has delegated responsibility
for the funding and administration of long-term care programs to regional
health authorities. In most provinces a license must be obtained from the applicable provincial
ministry of health in order to operate a nursing centre. There is almost a
universal restriction upon the issuance of new licenses across the country
because of the funding implications for governments. When new licenses are
issued, it is in response to a deficiency of long-term care beds in a
particular region, and some form of public competition for the license is
required. There are also provincial regulations regarding the sale and transfer
of existing licenses, and while such sales are regular occurrences, authorities
take steps to determine the adequacy and bona fidesof the new operator. In
addition to, or in some cases in place of, the licensure procedure, operators
in some provinces, such as Alberta and Ontario, are required to sign service
contracts with the provincial government or regional health authority. These
contracts spell out in detail the services to be provided and the remuneration
to be received. Nursing centre licenses and service contracts are subject to
annual renewals and do not represent any guarantee of continued operation
beyond the term of the license or contract. While it is possible for
authorities to revoke a license or cancel a service contract due to inadequate
performance by the operator, such actions are rare in Canada and would usually
be preceded by a series of warnings, notices and other sanctions. ECI has never
had such a license or service contract revoked. While ECI endeavours to comply with all regulatory requirements in its Canadian
nursing facilities, it is not unusual for stringent inspection procedures to
identify deficiencies in operations. Every effort is made to correct legitimate
problem areas that have been identified. The environmental laws to which the Company is subject in Canada are similar in
effect to the applicable environmental laws in the United States. Extendicare 2003 Annual Information Form 27




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In Canada the Personal Information Protection and Electronic Documents Act
(PIPEDA) came into effect on January 1, 2004. The PIPEDA establishes rules that
require all private-sector organizations operating in Canada that collect, use
or disclose personal information in the course of commercial activity to obtain
an individuals prior informed consent to such collection, use and disclosure,
subject to certain enumerated exceptions. It applies throughout Canada unless a
province enacts similar legislation, which may supersede the PIPEDA in certain
circumstances. All of the data protection legislation in Canada imposes
obligations on organizations to establish policies and implement practices
concerning the handling of personal information, as well as various logistical
and administrative obligations. ECI has designated a Privacy Officer as part of
the process to ensure its compliance with the legislation. Employees Extendicare currently employs approximately 35,800 people, including
approximately: 4,600 registered and licensed practical nurses; 12,900 nursing
assistants; 1,900 therapists; 6,300 dietary, domestic, maintenance and other
staff; 7,400 Canadian home care professionals and other staff; and 2,700
administrative employees who work at corporate and regional offices and
facilities. In Canada, there are 54 collective agreements covering
approximately 7,900 employees belonging to 14 different unions, operating under
5 different collective bargaining legislative jurisdictions. In the United
States, there are 36 collective agreements among seven unions covering
approximately 2,200 employees. The Company believes that its relationship with
its employees generally is good. Investment in Crown Life Insurance Company Extendicare Inc., through 159524 Canada Inc., owned a 34.8% (1,113,690 shares)
common equity interest in Crown Life Insurance Company (Crown Life) at December
31, 2003. Extendicare accounts for its investment in Crown Life on an equity
basis. The Company regards its investment in Crown Life as a non-core asset. Dividends on common shares from Crown Life are at the discretion of its
directors. Extendicare received a dividend of $14.00 per share, or $15.6
million on March 31, 2004, in the form of a promissory note bearing interest at
5% per annum due June 30, 2004. Payment of the note, at Crown Lifes
discretion, is to be in cash, or by way of transfer of ownership of a property
housing Extendicares corporate office in Markham Ontario, with the balance to
be paid in cash. The estimated fair value of the property is $33.2 million and
the property carries a mortgage of approximately $18.0 million. Extendicare
received no dividends in 2003 and in 2002 received cash dividends of $22.0
million or $19.75 per common 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,
resulting in a delay in the start of negotiation with Crown Life on the final
settlement of the Canada Life transaction. The negotiations are anticipated to
begin within the next 12 months. Crown Life has assets of $1.0 billion and is based in Regina, Saskatchewan.
Crown Lifes business is its remaining insurance operation, which consist
primarily of U.S. business together with related investment activities and is
administered by Canada Life under an administrative services agreement. Extendicare 2003 Annual Information Form 28




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SELECTED FINANCIAL INFORMATION Years ended December 312003
    
    2002
    
    2001(thousands of dollars unless otherwise noted)Income Statement Data:RevenueNursing and assisted living centresUnited States
    
    
    1,182,045
    
    
    
    1,236,565
    
    
    
    1,187,547Canada
    
    
    351,981
    
    
    
    315,907
    
    
    
    279,559Outpatient therapy  United States
    
    
    16,151
    
    
    
    16,144
    
    
    
    14,733Home health  Canada
    
    
    134,921
    
    
    
    146,034
    
    
    
    171,809Other (1)
    
    
    39,516
    
    
    
    44,135
    
    
    
    50,8631,724,614
    
    
    
    1,758,785
    
    
    
    1,704,511Operating and administrative costs (1)
    
    
    1,519,567
    
    
    
    1,574,325
    
    
    
    1,549,152Earnings before undernoted
    
    
    205,047
    
    
    
    184,460
    
    
    
    155,359Lease costs
    
    
    18,217
    
    
    
    24,119
    
    
    
    28,202Depreciation and amortization
    
    
    63,657
    
    
    
    68,989
    
    
    
    71,547Interest, net
    
    
    57,749
    
    
    
    62,047
    
    
    
    65,248Loss (gain) from asset disposals, impairment and other items
    
    
    (905
    )
    
    
    6,689
    
    
    
    50,165Earnings (loss) before income taxes
    
    
    66,329
    
    
    
    22,616
    
    
    
    (59,803
    )Income taxes (recovery)
    
    
    24,539
    
    
    
    11,202
    
    
    
    (12,659
    )Earnings (loss) from health care
    
    
    41,790
    
    
    
    11,414
    
    
    
    (47,144
    )Share of earnings of Crown Life
    
    
    18,884
    
    
    
    7,520
    
    
    
    10,738Net earnings (loss)
    
    
    60,674
    
    
    
    18,934
    
    
    
    (36,406
    )Earnings (loss) per share  Basic
    
    
    0.87
    
    
    
    0.26
    
    
    
    (0.52
    ) Diluted
    
    
    0.86
    
    
    
    0.26
    
    
    
    (0.52
    )Operating Statistics:Number of facilities (end of period)
    
    
    275
    
    
    
    277
    
    
    
    261Resident capacity (end of period)
    
    
    28,930
    
    
    
    29,175
    
    
    
    26,339Average occupancy rate (percentage)
    
    
    92.9
    
    
    
    92.0
    
    
    
    90.0U.S. payor source as a percentage of total U.S. revenuePrivate Pay
    
    
    23.9
    
    
    
    24.5
    
    
    
    25.3Medicare
    
    
    27.4
    
    
    
    25.7
    
    
    
    23.8Medicaid
    
    
    48.7
    
    
    
    49.8
    
    
    
    50.9Property and equipment capital expenditures
    
    
    64,347
    
    
    
    53,145
    
    
    
    45,377EBITDA
margin (2) (percentage)
    
    
    10.8
    
    
    
    9.1
    
    
    
    7.5Balance Sheet Data (at period end):AssetsCash and short-term investments (3)
    
    
    74,846
    
    
    
    52,624
    
    
    
    25,549Working capital (3)
    
    
    (20,154
    )
    
    
    (51,678
    )
    
    
    (79,097
    )Total health care assets
    
    
    1,454,139
    
    
    
    1,684,137
    
    
    
    1,603,360Investment in Crown Life, equity basis
    
    
    139,278
    
    
    
    121,508
    
    
    
    135,944Total assets
    
    
    1,593,417
    
    
    
    1,805,645
    
    
    
    1,739,304Long-term debt
    
    
    750,094
    
    
    
    846,734
    
    
    
    788,354Shareholders equity
    
    
    356,433
    
    
    
    358,026
    
    
    
    350,696
  (1)
    
    Certain items have been reclassified that increase revenue and
operating and administration costs in 2002.  (2)
    
    Earnings before interest, taxes, depreciation, amortization and loss
(gain) from asset disposals, impairment and other items (EBITDA) divided
by revenue.  (3)
    
    Certain items have been reclassified which decreased cash and working
capital for the years 2002 and 2001. Extendicare 2003 Annual Information Form 29




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COMPARABILITY OF SELECTED FINANCIAL INFORMATION Factors affecting the comparability of financial data of the Company include
the following significant acquisitions, construction, asset disposals and other
major changes in the business. Acquisitions On October 1, 2002, EHSI exercised its right to acquire seven nursing
facilities that it previously leased, for $28.2 million (US$17.9 million).
Three of the facilities are located in Ohio and four are in Indiana,
representing a total of 902 licensed beds. The purchase price consisted of
US$7.4 million in cash and a US$10.5 million 10-year interest-bearing note,
with the interest rate under dispute. In the latter part of 2003, EHSI prepaid
$6.3 million (US$4.5 million) against the note and agreed to refinance the
balance. In March 2004 EHSI refinanced the facilities and repaid the existing
balance of $7.4 million (US$5.6 million). On December 31, 2003, EHSI acquired a 99-bed skilled nursing facility in
Wisconsin for $5.3 million (US$4.1 million). EHSI anticipates completing the acquisition of five nursing homes (423 beds) by
the end of May 2004. Four of the facilities are located in Indiana and the
other in Wisconsin. The cost is estimated at US$8.0 million and will be
financed with cash on hand. Construction As part of the Government of Ontario program to add new long-term care beds,
ECI completed the following construction projects. 2001 ECI opened four new nursing facilities with capacity of 502 beds, including
licences for 40 beds transferred from an existing facility and one new 38-unit
assisted living wing. 2002 ECI opened two new nursing facilities with capacity of 267 beds, including one
38-unit assisted living wing. 2003/2004 In February 2003, ECI opened two new nursing facilities with capacity of 332
beds, including licences for 80 beds transferred from existing facilities. In
May and August of 2003, two more nursing facilities with capacity of 258 beds,
including licences for 34 existing beds, were opened, and in March 2004 the
final 128-bed facility was opened. In the United States, EHSI has the following construction program under
development. 2003/2004 Under Phase I of its three-phrase construction program, EHSI is expanding four
assisted living facilities (87 units) and two skilled nursing homes (38 beds),
and adding one new assisted living facility (40 units). The cost of these
projects is estimated at US$15.2 million, of which US$4.3 million was spent
during 2003 and US$3.6 million in the first quarter of 2004. Two of the
projects were completed in the first quarter of 2004, a 16-unit assisted living
addition in Kentucky that opened in February 2004, and a 20-bed nursing
addition in Wisconsin that opened in March. In addition in May 2004, a 40-unit
assisted living facility opened in Wisconsin. It is expected that another
project will be finished by the end of 2004, with the remaining three due to be
completed in early 2005. Under Phase II, launched in February 2004, EHSI will add a total of 329 new
assisted living units in eight facilities at an approximate cost of US$36.3
million. Five of the projects are new freestanding facilities and three are
additions to existing facilities. Phase III of the construction program will
involve seeking new property to develop
in markets where demand has increased and EHSI is unable to construct on land
immediately adjacent to existing facilities. Phase III is not expected to be
launched until 2005. Extendicare 2003 Annual Information Form 30




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Asset Disposals, Impairment and Other Items 2001 During the year the Company made provisions totalling $20.3 million related to
ceased operations. These were comprised of a provision of $3.0 million (US$2.0
million) related to the closure and/or sale of three nursing properties, a loss
of $2.8 million (US$1.8 million) related to the transfer of Texas nursing
operations, and $14.5 million (US$9.4 million) in provisions for previously
ceased operations, primarily for the Florida nursing homes. The Company also recorded charges of $1.4 million related to interest on past
years tax re-assessments and a write-off of deferred financing costs from the
early retirement of debt. In December ECI sold its investment in AIM, a rehabilitative therapy business,
resulting in a pre-tax gain of $1.1 million. Gross proceeds from the sale of
$3.5 million were comprised of cash of $2.2 million and notes receivable of
$1.3 million. At the end of September, EHSI ceased operating its nursing homes in Texas
consisting of 17 facilities (1,421 beds) through lease agreements with a
third-party operator that has an option to purchase the properties. In addition
to the loss described above on transfer of the assets, a provision of $2.6
million (US$1.7 million) was recorded for impairment of the remaining Texas
properties related to leasehold rights and leasehold improvements. In September based upon an independent actuarial review, the Company recorded
an additional provision of $27.0 million for resident care liability costs
related to the Companys ceased Florida operations for years prior to 2001. In April EHSI sold two leased facilities in Florida to Tandem Health Care, Inc.
(Tandem). Tandem had operated the facilities since December 31, 2000 under
lease agreements with purchase options. Gross proceeds received were $17.5
million (US$11.4 million, comprised of cash of US$7.0 million, an interest
bearing five-year note for US$2.5 million and US$1.9 million in cumulative
dividend preferred shares). The sale resulted in a $3.3 million (US$2.2
million) pre-tax gain that was deferred until the balance of the purchase
options held by Tandem on the remaining leased facilities were completed. The
Company applied US$4.0 million of the net cash proceeds to reduce its term bank
debt. 2002 In November, as a result of continuing unfavourable business conditions,
management approved a plan to exit the British Columbia home health care market
by winding down its ParaMed B.C. business by March 31, 2003. The Company
accrued exit costs of $1.6 million, consisting of $1.1 million for labour
related expenses and $0.5 million for operating lease penalties and other
costs. In December ECI recorded a reduction of $1.5 million of provisions for labour
costs that were no longer required due to certain events within the year. In June EHSI wrote off deferred financing costs, including a charge from the
termination of the swap agreement, of $4.5 million related to the previous
credit facility, which was retired from the proceeds of the issuance of the
9.5% Senior Notes due 2010. In May Tandem exercised its option to purchase seven Florida properties that it
leased from EHSI for gross proceeds of $45.0 million (US$28.6 million,
consisting of cash proceeds of US$15.6 million and five-year, 8.5% notes
receivable of US$13.0 million). This transaction, together with the deferred
gain from the April 2001 transaction with Tandem, as discussed above, resulted
in a pre-tax gain of $6.2 million. The May transaction also resulted in the
conversion of US$1.9 million in preferred shares received in the April 2001
transaction to US$1.9 million notes, due April 2006. Also in May, EHSI recorded
a provision for closure and exit costs related to Florida divested operations
of $8.3 million, concerning the settlement of cost report issues and supplier
and employee claims. Extendicare 2003 Annual Information Form 31




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2003 By the end of March 2003, ParaMed had exited the British Columbia home health
care market by selling its Vancouver operation to another service provider in
January 2003 and closing its other four B.C. branches. In April ECI sold a nursing home in Alberta for gross proceeds of $2.7 million,
resulting in a pre-tax loss of $0.2 million. In March the Company sold non-core
assets for proceeds of $1.1 million, consisting of cash and a $0.2 million note
receivable and, as these assets had been written off in prior years, their sale
resulted in a gain of $1.1 million. 2004 In February the Company sold a nursing home and a retirement home in Ontario,
representing 275 beds. Gross proceeds were $19.6 million, of which $6.6 million
was used to retire long-term debt associated with one of the homes. The pre-tax
gain on disposal was $12.7 million. Also in February, EHSI prepaid in full two Industrial Development Revenue Bonds
totalling $17.0 million (US$13.0 million). This prepayment resulted in a
pre-tax charge to earnings of $0.5 million (US$0.4 million) representing the
write off of deferred financing costs related to this debt. In March EHSI concluded the evaluation of two nursing facilities that operate
adjacent to one another in Indiana, both of which require capital renovations.
After evaluation of the respective operations EHSI decided, subject to State
approval, to consolidate the two operations into one renovated facility that
upon completion would decrease the total of the combined available nursing beds
by 46. The consolidation of the two operations is expected to be completed by
March 2005. As a result of the decision to close the one facility, EHSI
recorded a provision of $2.1 million (US$1.6 million) for impairment of
long-lived assets in the first quarter of 2004. On April 22 EHSI issued US$125.0 million aggregate principal amount of 6.875%
Senior Subordinated Notes due May 1, 2014 (the 2014 Notes). The 2014 Notes
were issued at a price of 97.5001% of par to yield 7.23%. The 2014 Notes are
fully and unconditionally guaranteed on a senior subordinated basis by all of
EHSIs existing and future U.S. domestic significant 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. The 2014 Notes were sold to qualified institutional buyers in reliance on Rule
144A and outside the United States in compliance with Regulation S under the
Securities Act of 1933, as amended. The 2014 Notes have not been registered
under the Securities Act and may not be offered or sold by holders thereof
without registration unless an exemption from such registration requirements is
available. In connection with the 2014 Notes offering, EHSI also amended and
restated its existing senior secured revolving credit facility to, among other
things, extend the maturity date by two years to June 28, 2009 and increase the
total borrowing capacity from US$105.0 to US$155.0 million. The net proceeds from the sale and issuance of the 2014 Notes were
approximately US$117.4 million (net of discount of US$3.1 million and fees and
expenses of US$4.5 million). EHSI will use these net proceeds, together with
borrowings under its amended and restated credit facility and cash on hand, to
purchase for cash any and all of the outstanding US$200.0 million aggregate
principal amount of 9.35% Senior Subordinated Notes due 2007 (the 2007 Notes)
tendered in a tender offer that commenced on April 5, 2004, to redeem any 2007
Notes not tendered in the tender offer and to pay related fees and expenses of
the tender offer and redemption. Under the conditions of the tender offer for the 2007 Notes, there was a
solicitation for consent to adopt proposed amendments to the indenture under
which the 2007 Notes were issued that would eliminate substantially all
restrictive covenants and certain event of default provisions. Holders who
validly tendered their 2007 Notes and delivered consents prior to April 14,
2004 received the total consideration, which was US$1,035 for each US$1,000
principal amount, plus accrued interest. The total consideration consisted of
the tender offer consideration, which was US$1,005 for each US$1,000 principal
amount and a consent payment of US$30 for each US$1,000 principal amount of the
2007 Notes validly tendered and not withdrawn. Holders who tendered after April
14 but prior to 12:00 oclock midnight on April 30, 2004 received the tender
offer consideration, but not the consent payment. Extendicare 2003 Annual Information Form 32




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EHSI intends to redeem any 2007 Notes not tendered in the tender offer under
the terms of the indenture and the current redemption price for the Notes is
US$1,031.17. Pursuant to the tender offer, 61% of the 2007 Notes, not owned by Extendicare
Inc. were tendered and repaid on April 22, 2004. The remaining 2007 Notes not
tendered will be redeemed and paid for on May 24, 2004. As a result of the tender and call of the 2007 Notes, Extendicare will pay a
premium for the early redemption of the 2007 Notes of approximately US$6.6
million, write off deferred financing charges of US$2.4 million and incur
estimated legal fees of US$0.3 million. The total of these pre-tax amounts of
US$9.3 million will be recognized in the second quarter of 2004. In April 2004, coterminous with the issuance of the 2014 Notes, EHSI terminated
its existing interest rate swap and cap agreements resulting in a pre-tax gain
of approximately US$3.3 million to be recognized in the second quarter of 2004.
In addition, to hedge EHSIs exposure to fluctuations in market value, it
entered into two new interest rate swap agreements and two new interest rate
cap agreements relating to the 9.50% Senior Notes due 2010 (the 2010 Notes)
and the 2014 Notes. With respect to the 2010 Notes, EHSI entered into an interest rate swap
agreement expiring July 1, 2010 with a notional amount of US$150.0 million.
This agreement effectively converted up to US$150.0 million of fixed interest
rate indebtedness into variable interest 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.
EHSI also entered into an interest rate cap agreement expiring July 1, 2010
with a notional amount of US$150.0 million. Under this cap agreement, EHSI paid
an upfront fee of US$3.5 million to the counterparty that will be amortized to
interest expense over the term of the cap. EHSI will receive a variable rate of
interest equal to the excess, if any, of the six-month LIBOR rate, 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 interest rate cap agreement, the
counterparty can call the cap if the interest rate swap agreement expiring July
1, 2010 is terminated. Regarding the 2014 Notes, EHSI entered into an interest rate swap agreement
expiring May 1, 2014 with a notional amount of US$125.0 million. This agreement
effectively converted up to US$125.0 million of fixed interest rate
indebtedness into variable interest 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. EHSI also
entered into an interest rate cap agreement expiring May 1, 2014 with a
notional amount of US$125.0 million. Under this cap agreement, 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
rate, 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. In April 2004 EHSI concluded negotiations with Greystone Tribeca Acquisition,
L.L.C. on the divestiture agreement for 15 Florida nursing homes previously
owned and operated by EHSI, which Greystone has been operating since September
2000. The initial transaction in 2000 was treated as a deferred sale since a
significant portion of the final consideration was contingent on certain
events, and EHSI held an option to repurchase the facilities. On April 29,
2004, EHSI received US$2.6 million of interest, and in addition to the US$30.0
million of cash consideration initially received in 2000, EHSI will receive in
June 2004, US$10.0 million as final payment of the contingent consideration.
The finalization of this transaction will result in the recognition in the
second quarter of 2004 of a pre-tax gain from the sale of assets of US$4.8
million and interest income of US$1.6 million. Extendicare 2003 Annual Information Form 33




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##### 



Share Capital Transactions During 2003 under the terms of its normal course issuer bids, the Company
purchased and cancelled 1,107,000 Subordinate Voting Shares at a cost of
$4,498,000 (2002  1,472,300 shares at a cost of $6,992,000) and 433,700
Multiple Voting Shares at a cost of $3,169,000 (2002  212,900 shares at a cost
of $1,084,000). As of April 30, 2004, under its current Normal Course Issuer Bid, 92,500
Subordinate Voting Shares were purchased and cancelled at a cost of $1,158,970
during 2004. In addition, 12,700 Multiple Voting Shares were purchased and
cancelled at a cost of $169,634, of which 1,000 shares at a cost of $14,390
were acquired in 2004. The current Normal Course Issuer Bid, entered into on
November 27, 2003, will terminate for each class of shares on the earlier of
November 26, 2004 and the dates on which a total of 4,700,000 Subordinate
Voting Shares, 600,000 Multiple Voting Shares and 38,200 Class II Preferred
Shares, Series 1, have been purchased and cancelled by the Company pursuant to
the Bid. DIVIDEND RECORD Preferred share dividends paid per share by Extendicare in each of the past
three fiscal years were as follows: Preferred SharesClass I
    
    Class IISeries 2
    
    Series 3
    
    Series 4
    
    Series 1($ per share)2003
    
    
    0.8320
    
    
    
    0.9900
    
    
    
    0.8438
    
    
    
    0.9362002
    
    
    0.7549
    
    
    
    0.9900
    
    
    
    0.7653
    
    
    
    0.8282001
    
    
    1.1990
    
    
    
    1.0500
    
    
    
    1.2159
    
    
    
    1.280
 No dividends are currently being paid on the Subordinate Voting Shares and
Multiple Voting Shares. MARKET FOR SECURITIES The Class I Preferred Shares, Series 2, Series 3 and Series 4; Class II
Preferred Shares, Series 1; Subordinate Voting Shares; and Multiple Voting
Shares of Extendicare are listed on the Toronto Stock Exchange and the
Subordinate Voting Shares are listed on the New York Stock Exchange. Extendicare 2003 Annual Information Form 34




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##### 



ADDITIONAL INFORMATION Extendicare shall provide to any person or company, upon request to the
Corporate Secretary of the Company, the following:  (1)
    
    when the securities of the Company are in the course of a distribution
pursuant to a short form prospectus or a preliminary short form
prospectus, which has been filed in respect of a distribution of its
securities:  (i)
    
    one copy of the 2003 Annual Information Form of the Company,
together with one copy of any document, or the pertinent pages of any
document, incorporated therein by reference;(ii)
    
    one copy of the Consolidated Financial Statements and Auditors
Report to the Shareholders of the Company for the financial year ended
December 31, 2003, together with one copy of any interim financial
statements of the Company subsequent to the Consolidated Financial
Statements for the financial year ended December 31, 2003;(iii)
    
    one copy of the Management Information and Proxy Circular of the
Company dated March 12, 2004 for the annual meeting of shareholders
held on May 6, 2004; and(iv)
    
    one copy of any other documents that are incorporated by reference
into the preliminary short form prospectus or the short form
prospectus; or  (2)
    
    at any other time, one copy of the documents referred to in paragraphs
(1) (i), (ii) and (iii) above, provided that the Company may require the
payment of a reasonable charge from such a person or company who is not a
holder of securities of the Company where the documents are furnished by
the Company pursuant to this paragraph (2). Additional information, including remuneration and indebtedness of directors
and executive officers, principal holders of the Companys Multiple Voting and
Subordinate Voting Shares, options to purchase securities and interests of
insiders in material transactions, where applicable, is contained in the
Management Information and Proxy Circular of the Company for the annual meeting
of shareholders held on May 6, 2004. Additional financial information is
provided in the Companys Consolidated Financial Statements for the financial
year ended December 31, 2003 contained in Extendicares 2003 Annual Report to
shareholders. A copy of such documents may be obtained from the Corporate
Secretary upon request at 3000 Steeles Avenue East, Markham, Ontario L3R 9W2,
Tel: (905) 470-5534. In addition, these documents are available for viewing or
printing on the Companys Website at www.extendicare.com. Extendicare 2003 Annual Information Form 35




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##### 



DIRECTORS AND OFFICERS The following table sets out the full name, municipality of residence, current
positions with Extendicare and principal occupations for the past five years of
each of the directors and officers of Extendicare: DirectorsTerm ExpiresName, Current Positions with
    
    
    
    (AnnualExtendicare and Municipality of
    
    
    
    Meeting)/Residence
    
    Principal Occupation for Past Five Years
    
    Director SinceDavid J. Hennigar(CG)
Director, Chairman
Bedford, Nova Scotia
    
    Chairman, Annapolis Group Inc. (real estate
development and holding company); Chairman,
High Liner Foods Incorporated (value added
food processor); and Chairman, Acadian
Securities Inc. (investment dealer)
    
    2007/1980H. Michael Burns(CG)(IS)
    
    Corporate Director
    
    2005/1978Director, Deputy ChairmanMaple, OntarioFrederick B. Ladly(CG) (HR) (QS)
Director, Deputy Chairman
Fallbrook, Ontario
    
    Vice-Chairman, Crown Life Insurance Company;
Deputy Chairman, Extendicare
    
    2007/1986Mel Rhinelander
Director, President and
Chief Executive Officer
Milwaukee, Wisconsin
    
    President and Chief Executive Officer of
Extendicare since August 2000; Chairman and
Chief Executive Officer of both Extendicare
Health Services, Inc. (EHSI) and Extendicare
(Canada) Inc. (ECI) since August 2000; during
1999, Mr. Rhinelander was appointed President
of Extendicare and Chief Executive Officer of
both EHSI and ECI; prior thereto he has served
as a senior executive in various capacities
for Extendicare and its subsidiaries
    
    2006/2000Derek H. L. Buntain(A) (HR) (IS)
Director
Grand Cayman, Cayman Islands
    
    President of The Dundee Bank (private bank
serving international clients); and President
and Chief Executive Officer, Goodman & Company
(Bermuda) Limited (investment counsel)
    
    2005/1995Sir Graham Day(CG) (HR)
Director
Hantsport, Nova Scotia
    
    Chairman, Sobeys Inc. (national food
distributor) since September 2001; and
Counsel, Stewart McKelvey Stirling Scales
(barristers and solicitors)
    
    2007/1989George S. Dembroski(A)(IS)
    
    Corporate Director
    
    2005/1995DirectorToronto, OntarioDavid M. Dunlap(A)(HR)(QS)
    
    Chairman, G.F. Thompson Co. Ltd. (manufacturer)
    
    2006/1980DirectorTownship of King, Ontario
 Extendicare 2003 Annual Information Form 36




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##### 



DirectorsTerm ExpiresName, Current Positions with
    
    
    
    (AnnualExtendicare and Municipality of
    
    
    
    Meeting)/Residence
    
    Principal Occupation for Past Five Years
    
    Director SinceGeorge A. Fierheller(A)(IS)
    
    President, Four Halls Inc. (investment and
consulting company)
    
    2006/1981Director
Toronto, OntarioDr. Seth B. Goldsmith(CG)(QS)
    
    Attorney and Professor Emeritus at the
University of Massachusetts
    
    2006/1995Director
Hollywood, FloridaMichael
J. L. Kirby(CG) (HR) (QS)
    
    Senator of the Parliament of Canada
    
    2005/1987DirectorNepean, OntarioAlvin G. Libin(A)
    
    President and Chief Executive Officer of Balmon
Holdings Ltd.
    
    2005/1984Director
Calgary, Alberta
    
    (investment company)J. Thomas MacQuarrie, Q.C.(A)(HR)
    
    Senior Partner, Stewart McKelvey Stirling
Scales
    
    2007/1980Director
Halifax, Nova Scotia
    
    (barristers and solicitors)Mark W. Durishan
    
    Executive of Extendicare since August 1999;Vice-President, Finance and Chief
Financial Officer
Milwaukee, Wisconsin
    
    prior thereto, Senior Vice President for
Finance and Operations, Blue Cross and Blue
Shield of MinnesotaJillian E. Fountain
    
    Executive of ExtendicareCorporate SecretaryToronto, Ontario
 Notes:
    
    (HR) Member of Human Resources Committee(A) Member of Audit Committee
    
    (IS) Member of Information Systems Committee(CG) Member of Corporate Governance and Nominating Committee
    
    (QS) Member of Quality Standards Committee
 At April 30, 2004, the directors and officers of Extendicare as a group
beneficially owned, directly or indirectly, or exercised control or direction
over 1,299,305 Subordinate Voting Shares and 8,145,300 Multiple Voting Shares
of Extendicare (representing 2.28% and 68.38% of the outstanding Subordinate
Voting Shares and Multiple Voting Shares, respectively, and representing 47.02%
of the combined votes). Extendicare 2003 Annual Information Form 37




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##### 



SUPPLEMENTARY INFORMATION RECONCILIATION OF CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Extendicare 2003 Annual Information Form A - 1




---



##### 



AUDITORS REPORT ON SUPPLEMENTARY INFORMATION The Board of Directors of Extendicare Inc. Under date of February 19, 2004, we reported on the consolidated balance sheets
of Extendicare Inc. (the Company) as at December 31, 2003 and 2002, and the
consolidated statements of earnings (loss), shareholders equity and cash flows
for each of the years in the three-year period ended December 31, 2003, as
incorporated by reference in the Companys 2003 Annual Information Form dated
May 14, 2004, included in the Annual Report on Form 40-F. In connection with
our audits of the aforementioned consolidated financial statements, we also
have audited the related supplemental note entitled Reconciliation of Canadian
and United States Generally Accepted Accounting Principles as set forth in the
Annual Information Form. This supplemental note is the responsibility of the
Companys management. Our responsibility is to express an opinion on this
supplemental note based on our audits. In our opinion, such supplemental note, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein as at December 31,
2003 and 2002 and for each of the years in the three-year period ended December
31, 2003. /s/ KPMGLLP
Chartered Accountants Toronto, Canada
February 19, 2004 Comments by Shareholders Auditors for U.S. Readers
On Canada  U.S. Reporting Difference In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Companys consolidated financial statements, such as the changes
described in note 1 (b) to the consolidated financial statements. Our report to
the shareholders dated February 19, 2004 is expressed in accordance with
Canadian reporting standards, which do not require a reference to such a change
in accounting principles in the auditors report when the change is properly
accounted for and adequately disclosed in the financial statements. /s/ KPMGLLP
Chartered Accountants Toronto, Canada
February 19, 2004 Extendicare 2003 Annual Information Form A - 2




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##### 



SUPPLEMENTARY INFORMATION RECONCILIATION OF CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(in thousands of Canadian dollars, except per share amounts) General The following supplementary information is provided in accordance with the
United States Securities Exchange Act of 1934 as required for companies
reporting on Form 40-F under the Multijurisdictional Disclosure System. The areas of material difference between Canadian and United States GAAP and
their impact on the consolidated financial statements of the Company are
described below. The application of United States GAAP would have the following effect on the
net earnings (loss) as reported: 2003
    
    2002
    
    2001Earnings (loss) from health care for the year as reported in accordance
with Canadian GAAP
    
    
    41,790
    
    
    
    11,414
    
    
    
    (47,144
    )Application of hedge accounting for derivatives, net of income taxes (D)
    
    
    108
    
    
    
    (644
    )
    
    
    Earnings (loss) from health care for the year as
reported in accordance with United States GAAP
    
    
    41,898
    
    
    
    10,770
    
    
    
    (47,144
    )Share of earnings of Crown Life for the year as reported in accordance
with Canadian GAAP
    
    
    18,884
    
    
    
    7,520
    
    
    
    10,738Application of United States GAAP (A)
    
    
    (7,060
    )
    
    
    24,680
    
    
    
    (5,873
    )Share of earnings of Crown Life for the year as reported in accordance
with United States GAAP
    
    
    11,824
    
    
    
    32,200
    
    
    
    4,865Earnings (loss) for the year as reported in accordance with United
States GAAP
    
    
    53,722
    
    
    
    42,970
    
    
    
    (42,279
    )Other comprehensive income (loss), net of tax (B):Foreign currency translation adjustments
    
    
    (53,621
    )
    
    
    (2,561
    )
    
    
    16,211Unrealized gains (losses) on invested assets (C)
    
    
    5,197
    
    
    
    (2,209
    )
    
    
    156Cumulative effect of change in accounting for hedging activities (D)
    
    
    
    
    
    
    
    
    
    
    (292
    )Net current period change in derivative gains (losses) (D)
    
    
    45
    
    
    
    1,530
    
    
    
    (1,419
    )Minimum pension liability adjustments (E)
    
    
    (3,277
    )
    
    
    (2,516
    )
    
    
    Share of comprehensive income (loss) of Crown Life (A)
    
    
    (1,262
    )
    
    
    5,734
    
    
    
    (3,018
    )Other comprehensive income (loss)
    
    
    (52,918
    )
    
    
    (22
    )
    
    
    11,638Comprehensive earnings (loss) as reported in accordance with
United States GAAP
    
    
    804
    
    
    
    42,948
    
    
    
    (30,641
    )Per share amounts in accordance with United States GAAPBasic earnings (loss)
    
    
    0.77
    
    
    
    0.60
    
    
    
    (0.60
    )Diluted earnings (loss)
    
    
    0.76
    
    
    
    0.60
    
    
    
    (0.60
    )
 Extendicare 2003 Annual Information Form A - 3




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##### 



The cumulative effect of these adjustments on shareholders equity is as
follows: 2003
    
    2002
    
    2001Shareholders equity in accordance with Canadian GAAP
    
    
    356,433
    
    
    
    358,026
    
    
    
    350,696Application of hedge accounting for derivatives, net of tax (D)
    
    
    (432
    )
    
    
    (647
    )
    
    
    Unrealized gains (losses) on invested assets, net of tax (C)
    
    
    1,929
    
    
    
    (3,502
    )
    
    
    (1,296
    )Unrealized gains (losses) on cash-flow hedges, net of tax (D)
    
    
    (128
    )
    
    
    (207
    )
    
    
    (1,760
    )Minimum pension liability adjustments, net of tax (E)
    
    
    (5,793
    )
    
    
    (2,516
    )
    
    
    Change in equity carrying value of Crown Life (A)
    
    
    13,326
    
    
    
    20,534
    
    
    
    (9,840
    )Shareholders equity in accordance with United States GAAP
    
    
    365,335
    
    
    
    371,688
    
    
    
    337,800
 Summary of Accounting Policy Differences (A) Crown Life The areas of material difference between Canadian GAAP and United States GAAP
related to the Companys share of earnings and other comprehensive income
(increase (decrease)) of Crown Life are as follows: 2003
    
    2002
    
    2001Share of earnings (loss)Policy liabilities
    
    
    (884
    )
    
    
    1,730
    
    
    
    1,733Investment income
    
    
    (5,120
    )
    
    
    28,734
    
    
    
    (6,805
    )Income taxes
    
    
    (1,056
    )
    
    
    (5,789
    )
    
    
    (811
    )Other
    
    
    
    
    
    
    5
    
    
    
    10(7,060
    )
    
    
    24,680
    
    
    
    (5,873
    )Other comprehensive incomeForeign currency translation adjustments
    
    
    (910
    )
    
    
    1,050
    
    
    
    1Unrealized gains (losses) on invested assets
    
    
    (352
    )
    
    
    4,684
    
    
    
    (3,019
    )(1,262
    )
    
    
    5,734
    
    
    
    (3,018
    )
 The cumulative effect between Canadian GAAP and United States GAAP related to
Crown Life on the Companys shareholders equity and equity carrying value of
Crown Life is as follows: 2003
    
    2002
    
    2001Equity carrying value of Crown Life in
accordance with Canadian GAAP
    
    
    139,278
    
    
    
    121,508
    
    
    
    135,944Policy liabilities
    
    
    1,470
    
    
    
    2,717
    
    
    
    (2,424
    )Invested assets
    
    
    14,922
    
    
    
    20,000
    
    
    
    (15,929
    )Income taxes
    
    
    (3,066
    )
    
    
    (2,183
    )
    
    
    8,517Other
    
    
    
    
    
    
    
    
    
    
    (4
    )13,326
    
    
    
    20,534
    
    
    
    (9,840
    )Equity carrying value of Crown Life in
accordance with United States GAAP
    
    
    152,604
    
    
    
    142,042
    
    
    
    126,104
 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 United States 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 United States 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. Extendicare 2003 Annual Information Form A - 4




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##### 



Invested Assets.Under Canadian GAAP, gains and losses on invested assets of
Crown Life are amortized into income. Under United States 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 Under United States GAAP, Statement of Financial Accounting Standard No. 130,
Reporting Comprehensive Income (FAS 130). 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 $(930), $1,101 and $481 for
2003, 2002 and 2001, respectively. (C) Securities Available for Sale United States GAAP requires that non-current marketable securities considered
to be 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. In addition, United States GAAP requires the
disclosure of information about the contractual maturities of those securities.
There is no similar requirement for Canadian GAAP. The 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 marketable securities in excess of their carrying values at
December 31, 2003 was $3,163, or $1,929 net of tax (December 31, 2002  $5,287
below their carrying values, or $3,502 net of tax). The amount reported to
other comprehensive income for 2003 was an after-tax gain of $5,197 (2002  an
after-tax loss of $2,209). Investments held for self-insured liabilities measured in accordance with
Canadian GAAP, include marketable securities at December 31, 2003 and 2002 with
maturities as follows: 2003
    
    2002Due in one year or less
    
    
    
    
    
    
    1,338Due after 1 year through 5 years
    
    
    18,264
    
    
    
    23,765Due after 5 years through 10 years
    
    
    5,823
    
    
    
    4,742Due after 10 years
    
    
    253
    
    
    
    4,05924,340
    
    
    
    33,904Cash and money market funds
    
    
    16,275
    
    
    
    22,29940,615
    
    
    
    56,203
 (D) Derivative Instruments and Hedging Activities The Company adopted on January 1, 2001, for United States GAAP reporting
purposes, Statement No. 133, Accounting for Derivative Instruments and Certain
Hedging Activities (FAS 133), which was amended in June 2000 by Statement No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of FASB Statement No. 133 (FAS 138). Under FAS 133
and FAS 138, all derivative instruments are recognized at fair value on the
balance sheet. The Company has derivative instruments that under Canadian GAAP
are not fair valued on the balance sheet. Under United States GAAP, changes in the fair value of a derivative that is
highly effective and that is designated and qualifies as a fair value hedge,
along with the loss or gain on the related hedged asset or liability that is
attributable to the hedged risk, are recorded in earnings. 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. The impact as of January 1,
2001 arising from the adoption of the standards (relating to the fair value of
derivatives) was a liability, representing an after-tax loss charged to
comprehensive income of $292. Extendicare 2003 Annual Information Form A - 5




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##### 



The Companys interest rate swap is designated as a fair-value hedge of
fixed-rate debt obligations and changes in the fair value of the swap had no
net impact on income during 2003, as it was offset by the change in the fair
value of the hedged fixed-rate debt. A portion of the interest rate cap
qualifies as a cash-flow hedge and any related change in fair value is reported
as AOCI. The remainder of the interest rate cap does not qualify as a hedging
instrument, and any related changes in fair value are reported in earnings. The fair value of the interest rate swap at December 31, 2003 was an asset of
$5,432 and was offset by an equal liability related to the change in the market
value of the hedged item. The fair value of the cash-flow hedges was a
liability of $215 ($128 net of tax) as of December 31, 2003, and the after-tax
gain credited to other comprehensive income for 2003 was $45 (2002  an
after-tax gain of $1,530; 2001  an after-tax loss of $1,419). The fair value
of the portion of the interest rate cap not designated as a hedging instrument
at December 31, 2003 was a liability of $797 ($431 net of tax), and the
after-tax gain reported in earnings for 2003 was $108 (2002  an after-tax loss
of $644). (E) Minimum Pension Liability Under United States 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 United States GAAP, these charges are recorded as a
reduction to shareholders equity, as a component of AOCI. In 2003, the Company
recorded a minimum liability of $5,390, or $3,277 net of tax to other
comprehensive income. The balance of the minimum pension liability in AOCI at
December 31, 2003 was a liability of $9,069, or $5,793 net of tax (2002 
$3,679, or $2,516 net of tax; 2001  nil). (F) Disclosure of Allowance for Doubtful Accounts United States GAAP requires the disclosure of allowances related to accounts
and notes receivable. There is no similar requirement under Canadian GAAP.
Current accounts receivable at December 31, 2003 and 2002, were reported net of
an allowance for doubtful accounts of $16,422 and $16,224, respectively. (G) Disclosure of Accrued Liabilities United States GAAP requires the separate disclosure of accrued liabilities.
There is no similar requirement under Canadian GAAP. At December 31, 2003 and
2002, accrued liabilities were $235,966 and $278,121, respectively. (H) Recently Adopted and Pending United States Accounting Standards In June 2001 the Financial Accounting Standards Board (FASB) issued Statement
No. 143, Accounting for Asset Retirement Obligations (FAS 143). This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. Under FAS 143, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppels. FAS 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized
as part of the carrying amount of the long-lived asset. The liability is
discounted and accretion expense is recognized using the credit-adjusted
risk-free interest rate in effect when the liability was initially recognized.
The Company adopted this Statement effective January 1, 2003, for United States
GAAP reporting purposes and it did not have an affect on the Companys
consolidated financial position or results of operations. In May 2002 FASB issued Statement No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections
(FAS 145). The most significant provision of FAS 145 addresses the termination
of extraordinary item treatment for gains and losses on early retirement of
debt. The Company adopted this Statement effective January 1, 2003, for United
States GAAP reporting purposes and has modified the presentation of its
comparative results by recording the loss on early retirement of debt in
earnings before income taxes. This is now consistent with the current
accounting under Canadian GAAP, and therefore has eliminated a reconciling
item. Extendicare 2003 Annual Information Form A - 6




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In July 2002 FASB issued Statement No. 146, Accounting for Exit and Disposal
Activities (FAS 146). The provisions of FAS 146 modify the accounting for the
costs of exit and disposal activities by requiring that liabilities for these
activities be recognized when the liability is incurred. Previous accounting
literature permitted recognition of some exit and disposal liabilities at the
date of commitment to an exit plan. Provisions of this Statement became
effective for exit or disposal activities initiated after December 31, 2002,
and correspond with Canadian GAAP accounting that became effective for
activities initiated after May 1, 2003. There were no reconciling items created
as a result of the differing effective dates. In November 2002 FASB issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statement Nos. 5, 57 and 107,
and a rescission of FASB Interpretation No. 34 (FIN 45). FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued and clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial recognition and
measurement provisions of FIN 45 are applicable to guarantees issued or
modified after December 31, 2002. This differs from Canadian GAAP, which does
not require guarantors to recognize a liability for the fair value of the
obligation undertaken, but does require appropriate disclosure of the
obligations under guarantee in financial statements of interim and annual
periods beginning on or after January 1, 2003. The Company adopted these
provisions effective January 1, 2003, for United States GAAP reporting purposes
and they do not materially affect the consolidated financial position or
results of operations. In 2003 FASB amended Interpretation No. 46, Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51 (FIN 46R). FIN 46R requires that a
variable interest entity (VIE) be consolidated by a company if that company is
subject to a majority of risk of loss from the VIEs activities and/or is
entitled to receive a majority of the VIEs residual returns. For the Company,
the provisions of FIN 46R apply in 2003 for all VIEs created after January 31,
2003. For VIEs created before February 1, 2003, the requirements of FIN 46
apply as of December 31, 2003 for a VIE that meets the definition of a
special-purpose entity (SPE) and as of January 1, 2004 for all entities that
are not SPEs. The Company has considered these provisions, and does not have
any entities, which would require application of FIN 46R as at December 31,
2003. The only entity which may qualify under FIN 46R is an entity for which
the Company has guaranteed a loan and has first right of refusal on the
purchase of the facility as described in Note 16 to the Companys 2003 Audited
Consolidated Financial Statements. However, this guarantee expires on November
29, 2004; therefore, the Company does not anticipate consolidating the assets
and liabilities of this entity. Extendicare 2003 Annual Information Form A - 7