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Exhibit 99.2 2004a n n u a l   r e p o r t (EXTENDICARE LOGO)




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FINANCIAL HIGHLIGHTS (HEALT CARE REVENUE BAR CHART)
    
    (HEALT CARE EBITDA BAR CHART)
    
    (HEALT CARE EARNING BAR CHART)
 n
United States oCanada (thousands of dollars unless otherwise noted)
    
    2004
    
    
    2003
    
    
    2002Revenue
    
    
    1,746,800
    
    
    
    1,724,614
    
    
    
    1,758,785EBITDA (1)
    
    
    224,592
    
    
    
    186,830
    
    
    
    160,341Earnings from health care before undernoted(1)
    
    
    80,702
    
    
    
    40,885
    
    
    
    15,268Valuation adjustment on interest rate caps, net of tax
    
    
    (6,396
    )
    
    
    
    
    
    
    Gain (loss) from asset disposals, impairment and other items, net
of tax
    
    
    2,552
    
    
    
    905
    
    
    
    (3,854
    )Prior year tax benefit
    
    
    38,968
    
    
    
    
    
    
    
    Earnings from health care
    
    
    115,826
    
    
    
    41,790
    
    
    
    11,414Share of equity accounted earnings
    
    
    9,375
    
    
    
    18,884
    
    
    
    7,520Net earnings
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934Diluted earnings (loss) per share ($)Health care operations before undernoted and
after preferred share dividends
    
    
    1.14
    
    
    
    0.58
    
    
    
    0.21Valuation adjustment on interest rate caps
    
    
    (0.09
    )
    
    
    
    
    
    
    Gain (loss) from asset disposals, impairment and other items
    
    
    0.03
    
    
    
    0.01
    
    
    
    (0.05
    )Prior year tax benefit
    
    
    0.56
    
    
    
    
    
    
    
    Share of equity accounted earnings
    
    
    0.14
    
    
    
    0.27
    
    
    
    0.10Diluted earnings per share
    
    
    1.78
    
    
    
    0.86
    
    
    
    0.26Cash provided by operations
    
    
    223,962
    
    
    
    100,679
    
    
    
    96,867Property and equipment capital expenditures
    
    
    69,122
    
    
    
    64,347
    
    
    
    53,145Total assets
    
    
    1,426,331
    
    
    
    1,593,417
    
    
    
    1,805,645Shareholders equity
    
    
    456,987
    
    
    
    356,433
    
    
    
    358,026Book value per common share ($)
    
    
    6.36
    
    
    
    4.90
    
    
    
    4.83Number of Subordinate and Multiple voting shares purchased for
cancellation
    
    
    463,800
    
    
    
    1,540,700
    
    
    
    1,685,200
   (1)
    
    Refer to discussion of non-GAAP measures on page 19.




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CORPORATE PROFILE Extendicare Inc. (EI), through its subsidiaries, OPERATES 440 NURSING



AND ASSISTED LIVING FACILITIES ACROSS NORTH AMERICA, WITH



CAPACITY FOR OVER 34,400 RESIDENTS. The Company is divided



into two operating groups, Extendicare Health Services, Inc. (EHSI) in



the United States and Extendicare (Canada) Inc. (ECI) in Canada. EHSI offers medical specialty services such as subacute care and rehabilitative



therapy services through PROGRESSIVE STEP REHABILITATION SERVICES



(ProStep). Extendicare also offers IT services to smaller long-term care providers
through VIRTUAL CARE PROVIDER, INC. (VCPI), thereby reducing their in-house



technology costs. Home health care services are provided in Canada through



PARAMED HOME HEALTH CARE (ParaMed). Extendicare also offers management



and consulting services and group purchasing of supplies to third parties. The Company employs 38,000 PEOPLE ACROSS 19 STATES AND FOUR PROVINCES IN NORTH AMERICA .  p.I 




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E X T E N D I C A R E
   AT    A    G L A N C E At the end of January 2005, Extendicares U.S. subsidiary finalized the acquisition of
Assisted Living Concepts, Inc. (ALC) of Dallas, Texas for US$285.0 million. The acquisition
solidifies the Companys position as a leading provider in the assisted living segment of senior
care. ALC has a portfolio of 177 assisted living facilities, which comprise 122 owned properties
and 55 leased facilities, representing 6,838 units located in 14 states, many in markets where
Extendicare already operates. The portfolio is relatively new, having been constructed through the
mid-to-late 1990s. The acquisition strengthens the Companys payor mix, as assisted living
facilities tend to be higher margin since they are largely composed of private-pay customers,
compared to the traditional nursing home business. (EXTENDICARE AT-A-GLANCE MAP) ASSISTED LIVING ANDOWNERSHIP
    
    NURSING CENTRES
    
    
    RETIREMENT CENTRES
    
    
    
    
    
    
    TOTALNumber of
    
    
    Resident
    
    
    Number of
    
    
    Resident
    
    
    Number of
    
    
    Residentat January 31, 2005
    
    Facilities
    
    
    Capacity
    
    
    Facilities
    
    
    Capacity
    
    
    Facilities
    
    
    CapacityUnited StatesOwned
    
    
    132
    
    
    
    13,038
    
    
    
    153
    
    
    
    6,275
    
    
    
    285
    
    
    
    19,313Leased
    
    
    9
    
    
    
    1,031
    
    
    
    56
    
    
    
    2,167
    
    
    
    65
    
    
    
    3,198Managed
    
    
    7
    
    
    
    813
    
    
    
    5
    
    
    
    156
    
    
    
    12
    
    
    
    969Total
    
    
    148
    
    
    
    14,882
    
    
    
    214
    
    
    
    8,598
    
    
    
    362
    
    
    
    23,480CanadaOwned
    
    
    45
    
    
    
    6,079
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    6,079Leased
    
    
    9
    
    
    
    1,155
    
    
    
    
    
    
    
    76
    
    
    
    9
    
    
    
    1,231Managed
    
    
    23
    
    
    
    3,246
    
    
    
    1
    
    
    
    417
    
    
    
    24
    
    
    
    3,663Total
    
    
    77
    
    
    
    10,480
    
    
    
    1
    
    
    
    493
    
    
    
    78
    
    
    
    10,973Total
    
    
    225
    
    
    
    25,362
    
    
    
    215
    
    
    
    9,091
    
    
    
    440
    
    
    
    34,453
  p.2 




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(FULL SPECTRUM OF CARE FLOW CHART) (COMPONENTS OF REVENUE PIE CHART) (U.S. REVENUE BY CUSTOMER PAYOR SOURCE PIE CHART)  p.3 




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FELLOW SHAREHOLDERS, The past year was an exceptional year for Extendicare, marked by the



accomplishment of a significant number of milestones including:  .
    An ongoing commitment
to delivering quality
care to our residents.
    Delivered the highest
Medicare census rates in
Extendicares history
in its U.S. operations.
    Introduced a
quarterly common
share dividend.
    Year-over-year
EBITDA growth of
20% while diluted
EPS doubled to $1.78.
    Retired US$200 million in high-cost debt while completing a new US$125 million
offering, which significantly enhanced Extendicares balance sheet.
    Received $82.4 million in
dividends from Crown Life.
    Broadened our
analyst following and
shareholder base.
    Initiated the acquisition of
Assisted Living Concepts, Inc.
for US$285.0 million to
expand our footprint in
the assisted living segment
of senior care Extendicare has demonstrated consistent
growth over the past few years by focusing on
a select group of goals. The Company continues
to make quality of care and services a focus
by introducing and expanding programs and
activities. We consider the safety of our
residents paramount and that is why we
introduced a program in 2004 to complete the
installation of sprinklers in all of our
homes. Our U.S. operations remain focused on growth
in our resident occupancy levels, with a
particular emphasis on Medicare patient
census. Im pleased to report that EHSI
delivered their fourth straight year of
continued growth, with Medicare census
reaching 16.6% for the year. In fact, as a
result of our census performance, EHSI
delivered industry-leading EBITDA margins
reaching 14.0% for the year. In Canada, despite challenges in Ontario, our
largest market, the Company delivered another
year of steady performance. We remain
committed to our cross-border strategy, which
diversifies our revenue stream and insulates
shareholders from the vagaries of either
market. The result of our efforts was an increase in
earnings from health care operations to $80.7
million, or $1.14 per diluted share, compared
to $40.9 million, or $0.58 per diluted share
in 2003. In addition, Extendicare realized a
further $82.4 million in dividends from its
legacy investment in Crown Life Insurance
Company, which remains subject to a put/call
agreement with Great-West Lifes subsidiary,
Canada Life. We continue to feel that our shares offer
exceptional value. During the year we
purchased 463,800 shares at an average price
of $14.54 and we renewed our normal course
issuer bid in November. At the Board meeting in February 2005, your
Directors declared a quarterly dividend of
$0.05 per Subordinate Voting Share and $0.025
per Multiple Voting Share. This initiative
elevates Extendicare into the ranks of a
dividend-paying growth company.  p.4 




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MESSAGE TO SHAREHOLDERS EHSI Medicare Patient Census This graph indicates growth in
Medicare patient census levels over the
past four years. EHSI is the only public,
skilled nursing provider to demonstrate
this level of growth. (EHSI MEDICARE PATIENT CENSUS CENSUS BAR CHART) EBITDA Margins 2004 was a record year for Extendicare
in both the U.S. and Canada. Our U.S.
operations delivered higher EBITDA margins
than any other public, skilled nursing
provider. (EBITDA MARGINS LINE GRAPH) In the U.S., Extendicare remains very
committed towards expanding our assisted
living units through our new build program.
Weve completed three of the five assisted
living projects of Phase I, which will total
128 assisted living units and are making good
progress towards completion of 334 units in
Phase II. In Ontario, our new build construction program
of 16 homes and 1,900 new nursing home beds,
including five public sector partnerships, is
now complete. I should note however, that
occupancy in Ontario, our largest market in
Canada remains an area of concern for our
industry. As the last of the government
sanctioned 20,000 new beds opened in 2004,
about 24% of the nursing homes in the
Province are continuing to operate below the
97% threshold required to receive full
funding. In 2004 we had four facilities under
97%  substantially better than the industry
average  of which only one is now operating
below the threshold. Future
Challenges
Looking ahead to 2005, our primary focus
will be to successfully integrate the
acquisition of ALC into EHSI. This acquisition
represents a significant increase for EHSI in
the assisted living sector of senior care and
supports our existing operations. While
nursing homes will remain Extendicares core
business, we believe it is prudent to
diversify our revenue streams into assisted
living as it is predominantly private pay and
offers higher margins. ALC operates in 14
states, seven of which overlap with EHSI,
while the remaining seven are located in close
proximity to states we operate in. They are
modern, well-run facilities and are largely
wholly owned, which is in keeping with our
stated strategy to own our facilities and
their property outright. In addition, they
offer built-in expansion opportunities for
future growth. We are enthusiastic about the
acquisition and look forward to welcoming
ALCs 3,400 employees to the Extendicare team.
We can now care for 9,000 people in this
business segment.  p.5 




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In 2005 the U.S. government is expected to
refine Medicare rates across the Resource
Utilization Groups (RUGs) effective October 1,
2005. Any changes made to the funding of these
RUGs will have a direct effect on all nursing
home providers. We are working with industry
groups to ensure the government understands
the importance of maintaining this funding. ParaMed, our home health care business in
Canada, had a difficult year as increased
funding for home care in Ontario has been slow
to materialize. We are pleased to note that
both the federal and provincial governments have identified home
health care as an area that requires
expansion. Once funds are allocated to this
segment of the Canadian health care system, we
are confident that ParaMed will become a
larger participant in this sector. Corporate Governance
Corporate values, ethics and governance
continue to generate a lot of attention with
market regulators, media and investors alike.
As such, I believe it is important for our
shareholders to understand Extendicares
position on these issues. Extendicare expects
and demands that its employees and Directors
conduct themselves in compliance with our
Business Conduct Policy. In addition,
management and our Board of Directors are
cognizant of their respective roles and
responsibilities and work together to ensure
all necessary duties are fulfilled. Conclusion
We have meticulously pursued and achieved
our goals over the past five years and believe
that today we have size, scale and sustainable
profitability that ranks among the top
performers in our industry. We are confident
that Extendicare is well positioned to
continue delivering ambitious growth and
innovation as a leading senior care provider
in what remains a highly fragmented industry.
I believe our best years lie ahead. In 2004 we grew our profitability and
delivered strong operational results. We
successfully acquired, constructed and
integrated new facilities into our business,
developed innovative services, all while
delivering quality care to the residents we
are entrusted with. These achievements were
the result of an outstanding effort by all of
Extendicares employees. It is the entrepreneurial spirit of our team
and their capacity to effectively manage
change that has driven Extendicare to achieve
new levels of success. I thank our residents
and their families for trusting us, our Board
of Directors for their ongoing guidance and
our shareholders for their continued support
of Extendicare. Mel Rhinelander (signed)President and Chief Executive Officer  p.6 




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TABLE OF CONTENTS Managements Discussion and Analysis
    
    
    8Managements Responsibility for Financial Statements
    
    
    47Auditors Report
    
    
    48Consolidated Financial Statements
    
    
    49Notes to Consolidated Financial Statements
    
    
    53Financial and Statistical Information
    
    
    86Board of Directors
    
    
    87Officers
    
    
    88Shareholder Information
    
    IBC




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MANAGEMENTS DISCUSSION AND ANALYSISFebruary 21, 2005 Basis of Presentation The consolidated financial results include
those of Extendicare Inc. and its subsidiaries.
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. This Managements Discussion and Analysis of
Results of Operations and Financial Position
(MD&A) describes Extendicares business, the
business environment, the principal factors
affecting the results of operations, liquidity and
capital resources, and the critical accounting
policies of the Company that will help the reader
understand Extendicares consolidated financial
results. This MD&A should be read in conjunction
with Extendicares audited consolidated financial
statements for the years ended 2004, 2003 and 2002
and the notes thereto, found in this Annual
Report. Extendicares accounting policies are in
accordance with Canadian generally accepted
accounting principles (GAAP) of The Canadian
Institute of Chartered Accountants (CICA). All
dollar amounts are in Canadian dollars unless
otherwise indicated. Except as otherwise
specified, references to years indicate the
Companys fiscal year ended December 31, 2004, or
December 31 of the year referenced, and all
comparisons are to prior years. Executive Overview Extendicare, through its subsidiaries, is a
major provider of long-term care and related
services in North America, with 38,000 employees,
following the acquisition of Assisted Living
Concepts, Inc. in January 2005. The Companys wholly owned U.S. subsidiary,
Extendicare Health Services, Inc. and its
subsidiaries (EHSI), operates skilled nursing and
assisted living facilities in 19 states. EHSI
offers a continuum of health care services,
including nursing care, assisted living and
related medical specialty services, such as
subacute care and rehabilitative therapy on an
inpatient and outpatient basis. In Canada the Companys wholly owned subsidiary,
Extendicare (Canada) Inc. and its subsidiaries
(ECI),
operates nursing and retirement centres in four
provinces, and also manages a chronic care
hospital unit in Ontario. ECI is a major provider
of home health care in Canada through its ParaMed
Home Health Care (ParaMed) division. On January 31, 2005, the Company completed the
acquisition of Assisted Living Concepts, Inc.
(ALC) of Dallas, Texas (OTC.BB: ASLC). ALC has a
portfolio of 177 assisted living facilities, which
comprise 122 owned properties and 55 leased
facilities representing a total of 6,838 units
located in 14 states, many in markets where EHSI
already operates. This acquisition significantly
increases the Companys presence in the assisted
living segment of the long-term care market, which
is less reliant on government fiscal policy and
complements EHSIs existing nursing home business. Extendicare, through its subsidiaries, now
operates 440 facilities with capacity for 34,453
residents (December 31, 2004  263 facilities with
capacity for 27,615 residents; December 31, 2003 
275 facilities with capacity for 28,930
residents). Prior to the acquisition of ALC, the
total number of facilities operated was reduced
during 2004 by 12 as a result of the reduction of
20 facilities, partially offset by the addition of
eight new facilities. The reduction of 20
facilities was as a result of: the disposal of
three Canadian nursing and retirement homes; the
disposal of four nursing and assisted living
centres in Arkansas; the transfer of operations of
one owned facility in Wisconsin to another
provider; a reduction of three managed facilities
in Canada as a result of their sale to another
provider; and a reduction of nine managed U.S.
facilities on transfer of the management
responsibilities to another long-term care
provider, for which the Company has retained
consulting services contracts. The Company
increased its nursing and assisted living centres
under operation by eight through: the acquisition
of four Indiana facilities, one of which was
subsequently closed; the opening of a new nursing
home in Ontario and an assisted living facility in
Wisconsin; and the commencement of management
contracts for two U.S. nursing facilities and one
Ontario nursing facility. Therefore, prior to the
acquisition of ALC, the net number of facilities
operated by the Company was reduced by 12. The Company has a significant presence (more than
10% of its resident capacity) in each of two
states in the U.S. Ohio and Pennsylvania  as
well as in the Province of Ontario, Canada.
Nursing and assisted living facilities are located
in groups within geographic proximity of each
other, thereby allowing for regional
development of ancillary  p.8 




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M D & A 2004 Annual Report businesses, cost-effective management control
and reduced travel costs. The Companys average
occupancy for the year ended December 31, 2004 was
93.0% compared to 92.9% for the year ended
December 31, 2003 and 92.0% for the year ended
December 31, 2002. Extendicare operates in a competitive marketplace
and depends substantially on revenue derived from
government sources, 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 to respond
to inspections, investigations and/or enforcement
actions, and to improve the quality of services
provided to its residents. The Companys primary focus remains on its core
skilled nursing facility operations, while
continuing to grow its complementary long-term
care services. By emphasizing quality care of
patients and by clustering several long-term care
facilities together within the geographic areas
served, the Companys goal is to build upon its
reputation as a leading provider of a full range
of long-term care services in its communities. The Companys key business goals are to:
strengthen both Medicare and total average daily
census; increase market share of Canadian home
health care operations; improve operating cash
flow; actively improve its asset portfolio through
renovation, expansion or acquisition, or where
appropriate through disposal of underperforming
facilities; diversify within the long-term care
industry in the areas of rehabilitative clinics
and management and consulting services; and manage
resident care liability claim settlements. In the United States, EHSIs total and Medicare
average daily census for 2004 continued to exceed
comparable figures of 2003. Total nursing home
average daily census on a same-facility basis
increased
in 2004 to 12,607 from 12,490 in 2003. Medicare
census on a same-facility basis increased 8.5% to
2,100 in 2004 compared to 1,935 in 2003. In
addition, Medicare and Medicaid rate increases
were realized during the year. These factors,
along with a focus on operating costs, resulted in
increased revenue and improvement in earnings in
2004 over 2003. However, management continues to
be cautious about potential government actions in
the future that could result in the discontinuance
of temporary Medicare funding enhancements. During 2004 the Company significantly reduced its
U.S. long-term debt, and through a new debt issue
reduced its weighted average interest rates,
thereby improving operating cash flow. In
addition, EHSI received $40.6 million (US$30.6
million) relating to its Florida divestiture
program and the Company reduced its balance of
non-current Medicare settlement receivables. As at
December 31, 2004, the Companys long-term debt to
equity ratio improved to 1.4 to 1 compared to 2.1
to 1 at December 31, 2003. After taking into
account interest rate swap arrangements, the
weighted average interest rate of all long-term
debt at the end of 2004 was approximately 7.3%,
compared to 7.8% at the end of 2003. In Canada the Ontario long-term care industry is
ECIs largest market. The industry experienced
occupancy pressure as a result of 20,000 new
long-term care beds opening in the Province during
the past four years, the last 10,000 of which were
substantially completed and opened in 2004.
Funding for a long-term care facility is reduced
if its average occupancy level for the year is
below 97%. In 2004 four of ECIs nursing homes
experienced an average occupancy level below 97%,
which resulted in lower funding of $0.8 million.
Also, as a result of the new long-term care beds
in Ontario, the government reduced funding to
long-term care providers for property taxes from
90% to 80% effective with the 2004 calendar year.
This reduction, from 90% to 80%, lowered ECIs
funding for 2004 by $0.8 million. Property tax
funding levels will remain at 80% for 2005.  p.9 




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Extendicare Inc. The Companys home health care operations
continued to suffer from reduced home health care
hours of service resulting from constraints
imposed by the Ontario Community Care Access
Centres (CCACs). ParaMeds total hours of service,
excluding the ceased
British Columbia operations, softened to 4.59
million in 2004 compared to 4.87 million in 2003.
Despite the lower service volumes, ParaMeds
revenue rates improved and costs remained under
control, resulting in a slight improvement in
earnings for 2004. For further details on the significant
transactions occurring in 2004 and 2003, refer to
Significant Developments in 2004 and 2003, and
for an analysis of the Companys financial
results, refer to the discussions under Summary
of Quarterly Results and Summary of Annual
Results. Significant Developments in 2004 and 2003 LEGISLATIVE ACTIONS AFFECTING U. S. REVENUE The majority of the Companys operations are
in the United States, where over 70% of its
revenue is earned. EHSI receives payment for its
services and products from the federal program
(Medicare) and state medical assistance programs
(Medicaid), as well as from private payors. The
private-pay classification includes payments from
individuals, commercial insurers, health
maintenance organizations, preferred provider
organizations and other charge-based payment
sources, including Blue Cross associations and the
Department of Veterans Affairs. The following table sets forth EHSIs percentage
of its total revenue from Medicare, private-pay,
and Medicaid sources: 2004
    
    
    2003
    
    
    2002Medicare
    
    
    29.8
    %
    
    
    27.4
    %
    
    
    25.7
    %Private pay
    
    
    22.9
    
    
    
    23.9
    
    
    
    24.5Medicaid
    
    
    47.3
    
    
    
    48.7
    
    
    
    49.8
 Medicare Funding 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 Resource Utilization Groupings
III (RUGs) rate and a 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, 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% inflationary increase,
or 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
12-months ended September 30, 2003, reduced EHSIs
revenue by $24.5 million (US$16.7 million). 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 (referred to as the
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 12-months ended September 30, 2004, the impact
of the 6.26% Medicare rate increase added
approximately US$18.45 per patient day, or $26.2
million (US$14.4 million) of revenue. However,
this revenue improvement was 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)  p.10 




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MD & A 2004 Annual Report 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 future cost reports will
require confirmation that the Administrative Fix
funding was spent on direct patient care and
related expenses. With respect to the RUGs Refinements, CMS
announced in July 2004 that the RUGs Refinements
would extend only until October 1, 2005. The U.S.

Congress enacted legislation directing CMS to
conduct a study on the RUGs classification system
and report its recommendations prior to making any
changes. The U.S. Presidents Proposed Budget,
released in February 2005, provides for the
discontinuance of the RUGs Refinements effective
October 1, 2005. This budget is subject to
legislative review and passage by the U.S.
Congress. EHSI estimates that it received an
average of US$25.50 per patient day in 2004
related to the RUGs Refinements, for revenue of
$26.2 million (US$20.1 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. 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. The
Presidents Proposed Budget, which is subject to
legislative review, provides for the
implementation of the plan over a three-year
period commencing on October 1, 2005. Under
current law, skilled nursing facilities are
reimbursed 100% for bad debts incurred. The plan
is to reduce the reimbursement levels from the
current 100% to: 90% beginning October 1, 2005;
80% beginning October 2006; and 70% beginning
October 2007. This is consistent with the
reimbursement policy applicable to hospitals. EHSI
estimates that should this occur, the negative
impact on pre-tax earnings would be: $0.5 million
(US$0.4 million) in 2005; $2.0 million (US$1.7
million) in 2006; $3.5 million (US$2.9 million) in
2007; and $4.6 million (US$3.8 million) in 2008. State Plan Amendments That Affect Medicaid Rates Several states in which EHSI operates have
submitted plan amendments and waivers to CMS which
seek to increase the level of federal funding for
the states Medicaid programs and, if approved,
would result in providing nursing facilities with
revenue rate increases to offset new or increased
provider taxes. In June 2004 CMS approved the Medicaid state plan
amendment and waiver submitted by the State of
Oregon pertaining to the fiscal year commencing
July 1, 2003. The net favourable impact to EHSIs
earnings before income taxes of $0.4 million
(US$0.3 million) was recorded in the 2004 second
quarter. In July 2004 the State of Kentucky
received approval of a state plan amendment and
waiver from CMS, which became effective July 1,
2004. The Kentucky plan amendment and waiver
increased EHSIs earnings before income taxes by
approximately $3.0 million (US$2.3 million)
for the six months ended December 31, 2004. In January 2005 the States of Pennsylvania and
Washington received approval from CMS for their
submitted state plan amendments and waivers. The
Washington plan will have no impact on earnings.
The Pennsylvania plan covers a four-year period
from July 1, 2003 to June 30, 2007, and the rates
for the first two fiscal years have been provided.
For the States fiscal year ending June 30, 2004,
EHSI estimates that in 2005 it will receive
retroactive revenue of approximately $13.6 million
(US$11.3 million) and will pay retroactive
provider taxes of approximately $10.5 million
(US$8.7 million), for a net impact to earnings
before income taxes of $3.1 million (US$2.6
million). The rates proposed for the States
second fiscal year ending June 30, 2005, are lower
and are still subject to state budgetary approval
and certain other actions. EHSI estimates that the
net impact to earnings before income taxes will be
$1.2 million (US$1.0 million), of which half will
apply to the six months ended December 31, 2004.
EHSI will record the above retroactive settlements
once the plans are finalized in 2005.  p.11 




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##### 



Extendicare Inc. The State of Indiana has submitted a proposed
state plan amendment and waiver pertaining to the
fiscal year commencing July 1, 2003, which is
awaiting review and approval by CMS. Since the
plan amendment and waiver has not been approved,
EHSI has recorded revenue based upon amounts
received. Approval of the retrospective amendment
and waiver submitted could result in the recording
of net incremental income before income taxes of
$5.5 million (US$4.6 million) in 2005 pertaining
to the 18-month period ended December 31, 2004.
There would be no impact if the plan is not
approved. LEGISLATIVE ACTIONS
AFFECTING CANADIAN REVENUE In Canada, the fees charged by ECI for its
nursing centres and home health care services are
regulated by provincial authorities. Accordingly,
provincial programs fund a substantial portion of
these fees, with the remainder paid by
individuals. Ontario is ECIs largest market for
both its long-term care and home health care
services. It represented approximately 73% of
ECIs total revenue in 2004. ECIs home health
care
operations received 90% of their revenue from
contracts tendered by locally administered
provincial agencies in 2004. Funding received by
ECI from the Ontario government represented
revenue of $267.9 million in 2004, $261.9 million
in 2003, and $228.2 million in 2002. Ontario Property Tax Funding During the second quarter of 2004, the Ontario
government reversed its decision earlier in the
year to reduce funding to long-term care providers
for property taxes for the 2003 calendar year,
which would have effectively resulted in a
retroactive reduction in funding to 73% from 90%.
It also revised its funding for 2004 to 80% from
the initial estimated reduction to 50%. During the
first quarter of 2004, the Company had reported a
$2.0 million reduction in revenue based on the
governments initial indications of a funding
reduction. As a result of the subsequent
revisions, the Company increased revenue in the
second quarter of 2004 by $1.8 million
representing a $1.3 million reversal of the 2003
property tax provision, along with a $0.5 million
adjustment to the assumed reduction in 2004
property tax funding. The issues surrounding
property tax funding resulted from the influx of
20,000 new long-term care beds in Ontario, which
has put a strain on the governments
allocated pool of funds. The impact of the reduced
funding for 2004, from 90% to 80%, reduced ECIs
revenue for 2004 by $0.8 million. Property tax
funding levels for 2005 remain at the 80% level.
However, there can be no assurance that funding
will not be reduced in the future. Extendicare is
working with its partners in the long-term care
industry to ensure the government understands the
serious nature of this issue. Ontario Long-term Care and Home Care Funding
2004 Budget In May 2004, as part of its 2004 Budget, the
Ontario government announced plans to invest
additional funding to improve Ontarios long-term
care facilities and home care program over the
next four years. The 2004 Budget calls for an
additional investment in long-term care of $191.0
million in 2004 and 2005 to improve care and
services for seniors in long-term care homes by
hiring 2,000 new staff (600 of whom are to be
nurses); additional training of front-line staff
to provide more personal care; and establishing a
new independent advocate for seniors in long-term
care homes who will oversee inspections and
compliance. The new funding began on October 1, 2004, and the
government indicated that a further increase would
occur on April 1, 2005. At the end of 2004, ECI
operated 4,981 owned or leased long-term care beds
in Ontario, and estimates that the funding
increase will represent additional annual revenue
of approximately $6.6 million beginning October 1,
rising to $8.0 million on April 1, 2005. Most of
the additional funding will be used to pay for
enhanced resident care in the nursing homes
through the nursing and personal care envelope
(nursing envelope) and the program and support
services envelope (program envelope), with about
$1.5 million of the annual revenue increase
directed towards the accommodation envelope to
assist in offsetting inflationary cost increases. The 2004 Budget also calls for an additional
investment of $448.0 million in home care over the
next four years. The government indicated that as
part of its four-year commitment to improve home
care services, 95,700 more Ontarians will receive
home care, and 6,000 more Ontarians will receive
compassionate end-of-life care in their homes. As
part of that initiative, the government provided
new funding of $73.2 million to Ontarios CCACs in
the latter half of 2004, targeted towards acute  p.12 




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##### 



MD & A 2004 Annual Report home care, end-of-life care, and chronic home
care services. To date there is no evidence that
the CCACs have passed these funds onto the care
providers to increase the number of home care
visits in the Province. In its announcement, the
government indicated that 21,000 additional people
would benefit from home care and end-of-life
services in 2004. The government also noted that
it remains committed to investing $10.0 million to
help patients and their families acquire medical
equipment for home use through a not-for-profit
agency. It is unclear at this time how much of the
funds will be spent on each program. As such, it
is not possible to predict to what extent
Extendicare, through its ParaMed Home Health Care
operations, will benefit. ParaMed and other
providers are seeking more definitive answers from
the government. Ontario Long-term Care Funding  2003 Budget 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 that have residents
who require a greater level of care than the
provincial average will have a higher CMI;
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 that
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. U. S. ISSUANCE AND RETIREMENT OF LONG-TERM DEBT In April 2004 EHSI issued US$125.0 million
aggregate principal amount of 6.875% Senior
Subordinated Notes due May 1, 2014 (the 2014
Notes) at a price of 97.5001% of par to yield
7.23%, and amended and restated its credit
facility (the Credit Facility) to include an
increase in borrowing capacity from US$105.0
million to US$155.0 million. The net proceeds from
the 2014 Notes were approximately US$117.4 million
(net of a US$3.1 million discount and fees and
expenses of US$4.5 million). The net proceeds were
used, together with cash on hand and new borrowing
capacity, to purchase for cash approximately
US$104.9 million aggregate principal amount of
EHSIs outstanding US$200.0 million 9.35% Senior
Subordinated Notes due 2007 (the 2007 Notes),
validly tendered, and to redeem the remaining
US$95.1 million of 2007 Notes not tendered or
cancelled prior to May 24, 2004. In addition, EHSI
terminated its related interest rate swap and cap
arrangements on a notional US$150.0 million, and
entered into new interest rate swap and cap
arrangements on a notional US$275.0 million. For
further information, refer to the discussion under
Liquidity and Capital Resources  Capital
Structure  Long-term Debt. VALUATION ADJUSTMENT ON INTEREST RATE CAPS The Company recorded a pre-tax charge in 2004
of $10.4 million related to the valuation of its
U.S. operations interest rate caps. The interest
rate cap arrangements, which cap the projected
six-month London Interbank Borrowing Rate (LIBOR)
at 7%, were put in place for a notional US$275.0
million in connection with the debt refinancing.
The interest rate cap arrangements do not qualify
as hedge instruments for accounting purposes, and
therefore are required to be adjusted to market
value each period, with any change reported in the
statement of earnings. On an after-tax basis, the
charge booked was $6.4 million, or a loss of $0.09
per diluted share.  p.13 




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##### 



Extendicare Inc. LOSS ( GAIN ) FROM ASSET DISPOSALS, IMPAIRMENT AND OTHER ITEMS The Company reported an overall pre-tax loss of $5.2 million related to a number of
transactions during 2004, in comparison to a pre-tax gain of $0.9 million in 2003. After applying
the benefit of net tax credits to the gain on disposal of assets, the after-tax gain of these items
contributed $2.6 million to net earnings, or $0.03 per diluted share in 2004, compared to $0.9
million, or $0.01 per diluted share in 2003. The components of these items are discussed below. (millions of dollars)
    
    
    
    
    
    
    
    
    
    2004
    
    
    2003Net
    
    
    Net Book
    
    
    Loss
    
    
    LossProceeds
    
    
    Value
    
    
    (Gain)
    
    
    (Gain)Loss (gain) from dispositionsCompletion of U.S. divestiture
    
    
    13.6
    
    
    
    7.0
    
    
    
    (6.6
    )
    
    
    Sale of U.S. nursing and assisted living facilities
    
    
    7.5
    
    
    
    8.3
    
    
    
    0.8
    
    
    
    Sale of three Canadian nursing and retirement homes
    
    
    22.6
    
    
    
    9.1
    
    
    
    (13.5
    )
    
    
    0.2U.S. issuance and retirement of long-term debt
    
    
    
    
    
    
    
    
    
    
    6.9
    
    
    
    U.S. prepayment of notes receivable
    
    
    
    
    
    
    
    
    
    
    1.7
    
    
    
    U.S. provision for impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    10.5
    
    
    
    Write-off of long-term investment
    
    
    
    
    
    
    
    
    
    
    5.0
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    (1.1
    )5.2
    
    
    
    (0.9
    )
 Completion of Divestiture 
Settlement of Greystone Transaction In 2004 EHSI concluded the divestiture agreement
with Greystone Tribeca Acquisition, L.L.C.
(Greystone) for 15 Florida facilities previously
owned and operated by EHSI, which Greystone had
been operating since September 2000. The initial
transaction in 2000 was treated as a deferred sale
as a significant portion of the final
consideration was contingent on certain events,
and because EHSI held an option to repurchase the
facilities. On April 29, 2004, EHSI received
US$2.6 million of interest, and in June 2004, in
addition to the US$30.0 million of cash
consideration initially received in 2000, EHSI
received US$10.0 million as final payment of the
contingent consideration. The finalization of this
transaction resulted in the recognition in the
second quarter of 2004 of a pre-tax gain from the
sale of assets of $6.6 million (US$4.9 million). Sale of U.S. Nursing and Assisted Living Facilities In August 2004 EHSI disposed of its Arkansas
operations, consisting of a 96-bed nursing
facility and three assisted living facilities (181
units) located on one campus, resulting in a
pre-tax loss of $0.8 million (US$0.6 million).
Gross proceeds of $8.0 million (US$6.1 million)
consisted of cash and a $1.2 million (US$0.9
million) five-year note. Before EHSI stopped
operating these facilities, they had contributed
$7.1 million (US$5.3 million) to revenue and $1.0
million (US$0.7 million) to earnings before

interest, tax, depreciation and amortization in
2004. For the year ended December 31, 2003, these
facilities had contributed $10.4 million (US$7.4
million) to revenue and $0.8 million (US$0.6
million) to earnings before interest, tax,
depreciation and amortization. Sale of Three Canadian Nursing and Retirement Homes The Company sold three nursing and retirement
homes during 2004 in two separate transactions,
resulting in a pre-tax gain of $13.5 million. In
February the Company sold two Ontario homes (275
beds) for gross proceeds of $19.6 million,
resulting in a pre-tax gain of $12.7 million. In
September the Company sold its only nursing home
in British Columbia (75 beds) for gross proceeds
of $5.5 million, resulting in a pre-tax gain of
$0.8 million. These gains were substantially
sheltered by capital loss carryforwards that had
been fully offset with a valuation allowance. A
portion of the proceeds were used to retire
mortgages of $9.8 million associated with the
homes. These homes had contributed $4.4 million to
revenue, $0.7 million to earnings before interest,
tax, depreciation and amortization, and $0.2
million to net earnings, prior to their disposal
in 2004. For the year ended December
31, 2003, these facilities had contributed $17.7
million to revenue, $2.6 million to earnings
before interest, tax, depreciation and
amortization, and $1.1 million to net earnings.  p.14 




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##### 



MD & A 2004 Annual Report U.S. Issuance and Retirement of Long-term Debt During the second quarter of 2004, as a result of
the tender and call of EHSIs 9.35% Senior
Subordinated Notes, the Company booked a pre-tax
loss of $6.9 million representing the net of the
following amounts: payment of tender and call
premiums of $7.8 million; write-off of deferred
financing costs of $3.2 million; legal fees of
$0.4 million; a gain on termination of the related
swap and cap arrangements of $3.7 million; and a
gain from unamortized bond discount and foreign
exchange of $0.8 million. U.S. Prepayment of Notes Receivable During the second quarter of 2004, EHSI recorded a
pre-tax charge of $1.7 million (US$1.3 million)
related to the early settlement of long-term notes
receivable from Tandem Health Care, Inc. (Tandem).
These notes had a face value of US$17.0 million
and were originally due in 2007. EHSI accepted a
cash pre-payment of US$16.2 million, and after
associated fees of US$0.5 million, recognized a
loss of US$1.3 million. U.S. Provision for Impairment of Long-lived Assets The Company reported a pre-tax provision for
impairment of assets of $10.5 million during 2004
related to the following two events. In March 2004 EHSI concluded the evaluation of two
nursing facilities that operate adjacent to one
another in Indiana, both of which require capital
renovations. After the evaluation management
decided, subject to the States approval, to
consolidate the two operations into one renovated
facility, which will accommodate all residents
from both facilities after decreasing the total
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
one facility, EHSI recorded a provision for
impairment of long-lived assets of $2.1 million. During the fourth quarter of 2004, the Company
booked a pre-tax asset impairment provision of
$8.4 million (US$6.8 million) on its 336-bed
nursing facility in Chippewa Falls, Wisconsin,
whose
operations had been transferred to a third party
earlier in the year. The provision was recorded as
a result of the poor financial and operating
performance of this facility. The carrying value
of the property was reduced from US$13.0 million
to US$6.2 million. There can be no assurance that
a future reduction in the carrying value will not
be required. In August 2004 EHSI transferred the
operations of this facility to Lakeside Health
L.L.C. (Lakeside Health), a subsidiary of
Benedictine Health Dimensions, Inc. (Benedictine)
for a term of three years. The transfer of
operations was in response to facility citations
for survey deficiencies and an agreement with the
State of Wisconsin to transfer the operations to a
new licensee. Under the terms of the agreement,
Lakeside Health is responsible for all operating
costs, including rent to EHSI, and Benedictine
will manage the nursing facility for a fee. EHSI
will receive annual rental income of US$0.5
million; however, EHSI will be responsible for
funding Lakeside Healths net operating losses, as
defined in the agreement, and to provide working
capital advances sufficient to maintain an
operating cash balance of US$1.5 million. As of
December 31, 2004, EHSI had advanced US$4.4
million to Lakeside Health, which is secured by a
first security interest in Lakeside Healths
accounts receivable and is repayable from future
cash flows of Lakeside Health, if any. In
September 2004 Benedictine completed its plan of
correction at the nursing facility and passed its
survey with the State, bringing the facility into
regulatory compliance. In the five months
Benedictine operated the facility, considerable
resources were employed to bring the facility into
compliance, and as a result, losses were incurred
during this time. As a result, EHSI recorded a
$2.6 million (US$2.0 million) provision against
the working capital advances made to Lakeside
Health, and therefore, as at December 31, 2004,
the net carrying value of the advances was $3.1
million (US$2.4 million). Prior to the transfer of
the operations, the Chippewa Falls facility
generated revenue of $11.8 million (US$8.9
million) and a loss before interest, tax,
depreciation and amortization of $1.6 million
(US$1.2 million) for the seven months ended July
31, 2004. For the year ended December 31, 2003,
the facility generated revenue of $25.4 million
(US$18.1 million) and earnings before interest,
tax, depreciation and amortization of $0.7 million
(US$0.5 million).  p.15 




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##### 



Extendicare Inc. Write-off of Long-term Investment During the 2004 third quarter, the Company wrote
off its investment in an Omnicare, Inc. (Omnicare)
warrant and recorded a charge of $5.0 million
(US$4.0 million). EHSI received the warrant to
acquire 1.5 million shares of Omnicare, which had
an original attributed carrying value of US$4.0
million pursuant to the sale of its pharmacy
operations in 1998. The warrant has an exercise
price of US$48.00 per share expiring on September
16, 2005. Management decided to write off the
investment in the third quarter because the
likelihood of the securities being in the money
before they expire had significantly declined as a
result of the decrease in Omnicares share price. Other Other items of $0.4 million relate to the
write-off of $0.6 million of deferred financing
costs, net of a gain on sale of miscellaneous
assets. 2003 Dispositions During 2003 the Company reported a pre-tax gain on
disposal of assets of $0.9 million (after-tax gain
of $0.9 million or $0.01 per share). This related
to the sale of non-core assets by the Company for
$1.1 million (consisting of cash and a $0.2
million note) during the first quarter of 2003.
These assets had been written off in prior years
and their sale resulted in a pre-tax gain of $1.1
million. In addition, during the second quarter of
2003, ECI sold an underperforming nursing home in
Alberta for gross proceeds of $2.7 million,
resulting in a pre-tax loss of $0.2 million. The
proceeds were used in part to repay a mortgage of
$1.8 million. ACQUISITIONS In February 2004 EHSI acquired a skilled
nursing facility in Washington for cash of $1.9
million, which it had been operating previously
under lease arrangements. On June 1, 2004, EHSI
acquired four nursing facilities (321 beds) in
Indiana for $6.9 million (US$5.0 million) in cash. On December 31, 2003, EHSI completed the
acquisition of a 99-bed skilled nursing facility
in Manitowoc, Wisconsin, for cash of $5.3 million
(US$4.1 million). CONSTRUCTION In March 2004 ECI opened the last of its 11
new Ontario nursing homes stemming from awards the
Government of Ontario initiated in 1998. Four of
the new facilities opened during 2001, two in
2002, and four in 2003. The 11 new nursing homes
have capacity for 1,487 residents, of which 154
beds were transferred from existing ECI nursing
homes, and 76 are assisted living units. Financing for nine of the new nursing homes was
obtained through a 25-year capital lease
arrangement with BCP Long-Term Care Facilities
Inc. (BCP  formerly Borealis Long-Term Care
Facilities Inc.) at an average borrowing rate of
approximately 8.0%. As at December 31, 2004, the
principal balance of the capital lease obligations
was $133.2 million. ECI is operating the
facilities for BCP during the 25-year capital
lease arrangement, and will own them at the end of
the lease term. The Ontario government is funding a portion of the
construction costs over a 20-year period. As each
facility opened, a receivable from the government
was recorded with an offset to the cost of
construction, and was discounted at a rate
equivalent to the yield on a 20-year Ontario
government bond. At December 31, 2004, the Company
had a receivable balance of $55.3 million recorded
for the 11 new nursing homes at discount rates
ranging from 5.3% to 6.5%. EHSI is in the midst of a two-phase construction
program. Phase I consists of seven projects to
expand four assisted living facilities (88 units)
and two skilled nursing homes (38 beds), and to
add one new assisted living facility (40 units).
Four of the projects have been completed at a cost
of US$10.0 million, and the remaining three are
due to open in 2005. Two of the projects were
completed in the first quarter of 2004, a 16-unit
assisted living addition that opened in February
2004 and a 20-bed nursing addition that opened in
March. In May 2004 EHSI completed and opened a
40-unit, free-standing assisted living facility
and a 30-unit assisted living addition. Phase II
represents eight new developments to add 334 units
during 2005 and 2006.  p.16 




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##### 



MD & A 2004 Annual Report INVESTMENT IN CROWN LIFE INSURANCE COMPANY Extendicare has a 34.8% equity interest in
Crown Life Insurance Company (Crown Life) that is
unencumbered by debt. At December 31, 2004, the
Companys carrying value of its investment was
$68.5 million (December 31, 2003  $139.3
million), which equated to Extendicares share of
Crown Lifes book value. Dividends from Crown Life
are at the discretion of its board of directors.
During 2004 the Company

received cash dividends of $82.4 million. There
were no dividends received in 2003. However, cash
dividends of $22.0 million and $22.6 million were
received during 2002 and 2001, respectively. 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
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. Great-West Lifeco
Inc. acquired Canada Life in July 2003, resulting
in a delay in the start of negotiations with Crown
Life on the final settlement of the Canada Life
transaction. Extendicare anticipates the final
settlement with Canada Life to occur within the
next 12 months. MEDICARE AND MEDICAID SETTLEMENT RECEIVABLES For Medicare revenue earned prior to the
implementation of the Medicare Prospective Payment
System, or PPS, and Medicaid programs with a
retrospective reimbursement system, differences
between revenue that is ultimately expected to be
realized and amounts received are reflected as
accounts receivable, or as accrued liabilities
when payments have exceeded revenue that is
ultimately expected to be realized. For Medicare
pre-PPS claims, normally such issues are resolved
during the audit process; however, general
provisions for disagreements that require
settlement through a formal appeal process are
recorded. Though there remain certain issues to be
resolved with fiscal intermediaries, the
significant settlement receivable issues in
respect of revenue earned prior to the
implementation of PPS have now been resolved.
EHSIs Medicare settlement receivables also
include amounts related to reimbursable Part A
co-insurance receivables, which totalled $12.7
million (US$10.6 million) and $11.0 million
(US$8.5 million) at December 31, 2004 and December
31, 2003, respectively. As of December 31, 2004, the net book value of
EHSIs Medicare and Medicaid settlement
receivables was $20.4 million (US$17.0 million)
compared to $48.2 million (US$37.2 million) at
December 31, 2003. It is expected that $8.1
million (US$6.7 million) will be substantially
collected within one year and is included in
accounts receivable as a current asset, compared
to $14.6 million (US$11.3 million) at December 31,
2003. The remaining balance of $12.3 million
(US$10.2 million) has been classified as long
term in nature (December 31, 2003 $33.6 million
or US$25.9 million).  p.17 




---



##### 



Extendicare Inc. During 2004 EHSI reached negotiated
settlements with fiscal intermediaries for all
significant outstanding Medicare settlement issues
pertaining to revenues earned prior to the
implementation of PPS. In January 2004 EHSI
negotiated and subsequently received a cash
settlement of US$5.6 million for a staffing cost
issue involving six claims years. This settlement
did not result in any significant adjustment to
the recorded receivable balance. In April 2004, in
respect of two cost reporting years under appeal,
EHSI reached a settlement with a fiscal
intermediary on an issue involving the allocation
of overhead costs. The settlement will result in
the payment of approximately US$7.7 million to
EHSI, of which US$6.6 million was received in May
2004, and the balance will be received upon
resolution of other matters concerning the cost
report years under appeal. In August 2004 EHSI
reached a settlement with a fiscal intermediary
with respect to various issues amounting to US$9.8
million regarding nursing facilities purchased in
1997 from Arbor Health Care Company (Arbor) and
subsequently sold to Tandem in 1999. The
settlement will result in the payment of US$2.1
million to EHSI, US$1.8 million of which was
received in the fourth quarter of 2004. These
Medicare matters had been reserved for at the time
of sale to Tandem through an accrual of a US$3.7
million long-term liability for outstanding tax,
Medicare and other claims against Arbor, and were
also reserved for within provisions for divested
operations. Upon settlement of these Medicare
matters, EHSI is confident that there are no
further outstanding claims in respect of Arbor.
However, there can be no assurance that other
claims will not be made until the expiry of the
warranty period with Tandem in 2007. As a result
of the settlement, EHSI applied the US$3.7 million
of other long-term liabilities and US$3.2 million
of accrued liabilities for divested operations
against the balance of the unrecoverable Medicare
settlement receivable. As a result, there was no
gain or loss recognized on settlement of this
issue. In September 2004 EHSI reached a settlement
with a fiscal intermediary with respect to a
Director of Nursing staff cost issue amounting to
US$3.2 million, of which US$2.8 million was
received in the fourth quarter of 2004, and the
balance will be received in 2005. There was no
gain or loss recognized on settlement of this
issue. OTHER EHSI has a preferred provider agreement with
Omnicare to provide pharmacy services to all of
EHSIs nursing facilities. Omnicare and EHSI are
currently negotiating the pricing of drugs for
Medicare residents for the years 2001 and 2002,
and should this matter not be settled, it will be
taken to arbitration. In addition, Omnicare has
requested arbitration for an alleged lost profits
claim related to EHSIs disposition of assets,
primarily in Florida. Damage amounts, if any,
cannot be reasonably estimated based on
information available at this time. An arbitration
hearing for this matter has not yet been
scheduled. Management believes it has interpreted
correctly and complied with the terms of the
preferred provider agreement. However, there can
be no assurance that other claims will not be made
with respect to the agreement. Subsequent Event On November 4, 2004, EHSI entered into a
definitive merger and acquisition agreement with
ALC providing for the acquisition of all of the
outstanding shares and stock options of ALC at
US$18.50 per share. The completion of the
acquisition was subject to certain conditions,
including approval by ALCs shareholders and
certain customary regulatory approvals. ALC has a
portfolio of 177 assisted living facilities, which
comprise 122 owned properties and 55 leased
facilities representing 6,838 units located in 14
states, many in markets where EHSI currently
operates. On January 31, 2005, the shareholders of ALC
approved the merger and acquisition, and EHSI
completed the acquisition for a total of
approximately US$285.0 million, including the
assumption of debt of approximately US$141.0
million. The acquisition was financed by drawing
US$60.0 million on EHSIs revolver loan, using
approximately US$29.0 million of EHSIs cash on
hand, and using US$55.0 million of cash from
Extendicares Canadian operations. The acquisition
will be accounted for as a purchase transaction.
Refer to note 22of the 2004 consolidated
financial statements for further details.  p.18 




---



##### 



2004 Annual Report MD&A  Summary of Quarterly ResultsThe following is a summary of selected consolidated financial information derived from the
Companys unaudited interim period consolidated financial statements for each of the years ended
2004 and 2003. (thousands of dollars unless otherwise noted)
    
    First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth Quarter2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Revenue
    
    
    429,572
    
    
    
    439,303
    
    
    
    445,639
    
    
    
    420,714
    
    
    
    445,601
    
    
    
    433,054
    
    
    
    425,988
    
    
    
    431,543EBITDA(1)
    
    
    50,980
    
    
    
    39,501
    
    
    
    59,054
    
    
    
    46,075
    
    
    
    62,566
    
    
    
    50,651
    
    
    
    51,992
    
    
    
    50,603Earnings from health care
before undernoted(1)
    
    
    15,165
    
    
    
    4,310
    
    
    
    21,688
    
    
    
    9,658
    
    
    
    23,262
    
    
    
    12,569
    
    
    
    20,587
    
    
    
    14,348Valuation adjustment on
interest rate caps, net of tax
    
    
    
    
    
    
    
    
    
    
    (3,661
    )
    
    
    
    
    
    
    (1,592
    )
    
    
    
    
    
    
    (1,143
    )
    
    
    Gain (loss) from asset disposals,
impairment, and other items,
net of tax
    
    
    10,722
    
    
    
    1,081
    
    
    
    (269
    )
    
    
    (176
    )
    
    
    (3,141
    )
    
    
    
    
    
    
    (4,760
    )
    
    
    Prior year tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,968
    
    
    
    Earnings from health care
    
    
    25,887
    
    
    
    5,391
    
    
    
    17,758
    
    
    
    9,482
    
    
    
    18,529
    
    
    
    12,569
    
    
    
    53,652
    
    
    
    14,348Share of equity accounted earnings
    
    
    2,452
    
    
    
    12,485
    
    
    
    584
    
    
    
    2,643
    
    
    
    1,083
    
    
    
    1,197
    
    
    
    5,256
    
    
    
    2,559Net earnings
    
    
    28,339
    
    
    
    17,876
    
    
    
    18,342
    
    
    
    12,125
    
    
    
    19,612
    
    
    
    13,766
    
    
    
    58,908
    
    
    
    16,907Earnings (loss) per diluted
share ($)Health care operations before
undernoted
    
    
    0.21
    
    
    
    0.06
    
    
    
    0.31
    
    
    
    0.14
    
    
    
    0.33
    
    
    
    0.17
    
    
    
    0.29
    
    
    
    0.21Valuation adjustment on
interest rate caps
    
    
    
    
    
    
    
    
    
    
    (0.05
    )
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    Gain (loss) from asset disposals,
impairment, and other items
    
    
    0.16
    
    
    
    0.01
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.08
    )
    
    
    Prior year tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.56
    
    
    
    Share of equity accounted earnings
    
    
    0.03
    
    
    
    0.18
    
    
    
    0.01
    
    
    
    0.04
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.03Earnings per diluted share
    
    
    0.40
    
    
    
    0.25
    
    
    
    0.26
    
    
    
    0.18
    
    
    
    0.28
    
    
    
    0.19
    
    
    
    0.84
    
    
    
    0.24
   (1)
    
    Refer to discussion of non-GAAP measures.  NON-GAAP MEASURESEBITDA is a measure commonly used in the
long-term care industry to evaluate performance,
primarily by lenders and investors in notes, and is
generally defined as earnings before interest,
income taxes, depreciation and amortization. In
this calculation, the Company has excluded the line
items valuation adjustment on interest rate caps
and loss (gain) from asset disposal, impairment
and other items. These line items are reported
separately because they relate to the change in
fair value of interest rate caps associated with
the Companys long-term debt, gains or losses on
the disposal or impairment of assets, provisions
for ceased operations, and the write-off of
unamortized financing costs on early retirement of
debt.The Company has also reported separately a prior
year tax benefit in 2004, as this related to the
tax benefit on a loss that occurred in 1999 and
does not relate to income earned in the current
period.In addition, the Company determines and reports
the above line items on an after-tax basis as a
means of deriving the remaining earnings from
health care operations and related diluted
earnings per share. The resulting term, health
care operations before undernoted is a measure
commonly used by the Company and its investors as
a means of assessing the performance of the core
operations in comparison to prior periods.  p.19 




---



##### 



Extendicare Inc.  Neither EBITDA nor health care operations before
undernoted have a standardized meaning under
Canadian GAAP, and they are not necessarily
comparable to similar measures disclosed by other
issuers. Accordingly, EBITDA and health care
operations before undernoted are not intended to
replace earnings (loss) from operations, net
earnings (loss) for the period, cash flow, or
other measures of financial performance and
liquidity reported in accordance with Canadian
GAAP.IMPACT OF FOREIGN CURRENCY TRANSLATIONThe majority of Extendicares operations are
conducted in the United States, which accounted
for over 70% of total revenue in 2004. As a result
of the strengthening of the Canadian dollar,
foreign currency translation had a significant
negative effect on the Companys earnings in 2004
in comparison to 2003. In addition, this impacted
the quarterly trend of earnings within 2004. For
example, the Company reported a decline in revenue
of $19.6 million from the third quarter of 2004 to
the fourth quarter. However, if the same average
foreign currency exchange rate had been applied to
the fourth quarter results as the third quarter
results, revenue would have reflected an
improvement of $0.9 million between periods.The table below illustrates the changes in the
average exchange rates between 2003 and 2004 and
its effect on the 2004 results. 2004
    
    
    2003Average US/Canadian dollar
exchange rate
    
    
    1.3015
    
    
    
    1.4015
 (millions of dollars)
    
    2004 vs 2003Revenue
    
    
    (95.7
    )EBITDA
    
    
    (13.6
    )Net earnings
    
    
    (9.4
    )
  As described under Significant Developments in
2004 and 2003, other factors affecting the
quarterly results included funding changes, most
notably those of the U.S. Medicare and Medicaid
programs. The majority of the states in which EHSI
operates have fiscal years beginning July 1, and
this is typically when their Medicaid funding
changes occur. However, in some instances, changes
in rates are delayed and enacted on a retroactive
basis. For instance in the third quarter of 2004,
the State of Pennsylvania implemented a Medicaid funding increase retroactive to July 1,
2003, resulting in the Company recording
additional revenue and pre-tax earnings of $6.1
million (US$4.6 million) in the quarter. Medicare
funding changes typically occur on October 1 of
each year. The Companys results for the first
nine months of 2003 were impacted by a reduction
in Medicare funding that took effect on October 1,
2002. However, on October 1, 2003, long-term care
providers received an increase in Medicare funding
in excess of the expected annual inflationary
adjustment, which improved the Companys results
going forward. In Canada, the Company realized a
significant improvement in long-term care funding
in the third quarter of 2003 due to initiatives of
the Ontario and Alberta governments to enhance
resident care.  p.20 




---



##### 



2004 Annual Report MD&A    FOURTH QUARTER RESULTSRevenue declined by $5.6 million to $426.0
million during the 2004 fourth quarter in
comparison to the 2003 fourth quarter. However,
prior to the negative impact of the stronger
Canadian dollar, revenue grew 4.2%. Of this 4.2%
increase, ongoing operations grew 7.4%, but were
partially offset by the disposal, or ceasing, of
operations that had contributed $12.6 million in
revenue in the 2003 fourth quarter. Ongoing U.S.
operations revenue grew 9.7% in its functional
currency, primarily due to a 6.8% increase in
average nursing home rates, and a 6.4% increase in
average daily Medicare patient census. EHSIs new
nursing and assisted living centres contributed
2.0% to the growth over the 2003 fourth quarter.
Revenue from ongoing Canadian operations grew $2.3
million, or 1.8%, approximately half of which was
from the new Ontario homes. ParaMeds home health
care revenue declined $1.6 million due to a 4.6%
reduction in service hours.EBITDA rose to $52.0 million in the 2004 fourth
quarter from $50.6 million in the 2003 fourth
quarter. EBITDA as a percent of revenue increased
to 12.2% from 11.7% in the prior year quarter.
EBITDA for the 2004 fourth quarter grew by 10%
over the 2003 fourth quarter, prior to the $3.7
million negative impact of the stronger Canadian
dollar.U.S. EBITDA grew 9.0% in its functional currency
for the 2004 fourth quarter in comparison to the
2003 fourth quarter. The impact of new facilities
was offset by disposed operations.EBITDA from Canadian operations improved $1.7
million, or 13.7%, to $13.8 million in the 2004
fourth quarter. The contribution from new Ontario
homes was offset by disposed operations. Remaining
nursing home operations improved primarily due to
funding enhancements. Canadian home health care
operations generated improved earnings, despite
lower volumes, as a result of higher rates and
reduced costs.Net interest costs for the 2004 fourth quarter
declined $6.2 million from the 2003 fourth
quarter. Lower average debt levels and interest
rates reduced the Companys interest costs between
periods. In addition, interest income was higher
between periods by $2.3 million as a result of
recording $4.8 million of interest in the 2004
fourth quarter associated with the tax refunds,
which was partially offset by lower interest
income on notes receivable that had been
collected.The Companys share of earnings of equity
investments improved to $5.3 million in the 2004
fourth quarter, compared to $2.6 million in the
2003 fourth quarter, primarily due to an
investment gain earned by Crown Life.  p.21 




---



##### 



Extendicare Inc.  Summary of Annual ResultsThe following is a summary of selected financial information. A discussion of the comparison
between years is provided under the headings: Fiscal Year 2004 Compared with 2003, Fiscal Year
2003 Compared with 2002, and Liquidity and Capital Resources. (thousands of dollars unless otherwise noted) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002INCOME STATEMENT DATARevenueNursing and assisted living centresUnited States
    
    
    1,195,904
    
    
    
    1,182,045
    
    
    
    1,236,565Canada
    
    
    366,863
    
    
    
    351,981
    
    
    
    315,907Outpatient therapy  United States
    
    
    14,300
    
    
    
    16,151
    
    
    
    16,144Home health  Canada
    
    
    127,971
    
    
    
    134,921
    
    
    
    146,034Other
    
    
    41,762
    
    
    
    39,516
    
    
    
    44,1351,746,800
    
    
    
    1,724,614
    
    
    
    1,758,785Operating and administrative costs
    
    
    1,505,978
    
    
    
    1,519,567
    
    
    
    1,574,325Earnings before undernoted
    
    
    240,822
    
    
    
    205,047
    
    
    
    184,460Lease costs
    
    
    16,230
    
    
    
    18,217
    
    
    
    24,119Depreciation and amortization
    
    
    56,873
    
    
    
    63,657
    
    
    
    68,989Interest, net
    
    
    39,991
    
    
    
    57,749
    
    
    
    62,047Valuation adjustment on interest rate caps
    
    
    10,379
    
    
    
    
    
    
    
    Loss (gain) from asset disposals, impairment and other items
    
    
    5,240
    
    
    
    (905
    )
    
    
    6,689Earnings before income taxes
    
    
    112,109
    
    
    
    66,329
    
    
    
    22,616Income taxes (recovery)
    
    
    (3,717
    )
    
    
    24,539
    
    
    
    11,202Earnings from health care
    
    
    115,826
    
    
    
    41,790
    
    
    
    11,414Share of equity accounted earnings
    
    
    9,375
    
    
    
    18,884
    
    
    
    7,520Net earnings
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934Earnings per share ($)Basic
    
    
    1.81
    
    
    
    0.87
    
    
    
    0.26Diluted
    
    
    1.78
    
    
    
    0.86
    
    
    
    0.26Average US/Canadian dollar exchange rate
    
    
    1.3015
    
    
    
    1.4015
    
    
    
    1.5704BALANCE SHEET DATA (AT PERIOD END)Health care assets
    
    
    1,357,800
    
    
    
    1,451,638
    
    
    
    1,684,137Equity accounted investments
    
    
    68,531
    
    
    
    141,779
    
    
    
    121,508Total assets
    
    
    1,426,331
    
    
    
    1,593,417
    
    
    
    1,805,645Long-term debt
    
    
    613,651
    
    
    
    750,094
    
    
    
    846,734US/Canadian dollar exchange rate
    
    
    1.2020
    
    
    
    1.2965
    
    
    
    1.5776CASH DIVIDENDS DECLARED BY CLASS OF SHAREMultiple Voting
    
    
    
    
    
    
    
    
    
    
    Subordinate Voting
    
    
    
    
    
    
    
    
    
    
    Class I, Series 2
    
    
    79
    
    
    
    108
    
    
    
    110Class I, Series 3
    
    
    92
    
    
    
    92
    
    
    
    92Class I, Series 4
    
    
    174
    
    
    
    204
    
    
    
    182Class II, Series 1
    
    
    310
    
    
    
    359
    
    
    
    320
  Note: Certain comparative figures have been reclassified in order to conform to the presentation adopted in 2004.  p.22 




---



##### 



2004 Annual Report MD&A    The following is a reconciliation of earnings before income taxes and EBITDA. (millions of dollars)
    
    2004
    
    
    2003
    
    
    2002Earnings before income taxes
    
    
    112.1
    
    
    
    66.3
    
    
    
    22.6Add (deduct):Depreciation and amortization
    
    
    56.9
    
    
    
    63.7
    
    
    
    69.0Interest, net
    
    
    40.0
    
    
    
    57.7
    
    
    
    62.0Loss (gain) from asset disposals, impairment and other items
    
    
    15.6
    
    
    
    (0.9
    )
    
    
    6.7EBITDA
    
    
    224.6
    
    
    
    186.8
    
    
    
    160.3
  Fiscal Year 2004 Compared with 2003Extendicares net earnings increased to
$125.2 million ($1.78 per diluted share) in 2004
compared to $60.7 million ($0.86 per diluted
share) in 2003. Net earnings from health care
operations improved $74.0 million to $115.8
million in 2004. The results of the U.S.
operations included the benefit of a prior year
tax recovery of $39.0 million and a net after-tax
loss of $19.2 million on disposal and impairment
of assets and other items. Prior to these items,
the U.S. operations improved $40.1 million over
2003, primarily due to increased Medicare and
Medicaid rates; managements continued emphasis on
growing revenue, particularly through increased
Medicare patient census; and as a result of lower
net interest costs due to the early retirement of
debt and lower average interest rates. The results
of the Canadian operations included a net
after-tax gain of $15.3 million on disposal of assets in
2004 compared to $0.9 million in 2003. Prior to
these items, the Canadian operations reflected a
$0.3 million decline in net earnings. However, the
disposal of nursing and retirement homes accounted
for a $0.8 million drop in net earnings. Growth in
the ongoing Canadian operations stemmed primarily
from the new Ontario nursing homes and improved
long-term care funding, which was partially offset
by reduced property tax funding in Ontario, lower
occupancy in Ontario nursing homes, and lower
interest income earned on investments. The
Companys share of equity accounted earnings
declined because the amount reported in 2003 of
$18.9 million included $9.4 million ($0.14 per
diluted share) related to the recording by Crown
Life of a reduction in provisions previously set
up for certain contingent liabilities. (millions of dollars except per share amounts)
    
    2004
    
    
    2003
    
    
    ChangeEarnings from health careUnited States
    
    
    87.9
    
    
    
    28.0
    
    
    
    59.9Canada
    
    
    27.9
    
    
    
    13.8
    
    
    
    14.1115.8
    
    
    
    41.8
    
    
    
    74.0Share of equity accounted earnings
    
    
    9.4
    
    
    
    18.9
    
    
    
    (9.5
    )Net earnings
    
    
    125.2
    
    
    
    60.7
    
    
    
    64.5Diluted earnings per share
    
    
    1.78
    
    
    
    0.86
    
    
    
    0.92
  The average exchange rates used to translate the results of the U.S. operations to Canadian dollars
were: 1.3015 for 2004 and 1.4015 for 2003. The 2004 net earnings were negatively impacted by $9.4
million as a result of applying the lower 2004 average foreign exchange rate of 1.3015 versus the
2003 rate of 1.4015 on translation of the U.S. operations.  p.23 




---



##### 



Extendicare Inc.  REVENUERevenue increased $22.2 million to $1,746.8 million in 2004. However, prior to the negative
impact of the stronger Canadian dollar, revenue in 2004 grew 6.8% over 2003. Of this 6.8% increase,
ongoing operations grew 9.0%, but were partially offset by the disposal, or ceasing, of operations
that had contributed $22.9 million and $57.0 million in revenue in 2004 and 2003, respectively. (millions of dollars unless otherwise noted)
    
    2004
    
    
    2003
    
    
    Change
    
    
    Change (%)RevenueUnited States in its functional currency (US$)
    
    
    956.5
    
    
    
    878.2
    
    
    
    78.3
    
    
    
    8.9Translation to Canadian dollars
    
    
    288.4
    
    
    
    352.5
    
    
    
    
    
    
    
    United States (C$)
    
    
    1,244.9
    
    
    
    1,230.7
    
    
    
    14.2
    
    
    
    1.2Canada
    
    
    501.9
    
    
    
    493.9
    
    
    
    8.0
    
    
    
    1.61,746.8
    
    
    
    1,724.6
    
    
    
    22.2
    
    
    
    1.3Average US/Canadian dollar exchange rate
    
    
    1.3015
    
    
    
    1.4015
  Revenue  U.S. OperationsRevenue from U.S. operations grew 8.9% in its functional currency to US$956.5 million. Nursing and
assisted living centres no longer operated by the Company had contributed US$14.2 million and
US$25.5 million to revenue prior to their disposal for the 2004 and 2003 years, respectively.
Ongoing U.S. operations revenue grew 10.5% in its functional currency, or US$89.6 million,
primarily due to higher funding levels and an 8.5% growth in average daily Medicare patient census.
EHSIs new U.S. nursing and assisted living centres contributed 1.5% to the growth over last year.
The following table provides further details on the US$89.6 million improvement in revenue from
ongoing U.S. operations. (US$ millions)48.0
    
    
    
    increase in average nursing home rates (Medicaid $23.1 million, Medicare $20.4 million, and private/other $4.5 million);15.3
    
    
    
    increase (decrease) in nursing home resident census (Medicare $18.1 million, Medicaid $(0.8) million and private/other $(2.0) million);13.0
    
    
    
    contribution from new nursing and assisted living facilities;6.3
    
    
    
    increase in nursing home resident ancillary services, primarily therapy and rehabilitative services;2.1
    
    
    
    increase due to one additional day in 2004;1.2
    
    
    
    improvement in assisted living operations due to higher rates;1.0
    
    
    
    favourable prior year revenue adjustments (2004 of $3.7 million compared to 2003 of $2.7 million); and2.7
    
    
    
    increase in other revenue.
  p.24 




---



##### 



2004 Annual Report MD&A Key Medicare and Medicaid statistics for the U.S. nursing home operations are summarized in the
following table. U.S. Nursing Home Operating Statistics
    
    2004
    
    
    2003
    
    
    Change (%)Average daily census (same-facility basis)Medicare
    
    
    2,100
    
    
    
    1,935
    
    
    
    8.5Private/other
    
    
    2,103
    
    
    
    2,134
    
    
    
    (1.5
    )Medicaid
    
    
    8,404
    
    
    
    8,421
    
    
    
    (0.2
    )Total
    
    
    12,607
    
    
    
    12,490
    
    
    
    0.9Medicare as a percent of total census (same-facility basis)
    
    
    16.6
    
    
    
    15.5Medicaid as a percent of total census (same-facility basis)
    
    
    66.7
    
    
    
    67.4Average percentage occupancy (same-facility basis)
    
    
    92.1
    
    
    
    91.4Average revenue rate by payor source (US$) (1)Medicare Part A and B
    
    
    357.94
    
    
    
    326.31
    
    
    
    9.7Private/other
    
    
    191.09
    
    
    
    183.76
    
    
    
    4.0Medicaid
    
    
    138.76
    
    
    
    131.31
    
    
    
    5.7Medicare Part A
    
    
    325.85
    
    
    
    298.81
    
    
    
    9.0
   (1)
    
    Excludes prior period settlement adjustments.  U.S. Medicare patient census increased to
16.6% of total nursing home census from 15.5% in
2003. This improvement was due to managements
focus on that sector, which resulted in increased
revenue of US$18.1 million from Medicare payor sources in comparison to 2003. Total nursing home
average daily census on a same-facility basis
improved to 12,607 from 12,490 in 2003. Average
U.S. nursing home occupancy grew to 92.1% compared
to 91.4% in the prior year.U.S. revenue was impacted by settlements for prior
year adjustments. Favourable Medicaid revenue
adjustments of US$3.7 million were realized in
2004 compared to US$5.4 million in 2003. In
addition, in 2003, the Company recorded a
provision, or contractual revenue adjustment, of
US$2.7 million related to prior year Medicare cost
settlements.Average U.S. Medicare rates increased 9.7%,
excluding the impact of any prior year
adjustments, to US$357.94 in 2004 in comparison to
2003. CMS implemented rate increases on October 1,
2003 and 2004 of 6.26% and 2.8%, respectively, as
discussed under Significant Developments in 2004
and 2003  Legislative Actions Affecting U.S.
Revenue. The remaining improvement in the
Companys average Medicare rates was due to the
change in mix of acuity care levels of Medicare
patients served.Excluding the impact of the prior period Medicaid
revenue settlements, the Company benefited from a
5.7% average rise in Medicaid revenue per resident
day from 2003. In a number of states, the increase
in funding was primarily attributable to higher
acuity care levels and funding for increased state
assessment fees and taxes. The increase in
provider taxes in 2004 in comparison to 2003 was
US$5.7 million.  p.25 




---



##### 



Extendicare Inc.  Revenue  Canadian OperationsRevenue from Canadian operations grew $8.0 million
or 1.6% from 2003. The comparability between
periods was impacted by the sale of nursing and
retirement homes and the ceasing of home health
care operations in British Columbia, which in
total had contributed $4.4 million and $21.3
million to revenue for the 2004 and 2003 periods,
respectively. Revenue from ongoing Canadian
operations grew $24.9 million, or 5.3%, of which
new Ontario nursing homes added $14.1 million,
with the remaining improvement primarily due to
funding increases to support greater care and
staffing needs (flow-through funding), as well as
rate increases. This was partially offset by lower
revenue from ongoing Canadian home health care
operations.Average occupancy of the Canadian operations on a
same-facility basis was 97.4% in 2004 compared to
98.0% in 2003. During 2004 four of Extendicares
Ontario nursing homes operated at an average level
for the year below the 97.0% occupancy threshold
required to sustain 100% accommodation funding.
This resulted in lower accommodation funding of
$0.8 million. By the end of 2004, only one of
these nursing homes was operating below the 97.0%
occupancy threshold.Canadian home health care operations experienced a
$3.8 million decline in revenue after adjusting
for the exit from the B.C. home health care market
in March of 2003. Home health care hours of
service from ongoing operations were 4.59 million
compared to 4.87 million in 2003. The reduction
resulted from constraints on service hours imposed
by the Ontario CCACs. However, a rise in service
rates partially offset the impact of the lower
volumes.EBITDAEBITDA rose 20.2% to $224.6 million in 2004 from $186.8 million in 2003. As a percent of
revenue, EBITDA increased to 12.9% from 10.8% in the prior year. In 2004 EBITDA was negatively
impacted by $13.6 million as a result of applying the lower 2004 average foreign exchange rate of
1.3015 versus the 2003 rate of 1.4015 on translation of the U.S. operations. % of
    
    
    
    
    
    
    % of
    
    
    EBITDA
    
    
    EBITDA(millions of dollars unless otherwise noted)
    
    2004
    
    
    Revenue
    
    
    2003
    
    
    Revenue
    
    
    Change
    
    
    Change (%)EBITDAUnited States in its functional currency (US$)
    
    
    136.0
    
    
    
    14.2
    
    
    
    100.3
    
    
    
    11.4
    
    
    
    35.7
    
    
    
    35.6Translation to Canadian dollars
    
    
    40.9
    
    
    
    
    
    
    
    40.3
    
    
    
    
    
    
    
    
    
    
    
    United States (C$)
    
    
    176.9
    
    
    
    14.2
    
    
    
    140.6
    
    
    
    11.4
    
    
    
    36.3
    
    
    
    25.8Canada
    
    
    47.7
    
    
    
    9.5
    
    
    
    46.2
    
    
    
    9.4
    
    
    
    1.5
    
    
    
    3.2224.6
    
    
    
    12.9
    
    
    
    186.8
    
    
    
    10.8
    
    
    
    37.8
    
    
    
    20.2Average US/Canadian dollar exchange rate
    
    
    1.3015
    
    
    
    
    
    
    
    1.4015
  EBITDA  U.S. OperationsU.S. EBITDA grew 35.6% in its functional currency
to US$136.0 million. As a percent of revenue,
EBITDA increased to 14.2% from 11.4% in 2003.
Nursing and assisted living facilities no longer
operated by the Company had generated a loss at
the EBITDA level of US$0.5 million in 2004
compared to income of US$1.1 million in 2003, prior to their disposal.
EBITDA from remaining operations improved US$37.3
million. Revenue improvements of US$89.6 million
discussed above were partially offset by a US$52.3
million rise in operating, administrative and lease costs. Operating and administrative costs
rose primarily due to the rise in number and
acuity level of residents served, in addition to
inflationary increases.  p.26 




---



##### 



2004 Annual Report MD&A  The following table provides further details on the US$52.3 million increase in costs from ongoing
U.S. operations. (US$ millions)26.1
    
    
    
    rise in labour-related costs of 4.8%, which included an average wage rate increase of 3.0% in nursing home operations;10.8
    
    
    
    rise in costs associated with new nursing and assisted living facilities acquired or built;5.7
    
    
    
    higher state assessments and bed taxes imposed in association with the Medicaid funding changes;3.1
    
    
    
    rise in drug costs due to higher resident census, Medicare mix and prices;2.2
    
    
    
    increase in equipment costs;2.0
    
    
    
    provision against working capital advances made to Lakeside Health; and2.4
    
    
    
    rise in other costs.
  EBITDA  Canadian OperationsEBITDA from Canadian operations increased 3.2% to
$47.7 million in 2004 from $46.2 million in 2003.
The sale of nursing and retirement homes and
discontinuation of its B.C. home health care
operations unfavourably impacted EBITDA between
years, as these operations had contributed $0.7
million and $2.2 million to EBITDA in 2004 and
2003, respectively, prior to their disposal.
EBITDA from remaining operations increased $3.0
million. The $24.9 million improvement in revenue
from ongoing operations was offset by a $21.9
million rise in operating, administrative and
lease costs. The new Ontario nursing homes
increased operating costs by approximately $11.4
million. Labour costs from remaining operations
increased $7.5 million, or 2.2%, and included a
5.0% rise in labour costs for the nursing home
operations, partially offset by a decline in home
health care labour costs due to lower volumes.
Other costs increases totalled $3.0 million.DEPRECIATION AND AMORTIZATIONDepreciation and amortization costs were
lower by $6.8 million, of which approximately $3.6
million was due to the change in the foreign
exchange rate. The remaining decline was due to
asset disposals, partially offset by higher
depreciation associated with new facilities.INTERESTNet interest costs declined $17.8 million, or
30.8%, in 2004. Interest income for 2004 was $6.0
million higher, and included $4.8 million in 2004
associated with tax refunds. Interest costs were
$11.8 million lower than in 2003, primarily due to
lower average debt levels and to lower average
interest rates associated with the 2004 second
quarter U.S. debt issue. In addition, the stronger
Canadian dollar contributed to the favourable
variance in net interest costs by approximately
$1.7 million.INCOME TAXESThe Company reported a tax recovery of $3.7
million for 2004 compared to a provision for
income taxes of $24.5 million in 2003. The 2004
results included a tax benefit of $39.0 million
(US$31.9 million) related to the 1999 sale of
EHSIs former subsidiary, Arbor Health Care
Company, primarily as a result of the issuance of
additional guidance by the Internal Revenue
Service (IRS) regarding the method to calculate
the loss on the sale of subsidiary stock, and
partially due to the settlement of an IRS audit
covering the tax years ending December 1997
through December 2002. In addition, a tax benefit
of $2.2 million (US$1.7 million) was recorded in
2004 relating to the IRS audit and other issues.
The Companys effective tax rate was also impacted
during 2004 and 2003 from asset disposals, whose
gains were sheltered by capital losses. Excluding
these items, the Companys effective tax rate in
2004 was 38.5% compared to 37.5% in 2003. The
increase in the effective rate primarily related
to the change in the valuation allowance for U.S.
future tax assets between the two years.SHARE OF EQUITY ACCOUNTED EARNINGSThe Company reported its share of equity
accounted earnings of $9.4 million ($0.14 per
diluted share) in 2004 compared to $18.9 million
($0.27 per diluted share) in 2003. The Companys
equity share of earnings in 2003 included
non-recurring income of $9.4 million ($0.14 per
diluted share) associated with Crown Lifes
recording of a reduction of provisions previously
set up for certain contingent liabilities.  p.27 




---



##### 



Extendicare Inc.  Fiscal Year 2003 Compared with 2002Extendicares net earnings increased to $60.7
million ($0.86 per diluted share) in 2003 compared
to $18.9 million ($0.26 per diluted share) in
2002. The Companys 2003 share of earnings of
Crown Life of $18.9 million included $9.4 million
($0.14 per share) related to the recording by
Crown Life of a reduction in provisions previously
set up for certain contingent liabilities. Net
earnings from health care operations rose $30.4
million to $41.8 million in 2003, with improvements from both the U.S. and
Canadian operations. Improvements from U.S.
operations were primarily due to managements
continued emphasis on growing revenue,
particularly through increased Medicare patient
census. Growth in Canadian operations stemmed
primarily from the new Ontario nursing homes,
improved performance from the home health care
business, and new management contracts. In
addition, funding changes improved operations on
both sides of the border. (millions of dollars except per share amounts)
    
    2003
    
    
    2002
    
    
    ChangeEarnings from health careUnited States
    
    
    28.0
    
    
    
    1.6
    
    
    
    26.4Canada
    
    
    13.8
    
    
    
    9.8
    
    
    
    4.041.8
    
    
    
    11.4
    
    
    
    30.4Share of equity accounted earnings
    
    
    18.9
    
    
    
    7.5
    
    
    
    11.4Net earnings
    
    
    60.7
    
    
    
    18.9
    
    
    
    41.8Diluted earnings per share
    
    
    0.86
    
    
    
    0.26
    
    
    
    0.60
  The average exchange rates used to translate the results of the U.S. operations to Canadian dollars
were: 1.4015 for 2003 and 1.5704 for 2002. The stronger Canadian dollar compared with the foreign
exchange rate used for 2002 had a $3.4 million negative impact on 2003 net earnings.REVENUERevenue increased by $138.2 million, or 8.0%, over the prior year, before the impact of: the
change in the foreign exchange rate of $148.3 million; the ceasing of its B.C. home health care
operations of $22.8 million; and the sale of an Alberta nursing home of $1.3 million. The U.S.
operations contributed $86.8 million to this increase and the Canadian operations contributed $51.4
million. (millions of dollars unless otherwise noted)
    
    2003
    
    
    2002
    
    
    Change
    
    
    Change (%)RevenueUnited States in its functional currency (US$)
    
    
    878.2
    
    
    
    822.8
    
    
    
    55.4
    
    
    
    6.7Translation to Canadian dollars
    
    
    352.5
    
    
    
    469.4
    
    
    
    
    
    
    
    United States (C$)
    
    
    1,230.7
    
    
    
    1,292.2
    
    
    
    (61.5
    )
    
    
    (4.8
    )Canada
    
    
    493.9
    
    
    
    466.6
    
    
    
    27.3
    
    
    
    5.91,724.6
    
    
    
    1,758.8
    
    
    
    (34.2
    )
    
    
    (1.9
    )Average US/Canadian dollar exchange rate
    
    
    1.4015
    
    
    
    1.5704
  p.28 




---



##### 



2004 Annual Report MD&A  Revenue  U.S. OperationsRevenue from U.S. operations grew 6.7% in its functional currency to US$878.2 million. The improvement of US$55.4
million over 2002 was due to several factors as summarized below, and explained in the discussion that follows. (US$ millions)26.6
    
    
    
    increase (decrease) in nursing home resident census (Medicare $33.2 million, Medicaid $(2.5) million and private/other $(4.1) million);19.5
    
    
    
    increase (decrease) in average nursing home rates (Medicare $(4.7) million, Medicaid $16.0 million, and private/other $8.2 million);6.8
    
    
    
    increase in nursing home resident ancillary services, primarily therapy and rehabilitative services;1.2
    
    
    
    improvement from outpatient therapy services;2.2
    
    
    
    improvement in assisted living operations due to higher rates and resident census;0.9
    
    
    
    favourable change in Medicare and Medicaid settlements; and a(1.8)
    
    
    
    decline in other revenue, primarily related to lower lease income on the 2002 sale of homes.
 Key Medicare and Medicaid statistics for the U.S. nursing home operations are summarized in the
following table. U.S. Nursing Home Operating Statistics
    
    2003
    
    
    2002
    
    
    Change (%)Average daily census (same-facility basis)Medicare
    
    
    1,997
    
    
    
    1,699
    
    
    
    17.5Private/other
    
    
    2,222
    
    
    
    2,291
    
    
    
    (3.0
    )Medicaid
    
    
    8,682
    
    
    
    8,737
    
    
    
    (0.6
    )Total
    
    
    12,901
    
    
    
    12,727
    
    
    
    1.4Medicare as a percent of total census (same-facility basis)
    
    
    15.5
    
    
    
    13.4Medicaid as a percent of total census (same-facility basis)
    
    
    67.3
    
    
    
    68.6Average percentage occupancy (same-facility basis)
    
    
    91.5
    
    
    
    90.3Average revenue rate by payor source (US$)(1)Medicare Part A and B
    
    
    326.31
    
    
    
    331.23
    
    
    
    (1.5
    )Private/other
    
    
    183.76
    
    
    
    170.86
    
    
    
    7.6Medicaid
    
    
    131.31
    
    
    
    126.03
    
    
    
    4.2Medicare Part A
    
    
    298.81
    
    
    
    305.21
    
    
    
    (2.1
    )
   (1)
    
    Excludes prior period settlement adjustments.  Average U.S. nursing home occupancy in 2003
climbed to 91.5% from 90.3% in 2002, resulting in
higher revenue of US$26.6 million. In particular,
Medicare patient census improved to 15.5% of total
nursing home resident census in 2003 from 13.4% in
the prior year, which accounted for US$33.2 million
of the additional revenue. This was partially
offset by a lower number of private-pay and
Medicaid payor source residents.Revenue in 2003 improved US$19.5 million due to the
higher average daily Medicaid and private-pay
rates, partially offset by a lower average daily
Medicare rate. As discussed under Significant
Developments in 2004 and 2003  Legislative Actions
Affecting U.S. Revenue, CMS reduced Medicare Part
A rates on October 1, 2002, which resulted in a lower average daily Medicare Part A
rate of US$292.93 for EHSI during the first nine
months of 2003, in comparison to US$311.55 during
the same period of 2002. On October 1, 2003, CMS
implemented an Administrative Fix, which
reinstated some of the funding lost in 2002. This in
combination with the annual inflationary increase
and an improvement in EHSIs Medicare patient
acuity mix raised EHSIs average daily Medicare
Part A rate to US$315.61 during the fourth quarter
of 2003. Average daily Medicaid rates increased
5.1% in 2003 relative to 2002. For a number of
states, the increase was primarily attributable to
higher acuity care levels and funding for
increased state assessment fees and taxes. In
addition, EHSIs average daily Medicaid rate was
impacted by settlement  p.29 




---



##### 



Extendicare Inc.  adjustments for prior periods. Excluding these
settlement adjustments, EHSIs average daily
Medicaid rate was US$131.31 for 2003 relative to
US$126.03 in 2002, a rise of 4.2%. The average
rates from private and other payor sources
increased 7.6% in 2003 from 2002, primarily due to
a shift in lower paying private-pay residents to
Medicare, and increases in rates received from
health state maintenance organizations.During 2003 favourable prior year Medicare and
Medicaid adjustments of US$0.9 million were
realized in comparison to 2002. A recovery of
US$4.2 million in Medicaid revenue occurred in
2003 as a result of a favourable court decision in
the State of Ohio relating to the recovery of
alleged government overpayments for adjudicated
Medicaid cost report periods. Medicaid cost
settlements for prior year cost reports increased
revenue by US$1.1 million in 2003, compared to
US$1.7 million in 2002. During 2003 the Company
recorded a provision, or contractual revenue
adjustment, of US$2.7 million related to prior
year Medicare settlement receivables.Revenue  Canadian OperationsRevenue for 2003 from Canadian operations improved
by $51.4 million, or 11.7%, after adjusting for
ceased operations which accounted for a $24.1
million year-over-year decline. The improvement
from continuing operations was due to: the opening of four Ontario nursing
homes in 2003 and one in May of 2002, which
contributed approximately $16.9 million; funding
enhancements for long-term care services to
support greater care and staffing needs of
approximately $20.5 million; improvements in
ongoing home health care operations of $11.7
million; and $2.3 million from additional
management contracts and other miscellaneous
revenue. Funding for long-term care services
increased in Ontario and Alberta during the third
quarter of 2003 as discussed under Significant
Developments in 2004 and 2003  Legislative
Actions Affecting Canadian Revenue.Hours of service provided by the home health care
operations improved to 4.87 million from 4.68
million in 2002, excluding the ceased B.C.
operations. In Ontario ParaMed contracts the
majority of its services with the CCACs. During
2002 the 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. This eased
somewhat in 2003, as ParaMeds volumes in Ontario
increased over 2002 as a whole. However, ParaMed
did experience a 2.3% drop in volumes, or 29,000
hours, in the fourth quarter of 2003 in comparison
to the third quarter of 2003 due to continued
pressure from the CCACs.EBITDAEBITDA rose $26.5 million, or 16.5%, to $186.8 million in 2003, and as a percent of revenue
increased to 10.8% from 9.1% in the prior year. In 2003 EBITDA was negatively impacted by $16.9
million as a result of applying the lower 2003 average foreign exchange rate of 1.4015 versus the
2003 rate of 1.5704 on translation of the U.S. operations. % of
    
    
    
    
    
    
    % of
    
    
    EBITDA
    
    
    EBITDA(millions of dollars unless otherwise noted)
    
    2003
    
    
    Revenue
    
    
    2002
    
    
    Revenue
    
    
    Change
    
    
    Change (%)EBITDAUnited States in its functional currency (US$)
    
    
    100.3
    
    
    
    11.4
    
    
    
    76.7
    
    
    
    9.3
    
    
    
    23.6
    
    
    
    30.8Translation to Canadian dollars
    
    
    40.3
    
    
    
    
    
    
    
    43.8
    
    
    
    
    
    
    
    
    
    
    
    United States (C$)
    
    
    140.6
    
    
    
    11.4
    
    
    
    120.5
    
    
    
    9.3
    
    
    
    20.1
    
    
    
    16.7Canada
    
    
    46.2
    
    
    
    9.4
    
    
    
    39.8
    
    
    
    8.5
    
    
    
    6.4
    
    
    
    16.1186.8
    
    
    
    10.8
    
    
    
    160.3
    
    
    
    9.1
    
    
    
    26.5
    
    
    
    16.5Average US/Canadian dollar exchange rate
    
    
    1.4015
    
    
    
    
    
    
    
    1.5704
  p.30 




---



##### 



2004 Annual Report MD&A  EBITDA  U.S. OperationsU.S. EBITDA grew 30.8% in its functional currency to US$100.3 million. As a percent of revenue,
EBITDA improved to 11.4% from 9.3% in 2002. Revenue improvements of US$55.4 million discussed
previously were partially offset by a US$31.8 million rise in operating, administrative and lease
costs. Higher overall costs were primarily related to the rise in number of residents served, in
addition to inflationary increases. Further details are provided in the following table. (US$ millions)23.8
    
    
    
    rise in labour-related costs of
4.5%, which included an average wage rate increase of 3.2% in nursing home operations;4.4
    
    
    
    higher state assessments and bed taxes imposed in association with the Medicaid funding changes;3.9
    
    
    
    rise in drug costs due to higher resident census, Medicare mix and prices;1.9
    
    
    
    higher professional fees primarily related to legal fees and nursing consulting;0.6
    
    
    
    increase in utility costs;(2.4)
    
    
    
    decrease in lease costs,
approximately half due to the acquisition of previously leased facilities and the rest due to the termination of equipment leases; and(0.4)
    
    
    
    decline in other costs.
  EBITDA  Canadian OperationsEBITDA from Canadian operations increased 16.1% to
$46.2 million from $39.8 million in the prior
year. The ceased operations negatively impacted
EBITDA by approximately $1.1 million. As a percent
of revenue, EBITDA improved to 9.4%. The $51.4
million improvement in revenue discussed above was
partially offset by a $43.9 million rise in total
operating, administrative and lease costs,
excluding those associated with the ceased
operations. Items of note were: additional costs
of approximately $14.2 million associated with the
new Ontario facilities; a rise of approximately
$24.0 million, or 7.4%, in labour-related costs in
remaining operations; and a $5.7 million increase
in other operating costs. Increased labour costs
were related to higher wage rates and increased
staffing levels to enhance resident care and to
accommodate the increased hours of service in the
home health care operations.DEPRECIATION AND AMORTIZATIONDepreciation and amortization costs declined
by $5.3 million, or 7.7%, in 2003 primarily due to
the change in the foreign exchange rate, partially
offset by an increase of $1.1 million associated
with the new Ontario nursing homes.INTERESTNet interest costs declined by $4.3 million,
or 6.9%, in 2003 due to the change in the foreign
exchange rate, which reduced costs by about $5.0
million; the receipt of $1.7 million of unaccrued interest income; higher net interest
costs of about $3.0 million due to the financing
of the new Ontario nursing homes; with the
remainder due to higher average debt levels,
partially offset by lower average rates on debt in
the U.S. operations. The interest rate swap and
cap agreements in place on the U.S. debt reduced
interest costs by $6.3 million in 2003 and $1.9
million in 2002.INCOME TAXESThe provision for income taxes for 2003 was
$24.5 million compared to $11.2 million in 2002.
The effective tax rate was 37.0% for 2003,
compared to 49.5% in 2002. The Companys effective
tax rate declined in the fourth quarter of 2003 due to the
improvement in its U.S. operations taxable
earnings, enabling a higher utilization of state
net operating losses not previously benefited.
Also, the effective tax rate was higher in 2002
due to a shift in income between taxable and
non-taxable entities and as a result of not having
tax benefited operating losses in the Companys
captive insurance company.SHARE OF EQUITY ACCOUNTED EARNINGSExtendicares share of equity accounted
earnings increased to $18.9 million ($0.27 per
diluted share) for 2003 from $7.5 million ($0.10
per share) in the prior year. Results for the
first quarter of 2003 included Extendicares share
of non-recurring income of $9.4 million ($0.14 per
diluted share) as Crown Life recorded a reduction
of provisions previously set up for certain
contingent liabilities.  p.31 




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##### 



Extendicare Inc.  Liquidity and Capital ResourcesSOURCES AND USES OF CASHAt December 31, 2004, the Company had cash
and cash equivalents of $156.2 million, compared
with $74.8 million at December 31, 2003.Cash flow generated from operations before working
capital changes improved to $207.8 million in
2004, compared to $92.8 million and $94.6 million
in 2003 and 2002, respectively. During 2004, the
Company received cash dividends from Crown Life
totalling $82.4 million, compared to none received
in 2003, and $22.0 million received in 2002. A
portion of the Crown Life dividends received in
2004 were classified as a return of investment on
the cash flow statement, and $68.3 million was
classified as part of cash from operations. The
increase in earnings and reduction in payments for
resident care liability claims accounted for the
remaining improvements.Cash flow from the net change in operating working
capital (excluding cash and borrowings included in
current liabilities) reflected a source of cash of
$16.2 million, $7.9 million and $2.3 million in
2004, 2003 and 2002, respectively. The Company has
improved its collection efforts with regards to
its receivables. In 2002 working capital was
impacted by an increase in taxes recoverable as a
result of the change in the U.S. tax loss
carryback period from two to five years.Cash provided by investing activities was $3.9
million in 2004, and included a $14.1 million
return of investment from Crown Life. Excluding
this, cash used for investing activities was $10.2
million, $65.8 million and $40.1 million in 2004, 2003 and 2002,
respectively. Property and equipment expenditures,
excluding acquisitions, were net of capital lease
financing, and were $69.1 million in 2004, $64.3
million in 2003 and $53.1 million in 2002. The
portion of these expenditures related to the
growth of the business  such as construction of
facilities and bed additions  were approximately
$24.0 million, $26.0 million and $11.8 million in
these years, respectively. The Company spent $19.5
million and $6.0 million on its U.S. construction projects during 2004 and 2003,
respectively. The remaining construction costs, in
addition to those incurred in 2002, related to the
Canadian operations 11 new Ontario homes, the last
of which was completed in 2004. The Ontario
nursing home expenditures were net of costs paid
directly by BCP under capital lease arrangements
of $11.4 million and $30.4 million in 2003 and
2002, respectively. The Companys property and
equipment expenditures for periodic capital
improvements and routine replacement of capital
items totalled $45.1 million, $38.3 million and
$41.3 million over the past three years,
respectively. These expenditures have fluctuated
due to the timing of major renovation projects to
enhance existing facilities. Acquisition costs of
$8.8 million in 2004 related to the purchase of
four Indiana facilities in June and a Washington
facility that was previously operated under lease
arrangements in February. Acquisition costs in
2003 and 2002 of $5.3 million and $11.0 million,
respectively, also related to the purchase of U.S.
nursing homes. During 2004 the Company received
net cash proceeds of $42.5 million: $22.5 million
of which related to the disposal of three Canadian
nursing and retirement homes; $13.6 million
related to the final settlement of the Greystone
transaction; and $6.4 million resulted from the
disposal of four U.S. nursing and assisted living
centres. Disposal activities during 2003 and 2002
generated cash proceeds of $2.0 million and $19.7
million, respectively. Proceeds from other assets
of $25.2 million in 2004 included $27.2 million of
cash proceeds received on the settlement of the
Tandem notes receivable.The Company used cash of $143.8 million in
financing activities during 2004, compared to $2.9
million and $29.9 million in 2003 and 2002,
respectively. The Companys U.S. operations issued
new debt and retired existing long-term debt
during each of 2004 and 2002, which resulted in
financing costs of $16.5 million and $13.2
million, respectively. The U.S. debt issue,
proceeds from asset disposals, collection of notes
receivable and improved earnings enabled the early
retirement of debt in 2004.  p.32 




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##### 



2004 Annual Report MD&A   CAPITAL STRUCTURE (millions of dollars unless otherwise noted)
    
    2004
    
    
    2003
    
    
    2002Share capital (including contributed surplus)Multiple Voting and Subordinate Voting shares
    
    
    295.5
    
    
    
    294.6
    
    
    
    299.1Preferred shares
    
    
    17.2
    
    
    
    17.7
    
    
    
    18.2312.7
    
    
    
    312.3
    
    
    
    317.3Retained earnings (deficit)
    
    
    151.9
    
    
    
    32.0
    
    
    
    (26.5
    )Foreign currency translation adjustment account
    
    
    (7.6
    )
    
    
    12.1
    
    
    
    67.2Shareholders equity
    
    
    457.0
    
    
    
    356.4
    
    
    
    358.0Long-term debt, including current portion
    
    
    620.9
    
    
    
    757.5
    
    
    
    852.9Long-term debt to equity (ratio)
    
    
    1.36:1
    
    
    
    2.13:1
    
    
    
    2.38:1Multiple Voting and Subordinate Voting shares (number at period end)
    
    
    68,592,078
    
    
    
    68,487,903
    
    
    
    69,664,103US/Canadian dollar exchange rate (at period end)
    
    
    1.2020
    
    
    
    1.2965
    
    
    
    1.5776
 Number of
    
    
    ClosingTSX
    
    
    Shares
    
    
    MarketShare Information (at January 31, 2005)
    
    Stock Symbol
    
    
    Outstanding
    
    
    Value (1)Subordinate Voting Shares
    
    EXE.SV
    
    
    56,748,336
    
    
    $
    18.85Multiple Voting Shares
    
    EXE.MV
    
    
    11,904,992
    
    
    
    19.00Class I Preferred SharesCumulative Redeemable, Series 2
    
    EXE.PR.B
    
    
    100,305
    
    
    
    24.75Adjustable Dividend, Series 3
    
    EXE.PR.C
    
    
    93,310
    
    
    
    22.00Adjustable Dividend, Series 4
    
    EXE.PR.D
    
    
    241,240
    
    
    
    24.25Class II Preferred Shares, Series 1
    
    EXE.PR.E
    
    
    382,979
    
    
    
    20.50
   (1)
    
    Per the Toronto Stock Exchange.  Effective November 15, 2004, Extendicares
trading symbols for its two classes of common
stock listed on the Toronto Stock Exchange
changed. The symbol for the Companys Multiple
Voting Shares changed from EXE to EXE.MV. The
symbol for the Subordinate Voting Shares changed
from EXE.A to EXE.SV. In addition, the Companys
trading symbol for its Subordinate Voting Shares
listed on the New York Stock Exchange changed from
EXE.A to EXE.The closing rates used to translate assets and
liabilities of the U.S. operations were 1.2020 at
December 31, 2004, 1.2965 at December 31, 2003,
and 1.5776 at December 31, 2002. As a result of
the stronger Canadian dollar, the assets of the
Companys U.S. operations declined by $71.1
million at the end of 2004 and liabilities
declined by $51.3 million, with the net change
resulting in a decrease in the foreign currency
translation adjustment account to a debit position
of $7.6 million. The impact of the stronger
Canadian dollar at the end of 2003 in comparison
to 2002 resulted in a $246.5 million decrease in
assets and a $191.4 million decline in
liabilities.  p.33 




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##### 



Extendicare Inc.    Long-term DebtThe terms and conditions of the Companys
long-term debt obligations are disclosed in the
notes to the 2004 consolidated financial
statements. Below is a description of the
significant changes in the Companys long-term
debt and associated financial instruments that
occurred during the year.During the second quarter of 2004, EHSI issued
US$125.0 million aggregate principal amount of
6.875% Senior Subordinated Notes due May 2014, and
retired its 9.35% US$200.0 million Senior
Subordinated Notes due 2007. The 2014 Notes were
issued at a price of 97.5001% of par to yield
7.23%. The net proceeds from the 2014 Notes were
approximately US$117.4 million (net of a US$3.1
million discount and fees and expenses of US$4.5
million). In addition, EHSI terminated its related
interest rate swap and cap arrangements on a
notional US$150.0 million, and entered into new
interest rate swap and cap arrangements on a
notional US$275.0 million.Long-term debt, including the portion due within
one year, declined $136.6 million to $620.9
million at December 31, 2004. The change in the
foreign exchange rate on translation of U.S.
dollars decreased long-term debt by $26.0 million.
Increases in long-term debt during 2004 totalled
$172.5 million and related to: the issuance of the
2014 Notes for proceeds of $163.1 million; the
issuance of $8.3 million of notes payable; and a
$1.1 million increase in capital lease
obligations. Repayments of long-term debt totalled
$283.1 million during 2004, and related to: the
redemption of the 2007 Notes of $229.4 million;
the early retirement of $29.9 million (US$22.5
million) of Industrial Development Revenue Bonds;
the early retirement of $9.8 million in mortgages
associated with the three sold Canadian homes; and
the refinancing of $7.4 million of notes payable;
and $6.6 million of scheduled regular repayments.After taking into account interest rate swap
agreements, the weighted average interest rate of
all long-term debt at December 31, 2004 was
approximately 7.3%, compared to 7.8% at December
31, 2003. In addition, after considering swap
agreements in place to convert fixed-rate debt to
floating rates, 44.5% of the long-term debt was
effectively at fixed rates at the end of 2004. The
Company is in compliance with all of its financial
covenants as of December 31, 2004.Credit RatingsIn April 2004 EHSIs 9.5% Senior Notes due 2010
(the 2010 Senior Notes) were upgraded by Moodys
Investors Service Inc. (Moodys) from B2 to
B1. The 2014 Notes issued in April were assigned
a B- rating by Standard & Poors Ratings Service
(S&P), and EHSIs Credit Facility was assigned a
BB- rating. The table below summarizes EHSIs
debt credit ratings as at December 31, 2004. S&P
    
    
    Moodys2010 Senior Notes
    
    
    B
    
    
    
    B12014 Notes
    
    
    B-
    
    
    
    B2Credit Facility
    
    
    BB-
        
    
    N/A
  2014 NotesThe 2014 Notes were issued pursuant to Rule 144A
and Regulation S under the U.S. Securities Act of
1933, as amended. In August 2004 EHSI completed
its offer to exchange new 2014 Notes that had been
registered under the Securities Act for the 2014
Notes issued in April. The terms of the new 2014
Notes are identical to those issued in April, and
are fully and unconditionally guaranteed on a
senior subordinated unsecured basis, jointly and
severally, by all of EHSIs existing and future
significant U.S. domestic subsidiaries, by all of
its existing and future U.S. domestic subsidiaries
that guarantee or incur any indebtedness and by
any other existing and future significant
subsidiaries or restricted subsidiaries of EHSI
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.  p.34 




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##### 



2004 Annual Report MD&A    Amendment and Restatement of Credit FacilityIn connection with the April 2004 issuance of the 2014 Notes, EHSI amended and restated its
Credit Facility that was established in June 2003, the terms of which include the following
changes, among other things:
    a two-year maturity extension to June 28, 2009;
    an additional US$50.0 million of senior secured financing on a revolving basis,
resulting in total borrowing capacity of US$155.0 million;
    an interest rate spread ranging from the Eurodollar rate plus 2.50% per annum to
3.25% per annum or the base rate plus 1.50% per annum to 2.25% per annum, subject, in each
case, to adjustments based on EHSIs senior leverage ratio;
    a commitment fee of 0.50% per annum on the undrawn capacity regardless of
utilization; and
    changes to the collateral securing the Credit Facility to permit EHSI to substitute
certain assets with other assets.The Credit Facility is used to back letters of
credit and for general corporate purposes.
Borrowings under this facility bear interest, at
EHSIs option, at the Eurodollar rate or the base
rate, plus applicable margins. As of December 31,
2004, the Company had no borrowings under the Credit Facility. The
unused portion of the Credit Facility that is
available for working capital and corporate
purposes, after reduction for outstanding letters
of credit of US$23.9 million, was US$131.1 million
as of December 31, 2004.The Credit Facility is secured by a perfected,
first priority security interest in certain
tangible and intangible assets and all of EHSIs
capital stock and the capital stock of its
subsidiary guarantors. The Credit Facility is also
secured by a pledge of 65% of the voting stock of
EHSIs foreign subsidiaries, including its
subsidiary guarantors foreign subsidiaries, if
any. The Credit Facility contains customary
covenants and events of default and is subject to
various mandatory prepayment and commitment
reductions. EHSI is permitted to make voluntary
prepayments at any time under the Credit Facility.
The Credit Facility requires that EHSI complies
with various financial covenants, including fixed
charge coverage, debt leverage, and tangible net
worth ratios.In January 2005 EHSI amended its Credit Facility
to accommodate the ALC acquisition. The ALC debt
will be non-recourse to EHSI and the debt and
earnings of ALC will be excluded from EHSIs
existing financial covenants under its Credit
Facility. In addition, EHSI will be restricted
from borrowing further within its Credit Facility
and under ALCs credit facility to finance any
potential ALC operating deficiencies. ALCs cash
flow will be retained within the ALCs operations.Interest Rate Swap and Cap ArrangementsIn April 2004 coterminous with the redemption of
its 2007 Notes, EHSI terminated its related
interest rate swap and cap agreements. To hedge
its exposure to fluctuations in the market value,
EHSI entered into two new interest rate swap and
two new interest rate cap agreements relating to
the 2010 Senior Notes and 2014 Notes, for a
notional US$275.0 million. The interest rate swap
arrangements are designated as highly effective
fair value hedges, and as a result, changes in
market value of the swaps are offset by changes in
market value of the hedged debt instruments. EHSI
uses the interest rate cap arrangements to offset
possible increases in interest payments under the
respective swaps caused by increases in market
interest rates over a certain level. Under the
terms of the cap arrangements, the counterparty
can call the cap if the respective swap is
terminated. Neither of the cap arrangements
qualifies as a hedging instrument under GAAP, and
therefore, changes in market value are recorded in
earnings.  p.35 




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##### 



Extendicare Inc. With respect to the 2010 Senior Notes, EHSI entered into an interest rate swap agreement
expiring July 1, 2010, with a notional amount of US$150.0 million (the 2010 Swap). The 2010 Swap
effectively converted up to US$150.0 million of fixed-rate indebtedness into variable-rate
indebtedness. Under the terms of the 2010 Swap, the counterparty can call the swap at any time on
or after July 1, 2006, with payments as determined under the agreement. This call option is a
mirror image of the embedded call option in the debt instrument. EHSI also entered into an interest
rate cap agreement expiring July 1, 2010, with a notional amount of US$150.0 million (the 2010
Cap). Under the terms of the 2010 Cap, EHSI paid an upfront fee of US$3.5 million to the
counterparty, and the change in fair value of this fee is recorded in the statement of earnings.
EHSI will receive a variable rate of interest equal to the excess, if any, of the six-month LIBOR,
adjusted semi-annually, over the cap rate of 7%. With respect to the 2014 Notes, EHSI also entered into an interest rate swap agreement expiring May
1, 2014, with a notional amount of US$125.0 million (the 2014 Swap). This agreement effectively
converted up to US$125.0 million of fixed-rate indebtedness into variable-rate indebtedness. Under
the terms of the 2014 Swap, the counterparty can call the swap at any time on or after May 1, 2009,
with payments as determined under the agreement. This call option is a mirror image of the embedded
call option in the debt instrument. EHSI also entered into an interest rate cap agreement expiring
May 1, 2014, with a notional amount of US$125.0 million (the 2014 Cap). Under the 2014 Cap, EHSI
pays a fixed rate of interest equal to 0.75% to the counterparty and receives a variable rate of
interest equal to the excess, if any, of the six-month LIBOR, adjusted semi-annually, over the cap
rate of 7%. As of December 31, 2004, the fair value of the 2010 Cap was an asset of $1.2 million (US$1.0
million), and the fair value of the 2014 Cap was a liability of $6.3 million (US$5.2 million). The
fair values of the interest rate caps are dependent on the projected six-month LIBOR, which is
influenced by long-term rates, and the volatility of these rates. As a result of a decline in the
volatility of rates at December 31, 2004, the value of EHSIs interest rate caps declined and
resulted in a valuation adjustment expense of $10.4 million (US$8.0 million). Normal Course Issuer Bid and Purchase Obligation The Company has been acquiring its common shares for cancellation since 1998 pursuant to normal
course issuer bids. Since 1998 the Company has acquired 8,141,100 Multiple Voting and Subordinate
Voting shares at a cost of $39.8 million, or an average cost of $4.89 per share. During 2004 the
Company acquired 463,800 Subordinate Voting and Multiple Voting shares at a cost of $6.7 million,
or an average cost of $14.54 per share. The reduction in preferred shares related to the Companys
annual obligation to purchase its Class I, Preferred Shares Series 2, whereby the Company is
obliged to make its best efforts to acquire 71,637 of these shares annually on the open market. A copy of the current normal course issuer bid, filed on November 29, 2004, may be obtained by
contacting the Corporate Secretary of the Company. The current bid expires on November 28, 2005,
and is for the purchase and cancellation of up to 2,800,000 Subordinate Voting Shares, 590,000
Multiple Voting Shares and 19,000 Class II Preferred Shares, Series 1.  p.36 




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##### 



md&a 2004 Annual Report Stock Option Plan In May 2004 the Companys Board of Directors, with the approval of the Toronto Stock Exchange,
amended the Companys Subordinate Voting Share stock option plan to add the ability to grant tandem
share appreciation rights (SARs) with option grants (the Stock Option Plan). Tandem SARs give
participants the right to choose to exercise a SAR instead of the corresponding option. When a SAR
is exercised the participant receives, at the election of the Company, either a payment in cash or
the equivalent value of Subordinate Voting Shares acquired on the open market, equal to the
difference between the closing price of the Subordinate Voting Shares and the exercise price of the
option. Awards pursuant to the Companys Stock Option Plan are exercisable only to the extent that
the option has vested, such period not to exceed 10 years, as determined by the Board of Directors
at the time of granting. The Company has not increased the number of Subordinate Voting Shares
reserved for issuance under its Stock Option Plan, and to the extent that awards pursuant to the
Stock Option Plan result in the exercise of SARs, the equivalent number of Subordinate Voting
Shares will be reduced from the number reserved and available under the Stock Option Plan for
future grants. Awards that include tandem SARs are accounted for on the fair value basis so that
the change in fair value of the underlying Subordinate Voting Shares is recognized in earnings. A total of 3,815,000 Subordinate Voting Shares have been reserved under the Stock Option Plan, of
which a total of 2,122,775 Subordinate Voting Shares have been granted. Of the options granted,
893,900 were exercisable at a weighted average exercise price of $3.62. During 2004, 440,000
options were awarded at a weighted average exercise price of $14.57, and included tandem SARs. The
grants vest equally over the first four years and expire at the end of 10 years. During 2004,
567,975 Subordinate Voting Shares were issued on the exercise of stock options. FUTURE LIQUIDITY AND CAPITAL RESOURCES Management believes that cash from operations, anticipated growth, together with available
bank credit facilities will be sufficient for the foreseeable future to support ongoing operations
and capital expenditures, service debt obligations and pay dividends. At December 31, 2004, EHSI
had cash and cash equivalents of US$29.6 million and US$131.1 million available under its revolver
loan, and Extendicares Canadian operations had cash and available bank lines totalling $121.6
million. As discussed under Subsequent Event, in order to acquire ALC on January 31, 2005, the Company
drew US$60.0 million on EHSIs revolver loan, used EHSIs available cash of approximately US$29.0
million, and used cash from Extendicares Canadian operations of $66.1 million (US$55.0 million).
Management believes that cash from operations, inclusive of the ALC acquisition, together with the
collective available sources of liquidity will be sufficient for the foreseeable future to fund
capital expenditures, service debt obligations and pay dividends. On February 22, 2005, the Companys Board of Directors declared the first quarterly dividend on its
common shares since 1991. The Board declared a dividend of $0.05 payable on May 16, 2005, on its
Subordinate Voting Shares and $0.025 on its Multiple Voting Shares. Based on the number of common
shares currently outstanding, this translates to an annual dividend payout of $12.5 million. Future
declarations of dividends are at the discretion of the Board of Directors. EHSI is in the midst of completing Phase I and II of its construction program. Phase I consists of
seven new developments to add 166 units, of which four projects for 106 units were completed in
2004, and the remainder are to be completed in 2005. Phase II represents eight new developments to
add 334 units during 2005 and 2006. To the end of 2004, the Company had spent $25.5 million
(US$19.4 million) on these projects, and estimates a further $39.2 million (US$32.6 million) will
be required to complete them, for which EHSI has purchase commitments of $15.1 million (US$12.6
million) outstanding at the end of 2004.  p.37 




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##### 



Extendicare Inc. The table below provides aggregated information about the Companys contractual obligations at
December 31, 2004. The table excludes self-insured liabilities, pension and other retirement
benefit obligations, which are discussed in notes 9 and 17of the 2004 consolidated financial
statements. (millions of dollars)
    
    Total
    
    
    Less than 1 year
    
    
    1  3 years
    
    
    4  5 years
    
    
    After 5 yearsCanadian operationsLong-term debt
    
    
    136.8
    
    
    
    3.7
    
    
    
    18.1
    
    
    
    25.1
    
    
    
    89.9Capital lease obligations
    
    
    287.4
    
    
    
    13.0
    
    
    
    25.9
    
    
    
    25.9
    
    
    
    222.6Operating lease obligations
    
    
    6.8
    
    
    
    1.7
    
    
    
    2.1
    
    
    
    1.5
    
    
    
    1.5United States operationsLong-term debt
    
    
    350.9
    
    
    
    1.3
    
    
    
    5.8
    
    
    
    5.8
    
    
    
    338.0Operating lease obligations
    
    
    53.9
    
    
    
    10.2
    
    
    
    11.2
    
    
    
    8.8
    
    
    
    23.7
 Accrual for Self-insured Liabilities At the end of 2004, the Companys accrual for self-insured general and professional liabilities was
$78.5 million compared to $95.4 million at the beginning of the year. Claims payments, net of the
current period provision, decreased the accrual by $10.7 million in 2004, with the change in the
foreign exchange rate accounting for a further $6.1 million decline. The accrual for self-insured
liabilities includes estimates of the costs of both reported claims and claims incurred but not yet
reported. Provisions recorded in 2004, 2003 and 2002 for potential general and professional
liability claims were $13.8 million, $13.0 million and $14.7 million, respectively. Payments for
self-insured liabilities in the past three years were $24.5 million, $31.5 million and $50.7
million, respectively. Payments made for resident care liability claims have been in excess of the
current accrual levels because the Company is still settling claims related to its discontinued
operations, for which provisions were previously recorded. The Company exited the nursing home
markets of the highly litigious States of Florida and Texas in 2000 and 2001, respectively.
Payments made for these claims have tapered off, reflecting the wind-down of claims associated with
these discontinued operations. Management anticipates that all claims associated with the past
Florida and Texas operations will be settled by the end of 2006. Exclusive of claims pertaining to
these disposed operations, the growth of claims has increased, but within managements projections.
The Company completed an independent actuarial review as part of the year-end audit, which
confirmed the adequacy of the balance sheet reserves for resident care liability claims. The
Company estimates that $30.1 million of the accrual for self-insured general and professional
liabilities will be paid within the next fiscal year. The timing of payments is not directly in the
Companys control and therefore, estimates could change in the future. Management believes the
Company has provided sufficient reserves as of December 31, 2004 for estimated costs of
self-insured liabilities. The Company invests funds to support the accrual for self-insured liabilities. These funds are
reported in other assets on the balance sheet, and totalled $48.9 million at the end of 2004,
compared to $40.6 million at the end of 2003. Most of the risks that the Company self-insures are
long-term in nature and, accordingly, claims payments for any particular policy year occur over a
long period of time. The Company believes that it has sufficient cash resources to meet its
estimated current claims payment obligations. RELATED PARTY TRANSACTIONS Extendicare Inc. made an investment of $0.1 million in 2004, and $2.5 million in 2003, in
Salumatics Inc. (Salumatics  formerly THiiNC Information Management Inc.), a provider of
electronic health information and record management services. The Chairman and one other Director
of Extendicare are board members of Salumatics, and three Directors of Extendicare are either
direct or indirect shareholders of Salumatics. In addition, the Chairman of Extendicare serves as
Chairman and Chief Executive Officer of a company that holds an equity interest in Salumatics and
has a contract to provide management services to Salumatics. Extendicare paid rent to Crown Life for the rental of certain office premises until the end of June
2004, which for the first six months of 2004 was $0.7 million, compared to $1.3 million in each of
the 2003 and 2002 years.  p.38 




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##### 



md & a 2004 Annual Report OFF-BALANCE SHEET ARRANGEMENTS The Company has two interest rate swap arrangements, as discussed under Liquidity and Capital
Resources Capital Structure  Interest Rate Swap and Cap Arrangements. As of December 31, 2004,
the fair value of the interest rate swaps designated as fair value hedges is an asset of $0.4
million (US$0.3 million) and is offset by a corresponding change in the fair value of the hedged
long-term debt obligation, both of which are off-balance sheet amounts. Critical Accounting Policies and Estimates The Companys consolidated financial statements have been prepared in accordance with Canadian
GAAP. For a full discussion of the Companys accounting policies as required by GAAP, see the
accompanying notes to Extendicares December 31, 2004 audited consolidated financial statements.
Management considers the Companys accounting policies discussed below to be critical to an
understanding of the Companys financial statements because their application requires significant
judgement and reliance on estimations of matters that are inherently uncertain. Specific risks
related to these critical accounting policies are also described below. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE Approximately 77% of the Companys U.S. operations revenue was derived from services provided
under various federal or state medical assistance programs during 2004. EHSI records its nursing
home revenue in the period in which the services and products are provided at established rates
less contractual adjustments. Contractual adjustments include differences between the Companys
established billing rates and amounts estimated by management as reimbursable under various
reimbursement formulas or contracts in effect. Estimation differences between final settlements and
amounts recorded in previous years are reported as adjustments to revenue in the period such
settlements are determined. Due to the complexity of laws and regulations governing the federal and
state reimbursement programs, there is a possibility that recorded estimates may change by a
material amount. In Canada, the fees charged by ECI for its nursing centres and home health care services are
regulated by provincial authorities. Accordingly, provincial programs fund a substantial portion of
these fees, with the remainder paid by individuals. Ontario is ECIs largest market for both its
long-term care and home health care services. It represented approximately 73% of ECIs total
revenue in 2004. 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. ECI receives a fixed amount per resident day for
accommodation and may retain any excess over costs incurred. For the remaining envelopes, any
deviation in actual costs from scheduled rates is either incurred by ECI (if costs exceed rates) or
is returned to the government (if costs are below rates). ECIs home health care operations
received approximately 90% of their revenue from contracts tendered by locally administered
provincial agencies in 2004. The Companys revenue from assisted living facilities is received primarily from private-pay
residents, and is recorded in the period in which the services are provided at rates established by
the Company based upon market conditions in the area of operation. The Company records receivables at the net realizable value expected from federal, state and
provincial reimbursement programs, other third-party payors or individual residents. The Company
also estimates which receivables may be collected within one year and reflects those not expected
to be collected within one year as non-current assets. Management continually monitors and adjusts
the allowances associated with these receivables. Allowances for bad debts from other third-party
payors or from individual patients are recorded based upon a specific assessment of an accounts
collection risk and the Companys historical experience by payor type. If circumstances change, for
instance due to an economic downturn resulting in higher than expected defaults or denials,
managements estimates of the recoverability of receivables could be reduced by a material amount. Due to differences in the government funding structures for the services provided, the Companys
Canadian operations are not subject to similar risks associated with the collection of accounts
receivable as are its U.S. operations. As a result, 94% of the Companys allowance for current  p.39 




---



##### 



Extendicare Inc. accounts receivable at December 31, 2004, is associated with its U.S. operations. The
allowance for doubtful accounts for current accounts receivable totalled $13.7 million and $16.4
million at December 31, 2004 and 2003, respectively. The Companys portion of accounts receivable that are classified as long-term in nature are largely
related to EHSIs outstanding Medicare and Medicaid receivables as discussed under Significant
Developments in 2004 and 2003  Medicare and Medicaid Settlement Receivables. The general
contractual allowance for these non-current accounts receivable totalled $3.6 million and $11.0
million at December 31, 2004 and 2003, respectively. VALUATION OF ASSETS AND ASSET IMPAIRMENT The Company periodically assesses the recoverability of long-lived assets when there are
indications of potential impairment based on estimates of undiscounted future cash flows. In
performing these analyses, the Company considers such factors as current results, trends and future
prospects, current market value and other economic and regulatory factors. Goodwill and other intangible assets with an indefinite life are tested for impairment at least
annually. Goodwill is allocated to reporting units and any potential impairment is identified by
comparing the fair value of each reporting unit and the value of other assets in that reporting
unit. The amount of any impairment is calculated by comparing the estimated fair market value with
the carrying value of the related asset. A substantial change in estimated future cash flows for these assets could materially change their
estimated fair values, possibly resulting in additional impairment. Changes that may impact future
cash flows include, but are not limited to, competition in the marketplace, decreases in government
funding, increases in wages or other operating costs, increased litigation and insurance costs, and
increased operational costs resulting from changes in legislation and regulatory scrutiny. As
detailed in note 2of the 2004 consolidated financial statements, the loss from impairment of
assets was $10.5 million in 2004, and $8.4 million in 2002. SELF-INSURED LIABILITIES Insurance coverage for resident care liability and other risks has become increasingly
difficult to obtain. The Company self-insures for certain risks related to comprehensive general
and professional liability, auto liability, health benefits, employers liability and workers
compensation. The Company obtains reinsurance coverage in amounts and with such coverage and
deductibles as management deems appropriate based on the nature and risks of the business,
historical experiences, availability, and industry standards. The Company accrues for self-insured liabilities based on past trends and information received from
an independent actuary. Management regularly evaluates the appropriateness of the carrying value of
the self-insured liabilities through an independent actuarial review. General and professional
liability claims are the most volatile and significant of the risks that the Company self-insures.
Managements estimate of the accrual for general and professional liability costs is significantly
influenced by assumptions, which are limited by the uncertainty of predicting future events and
assessments regarding expectations of several factors. These include, but are not limited to: the
frequency and severity of claims, which can differ materially by jurisdiction; coverage limits of
third-party reinsurance; the effectiveness of the claims management process; and the outcome of
litigation. Changes in the level of retained risk and other significant assumptions that underlie the Companys
estimates could have a material effect on the future carrying value of the self-insured
liabilities. The Company reports its annual accrual for potential resident care liability claims on
its consolidated statements of cash flows, and for the years ended 2004, 2003 and 2002, recorded a
provision of $13.8 million, $13.0 million, and $14.7 million, respectively. At December 31, 2004,
the Companys accrual for self-insured general and professional liabilities totalled $78.5 million
compared to $95.4 million at the beginning of the year. FUTURE TAX ASSETS AND LIABILITIES Future tax assets and liabilities are recognized to reflect the expected future tax
consequences attributed to differences between the financial statement carrying amounts of existing  p.40 




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##### 



md & a 2004 Annual Report assets and liabilities, and their respective tax bases, and operating loss and tax credit
carryforwards. Future tax assets and liabilities are measured using tax rates (enacted or
substantially enacted at the balance sheet date) anticipated to apply in the periods that the
temporary differences are expected to be recovered or settled. A valuation allowance is established
based upon managements estimate of whether it is more likely than not that some portion or all of
the future tax assets will not be realized. The ultimate realization of future tax assets depends
on the generation of taxable income during the periods in which those temporary differences become
deductible. In making this assessment, management considers the scheduled reversal of future tax
liabilities, projected future taxable income and tax planning strategies. The Companys valuation
allowance for future tax assets totalled $21.7 million and $45.8 million at December 31, 2004 and
2003, respectively. Risks and Uncertainties FOREIGN CURRENCY TRANSLATION The majority of Extendicares operations are conducted in the United States, which accounted
for over 70% of total revenue in 2004. The U.S. operations are self-sustaining and their revenues
and expenses are translated at average rates of exchange in effect during the period. Assets and
liabilities are translated at the exchange rates in effect at the balance sheet date. As a result,
Extendicares financial position is subject to foreign currency translation risk, which could
adversely impact its operating results. The translation effect of the strengthening of the Canadian
dollar on the Companys earnings is summarized on page 20. Based on the Companys results for 2004,
excluding any gains or losses on disposal of or impairment of assets, a one percent increase
(decrease) in the Canadian dollar against the U.S. dollar decreases (increases) the Companys
pre-tax earnings by approximately $0.8 million. A similar change in the Canadian dollar would
decrease (increase) the foreign currency translation account in shareholders equity by
approximately $2.7 million. GOVERNMENT FUNDING The Companys earnings are highly contingent on government funding, both in the U.S. and
Canada, and the effective management of staffing and other costs of operations, which are strictly
monitored through
government regulatory authorities. Management is unable to predict whether governments will adopt
changes in their reimbursement systems, or if adopted and implemented, what effect such initiatives
would have on the Company. For instance, limitations on U.S. Medicare and Medicaid reimbursement
for health care services are continually proposed. Changes in applicable laws and regulations could
have an adverse effect on reimbursement levels from governmental, private and other sources.
Approximately 75% of the Companys operating and administrative costs are labour-related costs.
Therefore, government funding constraints could have a significant adverse impact on the Companys
results from operations and cash flow. MEDICARE AND MEDICAID SETTLEMENT RECEIVABLES At December 31, 2004, EHSI had $25.6 million (US$21.3 million) in gross Medicare and Medicaid
settlement receivables with a related allowance for doubtful accounts of $5.3 million (US$4.4
million), reflecting managements estimate of the amounts collectible on Medicare and Medicaid
prior period cost reports. For Medicare revenue earned prior to the implementation of the Medicare
PPS and Medicaid programs with a retrospective reimbursement system, differences between revenue
that is ultimately expected to be realized and amounts received are reflected as accounts
receivable, or as accrued liabilities when payments have exceeded revenue that is ultimately
expected to be realized. For Medicare pre-PPS claims, normally such issues are resolved during the
audit process; however, general provisions for disagreements that require settlement through a
formal appeal process are recorded. Though there remain certain issues to be resolved with fiscal
intermediaries, the significant settlement receivable issues in respect of revenue earned prior to
the implementation of PPS have now been resolved. EHSIs Medicare settlement receivables also
include amounts related to reimbursable Part A co-insurance receivables, which totalled $12.7
million (US$10.6 million) and $11.0 million (US$8.5 million) at December 31, 2004 and December 31,
2003, respectively. Although management remains confident regarding the successful settlement of
these issues, an unfavourable settlement could impair EHSIs earnings and cash flow.  p.41 




---



##### 



Extendicare Inc. REGULATORY RISKS All long-term care providers are subject to
surveys and inspections by government authorities
to ensure compliance with applicable laws and
licensure requirements of the federal, state
and/or provincial funding programs. The survey
process is intended to review the actual provision
of care and services. Remedies for assessed
deficiencies can be levied based upon the scope
and severity of the cited deficiencies. Remedies
range from the assessment of fines to the
withdrawal of payments under the government
funding programs. Should a deficiency not be
addressed through a plan of correction, a facility
can be decertified from the funding program. Government agencies have steadily increased their
enforcement activity over the past several years.
As a result, the Company is continually allocating
increased resources to ensure compliance with
applicable regulations and to respond to
inspections, investigations and/or enforcement
actions. U.S. federal law requires each state to have a
Medicaid Fraud Control Unit, which is responsible
for investigating provider fraud and resident
abuse. EHSI has an investigation currently in
progress concerning resident care and funds
received for Certified Nurse Assistant training at
the Chippewa Falls nursing facility, which arose
before the operations were transferred to Lakeside
Health under a lease arrangement. EHSI has accrued
for known and estimated fines and penalties to be
assessed and is in final negotiations with the
State of Wisconsin to settle all of these issues.
EHSI is also aware of an investigation by this
unit in Kentucky, but this investigation has been
inactive for a substantial period of time. ASSETS, LIABILITIES AND
CONTINGENCIES RESULTING FROM U .S.
DIVESTITURE PROGRAM As a result of its divestiture program in
Texas and Florida, EHSI has assumed notes from the
purchasers and retained interest in, or ownership
of, certain nursing home properties and entered
into ongoing consulting service agreements with
operators in these two states.  On December 31, 2004, the remaining assets
relating to the divesture program were:
    six nursing home properties in Florida and four in
Texas, with a net book value of $16.9 million
(US$14.1 million), that are leased to and operated
by Senior Health Properties  South, Inc. (Senior
Health  South) and
Senior Health Properties  Texas, Inc. (Senior
Health Texas); and
    12 properties in Texas, which are subleased to
Senior Health  Texas.EHSI leases four Texas properties to Senior Health
Texas and six Florida properties to Senior Health
 South, with terms that expire in September and
December 2006, respectively. Also, EHSI subleases
12 Texas properties to Senior Health  Texas that
expire in February 2012. In addition, the Company
provides ongoing consulting services to Senior
Health  South and Senior Health Texas. As at
December 31, 2004, EHSI had $8.4 million (US$7.0
million) in non-current amounts receivable due
from them. As a result, EHSIs earnings and cash
flow can be influenced by the financial stability
of these unrelated long-term care operators.The Company has market risk related to the value
of its investment in 125,000 common shares of
Omnicare that were obtained in connection with the
1998 sale of EHSIs pharmacy operations. These
were recorded at the time of sale at a cost of
$5.5 million (US$4.0 million) being the Companys
carrying value at the end of 2004. The market
value of the Companys investment in Omnicares
common stock was $5.2 million at December 31, 2004
based on its market value of US$34.62 per share.
As part of the sale transaction, the Company also
obtained a warrant for 1.5 million shares of
Omnicare with an exercise price of US$48.00 per
share expiring in September 2005. The book value
of the warrant was written down to zero in 2004.
In effect, these holdings can be considered
contingent purchase price proceeds whose value, if
any, may not be realized for several years. These
stock and warrant holdings are subject to various
trading and exercise limitations. The Company
intends to hold them until management believes the
market opportunity is appropriate to sell or
exercise the holdings. Management monitors the
markets to determine the appropriate time to sell
or otherwise act with respect to its stock and
warrant holdings in order to maximize their value.  p.42 




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##### 



md & a 2004 Annual Report SELF-INSURED GENERAL AND
PROFESSIONAL LIABILITIES The Company had $78.5 million in accruals for
self-insured general and professional liabilities
at December 31, 2004, including estimates of the
costs of reported claims and claims incurred but
not yet reported. As a result of the adverse
development of claims experienced by the Company
and the long-term care industry as a whole, the
Companys per claim retained risk increased
significantly in 2000. This was mainly due to risk
levels associated with the Florida and Texas
operations. The Company was successful in exiting
these two highly litigious states and thereby
limiting future exposure to general liability
claims. Exclusive of claims pertaining to these
disposed operations, the growth of claims has
increased, but within managements projections.
However, changes in the level of retained risk,
timing and eventual settlement of claims, as well
as other significant assumptions that underlie
managements estimates, could have a material
effect on the future carrying value of the
self-insured liabilities. FUTURE TAX ASSETS AND LIABILITIES The Company has recorded a financial
statement benefit for tax losses and other
deferred tax assets based on future anticipated
taxable earnings. A valuation allowance of $21.7
million was recorded primarily against capital
losses and state net operating losses. The
allowance for state net operating losses was to
reflect shorter carryforward periods and
reductions in various states apportionments. The
amount of the deferred tax assets considered
realizable could be further reduced if estimates
of future taxable income during the carryforward
period are lowered. DEBT COVENANTS EHSI is in compliance with all of its
financial covenants as of December 31, 2004.
However, there can be no assurance that future
covenant requirements will be met. EHSIs bank
lines can be affected by its ability to remain in
compliance. If EHSI does not remain in compliance,
its ability to amend the covenants or refinance
its debt can be affected. OTHER EHSI entered into a preferred provider
agreement with Omnicare pursuant to the
divestiture of EHSIs pharmacy operation in 1998,
whereby Omnicare provides pharmacy services to all
of EHSIs nursing facilities. Omnicare has
requested arbitration for an alleged lost profits
claim relating to EHSIs disposition of assets,
primarily in Florida. Damage amounts, if any,
cannot be reasonably estimated based on
information available at this time. An arbitration
hearing has not yet been scheduled. Management
believes that it has interpreted the contract
correctly and has complied with its terms.
However, there can be no assurance that this claim
will not be successful or that other claims will
not arise. Also, EHSI and Omnicare are currently
negotiating the pricing of drugs for Medicare
residents for the years 2001 and 2002, and should
this matter not be settled, it will be taken to
arbitration. CREDIT AND INTEREST RATES The Company uses interest rate swaps to hedge
its fixed-rate U.S. debt obligations and interest
rate caps to limit exposure to increases in market
interest rates. The Company does not enter into derivative
instruments (i.e., interest rate swaps and caps)
for any purpose other than cash flow hedging
purposes. In other words, the Company does not
speculate using derivative instruments and does
not engage in trading activity of any kind. For the Companys variable-rate debt, changes in
interest rates generally do not impact the market
value of the debt instruments, but do affect the
Companys future income and cash flows. At
December 31, 2004, the Company had $326.9 million
(US$272.0 million) of fixed-rate debt outstanding
that had been effectively converted to
variable-rate debt using interest rate swaps.
Assuming that the balance of this debt remains
constant, each percentage point increase
(decrease) in the six-month LIBOR will result in
an annual increase (decrease) in interest expense,
and a corresponding decrease (increase) in cash
flows of approximately US$2.7 million. Increases
in interest expense are limited by interest rate
caps that reimburse EHSI to the extent that the
six-month LIBOR exceeds 7%.  p.43 




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##### 



Extendicare Inc. The table below presents principal, or notional, amounts and related weighted average interest
rates by year of maturity for the Companys debt obligations and interest rate swaps as of December
31, 2004. It incorporates only exposures that existed at that date and does not consider exposures
or positions that could arise subsequently or future interest rate movements. As a result, the
information has limited predictive value. The Companys ultimate results with respect to interest
rate fluctuations will depend on the exposures that occur, hedging strategies at the time and
interest rate movements. After
    
    
    
    
    
    Fair(thousands of dollars unless otherwise noted)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2009
    
    
    Total
    
    
    ValueCanadian operationsLong-term debtFixed rate
    
    
    3,701
    
    
    
    13,883
    
    
    
    4,219
    
    
    
    20,784
    
    
    
    4,327
    
    
    
    89,908
    
    
    
    136,822
    
    
    
    168,739Average interest rate
    
    
    9.15
    %
    
    
    8.55
    %
    
    
    9.23
    %
    
    
    6.71
    %
    
    
    9.81
    %
    
    
    9.81
    %
    
    
    9.18
    %
    
    
    Capital lease obligations (fixed rate)
    
    
    2,276
    
    
    
    2,450
    
    
    
    2,651
    
    
    
    2,868
    
    
    
    3,104
    
    
    
    119,830
    
    
    
    133,179
    
    
    
    145,828Average interest rate
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    8.01
    %
    
    
    United States operationsLong-term debtFixed rate
    
    
    1,287
    
    
    
    1,233
    
    
    
    4,566
    
    
    
    701
    
    
    
    5,069
    
    
    
    326,626
    
    
    
    339,482
    
    
    
    370,402Average interest rate
    
    
    5.98
    %
    
    
    5.79
    %
    
    
    6.87
    %
    
    
    6.75
    %
    
    
    7.00
    %
    
    
    8.48
    %
    
    
    8.42
    %
    
    
    Variable rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,419
    
    
    
    11,419
    
    
    
    11,419Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.01
    %
    
    
    2.01
    %
    
    
    Interest rate swaps (fixed to variable):Notional amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330,550
    
    
    
    330,550
    
    
    
    (370
    )Average pay rate (variable rate)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.24
    %
    
    
    6.24
    %
    
    
    Average receive rate (fixed rate)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.31
    %
    
    
    8.31
    %
    
    
    Interest rate capsNotional amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330,550
    
    
    
    330,550
    
    
    
    5,116
 Controls and Procedures EVALUATION OF DISCLOSURE
CONTROLS AND PROCEDURES The Companys management evaluated, with the
participation of the Companys Chief Executive
Officer and the Senior Vice-President and Chief
Financial Officer, the effectiveness of the design
and operation of the Companys disclosure controls
and procedures (as defined in Multilateral
Instrument 52-109 under the Ontario Securities
Act, and Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934) as of the end
of 2004. Based upon their evaluation of these
disclosure controls and procedures, the Chief
Executive Officer and the Senior Vice-President
and the Chief Financial Officer concluded that the
disclosure controls and procedures were effective
as of the end of 2004 to ensure that material
information relating to the Company (including its
consolidated subsidiaries) was made known to them
by others within those entities, particularly
during the period in which this report was being
prepared. CHANGES IN INTERNAL CONTROL There was no change in the Companys internal
control over financial reporting that occurred
during the quarter ended December 31, 2004 that
has materially affected, or is reasonably likely
to materially affect, the Companys internal
control over financial reporting.  p.44 




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##### 



md & a 2004 Annual Report  Changes in Accounting PoliciesThe Companys significant accounting policies
are set out in note 1of the 2004 consolidated
financial statements. Included in note 1is a
description of the changes to accounting policies
in 2004. These changes were as a result of new
accounting standards that were required to be
adopted on a prospective basis in 2004.
    The Company adopted a new accounting guideline
for hedging relationships, issued by the CICA,
which establishes more stringent and formalized
conditions for the use of hedge accounting. At
the beginning of the year, the Company had an
interest rate cap for a notional US$150.0
million, which under the new criteria, only
US$32.0 million qualified as an effective cash
flow hedge to limit increases in interest
payments under variable-rate debt obligations.
The remainder of the interest rate cap, with a
notional amount of US$118.0 million, did not
qualify as an effective hedge, and as such, the
Company on transition to the new rules,
recognized an associated unrealized loss of
$0.8 million (US$0.6 million), which was
deferred in other assets to be recognized in
earnings over the remaining term of the
interest rate cap to December 2007. In the
second quarter of 2004, the Company terminated
this interest rate cap arrangement, and as a
result wrote off the balance of the deferred
unrealized loss of $0.8 million. Two new
interest rate cap arrangements were entered
into during the second quarter of 2004, which
also do not qualify as effective hedges. At
December 31, 2004, the interest rate caps were
fair valued and a pre-tax charge of $10.4
million was reported in the statement of
earnings for 2004.
    The Company adopted CICA Accounting Guideline
15 (AG 15), Consolidation of Variable Interest
Entities requiring consolidation of variable
interest entities (VIEs) where the Company is
the primary beneficiary of the VIE. This
guideline became effective on November 1, 2004.
The Company did not have any such entities
requiring consolidation under this guideline.
    The Company adopted a new CICA accounting
guideline for the recognition, measurement, and
disclosure of the impairment of long-lived
assets.
    The Company follows the new CICA standards for
the recognition, measurement and disclosure of
liabilities for asset retirement obligations
and the associated retirement costs.
    The Company follows the new guidance issued by
the CICA on the application of revenue and
criteria for revenue recognition.
    The Company adopted the CICA amendments
requiring additional disclosure of employee
future benefits and now reports the future
benefit expense in its interim financial
statements and has enhanced its disclosure.Other than the impact of the change in accounting
guideline for hedging relationships, as described
above, these accounting policy changes did not
have a material impact on the Companys financial
condition, results of operations or changes in
financial condition for fiscal 2004.There are currently no future accounting standard
changes that will be effective for the Companys
2005 consolidated financial statements.Additional InformationAdditional information about Extendicare,
including the Companys Annual Information Form,
may be found on the SEDAR website at
www.sedar.com, on the U.S. Securities and Exchange
Commissions website at www.sec.gov, and on the
Companys website at www.extendicare.com. A copy
of this document and other public documents of the
Company are available upon request to the
Corporate Secretary.  p.45 




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##### 



FORWARDLOOKING STATEMENTS Information provided by the Company from time
to time, including this Annual Report, 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 successful integration of
Assisted Living Concepts, Inc.; changes in foreign
currency translation; 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.  p.46 




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##### 



financial statements managements responsibility for financial statements The accompanying consolidated financial statements
of Extendicare Inc. and other financial
information contained in this Annual Report are
the responsibility of management. The consolidated
financial statements have been prepared in
conformity with Canadian generally accepted
accounting principles, using managements best
estimates and judgements, where appropriate. In
the opinion of management, these consolidated
financial statements reflect fairly the financial
position, results of operations and cash flows of
the Company within reasonable limits of
materiality. The financial information contained
elsewhere in this Annual Report has been reviewed
to ensure consistency with that in the
consolidated financial statements. A system of internal accounting and administrative
controls is maintained by management to provide
reasonable assurance that assets are safeguarded
against loss from unauthorized use or disposition
and that financial records are properly maintained
to provide accurate and reliable financial
statements. The Extendicare Board of Directors is responsible
for ensuring that management fulfills its
responsibilities for financial reporting and
internal controls. The Board carries out this
responsibility principally through its independent
Audit Committee comprised of unrelated and outside
directors. The Audit Committee meets regularly
during the year to review significant accounting
and auditing matters with management and the
independent auditors and to review the interim and
annual consolidated financial statements of the
Company. The consolidated financial statements have been
audited by KPMG LLP, Chartered
Accountants, which has full and unrestricted
access to the Audit Committee. KPMGs report on
the consolidated financial statements follows. Mel Rhinelander (signed)
    
    Richard L. Bertrand (signed)President and Chief Executive Officer
    
    Senior Vice-President and Chief Financial OfficerFebruary 21, 2005
  p.47 




---



##### 



auditors reportTo the Shareholders of Extendicare Inc. We have audited the consolidated balance sheets of
Extendicare Inc. as at December 31, 2004 and 2003
and the consolidated statements of earnings,
shareholders equity and cash flows for each of
the years in the three-year period ended December
31, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our
audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards.
Those standards require that we plan and perform
an audit to obtain reasonable assurance whether
the consolidated financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. An audit also includes assessing the
accounting principles used and significant
estimates made by management, as well as
evaluating the overall consolidated financial
statement presentation. In our opinion, these consolidated financial
statements present fairly, in all material
respects, the financial position of the Company as
at December 31, 2004 and 2003 and the results of
its operations and cash flows for each of the
years in the three-year period ended December 31,
2004 in accordance with Canadian generally
accepted accounting principles. Toronto, Canada
    
    KPMG LLP (signed)February 21, 2005
    
    Chartered Accountants
  p.48 




---



##### 



financial statements consolidated balance sheetsExtendicare Inc. (thousands of dollars) December 31
    
    2004
    
    
    2003AssetsCurrent assetsCash and cash equivalents
    
    
    156,193
    
    
    
    74,846Accounts receivable, less allowances of $13,713 and $16,422, respectively
    
    
    140,761
    
    
    
    150,048Assets under divestiture agreement (note 4)
    
    
    
    
    
    
    43,722Income taxes recoverable
    
    
    2,916
    
    
    
    9,654Future income tax assets (note 13)
    
    
    19,296
    
    
    
    34,571Inventories, supplies and prepaid expenses
    
    
    13,312
    
    
    
    13,928332,478
    
    
    
    326,769Property and equipment (note 5)
    
    
    767,401
    
    
    
    821,682Goodwill and other intangible assets (note 6)
    
    
    89,683
    
    
    
    97,558Other assets (note 7)
    
    
    168,238
    
    
    
    205,6291,357,800
    
    
    
    1,451,638Equity accounted investments (note 8)
    
    
    68,531
    
    
    
    141,7791,426,331
    
    
    
    1,593,417Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable
    
    
    30,611
    
    
    
    32,240Accrued liabilities
    
    
    184,235
    
    
    
    204,707Accrual for self-insured liabilities (note 9)
    
    
    30,050
    
    
    
    32,413Deposits under divestiture agreement (note 4)
    
    
    
    
    
    
    38,895Current maturities of long-term debt (note 10)
    
    
    7,251
    
    
    
    7,409252,147
    
    
    
    315,664Accrual for self-insured liabilities (note 9)
    
    
    48,487
    
    
    
    62,990Long-term debt (note 10)
    
    
    613,651
    
    
    
    750,094Other long-term liabilities
    
    
    34,879
    
    
    
    31,259Future income tax liabilities (note 13)
    
    
    20,180
    
    
    
    76,977969,344
    
    
    
    1,236,984Shareholders equity
    
    
    456,987
    
    
    
    356,4331,426,331
    
    
    
    1,593,417
 Approved by the BoardDavid J. Hennigar (signed)
    
    Mel Rhinelander (signed)Chairman
    
    President and Chief Executive Officer
  p.49 




---



##### 



CONSOLIDATED STATEMENTS OF EARNINGSExtendicare Inc. (thousands of dollars except per share amounts) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Revenue (note 12)Nursing and assisted living centresUnited States
    
    
    1,195,904
    
    
    
    1,182,045
    
    
    
    1,236,565Canada
    
    
    366,863
    
    
    
    351,981
    
    
    
    315,907Outpatient therapy  United States
    
    
    14,300
    
    
    
    16,151
    
    
    
    16,144Home health  Canada
    
    
    127,971
    
    
    
    134,921
    
    
    
    146,034Other
    
    
    41,762
    
    
    
    39,516
    
    
    
    44,1351,746,800
    
    
    
    1,724,614
    
    
    
    1,758,785Operating and administrative costs
    
    
    1,505,978
    
    
    
    1,519,567
    
    
    
    1,574,325Earnings before undernoted
    
    
    240,822
    
    
    
    205,047
    
    
    
    184,460Lease costs
    
    
    16,230
    
    
    
    18,217
    
    
    
    24,119Depreciation and amortization
    
    
    56,873
    
    
    
    63,657
    
    
    
    68,989Interest, net
    
    
    39,991
    
    
    
    57,749
    
    
    
    62,047Valuation adjustment on interest rate caps
    
    
    10,379
    
    
    
    
    
    
    
    Loss (gain) from asset disposals, impairment and other items (note 2)
    
    
    5,240
    
    
    
    (905
    )
    
    
    6,689Earnings before income taxes
    
    
    112,109
    
    
    
    66,329
    
    
    
    22,616Income taxes (note 13)Current (recovery)
    
    
    37,072
    
    
    
    19,079
    
    
    
    (7,108
    )Future (reduction)
    
    
    (40,789
    )
    
    
    5,460
    
    
    
    18,310(3,717
    )
    
    
    24,539
    
    
    
    11,202Earnings from health care
    
    
    115,826
    
    
    
    41,790
    
    
    
    11,414Share of equity accounted earnings (note 8)
    
    
    9,375
    
    
    
    18,884
    
    
    
    7,520Net earnings
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934Earnings per share (note 14)Basic
    
    
    1.81
    
    
    
    0.87
    
    
    
    0.26Diluted
    
    
    1.78
    
    
    
    0.86
    
    
    
    0.26
  p.50 




---



##### 



financial statements consolidated statements of cash flowsExtendicare Inc. (thousands of dollars) Years ended December 31
    
    2004
    
    
    2003
    
    
    2002Cash provided by operationsNet earnings
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934Adjustments for:Depreciation and amortization
    
    
    56,873
    
    
    
    63,657
    
    
    
    68,989Provision for self-insured liabilities
    
    
    13,762
    
    
    
    13,010
    
    
    
    14,730Payments for self-insured liabilities
    
    
    (24,494
    )
    
    
    (31,545
    )
    
    
    (50,707
    )Future income taxes (note 13)
    
    
    (40,789
    )
    
    
    5,460
    
    
    
    18,310Dividends received from equity investments,
net of undistributed share of earnings
    
    
    58,919
    
    
    
    (18,884
    )
    
    
    14,476Valuation adjustment on interest rate caps
    
    
    10,379
    
    
    
    
    
    
    
    Loss (gain) from asset disposals, impairment and other items (note 2)
    
    
    5,240
    
    
    
    (905
    )
    
    
    6,689Other
    
    
    2,664
    
    
    
    1,309
    
    
    
    3,154207,755
    
    
    
    92,776
    
    
    
    94,575Net change in operating working capital, excluding cashAccounts receivable
    
    
    10,861
    
    
    
    4,724
    
    
    
    13,167Inventories, supplies and prepaid expenses
    
    
    (541
    )
    
    
    (225
    )
    
    
    (774
    )Accounts payable and accrued liabilities
    
    
    (40
    )
    
    
    (128
    )
    
    
    4,609Income taxes
    
    
    5,927
    
    
    
    3,532
    
    
    
    (14,710
    )223,962
    
    
    
    100,679
    
    
    
    96,867Cash provided by (used in) investment activitiesProperty and equipment
    
    
    (69,122
    )
    
    
    (64,347
    )
    
    
    (53,145
    )Acquisitions (note 3)
    
    
    (8,750
    )
    
    
    (5,346
    )
    
    
    (10,985
    )Net cash proceeds from dispositions (note 2)
    
    
    42,496
    
    
    
    2,047
    
    
    
    19,680Return of equity investment
    
    
    14,119
    
    
    
    
    
    
    
    Other assets
    
    
    25,190
    
    
    
    1,869
    
    
    
    4,3603,933
    
    
    
    (65,777
    )
    
    
    (40,090
    )Cash provided by (used in) financing activitiesIssue of long-term debt
    
    
    170,480
    
    
    
    11,021
    
    
    
    235,585Repayment of long-term debt
    
    
    (283,067
    )
    
    
    (14,320
    )
    
    
    (235,044
    )Decrease (increase) in investments held for self-insured liabilities
    
    
    (12,082
    )
    
    
    5,626
    
    
    
    (10,650
    )Purchase of shares for cancellation
    
    
    (7,294
    )
    
    
    (8,093
    )
    
    
    (8,441
    )Financing costs
    
    
    (16,494
    )
    
    
    (186
    )
    
    
    (13,235
    )Other
    
    
    4,663
    
    
    
    3,077
    
    
    
    1,921(143,794
    )
    
    
    (2,875
    )
    
    
    (29,864
    )Foreign exchange gain (loss) on cash held in foreign currency
    
    
    (2,754
    )
    
    
    (9,805
    )
    
    
    162Increase in cash and cash equivalents
    
    
    81,347
    
    
    
    22,222
    
    
    
    27,075Cash and cash equivalents at beginning of year
    
    
    74,846
    
    
    
    52,624
    
    
    
    25,549Cash and cash equivalents at end of year
    
    
    156,193
    
    
    
    74,846
    
    
    
    52,624
  p.51 




---



##### 



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYExtendicare Inc. (thousands of dollars for amounts)
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Years ended December 31
    
    Number
    
    
    Amount
    
    
    Number
    
    
    Amount
    
    
    Number
    
    
    AmountShare
capital (note 11)Class I Preferred SharesCumulative Redeemable, Series 2Issued and outstanding at beginning of year
    
    
    122,205
    
    
    
    3,054
    
    
    
    139,705
    
    
    
    3,492
    
    
    
    154,405
    
    
    
    3,860Purchased pursuant to obligation
    
    
    (21,900
    )
    
    
    (547
    )
    
    
    (17,500
    )
    
    
    (438
    )
    
    
    (14,700
    )
    
    
    (368
    )Issued and outstanding at end of year
    
    
    100,305
    
    
    
    2,507
    
    
    
    122,205
    
    
    
    3,054
    
    
    
    139,705
    
    
    
    3,492Adjustable Dividend, Series 3
    
    
    93,310
    
    
    
    2,333
    
    
    
    93,310
    
    
    
    2,333
    
    
    
    93,310
    
    
    
    2,333Adjustable Dividend, Series 4
    
    
    241,240
    
    
    
    6,031
    
    
    
    241,240
    
    
    
    6,031
    
    
    
    241,240
    
    
    
    6,031Class II Preferred Shares, Series 1
    
    
    382,979
    
    
    
    6,319
    
    
    
    382,979
    
    
    
    6,319
    
    
    
    382,979
    
    
    
    6,319Class I and II Preferred Shares issued
and outstanding at end of year
    
    
    
    
    
    
    17,190
    
    
    
    
    
    
    
    17,737
    
    
    
    
    
    
    
    18,175Subordinate Voting SharesIssued and outstanding at beginning of year
    
    
    56,575,211
    
    
    
    264,805
    
    
    
    57,107,011
    
    
    
    267,894
    
    
    
    58,544,511
    
    
    
    274,672Purchased pursuant to issuer bid
    
    
    (456,100
    )
    
    
    (2,125
    )
    
    
    (1,107,000
    )
    
    
    (5,170
    )
    
    
    (1,472,300
    )
    
    
    (6,877
    )Issued on conversion of Multiple Voting Shares
    
    
    
    
    
    
    
    
    
    
    210,700
    
    
    
    524
    
    
    
    5,925
    
    
    
    15Issued pursuant to options
    
    
    567,975
    
    
    
    2,896
    
    
    
    364,500
    
    
    
    1,557
    
    
    
    28,875
    
    
    
    84Issued and outstanding at end of year
    
    
    56,687,086
    
    
    
    265,576
    
    
    
    56,575,211
    
    
    
    264,805
    
    
    
    57,107,011
    
    
    
    267,894Multiple Voting SharesIssued and outstanding at beginning of year
    
    
    11,912,692
    
    
    
    29,642
    
    
    
    12,557,092
    
    
    
    31,245
    
    
    
    12,775,917
    
    
    
    31,790Purchased pursuant to issuer bid
    
    
    (7,700
    )
    
    
    (19
    )
    
    
    (433,700
    )
    
    
    (1,079
    )
    
    
    (212,900
    )
    
    
    (530
    )Converted to Subordinate Voting Shares
    
    
    
    
    
    
    
    
    
    
    (210,700
    )
    
    
    (524
    )
    
    
    (5,925
    )
    
    
    (15
    )Issued and outstanding at end of year
    
    
    11,904,992
    
    
    
    29,623
    
    
    
    11,912,692
    
    
    
    29,642
    
    
    
    12,557,092
    
    
    
    31,245Share capital
    
    
    
    
    
    
    312,389
    
    
    
    
    
    
    
    312,184
    
    
    
    
    
    
    
    317,314Contributed surplus  fair value of stock
options
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    Retained earnings (deficit)Balance at beginning of year
    
    
    
    
    
    
    31,959
    
    
    
    
    
    
    
    (26,545
    )
    
    
    
    
    
    
    (44,108
    )Earnings for the year
    
    
    
    
    
    
    125,201
    
    
    
    
    
    
    
    60,674
    
    
    
    
    
    
    
    18,934Purchase of
shares in excess of book, net (note 11)
    
    
    
    
    
    
    (4,602
    )
    
    
    
    
    
    
    (1,407
    )
    
    
    
    
    
    
    (667
    )Preferred share dividends
    
    
    
    
    
    
    (655
    )
    
    
    
    
    
    
    (763
    )
    
    
    
    
    
    
    (704
    )Balance at end of year
    
    
    
    
    
    
    151,903
    
    
    
    
    
    
    
    31,959
    
    
    
    
    
    
    
    (26,545
    )Foreign currency translation adjustment
account
    
    
    
    
    
    
    (7,623
    )
    
    
    
    
    
    
    12,146
    
    
    
    
    
    
    
    67,257456,987
    
    
    
    
    
    
    
    356,433
    
    
    
    
    
    
    
    358,026
  p.52 




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYears ended December 31, 2004, 2003 and 2002 NOTES  I
    Summary of Significant Accounting Policies(A)
    BASIS OF PRESENTATIONThe consolidated financial statements have
been prepared in accordance with Canadian
generally accepted accounting principles (GAAP)
and include the accounts of Extendicare Inc. and
its subsidiaries (Extendicare or the Company).
Health care operations are conducted through
wholly owned subsidiaries Extendicare Health
Services, Inc. (EHSI) in the United States, and
Extendicare (Canada) Inc. (ECI) in Canada, and
their subsidiaries.The equity method is used to account for the
Companys 34.8% ownership interest in Crown Life
Insurance Company (Crown Life).Certain comparative figures have been reclassified
in order to conform to the presentation adopted in
2004.(B)
    CHANGE IN ACCOUNTING POLICIESThe Company adopted the following new
accounting recommendations of the Canadian
Institute of Chartered Accountants (CICA) in 2004.HedgingEffective January 1, 2004, the Company adopted
CICA Accounting Guideline 13 (AG 13), Hedging
Relationships along with subsequent amendments.
AG 13 establishes guidance for the identification,
designation and documentation of the hedging
relationship, and an assessment of the
effectiveness of the hedging relationship. Hedge
accounting is discontinued for any hedging
relationships that do not meet the requirements of
the guideline. Currently, the only hedging
relationships the Company has are its interest
rate swaps, which effectively convert fixed-rate
debt to floating rates. At the beginning of the
year, the Company had an interest rate cap for a
notional US$150,000,000, which under the new
criteria, only US$32,000,000 qualified as an
effective cash flow hedge to limit increases in
interest payments under variable-rate debt
obligations. The remainder of the interest rate
cap, with a notional amount of US$118,000,000, did
not qualify as an effective hedge, and as such,
the Company on transition to the new rules,
recognized an associated unrealized loss of $796,000 (US$614,000), which
was deferred in other assets to be recognized in
earnings over the remaining term of the interest
rate cap to December 2007. In the second quarter
of 2004, the Company terminated this interest rate
cap arrangement, and as a result wrote off the
balance of the deferred unrealized loss of
$772,000 (US$575,000). Two new interest rate cap
arrangements were entered into during the second
quarter, which also do not qualify as effective
hedges. The interest rate caps are being fair
valued and a charge of $10,379,000 (US$7,983,000)
has been reported in the statement of earnings for
the year ended December 31, 2004.RevenueThe CICA Emerging Issues Committee (EIC) issued
Abstract EIC-141, Revenue Recognition, which
provided guidance on the application of CICA
Handbook Section 3400 Revenue, including three
basic criteria that must be met for revenue
recognition: persuasive evidence of the existence
of an arrangement; occurrence of delivery or
rendering of service; and a fixed and determinable
price. The CICA EIC also issued Abstract EIC-142,
Revenue Arrangements with Multiple Deliverables,
which addressed certain aspects of accounting by a
vendor for arrangements under which multiple
revenue generating activities are performed.
Effective January 1, 2004, the Company has
followed these guidelines. There has been no
significant impact on the Companys financial
statements as a result of adopting these
recommendations.Impairment of Long-lived AssetsEffective January 1, 2004, the Company adopted
CICA Handbook Section 3063, which establishes new
standards for the recognition, measurement, and
disclosure of the impairment of long-lived assets.
Changes to existing practice include, among
others, the determination of an impairment of
assets held for use under a two-step process and
the measurement of an impairment loss as the
amount by which the long-lived assets carrying
amount exceeds its fair value. There has been no
significant impact on the Companys financial
statements as a result of adopting this policy.  p.53 




---



##### 



Extendicare Inc.  Asset Retirement ObligationsEffective January 1, 2004, the Company adopted
CICA Handbook Section 3110, which establishes new
standards for the recognition, measurement and
disclosure of liabilities for asset retirement
obligations and the associated asset retirement
costs. The standards apply to legal obligations
associated with the retirement of a tangible
long-lived asset that results from acquisition,
construction, development or normal operations,
and require the Company to record the fair value
of a liability for an asset retirement obligation.
There has been no impact on the Companys
financial statements as a result of adopting this
policy.Employee Future BenefitsIn March 2004 the CICA amended Handbook Sections
1751, Interim Financial Statements and 3461,
Employee Future Benefits, to require additional
interim and annual disclosures. Section 1751 was
amended to require disclosure of total future
benefit costs in interim financial statements for
interim periods ending on or after June 30, 2004.
The Company has adopted this accounting
pronouncement and has reported the future benefit
expense in its interim financial statements and
enhanced its disclosure in note 17.(C)
    USE OF ESTIMATESThe preparation of financial statements in
conformity with Canadian GAAP requires management
to make estimates and assumptions that affect the
amounts reported in the financial statements and
accompanying notes. The more subjective of such
estimates are revenue rate settlements, accrual
for self-insured liabilities, impairment of
long-lived assets and goodwill, and valuation
allowances for future tax assets. The recorded
amounts for such items are based on managements
best information and judgement, and accordingly,
actual results could differ from estimates.(D)
    FOREIGN CURRENCY TRANSLATIONForeign operations and foreign currency
denominated items are translated to Canadian
dollars.Revenues and expenses of self-sustaining foreign
operations are translated at average rates of
exchange in effect during the period. Assets and
liabilities are translated at the exchange rates
in effect at the balance sheet date. Unrealized
exchange gains or losses arising on translation
are deferred and included in shareholders equity
in the foreign currency translation adjustment
account.Monetary items denominated in foreign currency are
translated to Canadian dollars at exchange rates
in effect at the balance sheet date and
non-monetary items are translated at rates of
exchange in effect when
the assets were acquired or obligations incurred.
Revenues and expenses are translated at rates in
effect at the time of the transactions. Foreign
exchange gains and losses are included in income.(E)
    CASH AND CASH EQUIVALENTSCash and cash equivalents include
unrestricted cash and short-term investments less
bank overdraft and outstanding cheques. Short-term
investments, comprised of money market
instruments, have a maturity of 90 days or less
from their date of purchase and are stated at
cost, which approximates net realizable value.(F)
    PROPERTY AND EQUIPMENTProperty and equipment is stated at cost less
accumulated depreciation and amortization.
Provisions for depreciation and amortization are
computed by the straight-line method at rates
based on the following estimated life
expectancies. Buildings
    
    20 to 40 yearsBuilding improvements
    
    5 to 30 yearsFurniture and equipment
    
    varying periods not
exceeding 15 yearsLand improvements
    
    10 to 25 yearsLeasehold improvements
    
    the shorter of the useful life
of the improvements or the
initial term of the lease
  Nursing home assets leased to unrelated operators
under operating lease arrangements are stated at
cost less accumulated depreciation. Provisions for
depreciation are computed as outlined above.Construction in progress includes pre-acquisition
costs and other direct costs related to
acquisition, development and construction of
properties, including interest, which are
capitalized until the facility is opened.
Depreciation of the facility, including interest
capitalized, is commenced the month after the
facility is opened based upon the useful life of
the asset, as outlined above.  p.54 




---



##### 



2004 Annual Report NOTES  Government grants funded over extended
periods to construct facilities are present valued
and recorded as long-term receivables, with an
offset to the cost of construction, once all
conditions of the grant have been met.(G)
    LEASESLeases that substantially transfer all of the
benefits and risks of ownership of property to the
Company, or otherwise meet the criteria for
capitalizing a lease under accounting principles
generally accepted, are accounted for as capital
leases. An asset is recorded at the time a capital
lease is entered into together with its related
long-term obligation to reflect its purchase and
financing. Property and equipment recorded under
capital leases are depreciated on the same basis
as described in note 1(F).Rental payments under
operating leases are expensed as incurred.(H)
    DEFERRED CHARGESCosts associated with obtaining financing are
deferred and amortized over the life of the
related debt. The costs of acquiring leasehold
rights are deferred and amortized over the term of
the lease including renewal options. Deferred
charges are stated at cost less accumulated
amortization and are included in other assets in
the consolidated balance sheets.(I)
    GOODWILL AND OTHER INTANGIBLE ASSETSGoodwill represents the cost of acquired net
assets in excess of their fair market values. The
purchase method of accounting is used for all
business combinations.Goodwill and other intangible assets with
indefinite useful lives are not amortized, but are
tested for impairment at least annually. Goodwill
is allocated to reporting units and any potential
goodwill impairment is identified by comparing the
carrying value of a reporting unit with its fair
value. If any potential impairment is indicated,
then it is quantified by comparing the carrying
value of goodwill to its fair value, based on the
fair value of the assets and liabilities of the
reporting unit.Other intangible assets with definite useful lives
are amortized over their respective estimated
useful lives to their estimated residual values,
and reviewed for impairment by assessing the
recoverability of the carrying values. Other
intangible assets relate to leasehold rights,
which are amortized over the term of the lease
including renewal options.(J)
    IMPAIRMENT OF LONG - LIVED ASSETSThe Company periodically assesses the
recoverability of long-lived assets when there are
indications of potential impairment. In performing
this analysis, management considers such factors
as current results,
trends and future prospects, in addition to other
economic and regulatory factors. The amount of any
impairment is determined as the excess of the
assets net carrying value over its fair value, as
determined by its estimated future cash flows
discounted using a risk adjusted interest rate or
current market value, as appropriate.(K)
    SELF - INSURED LIABILITIESThe Company self-insures certain risks
related to general and professional liability. The
accrual for self-insured liabilities includes
estimates of the costs of both reported claims and
claims incurred but not reported and is based on
estimates of loss based on assumptions made by
management, including consideration of actuarial
projections.The Company invests funds to support the accrual
for self-insured liabilities. These funds are
investment grade, are carried at cost or amortized
cost and are classified in other assets as
investments held for self-insured liabilities.The Company also self-insures certain risks
related to auto liability, health benefits,
employers liability and workers compensation and
accruals for these self-insured risks are included
in accounts payable and accrued liabilities.(L)
    REVENUEIn the United States, nursing centre revenue
results from the payment for services and products
from various federal and state medical assistance
programs as well as private-pay residents. Revenue
is recorded in the period in which services and
products are provided at established rates less
contractual adjustments. Contractual adjustments
include differences between established billing
rates and amounts estimated by management as
reimbursable under various reimbursement formulas
or contracts in effect. Differences between final
settlements and amounts recorded in previous years
are reported as adjustments to revenue in the
period such settlements are determined.  p.55 




---



##### 



Extendicare Inc.  In Canada fees charged for nursing centres
and home care services are regulated by provincial
authorities. Provincial programs fund a
substantial portion of these fees. Revenue is
recorded in the period in which services and
products are provided.Assisted living facility revenue is primarily
derived from private-pay residents in the period in which
the services are provided and at rates established
by the Company based upon the services provided
and market conditions in the area of operation.(M)
    INCOME TAXESThe Company follows the asset and liability
method of tax allocation, which is based on
differences between financial reporting and tax
bases of assets and liabilities. Future income tax
liabilities or assets are calculated using tax
rates anticipated to apply in the periods that the
temporary differences are expected to reverse. The
income tax rates used to measure income tax assets
and liabilities are those rates enacted or
substantially enacted at the balance sheet date.
Realization of future tax assets is dependent on
the availability of taxable income of similar
character.(N)
    EMPLOYEE FUTURE BENEFITSThe costs of the Companys defined benefit
pension plans are accrued as earned, based on
actuarial valuations. The Companys pension fund
assets are valued at market values and the net
actuarial gain or loss in excess of 10% of the
greater of the benefit obligations and the market
value of plan assets is amortized over the average
remaining service periods of active employees.
Employee future benefit obligations are measured
using market interest rates for high quality debt
instruments.(O)
    HEDGING DERIVATIVESThe Company enters into derivative contracts
in the form of interest rate swaps to hedge its
fixed-rate U.S. debt obligations and interest rate
caps to offset possible increases in variable-rate
payments under its interest rate swaps related to
increases in market interest rates. In order for a
derivative to qualify as a hedge, the hedge
relationship must be designated and formally
documented at its inception, detailing the
particular risk management objective and the
strategy for the hedge and the specific asset,
liability or cash flow being hedged, as well as
how effectiveness is being assessed. Changes in
the fair value of the derivative must be highly effective in
offsetting either changes in the fair value of
on-balance sheet items or changes in the amount of
future cash flows. Hedge effectiveness is
evaluated at the inception of the hedge
relationship and on an ongoing basis. The Company
discontinues hedge accounting prospectively when
it is determined that the derivative is no longer
effective in offsetting changes in the fair value
or cash flows of the hedged item, the derivative
expires or is
sold, terminated, or exercised, or because
management determines that designation of the
derivative as a hedging instrument is no longer
appropriate. When hedge accounting is discontinued
because it is determined that the derivative no
longer qualifies as an effective fair-value hedge,
the Company continues to carry the derivative on
the balance sheet at its fair value, and changes
in fair value are reported in the statement of
earnings. In all other situations in which hedge
accounting is discontinued, the Company continues
to carry the derivative at its fair value on the
balance sheet, and recognizes any changes in its
fair value in earnings.(P)
    STOCK - BASED COMPENSATION PLANThe Company has a stock-based compensation
plan, which is described in note 11.CICA Handbook
Section 3870, Stock-based Compensation and Other
Stock-based Payments, recommends the recognition
of an expense for option awards using the fair
value method of accounting. The Company adopted
the fair value method of accounting prospectively,
applied to awards granted under the plan beginning
January 1, 2003. For awards granted under the plan
prior to January 1, 2003, the Company applies the
settlement method, whereby no compensation cost is
recorded, and consideration paid by employees on
the exercise of stock options is treated as share
capital.In May 2004 the Company amended its stock option
plan to add the ability to grant tandem share
appreciation rights with option grants. For awards
under its stock option plan that included tandem
share appreciation rights, the Company accrues
compensation expense on a graded vesting basis in
an amount by which the quoted market value of the
Subordinate Voting Shares exceeds the option
price. Changes, either increases or decreases, in
the quoted market value of the Subordinate Voting
Shares between the date of grant and the reporting
period date result in a change in the measure of
compensation for the award.  p.56 




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##### 



2004 Annual Report NOTES  2.
    Loss (Gain) from Asset Disposals, Impairment and Other ItemsThe following summarizes the components of the loss (gain) from asset disposals, impairment
and other items. (thousands of dollars)
    
    
    
    
    
    
    
    2004
    
    
    2003
    
    
    2002Proceeds Net of
    
    
    Net Book
    
    
    Loss
    
    
    Loss
    
    
    LossDisposition Costs
    
    
    Value
    
    
    (Gain)
    
    
    (Gain)
    
    
    (Gain)Loss (gain) from dispositionsCompletion of U.S. divestiture
    
    
    13,577
    
    
    
    6,961
    
    
    
    (6,616
    )
    
    
    
    
    
    
    Sale of U.S. nursing and assisted living facilities
    
    
    7,542
    
    
    
    8,295
    
    
    
    753
    
    
    
    
    
    
    
    (6,224
    )Sale of Canadian nursing and retirement facilities
    
    
    22,556
    
    
    
    9,052
    
    
    
    (13,504
    )
    
    
    189
    
    
    
    43,675
    
    
    
    24,308
    
    
    
    (19,367
    )
    
    
    189
    
    
    
    (6,224
    )Issuance and retirement of debtTender and call premiums
    
    
    
    
    
    
    
    
    
    
    7,805
    
    
    
    
    
    
    
    Legal expenses
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    Write-off of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    3,167
    
    
    
    
    
    
    
    4,486Bond discount and foreign exchange
    
    
    
    
    
    
    
    
    
    
    (771
    )
    
    
    
    
    
    
    Termination of interest rate swap and cap
    
    
    
    

    
    
    
    
    
    
    (3,661
    )
    
    
    
    
    
    
    Loss on repayment of notes due from Tandem
    
    
    
    
    
    
    
    
    
    
    1,720
    
    
    
    
    
    
    
    Provision for impairment, closure,
exit costs and loss on disposalsUnited States facilities
    
    
    
    
    
    
    
    
    
    
    10,470
    
    
    
    
    
    
    
    8,317Canada home health care B.C. operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,635Canada reduction of labour-related provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,525
    )Write-off of long-term investment
    
    
    
    
    
    
    
    
    
    
    5,046
    
    
    
    
    
    
    
    Canada sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,081
    )
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    441
    
    
    
    (13
    )
    
    
    5,240
    
    
    
    (905
    )
    
    
    6,689
  The following reconciles the cash proceeds from dispositions to that reported in the cash flow
statements. (thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002Reconciliation of cash proceeds from dispositionsProceeds, net of disposition costs
    
    
    43,675
    
    
    
    2,047
    
    
    
    40,150Notes receivable
    
    
    (1,179
    )
    
    
    
    
    
    
    (20,470
    )42,496
    
    
    
    2,047
    
    
    
    19,680
  2004In June EHSI concluded with Greystone Tribeca
Acquisition, L.L.C. (Greystone) the divestiture
agreement as disclosed in note 4.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 because EHSI held an option to repurchase the
facilities. EHSI received $13,577,000
(US$10,000,000) as final payment of the contingent
consideration resulting in a pre-tax gain of
$6,616,000 (US$4,873,000).In August EHSI disposed of its Arkansas
operations, which consisted of a 96-bed nursing
facility and three assisted living facilities (181
units) located on one campus. Gross sale proceeds
were $7,972,000 (US$6,078,000) and consisted of cash and a
$1,179,000 (US$900,000) five-year note, resulting
in a pre-tax loss of $753,000 (US$574,000). Net
proceeds, after disposition costs, were
$7,542,000.  p.57 




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##### 



Extendicare Inc.  In September ECI sold its only nursing home
in British Columbia (75 beds) for gross proceeds
of $5,500,000, which resulted in a pre-tax gain of
$847,000. Of the proceeds, $4,702,000 was used to
retire a mortgage of $3,166,000 related to the
home and to pay $1,536,000 for other costs of
disposition. In February the Company sold two
Ontario homes (275 beds) for gross proceeds of
$19,570,000 resulting in a pre-tax gain of
$12,657,000. A portion of the proceeds was used to
retire a mortgage of $6,611,000 associated with
the homes. The total net proceeds and pre-tax gain
for both of these transactions after disposition
costs were $22,556,000 and $13,504,000,
respectively.In the second quarter, as a result of the tender
and call of EHSIs 9.35% Senior Subordinated Notes
due 2007 (the 2007 Notes), the Company booked
the following amounts: the consolidated net
premiums paid for the early redemption of the 2007
Notes of $7,805,000 (US$5,766,000); legal fees of
$390,000 (US$285,000); the write-off of deferred
financing charges of $3,167,000 (US$2,359,000);
and a gain from unamortized bond discount and
foreign exchange of $771,000. In addition,
pursuant to the termination of the associated
interest rate swap and cap arrangements, a
consolidated net gain of $3,661,000 (US$2,727,000)
was recorded.In June EHSI accepted a cash pre-payment of
$21,941,000 (US$16,150,000) for $23,096,000
(US$17,000,000) of notes receivable due 2007 from
Tandem Health Care, Inc. (Tandem) from
divestitures in 2002 and 1999. After payment of
associated selling expenses of $565,000
(US$416,000), EHSI recorded a pre-tax loss of
$1,720,000 (US$1,266,000).In September EHSI recorded a pre-tax charge of
$5,046,000 (US$4,000,000) to write off its
investment in an Omnicare, Inc. (Omnicare)
warrant, which EHSI received in connection with
the 1998 sale of its pharmacy operations. The
warrant is to acquire 1,500,000 shares of Omnicare
at an exercise price of US$48.00 per share,
expiring on September 16, 2005. EHSI wrote off the
investment because there is little likelihood the
securities will be in the money before the
expiry date.In August EHSI transferred the operations of a
nursing facility (336 beds) in Chippewa Falls,
Wisconsin, to Lakeside Health L.L.C. (Lakeside Health), a
subsidiary of Benedictine Health Dimensions, Inc.
(Benedictine) for a term of three years. The
transfer of operations was in response to facility
citations for survey deficiencies and an agreement
with the State of Wisconsin to transfer the
operations to a new licensee. On the date the
license was transferred, the State of Wisconsin
reduced the nursing facilitys licensed bed
capacity from 336 to 245. Under the terms of the
agreement, Lakeside Health is responsible for all
operating costs, including rent payable to EHSI
and management fees payable to Benedictine.
Benedictine completed a plan of correction at the
facility and passed its survey, bringing the
facility into regulatory compliance. For the five
months Benedictine has operated the facility, it
has reported a loss of $2,200,000 (US$1,800,000),
including expenditures to bring the facility into
compliance. Based upon the operating results of
the facility in the fourth quarter, EHSI recorded
an asset impairment provision of $8,345,000
(US$6,825,000) to reduce the carrying value of the
facility to $7,422,000 (US$6,175,000). In
addition, based on a formal decision to close an
86-bed nursing facility in Indiana, EHSI recorded
a pre-tax loss on impairment of assets of
$2,125,000 (US$1,612,000) in March.2003In April ECI sold a nursing home in Alberta for
gross proceeds of $2,700,000, resulting in a
pre-tax loss of $189,000. In March the Company
sold assets for proceeds of $1,081,000 consisting
of cash and a $180,000 note receivable. These
assets had been written off in prior years and
their sale resulted in a gain of $1,081,000.2002In May Tandem exercised its option to purchase
seven Florida properties that it leased from EHSI
for gross proceeds of $44,979,000 (US$28,567,000,
consisting of cash proceeds of US$15,567,000 and
five-year, 8.5% notes receivable of
US$13,000,000). This transaction, together with a
deferred gain from an April 2001 transaction with
Tandem, resulted in a pre-tax gain of $6,224,000.
The May transaction also resulted in the
conversion of US$1,904,000 of preferred shares
received  p.58 




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##### 



2004 Annual Report NOTES  in the April 2001 transaction to US$1,904,000
of notes, due April 2006. Also in May, EHSI
recorded a provision for closure and exit costs
related to Florida divested operations of
$8,317,000, concerning the
settlement of cost report issues and supplier and
employee claims.In June EHSI wrote off deferred financing costs,
including a charge from the termination of the
swap agreement as described in note 10,of
$4,486,000 related to the previous credit
facility, which was retired from the proceeds of
the issuance of the 9.5% Senior Notes due 2010.In November, as a result of continuing
unfavourable business conditions, management
approved a plan to leave the British Columbia home
health care market by winding down its B.C.
ParaMed business by March 31, 2003. The Company
accrued exit costs of $1,635,000, consisting of
$1,082,000 for labour-related expenses and
$553,000 for operating lease penalties and other
costs.In December ECI recorded a reduction of $1,525,000
for labour-related provisions that were no longer
required due to certain events within the year.3.
    AcquisitionsOn June 1, 2004, EHSI acquired four nursing
homes (321 beds) located in Indiana for cash of
$6,859,000 (US$5,031,000). On February 12, 2004,
EHSI acquired for cash of $1,891,000
(US$1,423,000) a skilled nursing facility in
Washington that it had operated previously under a
lease arrangement.On December 31, 2003, EHSI acquired a 99-bed
skilled nursing facility in Wisconsin for cash of
$5,346,000 (US$4,124,000).On October 1, 2002, EHSI exercised its right to
acquire seven nursing facilities that it
previously leased, for $28,157,000
(US$17,871,000). 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$7,371,000 in cash
and a US$10,500,000 10-year interest-bearing note.
In the latter part of 2003, EHSI prepaid
$6,300,000 (US$4,500,000) against the note and
agreed to refinance the balance.4.
    Assets and Deposits under Divestiture AgreementIn September 2000 EHSI reached an agreement
with Greystone, involving the disposal of 11
nursing centres and four assisted living centres
located in Florida. Gross proceeds were cash of
US$30,000,000 and contingent consideration in the
form of a Vendor Take Back Note and two other
contingent and interest-
bearing notes. The three notes had an aggregate
potential value of up to US$30,000,000 plus
interest. The notes were due in March 2004 and
could have been retired at any time out of the
proceeds from the sale or refinancing of the
facilities by Greystone. For the period September
2000 through March 2004, EHSI retained the right of
first refusal to repurchase the facilities. EHSI
also retained an option to repurchase the
facilities until March 2003; however, EHSI elected
not to place an offer to repurchase the facilities.
Upon maturity of the notes in March 2004, unless
the facilities were sold or refinanced, EHSI was
entitled to receive the US$10,000,000 Vendor Take
Back Note and accrued interest pursuant to the
terms of the Vendor Take Back and other contingent
notes. On April 29, 2004, EHSI received $3,666,000
(US$2,700,000) of interest, and in June 2004, in
addition to the US$30,000,000 of cash consideration
initially received in 2000, EHSI received
$13,577,000 (US$10,000,000) as final payment of the
contingent consideration. The finalization of this
transaction resulted in the recognition in the
second quarter of 2004 of a pre-tax gain from the
sale of assets of $6,616,000 (US$4,873,000), which
is included in loss (gain) from asset disposals,
impairment and other items in the statement of
earnings.The contingent notes were not reported on the
balance sheet, and while EHSI no longer operated
the facilities, the facilities remained on EHSIs
balance sheet as assets held under divestiture
agreement until the final consideration for each
facility was received and a corresponding gain or
loss was recorded. As the final consideration was
due in 2004, the assets of $43,722,000 and
deposits of $38,895,000 under divestiture
agreement were classified as current on the
balance sheet as at December 31, 2003. The assets
were net of depreciation of $10,965,000 from the
date of the agreement. At December 31, 2003, the
assets of $43,722,000 consisted of: land and
improvements of $3,997,000; buildings of
$71,989,000; furniture and equipment of
$11,503,000; less accumulated depreciation and
amortization of $43,767,000.  p.59 




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##### 



Extendicare Inc.  5.
    Property and Equipment (thousands of dollars)
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    2003Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedDepreciation and
    
    
    Net Book
    
    
    
    
    
    
    Depreciation and
    
    
    Net BookCost
    
    
    Amortization
    
    
    Value
    
    
    Cost
    
    
    Amortization
    
    
    ValueLand and land improvements
    
    
    68,247
    
    
    
    5,124
    
    
    
    63,123
    
    
    
    72,755
    
    
    
    6,027
    
    
    
    66,728Buildings
    
    
    967,459
    
    
    
    352,566
    
    
    
    614,893
    
    
    
    1,012,258
    
    
    
    351,585
    
    
    
    660,673Furniture and equipment
    
    
    130,168
    
    
    
    63,402
    
    
    
    66,766
    
    
    
    153,815
    
    
    
    86,396
    
    
    
    67,419Leasehold improvements
    
    
    15,566
    
    
    
    7,208
    
    
    
    8,358
    
    
    
    16,171
    
    
    
    7,244
    
    
    
    8,927Construction in progress
    
    
    14,261
    
    
    
    
    
    
    
    14,261
    
    
    
    17,935
    
    
    
    
    
    
    
    17,9351,195,701
    
    
    
    428,300
    
    
    
    767,401
    
    
    
    1,272,934
    
    
    
    451,252
    
    
    
    821,682
  Property and equipment includes $77,234,000 (2003
$84,419,000) of net assets under capital leases
of which $76,895,000 (2003  $84,039,000) relates
to construction of nine new facilities, net of
$58,996,000 (2003 $53,012,000) of government
funding and $4,500,000 (2003  $2,734,000) of
depreciation.Based on new beds awarded by the Government of
Ontario, ECI undertook to construct 11 new
facilities. In an agreement finalized in February
2001, ECI obtained financing of $125,400,000 from
BCP Long-Term Care Facilities Inc. (BCP) to build
eight of the new facilities. ECI is operating the
facilities for BCP during the 25-year capital
lease arrangement at a financing cost of
approximately 8.0%. In June 2003 ECI entered into
another 25-year lease arrangement with BCP, which
provided $14,400,000 in financing for an
additional Ontario nursing home, at a borrowing
rate of 7.28%. During 2004 BCP funded $606,000
(2003  $22,407,000) in construction costs, which
ECI capitalized as property and equipment, offset
by a capital lease obligation. ECI incurred
$11,021,000 of construction costs for the
additional nursing home prior to the finalization
of the June 2003 agreement. Accordingly, this
portion of the funding was reported on the 2003
statement of cash flows as an issue of long-term
debt. Construction costs subsequently incurred
were paid directly by BCP.The Ontario government is funding a portion of the
construction costs over a 20-year period, with
approximately $101,000,000 to be received by ECI
for the new beds and redevelopment of certain
existing beds. As each facility opens, a
receivable from the government is recorded and
offsets the cost of construction, based on
applying a discount rate equivalent to the yield
on a 20-year Ontario government bond. During 2004
$5,984,000 (2003 $24,875,000) of amounts
receivable included in other assets, discounted at
5.30%, was treated as a reduction of property and
equipment related to the facility that opened
during the year (note 7).At December 31, 2004, as a lessor, EHSI leases 11
nursing facilities and subleases 12 facilities,
all of which are treated as operating leases. An
operator in the State of Texas leases four of the
facilities, which expire in September 2006, and
subleases 12 facilities, which expire through
February 2012. Six leases with an operator in the
State of Florida expire December 2006.
The terms of the agreements provide the lessee
with the option to purchase these EHSI-owned
facilities during the term. One lease, with an
operator in the State of Wisconsin, expires in
July 2007. The net book value at December 31, 2004
of the assets under operating lease agreements was
$24,355,000 (2003  $20,450,000).Interest is capitalized in connection with the
construction of facilities and is amortized over
their estimated useful life. Interest capitalized
in 2004, 2003 and 2002 was $582,000, $1,342,000
and $2,625,000, respectively.  p.60 




---



##### 



2004 Annual Report NOTES  6.
    Goodwill and Other Intangible Assets (thousands of dollars)
    
    2004
    
    
    2003GoodwillBalance at beginning of year
    
    
    93,583
    
    
    
    113,858Additions in the year
    
    
    646
    
    
    
    Foreign exchange
    
    
    (6,865
    )
    
    
    (20,275
    )Balance at end of year
    
    
    87,364
    
    
    
    93,583Other intangible assetsGross carrying value
    
    
    12,039
    
    
    
    12,985Accumulated amortization
    
    
    (9,720
    )
    
    
    (9,010
    )Net carrying value
    
    
    2,319
    
    
    
    3,97589,683
    
    
    
    97,558
  Other intangible assets consist entirely of leasehold rights. Amortization recorded for the year
was $1,480,000 (2003 $1,606,000; 2002  $1,967,000). The remaining change was due to foreign
exchange and in 2003, the removal of fully amortized intangible assets of $1,173,000.Since the adoption of a new accounting standard effective January 1, 2002, the Company has ceased
the amortization of goodwill and the Company annually tests goodwill and intangible assets for
impairment. No impairment existed for the years 2004, 2003 and 2002.7.
    Other Assets (thousands of dollars)
    
    2004
    
    
    2003Investments held for self-insured liabilities
    
    
    48,920
    
    
    
    40,615Notes, mortgages and amounts receivable
    
    
    70,513
    
    
    
    93,497Other long-term receivables, less allowance of $3,599 (2003  $10,981)
    
    
    12,278
    
    
    
    33,629Deferred charges
    
    
    19,009
    
    
    
    17,895Other investments
    
    
    6,136
    
    
    
    11,046Long-term accounts receivable from consulting agreements
    
    
    11,382
    
    
    
    8,947168,238
    
    
    
    205,629
  INVESTMENTS HELD FOR SELF    INSURED LIABILITIESThese investments are subject to insurance regulatory requirements. The investment portfolio
is comprised of U.S. dollar-denominated cash, money market funds and investment-grade corporate and
government securities. (thousands of dollars)
    
    2004
    
    
    2003Fixed income securities, with maturities dueIn one year or less
    
    
    1,083
    
    
    
    After 1 year through 5 years
    
    
    12,782
    
    
    
    18,264After 5 years through 10 years
    
    
    4,691
    
    
    
    5,823After 10 years
    
    
    
    
    
    
    25318,556
    
    
    
    24,340Cash and money market funds
    
    
    27,093
    
    
    
    16,275Equities
    
    
    3,271
    
    
    
    48,920
    
    
    
    40,615
  p.61 




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##### 



Extendicare Inc.  NOTES, MORTGAGES AND AMOUNTS RECEIVABLEIncluded in notes, mortgages and amounts
receivable are $59,640,000 (2003  $56,696,000) of
notes receivable and discounted amounts receivable
due from government agencies. The amounts
receivable of $53,461,000 (2003  $49,440,000) are
discounted at rates ranging from 5.30% to 6.50%
and the notes receivable of $6,179,000 (2003
 $7,256,000) are interest bearing at interest
rates ranging from 6.35% to 7.75%.As at December 31, 2003, notes, mortgages and
amounts receivable included notes receivable from
Tandem, which were held by EHSI for $27,748,000
(US$21,402,000) and due between April 2006 and
December 2007 arising from previous divestitures.
Indemnification escrow funds on deposit of
US$3,700,000 were also included in amounts
receivable. In February 2004 Tandem refinanced two
of its nursing facilities and paid off $5,850,000
(US$4,402,000) of the notes. In June 2004 EHSI
accepted a cash payment of $21,927,000
(US$16,150,000) for the remaining US$17,000,000 of
notes receivable due from Tandem, resulting in a
pre-tax loss of $1,720,000 that is included in
loss (gain) from asset disposals, impairment and
other items in the statement of earnings.OTHER LONG    TERM RECEIVABLESFor Medicare revenue earned prior to the
implementation of the Prospective Payment System
(PPS), and Medicaid programs with a retrospective
reimbursement system, differences between revenue
that EHSI ultimately expects to realize from these
programs and amounts received are reflected as
accounts receivable; or as accrued liabilities
when payments have exceeded revenue that EHSI
ultimately expects to realize.Accounts receivable from both Medicare and
Medicaid state programs at December 31, 2004,
totalled $20,379,000 (2003  $48,250,000), net of
an allowance of $5,252,000 (2003  $18,174,000).
The amounts expected to be substantially collected
within one year are reported as current accounts
receivable, and the remaining amounts totalling
$12,278,000 (2003  $33,629,000) are reported in
other assets.Although there remain certain issues to be
resolved with fiscal intermediaries, the
significant settlement receivable issues in
respect of revenue earned prior to the
implementation
of PPS have been resolved as of December 31, 2004.
EHSIs remaining Medicare settlement receivables
primarily relate to reimbursable Part A
co-insurance receivables, which totalled
$12,741,000 (US$10,600,000) and $11,020,000
(US$8,500,000) at December 31, 2004 and December
31, 2003, respectively.During 2004 EHSI reached negotiated settlements
with fiscal intermediaries for outstanding
Medicare settlement issues pertaining to revenues
earned prior to the implementation of PPS. In
January 2004 EHSI negotiated and subsequently
received a cash settlement of $7,258,000
(US$5,600,000) for a staffing cost issue involving
six claims years. This settlement did not result
in any significant adjustment to the recorded
receivable balance. In April 2004, in respect of
two cost reporting years under appeal, EHSI
reached a settlement with a fiscal intermediary on
an issue involving the allocation of overhead
costs. The settlement will result in payments to
EHSI of approximately $10,000,000 (US$7,700,000),
of which $9,097,000 (US$6,600,000) was received in
May 2004, and the balance will be received upon
resolution of other matters concerning the cost
report years under appeal. EHSI had already
collected $4,200,000 (US$3,000,000) in 2003 for
the cost reporting year of 1996 under appeal
involving the allocation of overhead costs, which
resulted in no adjustment to the recorded
receivable balance.In August 2004 EHSI reached a settlement with a
fiscal intermediary with respect to various issues
regarding nursing facilities purchased in 1997
from Arbor Health Care Company (Arbor) and
subsequently sold to Tandem in 1999. The
settlement will result in payments to EHSI of
$2,567,000 (US$2,100,000), $2,200,000
(US$1,800,000) of which was received in
the fourth quarter of 2004 and the remainder will
be received in 2005. The settlement receivables
were reserved for at the time of sale to Tandem,
through an accrual of a US$3,700,000 long-term
liability for outstanding tax, Medicare and other
claims against Arbor, and were also reserved for
within provisions for divested operations. EHSIs
escrow funds of US$3,700,000 remain on deposit
with a trustee. Upon settlement of these Medicare
matters, EHSI is confident that there are no
further outstanding claims in respect of Arbor.
However, there can be no assurance that other
claims will not be made until the expiry of the
warranty period with  p.62 




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##### 



2004 Annual Report NOTES  Tandem in 2007. As a result of the
settlement, EHSI applied the US$3,700,000 of other
long-term liabilities and US$3,200,000 of accrued
liabilities for divested operations against the
balance of the unrecoverable Medicare settlement
receivable. As a result, there was no gain or loss
recognized on settlement of this issue.In September 2004 EHSI reached a settlement with a
fiscal intermediary with respect to a Director of
Nursing staff cost issue amounting to $3,912,000
(US$3,200,000), of which $3,423,000 (US$2,800,000)
was received in the fourth quarter of 2004 and the
balance will be received in 2005. There was no
gain or loss recognized on settlement of this
issue.OTHER INVESTMENTSIn September 2004 EHSI wrote off its carrying
value of $5,046,000 (US$4,000,000) of an
investment in a warrant to acquire 1,500,000
shares of Omnicare that it held pursuant to the
divestiture of the pharmacy operations to Omnicare
in 1998.8.
    Equity Accounted InvestmentsCROWN LIFE INSURANCE COMPANYExtendicare holds a 34.8% (1,113,690 shares)
common equity interest in Crown Life, with a
carrying value of $68,531,000 at December 31,
2004. Extendicares share of Crown Lifes earnings
for the year ended December 31, 2004 was
$11,998,000. Extendicare received dividends from
Crown Life of $15,592,000 on June 15, 2004, or
$14.00 per share and $66,821,000 on December 15,
2004, or $60.00 per share (2003  nil).In 1999 substantially all of Crown Lifes
insurance business was sold or indemnity reinsured
to The Canada Life Assurance Company (Canada
Life). The resulting comprehensive agreement
between Crown
Life and its principal shareholders, HARO
Financial Company and Extendicare, provides that
at any time after January 1, 2004, Canada Life may
either acquire substantially all of the balance of
Crown Lifes insurance business or, at the
election of Canada Life or Crown Lifes principal
shareholders, make an offer for all of the common shares of Crown Life. In July 2003 Great-West
Lifeco Inc. acquired Canada Life, which resulted
in a delay in the start of negotiations with Crown
Life on the final settlement of the Canada Life
transaction.Crown Life and a co-investor have provided a
guarantee in the amount of $5,500,000 on a joint
and several basis to a lender which has provided
financing for construction of an office building
that is to be held as a rental property and which
Crown Life and the co-investor each have a 50
percent interest.Crown Life has voided certain reinsurance
contracts and continues to investigate the
validity of the claims arising from other
reinsurance contracts. It is not possible to
estimate the ultimate costs, if any, which may
result.Crown Life is a defendant in a number of lawsuits.
It is not possible to predict the outcome of
outstanding litigation, or to estimate any costs
that might arise.SALUMATICS INC .The carrying value of Extendicares
investment in Salumatics Inc. (Salumatics), a
provider of electronic health information and
record management services, was reduced to zero
from $2,623,000 resulting from losses of
Salumatics and a provision against the remaining
carrying value of the Companys investment at
December 31, 2004 (note 19).9.
    Self-insured Liabilities and Measurement UncertaintyThe accrual for self-insured liabilities is
based on managements best estimate of the
ultimate cost to settle claims. Management
regularly evaluates the appropriateness of the
carrying value of this liability. General and
professional liability claims are the most
volatile and significant of the risks for which
the Company self-insures.Managements estimate of the accrual for general
and professional liability costs is significantly
influenced by assumptions, which are limited by the
uncertainty of predictions concerning future
events, and assessments regarding expectations of
several factors. Such factors include, but are not
limited to: the frequency and
severity of claims, which can differ materially by
jurisdiction in which the Company operates;
coverage limits of third-party reinsurance; the
effectiveness of the claims management process; and
uncertainty regarding the outcome of litigation.  p.63 




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##### 



Extendicare Inc.  As a result of the adverse development of
claims experienced by the Company and the
long-term care industry as a whole, the Companys
per claim retained risk increased significantly in
2000. This was mainly due to risk levels
associated with the Florida and Texas operations.
The Company was successful in exiting these two
highly litigious states and thereby limiting
future exposure to general liability claims.
However, changes in the Companys level of
retained risk, and other significant assumptions
that underlie managements estimates of
self-insured liabilities, could have a material
effect on the future carrying value of the
self-insured liabilities, as well as on the
Companys operating results and liquidity.General and professional liability claim
payments for any one policy year occur over a
period of several years. However, the Company
estimates and allocates a current portion of the
professional liability claim payments on its
balance sheet.The Company invests funds to support the accrual
for self-insured liabilities and believes that it
has sufficient cash resources to meet its
estimated current claims payment obligations.10.
    Long-term Debt (thousands of dollars)
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003Payable in Canadian dollarsMortgages, 5.81% to 9.81%, maturing through to 2013
    
    
    
    
    
    
    136,822
    
    
    
    
    
    
    
    150,093Obligations under capital leases (note 5)
    
    
    
    
    
    
    133,179
    
    
    
    
    
    
    
    134,163Payable in United States dollars
    
    US$
    
    
    
    
    
    US$Senior Subordinated Notes at 6.875%, due 2014
    
    
    122,022
    
    
    
    146,669
    
    
    
    
    
    
    
    Senior Subordinated Notes at 9.35%, due 2007
    
    
    
    
    
    
    
    
    
    
    172,100
    
    
    
    223,128Senior Notes at 9.50%, due 2010
    
    
    149,714
    
    
    
    179,956
    
    
    
    149,676
    
    
    
    194,056Mortgages and Industrial Development Revenue Bonds6.25% to 13.61%, maturing through to 2008
    
    
    4,345
    
    
    
    5,223
    
    
    
    4,738
    
    
    
    6,143At varying rates, due 2014
    
    
    9,500
    
    
    
    11,419
    
    
    
    32,000
    
    
    
    41,488Notes payable, at varying rates, maturing through to 2009
    
    
    6,340
    
    
    
    7,621
    
    
    
    6,476
    
    
    
    8,396Obligations under capital leases
    
    
    11
    
    
    
    13
    
    
    
    28
    
    
    
    36620,902
    
    
    
    
    
    
    
    757,503Less due within one year and included in current liabilities
    
    
    
    
    
    
    7,251
    
    
    
    
    
    
    
    7,409613,651
    
    
    
    
    
    
    
    750,094
  After taking into account interest rate swap
agreements, the weighted average interest rate of
all long-term debt at December 31, 2004, 2003 and
2002 was approximately 7.3%, 7.8% and 7.9%,
respectively. In addition, after considering swap
agreements in place to convert fixed-rate debt to
floating rates, 44.5% of the long-term debt was
effectively at fixed rates.Interest paid in 2004, 2003 and 2002 was
$53,095,000, $66,094,000 and $55,075,000,
respectively.ISSUANCE OF SENIOR SUBORDINATED
NOTES DUE 2014 AND REPAYMENT
OF SENIOR SUBORDINATED NOTES DUE
2007In April 2004 EHSI issued US$125,000,000 aggregate
principal amount of 6.875% Senior Subordinated
Notes due May 1, 2014 (the 2014 Notes) at a
price of 97.5001% of par to yield 7.23%, and
amended and restated its credit facility. The net
proceeds from the 2014 Notes were approximately
US$117,400,000, and were used, together with cash
on hand and new borrowing capacity, to purchase
for cash all of EHSIs outstanding US$200,000,000  p.64 




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##### 



2004 Annual Report NOTES  aggregate principal amount of the 2007 Notes.
On April 5, 2004, EHSI commenced a tender offer
for the 2007 Notes, for which 61%, excluding those
held by Extendicare Inc., were tendered and
US$104,900,000 aggregate principal was repaid on
April 22, 2004. The remaining US$95,100,000 of
2007 Notes not tendered were redeemed and paid for
on May 24, 2004, including the US$27,900,000 held
by Extendicare Inc.In August 2004 EHSI completed its offer to
exchange new 6.875% Senior Subordinated Notes due
2014 that had been registered under the Securities
Act of 1933 for the Senior Subordinated Notes
issued in April 2004 pursuant to Rule 144A and
Regulation S under the Securities Act of 1933, as
amended. The terms of the new 2014 Notes are
identical to the terms of the 2014 Notes issued in
April 2004.The 2014 Notes are fully and unconditionally
guaranteed on a senior subordinated unsecured
basis, jointly and severally, by all of EHSIs
existing and future significant U.S. domestic
subsidiaries, by all of its existing and future
U.S. domestic subsidiaries that guarantee or incur
any indebtedness and by any other existing and
future significant subsidiaries or restricted
subsidiaries that guarantee or otherwise provide
direct credit support for indebtedness of EHSI or
any of its U.S. domestic subsidiaries. The 2014
Notes and
guarantees are general unsecured obligations of
EHSI and its subsidiaries.SENIOR NOTES DUE 2010On June 28, 2002, EHSI completed a private
placement of US$150,000,000 of 9.5% Senior Notes
due July 1, 2010 (the 2010 Senior Notes), which
were issued at a discount of 0.25% of par to yield
9.54%. In January 2003 EHSI completed an offer to
exchange new 9.5% Senior Notes due 2010 that had
been registered under the Securities Act of 1933
for the Senior Notes issued in June 2002. The
terms of the new 2010 Senior Notes are identical
to the terms of the 2010 Senior Notes issued in
June 2002 and are guaranteed by all existing and
future active subsidiaries of EHSI.EHSI used the proceeds of $235,585,000
(US$149,625,000) to pay $13,123,000 (US$8,335,000)
of related fees and expenses, retire $206,008,000
of debt (US$130,840,000, consisting of
US$124,479,000 outstanding under its previous
credit facility and US$6,361,000 of other debt),
and for general corporate purposes.The 2010 Senior Notes and the 2014 Notes are
redeemable at EHSIs option starting on July 1,
2006, and May 1, 2009, respectively. The
redemption prices, if redeemed during the 12-month
period indicated, are as follows: Senior Notes, due 2010Year (starting July 1)2006
    
    
    104.750
    %2007
    
    
    102.375
    %2008 and thereafter
    
    
    100.000
    %
 Senior Subordinated Notes, due 2014Year (starting May 1)2009
    
    
    103.438
    %2010
    
    
    102.292
    %2011
    
    
    101.146
    %2012 and thereafter
    
    
    100.000
    %
  CREDIT FACILITYIn connection with the offering of the 2014
Notes, EHSI amended and restated its credit
facility (the Credit Facility) to, among other
things, extend the maturity date from June 28,
2007 to June 28, 2009, and increase the total
borrowing capacity from
US$105,000,000 to US$155,000,000.The Credit Facility is used to back letters of
credit and for general corporate purposes.
Borrowings under the Credit Facility bear
interest, at EHSIs option, at the Eurodollar rate
or the base rate, plus applicable margins.
Depending upon EHSIs senior leverage ratio, the
interest rate is equal to the Eurodollar rate plus
a margin of 2.50% to 3.25% per annum or the base
rate plus a margin of 1.50% to 2.25% per annum.
The commitment fee is 0.50% per annum on the
undrawn capacity regardless of utilization.The Credit Facility is secured by a perfected,
first priority security interest in certain
tangible and intangible assets and all of EHSIs
capital stock and the capital stock of EHSIs
subsidiary guarantors. The Credit Facility is also
secured by a pledge of 65% of the voting stock of
EHSIs foreign subsidiaries, including its
subsidiary guarantors foreign subsidiaries, if
any. The Credit Facility contains customary
covenants and events of default and is subject to
various mandatory prepayment and commitment
reductions. EHSI is permitted to make voluntary
prepayments at any time under the Credit Facility.  p.65 




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##### 



Extendicare Inc.  As at December 31, 2004 and December 31,
2003, EHSI had no borrowings under its Credit
Facility. The unused portion of the Credit
Facility that is available for working capital and
corporate purposes, after reduction for
outstanding letters of credit of US$23,900,000 was
US$131,100,000 as of December 31, 2004.The Credit Facility requires that EHSI comply with
various financial covenants, including fixed
charge coverage, debt leverage, and tangible net
worth ratios. EHSI is in compliance with all of
the financial covenants as of December 31, 2004.INTEREST RATE SWAP AND CAP AGREEMENTSOn June 28, 2002, EHSI entered into an
interest rate swap agreement and an interest rate
cap agreement. The swap arrangement was used to
hedge a notional US$150,000,000 of EHSIs
fixed-rate 9.35% 2007 Notes. EHSI paid a variable
rate of interest equal to the one-month London
Interbank Borrowing Rate (LIBOR), adjustable
monthly, plus a spread of 4.805% and received a
fixed rate of 9.35% to maturity of the swap in
December 2007.The interest rate cap agreement covered a notional
amount of US$150,000,000 maturing in December
2007. Under the cap agreement EHSI paid a fixed
rate of interest equal to 0.24% and received a
variable rate of interest equal to the excess, if
any, of the one-month LIBOR, adjusted monthly,
over the cap rate of 7%. A portion of the interest
rate cap with a notional amount of US$32,000,000
was designated as a hedging instrument (cash flow
hedge) to effectively limit possible increases in
interest payments under variable-rate debt
obligations. The remainder of the interest rate
cap with a notional amount of US$118,000,000 was
used to offset increases in variable-rate interest
payments under the interest rate swap to the
extent that one-month LIBOR exceeded 7%. Under the
terms of the agreements, the counterparties could
call the interest rate swap and the interest rate
cap upon 30 days notice.EHSI had also hedged a portion of its previous
variable-rate long-term debt through an interest
rate swap with a notional amount of US$25,000,000
that matured February 2003. Upon refinancing of
the debt, EHSI terminated this swap with a cash
payment of $1,000,000 (US$635,000), the cost of
which was included in the statement of earnings as
part of loss (gain) from asset disposals,
impairment and other items.On April 19, 2004, coterminous with the redemption
of its 2007 Notes, EHSI terminated its related
interest rate swap and cap agreements for an
aggregate gain of $4,433,000 (US$3,302,000), which
was recognized in the second quarter of 2004. In
addition, to hedge its exposure to fluctuations in
market value, on April 22, 2004, EHSI entered into
two new interest rate swap agreements and two new
interest rate cap agreements relating to EHSIs
2010 Senior Notes and 2014 Notes.With respect to the 2010 Senior Notes, EHSI
entered into an interest rate swap agreement
expiring July 1, 2010, with a notional amount of
US$150,000,000. This agreement effectively
converted up to US$150,000,000 of fixed-rate
indebtedness into variable-rate indebtedness.
Under the terms of this interest rate swap
agreement, the counterparty can call the swap at
any time on or after July 1, 2006, with payments
as determined under the agreement. This call
option is a mirror image of the embedded call
option in the debt instrument. EHSI also entered
into an interest rate cap agreement expiring July
1, 2010, with a notional amount of US$150,000,000
(the 2010 Cap). Under the terms of the 2010 Cap,
EHSI paid on April 22, 2004, an upfront fee of
US$3,500,000 to the counterparty, and the change
in fair value of this fee is recorded in the
statement of earnings. EHSI will receive a
variable rate of interest equal to the excess, if
any, of the six-month LIBOR, adjusted
semi-annually, over the cap rate of 7%. EHSI uses
the interest rate cap to offset possible increases
in interest payments under the interest rate swap
agreement expiring July 1, 2010, caused by
increases in market interest rates over a certain
level. Under the terms of the 2010 Cap, the
counterparty can call the cap if the interest rate
swap agreement expiring July 1, 2010, is
terminated.  p.66 




---



##### 



2004 Annual Report NOTES  With respect to the 2014 Notes, on April 22,
2004, EHSI entered into an interest rate swap
agreement expiring May 1, 2014, with a notional
amount of US$125,000,000. This agreement
effectively converted up to US$125,000,000 of
fixed-rate indebtedness into variable-rate
indebtedness. Under the terms of this interest
rate swap agreement, the counterparty can call the
swap at any time on or after May 1, 2009, with
payments as determined under the agreement. This
call option is a mirror image of the embedded call
option in the debt instrument. EHSI also entered
into an interest rate cap agreement expiring May
1, 2014, with a notional amount of US$125,000,000
(the 2014 Cap). Under the terms of the 2014 Cap,
EHSI pays a fixed rate of interest equal to 0.75%
to the counterparty and receives a variable rate
of interest equal to the excess, if any, of the
six-month LIBOR, adjusted semi-annually, over the
cap rate of 7%. EHSI uses the interest rate cap to
offset possible increases in interest payments
under the interest rate swap agreement expiring
May 1, 2014, caused by increases in market
interest rates over a certain level. Under the
terms of the interest rate cap agreement, the
counterparty can call the cap if the interest rate
swap agreement expiring May 1, 2014, is
terminated.The interest rate swaps maturing in 2010 and 2014
are designated as highly effective fair value
hedges, and as a result, changes in market value
of the swaps are offset by changes in market value
of the hedged debt instruments. As of December 31,
2004, the fair value of the interest rate swaps
designated as fair value hedges is an asset of
$370,000 (US$308,000) and is offset by a
corresponding change in the fair value of the
hedged long-term debt obligation, both of which
are off-balance sheet amounts.The interest rate caps maturing in 2010 and 2014
are not designated as hedges and the change in
fair value of these caps are reported in the
statement of earnings. As of December 31, 2004,
the fair value of the 2010 Cap is an asset of
$1,184,000 (US$984,000) and the fair value of the
2014 Cap is a liability of $6,300,000
(US$5,241,000). The asset is included in the
balance sheet as other assets and the liability is
included in other long-term liabilities.The fair values of EHSIs interest rate caps are
dependent on the projected six-month LIBOR, which
is influenced by long-term rates, and the
volatility of these rates. As a result of a
decline in the volatility of rates in 2004, the
value of EHSIs interest rate caps declined and
resulted in a valuation adjustment loss of
$10,379,000 (US$7,983,000) for the year ended
December 31, 2004.OTHERDuring the first and third quarters of 2004,
EHSI prepaid in full $16,900,000 (US$13,000,000)
and $12,400,000 (US$9,500,000), respectively, of
Industrial Development Revenue Bonds, resulting in
the write-off of $663,000 (US$506,000) of deferred
financing costs, which have been reported in loss
(gain) from asset disposals, impairment and other
items in the statement of earnings.On October 1, 2002, EHSI exercised its right to
acquire three nursing facilities located in Ohio
and four in Indiana that it had previously leased.
The purchase price included a US$10,500,000
10-year interest-bearing note. In the latter part
of 2003, EHSI prepaid $6,300,000 (US$4,500,000)
against the note. In April 2004 EHSI refinanced
the nursing facilities with mortgages and repaid
the remaining balance of the note due to the
seller.In Canada the Company has a $40,000,000 operating
line, of which $38,289,000 supports standby
letters of credit, primarily to secure pension
obligations.Principal payments on long-term debt due within
the next five fiscal years, exclusive of
obligations under capital leases, after giving
effect to renewal privileges, are as follows: Year
    
    (thousands of dollars)2005
    
    
    4,9752006
    
    
    15,1172007
    
    
    8,7852008
    
    
    21,4842009
    
    
    9,395
  p.67 




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##### 



Extendicare Inc.  11.
    Share CapitalThe authorized capital of the Company consists
of an unlimited number of:Class I preferred shares, issuable in series; Class
II preferred shares, issuable in series;
Subordinate Voting Shares; and Multiple Voting
Shares, convertible on the basis of one Subordinate
Voting Share for each Multiple Voting Share. All
preferred shares are redeemable at $25.00 per share
at the option of the Company.CLASS I PREFERRED SHARESCumulative Redeemable Preferred Shares, Series
2are entitled to receive quarterly cumulative
preferential cash dividends in an amount determined
by applying $25.00 to one-quarter of 71% of the
average Canadian prime rate of interest for the
quarter ended immediately before the relevant
dividend payment date. The provisions of these shares contain an annual purchase obligation,
whereby the Company is obliged to make its best
efforts to acquire 71,637 of these shares annually
on the open market.Adjustable Dividend Preferred Shares, Series 3are
entitled to receive quarterly cumulative
preferential cash dividends in an amount determined
by applying $25.00 to one-quarter of 72% of an
interest rate to be determined every five years by
reference to yields on selected Government of
Canada bonds. The rate has been set at 3.96% for
the period commencing February 16, 2001, and ending
February 15, 2006. The Series 3 Preferred Shares
are convertible into Adjustable Dividend Preferred
Shares, Series 4 on a share-for-share basis on
February 16, 2006, and on each fifth anniversary
thereof.Adjustable Dividend Preferred Shares, Series 4are
entitled to receive quarterly cumulative
preferential cash dividends in an amount determined
by applying $25.00 to one-quarter of 72% of the
average Canadian prime rate of interest for the
quarter ended immediately before the relevant
dividend payment date. The Series 4 Preferred
Shares are convertible into Series 3 Preferred
Shares on a share-for-share basis on February 16,
2006, and on each fifth anniversary thereof.CLASS II PREFERRED SHARESPreferred Shares, Series 1are entitled to
receive monthly cumulative cash dividends in an
amount determined by applying $25.00 to
one-twelfth of the defined Annual Dividend Rate
applicable to that calendar month. The Annual
Dividend Rate for a calendar month is calculated
with reference to the Canadian prime rate of
interest and the defined Calculated Trading Price
of the Class II Preferred Shares, Series 1.SUBORDINATE VOTING SHARES AND MULTIPLE VOTING SHARESSubordinate Voting Sharesare entitled to one
vote for each share held at any meeting of
shareholders of the Company. The Subordinate
Voting Shares entitle the holders thereof to
quarterly preferential dividends, cumulative
within each financial year, aggregating 2.5 cents
per share in each financial quarter, after which
each Multiple Voting Share and Subordinate Voting
Share participates equally in all further
dividends.Multiple Voting Sharesare entitled to 10 votes
for each share held at any meeting of
shareholders.NORMAL COURSE ISSUER BID AND PURCHASE OBLIGATIONDuring 2004, pursuant to normal course issuer
bids, the Company purchased and cancelled 456,100
Subordinate Voting Shares at a cost of $6,623,000
(2003  1,107,000 shares at a cost of $4,498,000)
and 7,700 Multiple Voting Shares at a cost of
$120,000 (2003  433,700 shares at a cost of
$3,169,000). The shares purchased and cancelled
during 2004 included 221,900 Subordinate Voting
Shares and 6,700 Multiple Voting Shares purchased
under the current bid at a total cost of
$3,562,000. The current bid, which commenced
November 29, 2004, will terminate for each class
of shares on the earlier of November 28, 2005 and
the dates on which a total of 2,800,000
Subordinate Voting Shares, 590,000 Multiple Voting
Shares and 19,000 Class II Preferred Shares,
Series 1, have been purchased and cancelled by the
Company pursuant to the bid.  p.68 




---



##### 



NOTES 2004 Annual Report  During 2004 the Company purchased 21,900
Class I Preferred Shares, Series 2 for $544,000
pursuant to the purchase obligation (2003  17,500
shares for $411,000).The purchase of shares for cancellation resulted
in a direct charge to retained earnings in 2004 of
$4,602,000 (2003 $1,407,000), for the net cost of
the shares in excess of, or below, their carrying
values.STOCK OPTION PLANThe Companys Amended and Restated
Subordinate Voting Share Option and tandem SAR
Plan (the Stock Option Plan) provides directors
and employees with an incentive to enhance
shareholder value by providing such persons with
an opportunity to participate in an increase in
the equity value of the Companys Subordinate
Voting Shares. Options are granted at the
discretion of the Board of Directors, upon
recommendation by the Human Resources Committee,
to certain directors, officers and employees of

the Extendicare group of companies.In May 2004 the Companys Board of Directors, with
the approval of the Toronto Stock Exchange (TSX),
amended the Stock Option Plan to add the ability
to grant tandem share appreciation rights (SARs)
with option grants. Tandem SARs give participants
the right to choose to exercise a SAR instead of
the corresponding option. When a SAR is exercised
the participant receives, at the election of the
Company, either a payment in cash or the
equivalent value of Subordinate Voting Shares
acquired on the open market, equal to the
difference between the closing price of the
Subordinate Voting Shares and the exercise price
of the option. Awards pursuant to the Companys
Stock Option Plan are exercisable only to the
extent that the option has vested, such period not
to exceed 10 years, as determined by the Board of
Directors at the time of granting. The Company has
not increased the number of Subordinate Voting
Shares reserved for issuance under its Stock
Option Plan, and to the extent that awards
pursuant to the Stock Option Plan result in the
exercise of SARs, the equivalent number of
Subordinate Voting Shares will be reduced from the
number reserved and available under the Stock
Option Plan for future grants. Awards that include
tandem SARs are accounted for on a fair value
basis so that the change in fair value of the
underlying Subordinate Voting Shares is recognized
in earnings.The Companys Stock Option Plan provides that the
exercise price of any option granted shall not be
less than the closing price (or, if there is no
closing price, the simple average of the bid and
ask price) for the Subordinate Voting Shares as
quoted on the TSX on the trading day prior to the
date of grant. The Stock Option Plan contains
provisions for appropriate adjustments in the
event of a corporate reorganization. Upon
termination of employment, for any reason other
than retirement or death, options that have not
vested are forfeited, and vested options must be
exercised within the 90-day period following the
date of termination. In the case of death, options
that have vested, including those that vest during
the next 270 days, must be exercised within the
270-day period following the date of death. In the
case of normal retirement, options continue to
vest and are exercisable in accordance with the
terms of their original grant.A total of 3,815,000 Subordinate Voting Shares
have been reserved under the Stock Option Plan, of
which a total of 2,122,775 Subordinate Voting
Shares have been granted. All options granted
prior to 2004 vest equally over the first four
years, and expire five years from the date of
grant. All options granted during 2004 included
tandem SARs, vest equally over the first four
years, and expire 10 years from the date of grant.
The options granted have exercise prices ranging
from $2.60 to $14.82, and expire between February
23, 2005, and August 3, 2014. p.69




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##### 



Extendicare Inc.  A summary of the status of the Companys stock options/SARs as of December 31, 2004, 2003 and 2002,
and changes during the years ending on those dates is presented below: 2004
    
    
    2003
    
    
    2002Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    average
    
    
    Number
    
    
    average
    
    
    Number
    
    
    averageof Stock
    
    
    Exercise
    
    
    of Stock
    
    
    Exercise
    
    
    of Stock
    
    
    ExerciseOptions
    
    
    Price ($)
    
    
    Options
    
    
    Price ($)
    
    
    Options
    
    
    Price ($)Outstanding at beginning
of year
    
    
    2,297,250
    
    
    
    3.86
    
    
    
    2,514,750
    
    
    
    4.14
    
    
    
    2,342,875
    
    
    
    6.84Granted
    
    
    440,000
    
    
    
    14.57
    
    
    
    458,000
    
    
    
    3.45
    
    
    
    846,000
    
    
    
    4.38Exercised
    
    
    (567,975
    )
    
    
    4.07
    
    
    
    (364,500
    )
    
    
    4.27
    
    
    
    (28,875
    )
    
    
    2.90Cancelled
    
    
    (46,500
    )
    
    
    4.17
    
    
    
    (311,000
    )
    
    
    5.09
    
    
    
    (645,250
    )
    
    
    14.29Outstanding at end of year
    
    
    2,122,775
    
    
    
    6.01
    
    
    
    2,297,250
    
    
    
    3.86
    
    
    
    2,514,750
    
    
    
    4.14Options exercisable at
year-end
    
    
    893,900
    
    
    
    3.62
    
    
    
    944,875
    
    
    
    3.85
    
    
    
    851,625
    
    
    
    4.33
  The following table summarizes information about stock options/SARs outstanding at December 31,
2004. Options Outstanding
    
    
    Options ExercisableWeighted-
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Number
    
    
    average
    
    
    average
    
    
    Number
    
    
    averageof Stock
    
    
    Remaining
    
    
    Exercise
    
    
    of Stock
    
    
    ExerciseRange of Exercise Price ($)
    
    Options
    
    
    Contractual Life
    
    
    Price ($)
    
    
    Options
    
    
    Price ($)Stock options2.60 to 3.70
    
    
    964,400
    
    
    
    1.9 years
    
    
    3.25
    
    
    
    550,525
    
    
    
    3.074.36 to 7.01
    
    
    718,375
    
    
    
    2.0
    
    
    
    4.48
    
    
    
    343,375
    
    
    
    4.50Options/SARs14.50 to 14.82
    
    
    440,000
    
    
    
    9.5
    
    
    
    14.57
    
    
    
    
    
    
    
    
  For awards under the Stock Option Plan that
included tandem SARs the Company accrues
compensation expense on a graded vesting basis in
an amount by which the quoted market value of the
Subordinate Voting Shares exceeds the option
price. Changes, either increases or decreases, in
the quoted market value of the Subordinate Voting
Shares between the date of grant and the reporting
period date result in a change in the measure of
compensation for the award. During 2004 the
Company recorded compensation expense of $90,000
associated with the tandem SARs granted during the
year.The Company elected to adopt the fair value based
method of accounting for stock-based compensation
on a prospective basis, applied to awards granted
under the Stock Option Plan beginning January 1,
2003. For awards granted under the Stock Option
Plan prior to January 1, 2003, the Company applies
the settlement method, in that no compensation
expense is recorded,
and when the options are exercised, share capital
is increased in the amount of the proceeds
received. For stock options granted subsequent to
December 31, 2002, which did not include tandem
SARs, the Company recorded compensation expense of
$192,000 (2003  $144,000). Contributed surplus
increased by $174,000 to $318,000 at the end of
2004, after an $18,000 adjustment for stock
options that were exercised. p.70




---



##### 



NOTES 2004 Annual Report  Had awards granted under the Stock Option Plan prior to January 1, 2003 been accounted for using
the fair value based method of accounting for stock-based compensation, the Companys consolidated
net earnings and related per share amounts would have been reduced to the pro forma amounts
indicated below: (thousands of dollars except per share amounts)
    
    2004
    
    
    2003
    
    
    2002Net earningsAs reported
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934Pro forma
    
    
    124,863
    
    
    
    60,092
    
    
    
    17,625Basic earnings per shareAs reported
    
    
    1.81
    
    
    
    0.87
    
    
    
    0.26Pro forma
    
    
    1.81
    
    
    
    0.86
    
    
    
    0.24Diluted earnings per shareAs reported
    
    
    1.78
    
    
    
    0.86
    
    
    
    0.26Pro forma
    
    
    1.77
    
    
    
    0.85
    
    
    
    0.24
  The weighted average fair value of options granted during the years ended December 31, 2003 and
2002 was $1.49 and $1.92, respectively. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions. 2003
    
    
    2002Dividend yield
    
    
    
    
    
    
    Expected share price volatility
    
    
    44.6
    %
    
    
    47.4
    %Risk-free rate of return
    
    
    4.0
    %
    
    
    4.3
    %Expected period until exercise (years)
    
    
    4.7
    
    
    
    4.4
  12.
    RevenueThe Company derived approximately 77%, 76%
and 76% of its United States revenue in 2004, 2003
and 2002, respectively, from services provided
under the federal program (Medicare) and state
medical assistance programs (Medicaid). The
Medicare program pays each participating facility
a prospectively set rate for each resident, which
is based on the residents acuity. Most Medicaid
programs fund participating facilities using a
case-mix based system, paying prospectively set
rates.In respect of Medicare cost reporting periods
prior to the implementation of PPS, EHSI has
ongoing discussions with its fiscal intermediaries
regarding the treatment of various items related
to prior years cost reports. Normally items are
resolved during the audit process and no provision
is required. Differences of opinion regarding cost
reporting methods between EHSI and its fiscal
intermediaries can be settled through a formal
appeal process. Should this occur, a general
provision for Medicare receivables may be recorded
for disagreements that result in EHSI filing
an appeal with the Provider Reimbursement Review
Board of the Centers for Medicare and Medicaid
Services (CMS).With respect to Medicaid in states that utilize
retrospective reimbursement systems, nursing
facilities are paid on an interim basis for
services provided, subject to adjustments based
upon allowable costs, which are generally
submitted in cost reports on an annual basis. In
these states, revenue is subject to adjustments as
a result of cost report settlements with the
state.In the third and fourth quarters of 2003, EHSI
recorded a provision for $3,083,000 (US$2,200,000)
and $2,455,000 (US$1,752,000), respectively,
pertaining to individual Medicare claims in
dispute with a fiscal intermediary for the cost
report years 1996 through 1998. Of the $5,538,000
provision, $1,794,000 (US$1,280,000) pertained to
discontinued operations and therefore was applied
to a previously accrued divested operations
liability balance. The net adjustment of
$3,744,000 (US$2,672,000) resulted in a reduction
of revenue in 2003. Offsetting this, EHSI recorded
a recovery of $5,879,000 (US$4,195,000) in
Medicaid revenue due to a favourable court
decision in the State of Ohio relating to the
recovery of alleged government overpayments for
adjudicated Medicaid cost report periods. p.71




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##### 



Extendicare Inc.  As of December 31, 2004, the States of
Pennsylvania, Indiana and Washington have proposed
state plan amendments and waivers pertaining to
the fiscal year commencing July 1, 2003, that are
awaiting review and approval by CMS. As the state
plan amendments and waivers had not been approved,
EHSI recorded revenue based upon amounts received.
Based upon the final and CMS approved state plan
amendments and waivers, changes in Medicaid rates
and any associated provider taxes could result in
adjustments to income for the period from July 1,
2003 to December 31, 2004.13.
    Income TaxesThe major factors that caused variations from the expected combined Canadian federal and
provincial statutory income tax rates were the following: (thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002Earnings from health care before income taxes
    
    
    112,109
    
    
    
    66,329
    
    
    
    22,616Income taxes
at statutory rates of 36.12% (2003  36.62%; 2002 
38.62%)
    
    
    40,494
    
    
    
    24,290
    
    
    
    8,733Income tax effect relating to the following itemsTax rate variance of foreign subsidiaries
    
    
    3,984
    
    
    
    2,806
    
    
    
    1,552Recovery of prior year taxes re loss on sale of subsidiary stock
    
    
    (38,968
    )
    
    
    
    
    
    
    IRS audit settlement and other items
    
    
    (2,103
    )
    
    
    
    
    
    
    Benefit of other operating and capital loss utilization
    
    
    (5,312
    )
    
    
    (2,744
    )
    
    
    (411
    )Non-taxable income
    
    
    (3,256
    )
    
    
    (410
    )
    
    
    Other items
    
    
    1,444
    
    
    
    597
    
    
    
    1,328(3,717
    )
    
    
    24,539
    
    
    
    11,202
  Income taxes for 2004 included a tax benefit of
$41,071,000 (US$33,596,000) recorded in December
2004 resulting from two events. EHSI recorded a
cumulative tax benefit of $38,968,000
(US$31,876,000) for an additional loss claimed
from the December 1999 sale of Arbor, its former
subsidiary, to Tandem. This additional loss was
allowed primarily due to the issuance of
additional guidance by the U.S. Internal Revenue
Service (IRS), regarding the allowable method to
calculate the loss on the sale of subsidiary
stock, and partially due to the settlement of an
IRS audit for the tax years ending December 1997
through December 2002. In addition, EHSI recorded
a tax benefit of $2,103,000 (US$1,720,000)
relating to this audit and other issues.Cash taxes paid in 2004, 2003 and 2002 were
$29,677,000, $15,547,000 and $7,571,000,
respectively.At December 31, 2004, the Company had net
operating loss carryforwards available for U.S.
state income tax financial reporting purposes of
$74,283,000 (US$61,800,000), which expire in 2005
through 2023. The Company also had net operating
loss carryforwards available for U.S. federal
income tax financial reporting purposes of
$7,611,000, which expire in 2021 through 2023. In
addition, the Company had $7,230,000 net operating
loss carryforwards available for Canadian income
tax purposes, which expire in 2005 through 2014.
To the extent the realization of these losses is
uncertain a valuation allowance has been
established.At December 31, 2004, there were capital losses
available for Canadian income tax purposes of
$55,222,000 (2003 $65,645,000) that can be
carried forward indefinitely to apply against
future capital gains. The future tax benefit of
the capital losses of $9,973,000 (2003 
$11,855,000) has been fully offset in the
valuation allowance for future tax assets. At
December 31, 2003, the Company had capital losses
available for U.S. state tax purposes of
$212,626,000 (US$164,000,000) with a related
future tax asset balance of $17,542,000
(US$13,530,000). These losses, which had been
fully offset with a valuation allowance, expired
during 2004, and the future tax asset was written
off against the valuation allowance. p.72




---



##### 



NOTES 2004 Annual Report  The valuation allowance for future tax assets
as of December 31, 2004 and 2003 was $21,690,000
and $45,820,000, respectively. The net change in
the total valuation allowance for 2004 and 2003
was a decrease of $24,130,000 and $8,794,000,
respectively. In assessing the realizability of
future tax assets, management considers whether it
is more likely than not that some portion or all
of the future tax assets will not be realized. The
ultimate realization of future tax assets is
dependent upon the generation of future taxable
income during the periods in which those temporary
differences become deductible. Management
considers the scheduled reversal of future tax
liabilities, projected future taxable income and
tax planning strategies in making this assessment.
Management believes it is more likely than not the
Company will realize the benefits of these
deductible differences, net of the valuation
allowances.  Future income taxes are provided for temporary differences. The significant components of future
income tax assets and liabilities are as follows: (thousands of dollars)
    
    2004
    
    
    2003Future income tax assetsSelf-insurance reserves
    
    
    28,677
    
    
    
    39,697Employee benefit accruals
    
    
    18,165
    
    
    
    13,841Operating loss carryforwards
    
    
    10,774
    
    
    
    11,432Alternative minimum tax credit carryforwards
    
    
    10,886
    
    
    
    Work opportunity tax credit carryforwards
    
    
    5,779
    
    
    
    Net capital loss carryforwards
    
    
    9,973
    
    
    
    29,397Deferred revenue
    
    
    4,827
    
    
    
    4,032Investment in Crown Life
    
    
    3,688
    
    
    
    5,795Goodwill
    
    
    1,586
    
    
    
    1,519Accounts receivable reserves
    
    
    1,566
    
    
    
    Operating reserves
    
    
    586
    
    
    
    2,774Other
    
    
    8,368
    
    
    
    7,492104,875
    
    
    
    115,979Less valuation allowance
    
    
    21,690
    
    
    
    45,82083,185
    
    
    
    70,159Future income tax liabilitiesProperty and equipment
    
    
    71,596
    
    
    
    93,095Leasehold rights
    
    
    953
    
    
    
    1,766Accounts receivable reserves
    
    
    
    
    
    
    1,084Other
    
    
    11,520
    
    
    
    16,62084,069
    
    
    
    112,565Future income tax liabilities, net
    
    
    884
    
    
    
    42,406Less current portion of future income tax assets, net
    
    
    19,296
    
    
    
    34,571Long-term future income tax liabilities, net
    
    
    20,180
    
    
    
    76,977
 p.73




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##### 



Extendicare Inc.  14.
    Earnings per SharePer share amounts are calculated by dividing net earnings after preferred share dividends
for the year by the weighted average number of combined Subordinate Voting Shares and Multiple
Voting Shares outstanding during the year. Diluted earnings per share, using the treasury stock
method, assumes outstanding stock options are exercised at the beginning of the year and common shares are purchased at the average market price during the year from funds derived on the
exercise of these outstanding options.The following table reconciles the numerator and denominator of the basic and diluted earnings
per share computation. (thousands of dollars except per share amounts)
    
    2004
    
    
    2003
    
    
    2002Numerator for basic and diluted earnings per shareNet earnings
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934Dividends on preferred shares
    
    
    (659
    )
    
    
    (764
    )
    
    
    (708
    )124,542
    
    
    
    59,910
    
    
    
    18,226Denominator for basic and diluted earnings per shareBasic weighted average number of shares
    
    
    68,719,066
    
    
    
    68,839,040
    
    
    
    70,696,172Dilutive stock options
    
    
    1,375,956
    
    
    
    722,599
    
    
    
    578,314Diluted weighted average number of shares
    
    
    70,095,022
    
    
    
    69,561,639
    
    
    
    71,274,486Earnings per shareBasic
    
    
    1.81
    
    
    
    0.87
    
    
    
    0.26Diluted
    
    
    1.78
    
    
    
    0.86
    
    
    
    0.26
  There were no stock options excluded from these calculations for the years ended December 31,
2004 and December 31, 2003.15.
    Other Commitments  At December 31, 2004, the Company was committed under non-cancellable leases requiring
future minimum rentals as follows: Capital
    
    
    Operating(thousands of dollars)
    
    Leases
    
    
    Leases
    
    
    Total2005
    
    
    12,964
    
    
    
    11,879
    
    
    
    24,8432006
    
    
    12,951
    
    
    
    7,819
    
    
    
    20,7702007
    
    
    12,951
    
    
    
    5,472
    
    
    
    18,4232008
    
    
    12,951
    
    
    
    5,344
    
    
    
    18,2952009
    
    
    12,951
    
    
    
    4,968
    
    
    
    17,919Thereafter
    
    
    222,655
    
    
    
    25,229
    
    
    
    247,884Total minimum payments
    
    
    287,423
    
    
    
    60,711
    
    
    
    348,134Less amount representing interest
    
    
    154,231Obligations under capital leases
    
    
    133,192
  At December 31, 2004, outstanding capital expenditure commitments for ECI totalled $481,000, and
for EHSI, totalled $25,000,000 (US$20,800,000). Included in EHSIs outstanding commitments was
US$12,600,000 related to expansion projects estimated to cost US$42,000,000, of which US$9,400,000
was spent in 2004, and the remaining US$20,000,000 was uncommitted at year-end. p.74




---



##### 



NOTES 2004 Annual Report  16.
    Contingent LiabilitiesThe Company and its consolidated subsidiaries
are defendants in actions brought against them
from time to time in connection with their
operations. It is not possible to predict the
ultimate outcome of the various proceedings at
this time or to estimate additional costs that may
result.The U.S. Department of Justice and other federal
agencies are increasing resources dedicated to
regulatory investigations and compliance audits of
health care providers. The Company is diligent to
address these regulatory efforts. U.S. federal law
requires each state to have a Medicaid Fraud
Control Unit, which is responsible for
investigating provider fraud and resident abuse in
Medicaid funded facilities. EHSI has an
investigation currently in progress concerning
resident care and funds received for Certified
Nursing Assistant training at the Lakeside nursing
facility, which arose before the facility was
transferred to Lakeside Health in July 2004 under
a lease arrangement. EHSI has accrued for known
and estimated fines and penalties to be assessed
and is in final negotiations with the State of
Wisconsin to settle all of these issues. EHSI is
also aware of an investigation by this unit in
Kentucky, but this investigation has been inactive
for a substantial period of time.EHSI entered into a preferred provider agreement
with Omnicare pursuant to the divestiture of its
pharmacy operations in 1998. In connection with
its agreement to provide pharmacy services,
Omnicare has requested arbitration for an alleged
lost profits claim related to EHSIs disposition
of assets, primarily in Florida. Damage amounts,
if any, cannot be reasonably estimated based on
information available at this time. An arbitration
hearing has not yet been scheduled. Management
believes it has interpreted correctly and complied
with the terms of the preferred provider
agreement; however, there can be no assurance that
this claim will not be successful or that other
claims will not be made with respect to the
agreement. Also, EHSI and Omnicare are currently
negotiating the pricing of drugs for Medicare
residents for the years 2001 and 2002 and should
this matter not be settled, it will be taken to
arbitration.17.
    Employee Future BenefitsRetirement compensation arrangements,
including defined benefit plans, are maintained
with certain employee groups.The Company provides a defined benefit pension
plan and a supplementary plan, which is an
unfunded defined benefit pension arrangement for
certain of its executives. The Company measures
its accrued benefit obligations and the fair value
of plan assets for accounting purposes at
September 30 of each year. A discount rate of 6%
was used to determine the benefit expense and the
accrued benefit obligation. Actuarial valuation
reports of the defined benefit pension plan are
completed every three years with the last one
completed on October 1, 2003. Additional
information for these benefit plans is provided in
the tables on the following page.The Company also maintains defined contribution
retirement 401(k) savings plans in its United
States operations, which are made available to
substantially all of the Companys United States
employees. EHSI pays a matching contribution of
25% of every qualifying dollar contributed by plan
participants, net of any forfeitures. The Company
incurred expenses and made cash payments related
to the 401(k) savings plans of $1,692,000,
$1,121,000 and $2,016,000 in 2004, 2003 and 2002,
respectively. p.75




---



##### 



Extendicare Inc. (thousands of dollars unless otherwise noted)
    
    2004
    
    
    2003Accrued benefit obligationsBalance at beginning of year
    
    
    33,949
    
    
    
    28,736Current service cost
    
    
    720
    
    
    
    552Benefits paid
    
    
    (1,434
    )
    
    
    (1,434
    )Interest costs
    
    
    2,037
    
    
    
    1,828Actuarial (gains) losses
    
    
    (1,879
    )
    
    
    4,267Balance at end of year
    
    
    33,393
    
    
    
    33,949Plan assetsFair value at beginning of year
    
    
    5,409
    
    
    
    5,098Employer contributions
    
    
    1,257
    
    
    
    1,265Actual return on plan assets
    
    
    641
    
    
    
    480Benefits paid
    
    
    (1,434
    )
    
    
    (1,434
    )Fair value at end of year
    
    
    5,873
    
    
    
    5,409Funded
status  plan deficit
    
    
    27,520
    
    
    
    28,540Unrecognized net experience losses
    
    
    (6,215
    )
    
    
    (9,160
    )Other
    
    
    (314
    )
    
    
    (314
    )Accrued benefit liability
    
    
    20,991
    
    
    
    19,066Net benefit plan expenseCurrent period service costs
    
    
    720
    
    
    
    552Interest cost
    
    
    2,037
    
    
    
    1,828Expected return on plan assets
    
    
    (399
    )
    
    
    (376
    )Amortization of losses
    
    
    824
    
    
    
    303Net benefit plan expense
    
    
    3,182
    
    
    
    2,307Reconciliation of funded status to amounts in financial statementsAccrued benefit liability at beginning of the year
    
    
    19,066
    
    
    
    18,017Pension expense
    
    
    3,182
    
    
    
    2,307Employer contributions
    
    
    (1,257
    )
    
    
    (1,258
    )Accrued benefit liability at end of the year
    
    
    20,991
    
    
    
    19,066Reported in the Companys balance sheet as:Current accrued liabilities
    
    
    1,257
    
    
    
    1,258Other long-term liabilities
    
    
    19,734
    
    
    
    17,808Accrued benefit liability at end of year
    
    
    20,991
    
    
    
    19,066Percentage of plan assetsEquities
    
    
    61
    %
    
    
    62
    %Fixed income securities
    
    
    31
    %
    
    
    33
    %Cash and short-term investments
    
    
    8
    %
    
    
    5
    %100
    %
    
    
    100
    %Significant assumptionsDiscount rate
    
    
    6.0
    %
    
    
    6.0
    %Expected long-term rate of return on plan assets
    
    
    7.5
    %
    
    
    7.5
    %Rate of compensation increase
    
    
    5.0
    %
    
    
    5.0
    %Average remaining service period of active employees (years)
    
    
    7
    
    
    
    8
 p.76




---



##### 



NOTES 2004 Annual Report  18.
    Financial Instruments  With the exception of the following, the fair values of financial instruments approximate
their recorded values. (thousands of dollars)
    
    2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueAccounts receivable, less allowance
    
    
    161,119
    
    
    
    160,061
    
    
    
    189,534
    
    
    
    184,043Notes, mortgages and amounts receivable,
including current portion
    
    
    79,350
    
    
    
    82,779
    
    
    
    96,587
    
    
    
    98,407Other investments
    
    
    601
    
    
    
    1,285
    
    
    
    11,046
    
    
    
    13,389Investments held for self-insured liabilities
    
    
    48,920
    
    
    
    49,224
    
    
    
    40,615
    
    
    
    41,435Long-term debt, including current portion
    
    
    620,902
    
    
    
    696,388
    
    
    
    757,503
    
    
    
    832,690Interest rate cap (asset)
    
    
    (1,184
    )
    
    
    (1,184
    )
    
    
    
    
    
    
    Interest rate cap (liability)
    
    
    6,300
    
    
    
    6,300
    
    
    
    
    
    
    
    1,013
  Accounts receivable, including other long-term
receivables, are recorded at the net realizable
value expected to be received from government
assistance programs, other third-party payors or
individual patients. The carrying values of
accounts receivable approximate fair values due to
their short maturities, with the exception of
certain settlement receivables from third-party
payors that are anticipated to be collected beyond
one year. The fair values of these settlement
receivables are estimated based on discounted cash
flows at current borrowing rates.  Notes and mortgages receivable primarily consist
of notes and amounts receivable from government
agencies, and third-party notes on the sale of
assets. The fair values for these instruments are
based on the amount of future cash flows
associated with each instrument, discounted using
current applicable rates for similar instruments
of comparable maturity and credit quality.Receivables from government agencies represent the
only concentrated group of credit risks for the
Company. Management does not believe that there
are any credit risks associated with these
government agencies other than possible funding
delays. Receivables other than from government
agencies consist of receivables from various
payors and do not represent any concentrated
credit risks to the Company. Furthermore,
management continually monitors and adjusts its
allowances associated with these receivables.Other investments consist of investments in stock
and warrants, the fair values of which are based
on quoted market prices.The fair values for investments held for
self-insured liabilities are based on quoted
market prices. The securities within the
investments held for self-insured liabilities are
all considered to be available for sale.The Company has determined that it is not
reasonable or meaningful to calculate a fair value
for the accrual for self-insured liabilities.The fair values for long-term debt are based on
the amount of future cash flows associated with
each instrument discounted using current
applicable rates for similar instruments of
comparable maturity and credit quality.The fair values of the interest rate swaps and
interest rate caps are based on the quoted market
prices as provided by the financial institutions
that are counterparty to the arrangements. As of
December 31, 2004, the fair value of the interest
rate swaps designated as fair value hedges is an
asset of $370,000 (2003  $5,432,000) and is
offset by a corresponding change in the fair value
of the hedged long-term debt obligation, both of
which are off-balance sheet amounts. p.77




---



##### 



Extendicare Inc.  19.
    Related Party TransactionsThe Company made an investment in Salumatics
of $122,000 in 2004 and $2,501,000 in 2003. The
Chairman and one other Director of Extendicare are
board members of Salumatics, and three Directors
of Extendicare are either direct or indirect
shareholders of Salumatics. In addition, the
Chairman of Extendicare serves as Chairman and
Chief Executive Officer of a company that holds an
equity interest in Salumatics and has a contract
to provide management services to Salumatics.Extendicare paid rent to Crown Life for rental of
certain office premises up until June 2004. For
the first six months ended June 30, 2004, the rent
paid amounted to $694,000 and for the years 2003
and 2002 was $1,319,000 and $1,257,000,
respectively.20.
    Segmented InformationDuring 2004 Extendicare had two reportable
operating segments: United States operations and
Canadian operations. The Companys operations are
managed independently of each other because of
their geographic areas and regulatory
environments. Each operation retains its own
management team and is responsible for compiling
its own financial information.The Company, through its subsidiaries, operates
long-term care facilities in the United States and
Canada. Also offered in the United States are
medical specialty services, such as subacute care
and rehabilitative therapy services, while home
health care services are provided in Canada.Substantial portions of the Companys revenues are
funded by various federal, state, provincial and
local government programs. The funding programs
from which Extendicare receives 10% or more of its
revenues are: the United States federal Medicare
program, representing revenues of $367,696,000,
$334,247,000 and $328,313,000 in 2004, 2003 and
2002, respectively; and the Ontario provincial
government, representing revenues of $267,885,000,
$261,919,000 and $228,201,000 in 2004, 2003 and
2002, respectively. p.78




---



##### 



2004 Annual Report NOTES The significant accounting policies of the reportable operating segments are the same as those
described in note 1. Information about the Companys segments and a reconciliation of segment
profit to net earnings are as follows: (thousands of dollars)
    
    
    
    
    
    
    
    
    
    2004United States
    
    
    Canada
    
    
    TotalRevenueNursing and assisted living centres
    
    
    1,195,904
    
    
    
    366,863
    
    
    
    1,562,767Outpatient therapy
    
    
    14,300
    
    
    
    
    
    
    
    14,300Home health
    
    
    
    
    
    
    127,971
    
    
    
    127,971Other
    
    
    34,742
    
    
    
    7,020
    
    
    
    41,7621,244,946
    
    
    
    501,854
    
    
    
    1,746,800Earnings before undernoted
    
    
    189,487
    
    
    
    51,335
    
    
    
    240,822Lease costs
    
    
    12,548
    
    
    
    3,682
    
    
    
    16,230Depreciation and amortization
    
    
    46,940
    
    
    
    9,933
    
    
    
    56,873Interest expense
    
    
    31,659
    
    
    
    23,819
    
    
    
    55,478Interest revenue
    
    
    (10,545
    )
    
    
    (4,942
    )
    
    
    (15,487
    )Intersegment interest expense (revenue)
    
    
    1,390
    
    
    
    (1,390
    )
    
    
    Valuation adjustment of interest rate caps
    
    
    10,379
    
    
    
    
    
    
    
    10,379Loss (gain) from asset disposals, impairment and other items
    
    
    20,931
    
    
    
    (15,691
    )
    
    
    5,240Earnings before income taxes
    
    
    76,185
    
    
    
    35,924
    
    
    
    112,109Income taxesCurrent
    
    
    27,234
    
    
    
    9,838
    
    
    
    37,072Future (reduction)
    
    
    (38,971
    )
    
    
    (1,818
    )
    
    
    (40,789
    )Earnings from health care
    
    
    87,922
    
    
    
    27,904
    
    
    
    115,826Share of equity accounted earnings
    
    
    
    
    
    
    
    
    
    
    9,375Net earnings
    
    
    
    
    
    
    
    
    
    
    125,201Cash used in property and equipment
    
    
    53,771
    
    
    
    15,351
    
    
    
    69,122Balance sheetProperty and equipment
    
    
    539,790
    
    
    
    227,611
    
    
    
    767,401Goodwill
    
    
    87,294
    
    
    
    70
    
    
    
    87,364Leasehold rights
    
    
    2,319
    
    
    
    
    
    
    
    2,319Assets before undernoted
    
    
    921,593
    
    
    
    436,207
    
    
    
    1,357,800Equity accounted investments
    
    
    
    
    
    
    
    
    
    
    68,531Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    1,426,331
  p.79 




---



##### 



Extendicare Inc. (thousands of dollars)
    
    
    
    
    
    
    
    
    
    2003United States
    
    
    Canada
    
    
    TotalRevenueNursing and assisted living centres
    
    
    1,182,045
    
    
    
    351,981
    
    
    
    1,534,026Outpatient therapy
    
    
    16,151
    
    
    
    
    
    
    
    16,151Home health
    
    
    
    
    
    
    134,921
    
    
    
    134,921Other
    
    
    32,543
    
    
    
    6,973
    
    
    
    39,5161,230,739
    
    
    
    493,875
    
    
    
    1,724,614Earnings before undernoted
    
    
    155,064
    
    
    
    49,983
    
    
    
    205,047Lease costs
    
    
    14,469
    
    
    
    3,748
    
    
    
    18,217Depreciation and amortization
    
    
    53,993
    
    
    
    9,664
    
    
    
    63,657Interest expense
    
    
    43,970
    
    
    
    23,306
    
    
    
    67,276Interest revenue
    
    
    (5,672
    )
    
    
    (3,855
    )
    
    
    (9,527
    )Intersegment interest expense (revenue)
    
    
    3,655
    
    
    
    (3,655
    )
    
    
    Gain from asset disposals and other items
    
    
    
    
    
    
    (905
    )
    
    
    (905
    )Earnings before income taxes
    
    
    44,649
    
    
    
    21,680
    
    
    
    66,329Income taxesCurrent
    
    
    14,230
    
    
    
    4,849
    
    
    
    19,079Future
    
    
    2,416
    
    
    
    3,044
    
    
    
    5,460Earnings from health care
    
    
    28,003
    
    
    
    13,787
    
    
    
    41,790Share of equity accounted earnings
    
    
    
    
    
    
    
    
    
    
    18,884Net earnings
    
    
    
    
    
    
    
    
    
    
    60,674Cash used in property and equipment
    
    
    37,231
    
    
    
    27,116
    
    
    
    64,347Balance sheetProperty and equipment
    
    
    584,953
    
    
    
    236,729
    
    
    
    821,682Goodwill
    
    
    93,513
    
    
    
    70
    
    
    
    93,583Leasehold rights
    
    
    3,975
    
    
    
    
    
    
    
    3,975Assets before undernoted
    
    
    1,119,081
    
    
    
    332,557
    
    
    
    1,451,638Equity accounted investments
    
    
    
    
    
    
    
    
    
    
    141,779Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    1,593,417
  p.80 




---



##### 



2004 Annual Report NOTES (thousands of dollars)
    
    
    
    
    
    
    
    
    
    2002United States
    
    
    Canada
    
    
    TotalRevenueNursing and assisted living centres
    
    
    1,236,565
    
    
    
    315,907
    
    
    
    1,552,472Outpatient therapy
    
    
    16,144
    
    
    
    
    
    
    
    16,144Home health
    
    
    
    
    
    
    146,034
    
    
    
    146,034Other
    
    
    39,472
    
    
    
    4,663
    
    
    
    44,1351,292,181
    
    
    
    466,604
    
    
    
    1,758,785Earnings before undernoted
    
    
    140,545
    
    
    
    43,915
    
    
    
    184,460Lease costs
    
    
    20,056
    
    
    
    4,063
    
    
    
    24,119Depreciation and amortization
    
    
    60,313
    
    
    
    8,676
    
    
    
    68,989Interest expense
    
    
    48,757
    
    
    
    19,966
    
    
    
    68,723Interest revenue
    
    
    (3,427
    )
    
    
    (3,249
    )
    
    
    (6,676
    )Intersegment interest expense (revenue)
    
    
    2,511
    
    
    
    (2,511
    )
    
    
    Loss from asset disposals, impairment and other items
    
    
    6,579
    
    
    
    110
    
    
    
    6,689Earnings before income taxes
    
    
    5,756
    
    
    
    16,860
    
    
    
    22,616Income taxesCurrent (recovery)
    
    
    (12,837
    )
    
    
    5,729
    
    
    
    (7,108
    )Future
    
    
    17,026
    
    
    
    1,284
    
    
    
    18,310Earnings from health care
    
    
    1,567
    
    
    
    9,847
    
    
    
    11,414Share of equity accounted earnings
    
    
    
    
    
    
    
    
    
    
    7,520Net earnings
    
    
    
    
    
    
    
    
    
    
    18,934Cash used in property and equipment
    
    
    30,928
    
    
    
    22,217
    
    
    
    53,145Balance sheetProperty and equipment
    
    
    718,439
    
    
    
    235,152
    
    
    
    953,591Goodwill
    
    
    113,788
    
    
    
    70
    
    
    
    113,858Leasehold rights
    
    
    6,646
    
    
    
    
    
    
    
    6,646Assets before undernoted
    
    
    1,376,158
    
    
    
    307,979
    
    
    
    1,684,137Equity accounted investment
    
    
    
    
    
    
    
    
    
    
    121,508Total consolidated assets
    
    
    
    
    
    
    
    
    
    
    1,805,645
  p.81 




---



##### 



Extendicare Inc.  21.
    Reconciliation of Canadian and United States GAAPThe consolidated financial statements of the Company have been prepared in accordance with
Canadian GAAP. The areas of material difference between Canadian and U.S. GAAP and their impact
on the consolidated financial statements of the Company are described below.The application of U.S. GAAP would have the following effect on the net earnings as reported: (thousands of dollars except per share amounts)
    
    2004
    
    
    2003
    
    
    2002Earnings from health care for the year as reported in accordance
with Canadian GAAP
    
    
    115,826
    
    
    
    41,790
    
    
    
    11,414Application of hedge accounting for derivatives, net of income taxes (D)
    
    
    431
    
    
    
    108
    
    
    
    (644
    )Earnings from health care for the year as reported in accordance
with U.S. GAAP
    
    
    116,257
    
    
    
    41,898
    
    
    
    10,770Share of equity accounted earnings for the year as reported in accordance
with Canadian GAAP
    
    
    9,375
    
    
    
    18,884
    
    
    
    7,520Application of U.S. GAAP (A)
    
    
    235
    
    
    
    (7,060
    )
    
    
    24,680Share of equity accounted earnings for the year as reported in accordance
with U.S. GAAP
    
    
    9,610
    
    
    
    11,824
    
    
    
    32,200Earnings for the year as reported in accordance with U.S. GAAP
    
    
    125,867
    
    
    
    53,722
    
    
    
    42,970Other comprehensive income (loss), net of tax (B):Foreign currency translation adjustments
    
    
    (19,479
    )
    
    
    (53,621
    )
    
    
    (2,561
    )Unrealized gains (losses) on invested assets (C)
    
    
    (1,610
    )
    
    
    5,197
    
    
    
    (2,209
    )Net current period change in derivative gains (D)
    
    
    128
    
    
    
    45
    
    
    
    1,530Minimum pension liability adjustments (E)
    
    
    1,643
    
    
    
    (3,277
    )
    
    
    (2,516
    )Share of comprehensive income (loss) of equity accounted investments (A)
    
    
    (3,627
    )
    
    
    (1,262
    )
    
    
    5,734Other comprehensive income (loss)
    
    
    (22,945
    )
    
    
    (52,918
    )
    
    
    (22
    )Comprehensive earnings as reported in accordance with U.S. GAAP
    
    
    102,922
    
    
    
    804
    
    
    
    42,948Earnings per share amounts in accordance with U.S. GAAPBasic
    
    
    1.82
    
    
    
    0.77
    
    
    
    0.60Diluted
    
    
    1.79
    
    
    
    0.76
    
    
    
    0.60
  The cumulative effect of these adjustments on shareholders equity is as follows: (thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002Shareholders equity in accordance with Canadian GAAP
    
    
    456,987
    
    
    
    356,433
    
    
    
    358,026Application of hedge accounting for derivatives, net of tax (D)
    
    
    
    
    
    
    (432
    )
    
    
    (647
    )Unrealized gains (losses) on invested assets, net of tax (C)
    
    
    276
    
    
    
    1,929
    
    
    
    (3,502
    )Unrealized gains (losses) on cash flow hedges, net of tax (D)
    
    
    
    
    
    
    (128
    )
    
    
    (207
    )Minimum pension liability adjustments, net of tax (E)
    
    
    (4,150
    )
    
    
    (5,793
    )
    
    
    (2,516
    )Change in equity carrying value of equity accounted investments (A)
    
    
    10,266
    
    
    
    13,326
    
    
    
    20,534Shareholders equity in accordance with U.S. GAAP
    
    
    463,379
    
    
    
    365,335
    
    
    
    371,688
  p.82 




---



##### 



2004 Annual Report NOTES SUMMARY OF ACCOUNTING POLICY DIFFERENCES  (A)
    Equity Accounted InvestmentsThe following table provides the areas of material difference between Canadian and U.S. GAAP of
the Companys share of earnings and other comprehensive income (increase (decrease)) of its
equity accounted investments, specifically as they relate to its investment in Crown Life. (thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002Share of earnings (loss)Policy liabilities
    
    
    900
    
    
    
    (884
    )
    
    
    1,730Investment income
    
    
    (665
    )
    
    
    (5,120
    )
    
    
    28,734Income taxes
    
    
    
    
    
    
    (1,056
    )
    
    
    (5,789
    )Other
    
    
    
    
    
    
    
    
    
    
    5235
    
    
    
    (7,060
    )
    
    
    24,680Other comprehensive incomeForeign currency translation adjustments
    
    
    146
    
    
    
    (910
    )
    
    
    1,050Unrealized gains (losses) on invested assets
    
    
    (3,773
    )
    
    
    (352
    )
    
    
    4,684(3,627
    )
    
    
    (1,262
    )
    
    
    5,734
  The following table provides the cumulative effect between Canadian and U.S. GAAP on the Companys
carrying value of its equity accounted investments. (thousands of dollars)
    
    2004
    
    
    2003
    
    
    2002Equity accounted investments in accordance with Canadian GAAP
    
    
    68,531
    
    
    
    141,779
    
    
    
    121,508Policy liabilities
    
    
    2,223
    
    
    
    1,470
    
    
    
    2,717Invested assets
    
    
    10,120
    
    
    
    14,922
    
    
    
    20,000Income taxes
    
    
    (2,077
    )
    
    
    (3,066
    )
    
    
    (2,183
    )10,266
    
    
    
    13,326
    
    
    
    20,534Equity accounted investments in accordance with U.S. GAAP
    
    
    78,797
    
    
    
    155,105
    
    
    
    142,042
  Policy Liabilities and Deferred Acquisition Costs.Under
Canadian GAAP, policy liabilities of Crown Life are
calculated using the Canadian asset liability method under
which assumptions are adjusted annually based on the
expected future experience of the company. Under U.S. GAAP,
liabilities for traditional life insurance products are
calculated using assumptions as to future experience, which
are set at the time of policy issue. These assumptions are
not adjusted unless experience is sufficiently adverse that
an overall loss on a block of business is expected over the
future duration of the business. Universal life or
investment type products are accounted for by the
retrospective deposit method under which assumptions are
updated at least annually. Under U.S. GAAP, costs that vary
with and are primarily related to the acquisition of
insurance products are capitalized separately as assets on
the balance sheet. For traditional life products, these
costs are charged to expense in future years in proportion
to the premium revenue recognized. For universal life or
investment type products, these costs are charged to expense
in future years in proportion to the emergence of margins
expected to be realized over the duration of the block of
business.  Invested Assets.Under Canadian GAAP, gains and losses on
invested assets of Crown Life are amortized into income.
Under U.S. GAAP, gains and losses on sales of invested
assets are included in income when realized. Invested assets
that are marketable securities, all of which are considered
to be available for sale, are carried at market value with
unrealized gains or losses, net of applicable taxes,
included in shareholders equity. The non-land component of
investment real estate is amortized over its expected useful
life.  p.83 




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##### 



Extendicare Inc.  (B)
    Comprehensive IncomeU.S. GAAP Statement of Financial Accounting Standard No.
130, Reporting Comprehensive Income (FAS 130) establishes
rules for the reporting and display of comprehensive income
and its components. Comprehensive income is net income, plus
certain other items that are recorded directly to
shareholders equity. The Company has reported as other
comprehensive income, foreign currency translation
adjustments, and unrealized gains (losses) on invested
assets and hedging activities. The amounts reported as
unrealized gains (losses) on invested assets and hedging
activities are net of tax; income tax expense (recovery)
included therein amounted to $(163,000), $(930,000) and
$1,101,000 for 2004, 2003 and 2002, respectively.  (C)
    Securities Available for SaleU.S. 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. 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, 2004, was
$656,000, or $276,000 net of tax (December 31, 2003
 $3,163,000 in excess of their carrying values, or
$1,929,000 net of tax). The amount reported to other
comprehensive income for 2004 was an after-tax loss of
$1,610,000 (2003  an after-tax gain of $5,197,000; 2002 
an after-tax loss of $2,209,000).  (D)
    Derivative Instruments and Hedging ActivitiesPrior to the Companys adoption of CICA AG 13, Hedging
Relationships effective January 1, 2004, and the
termination of certain derivative contracts during 2004, the
Company had differences in accounting for its derivative
instruments between Canadian and U.S. GAAP. This related to
an interest rate cap, of which a portion qualified as a
highly effective cash flow hedge and the remainder did not.
Under U.S. GAAP, changes in the fair value of a derivative
that is highly effective and is designated and qualifies as
a cash flow hedge are recorded in Accumulated Other
Comprehensive Income (AOCI) until earnings are affected by
the variability in cash flows of the designated hedged item.
Changes in the fair value of a derivative that is not
designated as a hedge are reported in earnings. Prior to the
implementation of AG 13, derivative instruments under
Canadian GAAP were not fair valued.At December 31, 2003, the fair value of the portion of the
interest rate cap not designated as a hedging instrument was
a liability of $796,000 ($431,000 net of tax). Upon
termination of this interest rate cap during 2004, the
Company realized the after-tax gain in earnings of $431,000.
In prior years, the change in fair value of the cap resulted
in an after-tax gain of $108,000 in 2003, and an after-tax
loss of $644,000 in 2002.At December 31, 2003, the portion of the interest rate cap
that qualified as a hedging instrument was a fair value
liability of $215,000 ($128,000 net of tax). Upon
termination of the interest rate cap in 2004, the after-tax
gain was realized in earnings and therefore, other comprehensive income was
charged with $128,000 net of tax. In 2003 the after-tax gain
credited to other comprehensive income was $45,000 (2002 
an after-tax gain of $1,530,000).  (E)
    Minimum Pension LiabilityUnder U.S. GAAP Statement of Financial Accounting Standard
No. 87, Employers Accounting for Pensions, the Company is
required to record a minimum pension liability for pension
plans representing the amount by which the accumulated
benefit obligation less the fair value of the plan assets is
greater than the associated liability recognized in the
financial statements for these plans. Under U.S. GAAP, these
charges are recorded as a reduction to shareholders equity,
representing a component of AOCI. The impact on other
comprehensive income in 2004 was earnings resulting from the
reduction of the minimum liability by $2,573,000, or
$1,643,000 net of tax (2003  a charge of $5,390,000, or
$3,277,000 net of tax; 2002  a charge of $3,679,000, or
$2,516,000 net of tax). The balance of the minimum pension
liability in AOCI at December 31, 2004, was a liability of
$6,496,000, or $4,150,000 net of tax (2003  $9,069,000 or
$5,793,000 net of tax; 2002  $3,679,000, or $2,516,000 net
of tax).  p.84 




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##### 



2004 Annual Report NOTES  22.
    Subsequent EventOn November 4, 2004, EHSI entered into a definitive
merger and acquisition agreement with Assisted Living
Concepts, Inc. (ALC) of Dallas, Texas (OTC. BB: ASLC)
providing for the acquisition of all of the outstanding
shares and stock options of ALC at US$18.50 per share. The
completion of the acquisition was subject to certain
conditions, including approval by ALCs shareholders and
certain customary regulatory approvals. ALC has a portfolio
of 177 assisted living facilities, which comprise 122 owned
properties and 55 leased facilities representing 6,838 units
located in 14 states, many in markets where EHSI currently
operates.On January 31, 2005, the shareholders of ALC approved the
merger and acquisition agreement with EHSI and EHSI completed
the acquisition for a total of approximately US$285,000,000,
including the assumption of debt of approximately
US$141,000,000. The acquisition was financed by drawing
US$60,000,000 on EHSIs revolver loan, using approximately
US$29,000,000 of EHSIs cash on hand, and using US$55,000,000
of cash from Extendicares Canadian operations. The
acquisition will be accounted for as a purchase transaction.
In the following table the Company has estimated the impact
of the acquisition and the allocation of the purchase price
as of January 31, 2005. These figures will be finalized in
2005. (thousands of dollars)
    
    US$
    
    
    C$AssetsCurrent assets
    
    
    12,318Property and equipment
    
    
    315,532Goodwill
    
    
    1,466Other long-term assets
    
    
    6,765336,081
    
    
    
    417,144LiabilitiesCurrent liabilities
    
    
    23,604Long-term debt
    
    
    141,012Capital lease obligations
    
    
    14,448Other long-term liabilities
    
    
    6,424Future income taxes
    
    
    6,746192,234
    
    
    
    238,601Purchase price
    
    
    143,847
    
    
    
    178,543
  ALCs debt will be non-recourse to EHSI and ALCs debt and
earnings will be excluded from existing financial covenants
under EHSIs Credit Facility. In addition, there will be
restrictions on EHSIs and ALCs credit facilities to
finance any ALC operating deficits.In January 2005 EHSI entered into a Memorandum of
Understanding (MOU) with LTC Properties, Inc. (LTC) in
respect of 37 facilities leased to ALC by LTC. Under the
terms of the MOU, which become effective January 1, 2005,
EHSI agreed to increase the annual rent paid to LTC by
US$250,000 per annum for each of the successive four years, commencing on January 1,
2005, and amended the terms relating to inflationary
increases. Formerly, the 37 leases had expiry dates ranging
from 2007 through to 2015. Under the terms of the MOU, the
amended lease provides for an initial 10-year lease term
commencing on January 1, 2005, and three successive 10-year
lease terms at the option of EHSI. The MOU provides that LTC
will not assert certain events of default against ALC under
the original leases.  p.85 




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##### 



FINANCIAL AND STATISTICAL INFORMATION (unaudited) (thousands of dollars unless otherwise noted)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Financial PositionProperty and equipment
    
    
    767,401
    
    
    
    821,682
    
    
    
    953,591
    
    
    
    968,202
    
    
    
    920,231Health care assets
    
    
    1,357,800
    
    
    
    1,451,638
    
    
    
    1,684,137
    
    
    
    1,603,360
    
    
    
    1,587,538Equity accounted investments
    
    
    68,531
    
    
    
    141,779
    
    
    
    121,508
    
    
    
    135,944
    
    
    
    147,407Long-term debt
    
    
    613,651
    
    
    
    750,094
    
    
    
    846,734
    
    
    
    788,354
    
    
    
    802,426Shareholders equity
    
    
    456,987
    
    
    
    356,433
    
    
    
    358,062
    
    
    
    350,696
    
    
    
    381,437Financial ResultsRevenueNursing and assisted living centresUnited States
    
    
    1,195,904
    
    
    
    1,182,045
    
    
    
    1,236,565
    
    
    
    1,187,547
    
    
    
    1,346,033Canada
    
    
    366,863
    
    
    
    351,981
    
    
    
    315,907
    
    
    
    279,559
    
    
    
    266,671Outpatient therapy  United States
    
    
    14,300
    
    
    
    16,151
    
    
    
    16,144
    
    
    
    14,733
    
    
    
    14,430Home health  Canada
    
    
    127,971
    
    
    
    134,921
    
    
    
    146,034
    
    
    
    171,809
    
    
    
    161,323Other
    
    
    41,762
    
    
    
    39,516
    
    
    
    44,135
    
    
    
    50,863
    
    
    
    18,9491,746,800
    
    
    
    1,724,614
    
    
    
    1,758,785
    
    
    
    1,704,511
    
    
    
    1,807,406Earnings (loss)Health careEBITDA (1)
    
    
    224,592
    
    
    
    186,830
    
    
    
    160,341
    
    
    
    127,157
    
    
    
    92,469Earnings (loss) from health care
    
    
    115,826
    
    
    
    41,790
    
    
    
    11,414
    
    
    
    (47,144
    )
    
    
    (67,105
    )Share of equity accounted earnings
    
    
    9,375
    
    
    
    18,884
    
    
    
    7,520
    
    
    
    10,738
    
    
    
    7,827Net earnings (loss)
    
    
    125,201
    
    
    
    60,674
    
    
    
    18,934
    
    
    
    (36,406
    )
    
    
    (59,278
    )Diluted earnings (loss) per share from operations ($)Health care operations before undernoted and
after preferred share dividends
    
    
    1.14
    
    
    
    0.58
    
    
    
    0.21
    
    
    
    (0.18
    )
    
    
    (0.55
    )Valuation adjustments on interest rate caps
    
    
    (0.09
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (loss) from asset disposals, impairment
and other items
    
    
    0.03
    
    
    
    0.01
    
    
    
    (0.05
    )
    
    
    (0.49
    )
    
    
    (0.36
    )Prior year tax benefit
    
    
    0.56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share of equity accounted earnings
    
    
    0.14
    
    
    
    0.27
    
    
    
    0.10
    
    
    
    0.15
    
    
    
    0.101.78
    
    
    
    0.86
    
    
    
    0.26
    
    
    
    (0.52
    )
    
    
    (0.81
    )Other InformationNumber of facilities (period end)United States
    
    
    185
    
    
    
    193
    
    
    
    197
    
    
    
    198
    
    
    
    212Canada
    
    
    78
    
    
    
    82
    
    
    
    80
    
    
    
    63
    
    
    
    62263
    
    
    
    275
    
    
    
    277
    
    
    
    261
    
    
    
    274Operational resident capacity (period end)United States
    
    
    16,642
    
    
    
    17,810
    
    
    
    18,269
    
    
    
    18,402
    
    
    
    19,420Canada
    
    
    10,973
    
    
    
    11,120
    
    
    
    10,906
    
    
    
    7,937
    
    
    
    7,63227,615
    
    
    
    28,930
    
    
    
    29,175
    
    
    
    26,339
    
    
    
    27,052Extendicare Health Services, Inc.Average nursing home occupancy (%)
    
    
    91.8
    
    
    
    91.5
    
    
    
    90.3
    
    
    
    87.5
    
    
    
    87.5Medicare nursing home patient days (%)
    
    
    16.5
    
    
    
    15.5
    
    
    
    13.4
    
    
    
    11.3
    
    
    
    10.9Total revenue by payor source (%)Medicare
    
    
    29.8
    
    
    
    27.4
    
    
    
    25.7
    
    
    
    23.8
    
    
    
    24.5Private
    
    
    22.9
    
    
    
    23.9
    
    
    
    24.5
    
    
    
    25.3
    
    
    
    24.7Medicaid
    
    
    47.3
    
    
    
    48.7
    
    
    
    49.8
    
    
    
    50.9
    
    
    
    50.8Average occupancy (%)
    
    
    93.0
    
    
    
    92.9
    
    
    
    92.0
    
    
    
    90.0
    
    
    
    89.9ParaMed home health care hours of service
    
    
    4,593,000
    
    
    
    4,956,000
    
    
    
    5,433,000
    
    
    
    6,868,000
    
    
    
    6,967,000Number of employees (period end)
    
    
    34,600
    
    
    
    35,800
    
    
    
    37,600
    
    
    
    36,700
    
    
    
    38,800Number of shares outstanding (period end)Subordinate Voting Shares
    
    
    56,687,086
    
    
    
    56,575,211
    
    
    
    57,107,011
    
    
    
    58,544,511
    
    
    
    60,063,923Multiple Voting Shares
    
    
    11,904,992
    
    
    
    11,912,692
    
    
    
    12,557,092
    
    
    
    12,775,917
    
    
    
    13,204,005
   (1)
    
    Refer to discussion of non-GAAP measures on page 19.  p.86 




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##### 



BOARD OF DIRECTORSof Extendicare Inc. BOARD OF DIRECTORS David J. Hennigar(CG) (F)Chairman 
 H. Michael Burns(CG) (IS)Deputy Chairman
President of Kingfield Investments Limited Frederick B. Ladly(CG) (HR) (QS)Deputy Chairman
Vice-Chairman of Crown Life Insurance Company Mel Rhinelander
President and Chief Executive Officer Derek H. L. Buntain(A) (F) (HR) (IS)
President of The Dundee Bank, a private bank
offering banking services to international clients Sir Graham Day(CG) (F) (HR)
Counsel to the Atlantic Canada law firm of
Stewart McKelvey Stirling Scales George S. Dembroski(A) (IS)
Corporate director David M. Dunlap(A) (HR) (QS)
Chairman of G.F. Thompson Co. Ltd., a manufacturer
and distributor of plumbing products George A. Fierheller(A) (IS)
President of Four Halls Inc., a private
investment and consulting firm Dr. Seth B. Goldsmith(CG) (QS)
Attorney and Professor Emeritus at the University
of Massachusetts at Amherst Michael J. L. Kirby(CG) (HR) (QS)
A member of The Senate of Canada Alvin G. Libin(A) (F)
President and Chief Executive officer of Balmon
Investments Ltd. J. Thomas MacQuarrie, Q.C.(A) (F) (HR)
Senior Partner in the Atlantic Canada law firm
of Stewart McKelvey Stirling Scales Charles H. Roadman II, MD(QS)
Corporate director HONORARY DIRECTORS Marsh A. Cooper
President, M.A. Cooper Consultants Inc. John J. Jodrey
Chairman, Scotia Investments Limited Derril G. McLeod, Q.C.  Further information on the Directors of Extendicare Inc. and a description of the Companys
Corporate Governance practices may be found in the Companys Management Information and Proxy
Circular, dated March 4, 2005, as filed with SEDAR at www.sedar.com, the United States Securities
and Exchange Commissions website at www.sec.gov, and on the Companys website at
www.extendicare.com.   AAudit CommitteeCGCorporate Governance and Nominating CommitteeFFinance CommitteeHRHuman Resources CommitteeISInformation Systems CommitteeQSQuality Standards Committee  p.87 




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##### 



OFFICERS Extendicare Inc.
3000 Steeles Avenue East
Markham, Ontario 
Canada L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588 David J. Hennigar
Chairman H. Michael Burns
Deputy Chairman Frederick B. Ladly
Deputy Chairman Mel Rhinelander
President and
Chief Executive Officer Richard L. Bertrand
Senior Vice-President and 
Chief
Financial Officer Jillian E. Fountain
Corporate Secretary Extendicare Health Services, Inc.
111 West Michigan Street
Milwaukee, Wisconsin 
United States 53203-2903
Tel: (414) 908-8000
        (800) 395-5000
Fax: (414) 908-8059 Mel Rhinelander
Chairman and
Chief Executive Officer Richard L. Bertrand
Senior Vice-President, 
Chief
Financial Officer
and Treasurer Philip W. Small
Executive Vice-President and
Chief Operating Officer Roch Carter
Vice-President, General Counsel 
and
Assistant Secretary Douglas J. Harris
Vice-President and Controller L. William Wagner
Vice-President, Human Resources Jillian E. Fountain
Corporate Secretary Extendicare (Canada) Inc.
3000 Steeles Avenue East
Markham, Ontario
Canada L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588 Mel Rhinelander
Chairman and
Chief Executive Officer Shelly L. Jamieson
President Richard L. Bertrand
Senior Vice-President and 
Chief
Financial Officer Stephen R. Haas
Vice-President,
ParaMed Home Health Care Len G. Koroneos
Vice-President, Business
Development and Privacy Officer Paul Rushforth
Vice-President, Western Operations Paul Tuttle
Vice-President, Eastern Operations Elaine E. Everson
Vice-President and Controller Christina L. McKey
Vice-President, Human Resources R. Gordon Spear
Vice-President, Administration Jillian E. Fountain
Corporate Secretary  p.88 




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##### 



SHAREHOLDER INFORMATION Extendicare Inc.
3000 Steeles Avenue East, Suite 700
Markham, Ontario L3R 9W2
Tel: (905) 470-4000
Fax: (905) 470-5588
www.extendicare.com Shareholder Inquiries
Jillian FountainCorporate Secretary
Tel: (905) 470-5534
email: jfountain@extendicare.com Investor Relations
Christopher BarnesManager, Investor Relations
Tel: (905) 470-5483
email: cbarnes@extendicare.com Transfer Agent
Computershare Trust Company
of Canada
Tel: (800) 564-6253
Fax: (866) 249-7775
email: service@computershare.com
www.computershare.com Annual Meeting
Shareholders are invited to
attend the Annual Meeting
of Extendicare Inc. on
Thursday, May 5, 2005
at 4:00 p.m. at the
Glenn Gould Studio,
Canadian Broadcasting Centre,
250 Front Street West,
Toronto, Ontario, Canada. Corporate Information
Extendicare Inc.s 2004 Annual
Report is available for viewing
or printing on the Companys
website at www.extendicare.com,
in addition to news releases,
quarterly reports and other filings
with the securities commissions.
Printed copies are available upon
request to the Corporate Secretary. Stock Exchange Listings
Toronto Stock Exchange New York Stock Exchange
(Subordinate Voting only  EXE)  Share Information TSX
    
    
    Shares Outstanding
    
    
    Year-end Closing Market Price on the TSXShares
    
    Stock Symbol
    
    
    at December 31, 2004
    
    
    2004
    
    
    2003
    
    
    2002Multiple Voting Shares
    
    EXE.MV
    
    
    11,904,992
    
    
    $
    15.95
    
    
    $
    13.40
    
    
    $
    4.70Subordinate Voting Shares
    
    EXE.SV
    
    
    56,687,086
    
    
    
    15.45
    
    
    
    13.25
    
    
    
    4.20Class I Preferred SharesCumulative Redeemable, Series 2
    
    EXE.PR.B
    
    
    100,305
    
    
    
    24.75
    
    
    
    24.00
    
    
    
    23.00Adjustable Dividend, Series 3
    
    EXE.PR.C
    
    
    93,310
    
    
    
    20.00
    
    
    
    20.25
    
    
    
    20.10Adjustable Dividend, Series 4
    
    EXE.PR.D
    
    
    241,240
    
    
    
    23.85
    
    
    
    22.75
    
    
    
    21.90Class II Preferred Shares, Series 1
    
    EXE.PR.E
    
    
    382,979
    
    
    
    20.25
    
    
    
    18.88
    
    
    
    17.00
  Quarterly Price Ranges of Subordinate Voting Shares
(EXE.SV) on the TSX 1st
    
    
    2nd
    
    
    3rd
    
    
    4th2004:High
    
    $
    15.98
    
    
    $
    16.33
    
    
    $
    17.09
    
    
    $
    17.40Low
    
    
    12.20
    
    
    
    13.83
    
    
    
    13.75
    
    
    
    14.752003:High
    
    $
    4.70
    
    
    $
    4.59
    
    
    $
    8.10
    
    
    $
    13.90Low
    
    
    2.65
    
    
    
    2.65
    
    
    
    4.33
    
    
    
    7.65
 Trading Price of Subordinate Voting Shares (EXE.SV) on the TSX (LINE GRAPH)




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##### 



CORE VALUES Companies, like people, make choices based on values that they hold. Our values guide our
behaviour and, in many ways, determine our future. For Extendicare, our values are our compass. They give us direction and purpose. Thats why our commitment to our shareholders, residents, patients and employees remains the same
today as it was yesterday. And it is the same today as it will be tomorrow. We owe them unwavering dedication to the core values that have been the foundation of our Company
for 35 years and will continue to drive its success.  
    Success means providing quality
services to residents and patients,
who entrust us with their health and
dignity. We endeavour to make each day
an affirmation of life.  
    Success means energizing employees to
live our vision of excellence. Good
people are our greatest strength. That
is why we strive to create enjoyable
and rewarding work environments.  
    Success means achieving profitable
growth over the long term to create
value for our shareholders. We are
committed to communicating effectively
with them. SUCCESS MEANS EMBRACING THESE VALUES.
THEY DEFINE EXTENDICARE. (EXTENDICARE LOGO) 3000 STEELES AVENUE EAST MARKHAM, ONTARIO, CANADA L3R 9W2 www.extendicare.com