##### 



Exhibit 99.1 (EXTENDICARE LOGO) Shareholders Quarterly Report For the Three months Ended
 March 31, 2004
 (GRAPHIC)




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##### 



Managements Discussion and AnalysisMay 6, 2004 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 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 discussion should be read in conjunction
with Extendicares unaudited interim consolidated financial statements, and
notes thereto, together with the managements discussion and analysis and
audited consolidated financial statements and notes found in the Companys 2003
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. Executive Overview Extendicare, through its subsidiaries, is a major provider of long-term care
and related services in North America, with 35,100 employees. The Companys wholly owned U.S. subsidiary, Extendicare Health Services, Inc.
and its subsidiaries (EHSI), operates long-term care and assisted living
facilities in 13 states. EHSI provides inpatient routine nursing care and
medical specialty services 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 five
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 division. At March 31, 2004, Extendicare, through its subsidiaries, operated 267
facilities with capacity for 27,874 residents (December 31, 2003: 275
facilities with capacity for 28,930 residents; March 31, 2003: 279 facilities
with capacity for 29,421 residents). The number of facilities operated has
reduced by eight since year end, reflecting the sale of two Ontario facilities,
the transfer of management responsibilities to another long-term care provider,
while retaining consulting services for nine U.S. facilities, the opening of a
new Ontario facility, and the commencement of managing two new U.S. nursing
facilities. The Company has a significant presence (more than 10% of its
facilities) in each of the three States in the U.S.  Pennsylvania, Wisconsin
and Ohio  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 businesses,
cost-effective management control and reduced travel costs. The Companys
average occupancy for the three months ended March 31, 2004 was 92.6% compared
to 92.3% in the same prior year period, and 92.9% for the year ended December
31, 2003. Critical Accounting Policies and Estimates For a full discussion of the Companys critical accounting policies, refer to
the managements discussion and analysis section of Extendicares 2003 Annual
Report. The disclosures in such report have not materially changed since that
report was filed; however, to the extent there have been changes, they are
discussed below under Significant Developments in 2004. Management considers
the Companys accounting policies 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.
There are specific risks relating to the accounting policies applied to revenue
recognition and the valuation of accounts receivable, the valuation of assets
and determination of asset impairment, the accrual for self-insured liabilities
and accounting for deferred income taxes. 1




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##### 



Significant Developments in 2004 Update of U.S. Legislative Actions In April 2002 Centers for Medicare and Medicaid Services, or CMS, announced
that it would delay the refinement of the Resource Utilization Groupings, or
RUGs classifications, thereby extending related funding enhancements until
September 30, 2003. In May 2003 CMS released a rule to maintain the current
RUGs classification until October 1, 2004. Further to, but independent of this,
U.S. Congress enacted legislation directing CMS to conduct a study on the RUGs
classification system and report its recommendations by January 2005. EHSI
estimates that it received an average of US$25.27 per patient day in the first
quarter of 2004 related to the RUGs Refinements. Based on the Medicare case mix
and average daily census of the three months ended March 31, 2004, this
represents annualized revenue of $27.0 million (US$20.5 million). 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. Under
current law, skilled nursing facilities are reimbursed 100% for any bad debts
incurred. The plan was to reduce the reimbursement levels from the current 100%
to: 90% beginning October 1, 2003; 80% beginning October 2004; and 70%
beginning October 2005. This is consistent with the Part A co-insurance
reimbursement plan applicable to hospitals. EHSI estimates that should this
plan be implemented, the negative impact to net earnings would be $1.7 million
(US$1.3 million) in 2004, increasing to $4.3 million (US$3.3 million) in 2006. Some of the states in which EHSI operates, namely Pennsylvania, Indiana,
Oregon, and Washington, have submitted proposed state plan amendments and
waivers pertaining to the fiscal year commencing July 1, 2003, which are
awaiting review and approval by CMS. The retrospective plan amendments and
waivers seek to increase the level of federal funding for the Medicaid
programs, and would result in providing nursing facilities with revenue rate
increases to offset new or increased provider taxes. As the plan amendments and
waivers have not been approved, EHSI has recorded revenue based upon amounts
received. In Pennsylvania, should CMS approve the States plan amendment and
waiver as submitted, incremental earnings, net of the provider tax, of US$2.8
million could be recorded in 2004 pertaining to the nine-month period ended
March 31, 2004; whereas without approval, a negative adjustment to earnings of
up to US$4.5 million could be recorded in 2004 pertaining to this same period.
In Indiana, approval of the original plan amendment and waiver submitted could
result in the recording of net incremental earnings of US$2.3 million in 2004
pertaining to the nine-month period ended March 31, 2004, and there would be no
impact if the plan is not approved. In Washington, the State has proceeded to
implement the provider tax and fund the incremental Medicaid rates, while
seeking approval from CMS of their proposal. If the plan is not approved, a
retroactive adjustment of no greater than US$0.5 million to earnings may be
required. The impact of Oregons plan amendment and waiver is not significant
to the Company. EHSI anticipates that amendments will be made to the original
plans submitted to CMS and cannot, therefore, predict the outcome of the plan
submissions or their impact on the Companys results of operations. Based on
the final CMS approved state plan amendments and waivers, changes in Medicaid
rates and any associated provider taxes could result in adjustments to earnings
for the period from July 1, 2003 to March 31, 2004. Update of Canadian Legislative Actions In April 2004, the Ontario government announced that funding to long-term care
providers for property taxes for the 2003 calendar year would be reduced from
90% to 73%, and that the estimated funding for 2004 would be reduced to 50%.
This was as a result of the influx of 20,000 new beds coming on stream, which
has put a strain on the governments allocated pool of funds. As a result,
Extendicares Canadian operations have booked a $2.0 million provision in the
2004 first quarter comprised of $1.3 million for the claw back of 2003 funding,
and an estimated $0.7 million for reduced funding for the first three months of
2004. Extendicare is working with its partners in the long-term care industry
to ensure the government understands the serious nature of this issue. Acquisitions In February 2004, EHSI acquired for $1.9 million a skilled nursing facility in
Washington that it had been operating previously under lease arrangements. Construction In March 2004, ECI opened the final of its 11 new Ontario nursing homes based
on the awards by the Government of Ontario initiated in 1998. 2




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##### 



EHSI is in the process of expanding four assisted living facilities (87 units)
and two skilled nursing homes (38 beds), and adding one new assisted living
facility (40 units). The cost of these projects is estimated at US$15.2
million, of which US$4.3 million was spent during 2003, and US$3.6 million in
the first quarter of 2004. Two of the projects were completed in the first
quarter of 2004, a 16-unit assisted living addition that opened in February
2004 and a 20-bed nursing addition that opened in March. In addition in May
2004, a 40-unit assisted living facility opened. A further project is expected
to be finished by the end of the year, and the remaining three are due to be
completed in early 2005. Gain from Asset Disposals and Other Items The Company has reported a gain on sale of assets and other items of $10.1
million during the first quarter of 2004, which on an after-tax basis
contributed $10.7 million to net earnings, or $0.16 per share. The previously
announced sale of two Ontario homes (275 beds) in February of 2004 for gross
proceeds of $19.6 million resulted in a pre-tax gain of $12.7 million, and
contributed $12.3 million to net earnings, or $0.18 per share, in the first
quarter of 2004. The gain on the sale of the Ontario facilities was
substantially sheltered by capital loss carryforwards that had been fully
offset with a valuation allowance. A portion of the proceeds were used to
retire long-term debt of $6.6 million associated with the homes. In addition,
during the first quarter of 2004, EHSI prepaid in full US$13.0 million of
Industrial Revenue Bonds that resulted in the write off of $0.5 million of
deferred financings costs, and EHSI recorded a loss on impairment of assets of
$2.1 million, as discussed further below. On an after-tax basis these two
charges totalled $1.6 million, for a loss per share of $0.02. 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 evaluation of the respective operations, management decided,
subject to State approval, to consolidate the two operations into one renovated
facility that upon completion, will accommodate all residents within 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 the one facility, EHSI recorded a
provision for impairment of long-lived assets in the first quarter of 2004. 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 March 31, 2004, the Companys carrying
value of its investment in Crown Life was $141.7 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. On
March 31, 2004, Crown Life Insurance Company declared a dividend payable in the
amount of $14.00 per common share, of which Extendicares 34.8% interest was
$15.6 million. The dividend to Extendicare was in the form of a promissory note
due June 30, 2004 (the Note), and when collected will be accounted for as a
reduction of the book value of the investment. Payment of the Note, at Crown
Lifes discretion, is to be in cash, or by way of transfer of the ownership of
Extendicares Corporate Office in Markham, Ontario, with the balance to be paid
in cash. The estimated fair market value of the property is $33.2 million, and
it currently carries a mortgage of $18.0 million. There were no dividends
received by Extendicare from Crown Life in 2003. 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. In July
2003 Great-West Lifeco Inc. acquired Canada Life, resulting in a delay in the
start of negotiations with Crown Life on the final settlement of the Canada
Life transaction. The negotiations are anticipated to begin within the next 12
months. Medicare and Medicaid Settlement Receivables EHSI is pursuing settlement of a number of outstanding Medicare and Medicaid
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. 3




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##### 



Due to the length of the settlement process, some of these receivables are not
expected to be collected within one year and, as a result, are classified as
long-term other assets. At March 31, 2004, the Company had gross Medicare and
Medicaid settlement receivables of $60.5 million (US$46.1 million), (December
31, 2003  $66.4 million (US$51.2 million)), with a related general contractual
allowance of $18.4 million (US$14.0 million), (December 31, 2003  $18.2
million (US$14.0 million). The net receivable of $42.1 million (US$32.1
million) represents the Companys estimate of the amount collectible on
Medicare and Medicaid prior period cost reports, $34.0 million of which has
been classified as long-term in nature. For a specific staffing cost matter, a settlement for the first of seven
specific claim years was reached prior to the January 2003 Provider
Reimbursement Review Board, or PRRB, hearing, and during 2003 EHSI continued to
negotiate the remaining years in dispute. In January 2004 EHSI negotiated and
subsequently received a cash settlement of US$5.6 million. This settlement did
not result in any significant adjustment to the recorded receivable balance. For another specific Medicare receivable issue involving the allocation of
overhead costs, the first of three specific claim years was presented to the
PRRB at a hearing in January 2003. The hearing procedures were discontinued
after the parties negotiated a methodology for resolution of the claim. The
negotiated settlement for this and other issues relating to the 1996 cost
report year resulted in no adjustment to the recorded receivable balance, and
EHSI subsequently collected US$3.0 million from the fiscal intermediary. For
the remaining two specific claim years, in April 2004, EHSI reached a
negotiated settlement that will result in the payment to EHSI of approximately
US$7.7 million, of which US$6.5 million will be received in May 2004 and the
balance upon resolution of other matters concerning the cost report years that
were appealed. EHSI anticipates the resolution of these matters and the
resulting final determination of the financial impact of the settlement, if
any, will be recorded in the second quarter of 2004. EHSI has a hearing scheduled in September 2004 for another Medicare receivable
issue in dispute with the fiscal intermediary involving a director of nursing
staff cost issue in the amount of US$3.8 million. Regulatory Risks 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 is aware of investigations by these units
involving one facility each in Kentucky and Wisconsin. The investigations have
not been sufficiently developed to enable EHSI to predict an outcome. Other EHSI has a preferred provider agreement with Omnicare, Inc. to provide pharmacy
services to all of EHSIs nursing facilities. Omnicare and EHSI are currently
negotiating the pricing of drugs for Medicare residents 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 on 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 Events Debt Refinancing In April 2004 EHSI refinanced certain of its long-term debt with the issuance
of US$125.0 million aggregate principal amount of 6.875% Senior Subordinated
Notes due May 1, 2014 (the 2014 Notes) issued at a price of 97.5001% of par
to yield 7.23%, and the amendment and restatement of its existing credit
facility, which included 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, and will be used, together with cash on hand
and new borrowing capacity, to purchase for cash all of EHSIs outstanding
US$200.0 million aggregate principal amount of 9.35% Senior Subordinated Notes
due 2007 (the 2007 Notes). On April 5, 2004 EHSI commenced a tender offer for
the 2007 Notes, for which 61% of the 2007 Notes, excluding those held by
Extendicare Inc., were tendered and repaid on April 22, 2004. The remaining
2007 Notes not tendered will be redeemed and paid for on May 24, 2004. In
addition, EHSI terminated its existing 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. 4




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##### 



As a result of the tender and call of the 2007 Notes, EHSI will pay a premium
for the early redemption of the 2007 Notes of approximately US$6.6 million;
write off deferred financing charges of approximately US$2.4 million and incur
estimated legal fees of $0.3 million. In addition, pursuant to the termination
of the existing interest rate swap and cap arrangements, EHSI will realize a
net gain of approximately $3.3 million. These amounts total to a pre-tax loss
of approximately US$5.9 million (US$3.9 million after-tax), which will be
recognized in the 2004 second quarter results. Based on debt levels and interest rates at March 31, 2004, the debt refinancing
lowered Extendicares long-term debt to approximately $711.7 million from
$738.3 million at the end of March; and reduced its weighted average interest
rate to approximately 6.5% from 8.0%. At these interest rates and debt levels,
this will result in annual interest savings of approximately $12.9 million. In
addition, subsequent to the refinancing and after taking into account the
interest rate swap arrangements, approximately 59.0% of Extendicares debt will
be subject to floating rates, compared to 30.0% of the balance of consolidated
long-term debt at March 31, 2004. The 2014 Notes are fully and unconditionally guaranteed on a senior
subordinated basis by all of EHSIs existing and future U.S. domestic
significant subsidiaries, by all of its existing and future U.S. domestic
subsidiaries that guarantee or incur any indebtedness and by any other existing
and future significant subsidiaries or restricted subsidiaries that guarantee
or otherwise provide direct credit support for indebtedness of EHSI or any of
its U.S. domestic subsidiaries. The 2014 Notes and guarantees are general
unsecured obligations of EHSI and its subsidiaries. Settlement of Greystone Transaction In April 2004 EHSI concluded negotiations with Greystone Tribeca Acquisition,
L.L.C. on the divestiture agreement for 15 Florida nursing homes previously
owned and operated by EHSI, which Greystone has been operating since September
2000. The initial transaction in 2000 was treated as a deferred sale as a
significant portion of the final consideration was contingent on certain
events, and EHSI held an option to repurchase the facilities. On April 29,
2004, EHSI received US$2.6 million of interest, and in addition to the US$30.0
million of cash consideration initially received in 2000, EHSI will receive in
June 2004, US$10.0 million as final payment of the contingent consideration.
The finalization of this transaction will result in the recognition in the
second quarter of 2004 of a pre-tax gain from the sale of assets of US$4.8
million and interest income of US$1.6 million. U.S. Acquisition The Company anticipates closing on the acquisition of five nursing homes (423
beds) by the end of May 2004. Four of the facilities are located in Indiana and
the other in Wisconsin. The cost is estimated at US$8.0 million and will be
financed with cash on hand. 2004 First Quarter Results Net earnings Extendicares net earnings increased to $28.3 million ($0.40 per diluted share)
in the 2004 first quarter from $17.9 million ($0.25 per diluted share) in the
2003 first quarter. Earnings from health care operations rose to $25.9 million
from $5.4 million. Results included a gain from asset disposals and other items
of $10.1 million ($10.7 million after-tax, or $0.16 per diluted share) in the
2004 first quarter compared to $1.1 million ($0.01 per diluted share), in the
prior year period. Earnings from health care operations, prior to these items
were $15.2 million, or $0.21 per diluted share, compared to $4.3 million, or
$0.06 per diluted share in the 2003 first quarter, and $14.3 million, or $0.21
per diluted share in the fourth quarter of 2003. Change
    
    
    
    
    
    ChangeQ1
    
    Q1
    
    2004 over
    
    Q4
    
    Q1 over(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2003
    
    2003
    
    Q4/2003Earnings from health careUnited States
    
    
    13.2
    
    
    
    2.7
    
    
    
    10.5
    
    
    
    11.3
    
    
    
    1.9Canada
    
    
    12.7
    
    
    
    2.7
    
    
    
    10.0
    
    
    
    3.0
    
    
    
    9.725.9
    
    
    
    5.4
    
    
    
    20.5
    
    
    
    14.3
    
    
    
    11.6Share of earnings of Crown Life
    
    
    2.4
    
    
    
    12.5
    
    
    
    
    
    
    
    2.6Net earnings
    
    
    28.3
    
    
    
    17.9
    
    
    
    
    
    
    
    16.9
 5




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##### 



The average exchange rates used to translate the results of the United States
operations to Canadian dollars were: 1.3180 for the 2004 first quarter and
1.5102 for the 2003 first quarter. The stronger Canadian dollar had a $1.9
million negative impact on the 2004 first quarter net earnings in comparison to
the exchange rate used in the first quarter of 2003. Revenue Revenue increased by $40.9 million, or 9.5% over the prior year period, before
the impact of the change in the foreign exchange rate of $44.9 million and the
impact of ceased operations of $5.7 million. Change
    
    
    
    
    
    ChangeQ1
    
    Q1
    
    2004 over
    
    Q4
    
    Q1 over(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2003
    
    2003
    
    Q4/2003RevenueUnited States (prior to impact of change in foreign
exchange rates)
    
    
    352.9
    
    
    
    321.5
    
    
    
    9.8
    %Impact of change in foreign exchange rates
    
    
    (44.9
    )
    
    
    
    
    
    
    United States as reported
    
    
    308.0
    
    
    
    321.5
    
    
    
    (4.2
    )%
    
    
    301.2
    
    
    
    2.3
    %Canada
    
    
    121.6
    
    
    
    117.8
    
    
    
    3.2
    %
    
    
    130.3
    
    
    
    (6.7
    )%429.6
    
    
    
    439.3
    
    
    
    (2.2
    )%
    
    
    431.5
    
    
    
    (0.4
    )%US/Canadian dollar exchange (average rate for the
period)
    
    
    1.3180
    
    
    
    1.5102
    
    
    
    
    
    
    
    1.3184
 Revenue from U.S. operations grew by $31.4 million over the 2003 first quarter,
prior to the impact of the stronger Canadian dollar. This was due to several
factors as summarized below, and explained in the discussion that follows. ($ millions)18.5
    
    
    
    
    
    
    increase in average nursing home rates (Medicare $8.1 million, Medicaid $7.5 million, and
private/other $2.9 million);5.2
    
    
    
    
    
    
    increase in nursing home resident census (Medicare $9.5 million, Medicaid $(3.2) million and
private/other $(1.1) million);3.2
    
    
    
    
    
    
    increase in nursing home revenue due to the additional day in the quarter;2.5
    
    
    
    
    
    
    contribution from a nursing home acquired at the end of 2003;1.7
    
    
    
    
    
    
    increase in nursing home resident ancillary services, primarily therapy and rehabilitative services;0.7
    
    
    
    
    
    
    improvement in assisted living operations due to higher rates and resident census;(2.1
    )
    
    
    
    
    
    unfavourable change in Medicare and Medicaid settlements; and a1.7
    
    
    
    
    
    
    increase in other revenue.
 Key Medicare and Medicaid statistics for the U.S. nursing home operations are
summarized in the following table. Change
    
    
    
    
    
    ChangeQ1
    
    Q1
    
    2004 over
    
    Q4
    
    Q1 overU.S. Nursing Home Operating Statistics
    
    2004
    
    2003
    
    2003
    
    2003
    
    Q4/2003Average daily census (same-facility basis)Medicare
    
    
    2,206
    
    
    
    1,966
    
    
    
    12.2
    %
    
    
    2,052
    
    
    
    7.5
    %Private/other
    
    
    2,185
    
    
    
    2,233
    
    
    
    (2.1
    )%
    
    
    2,248
    
    
    
    (2.8
    )%Medicaid
    
    
    8,489
    
    
    
    8,676
    
    
    
    (2.2
    )%
    
    
    8,686
    
    
    
    (2.3
    )%Total
    
    
    12,880
    
    
    
    12,875
    
    
    
    
    
    
    
    12,986
    
    
    
    (0.8
    )%Medicare as a percent of total census
    
    
    17.1
    %
    
    
    15.3
    %
    
    
    
    
    
    
    15.8
    %Medicaid as a percent of total census
    
    
    65.9
    %
    
    
    67.4
    %
    
    
    
    
    
    
    66.9
    %Average occupancy (same-facility basis)
    
    
    91.2
    %
    
    
    91.3
    %
    
    
    
    
    
    
    91.8
    %Average revenue rate by payor source 1Medicare Part A and B
    
    US$
    346.82
    
    
    US$
    318.12
    
    
    
    9.0
    %
    
    US$
    340.26
    
    
    
    1.9
    %Private/other
    
    US$
    192.77
    
    
    US$
    181.16
    
    
    
    6.4
    %
    
    US$
    183.93
    
    
    
    4.8
    %Medicaid
    
    US$
    134.37
    
    
    US$
    128.15
    
    
    
    4.9
    %
    
    US$
    134.32
    
    
    
    Medicare Part A
    
    US$
    317.99
    
    
    US$
    290.78
    
    
    
    9.4
    %
    
    US$
    315.61
    
    
    
    0.8
    %
  (1) excludes prior period settlement adjustments 6




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##### 



U.S. Medicare patient census increased to 17.1% of its total nursing home
census from 15.3% in the 2003 first quarter and from 15.8% in the 2003 fourth
quarter. The Company continued to improve Medicare patient census as part of
its focus on that sector, which resulted in increased revenue of $9.5 million
from Medicare payor sources in comparison to the first quarter of 2003. Total
nursing home average daily census on a same-facility basis was 12,880 compared
to 12,875 in the 2003 first quarter and 12,986 in the 2003 fourth quarter. The
increase in Medicare patients resulted in a decline in Medicaid and private-pay
residents. Average U.S. nursing home occupancy was 91.2 % compared to 91.3%
from the 2003 first quarter, and 91.8% in the 2003 fourth quarter. U.S. revenue is impacted by settlements for prior period adjustments.
Favourable Medicaid costs settlements of $2.0 million (US$1.3 million) were
realized in the 2004 first quarter compared to $1.8 million (US$1.2 million) in
the prior year quarter. In addition, in the first quarter of 2003 a recovery of
$2.2 million (US$1.5 million) in Medicaid revenues was realized resulting from
the favourable outcome of an Ohio court decision. Excluding the impact of the prior period Medicaid revenue settlements, the
Company benefited from an average 4.9% rise in Medicaid revenue per day from
the prior year first quarter. For 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
the first quarter of 2004, in comparison to the same period last year, was $2.4
million (US$1.6 million). In comparison to the 2003 first quarter, revenue from Canadian operations
increased $9.5 million, prior to the impact of ceased operations of $5.7
million. The new Ontario homes added $5.8 million, prior to the provision for
property tax funding. Nursing home funding increases received in 2003 to
support greater care and staffing needs (flow-through funding), as well as rate
increases contributed to the overall increase in nursing home revenue. However,
Canadian revenue was reduced in the first quarter of 2004 by $2.0 million to
provide for the Ontario governments announcement in April of a claw back of
the 2003 funding for property taxes, and reduced funding for 2004 and beyond
(see Significant Developments in 2004  Update of Canadian Legislative
Actions). Average occupancy of the Canadian operations on a same-facility
basis was 96.8% in the first quarter of 2004 compared to 97.6% in the same
prior year period, and 97.9% in the fourth quarter of 2003. The final 10,000 of
the 20,000 new Ontario long-term care beds are coming on stream in 2004, and as
a result the influx of new beds is causing occupancy pressure in certain
markets. Currently the Ontario government provides 100% of accommodation
funding to long-term care facilities that maintain an average occupancy level
for the year of 97% or greater (the occupancy threshold). Funding to a
long-term care facility is reduced if its average occupancy level for the year
is below 97%. During the first quarter of 2004, six of Extendicares Ontario
facilities were below the occupancy threshold, and therefore $0.3 million of
accommodation funding for the first three months of 2004 has been deferred in
the event that occupancy levels for the year do not improve and reach a 97%
average for the year. The Company is addressing this through an increased
emphasis on marketing and is also carefully managing costs. The Canadian home health care operations experienced a small increase in
revenue of $0.3 million, after adjusting for the exit from the British Columbia
home health care market in March of 2003. Home health care hours of service
from continuing operations were 1,152,000 compared to 1,176,000 in the first
quarter of 2003. The reduction in service hours resulted from continued
constraints imposed by the Ontario Community Care Access Centres, however home
health care revenue remained stable in comparison to the prior year period due
to rate increases. In comparison to the fourth quarter of 2003, Extendicares revenue declined by
$1.9 million. Revenue from U.S. operations increased by $6.8 million due to
higher payor rates and census mix; however, revenue from Canadian operations
was lower by $8.7 million. This was due to: a $2.0 million provision recorded
for the reduction in property tax funding; $1.9 million associated with the
sale of two Ontario facilities; lower home health care revenue of $2.3 million
primarily due to reduced volumes of service; and the remaining $2.5 million due
to seasonality in the nursing home operations. In addition to there being one
less day in the first quarter of 2004, Ontario nursing home revenue was lower
than in the fourth quarter of 2003 due to the timing of recognition of revenue
from the nursing and program flow-through envelopes, which is matched with
offsetting related spending in those envelopes. 7




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##### 



Earnings before depreciation, amortization, interest, and income taxes (EBITDA) Earnings before depreciation, amortization, interest, and income taxes, or
EBITDA, 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 item gain
from asset disposal and other items reported separately on its income
statement, as this relates to gains or losses on the disposal of assets,
provisions for ceased operations and the write-off of unamortized financing
costs on early retirement of debt. EBITDA does not have a standardized meaning
under Canadian GAAP and is not necessarily comparable to similar measures
disclosed by other issuers. Accordingly, EBITDA is 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. The following is a reconciliation of earnings before income taxes and EBITDA. Q1
    
    Q1
    
    Q4(millions of dollars)
    
    2004
    
    2003
    
    2003Earnings before income taxes
    
    
    34.1
    
    
    
    8.6
    
    
    
    22.2Add (deduct):Depreciation and amortization
    
    
    14.1
    
    
    
    16.4
    
    
    
    16.0Interest, net
    
    
    12.9
    
    
    
    15.6
    
    
    
    12.4Gain from asset disposals and other items
    
    
    (10.1
    )
    
    
    (1.1
    )
    
    
    EBITDA
    
    
    51.0
    
    
    
    39.5
    
    
    
    50.6
 The following presents EBITDA by country. Change
    
    
    
    
    
    ChangeQ1
    
    Q1
    
    2004 over
    
    Q4
    
    Q1 over(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2003
    
    2003
    
    Q4/2003EBITDAUnited States
    
    
    43.7
    
    
    
    31.1
    
    
    
    40.5
    %
    
    
    38.4
    
    
    
    13.8
    %Canada
    
    
    7.3
    
    
    
    8.4
    
    
    
    (13.1
    )%
    
    
    12.2
    
    
    
    (40.2
    )%51.0
    
    
    
    39.5
    
    
    
    29.1
    %
    
    
    50.6
    
    
    
    0.8
    %EBITDAas a percent of revenueUnited States
    
    
    14.2
    
    
    
    9.7
    
    
    
    
    
    
    
    12.8Canada
    
    
    6.0
    
    
    
    7.2
    
    
    
    
    
    
    
    9.4Total
    
    
    11.9
    
    
    
    9.0
    
    
    
    
    
    
    
    11.7
 EBITDA rose $11.5 million, or 29.1% to $51.0 million in the 2004 first quarter,
and as a percent of revenue, increased to 11.9% from 9.0% in the same prior
year period. In comparison to the first quarter of 2003, U.S. EBITDA rose $19.0 million in
the 2004 first quarter, prior to the $6.4 million negative impact of the
stronger Canadian dollar. As a percent of revenue, EBITDA improved to 14.2%.
Revenue improvements of $31.4 million discussed above were partially offset by
a $12.4 million rise in total operating, administrative and lease costs, prior
to the negative impact of the foreign exchange rate. Higher operating and
administrative costs were primarily related to the rise in number and acuity of
residents served, in addition to inflationary increases. Items of note were: a
$3.7 million, or 1.8%, rise in labour related costs, which included an average
wage rate increase of 1.6% in nursing home operations; $2.4 million of higher
state assessment and bed taxes imposed in association with the Medicaid funding
changes; a $2.1 million rise in drug costs due to higher resident census and
prices; a $1.3 million increase in bad debt expense; and other cost increases
of $2.9 million. EBITDA from Canadian operations declined to $7.3 million from $8.4 million in
the prior year quarter. The $9.5 million improvement in revenue was offset by a
$10.6 million rise in total operating, administrative and lease costs. Items of
note were: approximately $4.9 million of additional operating costs associated
with the new Ontario facilities; a $4.2 million, or 5.1%, rise in labour
related costs, which were primarily due to nursing home staffing and wage rate
changes in response to flow-through funding and other wage rate increases; and
other cost increases of $1.5 million. 8




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##### 



In comparison to the fourth quarter of 2003, EBITDA was $51.0 million in the
2004 first quarter compared to $50.6 million. EBITDA as a percent of revenue
increased to 11.9% from 11.7% in the 2003 fourth quarter. EBITDA from U.S.
operations increased 13.8% to $43.7 million from $38.4 million in the 2003
fourth quarter due to growth in Medicare patient census and increased
private-pay rates. In comparison to the fourth quarter of 2003, Canadian EBITDA declined to $7.3
million from $12.2 million. The provision for property tax funding and sale of
two Ontario facilities lowered earnings by $2.2 million. Approximately $2.0
million of the decrease was due to seasonality between the quarters, as
described in more detail below, with the remaining $0.7 million decline
primarily due to a 3.6% reduction in home health care hours of service and
increased labour costs. The $2.0 million seasonal reduction in Canadian
earnings resulted from: ParaMeds flu-shot program that took place during the
fourth quarter of 2003 and earned approximately $0.4 million, which did not
occur in the first quarter of 2004; higher utility costs of $1.0 million due to
the winter months; and spending in the nursing home envelopes in excess of
funding of $0.6 million, which is anticipated to reverse itself during the
remainder of the year. Similar levels of utility costs and excess envelope
spending occurred last year in the first quarter. The matching of the nursing
home envelope funding with spending typically smoothes itself out by the end of
the year, but can affect quarterly trends. Depreciation and amortization Depreciation and amortization decreased by $2.3 million, of which approximately
$1.9 million was due to the change in the foreign exchange rate. In addition,
the Company discontinued depreciating the assets held for divestiture as of
January 1, 2004, the expense for which totalled $0.9 million in the first
quarter of 2003. These assets have been accounted for as a sale in the second
quarter of 2004 as a result of the closing of the transaction with Greystone.
These favourable variances were partially offset by higher depreciation
associated with the new construction projects. Net interest costs Net interest costs declined by $2.8 million in the 2004 first quarter from the
prior year quarter, due primarily to the change in the foreign exchange rate of
$1.6 million and interest income of $1.3 million on notes receivable from
Greystone. The interest rate swap and cap in place in the U.S. operations
lowered net interest costs in the first quarter of 2004 by $1.4 million
compared to $1.6 million in the first quarter of 2003. Liquidity and Capital Resources Sources and Uses of Cash At March 31, 2004 the Company had cash and cash equivalents of $75.8 million,
compared with $74.8 million at December 31, 2003. Cash flow generated from operations before working capital changes improved to
$21.8 million in the first quarter of 2004 from $13.1 million in the same prior
year quarter due to the improvement in earnings and reduction in payments for
resident care liabilities. The net change in operating working capital (excluding cash and borrowings
included in current liabilities) reflected a use of cash of $6.5 million
compared to $17.1 million in the prior year quarter. The change period over
period was primarily due to an increase in current taxes payable. Cash provided by investing activities totalled $5.1 million in the first
quarter of 2004, which included the net cash proceeds from the sale of two
Ontario facilities of $18.5 million. Property and equipment expenditures,
excluding acquisitions, were net of capital lease financing, and totalled $16.4
million in the 2004 first quarter compared to $13.8 million in the prior year
period. The portion of these expenditures related to the growth of the business
- such as construction of facilities and bed additions  were approximately
$7.4 million and $5.8 million, respectively. In the first quarter of 2004, the
Company spent approximately $5.0 million on its U.S. construction projects and
approximately $2.4 million on the construction of its Ontario nursing homes.
The remaining property and equipment expenditures represented periodic capital
improvements and routine replacement of capital items and totalled $9.0 million
in the first three months of 2004 compared to $8.0 million in the prior year
period. Acquisition costs in the first quarter of 2004 of $1.9 million relate
to the purchase of a nursing home in Washington, previously operated under
lease arrangements. Cash used in financing activities was $20.2 million in the first quarter of
2004, and reflected the repayment of debt and purchase of shares for
cancellation, partially offset by a decrease in investments held for
self-insured liabilities. In the first quarter of 2003, cash provided by
financing activities of $5.7 million reflected the decline in investments held
for self-insured liabilities in excess of amounts used to repay debt and
purchase shares for cancellation. 9




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##### 



Capital Structure March 31
    
    Dec. 31
    
    Dec. 31(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
    
    
    17.7
    
    
    
    17.7
    
    
    
    18.2313.2
    
    
    
    312.3
    
    
    
    317.3Retained earnings (deficit)
    
    
    59.4
    
    
    
    32.0
    
    
    
    (26.5
    )Foreign currency translation adjustment account
    
    
    15.1
    
    
    
    12.1
    
    
    
    67.2Shareholders equity
    
    
    387.7
    
    
    
    356.4
    
    
    
    358.0Long-term debt, including current portion
    
    
    738.3
    
    
    
    757.5
    
    
    
    852.9Long-term debt to equity (ratio)
    
    
    1.90:1
    
    
    
    2.13:1
    
    
    
    2.38:1Multiple and Subordinate Voting shares (number at period end)
    
    
    68,671,153
    
    
    
    68,487,903
    
    
    
    69,664,103US/Canadian dollar exchange (rate at period end)
    
    
    1.3113
    
    
    
    1.2965
    
    
    
    1.5776
 Number of
    
    ClosingShares
    
    MarketShare Information
    
    Stock Symbol
    
    Outstanding (1)
    
    Value (1)Subordinate Voting Shares
    
    EXE.A
    
    
    56,877,961
    
    
    $
    14.90Multiple Voting Shares
    
    EXE
    
    
    11,911,692
    
    
    
    15.03Class I Preferred SharesCumulative Redeemable, Series 2
    
    EXE.PR.B
    
    
    121,805
    
    
    
    24.75Adjustable Dividend, Series 3
    
    EXE.PR.C
    
    
    93,310
    
    
    
    19.58Adjustable Dividend, Series 4
    
    EXE.PR.D
    
    
    241,240
    
    
    
    23.25Class II Preferred Shares, Series 1
    
    EXE.PR.E
    
    
    382,979
    
    
    
    21.50
  (1) At April 30, 2004, per the Toronto Stock Exchange. The closing rates used to translate assets and liabilities of the U.S.
operations were 1.3113 at March 31, 2004 and 1.2965 at December 31, 2003. As a
result of the stronger Canadian dollar, the Companys assets of its U.S.
operations increased by $12.8 million at the end of March 2004 and were
partially offset by an increase in liabilities of $9.9 million. The net change
in these assets and liabilities resulted in the increase in the foreign
currency translation adjustment account. Long-term debt, including the portion due within one year, declined $19.2
million to $738.3 million at March 31, 2004. The change in the foreign exchange
rate on translation of U.S. dollars increased long-term debt by $5.5 million
and the Company issued $0.9 million of notes payable in association with the
acquisition of assets. During the first quarter of 2004 the Company prepaid
debt of $6.6 million associated with the two Ontario facilities sold, and
repaid in full $17.1 million (US$13.0 million) of Industrial Revenue Bonds, and
met its regular repayment schedule of $1.9 million. To hedge its exposure to fluctuations in the market value of its 9.5% Senior
Notes due 2010 (the 2010 Senior Notes), EHSI entered into a five-year
interest rate swap contract with a notional amount of US$150.0 million due
2010, which effectively converted EHSIs fixed rate into a variable rate. In
addition, EHSI entered into a five-year interest rate cap agreement with a
notional amount of $150.0 million, due 2010. Under this cap agreement, EHSI
pays a fixed rate of interest equal to 0.24% and receives a variable rate of
interest equal to the excess, if any, of the one-month LIBOR rate, adjusted
monthly, 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
caused by increases in market interest rates over a certain level and also as a
cash flow hedge to effectively limit increases in interest payments under its
variable-rate debt obligations. 10




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##### 



Effective January 1, 2004, the Company adopted the new guidelines for hedging
relationships, see Recent Accounting Changes  Hedging. Under these new
guidelines, the Company must assess the effectiveness of its hedging
relationships. Currently, the only hedging relationships the Company has are
its interest rate swap and cap arrangements. The interest rate cap is for a
notional US$150.0 million and as at January 1, 2004, 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
of the new rules, recognized an associated unrealized loss of $0.8 million
(US$0.6 million), which amount was deferred in other assets to be recognized in
earnings over the remaining term of the interest rate cap to December 2007.
During the first quarter of 2004, the portion of the interest rate cap that
qualified as an effective cash flow hedge was reduced from US$32.0 million to
US$19.0 million, as a result of the early retirement of debt. Therefore, as at
March 31, 2004, a notional US$131.0 million of the interest rate cap did not
qualify as an effective hedge, and its fair value of $0.9 million (US$0.7
million) was recognized as a liability. The amount recorded in interest costs
during the quarter related to the portion of the interest rate cap not
qualifying as an effective hedge was $0.1 million (US$0.1 million). After taking into account interest rate swap agreements, the weighted average
interest rate of all long-term debt at March 31, 2004 was approximately 8.0%,
compared to 7.8% at December 31, 2003. In addition, after considering swap
agreements in place to convert fixed-rate debt to floating rates, 70.0% of the
long-term debt was effectively at fixed rates, at the end of March 2004. Subsequent to March 31, 2004, EHSI refinanced certain of its debt, and in
conjunction with this, terminated its existing interest rate swap and cap
agreements, and entered into two new interest rate swap and cap agreements. For
further information on this refer to Significant Developments in 2004 -
Subsequent Events. The impact of the debt refinancing lowered Extendicares long-term debt to
approximately $711.7 million from $738.3 million at the end of March; and will
reduce its weighted average interest rate to approximately 6.5% from 8.0%. At
these interest rates and debt levels, this will result in annual interest
savings of approximately $12.9 million. In addition, subsequent to the
refinancing and after taking into account the interest rate swap arrangements,
approximately 59.0% of Extendicares debt will be subject to floating rates,
compared to 30.0% of the balance of consolidated long-term debt at March 31,
2004. The Company has been acquiring its common shares for cancellation since 1998
under the terms of its normal course issuer bids. Since 1998, the Company has
acquired 7,770,800 Multiple Voting and Subordinate Voting shares at a cost of
$34.2 million, or an average cost of $4.40 per share. During the first quarter
of 2004 the Company acquired 93,500 Subordinate Voting and Multiple Voting
shares at a cost of $1.2 million, or an average cost of $12.55 per share. The Companys share capital is also impacted by the exercise of stock options
to acquire Subordinate Voting Shares. During the first quarter of 2004, 276,750
Subordinate Voting Shares were issued pursuant to the exercise of stock
options. As at March 31, 2004, options for 2,004,625 Subordinate Voting Shares
had been granted, of which 920,375 were exercisable. During the month of April,
a further 118,500 Subordinate Voting Shares were issued pursuant to the
exercise of stock options, and 875 options were cancelled. As at April 30,
2004, options for 2,102,475 Subordinate Voting Shares were issued, of which
831,875 were exercisable. Future Liquidity and Capital Resources Management believes that cash from operations together with available bank
credit facilities will be sufficient to support ongoing operations and capital
expenditures, service debt obligations and pay preferred share dividends. At
March 31, 2004, EHSI had cash and cash equivalents of US$47.9 million and
US$71.3 million available under its revolver loan, and Extendicares Canadian
operations had cash and available bank lines totalling $13.5 million. During 2004 capital expenditures, excluding acquisitions, of approximately
$90.0 million are planned, including an estimated $35.0 million for growth
construction projects. ECI is committed to spending $6.0 million to complete
the new Ontario homes in 2004. The remaining $29.0 million (US$23.0 million) is
planned for U.S. construction projects. 11




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##### 



As of March 31, 2004, EHSI had capital expenditure commitments outstanding of
approximately US$8.6 million. EHSI is in the process of completing seven new
developments (Phase I) to add 165 beds during 2004 and 2005. Two of the
projects were completed in the first quarter of 2004, being a 20-bed addition
to a nursing facility and a 16-unit addition to an assisted living center. The
total cost of the projects is expected to be US$15.2 million, of which US$4.3
million was spent in 2003 and US$3.6 million in the first quarter of 2004.
Furthermore, Phase II of the development plans is a proposal for eight new
projects that will add 329 units in 2005 and 2006 for a cost of approximately
US$36.3 million, of which US$0.2 million was spent in the first quarter of
2004. At the end of March 2004, the Companys accrual for self-insured general and
professional liabilities was $94.9 million compared to $95.4 million at the
beginning of the year. Claims payments, net of the current period provision,
decreased the accrual by $1.5 million in the first quarter of 2004, with the
change in the foreign exchange rate accounting for the offsetting increase. 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 the first quarter of 2004 and 2003 for potential general and professional
liability claims were $3.7 million and $3.4 million, respectively. Payments for
self-insured liabilities in the first quarter of 2004 and 2003 were $5.2
million and $13.2 million, respectively. The Company exited the nursing home
markets of the highly litigious States of Florida and Texas in 2000 and 2001,
respectively. As a result, accruals for general and professional liabilities
declined significantly from the 2001 level, and in 2003 the Company experienced
a tapering off of payments made for resident care liability claims, reflecting
the wind-down of claims associated with discontinued operations. The Company
completed an independent actuarial review as part of the 2003 year-end, which
confirmed the adequacy of the balance sheet reserves for resident care
liability claims. The Company estimates that $32.8 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 March 31, 2004 for estimated
costs of self-insured liabilities. The Company invests funds to support the accrual for self-insured liabilities.
These funds, reported as part of other assets, totalled $35.7 million at the
end of March 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 Transaction Extendicare pays rent to Crown Life for rental of certain office premises,
which for each of the first quarters of 2004 and 2003 was $0.3 million. 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 Vice President, Finance 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 the quarter
ended March 31, 2004. Based upon their evaluation of these disclosure controls
and procedures, the Chief Executive Officer and Vice President, Finance and
Chief Financial Officer concluded that the disclosure controls and procedures
were effective, as of the end of the quarter ended March 31, 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 quarterly 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 March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 12




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##### 



Recent Accounting Changes Hedging Effective January 1, 2004, the Company adopted The CICA issued 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 to be
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 swap, which effectively converts fixed-rate debt to floating
rates, and an interest rate cap. The interest rate cap is for a notional
US$150.0 million and as at January 1, 2004, 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 of the new rules,
recognized an associated unrealized loss of $0.8 million (US$0.6 million),
which amount was deferred in other assets to be recognized in earnings over the
remaining term of the interest rate cap to December 2007. The adoption of this
accounting guideline did not have a material impact on the Companys results of
operations for the quarter. Forward-looking Statements Statements contained in this report other than statements of historical fact,
including statements regarding anticipated financial performance, business
strategy and managements plans and objectives for future operations, are
forward-looking statements. These forward-looking statements can be identified
as such because the statements generally include words such as expect,
intend, anticipate, believe, estimate, plan or objective or other
similar expressions. These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed in, or
implied by, these statements. In addition to the risks and uncertainties
related to these statements, other risks and uncertainties are identified in
Extendicare Inc.s or Extendicare Health Services, Inc.s 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; resident care litigation, including exposure for punitive damage
claims and increased insurance costs, and other claims asserted against the
Company; the Companys ability to attract and retain qualified personnel; the
availability and terms of capital to fund the Companys capital expenditures;
changes in competition; and demographic changes. Given these risks and uncertainties, readers are cautioned not to place undue
reliance on the Companys forward-looking statements. All forward-looking
statements contained in this report are necessarily estimates reflecting the
best judgement of the party making such statements based upon current
information, and the Company assumes no obligation to update any
forward-looking statement. 13




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##### 



EXTENDICARE INC.
Consolidated Statements of Earnings
(unaudited) Three months ended(thousands of dollars except per share amounts)
    
    March 312004
    
    2003RevenueNursing and assisted living centresUnited States
    
    
    295,795
    
    
    
    309,298Canada
    
    
    88,294
    
    
    
    81,738Outpatient therapy  U.S.
    
    
    3,512
    
    
    
    3,993Home health  Canada
    
    
    31,441
    
    
    
    34,269Other
    
    
    10,530
    
    
    
    10,005429,572
    
    
    
    439,303Operating and administrative costs
    
    
    374,460
    
    
    
    395,058Earnings before undernoted
    
    
    55,112
    
    
    
    44,245Lease costs
    
    
    4,132
    
    
    
    4,744Depreciation and amortization
    
    
    14,135
    
    
    
    16,405Interest, net
    
    
    12,850
    
    
    
    15,609Gain from asset disposals and other items
    
    
    (10,068
    )
    
    
    (1,081
    )Earnings before income taxes
    
    
    34,063
    
    
    
    8,568Income taxesCurrent
    
    
    15,065
    
    
    
    2,188Future (reduction)
    
    
    (6,889
    )
    
    
    9898,176
    
    
    
    3,177Earnings from health care
    
    
    25,887
    
    
    
    5,391Share of earnings of Crown Life
    
    
    2,452
    
    
    
    12,485Net earnings
    
    
    28,339
    
    
    
    17,876Earnings per shareBasic
    
    
    0.41
    
    
    
    0.25Diluted
    
    
    0.40
    
    
    
    0.25
 14




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##### 



EXTENDICARE INC.
Consolidated Statements of Cash Flows
(unaudited) Three months ended(thousands of dollars)
    
    March 312004
    
    2003Cash provided by (used in) operationsNet earnings
    
    
    28,339
    
    
    
    17,876Adjustments for:Depreciation and amortization
    
    
    14,135
    
    
    
    16,405Provision for self-insured liabilities
    
    
    3,672
    
    
    
    3,387Payments for self-insured liabilities
    
    
    (5,236
    )
    
    
    (13,183
    )Future income taxes
    
    
    (6,889
    )
    
    
    989Gain from asset disposals and other items
    
    
    (10,068
    )
    
    
    (1,081
    )Undistributed share of earnings of Crown Life, net of dividends received
    
    
    (2,452
    )
    
    
    (12,485
    )Other
    
    
    325
    
    
    
    1,16821,826
    
    
    
    13,076Net change in operating working capital, excluding cashAccounts receivable
    
    
    2,122
    
    
    
    5,892Inventories, supplies and prepaid expenses
    
    
    (5,434
    )
    
    
    (7,660
    )Accounts payable and accrued liabilities
    
    
    (11,312
    )
    
    
    (15,389
    )Income taxes
    
    
    8,105
    
    
    
    1315,307
    
    
    
    (4,068
    )Cash provided by (used in) investment activitiesProperty and equipment
    
    
    (16,437
    )
    
    
    (13,777
    )Acquisitions
    
    
    (1,891
    )
    
    
    Net proceeds from dispositions
    
    
    18,526
    
    
    
    Other assets
    
    
    4,854
    
    
    
    3615,052
    
    
    
    (13,416
    )Cash provided by (used in) financing activitiesRepayment of long-term debt
    
    
    (25,654
    )
    
    
    (1,416
    )Decrease in investments held for self-insured liabilities
    
    
    5,712
    
    
    
    9,237Purchase of shares for cancellation
    
    
    (1,184
    )
    
    
    (1,751
    )Financing costs
    
    
    (41
    )
    
    
    (32
    )Other
    
    
    976
    
    
    
    (314
    )(20,191
    )
    
    
    5,724Foreign exchange gain (loss) on cash held in foreign currency
    
    
    755
    
    
    
    (2,827
    )Increase (decrease) in cash and cash equivalents
    
    
    923
    
    
    
    (14,587
    )Cash and cash equivalents at beginning of period
    
    
    74,846
    
    
    
    52,624Cash and cash equivalents at end of period
    
    
    75,769
    
    
    
    38,037
 Cash and cash equivalents represent cash and short-term investments
less bank overdraft. Cash interest paid in the determination of the
earnings for each of the periods ended March 31, 2004 and 2003 was
$17.5 million and $21.5 million, respectively. Cash taxes paid for
each of the periods ended March 31, 2004 and 2003 were $7.0 million
and $2.2 million, respectively. 15




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##### 



EXTENDICARE INC.
Consolidated Balance Sheets
(unaudited) March 31
    
    December 31(thousands of dollars)
    
    2004
    
    2003AssetsCurrent assetsCash and short-term investments
    
    
    75,769
    
    
    
    74,846Accounts receivable
    
    
    149,695
    
    
    
    150,048Assets under divestiture agreement
    
    
    44,221
    
    
    
    43,722Income taxes recoverable
    
    
    1,713
    
    
    
    9,654Future income taxes
    
    
    39,923
    
    
    
    34,571Inventories, supplies and prepaid expenses
    
    
    19,335
    
    
    
    13,928330,656
    
    
    
    326,769Property and equipment
    
    
    819,643
    
    
    
    821,682Goodwill and other intangible assets
    
    
    98,951
    
    
    
    97,558Other assets
    
    
    204,918
    
    
    
    208,1301,454,168
    
    
    
    1,454,139Investment in Crown Life Insurance Company
    
    
    141,693
    
    
    
    139,2781,595,861
    
    
    
    1,593,417Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable and accrued liabilities
    
    
    259,928
    
    
    
    268,206Accrual for self-insured liabilities
    
    
    32,782
    
    
    
    32,413Current maturities of long-term debt
    
    
    7,528
    
    
    
    7,409Deposits under divestiture agreement
    
    
    39,339
    
    
    
    38,895339,577
    
    
    
    346,923Accrual for self-insured liabilities
    
    
    62,153
    
    
    
    62,990Long-term debt
    
    
    730,739
    
    
    
    750,094Future income taxes
    
    
    75,729
    
    
    
    76,9771,208,198
    
    
    
    1,236,984Share capital and contributed surplus
    
    
    313,209
    
    
    
    312,328Retained earnings
    
    
    59,382
    
    
    
    31,959Foreign currency translation adjustment account
    
    
    15,072
    
    
    
    12,1461,595,861
    
    
    
    1,593,417Closing US/Cdn. dollar exchange rate
    
    
    1.3113
    
    
    
    1.2965
 EXTENDICARE INC.
Consolidated Statements of Retained Earnings (Deficit)
(unaudited) Three months ended(thousands of dollars)
    
    March 312004
    
    2003Retained Earnings (Deficit)Balance at beginning of period
    
    
    31,959
    
    
    
    (26,545
    )Earnings for the period
    
    
    28,339
    
    
    
    17,876Purchase of shares below/(in excess of) book value
    
    
    (741
    )
    
    
    (9
    )Preferred share dividends
    
    
    (175
    )
    
    
    (186
    )Balance at end of period
    
    
    59,382
    
    
    
    (8,864
    )
 16




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##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements 1. Basis of Presentation The unaudited interim period consolidated financial statements of Extendicare
Inc. have been prepared in accordance with Canadian generally accepted
accounting principles. The consolidated financial statements include those of
Extendicare Inc. and its subsidiaries (Extendicare or the Company). Health
care operations are conducted through wholly owned subsidiaries, Extendicare
Health Services, Inc. and its subsidiaries (EHSI) in the United States, and
Extendicare (Canada) Inc. and its subsidiaries (ECI) in Canada. The preparation
of financial data is based on accounting policies and practices consistent with
those used in the preparation of the annual audited consolidated financial
statements. All dollar amounts are in Canadian dollars unless otherwise
indicated. These unaudited interim period consolidated financial statements
should be read together with the annual audited consolidated financial
statements and the accompanying notes included in the Companys 2003 Annual
Report. 2. Change in Accounting Policies Effective January 1, 2004, the Company adopted the following accounting
pronouncements, none of which had a material impact on the financial results:
hedging relations; impairment of long-lived assets; asset retirement
obligations; revenue recognition; and revenue arrangements with multiple
deliverables. 3. Gain from Asset Disposals and Other Items The Company has reported a gain on sale of assets and other items of $10.1
million during the first quarter of 2004, which on an after-tax basis
contributed $10.7 million to net earnings, or $0.16 per share. The previously
announced sale of two Ontario homes (275 beds) in February of 2004 for gross
proceeds of $19.6 million resulted in a pre-tax gain of $12.7 million, and
contributed $12.3 million to net earnings, or $0.18 per share, in the first
quarter of 2004. The gain on the sale of the Ontario facilities was
substantially sheltered by capital loss carryforwards that had been fully
offset with a valuation allowance. A portion of the proceeds were used to
retire long-term debt of $6.6 million associated with the homes. In addition,
during the first quarter of 2004, EHSI prepaid in full US$13.0 million of
Industrial Revenue Bonds that resulted in the write off of $0.5 million of
deferred financings costs, and based on a formal decision to close an 86-bed
nursing facility in Indiana, EHSI recorded a loss on impairment of assets of
$2.1 million. On an after-tax basis these two charges totalled $1.6 million,
for a loss per share of $0.02. 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 evaluation of the respective operations, management decided,
subject to State approval, to consolidate the two operations into one renovated
facility that upon completion, will accommodate all residents within both
facilities after decreasing the total available nursing beds by 46. The
consolidation of the two operations is expected to be complete by March 2005.
As a result of the decision to close the one facility, EHSI recorded a
provision for impairment of long-lived assets in the first quarter of 2004. 4. Property and Equipment As of March 31, 2004, EHSI had capital expenditure commitments outstanding of
approximately US$8.6 million. EHSI is in the process of completing seven new
developments (Phase I) to add 165 beds during 2004 and 2005. Two of the
projects were completed in the first quarter of 2004, representing a 20-bed
addition to a nursing facility and a 16-unit addition to an assisted living
center. The total cost of the projects is expected to be US$15.2 million, of
which US$4.3 million was spent in 2003 and US$3.6 million in the first quarter
of 2004. Furthermore, Phase II of the development plans is a proposal for eight
new developments that will add 329 units in 2005 and 2006 for a cost of
approximately US$36.3 million, of which US$0.2 million was spent in the first
quarter of 2004. 5. Goodwill and Other Intangible Assets Included in goodwill and other intangible assets is intangible assets related
to leasehold rights, which are amortized over the term of the lease including
renewal options. As at March 31, 2004 these assets had a gross carrying value
of $13.1 million and accumulative amortization of $9.5 million, for a net book
value of $3.6 million. The aggregate amortization expense for the three months
ended March 31, 2004 was $0.4 million. 17




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##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements contd 6. Share Capital During the three months ended March 31, 2004, the Company purchased 400 Class I
Preferred Shares at a cost of $10,000 pursuant to the purchase obligation.
Under the terms of a Normal Course Issuer Bid, the Company purchased and
cancelled 92,500 Subordinate Voting Shares and 1,000 Multiple Voting Shares at
a cost of $1,173,000. In addition, during the three months, 276,750 Subordinate
Voting Shares were issued on exercise of stock options for proceeds of
$1,276,000. As a result of these transactions, the carrying value of capital
stock increased by $833,000 and retained earnings was charged with $741,000
attributable to the cost of purchases in excess of their carrying value. As at March 31, 2004, 4,106,225 Subordinate Voting Shares have been reserved
under stock option plans of which a total of 2,004,625 Subordinate Voting
Shares have been granted. These options have exercise prices ranging from $2.37
to $7.01, and expire between April 26, 2004 and May 7, 2008. During the three
months ended March 31, 2004, 15,875 options expired and/or were cancelled. The Company elected in 2003 to adopt the fair value based method of accounting
for stock-based compensation on a prospective basis, applied to awards granted
under its stock option plan beginning January 1, 2003. For awards granted under
the stock option plan prior to January 1, 2003, the Company applies the
intrinsic value based method. During the first quarter of 2004, the Company
recorded compensation cost associated with stock options granted since January
1, 2003 of $48,000, thereby increasing the related balance of contributed
surplus to $192,000 at the end of March 2004. 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: Three months ended(thousands of dollars except per share amounts)
    
    March 312004
    
    2003Net earnings for the period
    
    
    28,339
    
    
    
    17,876Compensation expense related to fair value of stock options, after
taxes of $nil
    
    
    (93
    )
    
    
    (229
    )Pro forma net income for the period
    
    
    28,246
    
    
    
    17,647Basic earnings per share (dollars)Reported
    
    
    0.41
    
    
    
    0.25Adjusted
    
    
    0.41
    
    
    
    0.25Diluted earnings per share (dollars)Reported
    
    
    0.40
    
    
    
    0.25Adjusted
    
    
    0.40
    
    
    
    0.25
 The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model. 7. Earnings per Share Earnings per share is calculated by dividing net earnings after preferred share
dividends for the period by the weighted average number of combined Subordinate
Voting Shares and Multiple Voting Shares outstanding during the period. Diluted
earnings per share, using the treasury stock method, assumes outstanding stock
options are exercised at the beginning of the year and common shares are
purchased at the average market price during the period from the funds derived
on the exercise of these outstanding options. Stock options with a strike price
above the average market price for the period are excluded from the calculation
of diluted earnings per share as to include them would increase earnings per
share. 18




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##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements contd The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computation. Three months ended(thousands of dollars except per share amounts)
    
    March 312004
    
    2003Numerator for basic and diluted earnings per shareNet earnings for the period
    
    
    28,339
    
    
    
    17,876Dividends on preferred shares
    
    
    177
    
    
    
    18628,162
    
    
    
    17,690Denominator for basic and diluted earnings per share (thousands)Basic weighted average number of shares
    
    
    68,598
    
    
    
    69,485Dilutive stock options 1
    
    
    1,476
    
    
    
    169Diluted weighted average number of shares
    
    
    70,074
    
    
    
    69,654Earnings per share (dollars)Basic
    
    
    0.41
    
    
    
    0.25Diluted
    
    
    0.40
    
    
    
    0.25
 (1) For the period ending March 31, 2003, 2,390,250 stock options were excluded from the
calculation of dilutive stock options as their strike prices ranged from $3.70 to $15.60,
which was above the average market price for the period. There were no stock options excluded
from this calculation for the period ended March 31, 2004. 8. Contingent Liabilities The Company and its consolidated subsidiaries are defendants in actions brought
against them from time to time in connection with their operations. It is not
possible to predict the ultimate outcome of the various proceedings at this
time or to estimate additional costs that may result. The U.S. Department of Justice and other federal agencies are increasing
resources dedicated to regulatory investigations and compliance audits of
healthcare 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 is aware of investigations by these units
involving one facility each in Kentucky and Wisconsin. The investigations have
not been sufficiently developed to enable us to predict an outcome. In connection with its agreement to provide pharmacy services to EHSI,
Omnicare, Inc. 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 and should this matter not be settled, it will be taken to
arbitration. The financial statements include provisions for settlement of this
claim. 19




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##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements contd 9. Segmented Information  Three months ended(millions of dollars)
    
    March 312004
    
    2003RevenueUnited States
    
    
    308.0
    
    
    
    321.5Canada
    
    
    121.6
    
    
    
    117.8429.6
    
    
    
    439.3EBITDAUnited States
    
    
    43.7
    
    
    
    31.1Canada
    
    
    7.3
    
    
    
    8.451.0
    
    
    
    39.5Health Care Net EarningsUnited States
    
    
    13.2
    
    
    
    2.7Canada
    
    
    12.7
    
    
    
    2.725.9
    
    
    
    5.4
 Mar. 31
    
    Dec. 31(millions of dollars)
    
    2004
    
    2003GoodwillUnited States 1
    
    
    95.2
    
    
    
    93.5Canada
    
    
    0.1
    
    
    
    0.195.3
    
    
    
    93.6Health Care AssetsUnited States
    
    
    1,122.9
    
    
    
    1,119.1Canada
    
    
    331.3
    
    
    
    335.01,454.2
    
    
    
    1,454.1Investment in Crown Life
    
    
    141.7
    
    
    
    139.3Total Consolidated Assets
    
    
    1,595.9
    
    
    
    1,593.4
 (1) The change in United States goodwill is primarily
related to foreign currency translation of U.S.
operations.
   10. Related Party Transaction Extendicare pays rent to Crown Life for rental of certain office premises,
which for each of the first quarters of 2004 and 2003 was $0.3 million. 11. Subsequent Events Issuance of New 2014 Notes and Repayment of 2007 Notes In April 2004 EHSI refinanced certain of its long-term debt with the issuance
of US$125.0 million aggregate principal amount of 6.875% Senior Subordinated
Notes due May 1, 2014 (the 2014 Notes) issued at a price of 97.5001% of par
to yield 7.23%, and the amendment and restatement of its existing credit
facility, which included 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, and will be used, together with cash on hand
and new borrowing capacity, to purchase for cash all of EHSIs outstanding
US$200.0 million aggregate principal amount of 9.35% Senior Subordinated Notes
due 2007 (the 2007 Notes). On April 5, 2004 EHSI commenced a tender offer for
the 2007 Notes, for which 61% of the 2007 Notes, excluding those held by
Extendicare Inc., were tendered and repaid on April 22, 2004. The remaining
2007 Notes not tendered will be redeemed and paid for on May 24, 2004. The 2014 Notes are fully and unconditionally guaranteed on a senior
subordinated basis by all of EHSIs existing and future U.S. domestic
significant subsidiaries, by all of its existing and future U.S. domestic
subsidiaries that guarantee or incur any indebtedness and by any other existing
and future significant subsidiaries or restricted subsidiaries that guarantee
or otherwise provide direct credit support for indebtedness of EHSI or any of
its U.S. domestic subsidiaries. The 2014 Notes and guarantees are general
unsecured obligations of EHSI and its subsidiaries. On or after May 1, 2009, EHSI may redeem all or part of the 2014 Notes, at the
redemption prices (expressed as percentages of principal amount) listed below,
plus accrued and unpaid interest, if any, to the date of redemption, if
redeemed during the twelve-month period commencing on May 1 of the years set
forth below: RedemptionYear
    
    Price2009
    
    
    103.438
    %2010
    
    
    102.292
    %2011
    
    
    101.146
    %2012 and thereafter
    
    
    100.000
    %
 20




---



##### 



Amendment and Restatement of Credit Facility In connection with the offering of the 2014 Notes, EHSI amended and restated
its current credit facility. The terms of the amended and restated credit
facility included 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 which ranges from LIBOR 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;
    
    a requirement that EHSI maintain a minimum fixed charge coverage ratio of 1.10 to 1 and increasing to 1.20 to 1 in 2005;
    
    a requirement that EHSI maintain a minimum tangible net worth that started at 85% of its tangible net worth at March 31,
2002 and increases by 50% of EHSIs net income for each fiscal quarter plus 100% of any additional equity that EHSI would
raise;
    
    a requirement that EHSI maintain a maximum senior leverage ratio starting at 4.25 to 1 and reducing to 4.00 to 1 in 2007;
    
    a requirement that EHSI maintain a maximum senior secured leverage ratio starting at 2.25 to 1 and reducing to 2.00 to 1 in
2007; and
    
    changes to the collateral securing the facility to permit EHSI to substitute certain assets with other assets. EHSI expects to borrow approximately US$30.0 million under the amended and
restated credit facility to partially fund the repurchase or redemption of the
outstanding US$200.0 million 2007 Notes. Based on EHSIs adjusted
capitalization and EBITDA for the quarter ended March 31, 2004, all borrowings
to be drawn under the amended and restated credit facility will initially bear
interest at a rate per annum equal to: LIBOR plus 2.75%; or the Base Rate plus
1.75%, and thereafter, in each case, subject to adjustments based on EHSIs
senior leverage ratio. Interest Rate Swap and Cap Agreements On April 19, 2004, coterminous with the issuance of the 2014 Notes, EHSI
terminated its existing interest rate swap and cap agreements for an aggregate
gain of approximately US$3.3 million to be recognized in the second quarter of
2004. This swap was a hedge against the 2007 Notes. 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 9.5% Senior Notes due 2010 (the 2010 Senior Notes), and
the 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$150.0 million.
This agreement effectively converted up to US$150.0 million of fixed interest
rate indebtedness into variable interest rate indebtedness. Under the terms of
this interest rate swap agreement, the counterparty can call the swap at any
time on or after July 1, 2006 with payments as determined under the agreement.
EHSI also entered into an interest rate cap agreement expiring July 1, 2010
with a notional amount of US$150.0 million. Under this cap agreement, EHSI paid
on April 22, 2004 an upfront fee of US$3.5 million to the counterparty that
will be amortized to interest expense over the term of the cap. EHSI will
receive a variable rate of interest equal to the excess, if any, of the
six-month LIBOR, adjusted semi-annually, over the cap rate of 7%. EHSI uses the
interest rate cap to offset possible increases in interest payments under the
interest rate swap agreement expiring July 1, 2010 caused by increases in
market interest rates over a certain level. Under the terms of the interest
rate cap agreement, the counterparty can call the cap if the interest rate swap
agreement expiring July 1, 2010 is terminated. 21




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##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements contd 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$125.0
million. This agreement effectively converted up to US$125.0 million of fixed
interest rate indebtedness into variable interest rate indebtedness. Under the
terms of this interest rate swap agreement, the counterparty can call the swap
at any time on or after May 1, 2009 with payments as determined under the
agreement. EHSI also entered into an interest rate cap agreement expiring May
1, 2014 with a notional amount of US$125.0 million. Under this cap agreement,
EHSI pays a fixed rate of interest equal to 0.75% to the counterparty and
receives a variable rate of interest equal to the excess, if any, of the
six-month LIBOR, 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. As a result of the tender and call of the 2007 Notes, EHSI will pay a premium
for the early redemption of the 2007 Notes of approximately US$6.6 million;
write off deferred financing charges of US$2.4 million and incur estimated
legal fees of US$0.3 million. In addition, pursuant to the termination of the
existing interest rate swap and cap arrangements, EHSI will realize a net gain
of approximately US$3.3 million. These amounts total to a pre-tax loss of
US$5.9 million (US$3.9 million after-tax), which will be recognized in the 2004
second quarter results. Based on debt levels and interest rates at March 31, 2004, the debt refinancing
lowered Extendicares long-term debt to approximately $711.7 million from
$738.3 million at the end of March; and reduced its weighted average interest
rate to approximately 6.5% from 8.0%. At these interest rates and debt levels,
this will result in annual interest savings of approximately $12.9 million. In
addition, subsequent to the refinancing and after taking into account the
interest rate swap arrangements, approximately 59.0% of Extendicares debt will
be subject to floating rates, compared to 30.0% of the balance of consolidated
long-term debt at March 31, 2004. Settlement of Greystone Transaction In April 2004 EHSI concluded negotiations with Greystone Tribeca Acquisition,
L.L.C. (Greystone) on the divestiture agreement for 15 Florida nursing homes
previously owned and operated by EHSI, which Greystone has been operating since
September 2000. The initial transaction in 2000 was treated as a deferred sale
since a significant portion of the final consideration was contingent on
certain events, and EHSI held an option to repurchase the facilities. On April
29, 2004, EHSI received US$2.6 million of interest, and in addition to the
US$30.0 million of cash consideration initially received in 2000, EHSI will
receive in June 2004, US$10.0 million as final payment of the contingent
consideration. The finalization of this transaction will result in the
recognition in the second quarter of 2004 of a pre-tax gain from the sale of
assets of US$4.8 million and interest income of US$1.6 million. U.S. Acquisition The Company anticipates closing on the acquisition of five nursing homes (423
beds) by the end of May 2004. Four of the facilities are located in Indiana and
the other in Wisconsin. The cost is estimated at US$8.0 million and will be
financed with cash on hand. 22




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##### 



Extendicare Inc. Facility Location and Resident Capacity Assisted Living andat March 31, 2004
    
    Nursing Centres
    
    Retirement Centres
    
    Chronic Care Units
    
    TotalNumber of
    
    Resident
    
    Number of
    
    Resident
    
    Number of
    
    Resident
    
    Number of
    
    ResidentBy State/Province
    
    Facilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    CapacityUnited StatesOhio
    
    
    29
    
    
    
    3,068
    
    
    
    2
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    3,204West Virginia
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    120Pennsylvania
    
    
    25
    
    
    
    2,895
    
    
    
    8
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    3,193Delaware
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    120Wisconsin
    
    
    25
    
    
    
    2,360
    
    
    
    10
    
    
    
    442
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    2,802Minnesota
    
    
    10
    
    
    
    1,274
    
    
    
    1
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    1,334Indiana
    
    
    17
    
    
    
    1,676
    
    
    
    2
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    1,785Kentucky
    
    
    18
    
    
    
    1,506
    
    
    
    1
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    1,561Washington
    
    
    15
    
    
    
    1,529
    
    
    
    8
    
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    1,908Oregon
    
    
    3
    
    
    
    195
    
    
    
    2
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    296Idaho
    
    
    2
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    191Arkansas
    
    
    1
    
    
    
    96
    
    
    
    3
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    277Texas
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    110Total United States
    
    
    147
    
    
    
    15,030
    
    
    
    39
    
    
    
    1,871
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    16,901CanadaOntario
    
    
    51
    
    
    
    7,511
    
    
    
    4
    
    
    
    668
    
    
    
    1
    
    
    
    120
    
    
    
    56
    
    
    
    8,299Alberta
    
    
    14
    
    
    
    1,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    1,183Saskatchewan
    
    
    5
    
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    654Manitoba
    
    
    5
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    762British Columbia
    
    
    1
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    75Total Canada
    
    
    76
    
    
    
    10,185
    
    
    
    4
    
    
    
    668
    
    
    
    1
    
    
    
    120
    
    
    
    81
    
    
    
    10,973TOTAL
    
    
    223
    
    
    
    25,215
    
    
    
    43
    
    
    
    2,539
    
    
    
    1
    
    
    
    120
    
    
    
    267
    
    
    
    27,874By Type of OwnershipUnited StatesOwned
    
    
    131
    
    
    
    13,191
    
    
    
    33
    
    
    
    1,652
    
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    14,843Leased
    
    
    9
    
    
    
    1,026
    
    
    
    1
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    1,089Managed
    
    
    7
    
    
    
    813
    
    
    
    5
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    969Total United States
    
    
    147
    
    
    
    15,030
    
    
    
    39
    
    
    
    1,871
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    16,901CanadaOwned
    
    
    46
    
    
    
    6,154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    6,154Leased
    
    
    9
    
    
    
    1,155
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    1,231Managed
    
    
    21
    
    
    
    2,876
    
    
    
    4
    
    
    
    592
    
    
    
    1
    
    
    
    120
    
    
    
    26
    
    
    
    3,588Total Canada
    
    
    76
    
    
    
    10,185
    
    
    
    4
    
    
    
    668
    
    
    
    1
    
    
    
    120
    
    
    
    81
    
    
    
    10,973TOTAL
    
    
    223
    
    
    
    25,215
    
    
    
    43
    
    
    
    2,539
    
    
    
    1
    
    
    
    120
    
    
    
    267
    
    
    
    27,874
 23




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##### 



Investor Information   Stock Exchange Listings
    
    Transfer AgentsToronto Stock Exchange
    
    Computershare Investor Services, Inc.New York Stock Exchange (EXE.A only)
    
    Tel: (800) 564-6253Fax: (866) 249-7775email: service@computershare.comwww.computershare.comShareholder Inquiries
    
    Investor RelationsJillian Fountain, Corporate Secretary
    
    Christopher Barnes, Manager, Investor RelationsTel: (905) 470-5534
    
    Tel: (905) 470-5483Fax: (905) 470-4003
    
    Fax: (905) 470-4003email: jfountain@extendicare.com
    
    email: cbarnes@extendicare.com
 Corporate Information Extendicare Inc.s 2003 Annual Report is available for viewing or printing on the Companys
Website, in addition to news releases, quarterly reports and other filings with the securities
commissions. Printed copies are available upon request to the Corporate Secretary. Visit Extendicares Website @www.extendicare.com   (EXTENDICARE LOGO) 24