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Exhibit 99.1 (EXTENDICARE LOGO)   Shareholders Quarterly Report For the Nine Months Ended
September 30, 2004
  (3 DIAMONDS GRAPHIC)




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Managements Discussion and Analysis November 4, 2004
 Basis of Presentation  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 for the
nine months ended September 30, 2004, and notes thereto, together with
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  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 12 states. EHSI offers a continuum of health care services,
including nursing care, assisted living and related medical specialty services,
such as subacute care and rehabilitative therapy on an inpatient and outpatient
basis. In Canada the Companys wholly owned subsidiary, Extendicare (Canada) Inc. and
its subsidiaries (ECI), operates nursing and retirement centres in four
provinces, and also manages a chronic care hospital unit in Ontario. ECI is a
major provider of home health care in Canada through its ParaMed Home Health
Care division. At September 30, 2004, Extendicare, through its subsidiaries, operated 266
facilities with capacity for 27,713 residents (December 31, 2003: 275
facilities with capacity for 28,930 residents; September 30, 2003: 276
facilities with capacity for 29,056 residents). The number of facilities
operated has been reduced by nine since year end. During the first nine months
of 2004, the Company increased its nursing and assisted living centres under
operation by eight through: the acquisition of four Indiana facilities, one of
which was subsequently closed; the opening of a new nursing home in Ontario and
an assisted living facility in Wisconsin; and the commencement of management
contracts for two U.S. nursing facilities and one Ontario nursing facility. The
Company has also reduced its number of homes by 17 as a result of the disposal
of three Canadian nursing and retirement homes; the sale of four nursing and
assisted living centres in Arkansas; the transfer of operations of one owned
facility in Wisconsin to another provider; and a reduction of nine managed U.S.
facilities on transfer of the management responsibilities to another long-term
care provider, for which the Company has retained consulting services
contracts. The Company has a significant presence (more than 10% of its
facilities) in each of three States in the U.S.  Pennsylvania, Wisconsin and
Ohio  as well as in the Province of Ontario in 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 nine months ended September 30, 2004 was 92.9%
compared to 92.7% in the same prior year period, and 92.9% for the year ended
December 31, 2003. The Companys key business goals are to: strengthen both Medicare and total
average daily census; increase market share of Canadian home health care
operations; improve operating cash flow; actively improve its asset portfolio
through renovation, expansion or acquisition, or where appropriate through
disposal of underperforming facilities; diversify within the long-term care
industry in the areas of rehabilitative clinics and management and consulting
services; and manage resident care liability claim settlements. In the United States, EHSIs total and Medicare average daily census for the
nine months ended September 30, 2004, continued to exceed comparable figures
from the prior year. Total nursing home average daily census on a same-facility
basis increased from 12,545 in the 2004 second quarter to 12,668 in the 2004
third quarter. However, the Company did experience a softening of Medicare
census, which declined to 2,052 in the third quarter from 2,073 in the second
quarter.  Extendicare Inc. September 2004
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In Canada the Ontario long-term care industry, which is ECIs largest market,
has experienced occupancy pressure as the result of 20,000 new long-term care
beds opening in the Province over the past four years, the last 10,000 of which
will have substantially been completed and opened in 2004. 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%. For the first
nine months of 2004, four of ECIs nursing homes experienced an average
occupancy level below 97%, which resulted in the deferral of $0.7 million of
funding in the event that occupancy levels for these facilities do not achieve
the 97% average for the full year. Also, as a result of the new long-term care beds in Ontario, the government
reduced funding to long-term care providers for property taxes from 90% to 80%
effective with the 2004 calendar year. The impact of the reduced funding for
2004, from 90% to 80% has reduced ECIs revenue for the first nine months of
2004 by $0.6 million. Property tax funding levels are still undecided for 2005.
Extendicare is working with its partners in the long-term care industry to
ensure the government understands the serious nature of this issue. As part of the Ontario governments $191.0 million funding initiative for
long-term care in the Province, new funding for long-term care providers took
effect October 1, 2004, most of which is directed to enhance resident care
through the nursing and personal care envelope (nursing envelope), and the
program and support services envelope (program envelope), and thus will be
offset by increased operating costs. In Canada, ParaMeds home health care operations are still suffering from
reduced home health care hours of service resulting from constraints imposed by
the Ontario Community Care Access Centres (CCACs). Hours of service softened to
1,136,000 in the 2004 third quarter compared to 1,162,000 in the 2004 second
quarter. Despite the lower service volumes, ParaMeds revenue rates have
improved and costs have remained under control, resulting in a slight
improvement in earnings contribution between the second and third quarters of
2004. The Ontario governments 2004 Budget calls for an additional investment
in home care over the next four years, and the government announced in July,
that $73.2 million would be distributed to the CCACs this year. It is unclear
at this time how much of the funds will be spent on each program, and
therefore, to what extent ParaMeds operations will benefit. During 2004 the Company has significantly reduced its U.S. long-term debt, and
through a new debt issue reduced its weighted average interest rates. As a
result, operating cash flow and cash resources will improve. In addition, EHSI
received $40.6 million (US$30.6 million) relating to its Florida divestiture
program and the Company reduced its balance of Medicare settlement receivables.
As at September 30, 2004, the Companys long-term debt, including the current
portion, was $639.5 million compared to $757.5 million at the beginning of the
year; and the Companys debt to equity ratio improved to 1.5 to 1 compared to
2.1 to 1 at December 31, 2003. After taking into account interest rate swap
arrangements, the weighted average interest rate of all long-term debt at the
end of September 2004 was approximately 7.1%, compared to 7.8% at the end of
2003. For further details on the significant transactions occurring in 2004, refer to
Significant Development in 2004; and for an analysis of the Companys
financial results, refer to the discussions under, 2004 Third Quarter Results
and 2004 Nine Months ended September 30, 2004. Critical Accounting Policies and Estimates   Extendicare Inc. September 2004
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Significant Developments in 2004 Update of U.S. Legislative Actions Medicare Funding
In July 2004 the Centers for Medicare and Medicaid Services, or CMS, announced
a 2.8% inflationary increase in Medicare rates effective October 1, 2004. Based
on the Medicare case mix and average daily census of EHSIs current facilities
in operation at September 30, 2004, the Company estimates the increase will
represent additional annual revenue of approximately $9.3 million (US$7.0
million), which will support higher operating costs for resident care. In April 2002 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. In July 2004 CMS announced that the
implementation of a RUGs refinement would be delayed until October 1, 2005.
Based on the Medicare case mix and average daily census of the first nine
months of 2004, EHSI estimates that it received an average of US$25.26 per
patient day related to the temporary funding enhancements, which on an
annualized basis amounts to revenue of $26.4 million (US$19.9 million). The
implementation of the RUGs refinement program, whereby all or part of the
enhancement is discontinued, 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 and the proposed plan would have reduced this to 70% over a three year
period as follows: 90% beginning on 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 $4.4 million (US$3.3
million) in 2006. Medicaid Rates Subject to CMS Approval
Several states in which EHSI operates have submitted plan amendments and
waivers to CMS which seek to increase the level of federal funding for the
states Medicaid programs and, if approved, would result in providing nursing
facilities with revenue rate increases to offset new or increased provider
taxes. In June 2004 CMS approved the Medicaid state plan amendment and waiver
submitted by the State of Oregon pertaining to the fiscal year commencing July
1, 2003. The net favourable impact to EHSI of $0.4 million (US$0.3 million) was
recorded in the 2004 second quarter. In July 2004 the State of Kentucky
received approval from CMS of a state plan amendment and waiver, which became
effective July 1, 2004. The Kentucky plan amendment and waivers are expected to
increase EHSIs annual earnings by approximately $4.0 million (US$3.0 million),
prior to any staffing increases that may be implemented. The states of Pennsylvania, Indiana, and Washington are still awaiting CMS
approval of their proposed state plan amendments and waivers pertaining to the
fiscal year commencing July 1, 2003. Since the plan amendments and waivers have
not been approved, EHSI has recorded revenue based upon amounts actually
received. In August 2004, Pennsylvania announced a retroactive increase in
Medicaid funding for the period July 1, 2003 to June 30, 2004, absent a
provider tax. This resulted in EHSI recording retroactive revenue of $6.1
million (US$4.6 million) in the third quarter of 2004. The State of
Pennsylvania has withheld the July 1, 2004 rate increases until approval by CMS
of its plan amendment and waiver, for which the State is seeking retroactive
treatment to July 1, 2003. Should CMS approve Pennsylvanias plan amendment and
waiver as submitted, EHSI does not anticipate any impact to earnings for the
July 1, 2003 to June 30, 2004 period, but does anticipate incremental earnings,
net of the provider tax, of US$0.6 million pertaining to the quarter ended
September 30, 2004. In Indiana, approval of the retrospective amendment and
waiver submitted could result in the recording of net incremental earnings of
US$3.8 million in 2004 pertaining to the 15-month period ended September 30,
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. EHSI does
not anticipate a rejection of the plan, however, if the plan is not approved, a
retroactive negative adjustment of no greater than US$0.8 million to earnings
may be required. 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 operations.  Extendicare Inc. September 2004
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Update of Canadian Legislative Actions Ontario Property Tax Funding
During the second quarter of 2004, the Ontario government reversed its decision
earlier in the year to reduce funding to long-term care providers for property
taxes for the 2003 calendar year, which would have effectively resulted in a
retroactive reduction in funding to 73% from 90%. It also revised its funding
for 2004 to 80% from the initial estimated reduction to 50%. During the first
quarter of 2004, the Company had reported a $2.0 million reduction in revenue
based on the governments initial indications of a funding reduction. As a
result of the subsequent revisions, the Company increased revenue in the second
quarter of 2004 by $1.8 million representing a $1.3 million reversal of the
2003 property tax provision, along with a $0.5 million adjustment to the
assumed reduction in 2004 property tax funding. The issues surrounding property
tax funding resulted from the influx of 20,000 new long-term care beds in
Ontario, which has put a strain on the governments allocated pool of funds.
The impact of the reduced funding for 2004, from 90% to 80% has reduced ECIs
revenue for the first nine months of 2004 by $0.6 million. Property tax funding
levels are still undecided for 2005. Extendicare is working with its partners
in the long-term care industry to ensure the government understands the serious
nature of this issue. Ontario Long-term Care and Home Care Funding  2004 Budget
In May 2004, as part of its 2004 Budget, the Ontario government announced plans
to invest additional funding to improve Ontarios long-term care facilities and
home care program over the next four years. The 2004 Budget calls for an
additional investment in long-term care of $191.0 million in 2004 and 2005 to
improve care and services for seniors in long-term care homes through the
hiring of 2,000 new staff (600 of which are to be nurses), additional training
of front-line staff to provide more personal care, and the establishment of a
new independent advocate for seniors in long-term care homes who will oversee
inspections and compliance. In October 2004, the Ontario government announced
that this new funding would begin October 1, 2004 with a further increase to
occur on April 1, 2005. At the end of September, ECI operated 4,981 owned or
leased long-term care beds in Ontario, and estimates that the funding increase
will represent additional annual revenue of $6.6 million beginning October 1,
rising to $8.0 million on April 1, 2005. Most of the additional funding will be
used to pay for enhanced resident care in the nursing homes through the nursing
envelope and the program envelope, with about $1.5 million of the annual
revenue increase directed towards the accommodation envelope to assist in
offsetting inflationary cost increases. The 2004 Budget calls for an additional investment in home care of $448.0
million over the next four years. The government indicated that as part of its
four-year commitment to improving home care services, 95,700 more Ontarians
will receive home care, and 6,000 more Ontarians will receive compassionate
end-of-life care in their homes, by 2007/08. As part of that initiative, the
government announced on July 5 that it would be providing new funding of $73.2
million to Ontarios CCACs this year, targeted towards acute home care,
end-of-life care, and chronic home care services. As of November 1, 2004, none
of these funds had been released to providers to increase the number of home
care visits in the province. In its announcement, the government indicated that
21,000 additional people would benefit from home care and end-of-life services
this year. The government also remains committed to investing $10.0 million to
help patients and their families acquire medical equipment for home use through
a not-for-profit agency. It is unclear at this time how much of the funds will
be spent on each program. As such, it is not possible to predict to what extent
Extendicare, through its ParaMed Home Health Care operations, will benefit.
ParaMed and other providers are seeking more definitive answers from the
government. U.S. Issuance and Retirement of Long-term Debt
In April 2004 EHSI issued US$125.0 million aggregate principal amount of 6.875%
Senior Subordinated Notes due May 1, 2014 (the 2014 Notes) at a price of
97.5001% of par to yield 7.23%, and amended and restated its 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 (net of a US$3.1 million discount and fees and
expenses of US$4.5 million). The net proceeds were used, together with cash on
hand and new borrowing capacity, to purchase for cash approximately US$104.9
million aggregate principal amount of EHSIs outstanding US$200.0 million of
9.35% Senior Subordinated Notes due 2007 (the 2007 Notes), validly tendered,
and to redeem any 2007 Notes not tendered or cancelled prior to 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. For further
information, refer to the discussion under the section Liquidity and Capital
Resources  Capital Structure  Long-term debt.  Extendicare Inc. September 2004
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Valuation Adjustment on Interest Rate Caps
The Company recorded a charge in the first nine months of 2004 of $8.5 million
related to the valuation of its U.S. interest rate caps. The interest rate cap
arrangements, which cap the projected six-month London Interbank Borrowing Rate
(LIBOR) at 7%, were put in place for a notional US$275 million in connection
with the debt refinancing. The interest rate cap arrangements do not qualify as
hedge instruments for accounting purposes and therefore are required to be
adjusted to market value each period, with any change reported in the earnings
statement. On an after-tax basis, the charge booked was $5.3 million, or a loss
of $0.08 per diluted share. Gain from Asset Disposals, Impairment and Other Items
The Company reported an overall pre-tax gain of $2.9 million related to a
number of transactions during the nine-month period ended September 30, 2004.
After applying the benefit of net tax credits, the after-tax gain contributed
$7.3 million to net earnings, or $0.11 per diluted share. The items making up
the net gain are summarized below. Completion of Divestiture  Settlement of Greystone Transaction
In April 2004 EHSI concluded negotiations with Greystone Tribeca Acquisition,
L.L.C. of the divestiture agreement for 15 Florida facilities previously owned
and operated by EHSI, which Greystone had been operating since September 2000.
The initial transaction in 2000 was treated as a deferred sale as a significant
portion of the final consideration was contingent on certain events, and
because EHSI held an option to repurchase the facilities. On April 29, 2004,
EHSI received US$2.7 million of interest, and in addition to the US$30.0
million of cash consideration initially received in 2000, EHSI received in June
2004, US$10.0 million as final payment of the contingent consideration. The
finalization of this transaction resulted in the recognition in the second
quarter of 2004 of a pre-tax gain from the sale of assets of $6.6 million
(US$4.9 million). Sale of U.S. Nursing and Assisted Living Facilities
In August 2004 EHSI disposed of its Arkansas operations, consisting of a 96-bed
nursing facility and three assisted living facilities (181 units) located on
one campus, resulting in a pre-tax loss of $0.8 million (US$0.6 million). Gross
proceeds of $8.0 million (US$6.1 million) consisted of cash and a $1.2 million
(US$0.9 million) five-year note. Up until the time that EHSI stopped operating
these facilities, they had contributed $7.1 million (US$5.3 million) to revenue
and $1.0 million (US$0.7 million) to earnings before interest, tax,
depreciation and amortization for the nine months ended September 30, 2004. For
the nine months ended September 30, 2003, these facilities had contributed $7.9
million (US$5.5 million) to revenue and $0.6 million (US$0.4 million) to
earnings before interest, tax, depreciation and amortization. Sale of three Canadian nursing and retirement homes
The Company has sold three nursing and retirement homes during 2004 in two
separate transactions, resulting in a pre-tax gain of $13.3 million. In
February, the Company sold two Ontario homes (275 beds) for gross proceeds of
$19.6 million, resulting in a pre-tax gain of $12.7 million. In September, the
Company sold its only nursing home in British Columbia (75 beds) for gross
proceeds of $5.5 million, resulting in a pre-tax gain of $0.6 million. These
gains were substantially sheltered by capital loss carryforwards that had been
fully offset with a valuation allowance. A portion of the proceeds were used to
retire long-term debt of $9.8 million associated with the homes. For the nine
months ended September 30, 2004, these homes had contributed $4.4 million to
revenue, $0.7 million to earnings before interest, tax, depreciation and
amortization, and $0.2 million to net earnings, prior to their disposal. For
the nine months ended September 30, 2003, these facilities had contributed
$13.3 million to revenue, $2.1 million to earnings before interest, tax,
depreciation and amortization, and $0.9 million to net earnings. U.S. Retirement of Long-term Debt
During the second quarter of 2004, as a result of the tender and call of EHSIs
9.35% Senior Subordinated Notes the Company booked a pre-tax loss of $6.9
million representing the net of the following amounts: payment of tender and
call premiums of $7.8 million; write-off of deferred financing costs of $3.2
million; legal fees of $0.4 million; a gain on termination of the related swap
and cap arrangements of $3.7 million; and a gain from unamortized bond discount
and foreign exchange of $0.8 million.  Extendicare Inc. September 2004
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Prepayment of Notes Receivable
During the second quarter of 2004, EHSI recorded a pre-tax charge of $1.7
million (US$1.3 million) related to the early settlement of long-term notes
receivable from Tandem Health Care, Inc. (Tandem). These notes had a true face
value of US$17.0 million and were originally due in 2007. EHSI agreed to settle
for US$16.2 million in cash, and after associated legal fees of US$0.5 million,
recognized a loss of US$1.3 million. Provision for Impairment of Assets
In March 2004 EHSI concluded the evaluation of two nursing facilities that
operate adjacent to one another in Indiana, both of which require capital
renovations. After the evaluation management decided, subject to State
approval, to consolidate the two operations into one renovated facility that
upon completion, will accommodate all residents from both facilities after
decreasing the total available nursing beds by 46. The consolidation of the two
operations is expected to be completed by March 2005. As a result of the
decision to close the one facility, EHSI recorded a provision for impairment of
long-lived assets of $2.1 million. Write-off of long-term investment
During the 2004 third quarter, the Company wrote off its investment in an
Omnicare, Inc. (Omnicare) warrant and recorded a charge of $5.0 million (US$4.0
million). EHSI received the warrant to acquire 1.5 million of Omnicare stock,
which had an original attributed carrying value of US$4.0 million pursuant to
the sale of its pharmacy operations in 1998. The warrant has an exercise price
of US$48.00 per share expiring on September 16, 2005, and at September 30, 2004
had a fair market value of US$0.3 million using the Black-Scholes model.
Management decided to write-off the investment in the third quarter as the
likelihood of the securities being in-the-money before they expire had
significantly declined as a result of the recent decrease in Omnicares share
price. In addition to the warrant, EHSI holds 125,000 common stock of Omnicare,
also acquired as part of the pharmacy sale, at a carrying value of US$4.0
million. At September 30, 2004, the Omnicare common stock had a fair market
value of US$3.5 million based on the closing price of US$28.36. Management
intends to hold this investment until it believes the market opportunity is
appropriate to dispose of it. Other
During the first and third quarters of 2004, EHSI prepaid in full US$13.0
million and US$9.5 million, respectively, of Industrial Development Revenue
Bonds, resulting in the write-off of $0.6 million of deferred financing costs.
This was partially offset by a $0.2 million gain on the sale of miscellaneous
assets by ECI during the second quarter of 2004. Acquisitions
In February 2004 EHSI acquired for cash of $1.9 million a skilled nursing
facility in Washington that it had been operating previously under lease
arrangements. On June 1, 2004, EHSI acquired four nursing facilities (321 beds)
in Indiana for $6.9 million (US$5.0 million) in cash. Construction
In March 2004 ECI opened the last of its 11 new Ontario nursing homes stemming
from the awards by the Government of Ontario initiated in 1998. Phase I of EHSIs construction program consists of seven projects to expand
four assisted living facilities (87 units) and two skilled nursing homes (38
beds), and add one new assisted living facility (40 units). The cost of these
projects is estimated at US$15.7 million, of which US$4.3 million was spent
during 2003 and US$6.5 million in the first nine months of 2004. Four of the
projects have been completed at a cost of US$10.0 million and the remaining
three are due to open in early 2005. Two of the projects were completed in the
first quarter of 2004, a 16-unit assisted living addition that opened in
February 2004 and a 20-bed nursing addition that opened in March. In May 2004,
EHSI completed and opened a 40-unit free standing assisted living facility and
a 30-unit assisted living addition. Equity Accounted Investments
The Company equity accounts for its investments in Crown Life Insurance Company
and Salumatics Inc. (formerly THiiNC Information Management Inc.). Crown Life Insurance Company
Extendicare has a 34.8% equity interest in Crown Life Insurance Company (Crown
Life) that is unencumbered by debt. At September 30, 2004, the Companys
carrying value of its investment in Crown Life was $128.9 million (December 31,
2003  $139.3 million), which equated to Extendicares share of Crown Lifes
book value.  Extendicare Inc. September 2004
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Dividends from Crown Life are at the discretion of its board of directors. In
June 2004 the Company received a cash dividend of $15.6 million ($14.00 per
common share) from Crown Life. There were no dividends received 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. Salumatics Inc.
The Company has a $2.7 million investment in Salumatics Inc., a provider of
electronic health information and record management services. The Companys
equity share of losses of Salumatics for the first nine months of 2004 was $1.2
million, bringing the carrying value of its investment down to $1.5 million at
the end of September 2004. Medicare and Medicaid Settlement Receivables
For Medicare revenue earned prior to the implementation of the Medicare
Prospective Payment System, or PPS, and Medicaid programs with a retrospective
reimbursement system, differences between revenue that is ultimately expected
to be realized and amounts received are reflected as accounts receivable, or as
accrued liabilities when payments have exceeded revenue that is ultimately
expected to be realized. For Medicare pre-PPS claims, normally such issues are
resolved during the audit process; however, general provisions for
disagreements that require settlement through a formal appeal process are
recorded. Though there remain certain issues to be resolved with the fiscal
intermediary, the significant settlement receivable issues in respect of
revenue earned prior to the implementation of PPS have now been resolved.
EHSIs Medicare settlement receivables also include amounts related to
reimbursable Part A co-insurance receivables, which totalled $11.6 million
(US$9.2 million) and $11.0 million (US$8.5 million) at September 30, 2004 and
December 31, 2003, respectively. As of September 30, 2004, the net book value of EHSIs Medicare and Medicaid
settlement receivables was $28.4 million (US$22.5 million) compared to $48.2
million (US$37.2 million) at December 31, 2003. It is expected that $20.6
million (US$16.4 million) will be substantially collected within one year and
is included in accounts receivable as a current asset compared to a net book
value of $14.6 million (US$11.3 million) at December 31, 2003. The remaining
balance of $7.8 million (US$6.1 million) has been classified as long-term in
nature (December 31, 2003  $33.6 million or US$25.9 million). During 2004, EHSI reached negotiated settlements with the fiscal intermediary
for all significant outstanding Medicare settlement issues pertaining to
revenues earned prior to the implementation of PPS. In January 2004 EHSI
negotiated and subsequently received a cash settlement of US$5.6 million for a
specific staffing cost issue involving six specific claims years. This
settlement did not result in any significant adjustment to the recorded
receivable balance. In April 2004, in respect of two cost reporting years under
appeal, EHSI reached a settlement with the fiscal intermediary on an issue
involving the allocation of overhead costs. The settlement will result in the
payment to EHSI of approximately US$7.7 million, of which US$6.6 million was
received in May 2004, and the balance will be received upon resolution of other
matters concerning the cost report years under appeal. In August 2004 EHSI
reached a settlement with the fiscal intermediary with respect to various
issues amounting to US$9.8 million regarding nursing facilities purchased in
1997 from Arbor Health Care Company (Arbor) and subsequently sold to Tandem in
1999. The settlement will result in the payment to EHSI of US$2.1 million in
the fourth quarter of 2004, and the withdrawal by EHSI of the remainder of the
settlement issues. The Medicare matters had been reserved for at the time of
sale to Tandem, through an accrual of a US$3.7 million long-term liability for
outstanding tax, Medicare and other claims against Arbor, and further within
provisions for divested operations. Upon settlement of these Medicare matters,
EHSI is confident that there are no further outstanding claims in respect of
Arbor. However, there can be no assurance that other claims will not be made
until the expiry of the warranty period with Tandem in 2007. As a result of the
settlement, the Company applied the US$3.7 million of other long-term
liabilities and US$3.2 million of accrued liabilities for divested operations
against the balance of the unrecoverable Medicare settlement receivable. As a
result, there was no gain or loss recognized on settlement of this issue. In
September 2004, EHSI reached a settlement with the fiscal intermediary with
respect to a Director of Nursing staff cost issue amounting to US$3.2 million,
of which US$2.8 million will be received in the fourth quarter of 2004 and the
balance in the first quarter of 2005. There was no gain or loss recognized on
settlement of this issue.  Extendicare Inc. September 2004
    7




---



##### 



Regulatory Risks
All long-term care providers are subject to surveys and inspections by
government authorities to ensure compliance with applicable laws and licensure
requirements of the federal, state and/or provincial funding programs. The
survey process is intended to review the actual provision of care and services.
Remedies for assessed deficiencies can be levied based upon the scope and
severity of the cited deficiencies. Remedies range from the assessment of fines
to the withdrawal of payments under the government funding programs. Should a
deficiency not be addressed through a plan of correction, a facility can be
decertified from the funding program. Government agencies have steadily increased their enforcement activity over the
past several years. As a result, the Company is continually allocating
increased resources to ensure compliance with applicable regulations and to
respond to inspections, investigations and/or enforcement actions. U.S. federal law requires each state to have a Medicaid Fraud Control Unit,
which is responsible for investigating provider fraud and resident abuse. EHSI
is aware of investigations by these units, which involve one facility in
Kentucky and one in Wisconsin. The investigations have not been sufficiently
developed to enable EHSI to predict an outcome. In addition in June 2004, in response to facility citations for survey
deficiencies in a nursing facility in Chippewa Falls, Wisconsin, EHSI reached a
tentative agreement with the State of Wisconsin to transfer the operations to a
new licensee. In July 2004, EHSI entered into an agreement to transfer the
operations, effective August 1, 2004, to Lakeside Health L.L.C. (Lakeside
Health), a subsidiary of Benedictine Health Dimensions, Inc. (Benedictine) for
a term of three years. Under the terms of the agreement, Lakeside Health is
responsible for all operating costs, including rent to EHSI, and Benedictine
will manage the nursing facility for a fee. EHSI will receive annual rental
income of US$0.5 million; however, EHSI will be responsible to fund Lakeside
Health for any and all net operating losses of the nursing facility, as defined
in the agreement, and to provide working capital advances of approximately
US$2.0 million. As of September 30, 2004, EHSI has advanced US$3.1 million to
Lakeside Health, which is secured by a first security interest in Lakeside
Healths accounts receivable and is repayable from future cash flows of
Lakeside Health, if any. In September 2004 Benedictine completed its plan of
correction at the nursing facility and passed its survey with the State
bringing the facility into regulatory compliance. Considerable resources were
employed during July and August to bring the facility into compliance, and as a
result, it incurred losses during this time. As a result, EHSI recorded a $1.3
million (US$1.0 million) provision against the working capital advances made to
Lakeside Health. Prior to the transfer of the operations, the Chippewa Falls
facility generated revenue of $11.8 million (US$8.9 million) and a loss before
interest, tax, deprecation and amortization of $1.6 million (US$1.2 million)
for the seven months ended July 31, 2004. For the year ended December 31, 2003,
the facility generated revenue of $25.4 million (US$18.1 million) and earnings
before interest, tax, depreciation and amortization of $0.7 million (US$0.5
million). Based on EHSI estimate of Lakeside Healths future cash flow, after
attaining compliance and suitable occupancy levels, EHSI believes it is not
required to take a charge for asset impairment, but there can be no assurance
that such a charge will not be required in the future if these estimates
change. 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 for the years 2001 and
2002, and should this matter not be settled, it will be taken to arbitration.
In addition, Omnicare has requested arbitration for an alleged lost profits
claim related to EHSIs disposition of assets, primarily in Florida. Damage
amounts, if any, cannot be reasonably estimated based on information available
at this time. An arbitration hearing for this matter has not yet been
scheduled. Management believes it has interpreted correctly and complied with
the terms of the preferred provider agreement. However, there can be no
assurance that other claims will not be made with respect to the agreement. Subsequent Event   Extendicare Inc. September 2004
    8




---



##### 



Summary of Quarterly Results  Third Quarter
    
    Second Quarter
    
    First Quarter
    
    Fourth Quarter(thousands of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003
    
    2002Revenue
    
    
    445,601
    
    
    
    433,054
    
    
    
    445,639
    
    
    
    420,714
    
    
    
    429,572
    
    
    
    439,303
    
    
    
    431,543
    
    
    
    452,086EBITDA(1)
    
    
    62,566
    
    
    
    50,651
    
    
    
    59,054
    
    
    
    46,075
    
    
    
    50,980
    
    
    
    39,501
    
    
    
    50,603
    
    
    
    35,927Earnings from health care
before undernoted
    
    
    23,262
    
    
    
    12,569
    
    
    
    21,688
    
    
    
    9,658
    
    
    
    15,165
    
    
    
    4,310
    
    
    
    14,348
    
    
    
    997Valuation adjustment on interest
rate caps, net of tax
    
    
    (1,592
    )
    
    
    
    
    
    
    (3,661
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (loss) from asset disposals,
impairment, and other items,
net of tax
    
    
    (3,141
    )
    
    
    
    
    
    
    (269
    )
    
    
    (176
    )
    
    
    10,722
    
    
    
    1,081
    
    
    
    
    
    
    
    (68
    )Earnings from health care
    
    
    18,529
    
    
    
    12,569
    
    
    
    17,758
    
    
    
    9,482
    
    
    
    25,887
    
    
    
    5,391
    
    
    
    14,348
    
    
    
    929Share of equity
accounted earnings
    
    
    1,083
    
    
    
    1,197
    
    
    
    584
    
    
    
    2,643
    
    
    
    2,452
    
    
    
    12,485
    
    
    
    2,559
    
    
    
    2,068Net earnings
    
    
    19,612
    
    
    
    13,766
    
    
    
    18,342
    
    
    
    12,125
    
    
    
    28,339
    
    
    
    17,876
    
    
    
    16,907
    
    
    
    2,997Earnings (loss) per diluted share ($)Health care operations before
undernoted
    
    
    0.33
    
    
    
    0.17
    
    
    
    0.31
    
    
    
    0.14
    
    
    
    0.21
    
    
    
    0.06
    
    
    
    0.21
    
    
    
    0.02Valuation adjustment on
interest rate caps
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.05
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain (loss) from asset disposals,
impairment, and other items
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.16
    
    
    
    0.01
    
    
    
    
    
    
    
    Share of equity
accounted earnings
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.04
    
    
    
    0.03
    
    
    
    0.18
    
    
    
    0.03
    
    
    
    0.02Earnings per diluted share
    
    
    0.28
    
    
    
    0.19
    
    
    
    0.26
    
    
    
    0.18
    
    
    
    0.40
    
    
    
    0.25
    
    
    
    0.24
    
    
    
    0.04
   (1)
    
    Earnings before interest, income taxes, depreciation and amortization (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 items valuation adjustment on interest rate caps and loss (gain) from asset
disposal, impairment and other items. These line items are reported separately on the Companys income statement because they relate to the change in
fair value of interest rate caps associated with the Companys long-term debt, gains or losses on the disposal or impairment of assets, provisions for
ceased operations and the write-off of unamortized financing costs on early retirement of debt. 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.  Extendicare Inc. September 2004
    9




---



##### 



The following is a reconciliation of earnings before income taxes and EBITDA
for each of the eight most recently completed quarters. Third Quarter
    
    Second Quarter
    
    First Quarter
    
    Fourth Quarter(thousands of dollars)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2003
    
    2002Earnings before income taxes
    
    
    29,201
    
    
    
    20,067
    
    
    
    27,013
    
    
    
    15,502
    
    
    
    34,063
    
    
    
    8,568
    
    
    
    22,192
    
    
    
    2,480Add (deduct):Depreciation and amortization
    
    
    14,142
    
    
    
    15,816
    
    
    
    14,687
    
    
    
    15,451
    
    
    
    14,135
    
    
    
    16,405
    
    
    
    15,985
    
    
    
    17,596Interest, net
    
    
    11,211
    
    
    
    14,768
    
    
    
    9,677
    
    
    
    14,946
    
    
    
    12,850
    
    
    
    15,609
    
    
    
    12,426
    
    
    
    15,741Valuation adjustment on
interest rate caps
    
    
    2,613
    
    
    
    
    
    
    
    5,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss (gain) from asset
disposals, impairment,
and other items
    
    
    5,399
    
    
    
    
    
    
    
    1,812
    
    
    
    176
    
    
    
    (10,068
    )
    
    
    (1,081
    )
    
    
    
    
    
    
    110EBITDA
    
    
    62,566
    
    
    
    50,651
    
    
    
    59,054
    
    
    
    46,075
    
    
    
    50,980
    
    
    
    39,501
    
    
    
    50,603
    
    
    
    35,927
 2004 Third Quarter Results Net earnings
Extendicares net earnings increased to $19.6 million ($0.28 per diluted share)
in the 2004 third quarter from $13.8 million ($0.19 per diluted share) in the
2003 third quarter. Earnings from health care operations rose to $18.5 million
from $12.6 million. Results for the 2004 quarter included pre-tax losses of
$5.4 million related primarily to the write-off of an investment and $2.6
million on the valuation of interest rate caps. The after-tax impact of these
items was a loss of $4.7 million in 2004, or a $0.07 loss per diluted share.
Earnings from health care operations prior to these items rose to $23.3 million
($0.33 per diluted share) compared to $12.6 million ($0.17 per diluted share)
in the 2003 third quarter. For the second quarter of 2004, earnings from health care operations of $17.8
million included a $5.9 million pre-tax loss on the valuation of interest rate
caps ($0.05 loss per diluted share) and a pre-tax loss from asset disposals,
impairment and other items of $1.8 million ($0.01 loss per diluted share).
Earnings from health care operations prior to these items were $21.7 million or
$0.31 per diluted share in the second quarter of 2004. Change
    
    
    
    
    
    ChangeQ3
    
    Q3
    
    2004 over
    
    Q2
    
    Q3 over(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2003
    
    2004
    
    Q2/2004Earnings from health careUnited States
    
    
    14.6
    
    
    
    7.6
    
    
    
    7.0
    
    
    
    10.6
    
    
    
    4.0Canada
    
    
    3.9
    
    
    
    5.0
    
    
    
    (1.1
    )
    
    
    7.1
    
    
    
    (3.2
    )18.5
    
    
    
    12.6
    
    
    
    5.9
    
    
    
    17.7
    
    
    
    0.8Share of equity accounted earnings
    
    
    1.1
    
    
    
    1.2
    
    
    
    (0.1
    )
    
    
    0.6
    
    
    
    0.5Net earnings
    
    
    19.6
    
    
    
    13.8
    
    
    
    5.8
    
    
    
    18.3
    
    
    
    1.3US/Canadian dollar exchange (average rate
for the period)
    
    
    1.3074
    
    
    
    1.3807
    
    
    
    
    
    
    
    1.3588
 The stronger Canadian dollar had a $0.7 million negative impact on the 2004
third quarter net earnings in comparison to the exchange rate used in the third
quarter of 2003. In comparison to the second quarter of 2004, earnings for the
third quarter were negatively affected by $0.4 million due to the change in the
foreign exchange rate.  Extendicare Inc. September 2004
    10




---



##### 



Revenue
Revenue increased by $30.5 million over the prior year period, before the
impact of the change in the foreign exchange rate of $18.0 million. Change
    
    
    
    
    
    ChangeQ3
    
    Q3
    
    2004 over
    
    Q2
    
    Q3 over(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2003
    
    2004
    
    Q2/2004RevenueUnited States (prior to impact of change in foreign
exchange rates)
    
    
    337.7
    
    
    
    307.1
    
    
    
    10.0
    %Impact of change in foreign exchange rates
    
    
    (18.0
    )
    
    
    
    
    
    
    United States as reported
    
    
    319.7
    
    
    
    307.1
    
    
    
    4.1
    %
    
    
    319.4
    
    
    
    Canada
    
    
    125.9
    
    
    
    126.0
    
    
    
    
    
    
    
    126.2
    
    
    
    445.6
    
    
    
    433.1
    
    
    
    2.9
    %
    
    
    445.6
    
    
    
    US/Canadian dollar exchange (average rate for the
period)
    
    
    1.3074
    
    
    
    1.3807
    
    
    
    
    
    
    
    1.3588
 Revenue from U.S. operations grew by $30.6 million over the 2003 third quarter,
prior to the impact of the stronger Canadian dollar. Nursing and assisted
living centres no longer operated by the Company had contributed $3.2 million
and $9.1 million to revenue prior to their disposal for the 2004 and 2003
periods, respectively. Revenue from ongoing operations increased by $36.3
million, or 12.2% over the prior year period, before the negative impact of the
change in the foreign exchange rate of $17.8 million. This was due to several
factors as summarized in the following table. ($ millions)15.4  increase in average nursing home rates (Medicare $7.1 million, Medicaid $6.9 million, and
private/other $1.4 million);6.5  favourable variance in prior period revenue adjustments (Medicaid $3.4 million and Medicare $3.1 million);6.0  contribution from new nursing and assisted living facilities;5.8  increase in nursing home resident census (Medicare $5.5 million, Medicaid $0.2 million and
private/other $0.1 million);2.3  increase in nursing home resident ancillary services, primarily therapy and rehabilitative services;0.2  improvement in assisted living operations due to higher rates, partially offset by start-up of new
additions; and0.1  increase in other revenue.
 Key Medicare and Medicaid statistics for the U.S. nursing home operations are
summarized in the following table. Change
    
    
    
    
    
    ChangeQ3
    
    Q3
    
    2004 over
    
    Q2
    
    Q3 overU.S. Nursing Home Operating Statistics
    
    2004
    
    2003
    
    2003
    
    2004
    
    Q2/2004Average daily census (same-facility basis)Medicare
    
    
    2,052
    
    
    
    1,906
    
    
    
    7.7
    %
    
    
    2,073
    
    
    
    (1.0
    )%Private/other
    
    
    2,117
    
    
    
    2,113
    
    
    
    0.2
    %
    
    
    2,099
    
    
    
    0.9
    %Medicaid
    
    
    8,499
    
    
    
    8,485
    
    
    
    0.2
    %
    
    
    8,373
    
    
    
    1.5
    %Total
    
    
    12,668
    
    
    
    12,504
    
    
    
    1.3
    %
    
    
    12,545
    
    
    
    1.0
    %Medicare as a percent of total census
(same-facility basis)
    
    
    16.2
    %
    
    
    15.2
    %
    
    
    
    
    
    
    16.5
    %Medicaid as a percent of total census
(same-facility basis)
    
    
    67.1
    %
    
    
    67.9
    %
    
    
    
    
    
    
    66.8
    %Average occupancy (same-facility basis)
    
    
    92.6
    %
    
    
    91.5
    %
    
    
    
    
    
    
    91.7
    %Average revenue rate by payor source(1)Medicare Part A and B
    
    US$
    356.88
    
    
    US$
    323.96
    
    
    
    10.2
    %
    
    US$
    357.65
    
    
    
    (0.2
    )%Private/other
    
    US$
    192.36
    
    
    US$
    185.29
    
    
    
    3.8
    %
    
    US$
    189.68
    
    
    
    1.4
    %Medicaid
    
    US$
    139.50
    
    
    US$
    133.46
    
    
    
    4.5
    %
    
    US$
    136.31
    
    
    
    2.3
    %Medicare Part A
    
    US$
    322.86
    
    
    US$
    294.12
    
    
    
    9.8
    %
    
    US$
    324.50
    
    
    
    (0.5
    )%
   (1)
    
    excludes prior period settlement adjustments U.S. Medicare patient census on a same-facility basis continued to exceed
comparable prior year figures, increasing to 16.2% of total nursing home census
from 15.2% in the 2003 third quarter. However, Medicare patient census softened
from 16.5% in the second quarter of 2004. The improvement over the prior year
in Medicare patient census as part of  Extendicare Inc. September 2004
    11




---



##### 



managements focus on that sector resulted in higher revenue in the third
quarter of 2004 of $5.5 million from Medicare payor sources in comparison to
the same 2003 quarter. Despite the decline in Medicare patients from the second
quarter of 2004, total nursing home average daily census on a same-facility
basis improved in the 2004 third quarter to 12,668 and average nursing home
occupancy rose to 92.6%. Average U.S. Medicare rates increased 10.2% to US$356.88 in the third quarter
of 2004 in comparison to the same 2003 quarter. This was due to the 6.26%
increase implemented by CMS on October 1, 2003 and to an increase in the acuity
care levels of patients admitted. A change in patient acuity care levels also
accounted for the 0.2% decline in average Medicare rates from the second
quarter of 2004 to the third quarter. U.S. revenue was impacted by settlements for prior period adjustments. During
the 2004 third quarter the Company received a favourable Pennsylvania Medicaid
revenue adjustment of $6.1 million (US$4.6 million) compared to favourable
Medicaid revenue adjustments of $2.7 million (US$1.9 million) in the prior year
period. In addition, during the third quarter of 2003, the Company reduced
revenue by $3.1 million (US$2.2 million) related to a provision for a prior
year Medicare cost settlements. Excluding the impact of any prior period Medicaid revenue adjustments, the
Company benefited from a 4.5% average rise in Medicaid revenue per day in
comparison to the 2003 third 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 third quarter of 2004, in comparison to the same period last year, was $1.6
million (US$1.2 million). In comparison to the 2003 third quarter, revenue from Canadian operations
declined $0.1 million. Nursing and retirement homes disposed of contributed
$0.9 million and $4.4 million to revenue for the 2004 and 2003 periods,
respectively. Revenue from ongoing operations improved by $3.4 million due to
the contribution from new Ontario homes of $2.4 million and to changes in
funding to support greater care and staffing needs (flow-through funding), as
well as rate increases, partially offset by a decline in home health care
revenue. Average occupancy of the Canadian operations on a same-facility basis was 97.8%
in the third quarter of 2004 compared to 98.4% in the same prior year period,
and 97.2% in the second quarter of 2004. During the third quarter of 2004, four
of Extendicares Ontario nursing homes remained below the occupancy threshold,
as was the case during the second quarter of 2004. As a result, $0.2 million of
accommodation funding was deferred in the third quarter in the event that the
four facilities do not achieve average occupancy levels of 97.0% for the year
as a whole. Canadian home health care operations experienced a $1.5 million decline in
revenue in comparison to the third quarter of 2003. Home health care hours of
service were 1,136,000 compared to 1,237,000 in the third quarter of 2003. The
reduction in service hours resulted from constraints on service hours imposed
by the Ontario Community Care Access Centres. However, a rise in service rates
partially offset the impact of the lower volumes. In comparison to the second quarter of 2004, Extendicares revenue increased
$12.4 million, prior to an equal offsetting $12.4 million negative impact in
the change in the foreign exchange rate. Revenue from U.S. operations grew by
$12.7 million over the 2004 second quarter, prior to the impact of the stronger
Canadian dollar. Nursing and assisted living centres no longer operated by the
Company had contributed $3.2 million and $8.0 million to revenue prior to their
disposal for the third and second quarters of 2004, respectively, resulting in
a $4.8 million revenue decline. Revenue from ongoing operations increased $17.5
million, and included: $6.1 million (US$4.6 million) of favourable Medicaid
adjustments in the third quarter; $3.0 million due to the additional day in the
quarter; contributions from new facilities of $2.3 million; with the rest due
to an increase in average daily Medicaid rates and overall resident occupancy.
Revenue from Canadian operations declined by $0.3 million in the 2004 third
quarter from the 2004 second quarter. The 2004 second quarter results included
a favourable revenue adjustment of $1.8 million to reverse a provision taken in
the first quarter of 2004 related to property tax funding. Excluding this item,
when comparing the two quarters, revenue in the third quarter improved by $1.5
million due to one additional day in the quarter and funding improvements,
partially offset by reduced revenue from home health care operations. ParaMeds
hours of service provided declined to 1,136,000 in the third quarter of 2004
from 1,162,000 in the second quarter of 2004.  Extendicare Inc. September 2004
    12




---



##### 



EBITDA
The following illustrates EBITDA by country. Change
    
    
    
    
    
    ChangeQ3
    
    Q3
    
    2004 over
    
    Q2
    
    Q3 over(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2003
    
    2004
    
    Q2/2004EBITDAUnited States
    
    
    49.9
    
    
    
    36.6
    
    
    
    36.3
    %
    
    
    45.2
    
    
    
    10.4
    %Canada
    
    
    12.7
    
    
    
    14.0
    
    
    
    (9.3
    )%
    
    
    13.8
    
    
    
    (8.0
    )%62.6
    
    
    
    50.7
    (1)
    
    
    23.5
    %
    
    
    59.0
    
    
    
    6.1
    %EBITDAas a percent of revenueUnited States
    
    
    15.6
    
    
    
    11.9
    
    
    
    
    
    
    
    14.1Canada
    
    
    10.1
    
    
    
    11.1
    
    
    
    
    
    
    
    11.0Total
    
    
    14.0
    
    
    
    11.7
    
    
    
    
    
    
    
    13.3
   (1)
    
    does not add due to rounding EBITDA rose $11.9 million, or 23.5%, to $62.6 million in the 2004 third
quarter, and as a percent of revenue, increased to 14.0% from 11.7% in the 2003
third quarter. In comparison to the 2003 third quarter, U.S. EBITDA rose $16.2 million in the
2004 third quarter, prior to the $2.9 million negative impact of the stronger
Canadian dollar. As a percent of revenue, EBITDA improved to 15.6%. Nursing and
assisted living facilities no longer operated by the Company had generated a
loss at the EBITDA level of $0.7 million in the 2004 third quarter compared to
income of $0.1 million in the comparable 2003 period, prior to their disposal.
EBITDA from remaining operations improved by $17.0 million. Revenue
improvements from ongoing operations of $36.3 million discussed above were
partially offset by a $19.3 million rise in operating, administrative and lease
costs, prior to the impact of the change in the foreign exchange rate.
Operating and administrative costs rose primarily due to the rise in number and
acuity level of residents served, in addition to inflationary increases. Items
of note were: a $12.5 million, or 6.8%, rise in labour related costs, which
included an average wage rate increase of 3.0% in nursing home operations; $1.6
million of higher state assessment and bed taxes imposed in association with
the Medicaid funding changes; a $1.7 million rise in drug costs due to higher
resident census and prices; higher costs of $6.0 million associated with new
nursing and assisted living facilities; and a decline in other costs of $2.5
million. EBITDA from Canadian operations declined $1.3 million to $12.7 million from the
2003 third quarter. After adjusting for the negative EBITDA variance associated
with ceased operations of $0.5 million, EBITDA from remaining operations were
lower by $0.8 million primarily due to labour cost increases in excess of
funding, timing of resident care costs under the Ontario nursing home envelope,
and a reduction in property tax funding. The $3.4 million improvement in
revenue from remaining operations was offset by a $4.2 million rise in
operating, administrative and lease costs. Items of note were: a rise in
operating costs of approximately $2.1 million associated with the new Ontario
facilities; a $1.3 million, or 1.4%, increase in labour related costs from
remaining operations, which were primarily due to increases in nursing home
staffing and wage rates in response to flow-through funding and other wage rate
increases, partially offset by lower labour related costs in home health care
operations due to less hours of service; and other cost increases of $0.8
million. In comparison to the second quarter of 2004, EBITDA rose $3.6 million to $62.6
million from $59.0 million. EBITDA as a percent of revenue increased to 14.0%
from 13.3% in the 2004 second quarter. In comparison to the 2004 second quarter, EBITDA from U.S. operations improved
$6.6 million to $49.9 million, prior to the negative $1.9 million impact of the
stronger Canadian dollar. Favourable retroactive revenue adjustments of $6.3
million and increases in Medicaid rates and resident occupancy were partially
offset by higher labour related costs in the nursing homes and a rise in state
assessment and bed taxes associated with the increased Medicaid funding. In comparison to the second quarter of 2004, Canadian EBITDA declined $1.1
million to $12.7 million from $13.8 million. The 2004 second quarter results
included a $1.8 million reversal of a property tax funding provision. Excluding
this, Canadian EBITDA improved by $0.7 million, primarily due to lower utility
costs due to seasonality of $0.5 million.  Extendicare Inc. September 2004
    13




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##### 



Depreciation and amortization
Depreciation and amortization costs were lower by $1.7 million, of which $0.7
million was due to the change in the foreign exchange rate. The remaining
improvement was primarily due to asset disposals, partially offset by higher
depreciation associated with the new facilities. Net interest costs
Net interest costs declined $3.6 million to $11.2 million from $14.8 million in
the prior year period primarily due to lower average interest rates associated
with the 2004 second quarter U.S. debt issue together with lower debt levels. 2004 Nine Months ended September 30, 2004 Net earnings
Extendicares net earnings for the nine months ended September 30, 2004 rose
$22.5 million to $66.3 million ($0.94 per diluted share) from net earnings of
$43.8 million ($0.62 per diluted share) in the same 2003 period. Results
included a pre-tax loss of $8.5 million on the valuation of interest rate caps
and a pre-tax gain from asset disposals, impairment and other items of $2.9
million in the first nine months of the year compared to a pre-tax gain of $0.9
million in the prior year period. The after-tax impact of these items was a
gain of $2.1 million ($0.03 per diluted share) in 2004 and a gain of $0.9
million ($0.01 per diluted share) in 2003. Earnings from health care operations
prior to these items rose to $60.1 million ($0.85 per diluted share) compared
to $26.5 million ($0.37 per diluted share) in the prior year period. YTD
    
    YTDSept.
    
    Sept.(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    ChangeEarnings from health careUnited States
    
    
    38.4
    
    
    
    16.6
    
    
    
    21.8Canada
    
    
    23.7
    
    
    
    10.8
    
    
    
    12.962.2
    (1)
    
    
    27.4
    
    
    
    34.8
    (1)Share of equity accounted earnings
    
    
    4.1
    
    
    
    16.3Net earnings
    
    
    66.3
    
    
    
    43.8
    (1)US/Canadian dollar exchange (average rate
for the period)
    
    
    1.3280
    
    
    
    1.4295
   (1)
    
    does not add due to rounding The stronger Canadian dollar had a $2.8 million negative impact on net earnings
for the nine months ended September 30, 2004 in comparison to the exchange rate
used in the same 2003 period. Revenue
Revenue increased $100.1 million, or 7.7% over the prior year period, before
the impact of the change in the foreign exchange rate of $72.4 million. YTD
    
    YTDSept.
    
    Sept.(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    Change
    
    Change %RevenueUnited States (prior to impact of change in foreign exchange rates)
    
    
    1,019.5
    
    
    
    929.5
    
    
    
    90.0
    
    
    
    9.7Impact of change in foreign exchange rates
    
    
    (72.4
    )
    
    
    
    
    
    
    (72.4
    )
    
    
    United States as reported
    
    
    947.1
    
    
    
    929.5
    
    
    
    17.6
    
    
    
    1.9Canada
    
    
    373.7
    
    
    
    363.6
    
    
    
    10.1
    
    
    
    2.81,320.8
    
    
    
    1,293.1
    
    
    
    27.7
    
    
    
    2.1US/Canadian dollar exchange (average rate for the period)
    
    
    1.3280
    
    
    
    1.4295
  Extendicare Inc. September 2004
    14




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##### 



Revenue from U.S. operations contributed $90.0 million to the improvement over
the first nine months of 2003, prior to the impact of the stronger Canadian
dollar. Nursing and assisted living centres no longer operated by the Company
had contributed $18.9 million and $27.5 million to revenue prior to their
disposal for the 2004 and 2003 periods, respectively. Revenue from ongoing
operations increased $97.3 million, or 10.8% over the prior year period, before
the negative impact of the change in the foreign exchange rate of $71.0
million. This was due to several factors as summarized in the table below. ($ millions)54.1  increase in average nursing home rates (Medicare $24.0 million, Medicaid $24.7 million, and
private/other $5.4 million);16.6  increase in nursing home resident census (Medicare $20.4 million, Medicaid $(2.3) million and
private/other $(1.5) million);12.3  contribution from new nursing and assisted living facilities;6.0  increase in nursing home resident ancillary services, primarily therapy and rehabilitative services;3.0  increase in nursing home revenue due to the additional day in the period;1.5  improvement in assisted living operations due to higher rates;1.1  favourable prior period revenue adjustments (Medicare $3.1 million; Medicaid $(2.0) million); and2.7  favourable variance in other revenue.
 Key Medicare and Medicaid statistics for the U.S. nursing home operations are
summarized in the following table. YTD
    
    YTDSept.
    
    Sept.U.S. Nursing Home Operating Statistics
    
    2004
    
    2003
    
    Change %Average daily census (same-facility basis)Medicare
    
    
    2,092
    
    
    
    1,914Private/other
    
    
    2,104
    
    
    
    2,126Medicaid
    
    
    8,375
    
    
    
    8,420Total
    
    
    12,571
    
    
    
    12,460Medicare as a percent of total census (same-facility basis)
    
    
    16.7
    %
    
    
    15.4
    %Medicaid as a percent of total census (same-facility basis)
    
    
    66.6
    %
    
    
    67.6
    %Average occupancy (same-facility basis)
    
    
    91.9
    %
    
    
    91.2
    %Average
revenue rate by payor source(1)Medicare Part A and B
    
    US$
    353.68
    
    
    US$
    321.43
    
    
    
    10.0Private/other
    
    US$
    191.59
    
    
    US$
    183.71
    
    
    
    4.3Medicaid
    
    US$
    137.86
    
    
    US$
    130.29
    
    
    
    5.8Medicare Part A
    
    US$
    321.73
    
    
    US$
    292.93
    
    
    
    9.8
   (1)
    
    excludes prior period settlement adjustments U.S. Medicare patient census increased to 16.7% of total nursing home census
from 15.4% in the first nine months of 2003. This improvement was due to
managements focus on that sector, which resulted in increased revenue of $20.4
million from Medicare payor sources in comparison to the first nine months of
2003. Total nursing home average daily census on a same-facility basis improved
to 12,571 compared to 12,460 in the nine months ended September 30, 2003.
Average U.S. nursing home occupancy grew to 91.9% compared to 91.2% in the same
prior year period. Average U.S. Medicare rates increased 10.0% to US$353.68 in the first nine
months of 2004, in comparison to the same 2003 period. This was due to the
6.26% increase implemented by CMS on October 1, 2003, with the remaining
improvement due to an increase in the acuity care levels of patients admitted. U.S. revenue was impacted by settlements for prior period adjustments.
Favourable Medicaid revenue adjustments of $4.4 million (US$3.3 million) were
realized in the nine months ended September 30, 2004 compared to $6.4 million
(US$4.5 million) in the prior year period. In addition, during the third
quarter of 2003, the Company recorded a provision, or contractual revenue
adjustment, of $3.1 million (US$2.2 million) related to prior year Medicare
cost settlements.  Extendicare Inc. September 2004
    15




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##### 



Excluding the impact of the prior period Medicaid revenue settlements, the
Company benefited from a 5.8% average rise in Medicaid revenue per day from the
prior year period. 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 nine
months ended September 30, 2004, in comparison to the same period last year,
was $6.4 million (US$4.5 million). In comparison to the nine months ended September 30, 2003, revenue from
Canadian operations increased $10.1 million. Nursing and retirement homes
disposed of and the ceased home health care operations in British Columbia
contributed $4.4 million and $16.9 million to revenue for the 2004 and 2003
periods, respectively. Revenue from ongoing operations improved by $22.6
million. The new Ontario homes added $12.8 million, while nursing home funding
increases to support greater care and staffing needs (flow-through funding), as
well as rate increases, contributed to the remaining improvements in nursing
home revenue, which was partially offset by a decline in home health care
revenue. Average occupancy of the Canadian operations on a same-facility basis was 97.3%
in the first nine months of 2004 compared to 98.0% in the same prior year
period. During the nine months ended September 30, 2004, four of Extendicares
Ontario facilities were below the 97.0% occupancy threshold required to sustain
100% accommodation funding, and therefore, $0.7 million of accommodation
funding for the first nine months of 2004 has been deferred in the event that
occupancy levels for these facilities do not achieve the 97.0% average for the
year as a whole. Canadian home health care operations experienced a $2.2 million decline in
revenue after adjusting for the exit from the British Columbia home health care
market in March of 2003. Home health care hours of service from ongoing
operations were 3,450,000 compared to 3,663,000 in the first nine months of
2003. The reduction in service hours resulted from constraints on service hours
imposed by the Ontario Community Care Access Centres. However, a rise in
service rates partially offset the impact of the lower volumes. EBITDA
The following is a reconciliation of earnings before income taxes and EBITDA
for the nine months ended September. YTD
    
    YTDSept.
    
    Sept.(millions of dollars)
    
    2004
    
    2003Earnings before income taxes
    
    
    90.3
    
    
    
    44.1Add (deduct):Depreciation and amortization
    
    
    43.0
    
    
    
    47.7Interest, net
    
    
    33.7
    
    
    
    45.3Valuation adjustment on interest rate caps
    
    
    8.5
    
    
    
    Loss (gain) from asset disposals, impairment and other items
    
    
    (2.9
    )
    
    
    (0.9
    )EBITDA
    
    
    172.6
    
    
    
    136.2
 The following illustrates EBITDA by country. YTD
    
    
    
    
    
    YTDSept.
    
    % of
    
    Sept.
    
    % of
    
    EBITDA
    
    EBITDA(millions of dollars unless otherwise noted)
    
    2004
    
    Revenue
    
    2003
    
    Revenue
    
    Change
    
    Change (%)EBITDAUnited States
    
    
    138.8
    
    
    
    14.7
    
    
    
    102.2
    
    
    
    11.0
    
    
    
    36.6
    
    
    
    35.8Canada
    
    
    33.8
    
    
    
    9.0
    
    
    
    34.0
    
    
    
    9.4
    
    
    
    (0.2
    )
    
    
    (0.6
    )172.6
    
    
    
    13.1
    
    
    
    136.2
    
    
    
    10.5
    
    
    
    36.4
    
    
    
    26.7
 EBITDA rose $36.4 million or 26.7% to $172.6 million in the first nine months
of 2004, and as a percent of revenue, increased to 13.1% from 10.5% in the same
prior year period. In comparison to the nine months ended September 30, 2003, U.S. EBITDA rose
$47.2 million, prior to the $10.6 million negative impact of the stronger
Canadian dollar, and as a percent of revenue, EBITDA improved to 14.7%. Nursing
and assisted living facilities no longer operated by the Company had generated
a loss at the EBITDA level of $0.6 million in the 2004 period compared to
income of $2.2 million in the comparable 2003 period, prior to their disposal.
EBITDA from remaining operations improved by $50.0 million. Revenue
improvements from ongoing operations of $97.3 million  Extendicare Inc. September 2004
    16




---



##### 



discussed above were partially offset by a $47.3 million rise in operating,
administrative and lease costs, prior to the impact of the change in the
foreign exchange rate. Higher operating and administrative costs were primarily
related to the rise in number and acuity level of residents served, in addition
to inflationary increases. Items of note were: a $23.8 million, or 4.2%, rise
in labour related costs, which included an average wage rate increase of 3.0%
in nursing home operations; $6.4 million of higher state assessment and bed
taxes imposed in association with the Medicaid funding changes; a $5.6 million
rise in drug costs due to higher resident census and prices; higher costs of
$10.6 million related to the acquisition of new homes; and other cost increases
of $0.9 million. EBITDA from Canadian operations declined $0.2 million to $33.8 million from
$34.0 million in the prior year period. After adjusting for the negative EBITDA
variance associated with ceased operations of $1.0 million, EBITDA from
remaining operations rose $0.8 million. The $22.6 million improvement in
revenue was offset by a $21.8 million rise in operating, administrative and
lease costs. Items of note were: approximately $10.7 million of additional
operating costs associated with the new Ontario facilities; a $9.4 million, or
5.7%, 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 $1.7 million. Depreciation and
amortization
Depreciation and amortization costs were lower by $4.7 million, of which
approximately $2.7 million was due to the change in the foreign exchange rate.
The remaining decline was due to asset disposals, partially offset by higher
depreciation associated with new facilities. Net interest costs
Net interest costs declined by $11.6 million from the nine months ended
September 30, 2003. During the first nine months of 2004, the Company recorded
interest income of $3.5 million related to the June settlement of the Greystone
transaction. The remaining $8.1 million improvement was primarily due to lower
average interest rates associated with the 2004 second quarter U.S. debt issue
together with lower debt levels. In addition, the stronger Canadian dollar
contributed to the favourable variance in net interest costs by
$1.5 million. Liquidity and Capital Resources Sources and Uses of Cash
At September 30, 2004, the Company had cash and cash equivalents of $72.5
million, compared with $74.8 million at December 31, 2003. Cash flow generated from operations before working capital changes improved to
$99.6 million in the nine months ended September 30, 2004 from $63.5 million in
the same prior year period due to the improvement in earnings and the receipt
during the 2004 second quarter of a $15.6 million cash dividend from Crown
Life. Cash flow from the net change in operating working capital (excluding cash and
borrowings included in current liabilities) reflected a source of cash of $10.6
million, compared to a use of cash of $3.5 million in the prior year period.
The 2004 source of cash reflects an increase in current taxes payable due to
the improvement in taxable income, and a decline in accounts receivable,
partially offset by a decline in accounts payable and increase in prepaid
expenses. The decline in accounts payable related primarily to the timing of
the payroll. The decline in accounts receivable during 2004 was primarily due
to the cash receipt of certain Medicaid settlement receivables as discussed
under the section Significant Developments in 2004  Medicare and Medicaid
Settlement Receivables. Cash provided by investing activities totalled $11.0 million in the first nine
months of 2004. During 2004 the Company received net cash proceeds of $42.5
million: $22.5 million of which related to the disposal of three Canadian
nursing and retirement homes; $13.6 million related to the final settlement of
the Greystone transaction; and $6.4 million resulted from the disposal of four
U.S. nursing and assisted living centres. Proceeds from other assets of $24.9
million included $27.2 million of cash proceeds received on the settlement of
the Tandem notes receivable during 2004. Acquisition costs of $8.8 million in
2004 related to the purchase of four Indiana facilities in June, and a
Washington facility that was previously operated under lease arrangements in
February. Property and equipment expenditures, excluding acquisitions and net
of capital lease financing, totalled $47.6 million in the first nine months of
2004 compared to $44.3 million in the prior year period. The portion of these
expenditures related to business growth  such as construction of facilities
and bed additions  was approximately $16.8 million and $18.9 million,
respectively. In the nine months ended September 30, 2004, the Company spent
approximately $12.4 million on construction projects in the U.S. and
approximately $4.4 million on the construction of new Ontario nursing homes.
The remaining property and equipment expenditures represented periodic  Extendicare Inc. September 2004
    17




---



##### 



capital improvements and routine replacement of capital items, which totalled
$30.8 million in 2004 compared to $25.4 million in the first nine months of
2003. The Company used cash of $123.2 million in financing activities during the nine
months ended September 30, 2004. Cash used in the net change in long-term debt
of $110.5 million primarily related to the net impact of the U.S. debt issue
and early retirement of long-term debt. In addition, financing costs of $16.3
million were incurred in association with the U.S. debt issue. Remaining
changes were associated with the purchase of shares for cancellation and a
decrease in investments held for self-insured liabilities. In the nine months
ended September 30, 2003, cash provided by financing activities of $5.5 million
reflected the decline in investments held for self-insured liabilities and net
increase in long-term debt, in excess of amounts used to acquire shares for
cancellation. Capital Structure Sept. 30
    
    Dec. 31
    
    Dec. 31(millions of dollars unless otherwise noted)
    
    2004
    
    2003
    
    2002Share capital (including contributed surplus)Multiple Voting and Subordinate Voting shares
    
    
    296.3
    
    
    
    294.6
    
    
    
    299.1Preferred shares
    
    
    17.4
    
    
    
    17.7
    
    
    
    18.2313.7
    
    
    
    312.3
    
    
    
    317.3Retained earnings (deficit)
    
    
    95.7
    
    
    
    32.0
    
    
    
    (26.5
    )Foreign currency translation adjustment account
    
    
    7.4
    
    
    
    12.1
    
    
    
    67.2Shareholders equity
    
    
    416.8
    
    
    
    356.4
    
    
    
    358.0Long-term debt, including current portion
    
    
    639.5
    
    
    
    757.5
    
    
    
    852.9Long-term debt to equity (ratio)
    
    
    1.53:1
    
    
    
    2.13:1
    
    
    
    2.38:1Multiple and Subordinate Voting shares (number at period end)
    
    
    68,776,178
    
    
    
    68,487,903
    
    
    
    69,664,103US/Canadian dollar exchange (rate at period end)
    
    
    1.2616
    
    
    
    1.2965
    
    
    
    1.5776
 Number of
    
    ClosingOld
    
    New
    
    Shares
    
    MarketShare Information
    
    Stock Symbol
    
    Stock Symbol
    
    Outstanding(1)
    
    Value(1)Subordinate Voting Shares
    
    EXE.A
    
    EXE.SV
    
    
    56,872,611
    
    
    $
    16.76Multiple Voting Shares
    
    EXE
    
    EXE.MV
    
    
    11,911,692
    
    
    
    16.79Class I Preferred SharesCumulative Redeemable, Series 2
    
    EXE.PR.B
    
    EXE.PR.B
    
    
    104,505
    
    
    
    27.00Adjustable Dividend, Series 3
    
    EXE.PR.C
    
    EXE.PR.C
    
    
    93,310
    
    
    
    21.50Adjustable Dividend, Series 4
    
    EXE.PR.D
    
    EXE.PR.D
    
    
    241,240
    
    
    
    22.50Class II Preferred Shares, Series 1
    
    EXE.PR.E
    
    EXE.PR.E
    
    
    382,979
    
    
    
    20.30
   (1)
    
    At October 31, 2004, per the Toronto Stock Exchange. Effective November 15, 2004, Extendicares trading symbols for its two classes
of common stock listed on the Toronto Stock Exchange will be changed. The
symbol for the Companys Multiple Voting Shares will change from EXE to EXE.MV.
The symbol for the Subordinate Voting Shares will change from EXE.A to EXE.SV. In addition, the Companys trading symbol for its Subordinate Voting Shares
listed on the New York Stock Exchange will change from EXE.A to EXE. The closing rates used to translate assets and liabilities of the U.S.
operations were 1.2616 at September 30, 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 decreased by $23.7 million at the end of September 2004 and were
partially offset by a decrease in liabilities of $19.0 million. The $4.7
million net change in these assets and liabilities resulted in a decrease in
the foreign currency translation adjustment account to $7.4 million.  Extendicare Inc. September 2004
    18




---



##### 



Long-term Debt
Long-term debt, including the portion due within one year, declined $118.0
million to $639.5 million at September 30, 2004. The change in the foreign
exchange rate on translation of U.S. dollars decreased long-term debt by $7.4
million. Increases in long-term debt occurred during 2004 due to the issuance
of the 2014 Notes for proceeds of $163.1 million and the issuance of $7.4
million of notes payable in association with the refinancing of existing notes
payable. Long-term debt was reduced during 2004 due to the redemption of the
2007 Notes of $229.4 million, the early retirement of $29.9 million (US$22.5
million) of Industrial Development Revenue Bonds, the early retirement of $9.8
million in mortgages associated with the three Canadian facilities, which were
sold, and the refinancing of $7.4 million of notes payable. The remaining
decline in debt levels was due to scheduled regular repayments of $4.6 million. After taking into account interest rate swap agreements, the weighted average
interest rate of all long-term debt at September 30, 2004 was approximately
7.1%, compared to 7.8% at December 31, 2003. In addition, after considering
swap agreements in place to convert fixed-rate debt to floating rates, 44.5% of
the long-term debt was effectively at fixed rates at the end of September 2004. During the second quarter of 2004, EHSI issued US$125.0 million aggregate
principal amount of 6.875% Senior Subordinated Notes due May 2014, and retired
its 9.35% US$200.0 million Senior Subordinated Notes due 2007. The net proceeds
from the 2014 Notes were approximately US$117.4 million (net of a US$3.1
million discount and fees and expenses of US$4.5 million). In addition, EHSI
terminated its 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. In April 2004 EHSIs 9.5% Senior Notes due 2010 (the 2010 Senior Notes) were
upgraded by Moodys Investors Service from B2 to B1. The 2014 Notes issued
in April were assigned a B- rating by Standard & Poors Ratings Service, and
EHSIs amended and restated credit facility was assigned a BB- rating. 2014 Notes
The 2014 Notes were issued pursuant to Rule 144A and Regulation S under the
U.S. Securities Act of 1933, as amended. In August EHSI completed its offer to
exchange new 2014 Notes that had been registered under the Securities Act for
the 2014 Notes issued in April. The terms of the new 2014 Notes are identical
to those issued in April, and are fully and unconditionally guaranteed on a
senior subordinated unsecured basis, jointly and severally, by all of EHSIs
existing and future significant U.S. domestic subsidiaries, by all of its
existing and future U.S. domestic subsidiaries that guarantee or incur any
indebtedness and by any other existing and future significant subsidiaries or
restricted subsidiaries of EHSI that guarantee or otherwise provide direct
credit support for indebtedness of EHSI or any of its U.S. domestic
subsidiaries. The 2014 Notes and guarantees are general unsecured obligations
of EHSI and its subsidiaries. Amendment and Restatement of Credit Facility
In connection with the April 2004 issuance of the 2014 Notes, EHSI amended and
restated its credit facility, the terms of which include the following changes,
among other things:  
    
    a two year maturity extension to June 28, 2009;
    
    an additional US$50.0 million of senior secured financing on a revolving basis, resulting in total borrowing capacity of
US$155.0 million;
    
    an interest rate spread ranging from 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; and
    
    changes to the collateral securing the facility to permit EHSI to substitute certain assets with other assets. The credit facility is used to back letters of credit and for general corporate
purposes. Borrowings under the credit facility bear interest, at EHSIs option,
at the Eurodollar rate or the prime rate, plus applicable margins. As of
September 30, 2004 and December 31, 2003, the Company had no borrowings under
the credit facility. The unused portion of the credit facility that is
available for working capital and corporate purposes, after reduction for
outstanding letters of credit of US$23.9 million, was US$131.1 million as of
September 30, 2004. The credit facility is secured by a perfected, first priority security interest
in certain tangible and intangible assets and all of EHSIs capital stock and
the capital stock of its subsidiary guarantors. The credit facility is also
secured by a pledge of 65% of the voting stock of EHSIs foreign subsidiaries,
including its subsidiary guarantors foreign subsidiaries, if any. The credit
facility contains customary covenants and events of default and is subject to
various mandatory prepayment and commitment reductions. EHSI is permitted to
make voluntary prepayments at any time under the credit facility.  Extendicare Inc. September 2004
    19




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##### 



The credit facility requires that EHSI complies with various financial
covenants, including fixed charge coverage, debt leverage, and tangible net
worth ratios. EHSI is in compliance with all of the financial covenants as of
September 30, 2004. Interest Rate Swap and Cap Arrangements
In April 2004, coterminous with the issuance of the 2014 Notes, EHSI terminated
its existing interest rate swap and cap agreements. To hedge its exposure to
fluctuations in the market value, EHSI entered into two new interest rate swap
and two new interest rate cap agreements relating to its 2010 Senior Notes and
the 2014 Notes, for a notional US$275.0 million. The interest rate swap
arrangements are designated as highly effective fair value hedges, and as a
result, changes in market value of the swaps are offset by changes in market
value of the hedged debt instruments. EHSI uses the interest rate cap
arrangements to offset possible increases in interest payments under the
respective swaps caused by increases in market interest rates over a certain
level. Under the terms of the cap arrangements, the counterparty can call the
cap if the respective swap is terminated. Neither of the cap arrangements
qualifies as a hedging instrument under generally accepted accounting
principles, and therefore, changes in market value are recorded in earnings. With respect to the 2010 Senior Notes, EHSI entered into an interest rate swap
agreement expiring July 1, 2010, with a notional amount of US$150.0 million
(the 2010 Swap). The 2010 Swap effectively converted up to US$150.0 million
of fixed interest rate indebtedness into variable interest rate indebtedness.
Under the terms of the 2010 Swap, the counterparty can call the swap at any
time on or after July 1, 2006, with payments as determined under the agreement.
This call option is a mirror image of the embedded call option in the debt
instrument. EHSI also entered into an interest rate cap agreement expiring July
1, 2010, with a notional amount of US$150.0 million (the 2010 Cap). Under the
terms of the 2010 Cap, EHSI paid an upfront fee of US$3.5 million to the
counterparty, and the change in fair value of this fee is recorded in the
earnings statement. EHSI will receive a variable rate of interest equal to the
excess, if any, of the six-month LIBOR, adjusted semi-annually, over the cap
rate of 7%. With respect to the 2014 Notes, EHSI also entered into an interest rate swap
agreement expiring May 1, 2014, with a notional amount of US$125.0 million (the
2014 Swap). This agreement effectively converted up to US$125.0 million of
fixed interest rate indebtedness into variable interest rate indebtedness.
Under the terms of the 2014 Swap, the counterparty can call the swap at any
time on or after May 1, 2009, with payments as determined under the agreement.
This call option is a mirror image of the embedded call option in the debt
instrument. EHSI also entered into an interest rate cap agreement expiring May
1, 2014, with a notional amount of US$125.0 million (the 2014 Cap). Under the
2014 Cap, EHSI pays a fixed rate of interest equal to 0.75% to the counterparty
and receives a variable rate of interest equal to the excess, if any, of the
six-month LIBOR, adjusted semi-annually, over the cap rate of 7%. As of September 30, 2004, the fair value of the 2010 Cap was an asset of $2.1
million (US$1.7 million), and the fair value of the 2014 Cap was a liability of
$5.7 million (US$4.5 million). The fair values of the interest rate caps are
dependent on the projected six-month LIBOR, which is influenced by long-term
rates, and the volatility of these rates. As a result of a decline in the
volatility of rates at September 30, 2004, the value of EHSIs interest rate
caps declined and resulted in a valuation adjustment expense of $8.5 million
(US$6.3 million). Normal Course Issuer Bid
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 7,912,500 Multiple Voting and Subordinate Voting shares at a cost of
$36.2 million, or an average cost of $4.58 per share. During the nine months
ended September 30, 2004 the Company acquired 235,200 Subordinate Voting and
Multiple Voting shares at a cost of $3.2 million, or an average cost of $13.53
per share. This bid expires on November 26, 2004. Subject to regulatory
approval, the Board of Directors of the Company intends to commence a Normal
Course Issuer Bid on November 29, 2004, for just less than 5% each of the
Companys outstanding Subordinate Voting, Multiple Voting and Class II
Preferred, Series 1 shares. Long-term Incentive Plan
In May 2004 the Board of Directors of the Company approved an amendment to the
Companys Subordinate Voting Shares stock option plan, and has received
approval for the amendments from the Toronto Stock Exchange (TSX). The
amendments add the ability to grant tandem share appreciation rights (SARs)
with option grants. Tandem SARs give the grantee the option to surrender to the
Company, unexercised, the right to subscribe for the Subordinate Voting Shares
pursuant to his grant under the related stock option, and to receive from the
Company an amount equal to the excess of the fair market value of the
Subordinate Voting Shares on the effective date of exercise, over the aggregate
option price of such shares in respect of which the option is surrendered.
Awards pursuant to the Companys Amended and Restated Subordinate Voting Share
Option and Tandem SAR Plan (the Plan) shall be exercisable only to the extent
that the option has vested, such period not to exceed 10 years, as determined
by the Board at the time of granting. The Company has not increased
the number of Subordinate Voting Shares reserved for issuance under its Plan, and
to the extent that awards  Extendicare Inc. September 2004
    20




---



##### 



pursuant to the Plan result in the exercise of tandem
SARs, the equivalent number of Subordinate Voting Shares will be reduced from
the number reserved and available under the Plan for future grants. Awards that
include tandem SARs are accounted for on a fair value basis so that the change
in fair value of the underlying Subordinate Voting Shares is recognized in
earnings. On May 6, 2004, the Board granted 96,000 tandem SARs pursuant to the Plan at an
exercise price of $14.82 per share, and on August 3, 2004, the Board granted
344,000 tandem SARs at an exercise price of $14.50 per share. The options vest
at a rate of 25% on the anniversary date of grant over a four-year period and
expire on May 6, 2014 and August 3, 2014, respectively. During the first nine months of 2004, 523,475 Subordinate Voting Shares were
issued on the exercise of stock options. As at September 30, 2004, 3,859,500
Subordinate Voting Shares were reserved under the Plan of which a total of
2,174,525 Subordinate Voting Shares had been granted. Of the options granted
939,025 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
September 30, 2004, EHSI had cash and cash equivalents of US$29.1 million and
US$131.1 million available under its revolver loan, and Extendicares Canadian
operations had cash and available bank lines totalling $36.0 million. Capital Expenditures
Capital expenditures for 2004, excluding acquisitions, are estimated to be
$75.0 million, including $26.0 million for growth construction projects. ECI
has spent $4.4 million to complete the new Ontario homes in 2004. The remaining
$21.6 million (US$16.0 million) is planned for U.S. construction projects. As of September 30, 2004, EHSI had capital expenditure commitments outstanding
of approximately US$28.3 million. Phase I of EHSIs construction program
consists of seven projects to add 165 beds during 2004 and 2005. Four of the
projects were completed in the first half of 2004, representing a 20-bed
addition to a nursing facility, a 16-unit and 30-unit addition to assisted
living centres, and a 40-unit free-standing assisted living facility. The cost
of the projects is expected to be US$15.7 million, of which US$4.3 million was
spent in 2003 and US$6.5 million in 2004. Furthermore, Phase II of the
development plans is a proposal for eight new projects that will add 325 units
in 2005 and 2006 for a cost of approximately US$36.3 million, of which US$2.8
million was spent in 2004. Accrual for Self-insured Liabilities
At the end of September 2004, the Companys accrual for self-insured general
and professional liabilities was $83.2 million compared to $95.4 million at the
beginning of the year. Claims payments, net of the current period provision,
decreased the accrual by $10.1 million in the nine months ended September 30,
2004, with the change in the foreign exchange rate accounting for a further
$2.1 million decline. The accrual for self-insured liabilities includes
estimates of the costs of both reported claims and claims incurred but not yet
reported. Provisions recorded in the first nine months of 2004 and 2003 for
potential general and professional liability claims were $11.2 million and $9.9
million, respectively. Payments for self-insured liabilities in the first nine
months of 2004 and 2003 were $21.4 million and $27.2 million, respectively.
Payments for the third quarter of 2004 were $12.8 million in comparison to $4.4
million in the same 2003 quarter. This increase relates to the Companys
discontinued operations as management endeavours to settle the backlog of these
claims. 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 interim
independent actuarial review, based on September 30, 2004 data, which confirmed
the adequacy of the balance sheet reserves for resident care liability claims.
The Company estimates that $31.5 million of the accrual for self-insured
general and professional liabilities will be paid within the next 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 September 30, 2004 for estimated costs of
self-insured liabilities.  Extendicare Inc. September 2004
    21




---



##### 



The Company invests funds to support the accrual for self-insured liabilities.
These funds, reported as part of Other Assets, totalled $34.8 million at the
end of September 2004, compared to $40.6 million at the end of December 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  Off-balance Sheet Arrangements  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 Senior Vice-President and Chief Financial Officer,
the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Multilateral Instrument 52-109 under the
Ontario Securities Act, and Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934) as of the end of the 2004 quarter. Based upon their
evaluation of these disclosure controls and procedures, the Chief Executive
Officer, and Senior Vice-President and Chief Financial Officer concluded that
the disclosure controls and procedures were effective, as of the end of the
2004 quarter, 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 2004 quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting. Recent Accounting Changes Hedging
Effective January 1, 2004, the Company adopted CICA Accounting Guideline 13 (AG 13),
Hedging Relationships along with subsequent amendments. AG 13
establishes guidance for the identification, designation and documentation of
the hedging relationship, and an assessment of the effectiveness of the hedging
relationship. Hedge accounting is discontinued for any hedging relationships
that do not meet the requirements of the guideline. Currently, the only hedging
relationships the Company has are its interest rate swaps, which effectively
convert fixed-rate debt to floating rates. At the beginning of the year, the
Company had an interest rate cap for a notional US$150.0 million, which under
the new criteria, only US$32.0 million qualified as an effective cash flow
hedge to limit increases in interest payments under variable-rate debt
obligations. The remainder of the interest rate cap, with a notional amount of
US$118.0 million, did not qualify as an effective hedge, and as such, the
Company on transition 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. In the second quarter of 2004, the Company
terminated this interest rate cap arrangement, and as a result wrote off the
balance of the deferred unrealized loss of $0.8 million. Two new interest rate
cap arrangements were entered into during the second quarter of 2004, which
also do not qualify as effective hedges. At the end of September 2004, the
interest rate caps were fair valued, and a charge of $8.5 million was reported
in income during the first nine months of 2004.  Extendicare Inc. September 2004
    22




---



##### 



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.  Extendicare Inc. September 2004
    23




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##### 



EXTENDICARE
INC.
Consolidated Statements
of Earnings
  Three months ended
    
    Nine months ended(thousands of dollars except per share amounts)
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003RevenueNursing and assisted living centresUnited States
    
    
    307,401
    
    
    
    294,044
    
    
    
    909,798
    
    
    
    891,774Canada
    
    
    92,289
    
    
    
    90,858
    
    
    
    272,655
    
    
    
    257,166Outpatient therapy  U.S.
    
    
    3,722
    
    
    
    4,171
    
    
    
    11,316
    
    
    
    12,501Home health  Canada
    
    
    31,915
    
    
    
    33,440
    
    
    
    95,868
    
    
    
    101,218Other
    
    
    10,274
    
    
    
    10,541
    
    
    
    31,175
    
    
    
    30,412445,601
    
    
    
    433,054
    
    
    
    1,320,812
    
    
    
    1,293,071Operating and administrative costs
    
    
    379,059
    
    
    
    377,530
    
    
    
    1,135,903
    
    
    
    1,142,803Earnings before undernoted
    
    
    66,542
    
    
    
    55,524
    
    
    
    184,909
    
    
    
    150,268Lease costs
    
    
    3,976
    
    
    
    4,873
    
    
    
    12,309
    
    
    
    14,041Depreciation and amortization
    
    
    14,142
    
    
    
    15,816
    
    
    
    42,964
    
    
    
    47,672Interest, net
    
    
    11,211
    
    
    
    14,768
    
    
    
    33,738
    
    
    
    45,323Valuation adjustment on interest rate caps
    
    
    2,613
    
    
    
    
    
    
    
    8,478
    
    
    
    Loss (gain) from asset disposals, impairment
and other items
    
    
    5,399
    
    
    
    
    
    
    
    (2,857
    )
    
    
    (905
    )Earnings before income taxes
    
    
    29,201
    
    
    
    20,067
    
    
    
    90,277
    
    
    
    44,137Income taxesCurrent
    
    
    14,097
    
    
    
    5,521
    
    
    
    46,352
    
    
    
    11,102Future (reduction)
    
    
    (3,425
    )
    
    
    1,977
    
    
    
    (18,249
    )
    
    
    5,59310,672
    
    
    
    7,498
    
    
    
    28,103
    
    
    
    16,695Earnings from health care
    
    
    18,529
    
    
    
    12,569
    
    
    
    62,174
    
    
    
    27,442Share of equity accounted earnings
    
    
    1,083
    
    
    
    1,197
    
    
    
    4,119
    
    
    
    16,325Net earnings
    
    
    19,612
    
    
    
    13,766
    
    
    
    66,293
    
    
    
    43,767Earnings per shareBasic
    
    
    0.29
    
    
    
    0.20
    
    
    
    0.96
    
    
    
    0.63Diluted
    
    
    0.28
    
    
    
    0.19
    
    
    
    0.94
    
    
    
    0.62
  Extendicare Inc. September 2004
    24




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##### 



EXTENDICARE INC.
Consolidated Statements of Cash Flows  Three months ended
    
    Nine months ended(thousands of dollars)
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003Cash provided by (used in) operationsNet earnings
    
    
    19,612
    
    
    
    13,766
    
    
    
    66,293
    
    
    
    43,767Adjustments for:Depreciation and amortization
    
    
    14,142
    
    
    
    15,816
    
    
    
    42,964
    
    
    
    47,672Provision for self-insured liabilities
    
    
    3,706
    
    
    
    3,240
    
    
    
    11,218
    
    
    
    9,915Payments for self-insured liabilities
    
    
    (12,827
    )
    
    
    (4,379
    )
    
    
    (21,365
    )
    
    
    (27,245
    )Future income taxes
    
    
    (3,425
    )
    
    
    1,977
    
    
    
    (18,249
    )
    
    
    5,593Valuation adjustment on interest rate caps
    
    
    2,613
    
    
    
    
    
    
    
    8,478
    
    
    
    Loss (gain) from asset disposals, impairment
and other items
    
    
    5,399
    
    
    
    
    
    
    
    (2,857
    )
    
    
    (905
    )Dividends received from equity investments,
net of undistributed share of earnings
    
    
    (1,083
    )
    
    
    (1,197
    )
    
    
    11,473
    
    
    
    (16,325
    )Other
    
    
    597
    
    
    
    (246
    )
    
    
    1,658
    
    
    
    1,01628,734
    
    
    
    28,977
    
    
    
    99,613
    
    
    
    63,488Net change in operating working capital, excluding cashAccounts receivable
    
    
    (2,654
    )
    
    
    5,077
    
    
    
    7,417
    
    
    
    10,589Inventories, supplies and prepaid expenses
    
    
    824
    
    
    
    2,444
    
    
    
    (4,777
    )
    
    
    (1,506
    )Accounts payable and accrued liabilities
    
    
    (5,848
    )
    
    
    (4,488
    )
    
    
    (6,166
    )
    
    
    (12,866
    )Income taxes
    
    
    1,741
    
    
    
    689
    
    
    
    14,135
    
    
    
    26522,797
    
    
    
    32,699
    
    
    
    110,222
    
    
    
    59,970Cash provided by (used in) investment activitiesProperty and equipment
    
    
    (13,980
    )
    
    
    (16,382
    )
    
    
    (47,640
    )
    
    
    (44,252
    )Acquisitions
    
    
    
    
    
    
    
    
    
    
    (8,750
    )
    
    
    Net proceeds from dispositions
    
    
    10,393
    
    
    
    
    
    
    
    42,496
    
    
    
    2,047Other assets
    
    
    (2,770
    )
    
    
    (1,260
    )
    
    
    24,863
    
    
    
    (641
    )(6,357
    )
    
    
    (17,642
    )
    
    
    10,969
    
    
    
    (42,846
    )Cash provided by (used in) financing activitiesIssue of long-term debt
    
    
    
    
    
    
    
    
    
    
    170,480
    
    
    
    11,021Repayment of long-term debt
    
    
    (16,866
    )
    
    
    (4,348
    )
    
    
    (281,029
    )
    
    
    (8,980
    )Decrease (increase) in investments held for
self-insured liabilities
    
    
    103
    
    
    
    (2,336
    )
    
    
    5,150
    
    
    
    8,030Purchase of shares for cancellation
    
    
    (1,813
    )
    
    
    (2,984
    )
    
    
    (3,565
    )
    
    
    (5,766
    )Financing costs
    
    
    4
    
    
    
    (121
    )
    
    
    (16,293
    )
    
    
    (156
    )Other
    
    
    1,075
    
    
    
    957
    
    
    
    2,098
    
    
    
    1,379(17,497
    )
    
    
    (8,832
    )
    
    
    (123,159
    )
    
    
    5,528Foreign exchange gain (loss) on cash held in foreign
currency
    
    
    (2,391
    )
    
    
    29
    
    
    
    (423
    )
    
    
    (7,326
    )Increase (decrease) in cash and cash equivalents
    
    
    (3,448
    )
    
    
    6,254
    
    
    
    (2,391
    )
    
    
    15,326Cash and cash equivalents at beginning of period
    
    
    75,903
    
    
    
    61,696
    
    
    
    74,846
    
    
    
    52,624Cash and cash equivalents at end of period
    
    
    72,455
    
    
    
    67,950
    
    
    
    72,455
    
    
    
    67,950
 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 nine months ended September 30, 2004 and 2003 was $43.3 million and $53.5
million, respectively. Cash taxes paid for each of the nine months ended
September 30, 2004 and 2003 were $32.2 million and $10.8 million, respectively.  Extendicare Inc. September 2004
    25




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##### 



EXTENDICARE INC.
Consolidated Balance Sheets  September 30
    
    December 31(thousands of dollars)
    
    2004
    
    2003AssetsCurrent assetsCash and short-term investments
    
    
    72,455
    
    
    
    74,846Accounts receivable
    
    
    155,659
    
    
    
    150,048Assets under divestiture agreement
    
    
    
    
    
    
    43,722Income taxes recoverable
    
    
    
    
    
    
    9,654Future income taxes
    
    
    37,290
    
    
    
    34,571Inventories, supplies and prepaid expenses
    
    
    17,862
    
    
    
    13,928283,266
    
    
    
    326,769Property and equipment
    
    
    794,944
    
    
    
    821,682Goodwill and other intangible assets
    
    
    94,485
    
    
    
    97,558Other assets
    
    
    152,010
    
    
    
    205,6291,324,705
    
    
    
    1,451,638Equity accounted investments
    
    
    130,411
    
    
    
    141,7791,455,116
    
    
    
    1,593,417Liabilities and Shareholders EquityCurrent liabilitiesAccounts payable and accrued liabilities
    
    
    235,367
    
    
    
    254,848Income taxes payable
    
    
    4,174
    
    
    
    Accrual for self-insured liabilities
    
    
    31,540
    
    
    
    32,413Current maturities of long-term debt
    
    
    7,074
    
    
    
    7,409Deposits under divestiture agreement
    
    
    
    
    
    
    38,895278,155
    
    
    
    333,565Accrual for self-insured liabilities
    
    
    51,655
    
    
    
    62,990Long-term debt
    
    
    632,470
    
    
    
    750,094Other long-term liabilities
    
    
    14,500
    
    
    
    13,358Future income taxes
    
    
    61,577
    
    
    
    76,9771,038,357
    
    
    
    1,236,984Share capital and contributed surplus
    
    
    313,651
    
    
    
    312,328Retained earnings
    
    
    95,677
    
    
    
    31,959Foreign currency translation adjustment account
    
    
    7,431
    
    
    
    12,1461,455,116
    
    
    
    1,593,417Closing US/Cdn. dollar exchange rate
    
    
    1.2616
    
    
    
    1.2965
 EXTENDICARE INC.
Consolidated Statements of Retained Earnings (Deficit)  Nine months ended(thousands of dollars)
    
    September 302004
    
    2003Retained Earnings (Deficit)Balance at beginning of period
    
    
    31,959
    
    
    
    (26,545
    )Earnings for the period
    
    
    66,293
    
    
    
    43,767Purchase of shares below/(in excess of) book value
    
    
    (2,087
    )
    
    
    313Preferred share dividends
    
    
    (488
    )
    
    
    (580
    )Balance at end of period
    
    
    95,677
    
    
    
    16,955
  Extendicare Inc. September 2004
    26




---



##### 



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. Certain reclassifications have been made to the prior period results to conform
to the 2004 presentation. 2.     Change in Accounting Policies
Effective January 1, 2004, the Company adopted the following accounting
pronouncements, none of which, other than the new rules for hedging
relationships as indicated below, had a material impact on the financial
results: hedging relationships; impairment of long-lived assets; asset
retirement obligations; revenue recognition; and revenue arrangements with
multiple deliverables. Hedging
Effective January 1, 2004, the Company adopted CICA Accounting Guideline 13 (AG
13), Hedging Relationships along with subsequent amendments. AG 13
establishes guidance for the identification, designation and documentation of
the hedging relationship, and an assessment of the effectiveness of the hedging
relationship. Hedge accounting is discontinued for any hedging relationships
that do not meet the requirements of the guideline. Currently, the only hedging
relationships the Company has are its interest rate swaps, which effectively
convert fixed-rate debt to floating rates. At the beginning of the year, the
Company had an interest rate cap for a notional US$150.0 million, which under
the new criteria, only US$32.0 million qualified as an effective cash flow
hedge to limit increases in interest payments under variable-rate debt
obligations. The remainder of the interest rate cap, with a notional amount of
US$118.0 million, did not qualify as an effective hedge, and as such, the
Company on transition 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. In the second quarter of 2004, the Company
terminated this interest rate cap arrangement, and as a result wrote off the
balance of the deferred unrealized loss of $0.8 million. Two new interest rate
cap arrangements were entered into during the second quarter, which also do not
qualify as effective hedges. The interest rate caps are being fair valued and a
charge of $2.6 million was reported in income for the third quarter and $8.5
million for the nine months ended September 30, 2004. Impairment of Long-lived Assets
Effective January 1, 2004, the Company adopted CICA Handbook Section 3063,
which establishes new standards for the recognition, measurement, and
disclosure of the impairment of long-lived assets. Changes to existing practice
include, among others, the determination of an impairment of assets held for
use under a two-step process and the measurement of an impairment loss as the
amount by which the long-lived assets carrying amount exceeds its fair value.
There has been no significant impact on the Companys financial statements as a
result of adopting this policy. Asset Retirement Obligations
Effective January 1, 2004, the Company adopted CICA Handbook Section 3110,
which establishes new standards for the recognition, measurement and disclosure
of liabilities for asset retirement obligations and the associated asset
retirement costs. The standards apply to legal obligations associated with the
retirement of a tangible long-lived asset that results from acquisition,
construction, development or normal operations, and require the Company to
record the fair value of a liability for an asset retirement obligation. There
has been no impact on the Companys financial statements as a result of
adopting this policy. Employee Future Benefits
In March 2004, the CICA amended Handbook Sections 1751, Interim Financial
Statements and 3461, Employee Future Benefits to require additional interim
and annual disclosures. Section 1751 was amended to require disclosure of total
future benefit cost in interim financial statements for interim periods ending
on or after June 30, 2004. The Company has adopted this accounting
pronouncement and has reported the future benefit expense in note 14.  Extendicare Inc. September 2004
    27




---



##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements 3.     Acquisitions
In June 2004 EHSI acquired four nursing homes (321 beds) located in Indiana for
cash of $6.9 million (US$5.0 million). In February 2004 EHSI acquired for cash
of $1.9 million (US$1.4 million) a skilled nursing facility in Washington that
it had operated previously under a lease arrangement. 4.     Loss (Gain) from Asset Disposals, Impairment and Other Items Three months ended
    
    Nine months ended(thousands of dollars)
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003Loss (gain) from dispositionsUnited StatesCompletion of divestiture
    
    
    
    
    
    
    
    
    
    
    (6,616
    )
    
    
    Sale of nursing and assisted living facilities
    
    
    753
    
    
    
    
    
    
    
    753
    
    
    
    Canada sale of nursing and retirement homes
    
    
    (599
    )
    
    
    
    
    
    
    (13,256
    )
    
    
    176Issuance and retirement of debtTender and call premiums
    
    
    
    
    
    
    
    
    
    
    7,805
    
    
    
    Legal expenses
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    Write-off of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    3,167
    
    
    
    Bond discount and foreign exchange
    
    
    
    
    
    
    
    
    
    
    (771
    )
    
    
    Termination of interest rate swap and cap
    
    
    
    
    
    
    
    
    
    
    (3,661
    )
    
    
    Loss on repayment of notes due from Tandem
    
    
    
    
    
    
    
    
    
    
    1,720
    
    
    
    Provision for impairment of nursing homes
    
    
    
    
    
    
    
    
    
    
    2,125
    
    
    
    Write-off of long-term investment
    
    
    5,046
    
    
    
    
    
    
    
    5,046
    
    
    
    Other
    
    
    199
    
    
    
    
    
    
    
    441
    
    
    
    (1,081
    )5,399
    
    
    
    
    
    
    
    (2,857
    )
    
    
    (905
    )
 In June 2004, EHSI concluded the sale with Greystone Tribeca Acquisition,
L.L.C. (Greystone) of the divestiture agreement for 15 Florida nursing and
assisted living facilities previously owned and operated by EHSI, which
Greystone had been operating since September 2000. The initial transaction in
2000 was treated as a deferred sale since a significant portion of the final
consideration was contingent on certain events, and because EHSI held an option
to repurchase the facilities. EHSI received US$10.0 million as final payment of
the contingent consideration resulting in a pre-tax gain of $6.6 million
(US$4.9 million). In August 2004, EHSI disposed of its Arkansas operation, which consisted of a
96-bed nursing facility and three assisted living facilities (181 units)
located on one campus. Gross sale proceeds were $8.0 million (US$6.1 million)
and consisted of cash and a $1.2 million (US$0.9 million) five-year note,
resulting in a pre-tax loss of $0.8 million (US$0.6 million). In September 2004, ECI sold its only nursing home in British Columbia (75 beds)
for gross proceeds of $5.5 million, which resulted in a pre-tax gain of $0.6
million. Of the proceeds, $4.7 million was used to retire $3.2 million of
long-term debt related to the home and to pay $1.5 million for other costs of
disposition. In February the Company reported a gain on sale of two Ontario
homes (275 beds) for gross proceeds of $19.6 million resulting in a pre-tax
gain of $12.7 million. A portion of the proceeds were used to retire long-term
debt of $6.6 million associated with the homes. In the second quarter of 2004, as a result of the tender and call of EHSIs
9.35% Senior Subordinated Notes due 2007 (the 2007 Notes), the Company booked
the following amounts: the consolidated net premiums paid for the early
redemption of the 2007 Notes of $7.8 million (US$5.8 million); legal fees of
$0.4 million (US$0.3 million); the write-off of deferred financing charges of
$3.2 million (US$2.4 million); and a gain from unamortized bond discount and
foreign exchange of $0.8 million. In addition, pursuant to the termination of
the existing interest rate swap and cap arrangements, a consolidated net gain
of $3.7 million (US$2.7 million) was recorded.  Extendicare Inc. September 2004
    28




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##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements Also, in the second quarter of 2004 EHSI accepted a cash pre-payment of US$16.2
million for US$17.0 million of notes receivable due 2007 from Tandem Health
Care, Inc. from a previous divestiture. After payment of associated selling
expenses of US$0.5 million, EHSI recorded a pre-tax loss of $1.7 million
(US$1.3 million). In addition, based on a formal decision to close an 86-bed
nursing facility in Indiana, EHSI recorded a pre-tax loss on impairment of
assets of $2.1 million (US$1.6 million). In September of 2004, EHSI recorded a pre-tax charge of $5.0 million (US$4.0
million) to write-off its investment in an Omnicare, Inc. (Omnicare) warrant,
which EHSI received in connection with the 1998 sale of its pharmacy
operations. The warrant is to acquire 1.5 million of Omnicare stock at an
exercise price of US$48.00 per share and the exercise period expires September
16, 2005. Management decided to write-off the investment in the third quarter
as the likelihood of the securities being in-the-money before they expire had
significantly declined as a result of the recent decrease in Omnicares share
price. In the first and third quarters of 2004, EHSI prepaid in full US$13.0 million
and US$9.5 million, respectively, of Industrial Development Revenue Bonds that
resulted in the pre-tax write-off of $0.6 million of deferred financing costs.
In Canada ECI sold non-core assets for a pre-tax gain of $0.2 million in the
second quarter. 5.     Property and Equipment
As of September 30, 2004, EHSI had capital expenditure commitments outstanding
of approximately $35.7 million (US$28.3 million). EHSI is in the process of
completing seven new developments (Phase I) to add 165 beds during 2004 and
2005. Four of the projects were completed in the first half of 2004,
representing a 20-bed addition to a nursing facility, 16-unit and 30-unit
additions to two assisted living centres and a new 40-unit assisted living
centre. The total cost of this new development is expected to be US$15.7
million, of which US$4.3 million was spent in 2003 and US$6.5 million in the
first nine months of 2004. Furthermore, Phase II of the development plans is a
proposal for eight new developments that will add 325 units in 2005 and 2006
for a cost of approximately US$36.3 million, of which US$2.8 million was spent
in the first nine months of 2004. In August 2004, EHSI transferred the operations of a nursing facility (336
beds) in Chippewa Falls, Wisconsin to Lakeside Health L.L.C. (Lakeside Health),
a subsidiary of Benedictine Health Dimensions, Inc. (Benedictine) for a term of
three years. The transfer of operations was in response to facility citations
for survey deficiencies and an agreement with the State of Wisconsin to
transfer the operations to a new licensee. Under the terms of the agreement,
Lakeside Health is responsible for all operating costs, including rent to EHSI
and management fees to Benedictine. EHSI will receive rental income of US$0.5
million per annum; however, EHSI is responsible to fund Lakeside Health for any
and all net operating losses from the nursing facility, as defined in the
agreement, and to provide working capital advances of approximately US$2.0
million. The facility passed its survey in September with the State of
Wisconsin bringing it into regulatory compliance. EHSIs current estimates of
the facilitys future cash flow, after having the facility return to regulatory
compliance and attaining suitable Medicare occupancy levels, indicate that a
charge for asset impairment is not required but there can be no assurance that
such a charge will not be required in the future if circumstances cause these
estimates to change. 6.     Goodwill and Other Intangible Assets
Included in goodwill and other intangible assets are intangible assets related
to leasehold rights, which are amortized over the term of the lease including
renewal options. As at September 30, 2004, these assets had a gross carrying
value of $12.6 million and accumulative amortization of $9.8 million, for a net
book value of $2.8 million. The aggregate amortization expense for the nine
months ended September 30, 2004 was $1.1 million. 7.     Equity Accounted Investments
Extendicares share of Crown Life Insurance Companys (Crown Life) earnings for
the first nine months of 2004 was $5.3 million and its share of losses of
Salumatics Inc. (formerly THiiNC Information Management Inc.) was $1.2 million.
For the first nine months of 2003, Extendicares share of Crown Lifes earnings
was $16.3 million. In June 2004 Extendicare received a cash dividend from Crown
Life of $15.6 million, or $14.00 per share. Crown Life did not pay any
dividends in 2003. 8.     Long-term DebtIssuance of 2014 Notes and Repayment of 2007 Notes
In April 2004, EHSI issued US$125.0 million aggregate principal amount of
6.875% Senior Subordinated Notes due May 1, 2014 (the 2014 Notes) at a price
of 97.5001% of par to yield 7.23%, and amended and restated its existing credit  Extendicare Inc. September 2004
    29




---



##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements 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 were 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 the 2007 Notes. On April 5, 2004, EHSI
commenced a tender offer for the 2007 Notes, for which 61%, excluding those
held by Extendicare Inc., were tendered and US$104.9 million aggregate
principal was repaid on April 22, 2004. The remaining US$95.1 million of 2007
Notes not tendered were redeemed and paid for on May 24, 2004. In August 2004, EHSI completed its offer that it had commenced in July 2004 to
exchange new 6.875% Senior Subordinated Notes due 2014 that have been
registered under the Securities Act of 1933 for the Senior Subordinated Notes
issued in April 2004 pursuant to Rule 144A and Regulation S under the
Securities Act of 1933, as amended. The terms of the new 2014 Notes are
identical to the terms of the 2014 Notes issued in April 2004. The 2014 Notes are fully and unconditionally guaranteed on a senior
subordinated unsecured basis, jointly and severally, by all of EHSIs existing
and future significant U.S. domestic subsidiaries, by all of its existing and
future U.S. domestic subsidiaries that guarantee or incur any indebtedness and
by any other existing and future significant subsidiaries or restricted
subsidiaries that guarantee or otherwise provide direct credit support for
indebtedness of EHSI or any of its U.S. domestic subsidiaries. The 2014 Notes
and guarantees are general unsecured obligations of EHSI and its subsidiaries. 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
    %
 Credit Facility
In connection with the offering of the 2014 Notes, EHSI amended and restated
its credit facility to, among other things, extend the maturity date from June
28, 2007 to June 28, 2009 and increase the total borrowing capacity by US$50.0
million from US$105.0 million to US$155.0 million. The credit facility is used to back letters of credit and for general corporate
purposes. Borrowings under the credit facility bear interest, at EHSIs option,
at the Eurodollar rate or the prime rate, plus applicable margins. Depending
upon EHSIs senior leverage ratio, the interest rate is equal to the Eurodollar
rate plus a margin of 2.50% to 3.25% per annum or the base rate plus a margin
of 1.50% to 2.25% per annum. The commitment fee is 0.50% per annum on the
undrawn capacity regardless of utilization. The credit facility is secured by a perfected, first priority security interest
in certain tangible and intangible assets and all of EHSIs capital stock and
the capital stock of EHSIs subsidiary guarantors. The credit facility is also
secured by a pledge of 65% of the voting stock of EHSIs foreign subsidiaries,
including its subsidiary guarantors foreign subsidiaries, if any. The credit
facility contains customary covenants and events of default and is subject to
various mandatory prepayment and commitment reductions. EHSI is permitted to
make voluntary prepayments at any time under the credit facility. As of September 30, 2004 and December 31, 2003, EHSI had no borrowings under
the credit facility. The unused portion of the credit facility that is
available for working capital and corporate purposes, after reduction for
outstanding letters of credit of US$23.9 million, was US$131.1 million as of
September 30, 2004. The credit facility requires that EHSI comply with various financial covenants,
including fixed charge coverage, debt leverage, and tangible net worth ratios.
EHSI is in compliance with all of the financial covenants as of September 30,
2004.  Extendicare Inc. September 2004
    30




---



##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements 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 US$3.3 million which was 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.
This call option is a mirror image of the embedded call option in the debt
instrument. EHSI also entered into an interest rate cap agreement expiring July
1, 2010 with a notional amount of US$150.0 million (the 2010 Cap). Under the
terms of the 2010 Cap, EHSI paid on April 22, 2004, an upfront fee of US$3.5
million to the counterparty, and the change in fair value of this fee is
recorded in the earnings statement. EHSI will receive a variable rate of
interest equal to the excess, if any, of the six-month London Interbank
Borrowing Rate (LIBOR), adjusted semi-annually, over the cap rate of 7%. EHSI
uses the interest rate cap to offset possible increases in interest payments
under the interest rate swap agreement expiring July 1, 2010, caused by
increases in market interest rates over a certain level. Under the terms of the
2010 Cap, the counterparty can call the cap if the interest rate swap agreement
expiring July 1, 2010, is terminated. With respect to the 2014 Notes, on April 22, 2004 EHSI entered into an interest
rate swap agreement expiring May 1, 2014, with a notional amount of US$125.0
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. This call option is a mirror image of the embedded call option in
the debt instrument. EHSI also entered into an interest rate cap agreement
expiring May 1, 2014, with a notional amount of US$125.0 million (the 2014
Cap). Under the terms of the 2014 Cap, EHSI pays a fixed rate of interest
equal to 0.75% to the counterparty and receives a variable rate of interest
equal to the excess, if any, of the six-month LIBOR rate, adjusted
semi-annually, over the cap rate of 7%. EHSI uses the interest rate cap to
offset possible increases in interest payments under the interest rate swap
agreement expiring May 1, 2014, caused by increases in market interest rates
over a certain level. Under the terms of the interest rate cap agreement, the
counterparty can call the cap if the interest rate swap agreement expiring May
1, 2014, is terminated. The interest rate swaps maturing in 2010 and 2014 are designated as highly
effective fair value hedges, and as a result, changes in market value of the
swaps are offset by changes in market value of the hedged debt instruments. As
of September 30, 2004, the fair value of the interest rate swaps designated as
fair value hedges is an asset of $1.1 million (US$0.9 million) and is offset by
a corresponding change in the fair value of the hedged long-term debt
obligation, both of which are off-balance sheet amounts. The interest rate caps maturing in 2010 and 2014 are not designated as hedges
and the change in fair value of these caps are reported in the earnings
statement. As of September 30, 2004, the fair value of the 2010 Cap is an asset
of $2.1 million (US$1.7 million) and the fair value of the 2014 Cap is a
liability of $5.7 million (US$4.5 million), both of which are recorded in the
financial statements. The fair values of EHSIs interest rate caps are
dependent on projected six-month LIBOR interest rates that are influenced by
long-term rates, and the volatility of these rates. As a result of a decline in
the third quarter of long-term market interest rates and a decrease in the
volatility of rates in the second and third quarters of 2004, the value of
EHSIs interest rate caps declined and resulted in a valuation adjustment loss
of $2.6 million (US$2.0 million) in the third quarter and $8.5 million (US$6.3
million) for nine months ended September 30, 2004. 9.     Share Capital
During the nine months ended September 30, 2004, the Company purchased 15,400
Class I Preferred Shares at a cost of $382,000 pursuant to the purchase
obligation. Under the terms of a Normal Course Issuer Bid, the Company
purchased and cancelled 234,200 Subordinate Voting Shares and 1,000 Multiple
Voting Shares at a cost of $3,182,000. In addition, during the nine months,
523,475 Subordinate Voting Shares were issued on exercise of stock options for
proceeds of $2,164,000, which after adjusting for tax credits and contributed
surplus, increased capital stock by $2,672,000. As a result of these
transactions, the carrying value of capital stock increased by $1,194,000 and
retained earnings was charged with $2,087,000 attributable to the cost of
purchases in excess of their carrying value.  Extendicare Inc. September 2004
    31




---



##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements Long-term Incentive Plan
In May 2004 the Board of Directors of the Company approved an amendment to the
Companys Subordinate Voting Shares stock option plan, and has received
approval for the amendments from the Toronto Stock Exchange (TSX). The
amendments add the ability to grant tandem share appreciation rights (SARs)
with option grants. Tandem SARs give the grantee the option to surrender to the
Company, unexercised, the right to subscribe for the Subordinate Voting Shares
pursuant to his grant under the related stock option, and to receive from the
Company an amount equal to the excess of the fair market value of the
Subordinate Voting Shares on the effective date of exercise, over the aggregate
option price of such shares in respect of which the option is surrendered.
Awards pursuant to the Companys Amended and Restated Subordinate Voting Share
Option and Tandem SAR Plan (the Plan) shall be exercisable only to the extent
that the option has vested, such period not to exceed 10 years, as determined
by the Board at the time of granting. The Company has not increased the number
of Subordinate Voting Shares reserved for issuance under its Plan, and to the
extent that awards pursuant to the Plan result in the exercise of tandem SARs,
the equivalent number of Subordinate Voting Shares will be reduced from the
number reserved and available under the Plan for future grants. For tandem SARs granted under the Plan the Company accrues compensation expense
in the amount by which the quoted market value of the Subordinate Voting Shares
exceeds the option price. Changes, either increases or decreases, in the quoted
market value of the Subordinate Voting Shares between the date of grant and the
reporting period date result in a change in the measure of compensation for the
award. During the first nine months of 2004, the Company accrued $79,000 of
compensation expense associated with tandem SARs granted. 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 Plan beginning January 1, 2003. For stock options awarded under the
Plan prior to January 1, 2003, the Company applies the intrinsic value based
method. During the first nine months of 2004, the Company recorded compensation
expense associated with stock options granted that did not include share
appreciation rights of $144,000. Contributed surplus increased by $129,000 to
$273,000 at the end of September 2004, after $15,000 of adjustments for a
portion of the stock options that were exercised. On May 6, 2004, the Board granted 96,000 tandem SARs pursuant to the Plan at an
exercise price of $14.82 per share, and on August 3, 2004, the Board granted
344,000 tandem SARs at an exercise price of $14.50 per share. The exercise
prices were based on the closing price of the Subordinate Voting Shares on the
TSX on the trading day prior to the grant. The options vest at a rate of 25% on
the anniversary date of grant over a four-year period, and expire on May 6,
2014 and August 3, 2014, respectively. As at September 30, 2004, 3,859,500 Subordinate Voting Shares have been
reserved under the Plan of which a total of 2,174,525 Subordinate Voting Shares
have been granted. These options have exercise prices ranging from $2.37 to
$14.82 per share, and expire between February 22, 2005 and August 3, 2014.
During the nine months ended September 30, 2004, 39,250 options expired and/or
were cancelled. Had stock options granted under the 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 in the
following table. Three months ended
    
    Nine months ended(thousands of dollars except per share amounts)
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net earnings for the period
    
    
    19,612
    
    
    
    13,766
    
    
    
    66,293
    
    
    
    43,767Compensation expense related to fair value of stock
options, after taxes of $nil
    
    
    (72
    )
    
    
    (155
    )
    
    
    (257
    )
    
    
    (612
    )Pro forma net income for the period
    
    
    19,540
    
    
    
    13,611
    
    
    
    66,036
    
    
    
    43,155Basic earnings per share (dollars)Reported
    
    
    0.29
    
    
    
    0.20
    
    
    
    0.96
    
    
    
    0.63Adjusted
    
    
    0.29
    
    
    
    0.20
    
    
    
    0.96
    
    
    
    0.62Diluted earnings per share (dollars)Reported
    
    
    0.28
    
    
    
    0.19
    
    
    
    0.94
    
    
    
    0.62Adjusted
    
    
    0.28
    
    
    
    0.19
    
    
    
    0.94
    
    
    
    0.61
 The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model.  Extendicare Inc. September 2004
    32




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##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements 10.     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. The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computation. Three months ended
    
    Nine months ended(thousands of dollars except per share amounts)
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003Numerator for basic and diluted earnings per shareNet earnings for the period
    
    
    19,612
    
    
    
    13,766
    
    
    
    66,293
    
    
    
    43,767Dividends on preferred shares
    
    
    (156
    )
    
    
    (196
    )
    
    
    (495
    )
    
    
    (579
    )19,456
    
    
    
    13,570
    
    
    
    65,798
    
    
    
    43,188Denominator for basic and diluted earnings per
share (thousands)Basic weighted average number of shares
    
    
    68,755
    
    
    
    68,438
    
    
    
    68,708
    
    
    
    68,967Dilutive stock options(1)
    
    
    1,321
    
    
    
    1,075
    
    
    
    1,391
    
    
    
    469Diluted weighted average number of shares
    
    
    70,076
    
    
    
    69,513
    
    
    
    70,099
    
    
    
    69,436Earnings per share (dollars)Basic
    
    
    0.29
    
    
    
    0.20
    
    
    
    0.96
    
    
    
    0.63Diluted
    
    
    0.28
    
    
    
    0.19
    
    
    
    0.94
    
    
    
    0.62
   (1)
    
    For the nine months ended September 30, 2003, 10,000 stock options were excluded from the calculation of
dilutive stock options as their strike price was $7.01, which was above the average market price for the
period. There were no stock options excluded from this calculation for the nine months ended September 30,
2004. 11.     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
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,
which involve one facility in Kentucky and one in Wisconsin. The investigations
have not been sufficiently developed to enable the Company to predict an
outcome. In addition, EHSI was under a plan of correction as a result of
facility citations for survey deficiencies in a nursing facility in Chippewa
Falls, Wisconsin. EHSI reached an agreement with the State of Wisconsin to
transfer the operations for three years effective August 1, 2004, to
Benedictine, another long-term care provider. In September 2004, Benedictine
completed its plan of correction at the nursing facility and passed its survey
with the State of Wisconsin, thereby bringing the facility into regulatory
compliance. In connection with its agreement to provide pharmacy services to EHSI, Omnicare
has requested arbitration for an alleged lost profits claim related to EHSIs
disposition of assets, primarily in Florida. Damage amounts, if any, cannot be
reasonably estimated based on information available at this time. An
arbitration hearing has not yet been scheduled. Management believes it has
interpreted correctly and complied with the terms of the preferred provider
agreement. However, there can be no assurance that this claim will not be
successful or that other claims will not be made with respect to the agreement. Also, EHSI and Omnicare are currently negotiating the pricing of drugs for
Medicare residents and should this matter not be settled, it will be taken to
arbitration. The financial statements include provisions for settlement of this
claim.  Extendicare Inc. September 2004
    33




---



##### 



Extendicare Inc.  Notes to the Unaudited Consolidated Financial Statements 12.     Segmented Information Three months ended
    
    Nine months ended(millions of dollars)
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003RevenueUnited States
    
    
    319.7
    
    
    
    307.1
    
    
    
    947.1
    
    
    
    929.5Canada
    
    
    125.9
    
    
    
    126.0
    
    
    
    373.7
    
    
    
    363.6445.6
    
    
    
    433.1
    
    
    
    1,320.8
    
    
    
    1,293.1EBITDA(1)United States
    
    
    49.9
    
    
    
    36.6
    
    
    
    138.8
    
    
    
    102.2Canada
    
    
    12.7
    
    
    
    14.0
    
    
    
    33.8
    
    
    
    34.062.6
    
    
    
    50.7
    (2)
    
    
    172.6
    
    
    
    136.2Health Care Net EarningsUnited States
    
    
    14.6
    
    
    
    7.6
    
    
    
    38.4
    
    
    
    16.6Canada
    
    
    3.9
    
    
    
    5.0
    
    
    
    23.7
    
    
    
    10.818.5
    
    
    
    12.6
    
    
    
    62.2
    (2)
    
    
    27.4
 Sept. 30
    
    Dec. 31(millions of dollars)
    
    2004
    
    2003GoodwillUnited States(3)
    
    
    91.6
    
    
    
    93.5Canada
    
    
    0.1
    
    
    
    0.191.7
    
    
    
    93.6Health Care AssetsUnited States
    
    
    967.1
    
    
    
    1,119.1Canada
    
    
    357.6
    
    
    
    332.51,324.7
    
    
    
    1,451.6Equity accounted investments
    
    
    130.4
    
    
    
    141.8Total Consolidated Assets
    
    
    1,455.1
    
    
    
    1,593.4
   (1)
    
    EBITDA refers to earnings before interest, taxes, depreciation, amortization, valuation adjustment on interest rate
caps, and loss (gain) from asset disposals, impairment and other items.(2)
    
    Does not add due to rounding.(3)
    
    The change in United States goodwill is primarily due to foreign currency translation of U.S. operations. 13.     Related Party Transaction
Up until the end of June 2004, Extendicare paid rent to Crown Life for the
rental of certain office premises, which for the six months of 2004 was $0.7
million and for the nine months of 2003 was $1.0 million. 14.     Employee Future Benefits
The future benefit expense of the Companys defined benefit pension plans for
the three months and nine months ending September 30, 2004 was $0.8 million and
$2.4 million, respectively. 15.     Subsequent Event
On November 4, 2004, EHSI entered into a definitive merger and acquisition
agreement with Assisted Living Concepts, Inc. (ALC) of Dallas, Texas (OTC. BB:
ASLC) providing for the acquisition of all of the outstanding shares and stock
options of ALC for US$18.50 per share totalling approximately US$132.0 million.
Total consideration for the transaction including the assumption of debt is
expected to be approximately US$280.0 million. The completion of the
acquisition is subject to certain conditions, including approval by ALCs
shareholders and certain customary regulatory approvals. The parties are
working towards closing the transaction during the early part of the first
quarter of 2005. EHSI intends to finance the acquisition by using available
cash on hand (US$29.1 million at September 30, 2004) and drawing on its line of
credit (US$131.1 million available at September 30, 2004). Assisted Living Concepts has a portfolio
of 177 assisted living facilities, comprised of 122 owned properties and 55
leased facilities representing 6,838 units, located in 14 states; many in
markets where Extendicare already operates. The portfolio is relatively new having
been constructed through the mid-to-late 1990s.  Extendicare Inc. September 2004
    34




---



##### 



(EXTENDICARE LOGO) Facility Location and Resident CapacityAssisted Living andat September 30, 2004
    
    Nursing Centres
    
    Retirement Centres
    
    Chronic Care Units
    
    TotalNumber of
    
    Resident
    
    Number of
    
    Resident
    
    Number of
    
    Resident
    
    Number of
    
    ResidentFacilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    Capacity
    
    Facilities
    
    CapacityBy State/ProvinceUnited StatesOhio
    
    
    29
    
    
    
    3,059
    
    
    
    2
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    3,195West Virginia
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    120Pennsylvania
    
    
    25
    
    
    
    2,895
    
    
    
    8
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    3,193Delaware
    
    
    1
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    120Wisconsin
    
    
    24
    
    
    
    2,024
    
    
    
    11
    
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    2,536Minnesota
    
    
    10
    
    
    
    1,276
    
    
    
    1
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    1,336Indiana
    
    
    20
    
    
    
    1,919
    
    
    
    2
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    2,028Kentucky
    
    
    18
    
    
    
    1,506
    
    
    
    1
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    1,561Washington
    
    
    15
    
    
    
    1,543
    
    
    
    8
    
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    1,922Oregon
    
    
    3
    
    
    
    195
    
    
    
    2
    
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    296Idaho
    
    
    2
    
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    190Texas
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    110Total United States
    
    
    148
    
    
    
    14,847
    
    
    
    37
    
    
    
    1,760
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    16,607CanadaOntario
    
    
    52
    
    
    
    7,719
    
    
    
    4
    
    
    
    668
    
    
    
    1
    
    
    
    120
    
    
    
    57
    
    
    
    8,507Alberta
    
    
    14
    
    
    
    1,183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    1,183Saskatchewan
    
    
    5
    
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    654Manitoba
    
    
    5
    
    
    
    762
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    762Total Canada
    
    
    76
    
    
    
    10,318
    
    
    
    4
    
    
    
    668
    
    
    
    1
    
    
    
    120
    
    
    
    81
    
    
    
    11,106TOTAL
    
    
    224
    
    
    
    25,165
    
    
    
    41
    
    
    
    2,428
    
    
    
    1
    
    
    
    120
    
    
    
    266
    
    
    
    27,713By Type of OwnershipUnited StatesOwned
    
    
    132
    
    
    
    13,003
    
    
    
    31
    
    
    
    1,541
    
    
    
    
    
    
    
    
    
    
    
    163
    
    
    
    14,544Leased
    
    
    9
    
    
    
    1,031
    
    
    
    1
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    1,094Managed
    
    
    7
    
    
    
    813
    
    
    
    5
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    969Total United States
    
    
    148
    
    
    
    14,847
    
    
    
    37
    
    
    
    1,760
    
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    16,607CanadaOwned
    
    
    45
    
    
    
    6,079
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    6,079Leased
    
    
    9
    
    
    
    1,155
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    1,231Managed
    
    
    22
    
    
    
    3,084
    
    
    
    4
    
    
    
    592
    
    
    
    1
    
    
    
    120
    
    
    
    27
    
    
    
    3,796Total Canada
    
    
    76
    
    
    
    10,318
    
    
    
    4
    
    
    
    668
    
    
    
    1
    
    
    
    120
    
    
    
    81
    
    
    
    11,106TOTAL
    
    
    224
    
    
    
    25,165
    
    
    
    41
    
    
    
    2,428
    
    
    
    1
    
    
    
    120
    
    
    
    266
    
    
    
    27,713
  Extendicare Inc. September 2004
    35




---



##### 



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 
 Visit Extendicares Website @www.extendicare.com Stock Symbol Change 
 In addition, the Companys trading symbol for its Subordinate Voting Shares listed on the
New York Stock Exchange will change from EXE.A to EXE.    (EXTENDICARE LOGO) 36