Extendicare Health Services, Inc. (Form: 8-K)

Extendicare Health Services, Inc. Achieves Record Operational Results
for the Second Quarter

MILWAUKEE, WISCONSIN – Extendicare Health Services, Inc. (EHSI) reported net income of $15.3 million in the 2005 second quarter, compared to $8.8 million in the 2004 second quarter. Results for the 2005 second quarter included a pre-tax loss of $5.1 million on disposal of assets and impairment of long-lived assets compared to a pre-tax gain of $4.5 million in the 2004 second quarter. The valuation of interest rate caps resulted in a pre-tax loss in each of the second quarters of 2005 and 2004 of $0.9 million and $4.3 million, respectively. In addition, the 2004 second quarter included a pre-tax loss of $6.0 million on the refinancing and retirement of debt.

EHSI is a wholly owned subsidiary of Extendicare Inc. (TSX: EXE.MV and EXE.SV; NYSE: EXE).

“EHSI continues to reach new heights, largely driven by the successful deployment of our sales-based model,” said Mel Rhinelander, EHSI’s Chairman and Chief Executive Officer. “In addition, the Assisted Living Concepts acquisition is continuing to perform ahead of our expectations and, we believe it will solidify our position as a significant player in the assisted living component of senior care.”

EHSI’s average daily Medicare patient census on a same-facility basis rose 16.4% to 2,437 compared to 2,093 in the 2004 second quarter, and improved slightly from the 2005 first quarter of 2,433. As a percent of same-facility nursing home census, Medicare patients represented 19.1% in the 2005 second quarter compared to 16.6% in the 2004 second quarter. Nursing home occupancy, on a same-facility basis, rose during the 2005 second quarter to 92.7% compared to 91.8% in the 2004 second quarter, and was down moderately from 93.8% in the 2005 first quarter. The performance on a same-facility basis of EHSI remained strong in the 2005 second quarter as a result of maintaining average daily Medicare census, increased Medicaid funding, and lower utility costs.

EHSI’s acquisition of ALC is performing above management’s initial expectations. For the 2005 second quarter, ALC contributed revenue of $46.6 million and EBITDA of $11.2 million. However, these results were impacted by adjustments that related to the 2005 first quarter, as the Company refined its preliminary purchase price allocation of ALC’s net assets acquired. Excluding these adjustments, ALC’s revenue and EBITDA for the 2005 second quarter were $46.2 million and $10.2 million, respectively.

In July 2005 the Centers for Medicare and Medicaid Services (CMS) announced their final regulations and rates for Medicare for fiscal 2006, subject to approval. If approved, CMS will implement a 3.1% market basket increase effective October 1, 2005, and changes to the Resource Utilization Groups (RUGs) funding categories that will reduce the average per diem rates effective January 1, 2006. While CMS’s proposal was more positive for the industry than previously anticipated, EHSI estimates the new funding formula will result in a net decline in its average Medicare rate per diem of about $10.00, commencing in January 2006.

Additionally, CMS’s recent approval of Indiana’s provider tax plan provided EHSI with 21 months of revenue totaling $13.1 million and earnings before income taxes of $5.6 million, retroactive to July 1, 2003, in the 2005 second quarter.

Quarters ended June 30, 2005 and June 30, 2004
Revenue increased $79.0 million, or 33.9%, over the 2004 second quarter. Excluding new and disposed facilities, revenue on a same-facility basis grew by $34.3 million, or 15.1%, due to: higher prior period settlement adjustments of $12.6 million, primarily associated with the Indiana Medicaid settlements; an average increase in payor rates of $13.6 million; improvements in occupancy and patient mix of $7.2 million; and an improvement of $0.8 million from other items.

EBITDA increased $19.9 million to $53.1 million in the 2005 second quarter from $33.2 million in the 2004 second quarter, and as a percent of revenue increased to 17.0% from 14.2%. New facilities, net of those disposed, contributed EBITDA of $11.6 million in the 2005 second quarter compared to a loss at the EBITDA level of $0.1 million in the 2004 second quarter. In addition, the net impact of prior period revenue and provider tax settlement adjustments contributed EBITDA of $5.0 million in the 2005 second quarter compared to none in the 2004 second quarter. Remaining operations improved EBITDA due primarily to higher resident occupancy and patient mix, with funding improvements mostly offset by cost increases. Labor related costs, on a same-facility basis, were up $9.8 million between periods associated with higher staffing levels to accommodate increased census, and included an average wage rate increase of 1.4%.

Six Months ended June 30, 2005 and June 30, 2004
Revenue increased $141.7 million, or 30.5%, over the first half of 2004. Excluding new and disposed facilities, revenue on a same-facility basis grew by $70.8 million, or 15.7%, due to: favorable prior period settlement adjustments of $26.1 million, primarily associated with the Pennsylvania and Indiana Medicaid settlements; an average increase in payor rates of $28.9 million; improvements in occupancy and patient mix of $15.6 million; and an improvement of $0.2 million from other items.

EBITDA increased $27.1 million to $92.6 million in the first half of 2005 from $65.5 million in the first half of 2004, and as a percent of revenue increased to 15.3% from 14.1%. New facilities, net of those disposed, contributed EBITDA of $15.7 million in the first half of 2005 compared to none in the first half of 2004. In addition, the net impact of prior period revenue and provider tax settlement adjustments contributed EBITDA of $7.8 million in the first half of 2005 compared to $1.3 million in the first half of 2004. Remaining operations improved EBITDA due primarily to higher resident occupancy and patient mix, with funding improvements mostly offset by cost increases. Labor related costs, on a same-facility basis, were up $22.2 million between periods associated with higher staffing levels to accommodate increased census, and included an average wage rate increase of 1.3%.

Net interest costs for the first half of 2005 were up $7.0 million from the first half of 2004. The 2004 results included non-recurring interest income associated with the settlement of the Greystone notes receivable of $2.7 million. The remaining increase was due to the added interest costs associated with the ALC acquisition, partially offset by a decline in other debt and interest rates.

Other Items
During the 2005 second quarter, the Company reported a pre-tax loss of $5.1 million on disposal of assets and impairment of long-lived assets. This net amount was the result of a gain of $0.6 million on the sale of an investment, offset by a $5.7 million provision for asset impairment of a nursing home whose operations were transferred to a third-party in 2004.

In June 2005, EHSI acquired a 127-bed nursing facility in Kentucky for $8.2 million in cash.

EHSI is currently in negotiations for the sale of its six remaining leased nursing home properties in Florida for proceeds of about $10.0 million and a pre-tax gain on sale of approximately $4.0 million. The transaction is anticipated to be completed in the 2005 third quarter.

On August 4, 2005, EHSI amended its $155.0 million credit facility (Amended and Restated Credit Facility) to among other things: increase the borrowing capacity to $200.0 million, comprised of an $86.0 million term loan and a $114.0 million revolving credit facility, and to extend the maturity date for just over one year to July 31, 2010. In addition, EHSI would have the ability, with willing lenders, to increase the term loan or the revolving credit facility by up to $15.0 million, for a total credit facility of up to $215.0 million. Proceeds from the Amended and Restated Credit Facility were immediately used to terminate and repay the balance of ALC’s $34.0 million of borrowings under its GE Capital Term Loan and Credit Facility, and will be used to repay ALC’s approximately $22.0 million of Revenue Bonds. Upon the payment in full of ALC’s Revenue Bonds, and subject to certain limitations, EHSI will no longer be restricted from advancing funds to and from ALC, including funds from borrowings under its Amended and Restated Credit Facility.

Extendicare Health Services, Inc. of Milwaukee, Wisconsin, is a wholly owned subsidiary of Extendicare Inc., and is a major provider of long-term care and related services in the United States. Through its subsidiaries, Extendicare Inc. operates 441 long-term care facilities in the United States and Canada, with capacity for over 34,600 residents. As well, through its operations in the United States, Extendicare offers medical specialty services such as subacute care and rehabilitative therapy services, while home health care services are provided in Canada. Extendicare Inc. employs 37,900 people in North America.

In a separate news release issued today, Extendicare Inc. announced its 2005 second quarter financial results. On August 5, 2005, at 10:00 a.m. (ET), Extendicare Inc. will hold a conference call to discuss its results for the second quarter. The call will be webcast live, and archived, in the investor information section of the Company’s website at www.extendicare.com. Alternatively, the call in number is 1-866-540-8136 or 416-340-8010. For those unable to listen to the call live, a taped rebroadcast will be available until midnight on August 19, 2005. To access the rebroadcast, dial 1-800-408-3053 or 416-695-5800, conference ID number 3158845. Also, a supplemental information package containing historical annual and quarterly financial results and operating statistics on the Company can be found on the website under Investor Information/Investor Documents/Supplemental Information.

The attached statements reflect certain reclassifications to the prior period figures to conform to the 2005 presentation.

Statements contained in this release 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 successful integration of Assisted Living Concepts, Inc.; 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 judgment of the party making such statements based upon current information, and the Company assumes no obligation to update any forward-looking statement.

For further information, contact:
Extendicare Inc.
Christopher Barnes,
Manager, Investor Relations
Phone: (905) 470-5483
Fax: (905) 470-4003
Email: cbarnes@extendicare.com

Three months ended

Six months ended

(thousands of U.S. dollars)

June 30

2005

2004

2005

2004

Revenues

Nursing and assisted living facilities

304,451

225,660

590,808

450,086

Outpatient therapy

2,903

3,009

5,630

5,674

Other

4,994

4,659

10,057

9,069

312,348

233,328

606,495

464,829

Operating and administrative costs

253,440

197,932

503,476

394,878

Lease costs

5,784

2,229

10,392

4,493

EBITDA ⁽¹⁾

53,124

33,167

92,627

65,458

Depreciation and amortization

12,267

8,831

22,607

17,512

Interest expense

10,179

6,658

18,736

14,858

Interest income

(311

)

(2,274

)

(724

)

(3,889

)

Valuation adjustment on interest rate caps

939

4,320

2,237

4,393

Loss (gain) on disposal of assets and impairment of

long-lived assets

5,070

(4,469

)

4,622

(2,857

)

Loss on refinancing and retirement of debt

–

5,978

275

6,332

Income before income taxes

24,980

14,123

44,874

29,109

Income tax expense

9,681

5,297

17,521

10,936

Net income

15,299

8,826

27,353

18,173

(1)

EBITDA refers to income before interest, taxes, depreciation, amortization, valuation adjustment on interest rate caps, loss (gain) on disposal of assets and impairment of long-lived assets, and loss on refinancing and retirement of debt.

EXTENDICARE HEALTH SERVICES, INC.
Condensed Consolidated Statements of Cash Flows


	Three months ended						Six months ended
(thousands of U.S. dollars)	June 30						June 30
	2005			2004			2005			2004
Operating activities
Net income		15,299			8,826			27,353			18,173
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation and amortization		12,267			8,831			22,607			17,512
Provision for self-insured liabilities		2,042			1,650			4,037			3,300
Payments for self-insured liabilities		(2,307	)		(1,785	)		(7,209	)		(4,897	)
Amortization of deferred financing costs		455			462			925			839
Purchase accounting adjustments:
Amortization of leases and debt		(168	)		–			(251	)		–
Amortization of below market resident leases		(1,165	)		–			(1,165	)		–
Valuation adjustment on interest rate caps		939			4,320			2,237			4,393
Loss (gain) on disposal of assets and impairment of long-lived assets		5,070			(4,469	)		4,622			(2,857	)
Loss on refinancing and retirement of debt		–			5,978			275			6,332
Deferred income taxes		979			(5,683	)		3,497			(9,494	)

		33,411			18,130			56,928			33,301
Changes in assets and liabilities
Accounts receivable		472			6,398			(27,252	)		8,025
Supplies, inventories and other current assets		2,507			199			2,951			(1,056	)
Accounts payable and accrued liabilities		(3,093	)		6,828			12,383			2,712
Income taxes		1,449			(1,643	)		1,135			(166	)
Current due to shareholder and affiliates		(6,540	)		3,243			5,204			8,823

Cash provided by operating activities		28,206			33,155			51,349			51,639

Investing activities
Payments for purchases of property and equipment		(5,097	)		(6,402	)		(11,437	)		(11,747	)
Payments for new construction projects		(7,407	)		(3,143	)		(13,106	)		(6,943	)
Acquisitions		(8,335	)		(4,325	)		(145,987	)		(6,454	)
Proceeds from sale of investments		976			4,894			976			4,894
Proceeds from completion of divestiture agreement		–			10,000			–			10,000
Proceeds from repayment of notes receivable		–			16,150			–			20,552
Other assets		(619	)		138			1,016			(229	)

Cash provided by (used in) investing activities		(20,482	)		17,312			(168,538	)		10,073

Financing activities
Proceeds from issuance of long-term debt		–			127,376			65,000			128,082
Payments of long-term debt		(1,070	)		(205,791	)		(20,350	)		(219,188	)
Net change in line of credit		4,000			–			52,000			–
Outstanding checks in excess of bank balance		(10,091	)		–			–			–
Payment of financing costs		–			(13,107	)		(125	)		(13,107	)
Advances from shareholder and affiliate					22,900			–			22,900
Other liabilities		114			(267	)		981			217

Cash provided by (used in) financing activities		(7,047	)		(68,889	)		97,506			(81,096	)

Increase (decrease) in cash and cash equivalents		677			(18,422	)		(19,683	)		(19,384	)
Cash and cash equivalents beginning of period		9,252			47,893			29,612			48,855

Cash and cash equivalents end of period		9,929			29,471			9,929			29,471


	June 30		December 31
(thousands of U.S. dollars)	2005		2004
Assets
Current assets
Cash and cash equivalents		9,929		29,612
Accounts receivable, less allowances of $12,648 and $10,594, respectively		126,894		95,973
Supplies, inventories and other current assets		21,567		17,751
Income taxes receivable		–		1,654
Deferred state income taxes		2,947		2,664
Due from shareholder and affiliates		21,662		26,179

		182,999		173,833
Property and equipment		746,665		446,085
Goodwill and other intangible assets		82,846		74,554
Deferred state income taxes		2,830		–
Other assets		42,284		41,485

		1,057,624		735,957

Liabilities and Shareholder’s Equity
Current liabilities
Accounts payable		20,974		22,297
Accrued liabilities		133,991		99,920
Current portion of accrual for self-insured liabilities		12,500		18,000
Current portion of amounts due to shareholder and affiliate		2,974		2,975
Current maturities of long-term debt		5,307		1,071
Income taxes payable		961		–

		176,707		144,263
Long-term debt and capital lease obligations		549,382		290,861
Accrual for self-insured liabilities		22,956		19,725
Other long-term liabilities		19,204		12,448
Deferred state income taxes		–		1,833
Due to shareholder and affiliates		11,893		16,638

		780,142		485,768
Shareholder’s equity		277,482		250,189

		1,057,624		735,957


	Three months ended						Six months ended
	June 30						June 30
	2005			2004			2005			2004
Components of Nursing and Assisted Living Facility Revenue (millions)
Nursing	$	248.2		$	215.9		$	496.2		$	430.5
Assisted living		56.2			9.8			94.6			19.6

	$	304.4		$	225.7		$	590.8		$	450.1

Nursing Facility Statistics
Percent of Revenue by Payor Source (same-facility basis)
Medicare		33.8	%		32.5	%		33.5	%		32.8	%
Private/other		14.6			17.6			14.6			17.6
Medicaid		51.6			49.9			51.9			49.6
Average Daily Census by Payor Source (same-facility basis)
Medicare		2,437			2,093			2,435			2,132
Private/other		1,951			2,114			1,984			2,112
Medicaid		8,409			8,435			8,455			8,375

		12,797			12,642			12,874			12,619

Percent of Average Daily Census by Payor Source (same-facility basis)
Medicare		19.1	%		16.6	%		18.9	%		16.9	%
Private/other		15.2			16.7			15.4			16.7
Medicaid		65.7			66.7			65.7			66.4
Average Revenue per Resident Day by Payor Source (excluding prior period settlement adjustments)
Medicare (Part A and B)	$	371.48		$	357.65		$	371.08		$	352.12
Private/other		199.22			189.68			197.90			191.20
Medicaid		147.87			136.31			147.77			135.35
Medicare Part A only		342.18			324.50			341.17			321.17

Assisted living facilities average daily census
Same-facility basis		1,341			1,322			1,329			1,325
Total		7,483			1,495			6,441			1,491

Average Occupancy (excluding managed facilities) (same-facility basis)
Nursing facilities		92.7	%		91.8	%		93.2	%		91.6	%
Assisted living facilities		83.1			85.3			83.8			85.9
Combined nursing and assisted living facilities		91.7			91.1			92.3			91.0

Average Occupancy (excluding managed facilities)
Nursing facilities		92.5	%		91.4	%		93.0	%		91.4	%
Assisted living facilities		87.7			85.1			88.0			85.9
Combined nursing and assisted living facilities		90.7			90.7			91.3			90.8


Delaware	333-97293 and 333-116927	98-0066268
_____________________ (State or other jurisdiction	_____________ (Commission	______________ (I.R.S. Employer
of incorporation)	File Number)	Identification No.)

111 West Michigan Street, Milwaukee, Wisconsin		53203
_________________________________ (Address of principal executive offices)		___________ (Zip Code)


	Extendicare Health Services, Inc.

August 4, 2005	By:	Richard L. Bertrand

		Name: Richard L. Bertrand
		Title: Vice President, Chief Financial Officer and Treasurer (principal financial officer and principal accounting officer)


Exhibit No.		Description

99.1		Extendicare Health Services, Inc. press release dated August 4, 2005


Date of Report (Date of Earliest Event Reported):		August 4, 2005


Registrant’s telephone number, including area code:		414-908-8000