DOCTORS' MEMORIAL HOSPITAL, INC.

FINANCIAL STATEMENTS

for the years ended May 31,2004 and 2003

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 CONTENTS

Pages

Independent Auditor's Report 1-2

Management's Discussion and Analysis 3-5

Financial Statements:

Balance Sheets 6-7

Statements of Revenues and Expenses 8

Statements of Changes in Net Assets 9

Statements of Cash Flows 10-11

Notes to Financial Statements 12-27

I
I

1
Government Auditing Standards Report:

Report on Compliance and on Internal Control

Over Financial Reporting Based on an Audit
of Financial Statements Performed in
Accordance with Government Auditing Standards 28-29

Schedule of Reportable Conditions 30

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 INDEPENDENT AUDITOR'S REPORT

Board of Directors
Doctor's Memorial Hospital, Inc.

We have audited the balance sheet of Doctor's Memorial Hospital, Inc. as of May 31, 2004, and the
related statements of revenues and expenses, changes in net assets and cash flows for the year then
ended. These [mancial statements are the responsibility of the Hospital's management. Our
responsibility is to express an opinion on these [mancial statements based on our audit. The [mancial
statements of Doctors' Memorial Hospital, Inc. as of May 31, 2003 were audited by other auditors,
whose report dated July 11, 2003 expressed an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of
America and Government Auditing Standards issued by the Comptroller General of the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the [mancial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the [mancial statements referred to above present fairly, in all material respects, the
financial position of Doctor's Memorial Hospital, Inc. as of May 31, 2004, and the results of its
operations, changes in net assets and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

P.O. BOX 6 PARTNERS: MEMBERS: .

2617 GILLIONVILLEROAD DOUGLAS E. FAIRCLOTH, CPA
DAVID N. BLITCH, JR., CPA
ILBANY. GEORGIA 31702-0006 CHARLES WilLIAMS,JR., CPA
(229) 883-7878 HENRY L. DUNN, CPA
FAX (229) 435-3152 J. MilTON JORDAN, CPA
LINTON A. HARRIS, CPA.
STEPHEN M. BEDSOLE, CPA
- - -
CYNTHIA R. DUPREE, CPA THE OF
AMERICANINSTITUTE
JIM L. CREAMER, SR., CPA CERTIFIED PUBLIC ACCOUNTANTS
JEFFREY S. WRIGHT, CPA
MilES V. ESPY, SR., CPA THE GEORGIA SOCIETY OF
MICHAEL L. REESE, CPA CERTIFIED PUBLIC ACCOUNTANTS
SANDRA D. CANNON, CPA
 In accordance with Government Auditing Standards, we have also issued our report dated August 26,
2004, on our consideration of the Hospital's internal control over financial reporting and our tests of its
compliance with certain provisions of laws, regulations, contracts, and grants. That report is an
integral part of an audit performed in accordance with Government Auditing Standards and should be
J read in conjunction with this report in considering the results of our audit.

Management's discussion and analysis on pages 3 through 5 is not a required part of the basic [manciaI
statements but is supplementary information required by the Governmental Accounting Standards
Board. We have applied certain limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of the supplementary information.
However, we did not audit the information and express no opinion on it.

As described in Note 1, the Hospital adopted the provisions of the Governmental Accounting Standards
Board Statement No. 34, Basic Financial Statements - and Management's Discussion and Analysis-
For State and Local Governments and Statement No. 38, Certain Financial Statement Note Disclosures
as of June 1, 2003. The effective date of these changes in accounting policy is June 1,2002. This
results in a change in the format and content of the basic [mancial statements.

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Albany, Georgia
Lt-P
August 26, 2004

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 DOCTORS'
MEMORIAL
HOSPITAL

Management's Discussion and Analysis

For the Year Ending May 31, 2004

This section of Doctor's Memorial Hospital, lnc.'s annual [mancial report presents our discussion and
analysis of the Hospital's [mancial performance during the fiscal year ended May 31,2004. Please
read it in conjunction with the Hospital's financial statements and accompanying notes.

This annual [mancial report consists of two parts: Management'sDiscussion and Analysis (this section)
and the basic [mancial statements. The Hospital is a self-supporting entity and follows proprietary fund
reporting; accordingly, the [mancial statements are presented using full accrual accounting.

, Financial Analysis of the Hospital

The following table summarizes the balance sheets as of May 31, 2004 and 2003:

Balance Sheet
Percent
Increase
2004 2003 (Decrease)

Current assets $ 5,931,418 $ 6,316,247 ( 6.1%)

Capital assets 5,230,056 5,794,647 ( 9.7%)
Other non-current assets 45,299 132,144 (65.7%)

Total assets $ 11.206.773 $ 12.243.038 ( 8.5%)

Current liabilities $ 3,986,155 $ 3,240,092 23%

Long-term liabilities 4,155,049 4,485,734 ( 7.4%)

Total liabilities 8,141,204 L725,826 5.4%

Continued

333 N. Byron Butler Parkway. Perry, Florida 32347. (850) 584-0800. Fax (850) 584-2524
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Management's Discussion and Analysis
For The Year Ending May 31, 2004

Percent
Increase
2004 2003 (Decrease)
Net assets:,
Invested in capital assets,
net of related debt $ 587,971 $ 1,116,542 ( 47.3%)
Unrestricted net assets 2,477,598 3,400,670 ( 27.1 %)

Total net assets 3,065,569 41517,212 ( 32.1%)

Total liabilities and

net assets $ 11.206.773 $ 12.243.038 ( 8.5%)

The changes in the balance sheet pertain to the slight decrease in cash and the reduction in accounts
receivable. The allowance for uncollectible accounts was less in 2004 than 2003. We were also able to
get the computer problems corrected and the collection staff were able to utilize the system to collect
and lower the accounts receivable balance. The cash designated for capital purchases and
improvements decreased due to the need for the cash to be used for operations. The Hospital was able
to repay the Medicare overpayment for fiscal year 2002 in full during 2004.

The following table summarizes the changes in net assets for the years ended May 31, 2004 and 2003:

Change in Net Assets

Percent
Increase
2004 2003 (pecrease)

Operating revenue $ 23,650,337 $ 20,065,166 17.9%

Operating expenses 25,5021866 22,217,411 14.8%

Loss from operations ( 1,852,529) ( 2,152,245) 13.9%

Nonoperating revenues
(expenses) ( 148,12}) 381,211 (138.9 %)

Excess of expenses over

revenues before donated
capital ( 2,000,652) ( 1,771,034) 13.0%

Donated capital 549,009

Decrease in net assets $( 1.451.643) $( 1.771.034) 18.0%

Continued

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 Management's Discussion and Analysis
For The Year Ending May 31, 2004

I, Revenues and Expenses

The net patient revenue for the fiscal year 2004 increased $2,326,746 over the prior year. The bad debt
amount increased from '$3,912,000 in 2003 to $4,431,000 in 2004. An increase in private P9-Ypatients
in 2004 and an aging accounts receivable contributed to the increase in bad debt expenses. Systems are
being designed with emphasis in collecting patient portions at time of service; converting private pay
patients to a qualifying third party payor source; and qualifying private pay patients for charity care
services. Charity care provided to patients in 2004 totaled $1,485,944 and $1,174,697 in fiscal 2003.

The Hospital experienced an increase in 2004 salaries and benefits due primarily to an increase in self
insured medical claims. The Hospital converted to a fully insured plan in December 2003. Contract
labor increased $292,703 in 2004 due to the need to engage contracted services to cover clinical
personnel shortages. The Hospital also realized an increase in the cost of utilities and telephone
expenses due to moving to the new hospital building which has increased square footage. The increase
in facility and equipment rental from 2003 to 2004 of $842,780 was the result of a GAAP
pronouncement, which requires the fair value of the hospital rental arrangement with the County be
reported as revenue and rental expense. This requirement is explained in Note 12 of the audit. Both
the rental expense with a corresponding increase to other revenue reflects this adjustment.

Home Health experienced a reduction in patient visits in the 2004 fiscal year, as well as, a reduction in
expenses. This agency incurred a loss for the year. A contract with a management company to oversee
operations was entered into and a new.director has been hired by the management company.

The Emergency Medical Services (EMS) realized an increase in transports for fisca12004. Even
though the EMS reduced operating expenses by $160,030, they still finished the year with a loss of
$194,834. A billing company specializing in ambulance services has been contracted to bill for EMS
during the 2005 fiscal year. A request for gas subsidy is being made to the county to help offset
expenses.

CaQitalAssets

At the end of 2004, the Hospital had approximately $5,230,056 invested in capital assets, net of
accumulated depreciation, as described in Note 6 to the [mancial statements. In 2004, the Hospital
purchased new equipment costing $581,244.

Debt

At year end, the Hospital had $4,841,929 in notes payable, and capital lease obligations outstanding as
discussed in Note 7 to the financial statements. Remaining debt on the commercial loan, which is
guaranteed 90% by the United States Department of Agriculture Rural Development, accounts for
$3,308,925 of the year end notes payable.and capital leases.

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 2004 2003

LIABILITIES AND NET ASSETS

Current liabilities:
Accounts payable and accrued expenses $ 3,299,275 $ 2,411,894
Estimated third-party payor settlements 249,225
Current installments of long-term debt 686,880 578,973

Total current liabilities 3,986,155 3,240,092

Long-term debt, excluding current installments 4, ~55,049 4A85,734

Total liabilities 8,I1-L204 7,22_~,826

Net assets:
Invested in capital assets, net of related debt 587,971 1,116,542
Unrestricted 2,477 ~598 3,400~670

Total net assets 3,065~569 4,~17~212

Total liabilities and net assets $ 11.206.773 . $ 12.243.038

The accompanying notes are an integral

part of these financial statements.

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 DOCTOR'S MEMORIAL HOSPITAL, INC.

NOTES TO FINANCIAL STATEMENTS, Continued

7. Long-Term Debt, Continued

Scheduled"principal repayments on long-term debt obligations are as follows:

2005 $ 660,338
2006 505,541
2007 504,656
2008 517,295
2009 452,752
2010-2014 2,155,429

$ 4.796.011

The future minimum lease payments required under capital leases at May 31, 2004, are as
follows: .

2005 $ 30,661
2006 20,269
50,930
Less amounts representing interest 5,012
Present value of future minimum 45,918
Less current installments of capital leases 26,542

Capital leases, excluding current installments $ 376

The capital lease obligations are for Hospital equipment with interest rates ranging from 9.25%
to 15.5% and payments of approximately $4,300 due monthly. Total value of assets held by
Doctors' Memorial Hospital under capital leases is approximately $198,988 less accumulated
amortization of approximately $159,483.

8. Debt Covenants

The $3.5 million comrnercialloan contains certain covenants and restrictions. Among otherI
items, the agreement requires maintenance of certain fmanciallevels and ratios. At May 31,
2004, the Hospital was not in compliance with certain loan covenants and subsequently
obtained waivers pertaining to the conditions of default for the year ending May 31, 2004.

.....

Continued

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 DOCTOR'S MEMORIAL HOSPITAL, INC.

NOTES TO FINANCIAL STATEMENTS, Continued

12. Facility Lease and County Contributions, Continued

During 2003, the County funded the construction of a replacement facility to be used by the
Hospital. In May 2003, the Hospital moved to the new facility and began operating the new
facility under the existing lease with the County.

GAAP requires the fair value of this rental arrangement with the County to be reported as
revenue and a corresponding rent expense. The square footage under the lease is 96,000 and
49,126 for 2004 and 2003, respectively. The fair rental value has been determined to be
$12.50 and $7 per square foot for 2004 and 2003, respectively. Accordingly, approximately
$1,200,000 and $344,000 have been reflected as rental expense and county contribution in the
accompanying statement of revenues, expenses and changes in net assets for the years ended,
May 31, 2004 and 2003, respectively. The Hospital has reflected the revenues under this
arrangement as other operating, due to the expectation of the Hospital to provide care for the
indigent.

The County also subsidized the Hospital's ambulance service. Upon moving to the new
facility, the County discontinued this subsidy. Contributions by the County for this service
amounted to $22,400 per month in 2003.

13. Fair Values of Financial Instruments

The following methods and assumptions were used by the Hospital in estimating the fair value
of its [mancial instruments:

Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.

Long-Term Debt: The fair value of the Hospital's remaining long-term debt is estimated using
discounted cash flow analyses, based on the Hospital's current inc~ementalborrowing rates for
similar types of borrowing arrangements.

Continued

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 DOCTOR'S MEMORIAL HOSPITAL, INC.

NOTES TO FINANCIAL STATEMENTS, Continued

16. Prior Period Adjustment

The Hospital identified certain errors in the prior "years' calculations of the allowance for
doubtful accounts. Accordingly, an adjustment of $816,000 and $1,388,000 was recorded to
decrease beginning net assets for the years ended May 31, 2004 and 2003, respectively. In
addition, the decrease in net assets has been restated for the year ended May 31, 2003. The
restatement resulted in a reduction of the decrease in net assets of approximately $572,000.

17. Subseguent Event

In July 2004, the Hospital entered into a line of credit agreement in the amount of $600,000.
In July 2004 and September 2004, the Hospital borrowed $250,000 and $300,000, respectively,
against the line of credit.

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 Draffin
. ~T1!gk£J1P
REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL
REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN
ACCORDANCE WITH GOVERNMENT AUDillNG STANDARDS

Board of Directors
Doctor's Memorial Hospital, Inc.

We have audited the [mancial statements of Doctor's Memorial Hospital, Inc. (the Hospital) as of
May 31, 2004, and have issued our report thereon dated August 26,2004. We conducted our audit
in accordance with auditing standards generally accepted in the United States of America and the
standards applicable to [mancial audits contained in GovernmentAuditing Standards, issued by the
Comptroller General of the United States.

ComQliance

As part of obtaining reasonable assurance about whether the Hospital's [mancial statements are free
of material misstatements, we performed tests of its compliance with certain provisions of laws,
regulations, contracts and grants, noncompliance with which could have a direct and material effect
on the determination of financial statement amounts. However, providing an opinion on compliance
with those provisions was not an objective of our audit, and accordingly, we do not express such an
opinion. The results of our tests disclosed no instances of noncompliance that are required to be
reported under Government Auditing Standards.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Hospital's internal control over financial
reporting in order to determine our auditing procedures for the purpose of expressing our opinion on
the financial statements and not to provide assurance on the internal control over financial reporting
and its operation that we consider to be reportable conditions. Reportable conditions involve matters
coming to our attention relating to significant deficiencies in the design or operation of the internal
~

control over [mancial reporting that, in our judgment, could adversely affect the Hospital's ability to
record, process, summarize, and report financial data consistent with the assertions of management
in the financial statements. Reportable conditions are described in the accompanying Schedule of
Reportable Conditions at page 30.
Continued

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P.O.BOX6 . PARTNERS: MEMBERS:

~617 GllLlONVlllE ROAD
;lBANY. GEORGIA 31702-0006
(229) 883-7878
FAX (229) 435-3152
- ----------
DOUGLAS E. FAIRCLOTH,CPA CYNTHIA R. DUPREE, CPA THEAMERICANINSTITUTEOF
DAVID N. BLITCH, JR., CPA JIM L. CREAMER, SR., CPA CERTIFIED PUBLIC ACCOUNTANTS
CHARLES WilLIAMS, JR., CPA JEFFREY S. WRIGHT, CPA
HENRY L. DUNN, CPA MILES V. ESPY, SR., CPA THE GEORGIA SOCIETY OF
J. MILTON JORDAN, CPA MICHAEL L. REESE, CPA CERTIFIED PUBLIC ACCOUNTANTS
LINTON A. HARRIS, CPA SANDRA D. CANNON, CPA
STEPHEN M. BEDSOLE, CPA
 A material weakness is a condition in which the design or operation of one or more of the internal
control components does not reduce to a relatively low level the risk that misstatements in amounts
that would be material in relation to the financial statements being audited may occur and not be
detected within a timely period by employees in the normal course of perfonning their assigned
functions. Our consideration of the internal control over [mancial reporting would not necessarily
disclose all matters in the internal control that might be reportable conditions and, accordingly,
would not necessarily disclose all reportable conditions that are also considered to be a material
weakness. We noted no matters involving the internal control over [mancial reporting and its
operation that we consider to be material weaknesses.

This report is intended solely for the information and use of the Board of Directors and management
and is not intended to be and should not be used by anyone other than these specified parties.

bA1¥'-I -r:;k 1 LGf

Albany, Georgia
August 26, 2004

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 DOCTOR'S MEMORIAL HOSPITAL, INC.

SCHEDULE OF REPORTABLE CONDITIONS

May 31,2004

Accounts Receivable

Accounts receivable are reviewed periodically to identify accounts which need to be written off.
Accounts that are identified for write-off are reviewed and approved as noted on the proposed
listing. The approved listing of accounts is discarded after the accounts are actually written-off. A
report is generated at month end that identifies accounts written-off during the month. The month-
end report is not reviewed by those approving the write-offs nor reconciled back to the "approved"
listing of write-offs.

Reconciliations should be performed to determine that accounts written-off during the month
represent accounts approved for write-off.

Policies and Procedures

Formal policies and procedures have not been developed and adopted for the accounting and
financial reporting function. The maintenance of policies and procedures would serve to strengthen
internal controls surrounding the [mancial reporting function. The policies would provide a
foundation upon which to develop and implement additional controls as needs are identified.

Check Si~nin~ Plate and Password

The accounts payable processing system generates check signatures through the use of a password
and a signature plate. The signature plate currently remains in the check signing machine. In
addition, accounts payable personnel have access to the password necessary to generate signed
checks. Control of the signature plate should be segregated from control of passwords.

Allowance Calculations

The allowance methodologies in use during fiscal year 2004 to estimate contractuals and accounts for
which collection is deemed doubtful are based on historical reimbursement andlor realization
percentages. Per discussion with accounting personnel, the percentages in use were not updated
during the fiscal year. A comparison of the utilized percentages with recent data indicates that the
amounts in use are not representative of current activity. Historical percentages should be updated
with current data on a periodic basis.

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