DOCTORS' MEMORIALHOSPITAL,me.

Financial Statements for the Years Ended May 3 I, 2003 and 2002

(with Independent Auditors' Reportthereon)

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DOCTORS' MEMORIAL HOSPITAL, INC.

Tableof Contents
May 31,2003 and 2002

Pa~ Independent Auditors' Report Financial Statements:
Balance Sheets-- Unrestricted Funds """""""""" """""""""""""""""""""" 2-3

1

Statements of Operations and Changes in Unrestricted Fund Balance

4

Statements of Cash Flows Notes to Financial Statements
""""'"

5 6-16

.11
CERTIFIEO

Crisp Hughes Evans

LLP

PUBLIC ACCOUNTANTS

AND CONSULTANTS

- Independent
The Board of Directors Doctors' Memorial Hospital, Inc.

Auditors' Report-

We have audited the balance sheets--unrestrictedfunds of Doctors' Memorial Hospital, Inc. (the "Hospital") as of May 31, 2003 and 2002, and the related statementsof operations and changes in unrestricted fund balance, and cash flows for the years then ended. These financial statements are the responsibility of the Hospital's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and GovernmentAuditing 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 financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion. In accordance with Government Auditing Standards, we have also issued our report dated July 11,2003, 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 read in conjunction with this report in considering the results of our audit.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Doctors' Memorial Hospital, Inc., as of May 31', 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

July 11, 2003

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Street, NE 404.586.0133 404.525.8705 fax www.che-llp.com

~s~

/;lY'

225 Peachtree Suite 600 Atlanta.
AFfiLIATED THROUGH

GA 30303-1728
WORLOWIOE AGN INTERNATIONAL

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DOCTORS' MEMORIAL HOSPITAL, INC. Balance Sheets--UnrestrictedFunds
May 31,2003 and 2002

Assets CUlTent ssets: a Cash and cash equivalents Certificates of deposit Receivables: Patient accounts receivable, net of allowance for doubtful accounts and contractual adjustmentsof approximately $5,118,000 and $4,102,000in 2003 and 2002, respectively Other receivables Estimated third-party payor settlements Supplies Prepaid expenses and other current assets Total current assets Property and equipment, net Loan costs, net Total assets

2003

2002

$

1,840,529 400,000

$

2,157,356 400,000

3,743,613 266,785

-

729,013 152,307 7.132.247 5,794,647 132.144 $ 13.059.038

4,535,972 69,507 202,782 527,997 46.687 7.940,301 3,098,727 146.288 $ 11.185.316

The accompanyingnotes are an integral part of these financialstatements.

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Liabilities and Fund Balance Current liabilities: Accounts payable and accrued expenses Estimated third-party payor settlements Current installments oflong-term debt Current installments of capital leases Total current liabilities

2003

2002

$

2,411,894 249,225 544,276 34.697 3.240.092 4,439,860 45.874 7.725.826 5.333.212

$

1,392,802 149,368 314,636 40.333 1.897.139 1,531,361 80.570 3.509.070 7.676.246

Long-termdebt, excludingcurrentinstallments Capital leases, excluding current installments Total liabilities Unrestricted fund balance

Total liabilities and fund balance

$ 13.059.038

$

11.185.316

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DOCTORS' MEMORIAL HOSPITAL, INC. Statements of Operationsand Changes in UnrestrictedFund Balance
For the Years Ended May 31, 2003 and 2002

2003 Revenues: Net patIent service revenues County contributions Other revenues Total revenues Expenses: Salaries and benefits Contract labor Supplies Professional fees Purchased services Utilities and telephone Facility and equipment rental Depreciation and amortization Insurance Provision for bad debts Interest Other Total expenses Income (loss) ITomoperations Non-operating income (loss): Loss on disposal of equipment and leasehold improvements Contributions Total non-operating income Excess pfrevenues over (under) expenses Unrestricted fund balance, beginning of year Unrestricted fund balance, end of year $ $ 23,487,118 676,158 269,971 24.433,247 $

2002 23,119,736 611,882 268,029 23.999,647

12,733,850 618,912 3,159,849 1,363,331 964,387 446,470 731,109 938,586 669,275 4,483,707 151,710 591.640 26,852,826 (2.4 19.579)

10,665,590 611,616 3,019,312 1,290,751 913,844 419,877 667,889 895,789 572,101 3,368,847 128,520 704,314 23,258.450 741.197

(97,118) 173,663 76.545 (2,343,034) 7,676.246 5.333.212 $

295.532 295.532 1,036,729 6,639,517 7.676.246

The accompanyingnotes are an integral part of these financial statements. (4)

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DOCTORS' MEMORIAL HOSPITAL, INC. Statements of Cash Flows For the Years Ended May 31,2003 and 2002

2003 Net cash flows from operating activities: Income (loss) from operations Interest expense considered financing activity Interest income considered investing activity Adjustments to reconcile income (loss) from operations to net cash provided by operating activities: Depreciationand amortization Provision for bad debts Changes in assets and liabilities: Patient accounts receivable Other receivables Estimated third-party payor settlements Supplies Prepaid expenses and other current assets Accounts payable and accrued expenses Net cash flow provided by operating activities Cash flows from non-capital financing activities: Non-operating income consisting of contributions Cash flows from capital and related financing activities: Purchase of equipment Loan issuance costs Payments on capital lease obligations Payments on long-term debt Proceeds from the issuance of debt Interestpaid on debt Net cash used by capital and related financing activities Cash flows from investing activities: Change in assets limited as to use Interest income Net cash provided by investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ $ (2,419,579) 151,710 (42,018) $

2002 741,197 128,520 (56,666)

938,586 4,483,707 (3,691,348) (197,278) 302,639 (201,016) (105,620) 1,019,092 238,875

895,789 3,368,847 (3,633,480) (20,040) 16,971 (1,688) 9,645 (770,895) 678.200

173,663

295532

(3,717,480)

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(40,332) (158,182) 3,296,321 (151,710) (771,383)

(1,032,480) (150,039) (32,304) (655,562) 1,671,865 (128,520) (327,040)

42,018 42,018 (316,827) 2,157,356 1.840.529 $

81,010 56,666 137,676 784,368 1,372,988 2.157.356

The accompanying notes are an integraL part ofthese financial statements. (5)

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DOCTORS' MEMORIAL HOSPITAL, INC. Notes to Financial Statements
For the Years Ended May 31, 2003 and 2002

1.

Summary ofSienificant Accountine Policies Oreanization and Basis of Presentation - Doctors' Memorial Hospital, Inc. (the "Hospital") is a not-for-profit acute care hospital located in Perry, Florida. The Hospital began operations on May 15, 1992 under an agreement entered into with the Board of County Commissioners of Taylor County (the "County Board") to operate the County's facility. The Hospital leases the hospital facility from the County (See Note 12 for leasing information). The Hospital applies the accounting and reporting guidelines set forth in the American Institute of Certified Public Accountants (AlCPA) Audit and Accounting Guide, Health Care Organizations ("Guide"). One of the purposes of the Guide is to establish the classification of Health Care Organizations based on their operating characteristics. The Hospital has been classified as a governmental health care organization based on the fact that its board members are appointed by the members of the County Board and due to the leasing arrangement described above. Pursuant to Government Accounting Standards Board ("GASB") Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the Hospital has elected to apply the provisions of all relevant pronouncements of the Financial Accounting Standards Board (FASB), including those issued after November 30, 1989, that do not conflict with or contradict GASB pronouncements.
Use of Estimates

- The

accounting principles followed by the Hospital and the methods

of applying these principles conform with accounting principlesgenerally accepted in the United States of America ("GAAP") and with general industrypractices. In preparing the financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents

- Cash and cash equivalents include investments in highly

liquiddebtinstruments withanoriginalmaturityof threemonthsor less.

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

Certificates of Deposit - Certificates of deposit are short-tenn investments with maturities of six and twelve months.

Supplies - Supplies are valued at a method that approximates the lower of cost or market, using the first-in, first-outmethod.
Property and Equipment

- Property

and equipment acquisitions are recorded at cost.

Depreciation is recorded using the straight-line method over the estimated useful life of each class of depreciable asset. Equipment under capital leases is amortized on the straight-line method over the shorter period of the lease tenn or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the financial statements. Property and equipment being leased from the County (Note 12) are not reflected in the accompanying financial statements. Loan Costs

- Loan costs are amortized over the life of the related borrowings

using the

straight-line method.
Net Patient Service Revenue - Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments due to future audits, reviews, and investigations. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, or investigations. Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near tenn. Revenues from the Medicare and Medicaid programs accounted for approximately 54% and 60% of the Hospital's net patient service revenue for the years ended May 31, 2003 and 2002, respectively. Charity Care - The Hospital provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because the Hospital does not pursue collection of amounts detennined to qualify as charity care, . they are not reported as revenue. Income Taxes - The Hospital is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes on related incomepursuant to Section 501(a) ofthe Code. Reclassification - Certain amounts in the May 31, 2002 financial statements have been reclassifiedto confonn to the May 31, 2003 presentation.

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

2.

Net Patient Service Revenue The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from their established rates. A summary of payment arrangements with major third-party payors follows:

Medicare * Inpatient acute-care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per discharge. These rates vary according to a patient classification system that is based on clinical, diagnostic and other factors. * Reimbursement for outpatient services is under a prospective payment system' called the Ambulatory Payment Classification System ("APCS"). Prospective payment rates are established for each group of services provided in the outpatient departments of organizations for the diagnosis or treatment of beneficiaries. This system categorizes payments according to clinical diagnoses and resource use. Services covered under other Medicare fee schedules are excluded and will continue to be paid using the fee schedules. * Home health services are paid on a prospective payment system that revolves around a 60-day "episode of care". The payment rendered for the "episode of care" will cover all services and supplies. The Hospital is subject to various final settlements determined after submission of annual cost reports and audits by the Medicare fiscal intermediary. The Hospital's classification of patients under the Medicare program and the appropriateness of their admissions are subject to an independent review by a peer review organization. The Hospital's Medicare cost reports have been final settled by the Medicare fiscal intermediary through May 31, 2000. The Hospital's Medicare cost reports for 2001 and 2002 have been filed with the fiscal intermediary and tentatively reviewed, but are subject to audit by the governmental agency. An estimated Medicare cost report provision for 2003 has been reflected in the accompanying financial statements within estimated third-party payor settlements. Medicaid * Acute inpatient services rendered to Medicaid program beneficiaries are paid according to prospectively determined per diem rates. * All outpatient services are reimbursed based on cost metho~ology. * Home health services are paid at prospectively determined per visit rates. The Hospital's classification of patients under the Medicaid program and the appropriateness of their admissions are subject to an independent review by a peer review organization. The Hospital recorded as revenue approximately $675,000 and $759,000 during 2003 and 2002, respectively,for funding from the State of Florida under the Medicaid Rural Financial

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

Assistance Program (the "Program"). Approximately $50,000 and $200,000 had not been received at May 31, 2003 and 2002, respectively, and was recorded as a receivable and included in estimated third-party payor settlements in the financial statements. Program proceeds are based on an allocation of a fixed sum appropriated by the Florida Legislature to be distributed to eligible rural hospitals based on the level of indigent and Medicaid care provided. Such amounts have been recognized as net patient service revenue in the accompanying statements of operations.

The State of Florida does not ensure future funding under the Program. Reduced Program funding may impact the Hospital's operations. Other Pavors - The Hospital has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment to the Hospital under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined rates. Net patient revenue decreased $202,000 and $336,000 in 2003 and 2002, respectively, due to a change in prior year retroactive settlements of amounts previously estimated. 3. Chari!y Care The Hospit.al provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. The Hospital maintains records to identify and monitor the level of charity care it provides. These amounts approximated $1,175,000 and $1,116,000 for the years ended May 31, 2003 and 2002, respectively, and reflect the amount of charges forgone for services and supplies furnished under the Hospital's charity care policy. 4. Cash and Cash Eguivalents Cash is required to be categorized to give an indication of the level of credit risk assumed' by the entity at year-end. The three categories of risk as defined by the Government Accounting Standards Board Statement No.3 are as follows:
.

I.

Insured or registered, or securities held by the entity or its agent in the entity's name. Uninsured and unregistered, with securities held by the counterparty's trust department or agent in the entity's name; and Uninsured and unregistered, with securities held by the counterparty, or by its trust department or agent, but not in the entity's name.

n.
III.

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

Cash and cash equivalents as of May 31, 2003 and 2002, is summarized as follows: Credit Risk Category II

2003 Cash on deposit and money market accounts*
2002

I

In

$1.840.529

$

$

Cash on deposit and money market accounts* Overnight bank repurchase agreement

$2,112,762 $2.112.762

$

$ 44.190

$

$

44.190

*

The Hospital's bank demand accounts are insured to the extent covered by the Federal Deposit Insurance Corporation ("FDIC"). 2003 2002

Bank canying value

$

2.049.410

$

2.255.333

In addition to insurance provided by the FDIC, all demand deposits are held in banking institutions approved by the State of Florida Treasurer (the "State Treasurer") to hold public funds. Under Florida Statutes, Chapter 280, Florida Securityfor Public Deposits Act, the State Treasurer requires all qualifiedpublic depositories to deposit with the State Treasurer, or another banking institution, eligible collateral equal to 50 percent to 125 percent of the average daily balance for each month of all public deposits in excess of any applicable deposit insurance held. The percentage of eligible collateral (generally, U.S. government and agency securities, state or local government debt or corporate bonds) to public deposits is dependent upon the depository's financial history and its compliance with Chapter 280. In the event of a failure of a qualified public depository, the remaining public depositories. would be responsible for covering any resulting losses.

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

5.

Property and EQuipment Property and equipment consist of the following: 2003 Building improvements Furniture and equipment Less accumulated depreciation Property and equipment, net $ $ 730,235 9J 88,592 9,918,827 4,124,180 5.794.647 $ 2002 803,708 5,783,658 6,587,366 3,488,639 3.098.727

$

In May 2003, the Hospital moved into a new facility (see Note 12 for leasing information). In conjunction with this move the Hospital purchased approximately $3.7 million and $1 million during 2003 and 2002, respectively, of new furniture and equipment. In addition, certain building improvements, furniture and equipment was abandoned, and appropriately disposed, as a result of the move to the new facility. 6. Long-Term Debt Long-term debt consists of the following: 2003 Commercial loan with bank, secured by all inventory, accounts receivable and equipment, interest at prime (4.25%), adjusted quarterly, interest only payable monthly through September 2003, principal and interest payable in monthly installments thereafter through September 2013 Commercial loan with bank, secured by all inventory, accounts receivable and equipment, interest at prime (4.25%), adjusted quarterly, interest only payable through August 2003, principal and interest payable thereafter in monthly installments through August 2013, maximum under agreement is $1.0 million Line of credit with bank, collateralized by certain hospital equipment, interest at 7% per annum, principal and interest payable in monthly installments t~ough May 2008. 2002

$

3,500,000

$

1,000,000

796,321

397,109

461,151

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

2003 Line of credit with bank, interest at 3.3% per annum, collateralized by a certificate of deposit of $100,000, principal and interest payable March 2004. .

2002

154,458

174,714

Commercial loan with bank, collateralized by equipment, interest at 6.83% per annum, principal and interest payable in monthly installments of$3,915 through November 2005. Other Less current installments
$

107,620 28,628 4,984,136 544,276 4.439.860 $

145,557 64.575 1,845,997 314,636 1.531.361

As discussed in note 5, the Hospital purchased a total of approximately $4.7 million of furniture and equipment for the new facility during 2003 and 2002: The Hospital financed the majority of these purchases through commercial loans with a bank. The $3.5 million commercial loan is guaranteed 90% by the United States Department of Agriculture Rural

Development("USDA").

.

In conjunction with these commercial loan agreements, the Hospital and the County have an agreement, whereby the County's 1% Sales Tax Levy ("Levy") will be utilized to repay the commercial loans. Revenues generated for the Levy will be applied first by the County to the payment of the principle and interest on the County's bonds, used to finance the new facility. Any annual excess will be contributed to the Hospital to be applied to the payment of principle and interest on the commercial loans. At May 31, 2003, a receivable from the County of $70,476 was included in other receivables for interest payments made by the Hospital on these loans during 2003. At May 31,2003, approximately $175,000 of unused borrowings remained on the lines of credit.

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DOCTORS' MEMORIAL HOSPITAL, INe.

Notes to Financial Statements, Continued

Scheduled principal repayments on long-tenn debt obligations are as follows: 2004 2005 2006 2007 2008 Thereafter $ 544,276 500,135 499,870 500,080 516,042 2,423,733 4.984.136

$

7. Debt Covenants The $3.5 million commercial loan contains certain covenants and restrictions. Among other items, the agreement requires maintenance of certain financial levels and ratios. At May 31, 2003, 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 31,2003. 8. Capital Lease Oblh!ations The future minimum lease payments required under capital leases at May 31,2003, are as follows: 2004 2005 2006 Less amounts representing interest Present value of future minimum lease payments Less currerit installments of capital leases Capital leases, excluding current installments $ $ 42,363 30,660 20,270 93,293 12,722 80,571 34,,697 4~74

.

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 $199,000 less accumulated amortization of approximately $124,000.

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

9. Concentrations of Credit Risk The Hospital grants credit without collateral to its patients, most of who are local residents and are insured under third-party payor agreements. Due to these factors, management believes no additional credit risk beyond amounts provided for collection losses is inherent in the Hospital's patient accounts receivable. The mix of receivables from patients and third-partypayors at May 31, 2003 and 2002 was as follows:
2003 2002 18% 6% 25% 51% 100%

Medicare Medicaid Other third-partypayors Self-pay

19% 5% 23% 53% 100%

10. Retirement Plan Effective September 4, 1994, the Hospital offered an employee benefit plan created in accordance with Internal Revenue Code- Section 403(b) to its employees. The plan is available to all employees who have completed six months of service. The Hospital makes a contributien equal to.a discretionary percentage as determined each year by the Hespital. Participants' interest in amounts contributed by the Hospital, as well as ameunts contributed by the participant, vest immediately. The Hospital's contributions are invested in accordance with the investment elections made by the participant. Loans are permitted from a minimum of $1,000 to.a maximum of 50 percent of an employee's vested account balance or $50,000, whichever is lewer. The Hespital centributed approximately $194,000 and $176,000, respectively, fer the years ended May 31, 2003 and 2002. 11. Professional Liabilitv Covera2e The Hospital is involved in litigation in the ordinary course of business related to professional liability claims. The Hospital insures its malpractice risks on an occurrence basis. Coverage limits under such pelicy is $1,000,000 per claim and $3,000,000 in the aggregate with self-insurance deductibles of $50,000 per claim and $150,000 in the aggregate. An accrual of appreximately $20,000 has been recorded at May 31, 2003 and 2002, fOt: essible losses attributable to claims for incidents which may have o.ccurredbut p have net been identified under the Hospital's incident reporting system.

(14)

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

12. Facility Lease and County Contributions

The Hospital and the County entered into a renewable lease agreement (the "Agreement") which expires on November 19, 2005. The Agreement provides that the H;ospitalwill operate the County's facility as a not-for-profit corporation under the laws of the State of Florida. Additionally, the Hospital pays the County $150 annually for the use of the facility and the Hospital pays all related maintenance and other costs. The agreement provides an option to renew subject to the satisfaction of the County and the Hospital and successful renegotiation of the terms of the agreement. 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 49,126. The fair rental value has been determined to be $7 per square foot. Accordingly, $343,882 has been reflected as rental expense and county contribution in the accompanying statement of operations for the years ended May 31, 2003 and 2002, 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 subsidizes the Hospital's ambulance service. Contributions by the County for this service amounts to $22,400 per month. During 2003, the County funded the construction of a replacement facility to be uS'edby the Hospital. The Hospital will operate the new facility under the existing lease with the County. In May 2003, the Hospital moved in to the new facility. The annual fair value of the rental arrangement and the corresponding county contribution for the new facility has yet to be determined. 13. Contributions During 2003 and 2002, the Hospital received grants of approximately $167,000 and $286,000, respectively, from the State of Florida Department of Health for fixed capital improvements to acquire, repair, improve or upgrade systems, facilities or equipment.

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DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements, Continued

14. Functional

Ex}!enses

The Hospital provides general healthcare services to residents within its geographic location. Expenses relatedto providing these services are as follows:
2003 Healthcare services General and administrative $ 23,775,953 3,076,873 $ 26,852.826 2002 $ 21,089,693 2.168,757 $ 23.258.450

(16)

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