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P.O. Box 31002
51. Petersburg, FL 33731-8902

P.O. Box 1439

Tampa. FL 33601-1439

Independent Auditors' Report

The Board of Directors

Doctors' Memorial Hospital, Inc.:

We have audited the balance sheets - unrestricted funds of Doctors' Memorial Hospital, Inc., (the
"Hospital") as of May 31, 2001 and 2000, and the related statements of 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 audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Governmental Auditing Standards,
issued by the Comptroller General of the United States. Those standards require that we plan and perform
the audits 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 accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. .

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, 2001 and 2000, 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.

During 2001, the Hospital changed its method of accounting for State of Florida Public Assistance trust fund
assessments.

In accordance with Government Auditing Standards, we have also issued a report dated August 3, 2001 on
our consideration of Doctors' Memorial Hospital, Inc.' s internal control over financial reporting and on 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 Governmental Auditing Standards and should be read
in conjunction with this report in considering the results of our audit.

KPM.GT LL-P

August 3, 2001

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 DOCTORS' MEMORIAL HOSPITAL, INC.

Balance Sheets - Unrestricted Funds

May 31, 2001 and 2000

Assets 2001 2000

(as adjusted
note 3)

Current assets:
Cash and cash equivalents (note 2) $ 1,772,988 1,841,622
Patient accounts receivable, net of estimated
uncollectibles of approximately $1,880,000
and $2,441,000 in 2001 and 2000, respectively 4,571,339 4,813,120
Supplies 526,309 332,862
Assets limited as to use 81,010 48,738
Prepaid expenses and other assets 112,300 132,482
Total current assets ,(10'1 ; c)) 7,063,946 7,168,824 .

Buildings and equipment, net (note 5) 2,958,285 2,791,744

Total assets $ 10,022,231 9,960,568

Liabilities and Fund Balance ::,G3 ;), 10

.'

Current liabilities:
Accounts payable and accrued expenses $ 2,163,697 2,820,754
Estimated third-party payor settlements 236,116 341,227
Current installments of long-term debt (note 6) 383,113 238,261
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Total current liabilities 2,78f,926 3,400,242 r

Long-tenn debt, excluding current installments (note 6) 599,788 331,015

Total liabilities
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Unrestricted fund balance 6,639,517 6,229,311

Commitments and contingencies (notes 6, 9 and 10)

Total liabilities and fund balance $ .10,022,231 9,960,568

See accompanying notes to financial statements.

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 DOCTORS' MEMORIAL HOSPITAL, INC.

Statements of Operations

Years ended May 31, 2001 and 2000

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2001 2000

Net patient service revenue (note 3) -, " O Ci <J /.~ I~ $ 20,073,456 21,092,613
Other revenue -L- I Ir,/V ~ 567,281 595,476
~ 0 ,0 7 ?:>,qS-6
Total revenue 20,640,737 21,688,089 E-
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Expenses:
Salaries and benefits 10,143,753 10,565,639
Supplies 2,345,799 2,586,839
Professional fees 1,288,393 1,264,955
Purchased services 943,869 1,062,567
Utilities and telephone 402,937 350,572
Depreciation 709,210 579,181
Insurance 564,042 454,925
Provision for uncollectible accounts 2,826,913 2,628,616
Interest 57,280 53,525
Other 1,672,239 1,873,946
Total expenses 20,954,435 21,420,765
(Loss) income from operations (313,698) 267,324

Nonoperating income:
Contributions (note 11) 222,015 837,538
(Deficit) excess of revenue over expenses before
cumulative effect of change in accounting principle (91,683) 1,104,862

Cumulative effect of change in accounting principle (note 1(j)) 501,889

Excess of revenue over expenses 410,206 1,104,862

Unrestricted fund balance, beginning of year, as previously reported 5,419,449

Adjustment (note 3) (295,000)

Unrestricted fund balance, beginning of year, as restated 6,229,311 5,124,449

Unrestricted fund balance, end of year $ . 6,639,517 6,229,311

See accompanying notes to financial statements.

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 DOCTORS' MEMORIAL HOSPITAL, INC.

Statements of Cash Flows

Years ended May 31, 2001 and 2000

2001 2000

Net cash flows from operating activities:

Excess of rt::venue over expenses $ 410,206 1,104,862
Adjustments to reconcile to net cash flow
provided by operating activities:
Depreciation expense 709,210 579,181
Provision for uncollectible accounts 2,826,913 2,628,616
Increase in patient accounts receivable (2,585,132) (4,399,850)
Decrease in estimated third party settlement (105,111) (707,566)
(Increase) decrease in supplies (193,447) 41,105
(Increase) decrease in prepaid expenses and other assets 20,182 (38,763)
(Decrease) increase in accounts payable and accrued expenses (657,057) 932,548
Net cash flow provided by operating activities 425,764 140,133

Cash flows from capital and related financing activities:

Payments on long-term debt (141,683) (229,927)
Proceeds from the issuance of long term debt 555,308 117,574
Net proceeds from sale of physician accounts receivable
and equipment - 55,225
Net proceeds from sale of buildings and equipment 18,407 139,996
Net cash provided by capital and related financing activities 432,032 82,868

Cash flows from investing activities:

Increase in assets limited as to use (32,272) (39,578)
Purchase of buildings and equipment (894,158) (1,237,359)
Net cash used in investing activities (926,430) (1,276,937)
Net decrease in cash (68,634) (1,053,936)

Cash and cash equivalents, beginning of year 1,841,622 2,895,558

Cash and cash equivalents, end of year $ 1,772,988 1,841,622

Supplemental disclosure of cash flow information:

Cash paid for interest $ 57,280 53,525
Capital lease obligations and notes payable assumed 554,724 70,380

See accompanying notes to financial statements.

4
 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001 and 2000

(1) Summary of Significant Accounting Policies

(a) Organization 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") to operate the
County's facility. Effective November 11, 1992, the Hospital began leasing the facility under a
five-year renewable lease which expired October 31, 1997. On September 8, 1997, the Hospital
renewed the lease with the County for an additional five-year term expiring October 31, 2002.

The Hospital applies the accounting and reporting guidelines set forth in the American Institute
of Certified Public Accountants (AICPA) 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 heen
classified as a governmental health care organization based on the fact that its board members are
appointed by the members of the Taylor County Board of County Commissioners.

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 GASBpronouncements.

These financial statements have been prepared on the accrual basis of accounting. Under this
method, revenue is recorded when earned and expenses are recognized when incurred.

(b) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting

principles r<;.quiresmanagement to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

(c) Cash and Cash Equivalents

For the purposes of the statements of cash flows, the Hospital considers cash and certificates of
deposit to be cash equivalents.

(d) Supplies

Supplies are valued at a metl!od that approximates the lower of cost or market, using the first-in,
first-out method.

5 (Continued)
 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001 and 2000

(e) Assets Limited as to Use

Assets limited as to use include assets held by a trustee under a self funded medical plan, over
which the board retains control and may at its discretion subsequently use for other purposes.

(j) Buildings and Equipment

Building 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
term or the estimated useful life of the equipment. Such amortization is included in depreciation
and amortization in the financial statements. Building and equipment being leased from the
County (note 10) are not reflected in the accompanying financial statements.

(g) 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
under reimbursement agreements with third-party payors. Retroactive adjustments are accrued
on an estimated basis in the period the related services are rendered and adjusted in future
periods as final settlements are determined.

(h) 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 determined to qualify as charity care, they are not reported as
revenue.

(iJ 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 re.1atedincome pursuant to Section
501(a) of the Code.

(j) Change in Accounting Principle

Effective June 1, 2000, the Hospital changed its method of accounting for the State of Florida's
Public Assistance Trust Fund assessments resulting in reducing liabilities that were established at
the inception of the Trust Fund program. The effect of this change was to increase excess of
revenue over expenses by $501,889.

6 (Continued)

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 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001 and 2000

(k) Reclassification

Certain amounts in the May 31, 2000 financial statements have been reclassified to conform to
the May 31, 2001 presentation.

(2) Cash

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:

1. Insured or registered, or securities held by the entity or its agent in the entity's name.

II. Uninsured and unregistered, with securities held by the counterparty's trust department or agent
in the entity's name; and

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

Cash and cash equivalents as of May 31, 2001 and 2000, was as follows:

Credit risk category Market

2001 1 2 3 value

Cash on deposit and money

market accounts * $ 951,554 - - 951,554
Overnight bank repurchase
agreement
- - 821,434 821,434

$ 951,554 - 821,434 1,772,988

Credit risk category. Market

2000 1 2 3 value

Cash on deposit and money

market accounts * $ 677,566 677,566
Overnight bank repurchase
agreement 1,164,056 1,164,056

$ 677,566 1,164,056 1,841,622

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

7 (Continued)
 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001 and 2000

In addition to insurance provided by the FDIC, all demand deposits are held in b~nking institutions
approved by the State of Florida Treasurer (the "State Treasurer") to hold public funds. Under Florida
Statutes, Chapter 280, Florida Security for Public Deposits Act, the State Treasurer requires all
qualified public 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.

(3) Net Patient Service Revenue

The Hospital has agreements with third-party payors that provide for reimbursement to the Hospital at
amounts different from its established rates. Medicare and Medicaid represented approximately 60
percent and 58 percent of gross revenue for 2001 and 2000, respectively. 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. Defined capital costs relating to Medicare beneficiaries are paid at prospectively
determined rates per discharge. Certain outpatient services related to Medicare beneficiaries, as well
as services rendered to Medicaid program beneficiaries are paid based on a cost reimbursement
method. The Hospital is reimbursed for cost reimbursable items at a tentative rate with final settlement
determined after submission of annual cost reports by the Hospital and audits thereof by the fiscal
intermediaries. The Hospital's Medicare cost reports for May 31, 1997 and prior have been audited by
the fiscal intermediary and final settlement has been recorded. The Hospital's Medicare cost report for
the years ended May 31, 1998 through 2000 have been filed with the fiscal intermediary and are
subject to audit by the governmental agency. An estimated Medicare cost report provision for the
period ended May 31, 2001 has been reflected in the accompanying financial statements.

The Hospital has also entered into reimbursement agreements with certain commercial insurance
carriers, and preferred provider organizations. The basis for reimbursement to the Hospital under these
agreements includes prospectively determined rates-per-discharge, djscounts from established charges,
and prospectively determined daily rates.

During 2001, it was determined that an error was made in the 1998 Medicare cost report filing
resulting in a decrease in the estimated settlement for that year. Accordingly, the beginning
unrestricted fund balance at May 31, 2000 was decreased by $295,000 to reflect the prior period
adjustment, and the estimated third party payor settlement liability was increased by a like amount.

8 (Continued)

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 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001 and 2000

The Hospital received approximately $376,000 and $419,000 during 2001 and 2000, respectively, from
the State of Florida under the Medicaid Rural Financial Assistance Program (the "Program"). 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.

(4) 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. The Hospital maintains records to identify and
monitor the level of charity care it provides. These amounts approximated $968,000 and $611,000 for
the years ended May 31, 2001 and 2000, respectively, and reflect the amount of charges forgone for
services and supplies furnished under the Hospital's charity care policy.

(5) Buildings and Equipment

Buildings and equipment consists of the following:

2001 2000

Buildings and building improvements $ 750,688 750,688

Furniture and equipment 4,762,093 3,995,081

5,512,781 4,745,769
Accumulated depreciation and amortization (2,605,885) (2,005,414)

2,906,896 2,740,355
Construction in progress 51,389 51,389

Buildings and equipment,net $ 2,958,285 2,791,744

9 (Continued)
 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001 and 2000

(6) Long-Term Debt

Long-tenn debt and capital lease obligations consists of the following:

2001 2000

Line of credit with bank, collateralized by certain hospital

equipment, interest at 7% per annum, principal and interest
payable in monthly installments through May 2008 $ 346,892

Commercial loan with bank, secured by certain real estate,

interest at prime plus 1% per annum, principal and interest
payable in monthly installments of $2,200 through October,
2001 4,052 25, 184

Commercial loan with bank, collateralized by equipment with

a net book value of $183,552, interest at 6.83% per annum,
principal and interest payable in monthly installments of
$3,915 through November 2005 181,182 214,320

Unsecured commercial loan with bank, interest at 6.72% per

annum, principal and interest payable in monthly
installments of$I,883 through November 2003 51,808 70,165

Lease obligation for hospital equipment, interest at 12.15%,

principal and interest payable in monthly installments of
$2,469 through January 2006 105,150

Lease obligation for hospital equipment, interest at 9.25% per

annum, principal and interest payable in monthly
installments of$I,689 through November 2003 44,736 66,197

Lease obligation for hospital equipment, interest at 10% per

annum, principal and interest payable in monthly
installments of $191 through June 2002 3,320 19,937

Commercial loan with bank, collateralized by equipment with

a net book value of$49,643, interest at 8.15% per annum,
principal and interest payable in monthly installments of
$1,432 through June 2004 46,611 59,473

10 (Continued)

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 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001 and 2000

2001 2000

Line of credit with bank, interest at 7% per annum,

collateralized by a certificate of deposit of $100,000,
principal and interest payable March 2002. $ 199,150 114,000

982,901 569,276
Less current installments (383,113) (238,261)

$ 599,788 331,015

At May 31, 2001, there was approximately $180,000 of unused borrowings remaining on the lines of
credit.

At May 31, 2001, scheduled principal repayments on long-term debt and capital lease obligations are
as follows:

2002 $ 383,113
2003 192,299
2004 185,485
2005 161,931
Thereafter 60,073

$ 982,901

(7) Concentrations of Credit Risk

The Hospital grants credit without collateral to its patients, most of whom are local residents and are
insured under third-party payor agreements. Due to these factors, management believ~s 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-party payors at May 31, 2001 and 2000was
as follows: .

2001 2000

Medicare 30% 28%

Medicaid 6% 9%
Other third-party payors 34% 35%
Self pay 30% 28%

100% 100%

11 (Continued)

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 DOCTORS' MEMORIAL HOSPITAL, INC.

Notes to Financial Statements

May 31, 2001.and 2000

(8) Pension 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 contribution equal to a discretionary
percentage as determined each year by the Hospital. Participants' interest in amounts contributed by
the Hospital as well as amounts 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 lower. The Hospital contributed
approximately $150,000 and $120,000, respectively, for the years ended May 31, 2001 and 2000.

(9) Commitments and Contingencies

The Hospital insures its malpractice risks on an occurrence basis. The Hospital has secured occurrence
basis coverage from October 15, 1992 through October 15,2001. Coverage limits under such policy is
$1,000,000 per claim and $3,000,000 in the aggregate with self-insurance retention of $10,000 per
claim and $30,000 in the aggregate. An accrual of approximately $50,000 has been recorded at
May 31, 2001 and 2000, respectively, for possible losses attributable to existing open claims and for
incidents which may have occurred but have not been identified under the Hospital's incident reporting
system.

Pursuant to the terms of the Hospital's lease agreement with the County (note 10), the Hospital is
indemnified by the County for any and all claims for malpractice, personal injuries, wrongful death or
other claims in any way connected with the operation of the Hospital prior to the effective date of the
lease agreement which was November 11, 1992.

The Hospital is involved in litigation and regulatory investigations arising in the ordinary course of
business. Management estimates that these matters will be resolved without material adverse effects
on the Hospital's future financial position or results from operations.

(10) Facility Lease

Effective November 11, 1992, the Hospital and the County entered into a five-year renewable lease
agreement (the "Agreement") which expired on October 31, 1997. The Agteement provided that the
Hospital will operate the County's facility as a not-for-profit corporation under the laws of the State of
Florida. Additionally, the Hospital paid the County $150 annually for the use of the facility and paid
all related maintenance and other costs.

12 (Continued)

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 DOCTORS' MEMORIAL HOSPITAL, INe.

Notes to Financial Statements

May 3 1, 2001 and 2000

On September 8, 1997, the Hospital and the County ren~wed the Agreement for an additional five-year
term expiring October 31, 2002 under the same conditions stated above. The new 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.

(11) Contributions

During the fiscal year ended May 31, 2001, the Hospital received grants of approximately $100,000
from the State of Florida Department of Health for fixed capital improvements to acquire, repair,
improve or upgrade systems, facilities or equipment. The Hospital used these funds to upgrade their
computer system.

The Hospital also received donations of approximately $12,000 from various sources to be used for the
purchaseof medicalequipmentandBoarddiscretion. .

Also during the fiscal year ended May 31, 2001, the Hospital received grants of approximately $88,000
and $21,000 from the United States Department of Agriculture and Big Bend Rural Health Network,
respectively, as partial funding toward a telemedicine program with other area hospitals. These funds
are restricted to use toward establishing a telemedicine radiology program and were used to purchase
telemedicine equipment.

13
 ~
P.O. Box 31002
St. Petersburg, FL 33731-8902

P.O, Box 1439

Tampa, FL 33601-1439

Independent Auditors' Report on Compliance and on Internal Control

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

The Board of Directors of

Doctors' Memorial Hospital, Inc.:

We have audited the financial statements of Doctors' Memorial Hospital, Inc. ("Hospital") as of and for the
year ended May 31,2001, and have issued our report thereon dated August 3, 2001. We conducted our audit
in accordance with auditing standards generally accepted in the United States of America and the standards
applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller
General of the United States.

Compliance

As part of obtaining reasonable assurance about whether the Hospital's financial statements are free of
material misstatement, we perfonned tests of its compliance with certain laws, regulations, contracts and
grants, noncompliance with which could have a direct and material effect on the detennination 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 GovernmentAuditing Standards.

Internal Control Over Financial Reporting

In planning and perfonning our audit, we considered the Hospital's internal control over financial reporting
in order to detennine our auditing procedures for the purpose of expressing our opinion on the financial
statement and not to provide assurance on internal controls over financial reporting. Our consideration of
internal controls over financial reporting would not necessarily disclose all matters in internal controls over
financial reporting that might be material weaknesses. 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 nonnal course of
perfonning their assigned functions. However, we noted other matters involving the internal control over
financial reporting that we have reported to management of the Hospital in a separate letter dated August 3,
2001.

14

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 This report is intended solely for the infonnation and use of the Board of Directors, management of the
Hospital and applicable governmental agencies and is not intended to be and should not be used by anyone
other than these specified parties.

KPM~ LL-P

August 3, 2001

15

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