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The audit - which dealt with the financial year from Oct. 1, 2002, to Sept. 30, 2003 - showed PAHCS running a deficit for the second year in a row, losing $446,200 in operations in that year's span. The audit -Ędone for the first time by McGladrey and Pullen - revealed that operating loss, though, to be smaller than anticipated, since the auditors found that over $330,000 in interest should actually have been expensed in the previous two fiscal years.

That discovery does not really help PAHCS's immediate financial position, which remains highly leveraged with a small margin of cash flow. For example, the state average for facilities the size of PAHCS is to have 50˘ of debt to every $1 in equity. PAHCS has $2.80 in debt ($12.71 million) to every $1 in equity ($4.51 million).

This indebted position is the result of the expansion PAHCS has done in the past couple years: purchasing two nursing homes (Washburne Court in town and Hilltop Care Center in Watkins) and undergoing a $7.5 million remodeling and expansion of its main campus in Paynesville.

PAHCS's annual debt service has increased from $1.168 million in 2001 to $1.901 in 2003. Its revenues available to pay that debt service did not cover it in 2003, resulting in precarious financial positions like having only 14 days cash on hand (really only 9 or 10 days if some designated funds are excluded) while the industry average is 18 days of cash on hand.

The auditors told the board that while none of this financial news was good, the bright spot was that PAHCS has established itself as a modern facility by making these recent investments. For instance, in age of plant, PAHCS averages seven years, while the industry average is more than nine, meaning PAHCS is newer than similar-sized facilities in the state.

And PAHCS is working to rectify its financial position.

Specifically, PAHCS is doing three things to improve its financial position. First, it has applied for and been granted critical access designation, which will increase its Medicare reimbursement in the hospital. Since Medicare patients comprise around 50 percent of the patient load at the hospital and since interest expense is partially covered through critical access designation, this change is expected to reap around $1.2 million in additional revenue for PAHCS in 2004.

Second, PAHCS is working to refinance $12 million of its debt, which would reduce its annual debt service payments from $1.9 million per year to $1.1 or $1.2 million per year.

Third, PAHCS did cut hours from 20 staff positions this fall, reducing its monthly expenditures by $50,000, effectively balancing its operating margin. The auditors warned the board and administration that they needed to be vigilant in hiring new staff. Because of its financial position, PAHCS has little cushion, so additional staff members would need to show that their return justifies the added expense. (Currently, staff and benefits account for about 50 percent of PAHCS's operating expenses, making them PAHCS's single largest expense.)

With these changes, PAHCS has budgeted a $580,000 profit for 2004. The auditors stressed that PAHCS does need to be profitable for long-term survival: to add programs, fulfill its mission of Caring for Life, and to weather funding changes and financial crises.