The Durango & Silverton Narrow Gauge Railroad Company and Subsidiaries. Consolidated Financial Statements December 31, 2011

Transcription

1 Narrow Gauge Railroad Company and Subsidiaries Consolidated Financial Statements December 31, 2011

2 Contents Independent Auditor s Report 1 Consolidated Financial Statements Consolidated balance sheets 2 3 Consolidated statements of income 4 Consolidated statements of stockholder s equity 5 Consolidated statements of cash flows 6 Notes to consolidated financial statements 7 17

3 Independent Auditor s Report To the Stockholder and Board of Directors The Durango & Silverton Durango, Colorado We have audited the accompanying consolidated balance sheets of The Durango & Silverton Narrow Gauge Railroad Company and Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholder s equity and cash flows for the years then ended. These financial statements are the responsibility of the Company 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. 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Durango & Silverton Narrow Gauge Railroad Company and Subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Naples, Florida June 19,

4 Consolidated Balance Sheets December 31, 2011 and 2010 Assets (Notes 6 and 7) Current Assets Cash $ 1,584,795 $ 2,025,949 Receivables 174,776 58,492 Receivables, related party (Note 3) 453, ,944 Inventories 378, ,273 Prepaid expenses and other current assets 98,058 47,049 Total current assets 2,690,048 3,004,707 Receivables, related party (Note 3) 326, ,520 Parts, net of allowances of $97, , ,972 Property and Equipment, net (Note 4) 28,272,336 27,608,491 Real Estate Development Costs (Note 2) 1,269,828 1,269,828 Deferred Loan Costs, net of accumulated amortization 2011 $159,223; 2010 $136, , ,213 $ 33,501,132 $ 33,310,731 See. 2

5 Liabilities and Stockholder's Equity Current Liabilities Accounts payable and accrued expenses $ 1,222,340 $ 1,195,340 Current maturities of long-term debt (Note 7) 993,440 1,052,541 Unearned revenue (Note 5) 767, ,031 Payables, related party (Note 3) 281, ,138 Total current liabilities 3,265,138 3,278,050 Long-Term Liabilities Accrued expenses 25,000 50,000 Payables, related party (Note 3) 75,876 95,837 Accrued pension plan liability (Note 8) 826, ,246 Line of credit (Note 6) 674, ,000 Long-term debt, less current maturities (Note 7) 16,631,472 16,668,579 Total liabilities 21,498,505 21,325,712 Commitments and Contingencies (Notes 2, 8 and 9) Stockholder's Equity Common stock, no par, 500,000 shares authorized, 100,000 shares issued and outstanding Additional paid-in capital 5,079,762 5,079,762 Retained earnings 7,917,295 7,696,745 Accumulated other comprehensive loss (Note 8) (994,530) (791,588) 12,002,627 11,985,019 $ 33,501,132 $ 33,310,731 3

6 Consolidated Statements of Income Years Ended December 31, 2011 and 2010 Concession sales $ 1,507,605 $ 1,528,213 Cost of concession sales 1,103,714 1,106,297 Gross profit 403, ,916 Passenger revenues and museum admissions 11,970,402 12,378,352 Historic preservation fees 486, ,150 Miscellaneous 619, ,828 Net revenue 13,480,856 13,765,246 Operating expenses Salaries and wages, payroll taxes and benefits (Note 3) 5,961,789 5,533,039 General operating expenses 3,526,845 3,558,345 Professional fees 362, ,642 Depreciation 888, ,078 Impairment of real estate development costs (Note 2) - 697,110 Bus operating expenses (Note 3) 309, ,200 Management fees (Note 3) 914, ,000 11,962,310 11,870,414 Operating income 1,518,546 1,894,832 Financial income (expense) Interest income 3,035 5,407 Interest expense (1,301,031) (1,377,976) (1,297,996) (1,372,569) Net income $ 220,550 $ 522,263 See. 4

7 Consolidated Statements of Stockholder's Equity Years Ended December 31, 2011 and 2010 Accumulated Common Stock Additional Other Stated Paid-In Retained Comprehensive Shares Value Capital Earnings Loss Total Balance, December 31, ,000 $ 100 $ 5,079,762 $ 7,174,482 $ (832,484) $ 11,421,860 Comprehensive income: Net income , ,263 Other comprehensive gain, defined benefit pension plan activity ,896 40,896 Comprehensive income 563,159 Balance, December 31, , ,079,762 7,696,745 (791,588) 11,985,019 Comprehensive income: Net income , ,550 Other comprehensive loss, defined benefit pension plan activity (202,942) (202,942) Comprehensive income 17,608 Balance, December 31, ,000 $ 100 $ 5,079,762 $ 7,917,295 $ (994,530) $ 12,002,627 See. 5

8 Consolidated Statements of Cash Flows Years Ended December 31, 2011 and 2010 Cash Flows From Operating Activities Net income $ 220,550 $ 522,263 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 888, ,078 Loss on disposal of property and equipment 22,847 34,423 Impairment of real estate development costs - 697,110 Amortization of loan costs 22,764 22,764 Pension plan contributions less than (in excess of) net period costs 64,960 (9,979) (Increase) decrease in: Receivables (116,284) (31,683) Receivables, related party 387,084 (272,332) Inventories (101,558) 66,517 Prepaid expenses and other current assets (51,009) 21,318 Parts (108,707) (74,255) Increase (decrease) in: Accounts payable and accrued expenses 2, ,193 Unearned revenue (15,396) 67,675 Payables, related party 14,624 81,048 Net cash provided by operating activities 1,230,164 2,182,140 Cash Flows From Investing Activities Proceeds from sale of equipment 7,500 7,882 Purchases of property and equipment (647,821) (553,865) Real estate development costs incurred - (73,272) Net cash used in investing activities (640,321) (619,255) Cash Flows From Financing Activities Repayments on line of credit (129) - Repayments of notes payable (1,030,868) (973,506) Net cash used in financing activities (1,030,997) (973,506) Net increase (decrease) in cash (441,154) 589,379 Cash: Beginning 2,025,949 1,436,570 Ending $ 1,584,795 $ 2,025,949 Supplemental Disclosures of Cash Flow Information Cash payments for interest $ 1,297,699 $ 1,355,616 Supplemental Disclosure of Noncash Investing and Financing Activities Property and equipment acquired through accounts payable and accrued expenses $ - $ 7,463 Land acquired through notes payable $ 934,660 $ - Conversion of line of credit to a term loan $ - $ 2,980,900 See. 6

9 Note 1. Nature of Business and Significant Accounting Policies Nature of business: The Durango & Silverton Narrow Gauge Railroad Company ( DSNGR ) was incorporated under the laws of the State of Colorado on June 22, DSNGR operates a steam engine railroad tourist attraction that carries passengers between the towns of Durango and Silverton, Colorado, principally between the months of May through October. DSNGR s business is highly seasonal; historically, at least 60% of the total number of passengers who ride DSNGR s train annually do so during the months of June, July and August. DSNGR is a wholly-owned subsidiary of American Heritage Railways, Inc. ( AHR ), which acquired DSNGR on July 2, Principles of consolidation: The consolidated financial statements include the accounts of DSNGR and its wholly-owned subsidiaries, Railroad Square, LLC ( RS ) and Durango Historic Preservation Association, LLC. All material intercompany accounts and transactions have been eliminated in consolidation. The above-named entities are collectively referred to as the Company. A summary of the Company s significant accounting policies follows: Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) requires management 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 revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Revenue recognition: The Company records revenue when the passenger rides the train. Amounts received for advanced bookings are accounted for as unearned revenue until the service is performed. Admission and concession sales are recognized when the product or service is provided to the customer. Historic preservation fees are charged on all ticket sales and are recognized when the passenger rides the train. The fees collected are used for the design, development, construction, preservation and maintenance of improvements on the property owned by the Company. Revenue from perpetual land easements and pedestrian license and crossing agreements are recognized at the time agreements are executed and collectability is reasonably assured. Concentration of credit risk: The Company maintains its cash in bank deposit accounts which, at times, may exceed federally-insured limits. The Company has not experienced any losses in such accounts. Receivables: Receivables are carried at the original charge amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a periodic basis. Management determines the allowance for doubtful accounts by assessing the financial position and ability to pay of its customers and related parties. At December 31, 2011 and 2010, no allowance was deemed necessary. Receivables are written off when deemed uncollectible. Inventories and parts: Inventories and parts are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 7

10 Note 1. Nature of Business and Significant Accounting Policies (Continued) Property and equipment: Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the assets using the straight-line method. Expenditures for repairs and maintenance are charged to expense as incurred. Real estate development costs: Real estate development costs are comprised of capitalized planning, architectural, engineering and related costs on a proposed hotel and conference center in Durango, Colorado (see Note 2) and are recorded at the Company s cost. Impairment of long-lived assets: Long-lived assets, such as property and equipment, real estate development costs and parts, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment was recognized in Deferred loan costs: Deferred loan costs are being amortized using the straight-line method over the term of the loan, which approximates the effective interest method. Income taxes: The Company s operations and accounts are included in AHR s federal and state income tax returns. AHR has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, AHR does not pay corporate income taxes on its taxable income and is not allowed a net operating loss carryover or carryback as a deduction. Instead, the stockholders are liable for individual income taxes on their respective shares of AHR s taxable income or may use losses to offset other taxable income on their individual tax returns. The Company has elected to be taxed as a Qualified S corporation subsidiary and, as such, is considered to be a disregarded entity under the Internal Revenue Code, and is treated as a part of AHR s operations. The Company has evaluated its tax positions and concluded that the Company has taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of the Financial Accounting Standards Board s guidance on accounting for uncertainty in income taxes. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal or state tax authorities for years prior to

11 Note 1. Nature of Business and Significant Accounting Policies (Continued) Fair value measurements: Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels are defined as follows: Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date. Level 2 inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable, reflecting the entity s own assumptions about assumptions market participants would use in pricing the asset or liability. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement (see Note 8). Advertising costs: Costs associated with advertising and promotions are expensed as incurred. Advertising expense was approximately $322,000 and $334,000 for the years ended December 31, 2011 and 2010, respectively. Recent accounting pronouncements: In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurement requirements, in addition to other amendments that change principles or requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for annual periods beginning after December 15, The adoption of this guidance is not expected to have a material effect on the Company s consolidated financial statements. In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income that eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholder s equity. The amendments require that all nonowner changes in stockholder s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years ending after December 15, The Company is currently evaluating which presentation option it will utilize for comprehensive income in its consolidated financial statements. The adoption of this guidance will not impact the Company's financial position, results of operations or cash flows and will only impact the presentation of other comprehensive income in the financial statements. 9

12 Note 1. Nature of Business and Significant Accounting Policies (Continued) Subsequent events: Management has assessed subsequent events through June 19, 2012, the date on which the financial statements were available to be issued. Note 2. Real Estate Development Costs In October 2008, RS was formed for the purpose of developing and operating a hotel and conference center (the center ) in Durango, Colorado. The proposed center is expected to include an upscale hotel, a restaurant, lounge, spa, fitness center, meeting and pre-function space, pool, office space, warehouse space and other ancillary facilities. DSNGR s initial investment in RS was a contribution of land having an approximate book value of $1,900,000. The Company incurred development costs of approximately $1,967,000 through December 31, 2011 of which approximately $697,000 were written off in There were no indicators of impairment in Management performs a comprehensive review of the total assets recorded for the development of the center to determine if any amounts should be written off. Amounts written-off in 2010 included assets that no longer had any continued value or expired, such as expired permits and licenses or for those assets in which the carrying value exceeded the estimated fair value. The net amount of $1,269,828 is recorded as an asset in real estate development costs on the consolidated balance sheet as of December 31, 2011 and The further development of the center is contingent on the Company obtaining suitable financing. Note 3. Related Party Transactions Related party receivables (payables) as of December 31, 2011 and 2010 consisted of the following: Durango Tour Bus Company $ (115,876) $ (135,837) Texas State Railroad 49,636 39,002 Rail Events, Inc. (176,953) (96,882) American Heritage Railways, Inc. (A) 354, ,136 Advances to AHR stockholder 276, ,793 Great Smoky Mountains Railroad, LLC 34, ,277 $ 422,781 $ 824,489 Reported as: Current related party receivable $ 453,588 $ 595,944 Noncurrent related party receivable 326, ,520 Current related party payable (281,723) (247,138) Noncurrent related party payable (75,876) (95,837) $ 422,781 $ 824,489 10

13 Note 3. Related Party Transactions (Continued) (A) This receivable is guaranteed by AHR s principal stockholder. The activity with AHR for the years ended December 31, 2011 and 2010 is as follows: Balance, beginning $ 376,136 $ 251,825 Management fee charges (914,000) (630,000) Amounts received from AHR (237,692) - Payments to and on behalf of AHR 1,130, ,311 Balance, ending $ 354,880 $ 376,136 AHR charged the Company a management fee of $914,000 and $630,000 during 2011 and 2010, respectively. The Company provides administrative and management services to the related parties listed above, and charges these related parties for their allocable share of the costs incurred by the Company in providing such services. The fees charged by the Company to these related parties has reduced the overall salaries and wages, payroll taxes and benefits on the statements of income by $428,046 and $458,605 in 2011 and 2010, respectively. During the years ended December 31, 2011 and 2010, the Company paid a subsidiary of AHR $309,200 and $269,200, respectively, to operate a bus transportation company to ferry the Company s train passengers, usually one-way to or from Silverton, Colorado. Note 4. Property and Equipment Property and equipment consist of the following as of December 31, 2011 and 2010: Estimated Useful Lives (Years) Land $ 19,344,517 $ 18,344,517 Buildings and improvements ,467,018 4,298,353 Machinery and equipment ,816,940 13,656,300 Computers 3 343, ,463 Projects in progress 600, ,954 38,572,476 37,030,587 Less accumulated depreciation 10,300,140 9,422,096 $ 28,272,336 $ 27,608,491 11

14 Note 5. Easement On February 17, 2009, the Company entered into an agreement to allow the City of Durango (the City ) a non-exclusive easement to maintain and operate a trail upon, along and adjacent to the right of way of the Company s railroad. Under the terms of the agreement, the City paid the Company $250,000 and issued a noninterest bearing note to the Company in the amount of $750,000, which requires annual payments of $250,000 beginning February The Company is obligated to pay for costs associated with challenges against the City s rights to acquire or utilize the trail easement up to $300,000. If costs exceed $300,000, the Company has the right to terminate the agreement and the easement, at which time all moneys previously paid to the Company from the City shall be refundable. In connection with its obligation under the agreement, the Company was required to, and has obtained, a surety bond in the amount of $300,000. In addition, the City has provided the Company use of a parking lot owned by the City for $1 per year for five years, with an option to terminate the lease upon 180 days notice. As of December 31, 2011, the Company and the City have been unable to obtain the required right-ofways and the easement has not been executed. Furthermore, the $250,000 payments due from the City in February 2010, 2011 and 2012 under the noninterest bearing note have not been made. The Company has deferred recognition of any revenue under the agreement until such time as the easement has been executed. Note 6. Lines of Credit and Subsequent Events DSNGR had a revolving line of credit with a bank that provided for borrowings up to $750,000 and expired on January 10, The line of credit was renewed on March 20, 2012, expires on March 10, 2013 and maximum borrowings were decreased to $675,000. The line is collateralized by substantially all the assets of DSNGR, a personal guaranty by the principal stockholder of AHR, and requires monthly payments of interest at the greater of the bank s prime rate plus 2.0% or 6.0%. There were no outstanding borrowings as of December 31, 2011 and The Company entered into a revolving line of credit with a bank in July Maximum borrowings of $675,000 are available bearing interest at the bank s prime rate plus 0.5%, but not less than 6.0%. The prevalent rate at December 31, 2011 was 6.0%. The line expires in July 2013 and is collateralized by real property owned by the Company with a book value of $500,000. The outstanding borrowings were $674,871 and $675,000 as of December 31, 2011 and 2010, respectively. On February 28, 2012, the Company entered into an agreement with a bank to extend the note payable with a balance of $132,268 as of December 31, 2011, which was originally to mature February 2012 (see Note 7), for six months and convert the loan to a line of credit that provides for borrowings up to $600,000. The line of credit is collateralized by a promissory note from the City of Durango (see Note 5) and real property owned by the Company. The line of credit is also guaranteed by the principal stockholder of AHR, requires monthly payments of interest at 6% and matures on August 28,

15 Note 7. Long-Term Debt Long-term debt consists of the following as of December 31, 2011 and 2010: Promissory note payable to Colorado Housing and Finance Authority ("CHFA") due in monthly payments of $129,414 each through December 2024, including interest at the rate of 7.15%, collateralized by a personal guaranty by AHR's stockholders, a security interest in all of the Company's assets and AHR's stock of the Company. The loan agreement contains certain covenants including maintaining a debt to equity ratio of no more than six to one and working capital requirements and other restrictions relating to capital expenditures, disposition of assets or incurring indebtedness. The Company was in violation of certain of the above covenants and received a written waiver of compliance through January 1, $ 13,121,535 $ 13,713,153 Note payable to Region 9 Economic Development District of Southwest Colorado ("Region 9"), payable in monthly installments of $3,406, including interest at 6.50%, through March 2013, and a balloon payment at maturity for all remaining principal, collateralized by substantially all the assets of the Company and guaranteed by the principal stockholder of AHR. 151, ,509 Notes payable to banks, payable in monthly installments of approximately $1,800, including interest ranging from %, through July The debt is collateralized by transportation equipment with a net book value of approximately $31,200 as of December 31, ,271 65,222 Note payable to a bank, payable in annual installments of $250,000, including interest at 7%, collateralized by a promissory note from the City of Durango (see Note 5), and guaranteed by the principal stockholder of AHR. On February 28, 2012, this note payable was converted to a line of credit that matures on August 28, 2012 (see Note 6). 132, ,000 Note payable to CHFA, payable in monthly installments of $2,040, including interest at 4%, through June 2013, and a balloon payment at maturity for all remaining principal, collateralized by equipment with a net book value of $84,842 as of December 31, ,964 79,652 13

16 Note 7. Long-Term Debt (Continued) Note payable, payable in monthly installments of $3,411, including interest at 7%, through April 2018 and a balloon payment at maturity for all remaining principal, unsecured. 396, ,117 Note payable, payable in monthly installments of $26,806, including interest at Prime Rate plus 1% (4.25% as of December 31, 2011) but not less than 7% though May 5, 2025, and a balloon payment at maturity for all remaining principal, collateralized by real property owned by RS (see Note 2) and guaranteed by the principal stockholder of AHR. 2,792,631 2,914,467 Note payable, payable in monthly installments of $564, including interest at 4.5%, through September 2018 and a balloon payment at maturity for all remaining principal, collateralized by land with a book value of $141, ,167 - Note payable, payable in monthly installments of $3,436, including interest at 4.5%, though June 2018 and a balloon payment at maturity for all remaining principal, collateralized by land with a book value of $859, ,663-17,624,912 17,721,120 Less current portion of long-term debt (993,440) (1,052,541) Long-term debt $ 16,631,472 $ 16,668,579 Aggregate future maturities required on long-term debt as of December 31, 2011 are as follows: Year Ending December 31, Amount 2012 $ 993, ,009, , , ,042,558 Thereafter 12,696,088 $ 17,624,912 14

17 Note 8. Employee Benefit Plans The Company has a noncontributory defined benefit retirement plan (the plan ) covering substantially all of its full-time employees over the age of 21 with at least one year of service. The Company amended the plan on December 31, 2008 to freeze participation at current levels and on February 13, 2009 to cease future benefit accruals as of April 1, Employees who were not participants in the plan on December 31, 2008 are not eligible to become a participant in the plan. The benefits are based on years of service and the employee s average compensation during the highest three consecutive years. The Company s funding policy for the plan is to annually contribute an amount between the minimum required and maximum allowable for federal income tax purposes. Contributions are intended to provide for benefits attributed to prior service. The Company uses a December 31 measurement date for its plan. Obligations and the funded status of the plan at December 31, 2011 and 2010 are as follows: Fair value of plan assets $ 1,564,760 $ 1,680,244 Benefit obligations 2,390,908 2,238,490 Funded status at end of year $ (826,148) $ (558,246) Amounts recognized in the consolidated balance sheet as of December 31, 2011 and 2010 consist of: Noncurrent accrued pension plan liability $ (826,148) $ (558,246) Amounts recognized in accumulated other comprehensive income as of December 31, 2011 and 2010 consist of net losses of $994,530 and $791,588, respectively. The accumulated benefit obligation for the plan was $2,390,908 and $2,238,490 at December 31, 2011 and 2010, respectively. Net periodic benefit cost and other amounts recognized in other comprehensive income for the years ended December 31, 2011 and 2010: Net periodic benefit cost $ 64,960 $ 71,397 Other changes in plan assets and benefit obligations recognized in other comprehensive income: Net (gain) loss 239,948 (2,310) Amortization of net loss (37,006) (38,586) Total recognized in other comprehensive (income) loss 202,942 (40,896) Total recognized in net periodic benefit cost and other comprehensive income $ 267,902 $ 30,501 The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is approximately $37,

18 Note 8. Employee Benefit Plans (Continued) Assumptions used to determine benefit obligations at December 31, 2011 and 2010, were as follows: Assumptions used in computing ending obligations: Discount rate 5.50% 5.50% Rate of compensation increase 0.00% 0.00% Assumptions used in computing net cost: Discount rate 5.50% 5.50% Rate of compensation increase 0.00% 0.00% Expected return on plan assets 5.50% 5.50% The discount rate used by the Company for valuing pension liabilities is based on a review of high quality corporate bond yields with maturities approximating the remaining life of the projected benefit obligations. Compensation increase assumptions are zero because the Plan has been frozen. Long-term rates of return were selected within the historical range of rates of return on similar investments. The plan s investment policy is to allocate assets among several classes of investments to seek optimum growth commensurate with modest risk, keeping in focus the long-term nature of pension benefit obligations. The fair values of the pension plan assets at December 31, 2011 and 2010 are as follows: Asset Category Cash $ 34,753 $ 86,831 Mutual funds: International funds 104, ,900 Growth funds 534, ,859 Mid-cap funds 176,109 46,175 Small-cap funds 45,532 47,076 Large-cap funds 118, ,425 Bond funds 551, ,978 $ 1,564,760 $ 1,680,244 Mutual funds are categorized as Level 1 for fair value measurement as they have quoted prices in active markets. 16

19 Note 8. Employee Benefit Plans (Continued) Cash flows for the years ended December 31, 2011 and 2010 are as follows: Employer contributions: 2010 (actual) $ 81, (actual) (estimated) 100,000 Benefit payments: 2010 $ 19, ,050 The following benefit payments are expected to be paid over the next ten years: Year Ending December 31, 2012 $ 67, , , , , $ 589,245 1,005, (k) profit sharing plan: AHR maintains a 401(k) profit sharing plan covering substantially all of the Company s employees meeting certain minimum age and service requirements. The Company s contributions to the 401(k) plan are determined by the Board of Directors and are limited to a maximum of 50% of the employee s contribution and 5% of the employee s compensation. Contributions to the 401(k) plan amounted to $79,334 and $72,477 for the years ended December 31, 2011 and 2010, respectively. Note 9. Contingencies The Company may be subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. Management believes its risk to be mitigated by carrying adequate insurance and the ultimate liability with respect to such claims and liabilities will not materially affect the financial statements. 17