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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report June 30, 2002 Commission file number 0-2751
------------- ------
AMERICAN HOSPITAL MANAGEMENT CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1861243
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1116
Arcata, California 95521
- ------------------ -----------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (707) 839-8474
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $1.00 par value
- --------------------------------------------------------------------------------
(Title of class)
$2.00 Cumulative Preferred Stock $1.00 par value
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ____ No __X__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes _____ No __X___
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, at a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405, 17 CRF 230.405.)
There is no market for the registrant's stock.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date (222,315 at November 20, 2002).
Total number of pages, including cover - 44
-2-
PART 1
Item 1. Business
- ------- --------
The primary business of the Company is the ownership and
operation of Mad River Community Hospital (the Hospital) and
satellite clinics, located in the Humboldt County area of
Northern California.
As a result of area growth and the merger of two competing
Hospitals in Eureka, and as part of a strategic plan, the
Company has expanded the scope of services offered by the
Hospital. The Hospital's service area on the north coast is
experiencing the highest rate of growth in the county and is
especially attractive to healthcare professionals who want to
work in a community with high family values.
The nearest competition to the Hospital is in Eureka
(approximately 12 miles south) where one remaining acute care
facility is located. Management of the Hospital feels that as
long as it maintains a strong position in providing a full
scope of health care services, the facility located in Eureka
will have little or no negative impact on Hospital use or
occupancy. For this reason, the Hospital organized outpatient
clinics in the outlying communities thereby maintaining the
Hospital's presence in the service area. A new two story
medical building is under construction adjacent to the
Hospital for expansion of patient services within the
Hospital. The anticipated completion date in 2003, of the new
22,000 square foot building, is subject to obtaining
financing.
Another positive factor supporting Hospital use is community
involvement. As the largest private employer in Arcata, with
expanding services being provided through Home Health and
Adult Day Health Care departments, the Hospital is highly
visible in the community served. The Hospital continues to try
to build on this strength by maintaining a solid community
provider image through the media and a helping hand in the
community. The Hospital is an advocate for a community health
care plan involving the medical staff, employers and the
area's hospitals and health care providers wherein they will
work together to provide a locally based alternative to out of
the area managed care.
As the health care industry is dependent on government payment
of care for the elderly and indigent, the Hospital may be
negatively impacted by new Government regulations or changes
in policy. As mentioned above, the Hospital is collaborating
with other health care professionals to establish a community
health care plan that could compete with the various outside
managed care plans.
-3-
Item 2. Properties
- ------- ----------
The main facility operated by the Company is Mad River
Community Hospital in Arcata, California. This single story
structure is licensed as an 80-bed acute hospital, providing
full hospital services to a population of approximately
55,000. Since opening in 1972, the Hospital has maintained a
program of expansion and improvements. It is located on 12
acres (part of a 48-acre site) which leaves sufficient open
area for expansion of medical services as needed in the
further. The Hospital is adjacent to an expanded medical
office complex owned by staff doctors.
The Company owns 27 acres of land approximately 4 miles from
the Hospital held for future residential development. A house
and barn on the property are currently used as an office,
guest quarters and storage space for the Company. The Company
owns a personal residence adjacent to the Hospital. This
acquisition was made to facilitate a continued favorable
occupancy by a Hospital-related specialty and is presently
being leased to an unrelated private resident who provides a
child day care service to hospital employees. The Company also
owns residences and commercial properties in Eureka, Lake
County, and McKinleyville, California. From time to time, the
Company acquires real estate being held for investment
purposes and future strategic use.
As part of its outreach program, the Company owns and operates
medical office buildings which include a medical clinic in
Willow Creek, California (38 miles east of the Hospital). The
Company also owns and operates real property in McKinleyville
which provides clinical services.
Adult Day Health Care of Mad River, a separate not-for-profit
organization, is operating an adult day health care facility
in a building adjacent to and owned by Mad River Community
Hospital. Michael Young, Controller of the Company, is
functioning as Adult Day Health Care's Administrator and
performs minimal accounting services for the organization. To
meet the growing demands for this service, the existing
building was expanded. This entity will continue to lease the
facility from the Hospital.
-4-
Item 3. Legal Proceedings
- ------- -----------------
None.
Item 4. Submission of Matters to Vote of Security Holders
- ------- -------------------------------------------------
There were no matters submitted to a vote by the security
holders during the fourth quarter of the fiscal year covered
by this report.
-5-
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
- ------- -------------------------------------------------------------
Holder Matters
--------------
There is no market for the registrant's stock. There are
approximately 385 shareholders at November 20, 2002. No
dividends were paid on common stock during the three years
ended June 30, 2002. The Company is current on paying all
cumulative preferred stock dividends.
-6-
Item 6. Selected Financial Data
- ------- -----------------------
Years ended June 30
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Total operating
revenue, net $ 30,547,032 $ 27,663,529 $ 24,759,228 $ 24,089,600 $ 22,992,958
Net (loss) income (843,080) 382,507 541,259 (164,824) 350,874
Basic (loss) earnings
per share (4.21) 1.30 2.00 (1.15) 1.12
Diluted (loss)
earnings per share (4.21) 1.21 1.71 (1.15) 1.09
Cash dividends per
common shares -- -- -- -- --
Total assets 25,161,711 24,862,687 22,409,022 22,302,627 22,411,941
Long-term debt 2,251,843 1,266,888 676,132 741,865 206,265
Working capital 7,605,491 8,312,317 8,861,853 8,553,820 8,905,761
Redeemable
preferred stock 46,471 46,487 46,829 47,442 47,690
Stockholders'
equity 14,583,066 15,641,209 15,690,291 15,416,989 15,891,443
-7-
Item 7 Management's Discussion and Analysis of
- ------ ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
2002
----
Results of Operations
---------------------
Hospital revenues increased during 2002 as the Hospital
continued to expand services offered to the community. Use of
inpatient and outpatient services increased approximately 11%.
In addition, fees for services rendered increased an average
of 7%. Patient revenue totaled $69,530,000 in 2002 compared to
$56,889,000 in 2001, a 22.2% increase of $12,641,000.
Contractual allowances totaled $40,931,000 in 2002 compared to
$30,449,000 in 2001, a 34.4% increase. Largely because of the
decrease in the reimbursement payments by third-party payers,
management elected to change the methodology for estimating
estimated allowances which contributed greatly to the large
percentage increase in contractual allowances. The estimated
allowances as a percentage of patient receivables increased
approximately 11.7%, or approximately $2,576,000. This is a
non-cash entry as indicated by the statement of cash flows
that shows $713,000 net cash provided by operations. The
change in estimate, in large part, was required by third-party
payers reimbursing based on fixed contracts which do not take
into account the ever increasing cost of providing health
care. Medicare and Medi- Cal indicate an attempt to reimburse
the hospitals' cost of providing services. But, as the
government continues its efforts to cut back on rising health
care payments, the actual reimbursement to the Hospital
continues to decrease. The majority of reimbursement is based
on fixed contracts. Therefore, as actual costs of providing
services increase, these amounts are not reimbursed. For the
three years ended June 30, 2001, contractual allowances and
provisions for bad debts have amounted to approximately
$77,700,000 or 51% of gross revenue. For the year ended June
30, 2002, contractual allowances, including the effect of
changing the methodology for estimating allowances, were 58.9%
of gross revenues. If the change in estimate had not been
made, this percentage would have been approximately 54%, a 3%
increase over prior years. As indicated above, much of the
time, the Hospital is unable to even recoup costs on Medicare
patients under the current methodology of reimbursement.
Medi-Cal has also imposed certain limitations that negatively
impact the amount the Hospital is reimbursed for Medi-Cal
patients.
Operating costs and expenses were $32,731,000 compared to
$27,895,000 in 2001, a 17.3% increase. The main cause of the
increase is an increase in salaries and related costs for
health care providers within the facility. These increases
were necessary to keep the Hospital's wage scale in line with
industry standards. The healthcare industry is experiencing a
serious shortage in nurses and ancillary care technicians.
During the year, as the volume of business increased
significantly, the Hospital was forced to use outside nursing
registry to cover required staffing
-8-
2002 continued
--------------
based on volume. The cost of outside nursing registry is more
than double the cost of payroll staffing. Therefore, not only
did payroll cost for nurses and medical technicians increase
approximately $2,000,000, the Hospital incurred approximately
$800,000 in registry costs. In order to stay competitive
within the market, the Hospital must continue to maintain a
wage scale that is comparable to other facilities in rural
areas. As of year end, management had been successful in
hiring the required staff and, therefore, the cost for nursing
registry will decrease significantly
The continued reduction in third-party reimbursement is the
major contributing factor to the increase in contractual
allowances. The Hospital is still dealing with third-party
payors to finalize cost reports under audits. Management is
actively appealing various adjustments made by the
intermediary, and, even though, it appears the Hospital will
prevail on various issues, no amount will be booked as a
receivable until the ultimate outcome of the appeal is known.
Mainly caused by the lower than expected reimbursement rate
effect of the change in estimate, the Company recorded a loss
of $843,000 compared to net income of $383,000 in the prior
year. Management feels strongly that this loss was caused by
the significant increase in the percentage of estimated
allowances compared to patient receivables, a balance sheet
adjustment. Even though all hospitals continue to be
negatively impacted by poor reimbursement contracts with third
party payers, if the required daily census can be maintained
at the increased level experienced in the current year and
costs are controlled, management anticipates continued
profitable operations.
The Company continues to enjoy a large positive current ratio
with current assets exceeding current liabilities by
$7,605,000. As the market has been in a down trend, the
investment portfolio for equity stocks has suffered an
approximate $842,000 decrease in fair value. This decrease is
a large contributing factor to the decrease in current assets
as well as the decrease in total stockholders' equity.
Management hopes that this decrease in fair value is a
short-term loss and will be recovered as the economy improves.
The Company continues to enjoy good returns on its investments
to help maintain operations. For the current year, sales of
investments resulted in gains of $20,000, while total
investment income was $462,000. As discussed in Item 1, the
Company continues to expand operations to maintain a
competitive edge in a continuing ever changing health care
environment. All construction projects considered necessary to
maintain operations will be completed without negative impact
on the financial statements.
-9-
2002 continued
--------------
The purpose of these projects is to keep the users of the
Hospital in their primary service area when health care is
required, thereby enhancing the Hospital's inpatient service
occupancy. By so doing, it is anticipated that operations will
improve, even though the continued burden of government
contractual agreements to provide health care, sometimes below
cost, is being further complicated by the introduction of
managed care contracts in the Humboldt County area.
Liquidity and Capital Resources
-------------------------------
The Company's financial condition remains very strong with
substantial investments, strong liquidity and minimal debt.
The current ratio is 1.87 to 1. The cash and liquid
investments are being maintained to subsidize Hospital
operations and to finance needed construction and increased
services at Mad River Community Hospital. Currently, the
Company has approximately $5,798,000 in cash and short-term
investments. Included in this amount are $1,771,000 in
unrealized holding gains. The short-term equity investments
are collateral for the $2,374,000 line of credit at June 30,
2002.
Cash from operating and investing activities continue to fund
investing activities, the largest of which is the purchase of
real estate, property and equipment, which totaled $1,187,000
in 2002. As the long-term debt relates only to the acquisition
of major equipment, cash required for financing activities
remains relatively low. The Hospital is currently seeking
alternatives for additional long-term financing to finance
major renovation and construction projects. The Hospital is
seeking $4,000,000 in long-term financing to complete the
attached medical building under construction. The proceeds
from this financing will also be used to pay off the
$1,074,000 term loan.
As discussed in Item I, government regulations, as well as
managed care contract agreements, may continue to negatively
impact operations. Management is unable to estimate any
potential negative impact of forthcoming laws or regulations.
Management believes that long-term key employees approve of
the working conditions at the Hospital and have proven their
ability to keep the Hospital staffed under difficult
conditions.
Inflation
---------
According to the U.S. Department of Labor Statistics Urban
Consumer Price Index, the inflation factor affecting costs for
medical care services has averaged approximately 5% over the
last three years. This moderate rate contributed to the
Hospital's success in maintaining a moderate increase in costs
from year to year.
-10-
Item 7 Management's Discussion and Analysis of
- ------ ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
2001
----
Results of Operations
---------------------
Hospital revenues increased during 2001 as the Hospital
continues to expand services to encourage use. Use of
inpatient and outpatient services increased, and there was a
rate increase. Patient revenue totaled $56,889,000 in 2001
compared to $50,615,000 in 2000, a 12.3% increase of
$6,274,000.
Contractual allowances totaled $30,449,000 in 2001 compared to
$27,579,000 in 2000, a 10.4% increase. Government regulatory
agencies attempt to reimburse the Hospital based on cost of
services. But, as the government continues its efforts to cut
back on rising health care payments, the actual reimbursement
to the Hospital continues to decrease as evidenced by the
large increase in contractual allowances. For the three years
ended June 30, 2001, contractual allowances and provisions for
bad debts have amounted to approximately $77,700,000 or 51% of
gross revenue. At times the Hospital is unable to even recoup
costs on Medicare patients under the current methodology of
reimbursement. Medi-Cal has also imposed certain limitations
that negatively impacted the amount the Hospital is reimbursed
for Medi- Cal patients.
Operating costs and expenses were $27,895,000 compared to
$24,908,000 in 2000, a 11.9% increase. The main cause of the
increase is caused by an increase in salaries and related cost
to health care providers within the facility. These increases
were necessary to keep the Hospital's wage scale more in line
with industry standards. The healthcare industry is
experiencing a serious shortage in nurses and ancillary care
technicians. In order to stay competitive within the market
the Hospital must continue to maintain a wage scale that in
comparable to other facilities in rural areas.
The continued reduction in third-party reimbursement is the
major contributing factor to the increase in contractual
allowances. The Hospital is still dealing with third-party
payors to finalize cost reports under audits. Management is
actively appealing various adjustments made by the
intermediary, and, even though, it appears the Hospital will
prevail on various issues, no amount will be booked as a
receivable until the ultimate outcome of the appeal is known.
Net income before income taxes is $597,000 in 2001 compared to
$696,000 in 2000. Even though the Hospital continues to be
negatively impacted by poor reimbursement contracts with third
party payers, if the required daily census can be maintained
and costs are controlled, management anticipates continued
profitable operations.
-11-
2001 continued
----
Over the years, as the Company incurs more contractual
allowances and uncollectible accounts, results from operations
have suffered. The Company continues to enjoy good returns on
its investments to help maintain a net profit. For the current
year, sales of investments resulted in gains of $41,000, while
total investment income was $378,000. As discussed in Item 1,
the Company continues to expand operations to maintain a
competitive edge in a continuing ever changing health care
environment. All construction projects, considered necessary
to maintain operations, will be completed without negative
impact on the financial statements.
The purpose of these projects is to keep the users of the
Hospital in their primary service area when health care is
required, thereby enhancing the Hospital's inpatient service
occupancy. By so doing, it is anticipated that operations will
improve, even though the continued burden of government
contractual agreements to provide health care, sometimes below
cost, is being further complicated by the introduction of
managed care contracts in the Humboldt County area.
Liquidity and Capital Resources
-------------------------------
Cash from operating and investing activities continue to fund
investing activities, the largest of which is the purchase of
real estate, property and equipment, which totaled $2,153,000
in 2001. As the long-term debt relates only to the acquisition
of major equipment, cash required for financing activities
remains relatively low. The Hospital is currently evaluating
the need for additional long-term financing to finance major
renovation and construction projects.
As discussed in Item I, government regulations, as well as
managed care contract agreements, may continue to negatively
impact operations. Management is unable to estimate any
potential negative impact of forthcoming laws or regulations.
Management believes that long-term key employees approve of
the working conditions at the Hospital and have proven their
ability to keep the Hospital staffed under difficult
conditions.
-12-
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
FINANCIAL STATEMENTS
--------------------
Description Page
----------- ----
Independent Auditors' Reports 15
Financial Statements:
Balance Sheets - June 30, 2002 and 2001 16-17
Statements of Operations
Years ended June 30, 2002, 2001 and 2000 18
Statements of Comprehensive Income
Years ended June 30, 2002, 2001 and 2000 19
Statements of Stockholders' Equity
Years ended June 30, 2002, 2001 and 2000 20
Statements of Cash Flows -
Years ended June 30, 2002, 2001 and 2000 21-22
Notes to Financial Statements 23-35
Item 14. Exhibits, Financial Statement, Schedules
and Reports on Form 8-K 40
-13-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
ANNUAL REPORT FOR CORPORATIONS - FORM 10-K
YEARS ENDED JUNE 30, 2002 AND 2001
FINANCIAL STATEMENTS,
SUPPLEMENTARY DATA AND AUDITORS' REPORT
-14-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American Hospital Management Corporation
We have audited the accompanying balance sheets of American Hospital
Management Corporation as of June 30, 2002 and 2001, and the related
statements of operations, comprehensive income, stockholders' equity
and cash flows for each of the years in the three-year period ended
June 30, 2002. Our audits also included the financial statement
schedules listed in the Index at Item 14. These financial statements
and financial statement schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion
on these financial statements and financial statement schedules 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, such financial statements present fairly, in all
material respects, the financial position of American Hospital
Management Corporation as of June 30, 2002 and 2001, and the results of
its operations and its cash flows for each of the years in the
three-year period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in
our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein
Hurley & Company
Granada Hills, California
October 7, 2002
-15-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
BALANCE SHEETS
JUNE 30, 2002 AND 2001
ASSETS
------
2002 2001
---- ----
Current assets:
Cash and cash equivalents $ 805,205 $ 256,995
Marketable securities 4,993,239 5,524,003
Receivables:
Patients, net of estimated allowances of $7,346,065
and $4,769,817, in 2002 and 2001, respectively 7,503,722 7,840,272
Other 339,335 472,132
Estimated third-party payor settlements 1,219,687 1,259,087
Income tax refund 238,944 --
Supplies, at lower of cost (first-in, first-out) or market 1,163,683 1,012,915
Prepaid expenses 53,171 101,203
----------- -----------
Total current assets 16,316,986 16,466,607
Property and equipment, net 6,187,174 5,801,022
Real estate held for investment, net 1,909,172 1,954,241
Deferred income taxes 227,938 97,007
Other assets 520,441 543,810
----------- -----------
$25,161,711 $24,862,687
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-16-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
BALANCE SHEETS
JUNE 30, 2002 AND 2001
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
2002 2001
---- ----
Current Liabilities:
Current maturities of long-term debt $ 384,693 $ 199,700
Line of credit 2,374,150 2,321,587
Accounts payable and accrued expenses:
Trade 2,337,300 2,086,732
Accrued liabilities 2,388,445 2,121,092
Estimated third-party payor settlements 161,000 --
Income taxes:
Current 148,386 224,506
Deferred 917,521 1,200,673
----------- -----------
Total current liabilities 8,711,495 8,154,290
----------- -----------
Long-term debt, less current maturities 1,867,150 1,067,188
----------- -----------
Stockholders' equity:
$2 cumulative preferred stock, par value $1 per share; authorized 100,000
shares; issued 65,270.82 shares; reacquired 18,799.74 and 18,784.20 shares;
outstanding 46,471.08 and 46,486.62 shares; aggregate redemption and
liquidating value of $1,277,955 and $1,278,382 at June 30, 2002 and 2001,
respectively 46,471 46,487
Common stock, par value $1.00 per share; authorized 400,000 shares, issued
249,051 shares, reacquired 26,736 and 26,436 shares; outstanding -
222,315 and 222,615 shares at June 30, 2002 and 2001, respectively 222,315 222,615
Additional paid-in capital 279,407 106,554
Accumulated other comprehensive income 1,052,554 1,353,762
Retained earnings 12,982,319 13,911,791
----------- -----------
Total Stockholders' equity 14,583,066 15,641,209
----------- -----------
$25,161,711 $24,862,687
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-17-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000
---- ---- ----
Net patient service revenue $ 30,547,032 $ 27,663,529 $ 24,759,228
Other revenue 389,612 393,155 346,071
------------ ------------ ------------
Total operating revenue 30,936,644 28,056,684 25,105,299
------------ ------------ ------------
Operating costs and expenses:
Professional care of patients 19,675,123 17,161,899 15,160,791
General services 2,686,040 2,527,309 2,357,961
Fiscal and administrative services 4,180,705 3,506,466 3,304,688
Employee health and welfare 2,615,432 2,104,678 1,132,846
Medical malpractice insurance 574,064 415,790 296,639
Interest 205,507 113,714 104,938
Depreciation and amortization 846,122 841,117 827,340
Provision for bad debts 1,947,544 1,223,545 1,723,497
------------ ------------ ------------
Total operating costs and expenses 32,730,537 27,894,518 24,908,700
------------ ------------ ------------
(Loss) income from operations (1,793,893) 162,166 196,599
------------ ------------ ------------
Other income:
Investment income 462,259 418,911 487,129
Other 21,672 15,586 12,642
------------ ------------ ------------
483,931 434,497 499,771
------------ ------------ ------------
(Loss) income before income tax benefit (provision) (1,309,962) 596,663 696,370
Provision for income tax benefit (expense) 466,882 (214,156) (155,111)
------------ ------------ ------------
Net (loss) income $ (843,080) $ 382,507 $ 541,259
============ ============ ============
Basic (loss) earnings per common share $ (4.21) $ 1.30 $ 2.00
============ ============ ============
Diluted (loss) earnings per common share $ (4.21) $ 1.21 $ 1.71
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-18-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002
- ----
Net loss $ (843,080)
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during tax period $ (281,667)
Less: reclassification adjustment for gains realized
in net income (19,541) (301,208)
----------- -----------
Comprehensive loss $(1,144,288)
===========
2001
- ----
Net income $ 382,507
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses arising during tax period $ (286,678)
Less: reclassification adjustment for gains realized
in net income (41,274) (327,952)
----------- -----------
Comprehensive income $ 54,555
===========
2000
- ----
Net income $ 541,259
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding gains arising during tax period $ 10,799
Less: reclassification adjustment for gains realized
in net income (167,590) (156,791)
----------- -----------
Comprehensive income $ 384,468
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-19-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Stockholders' Equity:
Cumulative Preferred Stock
Beginning balance $ 46,487 $ 46,829 $ 47,442
Reacquired stock (16) (342) (613)
------------ ------------ ------------
Ending balance 46,471 46,487 46,829
------------ ------------ ------------
Common Stock
Beginning balance 222,615 223,568 225,027
Reacquired stock (300) (953) (1,459)
------------ ------------ ------------
Ending balance 222,315 222,615 223,568
------------ ------------ ------------
Additional paid-in-capital
Beginning balance 106,554 122,384 148,783
Stockholder debt 175,626 -- --
Reacquired stock (2,773) (15,830) (26,399)
------------ ------------ ------------
Ending balance 279,407 106,554 122,384
------------ ------------ ------------
Accumulated other comprehensive income
Beginning balance 1,353,762 1,681,714 1,838,505
Change in unrealized holdings gains, net (301,208) (327,952) (156,791)
------------ ------------ ------------
Ending balance 1,052,554 1,353,762 1,681,714
------------ ------------ ------------
Retained Earnings
Beginning balance 13,911,791 13,615,796 13,157,232
Net (loss) income (843,080) 382,507 541,259
Cash dividends paid on preferred stock (86,392) (86,512) (82,695)
------------ ------------ ------------
Ending balance 12,982,319 13,911,791 13,615,796
------------ ------------ ------------
Total Stockholders' equity $ 14,583,066 $ 15,641,209 $ 15,690,291
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-20-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Cash received from patients
and third-party payors $ 29,596,524 $ 24,106,903 $ 23,172,826
Cash paid to employees and suppliers (29,078,230) (24,921,285) (22,638,608)
Investment income received 478,584 415,137 344,897
Interest paid (205,507) (113,714) (104,938)
Income taxes (paid) received (78,126) (77,227) 147,720
------------ ------------ ------------
Net cash provided by (used in)
operating activities 713,245 (590,186) 921,897
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment, net (1,187,205) (2,152,623) (768,647)
Proceeds from sale of short-term investments 2,588,137 1,030,918 1,844,750
Cash received from partnership investment -- 27,197 --
Purchase of short-term investments (2,514,004) (1,102,919) (1,919,742)
Other -- 120,312 110,987
------------ ------------ ------------
Net cash used in
investing activities (1,113,072) (2,077,115) (732,652)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,173,661 703,071 41,522
Principal reductions of long-term debt (188,706) (112,315) (107,255)
Net proceeds from line of credit 52,563 1,667,224 654,363
Dividends paid (86,392) (86,512) (82,695)
Payments for reacquired stock (3,089) (17,125) (28,471)
------------ ------------ ------------
Net cash provided by
financing activities 948,037 2,154,343 477,464
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 548,210 (512,958) 666,709
Cash and cash equivalents, beginning of year 256,995 769,953 103,244
------------ ------------ ------------
Cash and cash equivalents, end of year $ 805,205 $ 256,995 $ 769,953
============ ============ ============
Supplemental schedule of non-cash investing
activities:
Decrease in fair value of investments $ (485,347) $ (546,587) $ (251,889)
Change in deferred taxes 184,139 218,635 95,098
------------ ------------ ------------
Decrease in unrealized holding gains $ (301,208) $ (327,952) $ (156,791)
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-21-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS (CONCLUDED)
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
Reconciliation of net (loss) income to net cash
provided by (used in) operating activities:
Net (loss) income $ (843,080) $ 382,507 $ 541,259
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 860,985 864,128 844,241
Change in estimated uncollectibles 2,576,248 1,059,947 (431,326)
Partnership income (669) (1,097) (4,185)
Gain on sale of investments (19,541) (41,274) (167,590)
Change in assets and liabilities:
(Increase) decrease in patient receivables, net (2,106,901) (2,539,861) 812,688
Decrease (increase) in third-party payors, net 200,400 (1,246,322) (590,337)
Change in income taxes, net (545,008) 136,929 302,831
(Increase) decrease in supplies (150,768) (99,225) 117,360
Decrease (increase) in prepaid expenses 48,032 (13,453) (11,313)
Increase (decrease) in trade accounts payable 250,568 490,654 (472,004)
Increase (decrease) in accrued expenses, net 442,979 416,881 (19,727)
----------- ----------- -----------
Net cash provided by (used in)
operating activities $ 713,245 $ (590,186) $ 921,897
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-22-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Organization
------------
The Corporation owns and operates one acute-care hospital, Mad River
Community Hospital, located in Arcata, California. The Hospital
provides inpatient, outpatient and emergency care services for
residents of Humboldt County. It also operates other health care
related enterprises in the same location. Admitting physicians are
primarily practitioners in the local area. The Company was incorporated
as a C-Corporation in California in 1955.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the 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 from those estimates.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents represent cash in checking and demand savings
accounts. Cash is substantially held in one financial institution.
Investments
-----------
Investments in marketable securities with readily determinable fair
values and all investments in debt securities are measured at fair
value in the balance sheets. An investment in oil and gas properties
represents approximately 19% of the total investment in marketable
securities. All investments are held for sale. Investment income or
loss (including realized gains and losses on investments, interest,
royalties and dividends) is included in net income. Unrealized gains
and losses on investments are excluded from net income but are reported
as a separate component of stockholders' equity.
Property and Equipment
----------------------
Property and equipment acquisitions are recorded at cost. Depreciation
is provided over the estimated useful life of each class of depreciable
asset and is computed on the straight-line method. (lives range from
three to thirty years) 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.
Interest cost incurred on borrowed funds during the period of
construction of capital assets is capitalized as a component of the
cost of acquiring those assets.
-23-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Statements of Income
--------------------
Transactions deemed by management to be ongoing, major or central to
the provision of health care services are reported as revenues and
expenses. Peripheral or incidental transactions are reported as other
income, net.
Net Patient Service Revenue
---------------------------
The Hospital has agreements with third-party payors that provide for
payments to the Hospital at amounts different from its established
rates. Payment arrangements include prospectively determined rates per
discharge, reimbursed costs, discounted charges and per diem payments.
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.
Estimated Malpractice Costs
---------------------------
The provision for estimated medical malpractice claims includes
estimates for the ultimate costs for both reported claims and claims
incurred but not reported.
Income Taxes
------------
Deferred income taxes are provided for the estimated income tax effect
of temporary differences between financial and taxable income.
Investment in Partnership
-------------------------
Investment in a partnership is carried at the Company's equity in the
partnership's net assets. The partnership was organized in 1968 to
provide property sites for the hospital and medical centers. The two
general partners, the Company and its president, own 26% each. The
limited partners, consisting of local doctors, own the remaining 48%.
Impairment of Long-Lived Assets
-------------------------------
The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of." This statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Also, in general, long- lived assets and certain
identifiable intangibles to be disposed of should be reported at the
lower of carrying amount or fair market value less cost to sell.
-24-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Reclassifications
-----------------
Certain accounts from prior years financial statements have been
reclassified to be comparable with disclosure for the current year.
(2) NET PATIENT SERVICE REVENUE
---------------------------
The Hospital has agreements with third-party payors that provide for
payments to the Hospital at amounts different from its established
rates. A summary of the 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. Inpatient nonacute services, certain
outpatient services, and defined capital and medical education
costs related to Medicare beneficiaries are paid based on a
cost reimbursement methodology. 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 Medicare fiscal
intermediary. The Hospital's classification of patients under
the Medicare program and the appropriateness of their
admission are subject to an independent review by a peer
review organization under contract with the Hospital. The
Hospital's Medicare cost reports have been audited by the
Medicare fiscal intermediary through June 30, 1998.
* MEDICAID. Inpatient services rendered to Medicaid program
beneficiaries are reimbursed under a cost reimbursement
methodology. The Hospital is reimbursed at a tentative rate
with final settlement determined after submission of annual
cost reports by the Hospital and audits thereof by the
Medicaid fiscal intermediary. The Hospital's Medicaid cost
reports have been audited by the Medicaid fiscal intermediary
through June 30, 1998.
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 daily rates.
-25-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(2) NET PATIENT SERVICE REVENUE, continued
--------------------------
Gross patient service revenue and related provision for contractual
allowances for the years ended June 30, are summarized as follows:
2002 2001 2000
---- ---- ----
Gross patient service revenue $69,530,413 $56,889,189 $50,615,111
Less contractual allowances 38,983,381 29,225,660 25,855,883
----------- ----------- -----------
Net patient service revenue $30,547,032 $27,663,529 $24,759,228
=========== =========== ===========
At June 30, 2002 and 2001, accounts receivable are primarily
concentrated in federal and state governmental entities and other
patients in which the Company does not believe there are any undue
credit risk.
In prior years, the contractual allowance percentage of patient service
revenue has averaged approximately 51%. Third party payors' payments
for services rendered to patients has continued to decrease, most
significantly, in the current year. Therefore, management has elected
to make a change in the methodology for estimating estimated
allowances. The effect of this change has increased the percentage of
contractual allowances to patient service revenue to approximately 56%.
(Note 3)
(3) CHANGE IN ESTIMATE
------------------
During the fiscal year ended June 30, 2002, management recognized that
the estimated allowances account needed to be increased to reflect the
reduced payments received for services rendered. At any financial
reporting period, the amount of services billed but not collected is
recorded in the patient receivable account. The estimated allowances
account represents an estimate of the amount of patient receivables
that have been billed but will not be collected because of the third
party payers methodology for reimbursement. As discussed in Note 2, the
Hospital has various contractual agreements with third-party payers for
reimbursement of patient services billed. Each year the amount of
reimbursement under contractual agreement, Medicare, Medi-Cal and Blue
Cross being the largest providers, has not kept up with the rising cost
of healthcare, most specifically the cost for nurses and medical
technicians of which there is a shortage nation wide. As the lack of
adequate reimbursement is a problem for all healthcare providers,
management believes that third- party payers, most specifically
Medicare and Medi-Cal will need to change their methodology for
reimbursement to insure, at a minimum, that Hospital costs are
reimbursed.
-26-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(3) CHANGE IN ESTIMATE, CONTINUED
-----------------------------
Historically, the average percent of contractual allowances to gross
patient revenue has been approximately 51%. (retention percent).
Unfortunately, the actual average retention percent for bills rendered
to patients receiving care from the Hospital is now closer to 54%.
Therefore, the estimated allowance amount, per the balance sheet, has
increased from 37.8% of gross receivables at June 30, 2001, to 49.5% at
June 30, 2002, 54% for inpatients and outpatients of the Hospital. This
change, made in the year ended June 30, 2002, covers approximately
$5,207,700 in billings made over the current and past years. Management
does not anticipate that an additional adjustment for a change in
estimate will be necessary in subsequent years.
(4) MARKETABLE SECURITIES
---------------------
Cost and fair value of marketable equity securities at June 30, 2002
and 2001, are as follows:
2002 2001
---- ----
Available for sale:
Cost $ 3,222,291 $ 3,267
Fair Value 4,993,239 5,524,003
Unrealized Gain 2,189,066 2,501,927
Unrealized Loss (418,118) (245,657)
Gain or loss from sale of securities is based on specific
identification of the securities sold. The change in net unrealized
holding gains on securities available for sale, net of the tax effect,
of $(301,208), $(327,952) and $(156,791) for the years ended June 30,
2002, 2001 and 2000 have been charged to comprehensive income. For the
years ended June 30, 2002, 2001 and 2000, realized gains and realized
losses were $746,065 and $(726,524), $276,863 and $(235,589), and
$343,889 and $(176,299), respectively.
The Company has a line of credit with the Wells Fargo Bank, secured by
the equity investment portfolio. The maximum amount available under the
line of credit at June 30, 2002 is $2,500,000, of which $2,374,150 is
outstanding. The interest rate at June 30, 2002 and 2001 was 4.75% and
7.00%, respectively. The average short-term borrowing rate for the
Company was 5.25% and 7.24% for 2002 and 2001, respectively.
-27-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(5) PROPERTY AND EQUIPMENT
----------------------
At June 30, 2002 and 2001, property and equipment is comprised of the
following:
2002 2001
---- ----
Land and improvements $ 44,500 $ 44,500
Buildings 5,927,297 5,832,326
Equipment 9,610,007 9,527,590
Construction in progress 1,765,447 875,916
----------- -----------
17,347,251 16,280,332
Accumulated depreciation and amortization 11,160,077 10,479,310
----------- -----------
Net property and equipment $ 6,187,174 $ 5,801,022
=========== ===========
Capitalized interest of $89,321 and $58,535 is included in construction
in progress for the years ended June 30, 2002 and 2001, respectively.
Property and equipment include certain capitalized leases, as follows:
2002 2001
---- ----
Equipment $1,678,984 $1,678,984
Less accumulated amortization 657,721 415,360
---------- ----------
$1,021,263 $1,263,624
========== ==========
Amortization expense on capitalized leases for the years ended June 30,
2002, 2001 and 2000 totaled $242,361, $192,142 and $138,957,
respectively.
Annual future minimum lease payments under capitalized leases at June
30, 2002 are as follows:
2003 $ 462,906
2004 144,635
2005 136,373
2006 135,656
2007 135,656
Thereafter 158,264
-----------
Total minimum lease payments 1,173,490
Less amount representing interest (6.75% to 19.46%) 222,614
-----------
Present value of minimum lease payments 950,876
Less current maturity 382,511
-----------
$ 568,365
===========
-28-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(6) REAL ESTATE HELD FOR INVESTMENT
-------------------------------
Real estate held for investment consists of 14 properties, 9 of which
have a building on their lots. These are itemized as follows:
2002 2001
---- ----
Property Location:
McKinleyville, California $1,475,472 $1,475,472
Willow Creek, California 335,608 335,608
Lakeport, California 333,521 333,521
Arcata, California 161,750 161,750
Eureka, California 134,908 134,908
---------- ----------
2,441,259 2,441,259
Less accumulated depreciation for rented property 532,087 487,018
---------- ----------
$1,909,172 $1,954,241
========== ==========
The properties with buildings attached are either used temporarily for
Hospital purposes, or used as rental property. All properties are
valued at cost as it is not cost effective to determine fair value.
Based on the property records available, there is no impairment of
value.
(7) OTHER ASSETS
------------
At June 30, 2002, other assets include cash surrender value of life
insurance polices on three executives totaling $449,570 and an
investment in a partnership of $70,871. For the years ended 2002 and
2001, the investment in a partnership increased by income of $669 and
$1,097, respectively.
(8) LONG-TERM DEBT
--------------
Long-term debt at June 30, 2002 and 2001, consists of the following:
2002 2001
---- ----
Bank note, secured by investment property,
interest rate of 2.25% above bank index
(5.01% at June 30, 2002), payable in monthly
installments, maturing in 2021 $ 127,307 $ 131,623
Term note, secured by patients' receivables,
interest rate of prime plus 2%, (6.75% at
June 30, 2002), interest only through
December 31, 2002, thereafter, monthly
payments equal to 4.16% of the term loan
balance through December 31, 2004, with
entire principle balance due at that time. 1,073,660 --
-29-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) LONG-TERM DEBT, CONTINUED
--------------
Lease obligations, payable in installments
through 2008 with a weighted average
interest rate of 9.48% 950,876 1,135,265
Shareholder, unsecured, interest only at 7% 100,000 --
---------- ----------
2,251,843 1,266,888
Less current maturities 384,693 199,700
---------- ----------
$1,867,150 $1,067,188
========== ==========
The maturities of long-term debt for each of the succeeding five years
subsequent to June 30, 2002, are as follows: 2003-$384,693;
2004-$501,829; 2005-$823,142; 2006-$106,500; 2007- $116,468,
thereafter- $319,211.
(9) INCOME TAXES
------------
At June 30, income tax expense (benefit) consisted of the following:
2002
-------------------------------------
Federal California Total
------- ---------- -----
Current $(238,944) $ 800 $(238,144)
Deferred (191,358) (37,380) (228,738)
--------- --------- ---------
$(430,302) $ (36,580) $(466,882)
========= ========= =========
2001
-------------------------------------
Federal California Total
------- ---------- -----
Current $ 173,020 $ 51,486 $ 224,506
Deferred (8,271) (2,079) (10,350)
--------- --------- ---------
$ 164,749 $ 49,407 $ 214,156
========= ========= =========
2000
-------------------------------------
Federal California Total
------- ---------- -----
Current $ 69,120 $ 9,564 $ 76,684
Deferred 61,486 14,941 76,427
-------- -------- --------
$130,606 $ 24,505 $155,111
======== ======== ========
-30-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(9) INCOME TAXES continued
------------
Deferred tax expenses (credits) for 2002, 2001, and 2000 result from
the following temporary differences:
2002 2001 2000
---- ---- ----
California franchise tax $ 16,823 $ (15,590) $ (7,167)
Depreciation and amortization 53,036 92,708 84,089
Allowance for bad debts (214,720) (30,623) 29,221
Vacation accrual 7,178 (31,992) (32,700)
Correction of deferred tax liability -- (14,996) --
Net operating loss (96,460) -- --
Other 5,405 (9,857) 2,984
--------- --------- ---------
$(228,738) $ (10,350) $ 76,427
========= ========= =========
In addition, deferred tax liability is recorded in the balance sheet,
resulting from the change in unrealized holdings for investments. The
change in deferred income taxes for the years ended June 30, 2002 and
2001 was $(184,139) and $(218,635), respectively.
Recorded income tax expense (benefit) differs from that computed by
applying the statutory income tax rates for the following reasons:
2002 2001 2000
---- ---- ----
Computed tax at statutory rate $(445,387) $ 255,610 $ 298,325
Increases (decreases) resulting from:
California franchise tax (272) (18,498) (8,108)
Domestic dividend exclusion allowance (15,850) (18,740) (18,165)
Cash surrender value -- -- (112,833)
Entertainment deduction 8,406 10,016 11,093
Net operating loss carryover -- -- (18,043)
Other (13,779) (14,232) 2,842
--------- --------- ---------
$(466,882) $ 214,156 $ 155,111
========= ========= =========
The Company has a net operating loss carryforward of $259,464 for
federal taxes and $435,904 for state taxes which expire in the year
ending 2023.
-31-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(9) INCOME TAXES continued
------------
Principal components of the net asset/(liability) representing deferred
income tax balances are as follows:
2002 2001
---- ----
Allowance for bad debts $ 337,532 $ 98,109
Vacation accrual 285,515 293,521
Depreciation and amortization (704,241) (645,802)
Net operating loss 127,212 --
Unrealized holding gains (718,369) (902,508)
Other (17,232) 53,014
----------- -----------
Net deferred income tax liability $ (689,583) $(1,103,666)
=========== ===========
(10) PREFERRED STOCK
---------------
The preferred stock provides for cumulative dividends of $2 per share
per year. The stock has a redemption and liquidating value of $27.50
per share, plus dividends in arrears. Total redemption and liquidating
value of the outstanding shares at June 30, 2002 and 2001, was
$1,277,955 and $1,278,382, respectively. In the event of redemption,
two shares of common stock can be issued for each share of preferred
stock redeemed (if option is exercised by preferred stockholder).
Redemption of the preferred stock is at the option of the Company.
(11) (LOSS) EARNINGS PER COMMON SHARE
--------------------------------
Basic (loss) earnings per common share were computed by dividing the
net (loss) income after deduction of preferred stock dividend
requirements of $92,942, $92,973 and $93,657, by the weighted average
number of common shares outstanding (222,465, 223,092 and 224,298) for
2002, 2001 and 2000, respectively.
Diluted earnings per common share were computed by dividing net income
by the weighted average number of common shares outstanding, after
redemption of preferred stock, (315,588 and 317,255) for 2001 and 2000,
respectively. For 2002, there was an anti-dilutive effect for all
shares.
-32-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(12) MALPRACTICE INSURANCE ARRANGEMENTS
----------------------------------
The Hospital purchases professional and general liability insurance to
cover medical malpractice insurance claims. The coverage, through a
commercial insurance carrier, is on a claims-made basis. Under
claims-made policies, all accidents reported to the insurer are
covered. On the basis of the Hospital's current experience, neither an
accrual for a potential extended period reporting policy, which could
be necessary if the Hospital ceases to purchase claims-made coverage,
nor an accrual for unreported incidents has been made.
(13) 401(K) PLAN
-----------
The Plan is a defined contribution plan to which all employees are
permitted to make salary deferrals under the 401(k) provision. Such
contributions are credited directly to their accounts. Based on the
Plan document, the Company can make discretionary contributions for the
participants. The Company made a $34,636 contribution to the plan for
the year ended June 30, 2002. No Company contribution was made for any
of the two years ended June 30, 2001.
(14) 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. The mix of receivables from patients and third-party payors
at June 30, 2002 and 2001, was as follows:
2002 2001
---- ----
Medicare 44.1% 38.8%
Medi-Cal 18.9 11.6
Other third-party payors 29.1 39.0
Patients 7.9 10.6
----- -----
100.0% 100.0%
===== =====
-33-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(15) SELF-INSURANCE PROGRAM
----------------------
The Hospital has elected to self-insure for health care benefits to its
employees. Amounts charged to expense are based on claims processed and
approved by a third-party administrator, Capital Administrators. Claims
incurred but not recorded are estimated and charged to expense.
Management believes that amounts provided are sufficient to cover
claims and costs incurred through June 30, 2002. The rates used to
determine the amounts charged to expense for claims and costs are
adjusted periodically, as appropriate, to reflect actual experience.
The Hospital has insurance coverage for individual claim expenses in
excess of $75,000 and for aggregate claim expenses in excess of
$1,739,750.
Health care benefit expense was $1,867,391, $1,498,230 and $830,022 for
the years ended June 30, 2002, 2001 and 2000, respectively.
(16) COMMITMENTS AND CONTINGENCIES
-----------------------------
COMMITMENTS. The Company has entered into an agreement for
approximately $1,140,000 to construct the exterior shell of a medical
building adjacent to the Hospital. In that regard, the Company is
pursuing a real estate loan of approximately $4,000,000. The proceeds
from the proposed financing will be used to pay off the term loan and
finish construction of the medical building. As of June 30, 2002,
approximately $508,000 has been paid on the construction contract for
the building shell.
Total rental expense for the years ended June 30, 2002, 2001, and 2000,
was $296,277, $386,346, and $388,708, respectively. All leases are
currently month to month obligations. With the completion of the
medical building, the Company anticipates that certain departments
currently occupying leased office space will occupy the medical
building which will result in an approximate $21,000 reduction in
monthly lease cost.
LITIGATION. The Hospital is involved in litigation and regulatory
investigations arising in the course of business. After consultation
with legal counsel and insurance carriers, management estimates that
these matters will be resolved without material adverse effect on the
Hospital's future financial position or results from operations.
SEISMIC REGULATIONS. The state of California has passed legislation
requiring hospitals to perform structural evaluations of their
buildings and upgrade facilities to meet certain minimum seismic
standards by 2008. The Hospital has performed the initial evaluations
and will meet seismic standards by the required date.
-34-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONCLUDED
(17) RISKS AND UNCERTAINTIES
-----------------------
The Company's future operating results may be affected by a number of
factors. The Hospital's operations are in part dependent on
governmental reimbursement plans. Significant changes in the level of
governmental reimbursement could have a favorable or unfavorable impact
on the operating results of the Hospital. Also, as additional managed
health care plans are introduced into the service area, actual
admissions to the Hospital could increase or decrease depending on the
Hospital's ability to contract with the health plans.
(18) FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
Fair value estimates are made at a specific point in time and are based
on relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties and
matters of judgment and, therefore, cannot be determined with
precision. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular instrument. Changes in assumptions could
significantly affect the estimates.
Since the fair value is estimated as of June 30, 2002, the amounts that
will actually be realized or paid at settlement of the instruments
could be significantly different.
The carrying amount of cash and cash equivalents is assumed to be the
fair value because of the liquidity of these instruments. Accounts
receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these instruments. The recorded
balance of notes payable are assumed to be the fair value since the
rates specified in the notes approximate current market rates.
-35-
Item 9. Changes in and disagreements with accountants on
- ------- ------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
None.
-36-
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Name and principal occupation
during last five years Since Age Office Occupation
- ---------------------- ----- --- ------ ----------
Lawrence Senffner, M.D. 2001 62 Director Physician
Internal
Medicine
Allen E. Shaw, President 1960 84 President & President of
of the Company Director Company
Douglas A. Shaw, Vice President 1981 51 Vice President Hospital
Administrator & Director Administrator
Christopher Lee, M.D. 2001 55 Director Physician
Internal
Medicine
Michael Young, Controller 1978 54 Treasurer Hospital
& Director Controller
Donald J. Krpan, D.O. 1988 66 Director University
Provost,
Western
University of
Health
Sciences
Steven Paine 2001 50 Director Business
Owner
-37-
Item 11. Executive Compensation
- -------- ----------------------
The following table sets forth the aggregate direct
remuneration paid or accrued by the Company for services in
all capacities for the fiscal year ended June 30, 2002, to
each director and officer of the Company whose aggregate
direct remuneration exceeded $100,000 and to all directors and
officers (as a group) who were such at any time during the
last fiscal year.
Cash and cash equivalent
forms of remuneration
---------------------
Name of individual Salaries, fees,
or number of Capacities in which directors' fees
persons in group remuneration was received and bonuses
- ---------------- ------------------------- -----------
Allen E. Shaw President and Chairman of $ 122,803
the Board
All other directors
and officers as a
group (6 persons) 136,470
-------
(7 persons) $259,273
=======
Note: There were no contractual agreements with any directors regarding
compensation, pensions or stock options. Directors, from time to time,
are compensated for attendance at meetings for their general
administrative duties although there is no required payment. Total
director compensation for 2002 was $6,850. There have not been any
payments made to officers or directors for severance of relationship.
-38-
Item 12. Security Ownership of Certain
- -------- -----------------------------
Beneficial Owners and Management
--------------------------------
Owners of 5% or more of outstanding voting securities at June
30, 2002, were as follows:
Amount and
nature of
Title of beneficial Percent
Name of beneficial owner class ownership of class
- ------------------------ ----- --------- --------
Allen E. Shaw Family Common 118,079 53.11%
San Clemente, California Preferred 1,970 4.24%
Arcata Hospital Corporation* Common 20,898 9.40%
Palos Verdes Estates, California Preferred 11,481 24.71%
Security ownership of management as a group
- -------------------------------------------
All directors and officers as Common 118,079 53.11%
a group
All directors and officers Preferred 1,970 4.24%
a group
* Arcata Hospital Corporation is 98% owned by shareholders of the Company,
principally by the Allen E. Shaw Family.
Item 13. Certain Relations and
- -------- ---------------------
Related Transactions
--------------------
None.
-39-
PART IV
Item 14. Exhibits, Financial Statement
- -------- -----------------------------
Schedules, and Reports on Form 8-K
----------------------------------
Page
- ----
(a) (1) The following financial statements are included in
Part II, Item 8:
Reports of Independent Auditors'
Financial Statements:
Balance Sheets
June 30, 2002 and 2001
Statements of Operations
Years ended June 30, 2002, 2001 and 2000
Statements of Comprehensive Income
Years ended June 30, 2002, 2001 and 2000
Statements of Stockholders' Equity
Years ended June 30, 2002, 2001 and 2000
Statements of Cash Flows
Years ended June 30, 2002, 2001 and 2000
Notes to Financial Statements
(2) The following financial schedules for the Years 2002, 2001 and
2000 are submitted herewith:
Schedule II - Valuation and Qualifying Accounts
Schedule III - Real Estate and Accumulated
Depreciation
All other schedules are omitted because they are not
applicable or not required, or because the required
information is included in the financial statements
or notes hereto.
(3) Exhibits included herein:
None
(b) Registrant did not file any reports on Form 8-K during the
quarter ended June 30, 2002.
-40-
SCHEDULE II
AMERICAN HOSPITAL MANAGEMENT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Balance, Charged Charged Balance,
beginning to to other end
of year income accounts Deductions of year
------- ------ -------- ---------- -------
Allowance for
doubtful receivables:
2002 $ 229,013 $ 1,947,544 $ 1,388,668 $ 787,889
2001 157,532 1,223,545 1,152,064 229,013
2000 230,699 1,723,497 1,796,664 157,532
-41-
SCHEDULE III
AMERICAN HOSPITAL MANAGEMENT CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Related Accumulated Useful
Description debt Land Buildings Total Depreciation Life
-------------------------------------------------------------------------------------------------
Rental property $127,307 $482,346 $1,126,725 $1,609,071 $532,087 25
Investment None 832,188 832,188
-------------------------------------------------------------------------------
$127,307 $1,314,534 $1,126,725 $2,441,259 $532,087
====================================================================
Cost:
Balance at June 30, 2002, 2001 and 2000 $2,241,259
Accumulated Depreciation:
Balance at June 30, 2000 $ 441,351
Depreciation during period 45,667
-----------
Balance at June 30, 2001 487,018
Depreciation during period 45,069
-----------
Balance at June 30, 2002 $ 532,087
===========
-42-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized:
AMERICAN HOSPITAL MANAGEMENT CORPORATION
By: /s/ Allen E. Shaw
---------------------------------------
Allen E. Shaw, President
Date: October 31, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the principal Executive Officer, principal Financial
Officer, Secretary and majority of Board Members on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ Allen E. Shaw President and Director October 31, 2002
- --------------------------------
Allen E. Shaw
/s/ Michael J. Young Treasurer and Chief October 31, 2002
- -------------------------------- Accounting Officer
Michael J. Young Director
/s/ Donald J. Kaplan Director October 31, 2002
- --------------------------------
Donald J. Krpan
/s/ Doug Shaw Director October 31, 2002
- --------------------------------
Doug Shaw
-43-