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, 2003 Commission file number 0-2751
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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
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(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
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None
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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]
-1-
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 (216,905 at September 30, 2003).
Total number of pages, including cover - 45
-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 the spring of 2004, of the new 22,000 square foot medical
building adjacent to the Hospital, is subject to finalizing financing.
The building will house various health care related services that will
improve the quality of health care provided to the community.
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
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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
384 shareholders at September 30, 2003. No dividends were paid on
common stock during the three years ended June 30, 2003. The Company is
current on paying all cumulative preferred stock dividends.
-6-
Item 6. Selected Financial Data
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Years ended June 30
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Total operating
revenue, net $ 32,360,976 $ 30,547,032 $ 27,663,529 $ 24,759,228 $ 24,089,600
Net income (loss) 321,474 (843,080) 382,507 541,259 (164,824)
Basic earnings (loss)
per share 1.03 (4.21) 1.30 2.00 (1.15)
Diluted earnings
(loss) per share 1.02 (4.21) 1.21 1.71 (1.15)
Total assets 25,517,304 25,161,711 24,862,687 22,409,022 22,302,627
Long-term debt 1,907,478 1,861,150 1,067,188 562,945 642,154
Working capital 7,862,818 7,605,491 8,312,317 8,861,853 8,553,820
Redeemable
preferred stock 46,471 46,471 46,487 46,829 47,442
Stockholders'
equity 14,961,316 14,583,066 15,641,209 15,690,291 15,416,989
-7-
Item 7. Management's Discussion and Analysis of
- ------- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
2003
----
Results of Operations
---------------------
Hospital revenues increased during 2003 as the Hospital continued to
expand services offered to the community. Use of inpatient and
outpatient services increased approximately 2%. In addition, fees for
services rendered increased an average of 11%. Patient revenue totaled
$78,645,000 in 2003 compared to $69,530,000 in 2002, a 13.1% increase
of $9,115,000.
Contractual allowances totaled $46,284,000 in 2003 compared to
$38,983,000 in 2002, a 18.7 increase. Contractual cost continues to
cause a major concern for providing health as many third-party payers
reimburse based on fixed contracts which do not take into account the
ever increasing cost of providing health care. Therefore, as actual
costs of providing services increase, these amounts may not be
reimbursed. 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. For the three
years ended June 30, 2003, contractual allowances and provisions for
bad debts have amounted to approximately $119,759,000 or 58.4% of gross
revenue. 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 $32,469,000 compared to $32,731,000
in 2002, a slight decrease. The Hospital made a concerted effort to
reduce salary cost during the year while maintaining a wage scale in
line with industry standards. Although the healthcare industry
continues to experience a serious shortage in nurses and ancillary care
technicians, the Hospital was able to maintain sufficient staff during
the year to provide quality healthcare services. The major increase in
cost was group health insurance cost which increased approximately
$905,000. The Hospital is self insured for health care claims and even
though the cost of this benefit for employees is increasing , self
insurance is still considered less costly than paying premiums to an
insurance company for health care benefits. In order to stay
competitive within the market, the Hospital must continue to maintain a
wage scale and provide benefits that are comparable to other facilities
in rural areas.
-8-
2003 continued
----
The continued reduction in third-party reimbursement and that many
payers reimbursement based on a fixed contract (even though rates
increase, they reimburse the same amount per procedure or other basis
for reimbursement) are the major contributing factors 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 $506,869 in 2003,
compared to a loss in 2002 of $843,000. As previously indicated, the
2002 loss was mainly caused by a change in the methodology for
estimating allowances for contractual cost. Even though the Hospital
continues to be negatively impacted by poor reimbursement contracts
with third party payors, management anticipates continued profitable
operations.
The Company continues to enjoy a large positive current ratio with
current assets exceeding current liabilities by $7,862,818. The Company
continues to enjoy good returns on its investments to help maintain
operations. For the current year, sales of investments resulted in a
loss of approximately $102,000, while total investment income was
approximately $426,000. 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.
The Company will complete construction of a Medical Building adjacent
to the Hospital in the Spring of 2004. When the building is complete,
management anticipates that real property rent cost will decrease and
there will be an increase in outpatient services being provided.
-9-
2003 continued
----
Liquidity and Capital Resources
-------------------------------
The Company's financial condition remains very strong with substantial
investments, strong liquidity and minimal debt. The current ratio is
1.9 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 $6,101,000 in cash and short-term
investments. Included in this amount is $1,998,000 in unrealized
holding gains. The short-term equity investments are collateral for the
$2,250,000 line of credit at June 30, 2003.
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 $910,052 in 2003. As the
long-term debt relates only to the acquisition of major equipment and
cash required for operations. The Hospital has signed a commitment
letter for additional long-term financing of $4,000,000 to finance
major renovation and construction projects. The debt service relating
to this new debt will be covered by increased services and a reduction
in monthly real estate rental cost.
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
---------------------------------------------
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
-11-
2002 continued
----
to cover required staffing 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.
-12-
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 is $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.
-13-
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
FINANCIAL STATEMENTS
--------------------
Description Page
----------- ----
Independent Auditors' Reports 16
Financial Statements:
Balance Sheets - June 30, 2003 and 2002 17-18
Statements of Operations
Years ended June 30, 2003, 2002 and 2001 19
Statements of Comprehensive Income
Years ended June 30, 2003, 2002 and 2001 20
Statements of Stockholders' Equity
Years ended June 30, 2003, 2002 and 2001 21
Statements of Cash Flows -
Years ended June 30, 2003, 2002 and 2001 22-23
Notes to Financial Statements 24-36
Item 14. Exhibits, Financial Statement, Schedules
and Reports on Form 8-K 42
-14-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
ANNUAL REPORT FOR CORPORATIONS - FORM 10-K
YEARS ENDED JUNE 30, 2003 AND 2002
FINANCIAL STATEMENTS,
SUPPLEMENTARY DATA AND AUDITORS' REPORT
-15-
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, 2003 and 2002, 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, 2003. 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
management of American Hospital Management Corporation. 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 audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements referred to above present
fairly, in all material respects, the financial position of American
Hospital Management Corporation as of June 30, 2003 and 2002, and the
results of its operations and its cash flows for each of the years in
the three-year period ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, as
listed in the accompanying index, 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
September 19, 2003
-16-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
BALANCE SHEETS
JUNE 30, 2003 AND 2002
Assets
------ 2003 2002
----------- -----------
Current assets:
Cash and cash equivalents $ 957,780 $ 805,205
Marketable securities 5,142,849 4,993,239
Receivables:
Patients, net of estimated allowances of $9,655,612
and $7,346,065, in 2003 and 2002, respectively 7,645,492 7,503,722
Other 630,065 339,335
Estimated third-party payor settlements 663,546 1,219,687
Income tax refund -- 238,944
Supplies, at lower of cost (first-in, first-out) or market 1,128,184 1,163,683
Prepaid expenses 343,412 53,171
----------- -----------
Total current assets 16,511,328 16,316,986
Property and equipment, net 6,281,541 6,187,174
Real estate held for investment, net 1,869,031 1,909,172
Deferred income taxes 144,526 227,938
Other assets 710,878 520,441
----------- -----------
$25,517,304 $25,161,711
=========== ===========
The accompanying notes are an integral part of these financial statements.
-17-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
BALANCE SHEETS
JUNE 30, 2003 AND 2002
Liabilities and Stockholders' Equity
------------------------------------
2003 2002
----------- -----------
Current Liabilities:
Current maturities of long-term debt $ 222,712 $ 384,693
Line of credit 1,775,167 2,374,150
Accounts payable and accrued expenses:
Trade 2,644,917 2,069,410
Accrued liabilities 2,135,508 2,111,445
Construction contracts payable 544,890 544,890
Estimated third-party payor settlements 215,138 161,000
Income taxes:
Current 107,769 148,386
Deferred 1,002,409 917,521
----------- -----------
Total current liabilities 8,648,510 8,711,495
----------- -----------
Long-term debt, less current maturities 1,907,478 1,867,150
----------- -----------
Stockholders' equity:
$2 cumulative preferred stock, par value $1 per share;
authorized 100,000 shares; issued 65,270.82 shares;
reacquired 18,799.74 shares; outstanding 46,471.08 shares;
aggregate redemption and liquidating value of $1,277,955 for
each of the two years ended June 30, 2003 46,471 46,471
Common stock, par value $1.00 per share;
authorized 400,000 shares, issued 249,051 shares,
reacquired 26,736 shares; outstanding - 222,315 shares for
each of the two years ended June 30, 2003 222,315 222,315
Additional paid-in capital 279,407 279,407
Accumulated other comprehensive income 1,188,564 1,052,554
Retained earnings 13,224,559 12,982,319
----------- -----------
Total Stockholders' equity 14,961,316 14,583,066
----------- -----------
$25,517,304 $25,161,711
=========== ===========
The accompanying notes are an integral part of these financial statements.
-18-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
2003 2002 2001
------------ ------------ ------------
Net patient service revenue $ 32,360,976 $ 30,547,032 $ 27,663,529
Other revenue 256,389 389,612 393,155
------------ ------------ ------------
Total operating revenue 32,617,365 30,936,644 28,056,684
------------ ------------ ------------
Operating costs and expenses:
Professional care of patients 18,415,367 19,675,123 17,161,899
General services 2,439,378 2,686,040 2,527,309
Fiscal and administrative services 4,244,731 4,180,705 3,506,466
Employee health and welfare 3,629,209 2,615,432 2,104,678
Medical malpractice insurance 516,464 574,064 415,790
Interest 268,368 205,507 113,714
Depreciation and amortization 860,959 846,122 841,117
Provision for bad debts 2,094,750 1,947,544 1,223,545
------------ ------------ ------------
Total operating costs and expenses 32,469,226 32,730,537 27,894,518
------------ ------------ ------------
Income (loss) from operations 148,139 (1,793,893) 162,166
------------ ------------ ------------
Other income:
Investment income 323,713 462,259 418,911
Other 35,017 21,672 15,586
------------ ------------ ------------
358,730 483,931 434,497
------------ ------------ ------------
Income (loss) before income tax (provision) benefit 506,869 (1,309,962) 596,663
Provision for income tax (expense) benefit (185,395) 466,882 (214,156)
------------ ------------ ------------
Net income (loss) $ 321,474 $ (843,080) $ 382,507
============ ============ ============
Basic earnings (loss) per common share $ 1.03 $ (4.21) $ 1.30
============ ============ ============
Diluted earnings (loss) per common share $ 1.02 $ (4.21) $ 1.21
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-19-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED JUNE 30, 2003, 2002, AND 2001
2003
- ----
Net income $ 321,474
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding gains arising during tax period $ 237,711
Less: reclassification adjustment for losses
realized in net income 101,701 136,010
---------- ------------
Comprehensive income $ 457,484
============
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
============
The accompanying notes are an integral part of these financial statements.
-20-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Stockholders' Equity:
Cumulative Preferred Stock
Beginning balance $ 46,471 $ 46,487 $ 47,829
Reacquired stock -- (16) (342)
------------ ------------ ------------
Ending balance 46,471 46,471 46,487
------------ ------------ ------------
Common Stock
Beginning balance 222,315 222,615 223,568
Reacquired stock -- (300) (953)
------------ ------------ ------------
Ending balance 222,315 222,315 222,615
------------ ------------ ------------
Additional paid-in-capital
Beginning balance 279,407 106,554 122,384
Stockholder debt -- 175,626 --
Reacquired stock -- (2,773) (15,830)
------------ ------------ ------------
Ending balance 279,407 279,407 106,554
------------ ------------ ------------
Accumulated other comprehensive income
Beginning balance 1,052,554 1,353,762 1,681,714
Change in unrealized holdings gains, net 136,010 (301,208) (327,952)
------------ ------------ ------------
Ending balance 1,188,564 1,052,554 1,353,762
------------ ------------ ------------
Retained Earnings
Beginning balance 12,982,319 13,911,791 13,615,796
Net income (loss) 321,474 (843,080) 382,507
Cash dividends paid on preferred stock (79,234) (86,392) (86,512)
------------ ------------ ------------
Ending balance 13,224,559 12,982,319 13,911,791
------------ ------------ ------------
Total Stockholders' equity $ 14,961,316 $ 14,583,066 $ 15,641,209
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-21-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Cash received from patients
and third-party payors $ 30,763,824 $ 29,596,524 $ 24,106,903
Cash paid to employees and suppliers (29,134,028) (29,623,120) (24,921,285)
Investment income received 440,271 478,584 415,137
Interest paid (268,368) (205,507) (113,714)
Income taxes received (paid) 90,558 (78,126) (77,227)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 1,892,257 168,355 (590,186)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment, net (910,052) (1,187,205) (2,152,623)
Proceeds from sale of short-term investments 293,579 2,588,137 1,030,918
Cash received from partnership investment -- -- 27,197
Purchase of short-term investments (318,206) (2,514,004) (1,102,919)
Other (5,133) -- 120,312
------------ ------------ ------------
Net cash used in
investing activities (939,812) (1,113,072) (2,077,115)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 126,180 1,173,661 703,071
Principal reductions of long-term debt (247,833) (188,706) (112,315)
Net proceeds from line of credit (598,983) 52,563 1,667,224
Increase in construction contracts payable -- 544,890 --
Dividends paid (79,234) (86,392) (86,512)
Payments for reacquired stock -- (3,089) (17,125)
------------ ------------ ------------
Net cash (used in) provided
by financing activities (799,870) 1,492,927 2,154,343
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 152,575 548,210 (512,958)
Cash and cash equivalents, beginning of year 805,205 256,995 769,953
------------ ------------ ------------
Cash and cash equivalents, end of year $ 957,780 $ 805,205 $ 256,995
============ ============ ============
Supplemental schedule of non-cash investing
activities:
Increase (decrease) in fair value of investments $ 226,684 $ (485,347) $ (546,587)
Change in deferred taxes (90,674) 184,139 218,635
------------ ------------ ------------
Increase (decrease) in unrealized holding gains $ 136,010 $ (301,208) $ (327,952)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-22-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS (CONCLUDED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- -----------
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss) $ 321,474 $ (843,080) $ 382,507
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 862,834 860,985 864,128
Change in estimated uncollectibles 2,309,547 2,576,248 1,059,947
Partnership loss (income) 688 (669) (1,097)
Loss (gain) on sale of investments 101,701 (19,541) (41,274)
Change in assets and liabilities:
Increase in receivables (2,742,047) (2,106,901) (2,539,861)
Decrease (increase) in third-party payors, net 610,279 200,400 (1,246,322)
Change in income taxes, net 275,953 (545,008) 136,929
Decrease (increase) in supplies 35,499 (150,768) (99,225)
(Increase) decrease in prepaid expenses (290,241) 48,032 (13,453)
Increase in loan-fees (193,000) -- --
Increase (decrease) in trade accounts payable 575,507 (294,322) 490,654
Increase in accrued expenses, net 24,063 442,979 416,881
----------- ----------- -----------
Net cash provided by (used in)
operating activities $ 1,892,257 $ 168,355 $ (590,186)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-23-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2003, 2002 AND 2001
(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 21.4% 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 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.
-24-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(1) Summary of Significant Accounting Policies, 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.
-25-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(1) Summary of Significant Accounting Policies, CONCLUDED
-------------------------------------------
Reclassifications
-----------------
Certain accounts from prior year's 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, 2000.
* 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.
-26-
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:
2003 2002 2001
----------- ----------- -----------
Gross patient service revenue $78,645,060 $69,530,413 $56,889,189
Less contractual allowances 46,284,084 38,983,381 29,225,660
----------- ----------- -----------
Net patient service revenue $32,360,976 $30,547,032 $27,663,529
=========== =========== ===========
At June 30, 2003 and 2002, accounts receivable are primarily
concentrated in federal and state governmental entities and other
patients in which the Company does not believe there is any undue
credit risk.
During the year ended June 30, 2002, management elected to make a
change in the methodology for estimating estimated allowances. This
decision was a result of the continuing decrease in the amount
reimbursed by third-party payors. This change, made in the year ended
June 30, 2002, covers approximately $5,207,700 in billings made over
the year then ended and prior years. Management does not anticipate
that an additional adjustment for a change in estimate will be
necessary in subsequent years.
-27-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(3) Marketable Securities
---------------------
Cost and fair value of marketable equity securities at June 30, 2003
and 2002, are as follows:
2003 2002
---------- ----------
Available for sale:
Cost $3,145,241 $3,222,291
Fair Value 5,142,849 4,993,239
Unrealized Gain 2,329,854 2,189,066
Unrealized Loss (332,246) (418,118)
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 $ 136,010, $(301,208) and $(327,952) for the years ended June 30,
2003, 2002 and 2001 have been charged to comprehensive income. For the
years ended June 30, 2003, 2002 and 2001, realized gains and realized
losses were $12,113 and $(113,814), $746,065 and $(726,524), and
$276,863 and $(235,589), 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, 2003 is $2,225,000, of which $1,775,167 is
outstanding. The interest rate at June 30, 2003 and 2002 was 4.25% and
4.75%, respectively. The average short-term borrowing rate for the
Company was 4.43% and 5.25% for 2003 and 2002, respectively.
Subsequent to year end, the line of credit was transferred from Wells
Fargo Bank to Smith Barney through Citibank. The interest rate is 1%
below prime and the borrowing based is 65% of the managed account
portfolio balance.
-28-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(4) Property and Equipment
----------------------
At June 30, 2003 and 2002, property and equipment is comprised of the
following:
2003 2002
----------- -----------
Land and improvements $ 44,500 $ 44,500
Buildings 6,603,386 5,927,297
Equipment 9,255,938 9,610,007
Construction in progress 1,597,506 1,765,447
----------- -----------
17,501,330 17,347,251
Accumulated depreciation and amortization 11,219,789 11,160,077
----------- -----------
Net property and equipment $ 6,281,541 $ 6,187,174
=========== ===========
Capitalized interest of $85,032 and $89,321 is included in construction
in progress for the years ended June 30, 2003 and 2002, respectively.
Property and equipment include certain capitalized leases, as follows:
2003 2002
----------- -----------
Equipment $ 1,784,329 $ 1,678,984
Less accumulated amortization 902,837 657,721
----------- -----------
$ 881,492 $ 1,021,263
=========== ===========
Amortization expense on capitalized leases for the years ended June 30,
2003, 2002 and 2001 totaled $245,116, $242,361 and $192,142,
respectively.
Annual future minimum lease payments under capitalized leases at June
30, 2003 are as follows:
2004 $ 280,387
2005 272,126
2006 164,215
2007 156,264
2008 134,659
Thereafter 602
-----------
Total minimum lease payments 1,008,253
Less amount representing interest (5.42% to 19.46%) 164,079
-----------
Present value of minimum lease payments 844,174
Less current maturity 215,705
-----------
$ 628,469
===========
-29-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(5) 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:
2003 2002
---------- ----------
Property Location:
McKinleyville, California $1,480,605 $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
---------- ----------
2,446,392 2,441,259
Less accumulated depreciation for rented property 577,361 532,087
---------- ----------
$1,869,031 $1,909,172
========== ==========
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.
(6) Other Assets
------------
At June 30, 2003, other assets include cash surrender value of life
insurance polices on three executives totaling $449,570, an investment
in a partnership of $70,183, and unamortized loan fees of $191,125.
Loan fees are being amortized over the term of the respective loans.
Amortization for the year ended June 30, 2003, was $1,875.
(7) Long-Term Debt
--------------
Long-term debt at June 30, 2003 and 2002, consists of the following:
2003 2002
---------- ----------
Bank note, secured by investment property, interest rate of 2.25%
above bank index (5.01% at June 30, 2003), payable in monthly
installments, maturing in 2021 $ 120,780 $ 127,307
Term note, secured by patients' receivables, interest rate of prime
plus 2%, (6.25% at June 30, 2003), interest only through May, 2007
when entire principle balance
will be due. 1,065,236 1,073,660
-30-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(7) Long-Term Debt, continued
---------------
2003 2002
---------- ----------
Lease obligations, payable in installments
through 2009 with a weighted average
interest rate of 9.15% 844,174 950,876
Shareholder, unsecured, interest only at 7% 100,000 100,000
---------- ----------
2,130,190 2,251,843
Less current maturities 222,712 384,693
---------- ----------
$1,907,478 $1,867,150
========== ==========
The maturities of long-term debt for each of the succeeding five years
subsequent to June 30, 2003, are as follows: 2004-$222,712;
2005-$233,857; 2006-$142,350; 2007-$1,212,107; 2008-$137,816,
thereafter- $181,348.
(8) Income Taxes
------------
At June 30, income tax expense (benefit) consisted of the following:
2003
----
Federal California Total
--------- ---------- ---------
Current $ 62,961 $ 44,808 $ 107,769
Deferred 75,692 1,934 77,626
--------- -------- ---------
$ 138,653 $ 46,742 $ 185,395
========= ======== =========
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
========= ======== =========
-31-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Income Taxes continued
------------
Deferred tax expenses (credits) for 2003, 2002, and 2001 result from
the following temporary differences:
2003 2002 2001
--------- --------- ---------
California franchise tax $ (15,620) $ 16,823 $ (15,590)
Depreciation and amortization 7,479 53,036 92,708
Allowance for bad debts (11,152) (214,720) (30,623)
Vacation accrual 14,760 7,178 (31,992)
Correction of deferred tax liability -- -- (14,996)
Net operating loss 80,438 (96,460) --
Other 1,721 5,405 (9,857)
--------- --------- ---------
$ 77,626 $(228,738) $ (10,350)
========= ========= =========
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, 2003 and
2002 was $90,674 and $(184,139), respectively.
Recorded income tax expense (benefit) differs from that computed by
applying the statutory income tax rates for the following reasons:
2003 2002 2001
--------- --------- ---------
Computed tax at statutory rate $ 201,908 $(445,387) $ 255,610
Increases (decreases) resulting from:
California franchise tax (15,620) (272) (18,498)
Domestic dividend exclusion allowance (16,329) (15,850) (18,740)
Entertainment deduction 8,997 8,406 10,016
Other 6,439 (13,779) (14,232)
--------- --------- ---------
$ 185,395 $(466,882) $ 214,156
========= ========= =========
The Company has a net operating loss carry forward of $479,496 for
state taxes which expires in the year ending 2023. The state has
temporarily suspended the use of loss carry forwards.
-32-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(8) Income Taxes continued
------------
Principal components of the net asset/(liability) representing deferred
income tax balances are as follows:
2003 2002
--------- ---------
Allowance for bad debts $ 349,525 $ 337,532
Vacation accrual 278,570 285,515
Depreciation and amortization (708,451) (704,241)
Net operating loss 42,387 127,212
Unrealized holding gains (809,043) (718,369)
Other (10,871) (17,232)
--------- ---------
Net deferred income tax liability $(857,883) $(689,583)
========= =========
(9) 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 was $1,277,955 for both of the two
years ended June 30, 2003. 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.
(10) Earnings (loss) per Common Share
--------------------------------
Basic earnings (loss) per common share were computed by dividing the
net income (loss) after deduction of preferred stock dividend
requirements of $92,942, $92,942 and $92,973, by the weighted average
number of common shares outstanding (222,315, 222,465 and 223,092) for
2003, 2002 and 2001, 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, (315,257 and 315,588) for 2003 and 2001,
respectively. For 2002, there was an anti-dilutive effect for all
shares.
-33-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(11) 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.
(12) 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
either the year ended neither 2003 nor 2001.
(13) Concentrations of Credit Risk
-----------------------------
The Hospital grants credit without collateral to its patients, most of
who are local residents and are insured under third-party payor
agreements. The mix of receivables from patients and third-party payors
at June 30, 2003 and 2002, was as follows:
2003 2002
----- -----
Medicare 41.2% 44.1%
Medi-Cal 19.3 18.9
Other third-party payors 34.2 29.1
Patients 5.3 7.9
----- -----
100.0% 100.0%
===== =====
-34-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(14) 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, 2003. 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 $2,772,349, $1,867,391 and $1,498,230
for the years ended June 30, 2003, 2002 and 2001, respectively.
(15) Commitments and Contingencies
-----------------------------
Commitments. The Company has entered into an agreement for
approximately $3,318,000 to construct the a medical building adjacent
to the Hospital. The Company has a commitment letter for real estate
financing for $4,000,000, payable monthly based on a 20 year
amortization including interest a 7%, due and payable in ten years. The
Company is in the final stages of obtaining the required construction
financing. It is anticipated that the construction project will be
complete in the early spring of 2004. As of June 30, 2003,
approximately $508,000 has been paid on the construction contract for
the building shell.
Total rental expense for the years ended June 30, 2003, 2002, and 2001,
was $300,657, $296,277, and $386,346, 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 $22,500 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.
-35-
AMERICAN HOSPITAL MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS, CONCLUDED
(15) Commitments and Contingencies, CONTINUED
------------------------------
Construction contracts payable. During the year ended June 30, 2003,
the Company entered into an agreement with the general contractor for
payment of $235,838 in construction cost. This amount is included in
construction contracts payable, accrues interest at 5% annually, is due
August 30, 2003, and is secured by a deed of trust on the property.
(16) 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.
(17) 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, 2003, 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.
-36-
Item 9. Changes in and disagreements with accountants on
- ------- ------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
None.
-37-
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 63 Director Physician
Internal
Medicine
Allen E. Shaw 1960 85 Chairman Chairman of
Director the Board of
Directors
Douglas A. Shaw, 1981 52 President Hospital
Administrator & Director Administrator
Christopher Lee, M.D. 2001 56 Director Physician
Internal
Medicine
Michael Young, Controller 1978 55 Treasurer Hospital
& Director Controller
Donald J. Krpan, D.O. 1988 67 Secretary & University
Director Provost,
Western
University of
Health
Sciences
Steven Paine 2001 51 Director Business
Owner
-38-
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, 2003, to each director and officer of the Company
whose aggregate direct remuneration exceeded $100,000 (none) 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
- ---------------- ------------------------- -----------
All directors
and officers as a
group (7 persons) $226,476
========
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. There have
not been any payments made to officers or directors for severance of
relationship.
-39-
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 122,489 55.10%
Arcata, California Preferred 1,980 4.26%
Arcata Hospital Corporation* Common 20,895 9.40%
Palos Verdes Estates, California Preferred 11,481 24.71%
Security ownership of management as a group
- -------------------------------------------
All directors and officers as Common 124,239 55.88%
a group
All directors and officers Preferred 2,957 6.36%
a group
- ----------
* Arcata Hospital Corporation is 98% owned by shareholders of the Company,
principally by the Allen E. Shaw Family.
-40-
Item 13. Certain Relations and Related Transactions
- -------- ------------------------------------------
None.
Item 14. Our Controls and Procedures
- -------- ---------------------------
Under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d--15(e) of the
Exchange Act, as of the end of the period covered by this report. Based
on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that these disclosure controls and procedures
are effective. There were no changes in our internal control over
financial reporting during our last fiscal quarter ended June 30, 2003
that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
-41-
PART IV
Item 15. 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, 2003 and 2002
Statements of Operations
Years ended June 30, 2003, 2002 and 2001
Statements of Comprehensive Income
Years ended June 30, 2003, 2002 and 2001
Statements of Stockholders' Equity
Years ended June 30, 2003, 2002 and 2001
Statements of Cash Flows
Years ended June 30, 2003, 2002 and 2001
Notes to Financial Statements
(2) The following financial schedules for the Years 2003, 2002
and 2001 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:
Exhibit 31.1 - Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.1 - Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Registrant did not file any reports on Form 8-K during the
quarter ended June 30, 2003.
-42-
SCHEDULE II
AMERICAN HOSPITAL MANAGEMENT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
Balance, Charged Charged Balance,
beginning to to other end
of year income accounts Deductions of year
------- ------ -------- ---------- -------
Allowance for
doubtful receivables:
2003 $ 787,889 $ 2,094,750 $ 2,066,755 $ 815,884
2002 229,013 1,947,544 1,388,668 787,889
2001 157,532 1,223,545 1,152,064 229,013
-43-
SCHEDULE III
AMERICAN HOSPITAL MANAGEMENT CORPORATION
REAL ESTATE AND ACCUMULATED DEPRECIATION
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
Related Accumulated Useful
Description debt Land Buildings Total Depreciation Life
- --------------------------------------------------------------------------------------------------
Rental property $120,780 $482,346 $1,131,858 $1,609,071 $532,087 25
Investment None 832,188 832,188
---------------------------------------------------
$120,780 $1,314,534 $1,131,858 $2,446,392 $577,361
==================================================================
Cost:
Balance at June 30, 2002 and 2001 $2,241,259
Additions 5,133
----------
$2,446,392
==========
Accumulated Depreciation:
Balance at June 30, 2002 $ 487,018
Depreciation during period 45,069
----------
Balance at June 30, 2002 532,087
Depreciation during period 45,274
----------
Balance at June 30, 2003 $ 577,361
==========
-44-
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:
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 15, 2003
- ----------------------
Allen E. Shaw
/s/ Michael J. Young Treasurer and Chief October 15, 2003
- ---------------------- Accounting Officer
Michael J. Young Director
/s/ Donald J. Krpan Director October 15, 2003
- ----------------------
Donald J. Krpan
/s/ Doug Shaw Director October 15, 2003
- ----------------------
Doug Shaw
-45-