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, 1996 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: (800) 662-2280 -------------------- 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 ----- ------ -1- 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 (232,417 at December 31, 1996). Total number of pages, including cover - 37 -2- PART I Item 1. Business - ------- -------- The primary business of the Company is the operation and ownership of Mad River Community Hospital (the Hospital) and satellite clinics, located in the Humboldt County area of Northern California. Over the last several years the Company has expanded the scope of services offered by the Hospital to include advanced ancillary service departments used by physicians practicing in the rural service area. As a result of the ongoing expansion of facilities and services, the Hospital continues to recruit new physicians to provide the added care as well as to replace physicians who are retiring from active practice, many after twenty-eight years of medical staff membership. The Hospital's service area on the north coast is experiencing the highest rate of growth in the county and is especially attractive to physicians who want to live and work in a community with high family values. The nearest competition to the Hospital is in Eureka (approximately 12 miles south) where two acute care facilities are 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 facilities located in Eureka will have less of a negative impact on Hospital use or occupancy. For this reason, the Hospital organized two out-patient clinics, one in-house clinic and one clinic in the outlying community thereby maintaining the Hospital's presence in the service area. New buildings are planned for those departments still housed in mobile facilities adjacent to the Hospital. In the past year, business and administrative departments have been moved to a new permanent location. The area will be used for the expansion of adult day health care into a new building. In addition, a cath-lab is in the final process of being approved for installation in the Hospital. An MRI is on order and is expected to be operating adjacent to the Hospital by early 1997. Another positive factor supporting Hospital use is community involvement. As the largest private employer in Arcata, the Hospital provides employment to approximately 520 local residents and, through its Home Health and Adult Day Health Care departments, is highly visible in the community served. The Hospital continues to try to build on this strength by maintaining a strong image through the media and a helping hand in the community, while providing personalized quality services. The Hospital is a strong 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. As mentioned above, the Hospital is working diligently to establish a community health care plan that could compete with the various outside managed care plans planning to enter the Humboldt County area. -3- Item 2. Properties - ------- ---------- The main facility operated by the Company is Mad River Community Hospital in Arcata, California. This single-level structure is licensed as a 78-bed acute hospital in Northern Humboldt County, California, where it provides 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) adjacent to an expanded medical office complex owned by staff doctors which leaves sufficient open area for further expansion of medical services as needed. 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 is currently used as an office, guest quarters and storage space for the Company. The Company owns a personal residence adjacent to the Hospital that had been used as a physician's office. 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, providing a child day care service to hospital employees. The Company also owns residences and commercial properties in Eureka and McKinleyville, California. They are currently being leased to unrelated private parties, held for investment or can be converted to medical offices, if needed to protect the Hospital's market share. From time to time, the Company acquires real estate being held for investment purposes. As part of its outreach program, the Company owns and operates medical office buildings under the name of Willow Creek Six Rivers Medical Center in Willow Creek, California (38 miles east of the Hospital). The Company also owns and operates real property in McKinleyville which provides laboratory and radiology outpatient services. It also operates an after-hours clinic at this location. Adult Day Health Care of Mad River (the Company), 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, a new building will be built adjacent to the present facility. The Company will lease the new facility from the Hospital. -4- Item 3. Legal Proceedings - ------- ----------------- None. -5- 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. -6- 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 436 shareholders. No dividends were paid on common stock during the three years ended June 30, 1996. -7- Item 6. Selected Financial Data - ------- ----------------------- Year ended June 30 ----------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Total operating revenue, net $21,421,707 $21,148,254 $20,671,387 $19,218,602 $18,592,956 Net income 223,815 593,342 502,956 387,436 624,342 Primary earnings per share .52 2.06 1.67 1.18 2.16 Fully diluted earnings per share .67 1.75 1.47 1.13 1.81 Cash dividends per common share -- -- -- -- -- Total assets 20,557,286 19,800,615 18,325,512 16,995,552 15,698,301 Long-term debt 403,581 803,248 861,648 809,411 466,362 Working capital 7,851,133 7,165,927 6,010,324 6,265,004 6,348,123 Redeemable preferred stock 50,850 51,623 51,768 51,900 51,957 Stockholders' equity 14,633,038 14,077,102 13,040,598 12,636,033 12,347,231 -8- Item 7. Management's Discussion and Analysis of - ------- --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- 1996 ---- Results of Operations --------------------- Hospital revenues increased slightly during 1996 as the hospital continues to expand services to encourage use. Use of outpatient services increased, and there was a small rate increase. Patient revenue totaled $40,617,000 in 1996 compared to $39,002,000 in 1995, a 4% increase of $615,000. Contractual allowances totaled $13,808,000 in 1996 compared to $13,638,000 in 1995, only a 1% increase. Government regulatory agencies attempt to reimburse the hospital based on the cost of services rendered. As the government continues its efforts to cut back on rising health care cost, the actual reimbursement continues to decrease and the Hospital is unable to even recoup costs on many Medicare patients. Medi-Cal has also imposed certain limitations (discharge and Maximum Inpatient Reimbursement Liability) that have adversely affected reimbursements. As discussed in the next paragraph, the result of these continuing cuts is to increase the provision for bad debts. Operating costs and expenses were $27,928,000 compared to $25,749,000 in 1995, an 8.5% increase. This increase, other than the provision for bad debts, is mainly related to increased labor costs and moderate inflation. In 1996, the provision for bad debts increased 24% from 1995. The provision for bad debts increases as third-party payors reduce the amount they reimburse, as discussed in prior paragraph. Increased use of outpatient services and the change in patient mix also affects bad debt write offs. The result in the reduction of third-party reimbursement, causing increased bad debt write offs, was a $769,000 decrease in income from operations. Net income, after investment income, was $224,000 in 1996 compared to $593,000 in 1995. 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 $113,600 while total investment income was $1,076,100. 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 close to the Hospital and medical staff members, 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. -9- 1996 continued ---- Financial Condition ------------------- The Company's financial condition remains very strong with substantial investments, strong liquidity and minimal debt. The cash and liquid investments are being maintained to subsidize Hospital operations, finance needed construction and increased services at Mad River Community Hospital. Currently, the Company has approximately $5,261,000 in cash and short-term investments. As previously noted, some of these investments, as determined by management, will be used to fund needed expansion. Cash provided by operating and investing activities continue to fund investing activities, the largest of which is the purchase of real estate, property and equipment, which totaled $735,400 in 1996. As the long-term debt relates only to the acquisition of major equipment, cash required for financing activities remains relatively low. As discussed in Item 1, 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 --------- The inflation rate affecting costs has remained relatively low, approximately 5%, over the last three years. This moderate rate contributes to the Hospital's success in maintaining a moderate increase in costs from year to year. -10- Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- 1995 ---- Results of Operations --------------------- Hospital revenues increased slightly during 1995 as the hospital continues to expand services to encourage use. Use of outpatient services increased, and there was a small rate increase. Patient revenues in 1995 were $39,002,000 compared to $38,120,000 for 1994, a 2% increase of $882,000. Contractual allowances totaled $13,638,000 in 1995 compared to $13,929,000 in 1994, a 2% decrease. Therefore, although revenue went up slightly, contractural allowances decreased, indicating a different mix of patients. Government regulatory agencies attempt to reimburse the hospital based on the cost of services rendered. At times, under current regulations, the hospital is unable to recoup costs on certain Medicare patients. Medi-Cal has also imposed certain limitations (discharge and Maximum Inpatient Reimbursement Liability) that have adversely affected reimbursement. Operating costs and expenses were $25,749,000 compared to $24,631,000 in 1994, a 5% increase. This increase, other than the provision for bad debts, is mainly related to increased labor costs and moderate inflation. The provision for bad debts, which increased from $3,914,601 in 1994 to $4,669,157 in 1995, increases as third-party payors reduce their reimbursements, as discussed in previous paragraph. Increased use of outpatient services and the change in patient mix also affects bad debt write offs. Net income was $593,000 in 1995, compared to $503,000 in 1994, a 18% increase. 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 an increase in net profit. For the current year, sales of investments resulted in gains of $171,000. 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 close to the Hospital and medical staff members, thereby enhancing the Hospital's inpatient service occupancy. By so doing, it is anticipated that operations will remain profitable even though the continued burden of government contractual agreements to provide healthcare, sometimes below cost, is being further complicated by the introduction of managed care contracts in the Humboldt County. The Company continues to do what is necessary to retain its occupancy, cut costs and provide excellent care so as to continue profitable operations. -11- 1995 continued ---- Financial Condition ------------------- The Company's financial condition remains very strong with profitable hospital operations, substantial investment capital, strong liquidity and minimal debt. The cash and liquid investments are being maintained to finance the planned construction and increased services at Mad River Community Hospital. As discussed above, current liquidity may be affected by long-term plans to expand hospital operations. Currently, the Company has approximately $4,380,582 in short-term investments. Some of these investments, as determined by Management, will be used to fund needed expansion. Cash provided by operating activities continue to fund investing activities, the largest of which is the purchase of real estate, property and equipment which totaled $884,109 in 1995. As long-term debt relates only to the acquisition of equipment, cash required for financing activities remains relatively low. As discussed in Item 1, Government regulations, as well as managed contract agreements, may negatively impact operations. Management is unable to estimate any potential negative impact of forth-coming 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. The Hospital creation of a cafeteria benefit plan and a 401-k investment fund is appreciated by employees and is beneficial in attracting new professionals to fill the positions created by turnover and growth in services offered. Inflation --------- The inflation rate affecting costs has remained relatively low, approximately 4%, over the last three years. This moderate rate contributes to the Hospital's success in maintaining a moderate increase in costs from year to year. -12- Item 8. Financial Statements and Supplementary Data - ------- ------------------------------------------- FINANCIAL STATEMENTS Page ---- Description ----------- Independent Auditors' Report 15 Financial Statements: Balance Sheets - June 30, 1996 and 1995 16-17 Statements of Income and Retained Earnings - Years ended June 30, 1996, 1995, and 1994 18 Statements of Cash Flows - Years ended June 30, 1996, 1995, and 1994 19-20 Notes to Financial Statements 21-26 Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K 32 -13- AMERICAN HOSPITAL MANAGEMENT CORPORATION Annual Report for Corporations - Form 10-K Years ended June 30, 1996, and 1995 Financial Statements, Supplementary Data and Auditors' Report -14- Independent Auditors' Report ---------------------------- The Board of Directors American Hospital Management Corporation We have audited the accompanying balance sheets of American Hospital Management Corporation as of June 30, 1996, and 1995, and the related statements of income and retained earnings, and cash flows and the supporting financial statement schedules as listed in the accompanying index at Item 14, for the years then ended. These financial statements and financial statement schedules are the responsibility of the Company'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 generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial statement schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Hospital Management Corporation at June 30, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles, and the supporting financial statement schedules as listed in the accompanying index at Item 14, when considered in relation to the basic financial statements taken as a whole, in our opinion, present fairly in all material respects, the information set forth therein. /s/ K.C. Miller, CPA K.C. Miller, CPA West Covina, California December 20, 1996 -15- AMERICAN HOSPITAL MANAGEMENT CORPORATION Balance Sheets June 30, 1996 and 1995 Assets ------ 1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 925,843 $ 819,341 Investments 5,260,968 4,380,582 Receivables: Patients, net of estimated uncollectibles of $202,650 and $217,709 in 1996 and 1995, respectively 6,231,306 6,178,224 Other 290,028 126,161 Supplies, at lower of cost (first-in, first-out) or market 855,334 887,176 Prepaid expenses 84,981 65,686 ----------- ----------- Total current assets 13,648,460 12,457,170 ----------- ----------- Deferred income taxes 478,107 446,258 ----------- ----------- Investments and other assets: Real estate held for investment, net of $268,071 and $228,666 accumulated depreciation in 1996 and 1995, respectively 1,974,803 1,887,073 Investments in partnerships 87,086 84,129 Cash surrender value of life insurance 227,270 208,649 Other 146,216 234,569 ----------- ----------- 2,435,375 2,414,420 ----------- ----------- Property and equipment, at cost: Land and improvements 44,500 36,000 Buildings 4,233,728 4,233,728 Equipment 5,727,870 5,158,618 Construction in progress -- 1,674 ----------- ----------- 10,006,098 9,430,020 Less accumulated depreciation and amortization 6,010,754 4,947,253 ----------- ----------- 3,995,344 4,482,767 ----------- ----------- $20,557,286 $19,800,615 =========== =========== (continued) See accompanying notes to financial statements -16- AMERICAN HOSPITAL MANAGEMENT CORPORATION Balance Sheets (concluded) June 30, 1996 and 1995 Liabilities and Stockholders' Equity ------------------------------------ 1996 1995 ---- ---- Current Liabilities: Current maturities of long-term debt $ 276,660 $ 370,978 Accounts payable and accrued expenses: Trade 562,306 1,138,571 Accrued liabilities 1,802,106 1,620,548 Estimated third-party payor settlements 1,823,149 946,555 Income taxes: Current -- 195,798 Deferred 1,333,106 1,018,793 ----------- ----------- Total current liabilities 5,797,327 5,291,243 ----------- ----------- Long-term debt, less current maturities 126,921 432,270 ----------- ----------- Stockholders' equity: $2 cumulative preferred stock, par value $1 per share; authorized 100,000 shares; issued 65,270.82 shares; reacquired 14,421.08 shares; outstanding 50,849.74 shares; aggregate redemption and liquidating value of $1,398,368 and $1,419,650 at June 30, 1996, and 1995, respectively 50,850 51,623 Common stock, par value $1.00 per share; authorized 400,000 shares, issued 249,051 shares; reacquired 15,838 shares; outstanding - 233,123 shares 233,213 236,479 Additional paid-in capital 296,210 340,912 Unrealized holding gains, net, for investments 1,026,809 551,933 Retained earnings 13,025,956 12,896,155 ----------- ----------- Total stockholders' equity 14,633,038 14,077,102 ----------- ----------- $20,557,286 $19,800,615 =========== =========== See accompanying notes to financial statements. -17 AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Income and Retained Earnings Years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Net patient service revenue $ 26,809,409 $ 25,364,285 $ 24,191,063 Other revenue 417,075 453,126 394,385 ------------ ------------ ------------ Total operating revenue 27,226,484 25,817,411 24,585,448 ------------ ------------ ------------ Operating costs and expenses: Professional care of patients 13,462,487 12,984,368 12,942,401 General services 2,734,438 2,426,633 2,455,063 Administrative services 2,989,859 2,759,002 2,716,641 Employee health and welfare 1,318,048 1,322,370 1,133,908 Medical malpractice insurance 406,630 430,435 509,380 Interest 76,289 97,401 84,126 Depreciation and amortization 1,135,152 1,059,902 875,702 Provision for bad debts 5,804,777 4,669,157 3,914,061 ------------ ------------ ------------ Total operating costs and expenses 27,927,680 25,749,268 24,631,282 ------------ ------------ ------------ Income (loss) from operations (701,196) 68,143 (45,834) ------------ ------------ ------------ Other income: Investment income 1,076,148 944,052 733,630 Other 31,019 9,974 16,040 ------------ ------------ ------------ 1,107,167 954,026 749,670 ------------ ------------ ------------ Income before income taxes 405,971 1,022,169 703,836 Income taxes 182,156 428,827 200,880 ------------ ------------ ------------ Net income 223,815 593,342 502,956 Retained earnings, beginning of year 12,896,155 12,394,101 11,983,591 Cash dividends paid on preferred stock ($2 per share) (94,014) (91,288) (92,446) ------------ ------------ ------------ Retained earnings, end of year $ 13,025,956 $ 12,896,155 $ 12,394,101 ============ ============ ============ Primary earnings per share $ .52 $ 2.06 $ 1.67 ============ ============ ============ Fully diluted earnings per share $ .67 $ 1.75 $ 1.47 ============ ============ ============ See accompanying notes to financial statements. -18- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Cash Flows Years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Cash received from patients and third-party payors $ 22,245,219 $ 20,398,950 $ 21,214,801 Cash paid to employees and suppliers (21,312,243) (19,638,638) (19,555,423) Investment income received 1,025,397 666,219 589,982 Interest paid (76,290) (97,401) (84,126) Income taxes paid (412,073) (225,467) (173,485) ------------ ------------ ------------ Net cash provided by operating activities 1,470,010 1,103,663 1,991,749 ------------ ------------ ------------ Cash flows from investing activities: Purchase of real estate held for investment, net (127,135) -- (364,333) Distributions from partnerships -- 132,424 226,605 Purchase of property and equipment (608,324) (844,109) (1,172,796) Proceeds from sale of short-term investments 2,381,529 1,983,228 2,180,048 Purchase of short-term investments (2,356,870) (2,119,134) (2,294,703) Other (110,286) (20,596) 27,831 ------------ ------------ ------------ Net cash used in investing activities (821,086) (868,187) (1,397,348) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt -- 336,766 270,532 Principal reductions of long-term debt (399,667) (395,166) (218,295) Dividends paid (94,014) (91,288) (92,655) Payments for reacquired stock (48,741) (17,483) (5,945) ------------ ------------ ------------ Net cash used in financing activities (542,422) (167,171) (46,363) ------------ ------------ ------------ Net increase in cash and cash equivalents 106,502 68,305 548,038 Cash and cash equivalents, beginning of year 819,341 751,036 202,998 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 925,843 $ 819,341 $ 751,036 ============ ============ ============ Supplemental schedule of non-cash investing activities: Increase in fair value of investments $ 791,459 $ 919,888 Increase in deferred taxes 316,583 367,955 ------------ ------------ Increase in unrealized holding gains $ 474,876 $ 551,933 ============ ============ See accompanying notes to financial statements -19- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Cash Flows (concluded) Years ended June 30, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Reconciliation of net income to net cash provided by operating activities: Net income $ 223,815 $ 593,342 $ 502,956 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,169,924 1,092,844 908,644 Partnership income (2,957) (149,813) (175,068) Gain on sale of investments (113,586) (170,936) (192,630) Increase in cash surrender value (18,621) (21,924) (11,108) Change in assets and liabilities: (Increase) decrease in patient receivables, net (53,082) (385,725) 295,575 Increase (decrease) in third-party payors, net 876,594 (363,579) 422,907 (Increase) decrease in income taxes, net (229,917) 203,361 27,395 (Decrease) increase in supplies 31,842 (100,581) (125,933) (Increase) decrease in prepaid expenses (19,295) (1,893) 21,313 (Decrease) increase in trade accounts payable (576,265) 189,208 117,822 Increase in accrued expenses, net 181,558 219,359 199,876 ------------ ------------ ------------ Net cash provided by operating activities $ 1,470,010 $ 1,103,663 $ 1,991,749 ============ ============ ============ See accompanying notes to financial statements. -20- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements June 30, 1996, 1995 and 1994 (1) Summary of Significant Accounting Policies ------------------------------------------ Organization ------------ The Corporation owns and operates one acute-care hospital in the Arcata, California area. It also operates other health-care related enterprises in the same location. Most of the patients to whom the hospital extends credit are residents of the area. Net Patient Service Revenue --------------------------- Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement-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. Statement of Revenue and Expenses --------------------------------- 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. Cash and Cash Equivalents ------------------------- All cash and cash equivalents represent cash in checking and demand savings accounts. Cash is held in several banks with no significant concentration of risk. 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. 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. Income Taxes ------------ Deferred income taxes are provided for the estimated income tax effect of timing differences between financial and taxable income. Investments in Partnerships --------------------------- 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%. -21- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued Self-insurance Program ---------------------- The Hospital has elected to self-insure for health care benefits to its employees. Amounts charged to expense and transferred monthly to a trust fund to cover such claims are estimated using rates comparable to actual rates in the industry. Management believes that amounts provided are sufficient to cover claims and costs incurred through June 30, 1996. 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 100 percent insurance coverage for individual claim expenses in excess of $45,000 and for aggregate claim expenses in excess of $973,011. Health care benefit expense was approximately $1,190,238, $1,189,583 and $914,288 for the years ended June 30, 1996, 1995 and 1994, respectively. Use of Estimates ---------------- Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. 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: o 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, 1993. o Medicaid. Inpatient and outpatient 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, 1993. o Blue Cross. Inpatient services rendered to Blue Cross subscribers are reimbursed at prospectively determined rates per day of hospitalization. The prospectively determined per-diem rates are not subject to retroactive adjustment. -22- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued 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. At June 30, 1996 and 1995, 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. (3) Investments ----------- For the year ended June 30, 1995, the Company adopted Statement of Financial Accounting Standard No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Securities. SFAS 115 requires that securities, which are available for sale, be recorded at their fair value. Unrealized holding gains and losses are reported in a separate component of shareholders' equity, net of tax effect, until realized. The total amount recorded in stockholder's equity was $1,026,809 of which $474,876 relates to the change in unrealized gain in securities for the current year, net of the income tax effect. Short-term investments at June 30, 1996 consists of the following: Fair Unrealized Unrealized Value Gain Loss ----- ---- ---- Equity securities $5,260,968 $1,680,334 $ (82,381) Gain or loss from sale of securities is based on specific identification of the securities sold. For the year ended June 30, 1996, realized gains and realized losses were $170,507 and $(56,921), respectively. (4) Capital Lease Obligations ------------------------- A portion of the Hospital's equipment is leased under capital leases that expire at various dates through 1999. Property and equipment, at June 30, 1996 and 1995, respectively, includes the following amounts for property leased under capital leases: 1996 1995 ---- ---- Equipment $1,374,581 $1,347,827 Less accumulated amortization 774,850 502,610 ---------- ---------- $ 599,731 $ 845,217 ========== ========== -23- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (4) Capital Lease Obligations (continued) ------------------------------------- Annual future minimum lease payments under capitalized leases at June 30, 1996 are as follows: 1997 $294,008 1998 119,804 1999 25,985 ------- Total minimum lease payments 439,797 Less amount representing interest (36,216) ------- Present value of minimum lease payments 403,581 Less current maturity 276,660 ------- $126,921 ======= (5) Net Patient Service Revenue --------------------------- Gross patient service revenue and related provision for contractual allowances for the years ended June 30 are summarized as follows: 1996 1995 1994 ---- ---- ---- Gross patient service revenue $ 40,617,321 $ 39,002,465 $ 38,120,076 Less contractual allowances 13,807,912 13,638,180 13,929,013 ------------ ------------ ------------ Net patient service revenue $ 26,809,409 $ 25,364,285 $ 24,191,063 ============ ============ ============ -24- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (6) Income Taxes ------------ At June 30, income tax expense consisted of the following: 1996 -------------------------------------- Federal California Total ------- ---------- ----- Current $139,977 $ 54,424 $194,401 Deferred (8,447) (3,798) (12,245) ------- ------- ------- $131,530 $ 50,626 $182,156 ======= ======= ======= 1995 -------------------------------------- Federal California Total ------- ---------- ----- Current $141,990 $ 53,808 $195,798 Deferred 184,833 48,196 233,029 ------- ------- ------- $326,823 $102,004 $428,827 ======= ======= ======= 1994 -------------------------------------- Federal California Total ------- ---------- ----- Current $124,720 $ 56,088 $180,808 Deferred 30,502 (10,430) 20,072 ------- ------- ------- $155,222 $ 45,658 $200,880 ======= ======= ======= Deferred tax expenses (credits) for 1996, 1995, and 1994 result from the following timing differences: 1996 1995 1994 ---- ---- ---- California franchise tax $ 19,494 $ 21,203 $ 32,139 Depreciation and amortization 26,532 38,112 89,605 Allowance for bad debts (229) 189,582 (43,885) Vacation accrual (26,387) (8,464) (22,005) Gain on sale of investments (49,099) -- -- Other 17,444 (7,404) (35,782) ------- ------- ------- $ (12,245) $233,029 $ 20,072 ======= ======= ======= -25- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, concluded Recorded income tax expense differs from that computed by applying the statutory income tax rates for the following reasons: 1996 1995 1994 ---- ---- ---- Computed tax at statutory rate $175,785 $442,600 $304,761 Increases (decreases) resulting from: California franchise tax (13,671) (32,548) (22,063) Domestic dividend exclusion allowance (24,661) (25,466) (31,729) Cash surrender value 8,063 4,620 (3,740) Prior year under (over) accrual 36,640 39,621 (46,349) ------- ------- ------- $182,156 $428,827 $200,880 ======= ======= ======= (7) 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, 1996 and 1995, was $1,398,368 and $1,419,650, 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, in total only, is at the option of the Company. (8) Income per Common Share ----------------------- Income per common share, assuming no dilution, was computed by dividing the net income after deduction of preferred stock dividend requirements of $101,699, $103,247 and $103,536, by the weighted average number of common shares outstanding (234,846, 237,529 and 238,904) for 1996, 1995, and 1994, respectively. Income per common share, assuming full dilution, was computed by dividing net income by the weighted average number of common shares outstanding, after redemption of preferred stock, (334,912, 339,726, 342,115) for 1996, 1995 and 1994, respectively. (Note 7) (9) Malpractice Insurance Arrangements ---------------------------------- The Hospital maintains medical malpractice insurance coverage through a commercial insurance carrier 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. (10) 401(k) Plan ----------- The Plan is a defined contribution plan to which 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 Employer can make discretionary contributions for the participants. No contribution was made for any of the three years ended June 30, 1996. -26- Item 9. Changes in and disagreements with accountants on - ------- ------------------------------------------------ Accounting and Financial Disclosure ----------------------------------- None. -27- Item 10. Directors and Executive Officers of the Registrant - -------- -------------------------------------------------- Name and principal occupation during last five years Since Age Office Occupation - ---------------------- ----- --- ------ ---------- Lawrence V. Blashaw 1970 70 Director President of Freight For- warding Co. Charles F. Forbes, Attorney 1968 66 Secretary & Attorney Musick, Peeler & Garrett Director Allen E. Shaw, President 1960 78 President & President of of the Company Director Company Douglas A. Shaw, Vice President 1981 45 Vice President Hospital (son of president) & Director Administrator Richard J. Stanczak 1977 70 Director Business Business Consultant Consultant Michael Young, Controller 1978 48 Treasurer Hospital Administrator Controller Scott L. Holmes, M.D. 1988 59 Director Physician Donald J. Krpan, D.O. 1988 60 Director Dean of Students College of Medicine -28- 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, 1996, 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 Insurance persons in group remuneration was received and bonuses benefits - ---------------- ------------------------- ----------- -------- Allen E. Shaw President and Chairman of $100,000 the Board Douglas A. Shaw Vice President, Administrator 43,204 -- Michael Young Treasurer and Controller of 64,500 -- Mad River Community Hospital All other directors and officers as a group (5 persons) 6,700 ------- (8 persons) $214,404 ======= Note: There was no contractual agreement with any directors regarding compensation, pensions, or stock option. 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 1996 was $6,700. There have not been any payments made to officers or directors for severance of relationship. -29- Item 12. Security Ownership of Certain - -------- ----------------------------- Beneficial Owners and Management -------------------------------- Owners of 5% or more of outstanding voting securities at June 30, 1996, 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 50.6% San Clemente, California Preferred 2,327 4.6% Arcata Hospital Corporation* Common 20,898 8.9% Palos Verdes Estates, California Preferred 11,481 22.6% Security ownership of management as a group - ------------------------------------------- All directors and officers as Common 120,579 51.7% a group All directors and officers as Preferred 2,327 4.6% a group Security ownership of management is as follows: - ----------------------------------------------- Number of shares ---------------- Name Common Preferred ---- ------ --------- Lawrence V. Blashaw 2,500 -- Allen E. Shaw Family 118,079 2,327 ------- ------- 120,579 2,327 ======= ======= * Arcata Hospital Corporation is 98% owned by shareholders of the Company. -30- Item 13. Certain Relations and - -------- --------------------- Related Transactions -------------------- None. -31- 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: Report of Independent Auditors' Financial Statements: Balance Sheets June 30, 1996 and 1995 Statements of Income and Retained Earnings Years ended June 30, 1996, 1995 and 1994 Statements of Cash Flows - Years ended June 30, 1996, 1995, and 1994 Notes to Financial Statements (2) The following financial schedules for the Years 1996, 1995, and 1994 are submitted herewith: Schedule I - Short-Term Investments Schedule V - Property, Plant & Equipment Schedule VI - Accumulated Depreciation and Amortization of Property, Plant & Equipment Schedule VIII - Valuation and Qualifying Accounts 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 27 - Financial Data Schedule (Electronic filing only). (b) Registrant did not file any reports on Form 8-K during the quarter ended June 30, 1996. -32- Schedule I AMERICAN HOSPITAL MANAGEMENT CORPORATION Investments Years ended June 30, 1996, 1995 and 1994 Amount at Market value which of each issue each issue Cost of at balance is carried Name of Issuer each issue sheet date on books - -------------- ---------- ---------- -------- 1996: Equity securities $3,663,015 $5,260,928 $5,260,928 ========== ========== ========== 1995: Equity securities $3,460,694 $4,380,582 $4,380,582 ========== ========== ========== 1994: Money Market $ 284,454 $ 284,454 $ 284,454 Equity securities 2,869,398 3,665,885 2,869,398 ---------- ---------- ---------- $3,153,852 $3,950,339 $3,153,852 ========== ========== ========== -33- Schedule V AMERICAN HOSPITAL MANAGEMENT CORPORATION Property, Plant and Equipment Years ended June 30, 1996, 1995 and 1994 Balance, beginning Additions Other Charges, Balance, of year at cost Retirements add (deduct) end of yr ------- ------- ----------- ------------ --------- 1996: Land & Improvements $ 36,000 $ 8,500 $ 44,500 Buildings 4,233,728 4,233,728 Equipment 5,158,618 601,497 $ 32,245 5,727,870 Construction in progress 1,674 -- 1,674 -- -- --------- -------- ------- ------- --------- $ 9,430,020 $ 609,997 $ 33,919 -- $10,006,098 ========= ======== ======= ======= ========= 1995: Land & Improvements $ 138,121 $ 102,121 $ 36,000 Buildings 4,233,728 4,233,728 Equipment 8,066,583 830,047 3,750,400 $ 12,388 5,158,618 Construction in progress -- 14,062 -- (12,388) 1,674 --------- -------- --------- ------- --------- $12,438,432 $ 844,109 $3,852,521 -- $ 9,430,020 ========= ======== ========= ======= ========= 1994: Land & Improvements $ 138,121 $ 138,121 Buildings 4,198,149 $ 35,579 4,233,728 Equipment 6,902,239 $1,164,344 -- -- 8,066,583 Construction in progress 27,176 8,403 (35,579) -- --------- -------- ------- ------- --------- $11,265,685 $1,172,747 -- -- $12,438,432 ========= ========= ======= ======= ========= -34- Schedule VI AMERICAN HOSPITAL MANAGEMENT CORPORATION Accumulated Depreciation and Amortization of Property, Plant and Equipment Years ended June 30, 1996, 1995, and 1994 Balance, Balance, beginning end of year Provision Retirements of year ------- --------- ----------- ------- 1996: Buildings $2,195,915 $ 209,321 $2,405,236 Equipment 2,751,338 886,142 $ 32,245 3,605,235 Improvements -- 283 -- 283 -------- -------- -------- -------- Total $4,947,253 $1,095,746 $ 32,245 $6,010,754 ======== ======== ======== ======== 1995: Buildings $2,007,448 $ 188,467 $2,195,915 Equipment 5,669,708 832,030 $3,750,400 2,751,338 Improvements 102,121 -- 102,121 -- -------- -------- -------- -------- Total $7,779,277 $1,020,497 $3,852,521 $4,947,253 ======== ======== ======== ======== 1994: Buildings $1,799,313 $ 208,135 $2,007,448 Equipment 5,032,874 636,834 -- 5,669,708 Improvements 102,121 -- 102,121 -------- -------- -------- -------- Total $6,934,308 $ 844,969 -- $7,779,277 ======== ======== ======== ======== -35- Schedule VII AMERICAN HOSPITAL MANAGEMENT CORPORATION Valuation and Qualifying Accounts Years ended June 30, 1996, 1995, and 1994 Balance, Charged Charged Balance, beginning to to other end of year income accounts Deductions of year ------- ------ -------- ---------- ------- Allowance for doubtful receivables: 1996 $217,709 $5,804,777 $5,819,836 $202,650 1995 655,845 4,669,157 5,107,293 $217,709 1994 554,494 3,914,061 3,812,710 655,845 -36- 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, thereunto duly authorized: AMERICAN HOSPITAL MANAGEMENT CORPORATION By: /s/ Allen E. Shaw --------------------------------------- Allen E. Shaw, President Date: 12-27-96 ------------------------------------- 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 12-27-96 - ------------------------- Allen E. Shaw /s/ Charles F. Forbes Secretary and Director 12-27-96 - -------------------------- Charles F. Forbes Treasurer and Chief /s/ Michael J. Young Accounting Officer 12-27-96 - -------------------------- Michael J. Young /s/ Donald J. Krpan Director 12-27-96 - -------------------------- Donald J. Krpan /s/ Doug Shaw Director 12-27-96 - -------------------------- Doug Shaw