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, 1997 Commission file number 0-2751 ------------- ------ AMERICAN HOSPITAL MANAGEMENT CORPORATION ---------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-1861243 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 1116 Arcata, California 95521 - ------------------ ---------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (707) 839-8474 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ None - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock $1.00 par value - -------------------------------------------------------------------------------- (Title of class) $2.00 Cumulative Preferred Stock $1.00 par value - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes______ No X -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 share outstanding of each of the registrant's classes of common stock as of the latest practicable date (228,057 at June 30, 1997). Total number of pages, including cover - 35 -2- PART 1 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. 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. The business department has been moved to a new permanent location. The area will be used for the expansion of the adult day health care 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 1998. 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. -3- 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. 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. 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 , 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 will be expanded. This entity will continue to lease the facility from the Hospital. Item 3. Legal Proceedings - ------ ----------------- None. -4- 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 415 shareholders at June 30, 1997. No dividends were paid on common stock during the three years ended June 30, 1997. The Company is current on paying all cumulative preferred stock dividends. -6- Item 6. Selected Financial Data - ------ ----------------------- Year ended June 30 ---------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Total operating revenue, net $21,843,882 $21,421,707 $21,148,254 $20,671,387 $19,218,602 Net income 200,588 223,815 593,342 502,956 387,436 Primary earnings per share .45 .52 2.06 1.67 1.18 Fully diluted earnings per share .62 .67 1.75 1.47 1.13 Cash dividends per common share -- -- -- -- -- Total assets 20,342,679 20,557,286 19,800,615 18,325,512 16,995,552 Long-term debt 206,932 403,581 803,248 861,648 809,411 Working capital 8,542,725 7,851,133 7,165,927 6,010,324 6,265,004 Redeemable preferred stock 48,334 50,850 51,623 51,768 51,900 Stockholders' equity 15,060,535 14,633,038 14,077,102 13,040,598 12,636,033 -7- Item 7 Management's Discussion and Analysis of - ------ Financial Condition and Results of Operations --------------------------------------------- 1997 ---- Results of Operations --------------------- Hospital revenues increased slightly during 1997 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 $41,030,000 in 1997 compared to $40,617,000 in 1996, a 1% increase of $413,000. Contractual allowances totaled $15,147,000 in 1997 compared to $13,808,000 in 1996, a 10% increase. Government regulatory agencies attempt to reimburse the Hospital based on cost of services. But, as the government continues its efforts to cut back on rising health care payments, the actual reimbursement to the Hospital continues to decrease as evidenced by the large increase in contractual allowances. At times the Hospital is unable to even recoup costs on Medicare patients under the current methodology of reimbursement. Medi-Cal has also imposed certain limitations that negatively impacted the amount the Hospital is reimbursed for MediCal patients. Operating costs and expenses were $27,145,000 compared to $27,928,000 in 1996, a 3% decrease. Operating costs actually increased $524,000 while the provision for bad debts decreased by $1,309,000, resulting in the combined decrease of 3%. The Hospital has concentrated efforts in the collection of receivables resulting in less accounts being written off. The continued reduction in third-party reimbursement is a major contributing factor to the 1997 operating loss of $805,000. Net income, after investment income was $201,000 in 1997 compared to $224,000 in 1996. 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 $125,000, while total investment income was $990,000. 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. -8- 1997 continued -------------- Liquidity and Capital Resources ------------------------------- 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 $6,438,000 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 $706,000 in 1997. 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 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 --------- 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. -9- 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 $1,615,000. 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 costs, 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. -10- 1996 continued -------------- Liquidity and Capital Resources ------------------------------- 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 $6,187,000 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 $608,400 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. -11- Item 8. Financial Statements and Supplementary Data ------ ------------------------------------------- FINANCIAL STATEMENTS -------------------- Description Page ----------- ---- Independent Auditors' Report 14 Financial Statements: Balance Sheets - June 30, 1997 and 1996 15-16 Statements of Income - Years ended June 30, 1997, 1996 and 1995 17 Statements of Stockholders' Equity Years ended June 30, 1997, 1996 and 1995 18 Statements of Cash Flows - Years ended June 30, 1997, 1996 and 1995 19-20 Notes to Financial Statements 21-27 Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K 33 -12- AMERICAN HOSPITAL MANAGEMENT CORPORATION Annual Report for Corporations - Form 10-K Years ended June 30, 1997 and 1996 Financial Statements, Supplementary Data and Auditors' Report -13- 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, 1997 and 1996, and the related statements of income, stockholders' equity, and cash flows and the supporting financial statement schedules as listed in the accompanying index at Item 14, for the years ended June 30, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations and its cash flows for the years ended June 30, 1997, 1996 and 1995 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. K.C. Miller, CPA West Covina, California September 26, 1997 -14- AMERICAN HOSPITAL MANAGEMENT CORPORATION Balance Sheets June 30, 1997 and 1996 Assets 1997 1996 ---- ---- Current assets: Cash and cash equivalents ($425,000 held as security for a letter of credit in 1997) $ 505,027 $ 925,843 Investments 5,933,303 5,260,968 Receivables: Patients, net of estimated uncollectibles of $285,055 and $202,650, in 1997 and 1996, respectively 6,046,298 6,231,306 Other 350,429 290,028 Supplies, at lower of cost (first-in, first-out) or market 852,654 855,334 Prepaid expenses 108,207 84,981 ------------ ------------- Total current assets 13,795,918 13,648,460 ------------ ------------- Deferred income taxes 432,702 478,107 ------------ ------------- Investments and other assets: Real estate held for investment, at cost, net of $307,476 and $268,071 accumulated depreciation in 1997 and 1996, respectively 1,935,397 1,974,803 Investments in partnerships 87,429 87,086 Cash surrender value of life insurance 287,270 227,270 Other 113,275 146,216 ------------ ------------- 2,423,371 2,435,375 ------------ ------------- Property and equipment, at cost: Land and improvements 44,500 44,500 Buildings 4,233,728 4,233,728 Equipment 6,314,556 5,727,870 Construction in progress 158,879 -- ------------ ------------- 10,751,663 10,006,098 Less accumulated depreciation and amortization 7,060,975 6,010,754 ------------ ------------- 3,690,688 3,995,344 ------------ ------------- $20,342,679 $20,557,286 ============ ============= (continued) The accompanying notes are an integral part of these financial statements. -15- AMERICAN HOSPITAL MANAGEMENT CORPORATION Balance Sheets (concluded) June 30, 1997 and 1996 Liabilities and Stockholders' Equity ------------------------------------ 1997 1996 ---- ---- Current Liabilities: Current maturities of long-term debt $ 177,981 $ 276,660 Accounts payable and accrued expenses: Trade 973,944 562,306 Accrued liabilities 1,764,500 1,802,106 Estimated third-party payor settlements 721,754 1,823,149 Income taxes: Current 30,502 -- Deferred 1,584,512 1,333,106 ----------- ----------- Total current liabilities 5,253,193 5,797,327 ----------- ----------- Long-term debt, less current maturities 28,951 126,921 ----------- ----------- Stockholders' equity: $2 cumulative preferred stock, par value $1 per share; authorized 100,000 shares; issued 65,270.82 shares; reacquired 16,937.28 and 14,421.08 shares; outstanding 48,333.54 and 50,849.74 shares; aggregate redemption and liquidating value of $1,329,172 and $1,398,368 at June 30, 1997 and 1996, respectively 48,334 50,850 Common stock, par value $1.00 per share; authorized 400,000 shares, issued 249,051 shares, reacquired 20,994 and 15,838 shares; outstanding - 228,057 and 233,123 shares at June 30, 1997 and 1996, respectively 228,057 233,213 Additional paid-in capital 194,427 296,210 Unrealized holdings gains, net, for investments 1,455,544 1,026,809 Retained earnings 13,134,173 13,025,956 ---------- ---------- Total stockholders' equity 15,060,535 14,633,038 ---------- ---------- $20,342,679 $20,557,286 ========== ========== The accompanying notes are an integral part of these financial statements. -16- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Income Years ended June 30, 1997, 1996, and 1995 1997 1996 1995 ---- ---- ---- Net patient service revenue $ 25,883,197 $26,809,409 $25,364,285 Other revenue 456,549 417,075 453,126 ------------ ------------- ------------- Total operating revenue 26,339,746 27,226,484 25,817,411 ------------ ------------- ------------- Operating costs and expenses: Professional care of patients 13,730,083 13,462,486 12,984,368 General services 2,588,394 2,734,438 2,426,633 Administrative services 3,388,734 2,989,859 2,759,002 Employee health and welfare 1,459,831 1,318,048 1,322,370 Medical malpractice insurance 382,619 406,630 430,435 Interest 48,775 76,290 97,401 Depreciation and amortization 1,050,221 1,135,152 1,059,902 Provision for bad debts 4,495,864 5,804,777 4,669,157 ------------ ------------- ------------- Total operating costs and expenses 27,144,521 27,927,680 25,749,268 ------------ ------------- ------------- (Loss) income from operations (804,775) (701,196) 68,143 ------------ ------------- ------------- Other income: Investment income 990,102 1,076,148 944,052 Other 36,418 31,019 9,974 ------------ ------------- ------------- 1,026,520 1,107,167 954,026 ------------ ------------- ------------- Income before provision for income taxes 221,745 405,971 1,022,169 Provision for income taxes 21,157 182,156 428,827 ------------ ------------- ------------- Net income $ 200,588 $ 223,815 $ 593,342 ============= ============= ============= Primary earnings per share $ .45 $ .52 $ 2.06 ============= ============= ============= Fully diluted earnings per share $ .62 $ .67 $ 1.75 ============= ============= ============= The accompanying notes are an integral part of these financial statements. -17- AMERICAN HOSPITAL MANAGEMENT CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Years ended June 30, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Stockholders' Equity: Cumulative Preferred Stock Beginning balance $ 50,850 $ 51,623 $ 51,768 Reacquired stock 2,516 773 145 -------------- -------------- --------------- Ending balance 48,334 50,850 51,623 -------------- -------------- --------------- Common Stock Beginning balance 233,213 236,479 238,579 Reacquired stock 5,156 3,266 2,100 -------------- -------------- --------------- Ending balance 228,057 233,213 236,479 -------------- -------------- --------------- Additional paid-in-capital Beginning balance 296,210 340,912 356,150 Reacquired stock 101,783 44,702 15,238 -------------- -------------- --------------- Ending balance 194,427 296,210 340,912 -------------- -------------- --------------- Unrealized holdings gains, net, for investments Beginning balance 1,026,809 551,933 0 Increase in unrealized holdings gains 428,735 474,876 551,933 -------------- -------------- --------------- Ending balance 1,455,544 1,026,809 551,933 -------------- -------------- --------------- Retained Earnings Beginning balance 13,025,956 12,896,155 12,394,101 Net income 200,588 223,815 593,342 Cash dividends paid on preferred stock (92,371) (94,014) (91,288) -------------- -------------- --------------- Ending balance 13,134,173 13,025,956 12,896,155 -------------- -------------- --------------- Total Stockholders' equity $15,060,535 $14,633,038 $14,077,102 ============== ============== =============== The accompanying notes are an integral part of these financial statements. -18- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Cash Flows Years ended June 30, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Cash received from patients and third-party payors $20,927,495 $22,245,219 $20,398,950 Cash paid to employees and suppliers (21,256,175) (21,312,243) (19,638,638) Investment income received 934,579 1,025,397 666,219 Interest paid ( 48,775) (76,290) (97,401) Income taxes, net change 20,332 (412,073) (225,467) ------------- ------------ ------------ Net cash provided by operating activities 577,456 1,470,010 1,103,663 ------------- ------------ ------------ Cash flows from investing activities: Purchase of real estate held for investment, net - (127,135) - Distributions from partnerships - - 132,424 Purchase of property and equipment, net (706,159) (608,324) (844,109) Proceeds from sale of short-term investments 2,433,022 2,381,529 1,983,228 Purchase of short-term investments (2,691,259) (2,356,870) (2,119,134) Other (60,401) (110,286) (20,596) ------------- ------------ ------------ Net cash used in investing activities (1,024,797) (821,086) (868,187) ------------- ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt 121,216 - 336,766 Principal reductions of long-term debt (317,865) (399,667) (395,166) Dividends paid (92,371) (94,014) (91,288) Payments for reacquired stock (109,455) (48,741) (17,483) ------------- ------------ ------------ Net cash used by financing activities (398,475) (542,422) (167,171) ------------- ------------ ------------ Net (decrease) increase in cash and cash equivalents (845,816) 106,502 68,305 Cash and cash equivalents, beginning of year 925,843 819,341 751,036 ------------- ------------ ------------ Cash and cash equivalents, end of year, unrestricted $ 80,027 $ 925,843 $ 819,341 ============= ============ ============ Supplemental schedule of non-cash investing activities: Increase in fair value of investments $ 714,559 $ 791,459 $ 919,888 Increase in deferred taxes (285,824) (316,583) (367,955) ------------- ------------ ------------ Increase in unrealized holding gains $ 428,735 $ 474,876 $ 551,933 ============= ============ ============ The accompanying notes are an integral part of these financial statements. -19- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Cash Flows (concluded) Years ended June 30, 1997, 1996 and 1995 1997 1996 1995 ---- ---- ---- Reconciliation of net income to net cash provided by operating activities: Net income $ 200,588 $ 223,815 $ 593,342 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,083,162 1,169,924 1,092,844 Partnership income (343) (2,957) (149,813) Gain on sale of investments (124,539) (113,586) (170,936) Increase in cash surrender value (60,000) (18,621) (21,924) Change in assets and liabilities: (Decrease) increase in patient receivables, net 185,008 (53,082) (385,725) (Decrease) increase in third-party payors, net (1,101,395) 876,594 (363,579) (Decrease) increase in income taxes, net 41,489 (229,917) 203,361 (Decrease) increase in supplies 2,680 31,842 (100,581) Decrease in prepaid expenses (23,226) (19,295) (1,893) (Increase) decrease in trade accounts payable 411,638 (576,265) 189,208 (Decrease) increase in accrued expenses, net (37,606) 181,558 219,359 ----------- ------------ ------------ Net cash provided by operating activities $ 577,456 $ 1,470,010 $ 1,103,663 =========== ============ ============ The accompanying notes are an integral part of these financial statements. -20- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements June 30, 1997, 1996 and 1995 (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 temporary differences between financial and taxable income. Investments 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%. -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, 1997. 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 $1,459,187. Health care benefit expense was approximately $1,459,831, $1,318,048 and $1,322,370 for the years ended June 30, 1997, 1996 and 1995, respectively. Use of Estimates ---------------- Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. 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, 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, 1997, 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. Reclassifications ----------------- Certain accounts from prior years financial statements have been reclassified to be comparable with disclosure for the current year. -22- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (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, 1994. * 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, 1995. * 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. 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, 1997 and 1996, 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 stockholders' equity, net of tax effect, until realized. The total amount recorded in stockholders' equity was $1,455,544 of which $403,400 relates to the change in unrealized gain in securities for the current year, net of the income tax effect. -23- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued Short term investments at June 30, 1997 and 1996 consist of the following: 1997 1996 ---- ---- Equity securities: Fair Value $5,933,303 $5,260,968 Unrealized Gain $2,466,856 $1,680,334 Unrealized Loss $ (40,950) $ (82,381) Gain or loss from sale of securities is based on specific identification of the securities sold. For the year ended June 30, 1997 and 1996, realized gains and realized losses were $327,314 and $(202,775), and $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, 1997 and 1996, respectively, includes the following amounts for property leased under capital leases: 1997 1996 ---- ---- Equipment $ 1,495,799 $1,374,581 Less accumulated amortization 1,061,888 774,850 --------- ---------- $ 433,911 $ 599,731 ========== ========== Amortization expense on capitalized leases for the years ended June 30, 1997, 1996 and 1995 totaled $287,038, $272,240 and $235,889, respectively. Annual future minimum lease payments under capitalized leases at June 30, 1997 are as follows: 1998 $ 189,736 1999 23,984 2000 6,940 --------- Total minimum lease payments 220,660 Less amount representing interest (5.5% to 10.75%) (13,728) --------- Present value of minimum lease payments 206,932 Less current maturity 177,981 --------- $ 28,951 ========= -24- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (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: 1997 1996 1995 ---- ---- ---- Gross patient service revenue $41,030,222 $ 40,617,321 $39,002,465 Less contractual allowances 15,147,025 13,807,912 13,638,180 ----------- ------------ ----------- Net patient service revenue $25,883,197 $ 26,809,409 $25,364,285 =========== ============ =========== (6) Income Taxes At June 30, income tax expense consisted of the following: 1997 ------------------------------------ Federal California Total ------- ---------- ----- Current $ 48,502 $ 33,995 $ 82,497 Deferred (38,344) (22,996) (61,340) --------- --------- --------- $ 10,158 $ 10,999 $ 21,157 ========= ========= ========= 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 ======== ======== ========= Deferred tax expenses (credits) for 1997, 1996, and 1995 result from the following temporary differences: 1997 1996 1995 ---- ---- ---- California franchise tax $ 16,095 $ 19,494 $ 21,203 Depreciation and amortization (67,878) 26,532 38,112 Allowance for bad debts (35,681) (229) 189,582 Vacation accrual 33,937 (26,387) (8,464) Other (7,813) (31,655) (7,404) --------- --------- ---------- $ (61,340) $ (12,245) $233,029 ========= ========= ========== -25- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued In addition, deferred tax liability is recorded in the balance sheet, resulting from the change in unrealized holdings for investments. The increase in deferred income taxes for the years ended June 30, 1997 and 1996 was $235,471 and $270,219, respectively. Recorded income tax expense differs from that computed by applying the statutory income tax rates for the following reasons: 1997 1996 1995 ---- ---- ---- Computed tax at statutory rate $ 95,866 $ 175,785 $ 442,600 Increases (decreases) resulting from: California franchise tax (5,691) (13,671) (32,548) Domestic dividend exclusion allowance (37,056) (24,661) (25,466) Cash surrender value (22,260) 8,063 4,620 Prior year (over) under accrual ( 9,702) 36,640 39,621 --------- ---------- --------- $ 21,157 $ 182,156 $ 428,827 ========= ========== ========= (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, 1997 and 1996, was $1,329,172 and $1,398,368, 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 $96,667, $101,699 and $103,247, by the weighted average number of common shares outstanding (230,635, 234,846 and 237,846) for 1997, 1996 and 1995, 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, (324,724, 334,912, 339,726) for 1997, 1996 and 1995, respectively. (Note 7) -26- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, concluded (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 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 Employer can make discretionary contributions for the participants. No contribution was made for any of the three years ended June 30, 1997. -27- Item 9. Changes in and disagreements with accountants on - ------ Accounting and Financial Disclosure ----------------------------------- None. -28- PART III 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 71 Director President of Freight For- warding Co. Charles F. Forbes, Attorney 1968 67 Secretary & Attorney Musick, Peeler & Garrett Director Allen E. Shaw, President 1960 79 President & President of of the Company Director Company Douglas A. Shaw, Vice President 1981 46 Vice President Hospital (son of president) & Director Administrator Richard J. Stanczak 1977 71 Director Business Business Consultant Consultant Michael Young, Controller 1978 49 Treasurer Hospital Administrator Controller Scott L. Holmes, M.D. 1988 60 Director Physician Donald J. Krpan, D.O. 1988 61 Director Dean of Students College of Medicine -29- 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, 1997, to each director and officer of the Company whose aggregate direct remuneration exceeded $100,000 and to all directors and officers (as a group) who were such at any time during the last fiscal year. Cash and cash equivalent forms of remuneration ------------------------ Name of individual Salaries, fees, or number of Capacities in which directors' fees persons in group remuneration was received and bonuses - ------------------ ------------------------- --------------- Allen E. Shaw President and Chairman of $100,000 the Board Douglas A. Shaw Vice President, Administrator 52,000 Michael Young Treasurer and Controller of 65,968 Mad River Community Hospital All other directors and officers as a group (5 persons) 7,100 --------- (8 persons) $225,068 ========= Note: There was no contractual agreement with any directors regarding compensation, pensions or stock options. Directors, from time to time, are compensated for attendance at meetings for their general administrative duties although there is no required payment. Total director compensation for 1997 was $7,100. There have not been any payments made to officers or directors for severance of relationship. -30- Item 12. Security Ownership of Certain - ------- Beneficial Owners and Management -------------------------------- Owners of 5% or more of outstanding voting securities at June 30, 1997, 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 51.78% San Clemente, California Preferred 1,970 4.08% Arcata Hospital Corporation* Common 20,898 9.16% Palos Verdes Estates, California Preferred 11,481 23.75% Security ownership of management as a group - ------------------------------------------- All directors and officers as Common 120,579 52.87% a group All directors and officers Preferred 1,970 4.08% 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 1,970 -------- -------- 120,579 1,970 ======== ======== * Arcata Hospital Corporation is 98% owned by shareholders of the Company. -31- Item 13. Certain Relations and - ------- Related Transactions --------------------- None. -32- 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, 1997 and 1996 Statements of Income and Retained Earnings Years ended June 30, 1997, 1996 and 1995 Statements of Cash Flows - Years ended June 30, 1997, 1996 and 1995 Notes to Financial Statements (2) The following financial schedules for the Years 1997, 1996 and 1995 are submitted herewith: Schedule II - Valuation and Qualifying Accounts Schedule III - Real Estate and Accumulated Depreciation All other schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes hereto. (3) Exhibits included herein: None (b) Registrant did not file any reports on Form 8-K during the quarter ended June 30, 1997 -33- Schedule II AMERICAN HOSPITAL MANAGEMENT CORPORATION Valuation and Qualifying Accounts Years ended June 30, 1997, 1996 and 1995 Balance, Charged Charged Balance, beginning to to other end of year income accounts Deductions of year --------- ------- -------- ---------- -------- Allowance for doubtful receivables: 1997 $ 202,650 $4,495,864 $4,413,459 $ 285,055 1996 217,709 5,804,777 5,819,836 202,650 1995 655,845 4,669,157 5,107,293 217,709 -34- Schedule III AMERICAN HOSPITAL MANAGEMENT CORPORATION Real Estate and Accumulated Depreciation Years ended June 30, 1997, 1996 and 1995 Related Accumulated Useful Description debt Land Buildings Total Depreciation Life ------------------------------------------------------------------------------------------------------ Rental property None $440,554 $970,130 $1,410,684 $307,476 25 Investment None 832,189 832,189 -------------------------------------------------- $1,272,743 $970,130 $2,242,873 $307,476 ================================================== Balance at June 30, 1995 $ 2,115,739 Purchases during period 127,135 ----------- Balance at June 30, 1996 and 1997 $ 2,242,874 =========== Balance at June 30, 1995 $ 228,666 Depreciation during period 39,405 ----------- Balance at June 30, 1996 268,071 Depreciation during period 39,405 ----------- Balance at June 30, 1997 $ 307,476 =========== -35- 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: April 13, 1998 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 April 13, 1998 Allen E. Shaw /s/ Charles F. Forbes - ------------------------ Secretary and Director April 13, 1998 Charles F. Forbes /s/ Michael J. Young - ------------------------ Treasurer and Chief Michael J. Young Accounting Officer April 13, 1998 /s/ Donald J. Krpan - ------------------------ Director April 13, 1998 Donald J. Krpan /s/ Doug Shaw - ------------------------ Director April 13, 1998 Doug Shaw