10-K 1 ahmc-10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report June 30, 2001 Commission file number 0-2751 ------------- ------ AMERICAN HOSPITAL MANAGEMENT CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 95-1861243 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 1116 Arcata, California 95521 ------------------ --------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (707) 839-8474 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- None ---------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock $1.00 par value ----------------------------------------- (Title of class) $2.00 Cumulative Preferred Stock $1.00 par value -------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X ----------- ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes No X ----------- ----------- State the aggregate market value of the voting stock held by nonaffiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, at a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405, 17 CRF 230.405.) There is no market for the registrant's stock. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of share outstanding of each of the registrant's classes of common stock as of the latest practicable date (222,615 at June 30,2001). Total number of pages, including cover - 41 -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. As a result of area growth, the merger of two competing Hospitals in Eureka, and as part of a strategic plan, the Company has expanded the scope of services offered by the Hospital. 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 one acute care facility is located. Management of the Hospital feels that as long as it maintains a strong position in providing a full scope of health care services, the facility located in Eureka will have less of a negative impact on Hospital use or occupancy. For this reason, the Hospital organized out-patient clinics in the outlying communities thereby maintaining the Hospital's presence in the service area. A new medical building is under construction adjacent to the Hospital and major renovation has started for Radiology and the I.C.U. unit. The Hospital is improving landscaping and the overall appearance of the facility every year. Another positive factor supporting Hospital use is community involvement. As the largest private employer in Arcata, the Hospital provides employment to approximately 500 local residents and, through its Home Health and recently expanded 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 collaborating with other health care professionals to establish a community health care plan that could compete with the various outside managed care plans. -3- Item 2. Properties ------- ---------- The main facility operated by the Company is Mad River Community Hospital in Arcata, California. This single story structure is licensed as a 80-bed acute hospital, providing full hospital services to a population of approximately 55,000. Since opening in 1972, the Hospital has maintained a program of expansion and improvements. It is located on 12 acres (part of a 48 acre site) 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 and future strategic use. 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. Adult Day Health Care of Mad River, a separate not-for-profit organization, is operating an adult day health care facility in a building adjacent to and owned by Mad River Community Hospital. Michael Young, Controller of the Company, is functioning as Adult Day Health Care's Administrator and performs minimal accounting services for the organization. To meet the growing demands for this service, the existing building was expanded. This entity will continue to lease the facility from the Hospital. -4- Item 3. Legal Proceedings ------- ----------------- None. Item 4. Submission of Matters to Vote of Security Holders ------- ------------------------------------------------- There were no matters submitted to a vote by the security holders during the fourth quarter of the fiscal year covered by this report. -5- PART II Item 5. Market for the Registrant's Common Stock and Related Security ------- ------------------------------------------------------------- Holder Matters --------------- There is no market for the registrant's stock. There are approximately 386 shareholders at June 30, 2001. No dividends were paid on common stock during the three years ended June 30, 2001. The Company is current on paying all cumulative preferred stock dividends. -6- Item 6. Selected Financial Data ------- -----------------------

-7- Item 7 Management's Discussion and Analysis of ------ --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- 2001 ---- Results of Operations --------------------- Hospital revenues increased during 2001 as the Hospital continues to expand services to encourage use. Use of inpatient and outpatient services increased, and there was a rate increase. Patient revenue totaled $56,889,000 in 2001 compared to $50,615,000 in 2000, a 12.3% increase of $6,274,000. Contractual allowances totaled $30,449,000 in 2001 compared to $27,579,000 in 2000, a 10.4% increase. Government regulatory agencies attempt to reimburse the Hospital based on cost of services. But, as the government continues its efforts to cut back on rising health care payments, the actual reimbursement to the Hospital continues to decrease as evidenced by the large increase in contractual allowances. For the three years ended June 30, 2001, contractual allowances and provisions for bad debts have amounted to approximately $77,700,000 or 50% of gross revenue. At times the Hospital is unable to even recoup costs on Medicare patients under the current methodology of reimbursement. Medi-Cal has also imposed certain limitations that negatively impacted the amount the Hospital is reimbursed for Medi-Cal patients. Operating costs and expenses were $27,895,000 compared to $24,908,000 in 2000, a 11.9% increase. The main cause of the increase is caused by an increase in salaries and related cost to health care providers within the facility. These increases were necessary to keep the Hospital's wage scale more in line with industry standards. The health-care industry is experiencing a serious shortage in nurses and ancillary care technicians. In order to stay competitive within the market the Hospital must continue to maintain a wage scale that in comparable to other facilities in rural areas. The continued reduction in third-party reimbursement is the major contributing factor to the increase in contractual allowances. The Hospital is still dealing with third-party payors to finalize cost reports under audit. Management is actively appealing various adjustments made by the intermediary, and, even though, it appears the Hospital will prevail on various issues, no amount will be booked as a receivable until the ultimate outcome of the appeal is known. Net income before income taxes is $557,000 in 2001 compared to $696,000 in 2000. Even though the Hospital continues to be negatively impacted by poor reimbursement contracts with third party payers, if the required daily census can be maintained and costs are controlled, management anticipates continued profitable operations. -8- 2001 continued ---- Over the years, as the Company incurs more contractual allowances and uncollectible accounts, results from operations have suffered. The Company continues to enjoy good returns on its investments to help maintain a net profit. For the current year, sales of investments resulted in gains of $41,000, while total investment income was $772,000. As discussed in Item 1, the Company continues to expand operations to maintain a competitive edge in a continuing ever changing health care environment. All construction projects, considered necessary to maintain operations, will be completed without negative impact on the financial statements. The purpose of these projects is to keep the users of the Hospital in their primary service area when health care is required, thereby enhancing the Hospital's inpatient service occupancy. By so doing, it is anticipated that operations will improve, even though the continued burden of government contractual agreements to provide health care, sometimes below cost, is being further complicated by the introduction of managed care contracts in the Humboldt County area. Liquidity and Capital Resources ------------------------------- 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 $5,781,000 in cash and short-term investments. Included in this amount are $2,502,000 in unrealized holding gains. The short-term investments are collateral for the $2,322,000 line of credit at June 30, 2001 Cash from operating and investing activities continue to fund investing activities, the largest of which is the purchase of real estate, property and equipment, which totaled $2,153,000 in 2001. As the long-term debt relates only to the acquisition of major equipment, cash required for financing activities remains relatively low. The Hospital is currently evaluating the need for additional long-term financing to finance major renovation and construction projects. As discussed in Item I, government regulations, as well as managed care contract agreements, may continue to negatively impact operations. Management is unable to estimate any potential negative impact of forthcoming laws or regulations. Management believes that long-term key employees approve of the working conditions at the Hospital and have proven their ability to keep the Hospital staffed under difficult conditions. 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- Item 7 Management's Discussion and Analysis of ------ --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- 2000 ---- Results of Operations --------------------- Hospital revenues increased during 2000 as the Hospital continues to expand services to encourage use. Use of outpatient services increased, and there was a rate increase. Patient revenue totaled $50,615,000 in 2000 compared to $46,721,000 in 1999, a 8.3% increase of $3,894,000. Contractual allowances totaled $27,579,000 in 2000 compared to $23,808,000 in 1999, a 15.8% increase. Government regulatory agencies attempt to reimburse the Hospital based on cost of services. But, as the government continues its efforts to cut back on rising health care payments, the actual reimbursement to the Hospital continues to decrease as evidenced by the large increase in contractual allowances. For the three years ended June 30, 2000, contractual allowances and provisions for bad debts have amounted to approximately $74,200,000 or 52% of gross revenue. At times the Hospital is unable to even recoup costs on Medicare patients under the current methodology of reimbursement. Medi-Cal has also imposed certain limitations that negatively impacted the amount the Hospital is reimbursed for Medi-Cal patients. Operating costs and expenses were $24,908,000 compared to $25,459,000 in 1999, a 2.2% decrease. Operating costs actually decreased $1,098,000 while the provision for bad debts increased by $547,000, resulting in the combined decrease of $551,000. The increase in accounts written off is indicative of the industry wide difference between standard rates and the amount actually collected. The decrease in operating cost is mainly attributable to a decrease in employee health and welfare benefits paid, caused by not incurring a number of catastrophic claims that result in maximum reimbursement, as incurred in 1999. The continued reduction in third-party reimbursement is the major contributing factor to the increase in contractual allowances. The Hospital is still dealing with third-party payors to finalize cost reports under audit. Management is actively appealing various adjustments made by the intermediary, and, even though, it appears the Hospital will prevail on various issues, no amount will be booked as a receivable until the ultimate outcome of the appeal is known. Net income, after investment income was $541,259 in 2000 compared to net loss of $164,824 in 1999. Even though the Hospital continues to be negatively impacted by poor reimbursement contracts with third party payers, if the required daily census can be maintained and costs are controlled, management anticipates continued profitable operations. -10- 2000 continued ---- Over the years, as the Company incurs more contractual allowances and uncollectible accounts, results from operations have suffered. The Company continues to enjoy good returns on its investments to help maintain a net profit. For the current year, sales of investments resulted in gains of $168,000, while total investment income was $773,000. As discussed in Item 1, the Company continues to expand operations to maintain a competitive edge in a continuing ever changing health care environment. All construction projects, considered necessary to maintain operations, will be completed without negative impact on the financial statements The purpose of these projects is to keep the users of the Hospital in their primary service area when health care is required, thereby enhancing the Hospital's inpatient service occupancy. By so doing, it is anticipated that operations will improve, even though the continued burden of government contractual agreements to provide health care, sometimes below cost, is being further complicated by the introduction of managed care contracts in the Humboldt County area. Liquidity and Capital Resources ------------------------------- 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 $6,727,000 in cash and short-term investments. Included in this amount are $3,457,000 in unrealized holding gains. 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 $768,647 in 2000. 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. -11- Item 8. Financial Statements and Supplementary Data ------- ------------------------------------------- FINANCIAL STATEMENTS -------------------- Description Page ----------- ---- Independent Auditors' Reports 14 Financial Statements: Balance Sheets - June 30, 2001 and 2000 15-16 Statements of Operations Years ended June 30, 2001, 2000 and 1999 17 Statements of Comprehensive Income Years ended June 30, 2001, 2000 and 1999 18 Statements of Stockholders' Equity Years ended June 30, 2001, 2000 and 1999 19 Statements of Cash Flows - Years ended June 30, 2001, 2000 and 1999 20-21 Notes to Financial Statements 22-32 Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K 38 -12- AMERICAN HOSPITAL MANAGEMENT CORPORATION Annual Report for Corporations - Form 10-K Years ended June 30, 2001 and 2000 Financial Statements, Supplementary Data and Auditors' Report -13- INDEPENDENT AUDITORS' REPORT To the Board of Directors American Hospital Management Corporation We have audited the accompanying balance sheets of American Hospital Management Corporation as of June 30, 2001 and 2000 and the related statements of operations, comprehensive income and loss, stockholders' equity and cash flows for each of the three years ended June 30, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of American Hospital Management Corporation as of June 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years ended June 30. 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein Hurley & Company Granada Hills, California October 15, 2001 -14- AMERICAN HOSPITAL MANAGEMENT CORPORATION Balance Sheets June 30, 2001 and 2000

(continued) The accompanying notes are an integral part of these financial statements -15- AMERICAN HOSPITAL MANAGEMENT CORPORATION Balance Sheets June 30, 2001 and 2000

(concluded) The accompanying notes are an integral part of these financial statements. -16- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Operations Years ended June 30, 2001, 2000, and 1999

The accompanying notes are an integral part of these financial statements. -17- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Comprehensive Income and Loss Years ended June 30, 2001, 2000, and 1999

The accompanying notes are an integral part of these financial statements. -18- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Stockholders' Equity Years ended June 30, 2001, 2000 and 1999

The accompanying notes are an integral part of these financial statements. -19- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Cash Flows Years ended June 30, 2001, 2000 and 1999

The accompanying notes are an integral part of these financial statements. -20- AMERICAN HOSPITAL MANAGEMENT CORPORATION Statements of Cash Flows (concluded) Years ended June 30, 2001, 2000 and 1999

The accompanying notes are an integral part of these financial statements. -21- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements June 30, 2001, 2000 and 1999 (1) Summary of Significant Accounting Policies ------------------------------------------ Organization ------------ The Corporation owns and operates one acute-care hospital, located in Arcata, California. The Hospital provides inpatient, outpatient and emergency care services for residents of Humboldt County. It also operates other health care related enterprises in the same location. Admitting physicians are primarily practitioners in the local area. The Company was incorporated as a C-Corporation in California in 1955. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- Cash and cash equivalents represent cash in checking and demand savings accounts. Cash is held in several banks with no significant concentration of risk. Investments ----------- Investments in marketable securities with readily determinable fair values and all investments in debt securities are measured at fair value in the balance sheets. All investments are held for sale. Investment income or loss (including realized gains and losses on investments, interest and dividends) is included in net income. Unrealized gains and losses on investments are excluded from net income but are reported as a separate component of stockholders' equity. Property and Equipment ---------------------- Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line method. 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. Statements of Income Transactions deemed by management to be ongoing, major or central to the provision of health care services are reported as revenues and expenses. Peripheral or incidental transactions are reported as other income, net. -22- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued Net Patient Service Revenue --------------------------- The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. 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%. Impairment of Long-Lived Assets ------------------------------- The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Also, in general, long-lived assets and certain identifiable intangibles to be disposed of should be reported at the lower of carrying amount or fair market value less cost to sell. Reclassifications ----------------- Certain accounts from prior years financial statements have been reclassified to be comparable with disclosure for the current year. -23- 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, 1998. * Medicaid. Inpatient services rendered to Medicaid program beneficiaries are reimbursed under a cost reimbursement methodology. The Hospital is reimbursed at a tentative rate with final settlement determined after submission of annual cost reports by the Hospital and audits thereof by the Medicaid fiscal intermediary. The Hospital records supplies cost acquired and used by the operating room department as operating cost of that department. The intermediary disagreed with the classification of cost in the operating department and reclassified the revenue relating to the cost to Central Supply. Therefore, the Hospital has included the cost effect of the reclassification of revenue, as required by Medicaid, in its financial statements. Management of the Hospital feels this reclassification was made in error and is appealing the decision made by the intermediary. Until a final decision is reached, the Hospital will not include the effect of including the supplies cost in the operating department as part of the revenues of the Hospital. The Hospital's Medicaid cost reports have been audited by the Medicaid fiscal intermediary through June 30, 1998. The Hospital has also entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Hospital under these agreements includes prospectively determined rates per discharge, discounts from established charges and prospectively determined daily rates. -24- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (2) Net Patient Service Revenue, continued ---------------------------- Gross patient service revenue and related provision for contractual allowances for the years ended June 30, are summarized as follows:

At June 30, 2001 and 2000, 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. For the three years ended June 30, 2001, contractual allowances and provisions for bad debts has totaled $77,712,962, approximately 50% of gross revenue. (3) Marketable Securities --------------------- Cost and fair value of marketable equity securities at June 30, 2001 and 2000, are as follows: 2001 2000 ---- ---- Available for sale: Cost $3,267,733 $2,500,094 Fair Value 5,524,003 5,957,315 Unrealized Gain 2,501,927 3,637,800 Unrealized Loss (245,657) (180,579) Gain or loss from sale of securities is based on specific identification of the securities sold. The change in net unrealized holding gains on securities available for sale, net of the tax effect, of $(327,952), $(156,791) and $(216,549) for the years ended June 30, 2001, 2000 and 1999 have been charged to comprehensive income. For the years ended June 30, 2001, 2000 and 1999, realized gains and realized losses were $276,863 and $(235,589), $343,889 and $(176,299), and $606,848 and $(174,157), respectively. The Company has a line of credit with the Wells Fargo Bank, secured by the investment portfolio. The maximum amount available under the line of credit at June 30, 2001 is $2,500,000, of which $2,321,587 is outstanding. The interest rate at June 30, 2001 was 6.75%. -25- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (4) Property and Equipment ---------------------- At June 30, 2001 and 2000, property and equipment is comprised of the following:

Amortization expense on capitalized leases for the years ended June 30, 2001, 2000 and 1999 totaled $192,142, $138,957 and $136,087, respectively. Annual future minimum lease payments under capitalized leases at June 30, 2001 are as follows: 2002 $ 296,430 2003 462,906 2004 144,635 2005 136,373 2006 135,656 Thereafter 271,311 --------- Total minimum lease payments 1,447,311 Less amount representing interest (6.75% to 19.46%) 312,046 ---------- Present value of minimum lease payments 1,135,265 Less current maturity 197,518 ---------- $ 937,747 =========== -26- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (5) Real Estate Held for Investment ------------------------------- Real estate held for investment consists of 14 properties, 9 of which have a building on their lots. These are itemized as follows: Property Location: McKinleyville, California $1,475,472 Willow Creek, California 335,608 Lakeport, California 333,521 Arcata, California 161,750 Eureka, California 134,908 ---------- 2,441,259 Less accumulated depreciation for rented property 487,018 ---------- $1,954,241 The properties with buildings attached are either used temporarily for Hospital purposes, or used as rental property. All properties are valued at cost as it is not cost effective to determine fair value. Based on the property records available, there is no impairment of value. (6) Other Assets ------------ At June 30, 2001 and 2000, other assets include cash surrender value of four life insurance polices totaling $449,570, investment in partnerships of $70,202, and $24,038 in other investments. (7) Long-Term Debt -------------- Long-term debt at June 30, 2001 and 2000, consists of the following: 2001 2000 ---- ---- Bank note, secured by investment property, interest rate of 2.25% above bank index (7.448% at June 30, 2001), payable in monthly installments, maturing in 2021 $ 131,623 $133,705 Lease obligations, payable in installments through 2004 with a weighted average interest rate of 9.48% 1,135,265 542,427 --------- -------- 1,266,888 676,132 Less current maturities 199,700 113,187 ---------- --------- $1,067,188 $562,945 ========== ======== The maturities of long-term debt for each of the succeeding five years subsequent to June 30, 2001, are as follows: 2002-$199,700; 2003-$385,959; 2004-$101,311; 2005-$102,025; 2006-$110,682,and beyond-$367,211. -27- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (8) Income Taxes ------------ At June 30, income tax expense (benefit) consisted of the following: 2001 ----------------------------------------------- Federal California Total --------- ---------- --------- Current $ 173,020 $ 51,486 $ 224,506 Deferred (8,271) (2,079) (10,350) --------- --------- --------- $ 164,749 $ 49,407 $ 214,156 ========= ========= ========= 2000 ----------------------------------------------- Federal California Total --------- ---------- --------- Current $ 69,120 $ 9,564 $ 78,684 Deferred 61,486 14,941 76,427 --------- --------- --------- $ 130,606 $ 24,505 $ 155,111 ========= ========= ========= 1999 ----------------------------------------------- Federal California Total --------- ---------- --------- Current $(175,600) $ 800 $(174,800) ========= ========= ========= Deferred tax expenses (credits) for 2001, 2000, and 1999 result from the following temporary differences: 2001 2000 1999 -------- -------- -------- California franchise tax $(15,590) $ (7,167) $(11,750) Depreciation and amortization 92,708 84,089 (13,667) Allowance for bad debts (30,623) 29,221 (26,571) Vacation accrual (31,992) (32,700) (2,692) Correction of deferred tax liability (14,996) -- 54,680 Other (9,857) 2,984 -- -------- -------- -------- $(10,350) $ 76,427 $ 0 ======== ======== ======== In addition, deferred tax liability is recorded in the balance sheet, resulting from the change in unrealized holdings for investments. The change in deferred income taxes for the years ended June 30, 2001 and 2000 was $(218,635) and $(239,465), respectively. -28- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (8) Income Taxes continued ---------------------- Recorded income tax expense (benefit) differs from that computed by applying the statutory income tax rates for the following reasons: 2001 2000 1999 --------- --------- --------- Computed tax at statutory rate $ 255,610 $ 298,325 $(115,472) Increases (decreases) resulting from: California franchise tax (18,498) (8,108) (272) Domestic dividend exclusion allo (18,740) (18,165) (22,361) Cash surrender value -- (112,833) (4,321) Entertainment deduction 10,016 11,093 9,649 Net operating loss carryover -- (18,043) -- Other (14,232) 2,842 (42,023) --------- --------- --------- $ 214,156 $ 155,111 $(174,800) ========= ========= ========= (9) Preferred Stock --------------- The preferred stock provides for cumulative dividends of $2 per share per year. The stock has a redemption and liquidating value of $27.50 per share, plus dividends in arrears. Total redemption and liquidating value of the outstanding shares at June 30, 2001 and 2000, was $1,278,382 and $1,287,778, 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. (10) Income per Common Share ----------------------- Basic income per common share was computed by dividing the net income after deduction of preferred stock dividend requirements of $92,973, $93,657 and $94,884, by the weighted average number of common shares outstanding (223,092, 224,298 and 225,592) for 2001, 2000 and 1999, respectively. Diluted income per common share was computed by dividing net income by the weighted average number of common shares outstanding, after redemption of preferred stock, (315,588 and 317,255) for 2001 and 2000, respectively. For 1999, there was an anti-dilutive effect for all shares. -29- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (11) Malpractice Insurance Arrangements ---------------------------------- The Hospital purchases professional and general liability insurance to cover medical malpractice insurance claims. The coverage, through a commercial insurance carrier, is on a claims-made basis. Under claims-made policies, all accidents reported to the insurer are covered. On the basis of the Hospital's current experience, neither an accrual for a potential extended period reporting policy, which could be necessary if the Hospital ceases to purchase claims-made coverage, nor an accrual for unreported incidents has been made. (12) 401(k) Plan ----------- The Plan is a defined contribution plan to which all employees are permitted to make salary deferrals under the 401(k) provision. Such contributions are credited directly to their accounts. Based on the Plan document, the Employer can make discretionary contributions for the participants. No employer contribution was made for any of the three years ended June 30, 2001. (13) Concentrations of Credit Risk ----------------------------- The Hospital grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The mix of receivables from patients and third-party payors at June 30, 2001 and 2000, was as follows: 2001 2000 ---- ---- Medicare 38.8% 33.4% Medi-Cal 11.6 18.4 Other third-party payors 39.0 41.0 Patients 10.6 7.2 ------ ------- 100.0% 100.0% ===== ===== -30- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued (14) Self-insurance Program ---------------------- The Hospital has elected to self-insure for health care benefits to its employees. Amounts charged to expense 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, 2001. 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 $50,000 and for aggregate claim expenses in excess of $1,739,750. Health care benefit expense was approximately $1,498,230, $830,022 and $2,084,133 for the years ended June 30, 2001, 2000 and 1999, respectively. (15) Commitments and Contingencies ----------------------------- Total rental expense for the years ended June 30, 2001, 2000, and 1999, was $386,346, $388,708 and $380,325, respectively The Company has entered into an agreement for approximately $1,140,000 to construct a medical office building adjacent to the Hospital. There will be additional cost, depending on the final occupants' of the buildings needs. As of June 30, 2001, approximately $400,000 has been paid on the contract. Litigation. The Hospital is involved in litigation and regulatory investigations arising in the course of business. After consultation with legal counsel and insurance carriers, management estimates that these matters will be resolved without material adverse effect on the Hospital's future financial position or results from operations. (16) Risks and Uncertainties ----------------------- The Company's future operating results may be affected by a number of factors. The Hospital's operations are in part dependent on governmental reimbursement plans. Significant changes in the level of governmental reimbursement could have a favorable or unfavorable impact on the operating results of the Hospital. Also, as additional managed health care plans are introduced into the service area, actual admissions to the Hospital could increase or decrease depending on the Hospital's ability to contract with the health plans. -31- AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, concluded (17) Fair values of Financial Instruments ------------------------------------ Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. Changes in assumptions could significantly affect the estimates. Since the fair value is estimated as of June 30, 2001, 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. -32- Item 9. Changes in and disagreements with accountants on ------------------------------------------------ Accounting and Financial Disclosure ----------------------------------- None. -33- 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 75 Director President of Freight For- warding Co. Charles F. Forbes, Attorney 1968 71 Secretary & Retired Director Attorney Allen E. Shaw, President 1960 83 President & President of of the Company Director Company Douglas A. Shaw, Vice President 1981 50 Vice President Hospital Administrator & Director Administrator Richard J. Stanczak 1977 75 Director Business Business Consultant Consultant Michael Young, Controller 1978 53 Treasurer Hospital Administrator Controller Donald J. Krpan, D.O. 1988 65 Director President of the American Osteopath Association John Aryanpur, M.D. 1998 41 Director Neurosurgeon -34- 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, 2000, to each director and officer of the Company whose aggregate direct remuneration exceeded $100,000 and to all directors and officers (as a group) who were such at any time during the last fiscal year. Cash and cash equivalent forms of remuneration Name of individual Salaries, fees, or number of Capacities in which directors' fees persons in group remuneration was received and bonuses ---------------- ------------------------- ----------- Allen E. Shaw President and Chairman of $ 122,802 the Board Douglas A. Shaw Vice President, Administrator 52,000 Michael Young Treasurer and Controller of 75,954 Mad River Community Hospital All other directors and officers as a group (5 persons) 24,131 -------- (8 persons) $ 274,887 ========== 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 2001 was $24,131. There have not been any payments made to officers or directors for severance of relationship. -35- Item 12. Security Ownership of Certain ------- ----------------------------- Beneficial Owners and Management -------------------------------- Owners of 5% or more of outstanding voting securities at June 30, 1999, 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 52.80% San Clemente, California Preferred 1,970 4.20% Arcata Hospital Corporation* Common 20,898 9.38% Palos Verdes Estates, California Preferred 11,481 24.51% Security ownership of management as a group ------------------------------------------- All directors and officers as Common 120,579 53.92% a group All directors and officers Preferred 1,970 4.20% 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. -36- Item 13. Certain Relations and ------- --------------------- Related Transactions -------------------- None. -37- PART IV Item 14. Exhibits, Financial Statement ------- ----------------------------- Schedules, and Reports on Form 8-K ---------------------------------- Page ---- (a) (1) The following financial statements are included in Part II, Item 8: Reports of Independent Auditors' Financial Statements: Balance Sheets June 30, 2001 and 2000 Statements of Operations Years ended June 30, 2001, 2000 and 1999 Statements of Comprehensive Income Years ended June 30, 2001, 2000 and 1999 Statements of Stockholders' Equity Years ended June 30, 2001, 2000 and 1999 Statements of Cash Flows Years ended June 30, 2001, 2000 and 1999 Notes to Financial Statements (2) The following financial schedules for the Years 2001, 2000 and 1999 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, 2001. -38- Schedule II AMERICAN HOSPITAL MANAGEMENT CORPORATION Valuation and Qualifying Accounts Years ended June 30, 2001, 2000 and 1999

-39- Schedule III AMERICAN HOSPITAL MANAGEMENT CORPORATION Real Estate and Accumulated Depreciation Years ended June 30, 2001, 2000 and 1999

Cost: Balance at June 30, 2000, 1999 and 1998 $2,241,260 Accumulated Depreciation: Balance at June 30, 1998 $ 395,682 Depreciation during period 45,669 ----------- Balance at June 30, 1999 441,351 Depreciation during period 45,667 ----------- Balance at June 30, 2000 $ 487,018 ========== -40- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized: AMERICAN HOSPITAL MANAGEMENT CORPORATION By: /s/ Allen E. Shaw ------------------------------------ Allen E. Shaw, President Date: November 15, 2001 ---------------------------------- 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 November 15, 2001 ---------------------------- Allen E. Shaw /s/ Michael J. Young Treasurer and Chief November 15, 2001 ---------------------------- Accounting Officer Michael J. Young Director /s/ Donald J. Krpan Director November 15, 2001 ---------------------------- Donald J. Krpan /s/ Doug Shaw Director November 15, 2001 ---------------------------- Doug Shaw 41

AMERICAN HOSPITAL MANAGEMENT CORP 10-K