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 out-patient clinics in the outlying communities thereby maintaining the Hospital's presence in the service area. New buildings are planned for those departments still housed in mobile facilities adjacent to the Hospital. In addition, a cath-lab was opened in the spring of 1998 and a M.R.I. is currently under construction.
Another positive factor supporting Hospital use is community involvement. As the largest private employer in Arcata, the Hospital provides employment to approximately 520 local residents and, through its Home Health and Adult Day Health Care departments, is highly visible in the community served. The Hospital continues to try to build on this strength by maintaining a strong image through the media and a helping hand in the community, while providing personalized quality services. The Hospital is a strong advocate for a community health care plan involving the medical staff, employers and the area's hospitals and health care providers wherein they will work together to provide a locally based alternative to out of the area managed care.
As the health care industry is dependent on government payment of care for the elderly and indigent, the Hospital may be negatively impacted by new Government regulations. As mentioned above, the Hospital is working diligently to establish a community health care plan that could compete with the various outside managed care plans planning to enter the Humboldt County area.
Item 2.
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.
Item 3. Legal Proceedings - ------- -----------------
None.
Item 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.
PART II
Item 5.
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 407 shareholders at June 30, 1998. No dividends were paid on common stock during the three years ended June 30, 1998. The Company is current on paying all cumulative preferred stock dividends.
Item 6.
Item 6. Selected Financial Data - ------- -----------------------
Item 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations - ------ ---------------------------------------------
----
Results of Operations ---------------------
Hospital revenues increased slightly during 1998 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 $44,682,000 in 1998 compared to $41,030,000 in 1997, a 8.9% increase of $3,652,000.
Contractual allowances totaled $21,690,000 in 1998 compared to $18,934,000 in 1997, a 14.6% 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 five years ended June 30, 1998, contractual allowances and provisions for bad debts have amounted to approximately $111,000,000 or 48% 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 MediCal patients.
Operating costs and expenses were $23,984,000 compared to $23,358,000 in 1997, a 2.7% increase. Operating costs actually increased $219,000 while the provision for bad debts also increased by $407,000, resulting in the combined increase of $626,000. The increase in accounts written off is indicative of the industry wide difference between standard rates and the amount actually collected.
The continued reduction in third-party reimbursement is a major contributing factor to the 1998 operating loss of $594,000. During the current operating year, the Hospital charged to operations approximately $967,000 of cost as a result of the audit finalization of prior years' cost reports. Management intends to appeal various adjustments made by the intermediary, but no amount as been booked as a receivable for ultimate outcome of the appeal. Net income, after investment income was $351,000 in 1998 compared to $224,000 in 1997.
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 $517,000, while total investment income was $1,049,000. 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.
1998 continued ----
The purpose of these projects is to keep the users of the Hospital in their primary service area when health care is required, thereby enhancing the Hospital's inpatient service occupancy. By so doing, it is anticipated that operations will improve, even though the continued burden of government contractual agreements to provide health care, sometimes below cost, is being further complicated by the introduction of managed care contracts in the Humboldt County area.
Liquidity and Capital Resources -------------------------------
The Company's financial condition remains very strong with substantial investments, strong liquidity and minimal debt. The 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 $7,251,000 in cash and short-term investments. Included in this amount are $2,055,000 in unrealized holding gains. Subsequent to year end, the market had an approximately 15% decrease in market value which will affect the fair value of equity securities held by the Company 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 $1,258,000 in 1998. 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------------------------------------
----
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.
Item 8.
Item 8. Financial Statements and Supplementary Data ------- -------------------------------------------
FINANCIAL STATEMENTS --------------------
Description Page ----------- ----
Independent Auditors' Report 14
Financial Statements:
Balance Sheets - June 30, 1998 and 1997 15-16
Statements of Income - Years ended June 30, 1998, 1997 and 1996 17
Statements of Stockholders' Equity Years ended June 30, 1998, 1997 and 1996 18
Statements of Cash Flows - Years ended June 30, 1998, 1997 and 1996 19-20
Notes to Financial Statements 21-31
Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K 37
AMERICAN HOSPITAL MANAGEMENT CORPORATION
Annual Report for Corporations - Form 10-K Years ended June 30, 1998 and 1997
Financial Statements, Supplementary Data and Auditors' Report
Independent Auditors' Report ----------------------------
The Board of Directors and Stockholders: American Hospital Management Corporation
We have audited the accompanying balance sheets of American Hospital Management Corporation as of June 30, 1998 and 1997, 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, 1998, 1997 and 1996. 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, 1998 and 1997, and the results of its operations and its cash flows for the years ended June 30, 1998, 1997 and 1996 in conformity with generally accepted accounting principles, and the supporting financial statement schedules as listed in the accompanying index at Item 14, when considered in relation to the basic financial statements taken as a whole, in our opinion, present fairly in all material respects, the information set forth therein.
/s/ K.C. Miller, CPA -------------------- K.C. Miller, CPA
West Covina, California September 30, 1998
(continued) The accompanying notes are an integral part of these financial statements.
(concluded) The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements June 30, 1998, 1997 and 1996
(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.
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." Historically, the Company has complied with the requirements of SFAS No. 121. 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.
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, 1997. * 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 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 cost in 1998 of approximately $967,000 relating to audit adjustments made by the intermediary for prior years' cost reports. Management of the Hospital feels this reclassification was made in error and intends to appeal 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, 1996.
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.
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, 1998 and 1997, 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, 1998, contractual allowances and provisions for bad debts has totaled $62,062,182, approximately 48% of gross revenue.
(3) Marketable Securities ---------------------
Cost and fair value of marketable equity securities at June 30, 1998 and 1997, are as follows: 1998 1997 ---- ---- Available for sale: Cost $3,625,311 $3,507,397 Fair Value 7,040,973 5,933,303 Unrealized Gain 3,459,682 2,466,856 Unrealized Loss (44,020) (40,950)
Gain or loss from sale of securities is based on specific identification of the securities sold. Net unrealized holding gains on securities available for sale, net of the tax effect of $1,360,608 and $970,362 for the years ended June 30, 1998 and 1997, are shown as a separate component of stockholders' equity. For the years ended June 30, 1998, 1997 and 1996, realized gains and realized losses were $578,111 and $(60,741), $327,314 and $(202,775), and $170,507 and $(56,921), respectively.
The Company intends to implement the provision of FASB No. 130, Reporting Comprehensive Income, beginning with the fiscal year ending June 30, 1999. The Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Currently, net unrealized holding gains is the only income that would be disclosed as part of comprehensive income. For the year ended June 30, 1998, the change in net unrealized holding gains on securities available for sale, representing comprehensive income, is $989,756, net of $390,246 in deferred tax.
AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued
(4) Property and Equipment ----------------------
At June 30, 1998 and 1997, property and equipment is comprised of the following:
Amortization expense on capitalized leases for the years ended June 30, 1998, 1997 and 1996 totaled $301,767, $287,038 and $272,240, respectively.
Annual future minimum lease payments under capitalized leases at June 30, 1998 are as follows:
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 its lot. These are itemized as follows:
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, 1998 and 1997, other assets include cash surrender value of four life insurance polices totaling $449,570 and $287,270, and investment in partnerships of $$92,117 and $87,429.
(7) Long-Term Debt --------------
Long-term debt at June 30, 1998 and 1997, consists of the following:
The maturities of long-term debt for each of the succeeding five years subsequent to June 30, 1998, are as follows: 1999-$63,820; 2000-$9,620; 2001-$2,880; 2002-$3,095; 2003-$3,326 and 2004 and beyond-$123,913.
AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued
(8) Income Taxes ------------
At June 30, income tax expense consisted of the following:
---- Federal California Total ------- ---------- ----- Current $ 82,505 $ 33,069 $115,574 Deferred 4,743 ( 2,816) 1,927 -------- -------- -------- $ 87,248 $ 30,253 $117,501 ======== ======== ========
---- Federal California Total ------- ---------- ----- Current $ 48,502 $ 33,995 $ 82,497 Deferred (38,344) (22,996) (61,340) -------- -------- -------- $ 10,158 $ 10,999 $ 21,157 ======== ======== ========
---- Federal California Total ------- ---------- ----- Current $139,977 $ 54,424 $194,401 Deferred (8,447) (3,798) (12,245) -------- -------- -------- $131,530 $ 50,626 $182,156 ======== ======== ========
Deferred tax expenses (credits) for 1998, 1997, and 1996 result from the following temporary differences:
1998 1997 1996 ---- ---- ---- California franchise tax $ 8,921 $ 16,095 $ 19,494 Depreciation and amortization (31,277) (67,878) 26,532 Allowance for bad debts (3,067) (35,681) (229) Vacation accrual 39,391 33,937 (26,387) Other (12,041) (7,813) (31,655) -------- -------- -------- $ 1,927 $(61,340) $(12,245) ======== ======== ========
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, 1998 and 1997 was $390,246 and $235,471, respectively.
AMERICAN HOSPITAL MANAGEMENT CORPORATION Notes to Financial Statements, continued
(8) Income Taxes continued ----------------------
Recorded income tax expense differs from that computed by applying the statutory income tax rates for the following reasons:
1998 1997 1996 ---- ---- ---- Computed tax at statutory rate $186,574 $ 95,866 $175,785 Increases (decreases) resulting from: California franchise tax (1,365) (5,691) (13,671) Domestic dividend exclusion allowance (27,335) (37,056) (24,661) Cash surrender value (60,958) (22,260) 8,063 Entertainment deduction 11,438 6,000 10,200 Prior year (over) under accrual 9,147 (15,702) 26,440 -------- -------- --------
$117,501 $ 21,157 $182,156 ======== ======== ========
(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, 1998 and 1997, was $1,311,471 and $1,329,172, 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 - ---- -----------------------
Income per common share, assuming no dilution, was computed by dividing the net income after deduction of preferred stock dividend requirements of $95,380, $96,667 and $101,699, by the weighted average number of common shares outstanding (227,332, 230,635 and 234,846) for 1998, 1997 and 1996, 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, (321,537, 324,724, 334,912) for 1998, 1997 and 1996, respectively.
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 contribution was made for any of the three years ended June 30, 1998.
(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, 1998 and 1997, was as follows:
1998 1997 ---- ---- Medicare 37.5% 33.7% Medi-Cal 16.2 19.7 Other third-party payors 33.4 32.5 Patients 12.9 14.1 ------ ------ 100% 100% ===== ======
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, 1998. 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 $1,365,218.
Health care benefit expense was approximately $1,210,164, $1,459,831 and $1,318,370 for the years ended June 30, 1998, 1997 and 1996, respectively.
(15) Commitments and Contingencies -----------------------------
Commitments.
At June 30, 1998, the Company had an outstanding letter of credit for approximately $326,000 to acquire a new MRI machine. The letter of credit is secured by restricted cash.
The Company had one operating lease with monthly payments of $2,450 with a remaining term of 23 months. Total rental expense for the years ended June 30, 1998, 1997 and 1996 was $242,124, $227,486 and $201,118, respectively
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.
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, 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, 1998, 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.
Item 9.
Item 9. Changes in and disagreements with accountants on Accounting and Financial Disclosure - ------- ------------------------------------------------
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------
Item 11.
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, 1998, 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.
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 1998 was $6,800. There have not been any payments made to officers or directors for severance of relationship.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------
Owners of 5% or more of outstanding voting securities at June 30, 1998, were as follows:
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.
Item 13.
Item 13. Certain Relations and Related Transactions - -------- --------------------
None.
PART IV
Cost: Balance at June 30, 1996 and 1997 $2,242,874 Purchases 198,386 ---------- Balance at June 30, 1998 $2,441,260 ==========
Accumulated Depreciation:
Balance at June 30, 1996 $ 268,071 Depreciation during period 39,405 ---------- Balance at June 30, 1997 307,476 Depreciation during period 42,537 Balance at June 30, 1998 $ 350,013 ==========
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: November 6, 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 November 6, 1998 - --------------------- Allen E. Shaw
/s/ Charles F. Forbes Secretary and Director November 6, 1998 - --------------------- Charles F. Forbes
/s/ Michael J. Young Treasurer and Chief November 6, 1998 - --------------------- Accounting Officer Michael J. Young
/s/ Donald J. Krpan Director November 6, 1998 - --------------------- Donald J. Krpan
/s/ Doug Shaw Director November 6, 1998 - --------------------- Doug Shaw