10-K 1 americanhospmgmt10k.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, 2002 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 shares outstanding of each of the registrant's classes of common stock as of the latest practicable date (222,315 at November 20, 2002). Total number of pages, including cover - 44 -2- PART 1 Item 1. Business ------- -------- The primary business of the Company is the ownership and operation of Mad River Community Hospital (the Hospital) and satellite clinics, located in the Humboldt County area of Northern California. As a result of area growth and the merger of two competing Hospitals in Eureka, and as part of a strategic plan, the Company has expanded the scope of services offered by the Hospital. The Hospital's service area on the north coast is experiencing the highest rate of growth in the county and is especially attractive to healthcare professionals who want to work in a community with high family values. The nearest competition to the Hospital is in Eureka (approximately 12 miles south) where one remaining acute care facility is located. Management of the Hospital feels that as long as it maintains a strong position in providing a full scope of health care services, the facility located in Eureka will have little or no negative impact on Hospital use or occupancy. For this reason, the Hospital organized outpatient clinics in the outlying communities thereby maintaining the Hospital's presence in the service area. A new two story medical building is under construction adjacent to the Hospital for expansion of patient services within the Hospital. The anticipated completion date in 2003, of the new 22,000 square foot building, is subject to obtaining financing. Another positive factor supporting Hospital use is community involvement. As the largest private employer in Arcata, with expanding services being provided through Home Health and Adult Day Health Care departments, the Hospital is highly visible in the community served. The Hospital continues to try to build on this strength by maintaining a solid community provider image through the media and a helping hand in the community. The Hospital is an advocate for a community health care plan involving the medical staff, employers and the area's hospitals and health care providers wherein they will work together to provide a locally based alternative to out of the area managed care. As the health care industry is dependent on government payment of care for the elderly and indigent, the Hospital may be negatively impacted by new Government regulations or changes in policy. As mentioned above, the Hospital is collaborating with other health care professionals to establish a community health care plan that could compete with the various outside managed care plans. -3- Item 2. Properties ------- ---------- The main facility operated by the Company is Mad River Community Hospital in Arcata, California. This single story structure is licensed as an 80-bed acute hospital, providing full hospital services to a population of approximately 55,000. Since opening in 1972, the Hospital has maintained a program of expansion and improvements. It is located on 12 acres (part of a 48-acre site) which leaves sufficient open area for expansion of medical services as needed in the further. The Hospital is adjacent to an expanded medical office complex owned by staff doctors. The Company owns 27 acres of land approximately 4 miles from the Hospital held for future residential development. A house and barn on the property are currently used as an office, guest quarters and storage space for the Company. The Company owns a personal residence adjacent to the Hospital. This acquisition was made to facilitate a continued favorable occupancy by a Hospital-related specialty and is presently being leased to an unrelated private resident who provides a child day care service to hospital employees. The Company also owns residences and commercial properties in Eureka, Lake County, and McKinleyville, California. From time to time, the Company acquires real estate being held for investment purposes and future strategic use. As part of its outreach program, the Company owns and operates medical office buildings which include a medical clinic in Willow Creek, California (38 miles east of the Hospital). The Company also owns and operates real property in McKinleyville which provides clinical services. Adult Day Health Care of Mad River, a separate not-for-profit organization, is operating an adult day health care facility in a building adjacent to and owned by Mad River Community Hospital. Michael Young, Controller of the Company, is functioning as Adult Day Health Care's Administrator and performs minimal accounting services for the organization. To meet the growing demands for this service, the existing building was expanded. This entity will continue to lease the facility from the Hospital. -4- Item 3. Legal Proceedings ------- ----------------- 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 385 shareholders at November 20, 2002. No dividends were paid on common stock during the three years ended June 30, 2002. The Company is current on paying all cumulative preferred stock dividends. -6- Item 6. Selected Financial Data ------- -----------------------

~~Year~~Years ended June 30 --------------------------------------------------------------------~~---~~ 2002 2001 2000 1999 1998 ~~1997~~ ----~~------~~ ----~~------~~ ----~~------~~ ----~~------~~ ----~~------~~ Total operating revenue, net $ 30,547,032 $ 27,663,529 $ 24,759,228 $ 24,089,600 $ 22,992,958 ~~$ 22,096,357~~ Net (loss) income (~~loss~~843,080) 382,507 541,259 (164,824) 350,874 ~~200,588~~ Basic (loss) earnings per share (4.21) 1.30 2.00 (1.15) 1.12 ~~.45~~ Diluted (loss) earnings per share (4.21) 1.21 1.71 (1.15) 1.09 ~~.62~~ Cash dividends per common ~~share~~shares -- -- -- -- -- Total assets 25,161,711 24,862,687 22,409,022 22,302,627 22,411,941 ~~20,342,679~~ Long-term debt 2,251,843 1,266,888 676,132 741,865 206,265 ~~206,932~~ Working capital 7,605,491 8,312,317 8,861,853 8,553,820 8,905,761 ~~8,542,725~~ Redeemable preferred stock 46,471 46,487 46,829 47,442 47,690 ~~48,334~~ Stockholders' equity 14,583,066 15,641,209 15,690,291 15,416,989 15,891,443 ~~15,060,535~~

-7- Item 7 Management's Discussion and Analysis of ------ --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- 2002 ---- Results of Operations --------------------- Hospital revenues increased during 2002 as the Hospital continued to expand services offered to the community. Use of inpatient and outpatient services increased approximately 11%. In addition, fees for services rendered increased an average of 7%. Patient revenue totaled $69,530,000 in 2002 compared to $56,889,000 in 2001, a 22.2% increase of $12,641,000. Contractual allowances totaled $40,931,000 in 2002 compared to $30,449,000 in 2001, a 34.4% increase. Largely because of the decrease in the reimbursement payments by third-party payers, management elected to change the methodology for estimating estimated allowances which contributed greatly to the large percentage increase in contractual allowances. The estimated allowances as a percentage of patient receivables increased approximately 11.7%, or approximately $2,576,000. This is a non-cash entry as indicated by the statement of cash flows that shows $713,000 net cash provided by operations. The change in estimate, in large part, was required by third-party payers reimbursing based on fixed contracts which do not take into account the ever increasing cost of providing health care. Medicare and Medi- Cal indicate an attempt to reimburse the hospitals' cost of providing services. But, as the government continues its efforts to cut back on rising health care payments, the actual reimbursement to the Hospital continues to decrease. The majority of reimbursement is based on fixed contracts. Therefore, as actual costs of providing services increase, these amounts are not reimbursed. For the three years ended June 30, 2001, contractual allowances and provisions for bad debts have amounted to approximately $77,700,000 or 51% of gross revenue. For the year ended June 30, 2002, contractual allowances, including the effect of changing the methodology for estimating allowances, were 58.9% of gross revenues. If the change in estimate had not been made, this percentage would have been approximately 54%, a 3% increase over prior years. As indicated above, much of the time, the Hospital is unable to even recoup costs on Medicare patients under the current methodology of reimbursement. Medi-Cal has also imposed certain limitations that negatively impact the amount the Hospital is reimbursed for Medi-Cal patients. Operating costs and expenses were $32,731,000 compared to $27,895,000 in 2001, a 17.3% increase. The main cause of the increase is an increase in salaries and related costs for health care providers within the facility. These increases were necessary to keep the Hospital's wage scale in line with industry standards. The healthcare industry is experiencing a serious shortage in nurses and ancillary care technicians. During the year, as the volume of business increased significantly, the Hospital was forced to use outside nursing registry to cover required staffing -8- 2002 continued -------------- based on volume. The cost of outside nursing registry is more than double the cost of payroll staffing. Therefore, not only did payroll cost for nurses and medical technicians increase approximately $2,000,000, the Hospital incurred approximately $800,000 in registry costs. In order to stay competitive within the market, the Hospital must continue to maintain a wage scale that is comparable to other facilities in rural areas. As of year end, management had been successful in hiring the required staff and, therefore, the cost for nursing registry will decrease significantly The continued reduction in third-party reimbursement is the major contributing factor to the increase in contractual allowances. The Hospital is still dealing with third-party payors to finalize cost reports under audits. Management is actively appealing various adjustments made by the intermediary, and, even though, it appears the Hospital will prevail on various issues, no amount will be booked as a receivable until the ultimate outcome of the appeal is known. Mainly caused by the lower than expected reimbursement rate effect of the change in estimate, the Company recorded a loss of $843,000 compared to net income of $383,000 in the prior year. Management feels strongly that this loss was caused by the significant increase in the percentage of estimated allowances compared to patient receivables, a balance sheet adjustment. Even though all hospitals continue to be negatively impacted by poor reimbursement contracts with third party payers, if the required daily census can be maintained at the increased level experienced in the current year and costs are controlled, management anticipates continued profitable operations. The Company continues to enjoy a large positive current ratio with current assets exceeding current liabilities by $7,605,000. As the market has been in a down trend, the investment portfolio for equity stocks has suffered an approximate $842,000 decrease in fair value. This decrease is a large contributing factor to the decrease in current assets as well as the decrease in total stockholders' equity. Management hopes that this decrease in fair value is a short-term loss and will be recovered as the economy improves. The Company continues to enjoy good returns on its investments to help maintain operations. For the current year, sales of investments resulted in gains of $20,000, while total investment income was $462,000. As discussed in Item 1, the Company continues to expand operations to maintain a competitive edge in a continuing ever changing health care environment. All construction projects considered necessary to maintain operations will be completed without negative impact on the financial statements. -9- 2002 continued -------------- The purpose of these projects is to keep the users of the Hospital in their primary service area when health care is required, thereby enhancing the Hospital's inpatient service occupancy. By so doing, it is anticipated that operations will improve, even though the continued burden of government contractual agreements to provide health care, sometimes below cost, is being further complicated by the introduction of managed care contracts in the Humboldt County area. Liquidity and Capital Resources ------------------------------- The Company's financial condition remains very strong with substantial investments, strong liquidity and minimal debt. The current ratio is 1.87 to 1. The cash and liquid investments are being maintained to subsidize Hospital operations and to finance needed construction and increased services at Mad River Community Hospital. Currently, the Company has approximately $5,798,000 in cash and short-term investments. Included in this amount are $1,771,000 in unrealized holding gains. The short-term equity investments are collateral for the $2,374,000 line of credit at June 30, 2002. Cash from operating and investing activities continue to fund investing activities, the largest of which is the purchase of real estate, property and equipment, which totaled $1,187,000 in 2002. As the long-term debt relates only to the acquisition of major equipment, cash required for financing activities remains relatively low. The Hospital is currently seeking alternatives for additional long-term financing to finance major renovation and construction projects. The Hospital is seeking $4,000,000 in long-term financing to complete the attached medical building under construction. The proceeds from this financing will also be used to pay off the $1,074,000 term loan. As discussed in Item I, government regulations, as well as managed care contract agreements, may continue to negatively impact operations. Management is unable to estimate any potential negative impact of forthcoming laws or regulations. Management believes that long-term key employees approve of the working conditions at the Hospital and have proven their ability to keep the Hospital staffed under difficult conditions. Inflation --------- According to the U.S. Department of Labor Statistics Urban Consumer Price Index, the inflation factor affecting costs for medical care services has averaged approximately 5% over the last three years. This moderate rate contributed to the Hospital's success in maintaining a moderate increase in costs from year to year. -10- 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 51% 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 healthcare 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 audits. Management is actively appealing various adjustments made by the intermediary, and, even though, it appears the Hospital will prevail on various issues, no amount will be booked as a receivable until the ultimate outcome of the appeal is known. Net income before income taxes is $597,000 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. -11- 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 $378,000. 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 ------------------------------- 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. -12- Item 8. Financial Statements and Supplementary Data ------- ------------------------------------------- FINANCIAL STATEMENTS -------------------- Description Page ----------- ---- Independent Auditors' Reports 15 Financial Statements: Balance Sheets - June 30, 2002 and 2001 16-17 Statements of Operations Years ended June 30, 2002, 2001 and 2000 18 Statements of Comprehensive Income Years ended June 30, 2002, 2001 and 2000 19 Statements of Stockholders' Equity Years ended June 30, 2002, 2001 and 2000 20 Statements of Cash Flows - Years ended June 30, 2002, 2001 and 2000 21-22 Notes to Financial Statements 23-35 Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K 40 -13- AMERICAN HOSPITAL MANAGEMENT CORPORATION ANNUAL REPORT FOR CORPORATIONS - FORM 10-K YEARS ENDED JUNE 30, 2002 AND 2001 FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND AUDITORS' REPORT -14- 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, 2002 and 2001, and the related statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2002, 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 7, 2002 -15- AMERICAN HOSPITAL MANAGEMENT CORPORATION BALANCE SHEETS JUNE 30, 2002 AND 2001

~~Assets~~ASSETS ------ 2002 2001 ~~2000~~ ----~~-------~~ ----~~-------~~ Current assets: Cash and cash equivalents $ ~~256~~805,~~995~~205 $ ~~769~~256,~~953~~995 Marketable securities 54,~~524~~993,~~003~~239 5,~~957~~524,~~315~~003 Receivables: Patients, net of estimated ~~uncollectibles~~allowances of $47,~~769~~346,~~817~~065 and $34,~~709~~769,~~870~~817, in ~~2001~~2002 and ~~2000~~2001, respectively 87,~~196~~503,~~500~~722 67,~~716~~840,~~586~~272 Other ~~115~~339,~~904~~335 ~~236~~472,~~216~~132 Estimated third-party payor settlements 1,219,687 1,259,087 ~~336~~Income tax refund 238,~~129~~944 -- Supplies, at lower of cost (first-in, first-out) or market 1,163,683 1,012,915 ~~913,690~~ Prepaid expenses 53,171 101,203 ~~87,750~~ ----------- ----------- Total current assets 16,~~466~~316,~~607~~986 1516,~~017~~466,~~639~~607 Property and equipment, net 6,187,174 5,801,022 ~~4,443,847~~ Real estate held for investment, net 1,~~954~~909,~~241~~172 1,~~999~~954,~~909~~241 Deferred income taxes 227,938 97,007 ~~354,705~~ Other assets 520,441 543,810 ~~592,922~~ ----------- ----------- $2425,~~862~~161,~~687~~711 $2224,~~409~~862,~~022~~687 =========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -16- AMERICAN HOSPITAL MANAGEMENT CORPORATION BALANCE SHEETS JUNE 30, 2002 AND 2001

~~Liabilities~~LIABILITIES ~~and~~AND ~~Stockholders~~STOCKHOLDERS' ~~Equity~~EQUITY ------------------------------------ 2002 2001 ~~2000~~ ----~~-------~~ ----~~-------~~ Current Liabilities: Current maturities of long-term debt $ ~~199~~384,~~700~~693 $ ~~113~~199,~~187~~700 Line of credit 2,374,150 2,321,587 ~~654,363~~ Accounts payable and accrued expenses: Trade 2,~~086~~337,~~732~~300 12,~~596~~086,~~078~~732 Accrued liabilities 2,~~121~~388,~~092~~445 12,~~704~~121,~~211~~092 Estimated third-party payor settlements 161,000 -- ~~323,364~~ Income taxes: Current 148,386 224,506 ~~77,226~~ Deferred 917,521 1,200,673 ~~1,687,357~~ ----------- ----------- Total current liabilities 8,~~154~~711,~~290~~495 68,~~155~~154,~~786~~290 ----------- ----------- Long-term debt, less current maturities 1,867,150 1,067,188 ~~562,945~~ ----------- ----------- Stockholders' equity: $~~2cumulative~~2 cumulative preferred stock, par value $1 per share; authorized 100,000 shares; issued 65,270.82 shares; reacquired 18,~~784~~799.2074 and 18,~~442~~784.2620 shares; outstanding 46,~~486~~471.6208 and 46,~~828~~486.5662 shares; aggregate redemption and liquidating value of $1,~~278~~277,~~382~~955 and $1,~~287~~278,~~778~~382 at June 30, ~~2000~~2002 and ~~1999~~2001, respectively 46,~~487~~471 46,~~829~~487 Common stock, par value $1.00 per share; authorized 400,000 shares, issued 249,051 shares, reacquired 26,~~436~~736 and 2526,~~483~~436 shares; outstanding - 222,~~615~~315 and ~~223~~222,~~568~~615 shares at June 30, ~~2000~~2002 and ~~1999~~2001, respectively 222,~~615~~315 ~~223~~222,~~568~~615 Additional paid-in capital 279,407 106,554 ~~122,384~~ Accumulated other comprehensive income 1,~~353~~052,~~762~~554 1,~~681~~353,~~714~~762 Retained earnings 1312,~~911~~982,~~791~~319 13,~~615~~911,~~796~~791 ----------- ----------- Total Stockholders' equity 1514,~~641~~583,~~209~~066 15,~~690~~641,~~291~~209 ----------- ----------- $2425,~~862~~161,~~687~~711 $2224,~~409~~862,~~022~~687 =========== ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -17- AMERICAN HOSPITAL MANAGEMENT CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2002, 2001, AND 2000

2002 2001 2000 ~~1999~~ ----~~--------~~ ----~~--------~~ ----~~--------~~ Net patient service revenue $ 30,547,032 $ 27,663,529 $ 24,759,228 ~~$ 24,089,600~~ Other revenue 389,612 393,155 346,071 ~~389,879~~ ------------ ------------ ------------ Total operating revenue 30,936,644 28,056,684 25,105,299 ~~24,479,479~~ ------------ ------------ ------------ Operating costs and expenses: Professional care of patients 19,675,123 17,161,899 15,160,791 ~~14,819,559~~ General services 2,686,040 2,527,309 2,357,961 ~~2,456,966~~Fiscal ~~Administrative~~and administrative services 4,180,705 3,506,466 3,304,688 ~~3,583,756~~ Employee health and welfare 2,615,432 2,104,678 1,132,846 ~~2,084,133~~ Medical malpractice insurance 574,064 415,790 296,639 ~~323,546~~ Interest 205,507 113,714 104,938 ~~74,966~~ Depreciation and amortization 846,122 841,117 827,340 ~~939,858~~ Provision for bad debts 1,947,544 1,223,545 1,723,497 ~~1,176,463~~ ------------ ------------ ------------ Total operating costs and expenses 32,730,537 27,894,518 24,908,700 ~~25,459,247~~ ------------ ------------ ------------ ~~Income~~ (~~loss~~Loss) income from operations (1,793,893) 162,166 196,599 ~~(979,768)~~ ------------ ------------ ------------ Other income: Investment income 462,259 418,911 487,129 ~~627,759~~ Other 21,672 15,586 12,642 ~~12,385~~ ------------ ------------ ------------ 483,931 434,497 499,771 ~~640,144~~ ------------ ------------ ------------ ~~Income~~ (~~loss~~Loss) income before income ~~taxes~~tax benefit (provision) (1,309,962) 596,663 696,370 ~~(339,624)~~ Provision for income tax ~~expense~~benefit (~~benefit~~expense) 466,882 (214,156) (155,111 ~~(174,800~~) ------------ ------------ ------------ Net (loss) income $ (~~loss~~843,080) $ 382,507 $ 541,259 ~~$ (164,824)~~ ============ ============ ============ Basic ~~earnings~~ (loss) earnings per common share $ (4.21) $ 1.30 $ 2.00 ~~$ (1.15)~~ ============ ============ ============ Diluted ~~earnings~~ (loss) earnings per common share $ 1(4.21) $ 1.7121 $ (1.~~15)~~71 ============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -18- AMERICAN HOSPITAL MANAGEMENT CORPORATION STATEMENTS OF COMPREHENSIVE (LOSS) INCOME YEARS ENDED JUNE 30, 2002, 2001, AND 2000 2002 ---- Net loss $ (843,080) Other comprehensive income, net of tax: Unrealized losses on securities: Unrealized holding losses arising during tax period $ (281,667) Less: reclassification adjustment for gains realized in net income (19,541) (301,208) ----------- ----------- Comprehensive loss $(1,144,288) =========== 2001 ---- Net income $ 382,507 Other comprehensive income, net of tax: Unrealized losses on securities: Unrealized holding losses arising during tax period $ (286,678) Less: reclassification adjustment for gains realized in net income (41,274) (327,952) ----------- ----------- Comprehensive income $ 54,555 =========== 2000 ---- Net income $ 541,259 Other comprehensive income, net of tax: Unrealized losses on securities: Unrealized holding gains arising during tax period $ 10,799 Less: reclassification adjustment for gains realized in net income (167,590) (156,791) ----------- ----------- Comprehensive income $ 384,468 ===========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -19- AMERICAN HOSPITAL MANAGEMENT CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2002, 2001 AND 2000

2002 2001 2000 ---- ~~Net~~---- ~~income~~---- Stockholders' Equity: Cumulative Preferred Stock Beginning balance $ ~~382~~46,~~507~~487 ~~Other~~$ ~~comprehensive income~~46,829 ~~net~~$ of47,442 ~~tax:~~Reacquired ~~Unrealized~~stock ~~losses~~(16) on(342) ~~securities:~~(613) ~~Unrealized~~------------ ~~holding~~------------ ~~losses~~------------ ~~arising~~Ending ~~during~~balance ~~tax~~46,471 ~~period~~46,487 ~~$(286~~46,~~678)~~829 ~~Less:~~------------ ~~reclassification~~------------ ~~adjustment~~------------ ~~for~~Common ~~gains~~Stock ~~realized~~Beginning inbalance ~~net~~222,615 ~~income~~223,568 ~~(41~~225,~~274~~027 Reacquired stock (300) (~~327~~953) (1,~~952~~459) ------------ ------------ ~~Comprehensive~~------------ ~~income~~Ending $balance 54222,~~555~~315 ~~2000~~222,615 223,568 ------------ ~~Net~~------------ ~~income~~------------ $Additional ~~541,259~~paid-in-capital ~~Other~~Beginning ~~comprehensive~~balance ~~income~~106,554 ~~net~~122,384 of148,783 ~~tax:~~Stockholder ~~Unrealized~~debt ~~losses~~175,626 on-- ~~securities:~~-- ~~Unrealized~~Reacquired ~~holding~~stock ~~gains~~(2,773) ~~arising~~(15,830) ~~during~~(26,399) ~~tax~~------------ ~~period~~------------ $------------ 10Ending balance 279,~~799~~407 ~~Less:~~106,554 ~~reclassification~~122,384 ~~adjustment~~------------ ~~for~~------------ ~~gains~~------------ ~~realized~~Accumulated other comprehensive income Beginning balance 1,353,762 1,681,714 1,838,505 Change in unrealized holdings gains, net ~~income~~(301,208) (~~167~~327,~~590~~952) (156,791) ------------ ------------ ~~Comprehensive~~------------ ~~income~~Ending $balance ~~384~~1,~~468~~052,554 ~~=========~~1,353,762 ~~1999~~1,681,714 ------------ ~~Net~~------------ ~~loss~~------------ ~~$(164,824)~~Retained ~~Other~~Earnings ~~comprehensive~~Beginning ~~income~~balance 13,911,791 ~~net~~13,615,796 of13,157,232 ~~tax:~~Net ~~Unrealized~~(loss) ~~gains~~income on(843,080) ~~securities:~~382,507 ~~Unrealized~~541,259 ~~holding~~Cash ~~gains~~dividends ~~arising~~paid ~~during~~on ~~tax~~preferred ~~period~~stock $(86,392) ~~216~~(86,~~142~~512) ~~Less:~~(82,695) ~~reclassification~~------------ ~~adjustment~~------------ ~~for~~------------ ~~gains~~Ending ~~realized~~balance in12,982,319 ~~net income (432~~13,~~691)~~911,791 ~~(216~~13,~~549)~~615,796 ------------ ------------ ~~Comprehensive~~------------ ~~loss~~Total Stockholders' equity $~~(381~~ 14,~~373)~~583,066 $ 15,641,209 $ 15,690,291 ============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -20- AMERICAN HOSPITAL MANAGEMENT CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001 AND 2000

2002 2001 2000 ~~1999~~ ----~~--------~~ ----~~--------~~ ----~~--------~~ ~~Stockholders'~~Cash ~~Equity~~flows from operating activities: ~~Cumulative~~Cash ~~Preferred~~received ~~Stock~~from ~~Beginning~~patients ~~balance~~and third-party payors $ 4629,~~829~~596,524 $ 4724,~~442~~106,903 $ 4723,~~690~~172,826 ~~Reacquired~~Cash ~~stock~~paid ~~342~~to ~~613~~employees ~~248~~and suppliers (29,078,230) (24,921,285) (22,638,608) Investment income received 478,584 415,137 344,897 Interest paid (205,507) (113,714) (104,938) Income taxes (paid) received (78,126) (77,227) 147,720 ------------ ------------ ------------ ~~Ending~~Net ~~balance~~cash 46provided by (used in) operating activities 713,~~487~~245 46(590,~~829~~186) 47921,~~442~~897 ------------ ------------ ------------ ~~Common~~Cash ~~Stock~~flows ~~Beginning~~from ~~balance~~investing ~~223~~activities: Purchase of property and equipment,~~568~~ ~~225~~net (1,~~027~~187,205) ~~226~~(2,~~157~~152,623) ~~Reacquired~~(768,647) ~~stock~~Proceeds ~~953~~from sale of short-term investments 2,588,137 1,~~459~~030,918 1,~~130~~844,750 Cash received from partnership investment --~~----------~~ 27,197 --~~----------~~ Purchase of short-~~-----------~~term ~~Ending~~investments ~~balance~~(2,514,004) ~~222~~(1,~~615~~102,919) ~~223~~(1,~~568~~919,742) ~~225~~Other -- 120,~~027~~312 110,987 ------------ ------------ ------------ ~~Additional~~Net ~~paid-~~cash used in~~-capital~~ ~~Beginning~~investing ~~balance~~activities ~~122~~(1,~~384 148~~113,~~783~~072) ~~163~~(2,~~769 Reacquired stock 15~~077,~~830~~115) 26(732,~~399~~652) ~~14,986~~ ------------ ------------ ------------ ~~Ending~~Cash ~~balance~~flows ~~106~~from financing activities: Proceeds from issuance of long-term debt 1,~~554~~173,661 ~~122~~703,~~384~~071 ~~148~~41,~~783~~522 ~~------------~~Principal ~~------------~~reductions of long-~~-----------~~term ~~Accumulated~~debt ~~other~~(188,706) ~~comprehensive~~(112,315) ~~income~~(107,255) ~~Beginning~~Net ~~balance~~proceeds 1from line of credit 52,~~681,714~~563 1,~~838~~667,~~505~~224 2654,~~055,054~~363 ~~Change~~Dividends inpaid ~~unrealized~~(86,392) ~~holdings~~(86,512) ~~gains~~(82,695) ~~net~~Payments for reacquired stock (~~327~~3,~~952~~089) (~~156~~17,~~791~~125) (~~216~~28,~~549~~471) ------------ ------------ ------------ ~~Ending~~Net ~~balance~~cash 1provided by financing activities 948,~~353,762~~037 12,~~681~~154,~~714~~343 1477,~~838,505~~464 ------------ ------------ ------------ ~~Retained~~Net ~~Earnings~~increase ~~Beginning~~(decrease) ~~balance~~in ~~13,615,796~~cash ~~13,157,232~~and ~~13,398,773~~cash ~~Net~~equivalents ~~income (loss) 382~~548,~~507~~210 ~~541,259~~ (~~164~~512,~~824~~958) 666,709 Cash ~~dividends~~and ~~paid~~cash onequivalents, ~~preferred~~beginning ~~stock~~of ~~(86~~year 256,~~512)~~995 ~~(82~~769,~~695)~~953 ~~(76~~103,~~717)~~244 ------------ ------------ ------------ ~~Ending~~Cash ~~balance~~and 13cash equivalents,~~911~~ end of year $ 805,~~791~~205 13$ 256,~~615~~995 $ 769,~~796~~953 13============ ============ ============ Supplemental schedule of non-cash investing activities: Decrease in fair value of investments $ (485,~~157~~347) $ (546,~~232~~587) $ (251,889) Change in deferred taxes 184,139 218,635 95,098 ------------ ------------ ------------ ~~Total~~Decrease ~~Stockholders'~~in ~~equity~~unrealized holding gains $ 15(301,~~641,209~~208) $ 15(327,~~690,291~~952) $ 15(156,~~416,989~~791) ============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -21- AMERICAN HOSPITAL MANAGEMENT CORPORATION STATEMENTS OF CASH FLOWS (CONCLUDED) YEARS ENDED JUNE 30, 2002, 2001 AND 2000

2002 2001 2000 ~~1999~~ ----~~--------~~ ----~~--------~~ ----~~--------~~ ~~Cash~~Reconciliation ~~flows~~of ~~from~~net ~~operating~~(loss) ~~activities:~~income ~~Cash~~to ~~received~~net ~~from~~cash ~~patients~~provided ~~and~~by ~~third-party~~(used ~~payors~~in) $operating ~~24,106,903~~activities: $Net ~~23,172,826 $ 21,394,707 Cash paid to employees and suppliers~~ (~~24,921,285~~loss) ~~(22,638,608) (22,010,456) Investment~~ income ~~received~~$ ~~415,137 344,897 232,119 Interest paid~~ (~~113~~843,~~714~~080) ~~(104,938)~~$ ~~(74~~382,~~966)~~507 ~~Income~~$ ~~taxes~~541,259 ~~net~~Adjustments ~~change~~to ~~(77,227)~~reconcile ~~147,720~~net (~~116,602~~loss) ~~------------~~income ~~------------~~to ~~------------~~net ~~Net~~ cash ~~(used in)~~ provided by ~~operating activities~~ (~~590,186)~~used ~~921,897 (575,198~~in) ~~------------~~operating ~~------------ ------------ Cash flows from investing~~ activities: ~~Purchase~~Depreciation ~~of property~~ and ~~equipment,~~amortization ~~net (2~~860,~~152,623)~~985 ~~(768~~864,~~647)~~128 (1844,~~380,999)~~241 ~~Proceeds~~Change ~~from~~in ~~sale~~estimated ofuncollectibles ~~short-term investments 1~~2,~~030~~576,~~918~~248 1,~~844~~059,~~750~~947 3(431,~~719,964~~326) ~~Cash~~Partnership ~~received~~income ~~from~~(669) ~~partnership~~(1,097) ~~investment 27~~(4,~~197~~185) --Gain --on ~~Purchase~~sale of ~~short-term~~ investments (119,~~102,919~~541) (141,~~919,742~~274) (2167,~~247,503~~590) ~~Other~~Change ~~120,312~~in ~~110,987~~assets ~~(65,191)~~and ~~------------~~liabilities: ~~------------ ------------ Net cash~~ (~~used in~~Increase) ~~provided~~decrease byin ~~investing~~patient ~~activities~~receivables, net (2,~~077~~106,~~115~~901) (~~732~~2,~~652~~539,861) 26812,~~271~~688 ~~------------~~Decrease ~~------------~~(increase) ~~------------~~in ~~Cash flows from financing activities: Proceeds from issuance of long~~third-~~term~~party ~~debt 703~~payors,~~071~~ ~~41,522~~net ~~679~~200,~~699~~400 ~~Principal reductions of long-term debt~~ (~~112~~1,~~315) (107~~246,~~255~~322) (~~144~~590,~~099~~337) ~~Net~~Change ~~proceeds~~in ~~from~~income ~~line of credit 1~~taxes,~~667,224~~ ~~654,363~~net ~~-- Dividends paid~~ (86545,~~512~~008) ~~(82~~136,~~695)~~929 ~~(76~~302,~~717~~831 (Increase) ~~Payments~~decrease ~~for~~in ~~reacquired~~supplies ~~stock~~ (17150,~~125~~768) (2899,~~471~~225) ~~(16~~117,~~364)~~360 ~~------------~~Decrease ~~------------~~(increase) ~~------------~~in ~~Net~~prepaid ~~cash~~expenses ~~provided by financing activities 2~~48,~~154,343~~032 ~~477~~(13,~~464~~453) ~~442~~(11,~~519~~313) ~~------------~~Increase ~~------------ ------------ Net~~ (decrease) ~~increase~~ in ~~cash~~trade ~~and~~accounts ~~cash~~payable ~~equivalents (512~~250,~~958)~~568 ~~666~~490,~~709~~654 (~~106~~472,~~408~~004) ~~Cash~~Increase ~~and~~(decrease) ~~cash~~in ~~equivalents~~accrued expenses, ~~beginning~~net ~~of year 769~~442,~~953~~979 ~~103~~416,~~244~~881 ~~209~~(19,~~652~~727) ------------ ------------ ------------ ~~Cash~~Net ~~and~~ cash ~~equivalents,~~provided ~~end~~by of(used ~~year $ 256,995 $ 769,953 $ 103,244 ============ ============ ============ Supplemental schedule of non-cash investing activities: Decrease~~ in ~~fair value of investments $ (546,587~~) $operating ~~(251,889)~~activities $ ~~(360~~713,~~915)~~245 ~~Change in deferred taxes 218,635 95,098 144,366 ------------ ------------ ------------ Decrease in unrealized holding gains~~ $ (~~327~~590,~~952~~186) $ ~~(156~~921,~~791)~~897 ~~$ (216,549)~~ ============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -22- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Organization ------------ The Corporation owns and operates one acute-care hospital, Mad River Community Hospital, located in Arcata, California. The Hospital provides inpatient, outpatient and emergency care services for residents of Humboldt County. It also operates other health care related enterprises in the same location. Admitting physicians are primarily practitioners in the local area. The Company was incorporated as a C-Corporation in California in 1955. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- Cash and cash equivalents represent cash in checking and demand savings accounts. Cash is substantially held in one financial institution. Investments ----------- Investments in marketable securities with readily determinable fair values and all investments in debt securities are measured at fair value in the balance sheets. An investment in oil and gas properties represents approximately 19% of the total investment in marketable securities. All investments are held for sale. Investment income or loss (including realized gains and losses on investments, interest, royalties and dividends) is included in net income. Unrealized gains and losses on investments are excluded from net income but are reported as a separate component of stockholders' equity. Property and Equipment ---------------------- Property and equipment acquisitions are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line method. (lives range from three to thirty years) Equipment under capital leases is amortized on the straight-line method over the 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. Interest cost incurred on borrowed funds during the period of construction of capital assets is capitalized as a component of the cost of acquiring those assets. -23- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Statements of Income -------------------- Transactions deemed by management to be ongoing, major or central to the provision of health care services are reported as revenues and expenses. Peripheral or incidental transactions are reported as other income, net. Net Patient Service Revenue --------------------------- The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Estimated Malpractice Costs --------------------------- The provision for estimated medical malpractice claims includes estimates for the ultimate costs for both reported claims and claims incurred but not reported. Income Taxes ------------ Deferred income taxes are provided for the estimated income tax effect of temporary differences between financial and taxable income. Investment in Partnership ------------------------- Investment in a partnership is carried at the Company's equity in the partnership's net assets. The partnership was organized in 1968 to provide property sites for the hospital and medical centers. The two general partners, the Company and its president, own 26% each. The limited partners, consisting of local doctors, own the remaining 48%. Impairment of Long-Lived Assets ------------------------------- The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Also, in general, long- lived assets and certain identifiable intangibles to be disposed of should be reported at the lower of carrying amount or fair market value less cost to sell. -24- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED Reclassifications ----------------- Certain accounts from prior years financial statements have been reclassified to be comparable with disclosure for the current year. (2) NET PATIENT SERVICE REVENUE --------------------------- The Hospital has agreements with third-party payors that provide for payments to the Hospital at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: * 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'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. -25- 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:

2002 2001 2000 ~~1999~~ ----~~-------~~ ----~~-------~~ ----~~-------~~ ~~Reconciliation~~Gross ofpatient ~~net~~service ~~income~~revenue ~~to net cash (used in) provided by operating activities: Net income (loss)~~ $ ~~382~~69,~~507 $ 541~~530,~~259~~413 $ ~~(164~~56,~~824) Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 864~~889,~~128~~189 ~~844~~$50,~~241 964~~615,~~524~~111 ~~Partnership~~Less ~~income~~contractual ~~(1,097)~~allowances (438,~~185) -- Gain on sale of investments (41~~983,~~274) (167,590) (432,691) Change in assets and liabilities: (Increase) decrease in patient receivables, net (1,479,914)~~ 381~~,362~~ ~~(724~~29,~~760) Increase in third-party payors, net (1,246,322) (590,337) (1,183,549) Change in income taxes, net 136,929 302,831 (291,402) (Increase) decrease in supplies (99,~~225~~) 117~~,~~360~~660 ~~(56~~25,~~484) (Increase) decrease in prepaid expenses (13~~855,~~453)~~883 ~~(11,313) 651 Increase (decrease) in trade accounts payable 490,654 (472,004) 1,257,343 Increase (decrease) in accrued expenses, net 416,881 (19,727) 55,994~~ ----------- ----------- ----------- Net ~~cash~~patient ~~(used~~service ~~in)~~revenue ~~provided by operating activities~~ $ ~~(590~~30,~~186)~~547,032 $ ~~921~~27,~~897~~663,529 $ ~~(575~~24,~~198)~~759,228 =========== =========== ===========

At June 30, 2002 and 2001, accounts receivable are primarily concentrated in federal and state governmental entities and other patients in which the Company does not believe there are any undue credit risk. In prior years, the contractual allowance percentage of patient service revenue has averaged approximately 51%. Third party payors' payments for services rendered to patients has continued to decrease, most significantly, in the current year. Therefore, management has elected to make a change in the methodology for estimating estimated allowances. The effect of this change has increased the percentage of contractual allowances to patient service revenue to approximately 56%. (Note 3) (3) CHANGE IN ESTIMATE ------------------ During the fiscal year ended June 30, 2002, management recognized that the estimated allowances account needed to be increased to reflect the reduced payments received for services rendered. At any financial reporting period, the amount of services billed but not collected is recorded in the patient receivable account. The estimated allowances account represents an estimate of the amount of patient receivables that have been billed but will not be collected because of the third party payers methodology for reimbursement. As discussed in Note 2, the Hospital has various contractual agreements with third-party payers for reimbursement of patient services billed. Each year the amount of reimbursement under contractual agreement, Medicare, Medi-Cal and Blue Cross being the largest providers, has not kept up with the rising cost of healthcare, most specifically the cost for nurses and medical technicians of which there is a shortage nation wide. As the lack of adequate reimbursement is a problem for all healthcare providers, management believes that third- party payers, most specifically Medicare and Medi-Cal will need to change their methodology for reimbursement to insure, at a minimum, that Hospital costs are reimbursed. -26- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (3) CHANGE IN ESTIMATE, CONTINUED ----------------------------- Historically, the average percent of contractual allowances to gross patient revenue has been approximately 51%. (retention percent). Unfortunately, the actual average retention percent for bills rendered to patients receiving care from the Hospital is now closer to 54%. Therefore, the estimated allowance amount, per the balance sheet, has increased from 37.8% of gross receivables at June 30, 2001, to 49.5% at June 30, 2002, 54% for inpatients and outpatients of the Hospital. This change, made in the year ended June 30, 2002, covers approximately $5,207,700 in billings made over the current and past years. Management does not anticipate that an additional adjustment for a change in estimate will be necessary in subsequent years. (4) MARKETABLE SECURITIES --------------------- Cost and fair value of marketable equity securities at June 30, 2002 and 2001, are as follows: 2002 2001 ---- ---- Available for sale: Cost $ 3,222,291 $ 3,267 Fair Value 4,993,239 5,524,003 Unrealized Gain 2,189,066 2,501,927 Unrealized Loss (418,118) (245,657) 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 $(301,208), $(327,952) and $(156,791) for the years ended June 30, 2002, 2001 and 2000 have been charged to comprehensive income. For the years ended June 30, 2002, 2001 and 2000, realized gains and realized losses were $746,065 and $(726,524), $276,863 and $(235,589), and $343,889 and $(176,299), respectively. The Company has a line of credit with the Wells Fargo Bank, secured by the equity investment portfolio. The maximum amount available under the line of credit at June 30, 2002 is $2,500,000, of which $2,374,150 is outstanding. The interest rate at June 30, 2002 and 2001 was 4.75% and 7.00%, respectively. The average short-term borrowing rate for the Company was 5.25% and 7.24% for 2002 and 2001, respectively. -27- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (5) PROPERTY AND EQUIPMENT ---------------------- At June 30, 2002 and 2001, property and equipment is comprised of the following: 2002 2001 ---- ---- Land and improvements $ 44,500 $ 44,500 Buildings 5,927,297 5,832,326 Equipment 9,610,007 9,527,590 Construction in progress 1,765,447 875,916 ----------- ----------- 17,347,251 16,280,332 Accumulated depreciation and amortization 11,160,077 10,479,310 ----------- ----------- Net property and equipment $ 6,187,174 $ 5,801,022 =========== =========== Capitalized interest of $89,321 and $58,535 is included in construction in progress for the years ended June 30, 2002 and 2001, respectively. Property and equipment include certain capitalized leases, as follows: 2002 2001 ---- ---- Equipment $1,678,984 $1,678,984 Less accumulated amortization 657,721 415,360 ---------- ---------- $1,021,263 $1,263,624 ========== ========== Amortization expense on capitalized leases for the years ended June 30, 2002, 2001 and 2000 totaled $242,361, $192,142 and $138,957, respectively. Annual future minimum lease payments under capitalized leases at June 30, 2002 are as follows: 2003 $ 462,906 2004 144,635 2005 136,373 2006 135,656 2007 135,656 Thereafter 158,264 ----------- Total minimum lease payments 1,173,490 Less amount representing interest (6.75% to 19.46%) 222,614 ----------- Present value of minimum lease payments 950,876 Less current maturity 382,511 ----------- $ 568,365 =========== -28- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (6) 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:

2002 2001 ~~2000 1999~~ ---- ---- ~~----~~Property ~~Gross~~Location: ~~patient~~McKinleyville, ~~service~~California ~~revenue~~ $561,~~889~~475,~~189~~472 $501,~~615~~475,~~111~~472 ~~$46~~Willow Creek,~~721~~ California 335,~~019~~608 ~~Less~~335,608 ~~contractual~~Lakeport, ~~allowances~~California 29333,~~225~~521 333,~~660~~521 25Arcata,~~855~~ California 161,~~883~~750 22161,~~631~~750 Eureka,~~419~~ California 134,908 134,908 ----------- ----------- 2,441,259 2,441,259 Less accumulated depreciation for rented property 532,087 487,018 ---------- ---------- ~~Net patient service revenue~~ $271,~~663~~909,~~529~~172 $241,~~759~~954,~~228~~241 ~~$24,089,600~~ =========== ==========~~= ===========~~

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. (7) OTHER ASSETS ------------ At June 30, 2002, other assets include cash surrender value of life insurance polices on three executives totaling $449,570 and an investment in a partnership of $70,871. For the years ended 2002 and 2001, the investment in a partnership increased by income of $669 and $1,097, respectively. (8) LONG-TERM DEBT -------------- Long-term debt at June 30, 2002 and 2001, consists of the following: 2002 2001 ---- ---- Bank note, secured by investment property, interest rate of 2.25% above bank index (5.01% at June 30, 2002), payable in monthly installments, maturing in 2021 $ 127,307 $ 131,623 Term note, secured by patients' receivables, interest rate of prime plus 2%, (6.75% at June 30, 2002), interest only through December 31, 2002, thereafter, monthly payments equal to 4.16% of the term loan balance through December 31, 2004, with entire principle balance due at that time. 1,073,660 -- -29- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (8) LONG-TERM DEBT, CONTINUED -------------- Lease obligations, payable in installments through 2008 with a weighted average interest rate of 9.48% 950,876 1,135,265 Shareholder, unsecured, interest only at 7% 100,000 -- ---------- ---------- 2,251,843 1,266,888 Less current maturities 384,693 199,700 ---------- ---------- $1,867,150 $1,067,188 ========== ========== The maturities of long-term debt for each of the succeeding five years subsequent to June 30, 2002, are as follows: 2003-$384,693; 2004-$501,829; 2005-$823,142; 2006-$106,500; 2007- $116,468, thereafter- $319,211. (9) INCOME TAXES ------------ At June 30, income tax expense (benefit) consisted of the following: 2002 ------------------------------------- Federal California Total ------- ---------- ----- Current $(238,944) $ 800 $(238,144) Deferred (191,358) (37,380) (228,738) --------- --------- --------- $(430,302) $ (36,580) $(466,882) ========= ========= ========= 2001 ------------------------------------- Federal California Total ------- ---------- ----- Current $ 173,020 $ 51,486 $ 224,506 Deferred (8,271) (2,079) (10,350) --------- --------- --------- $ 164,749 $ 49,407 $ 214,156 ========= ========= ========= 2000 ------------------------------------- Federal California Total ------- ---------- ----- Current $ 69,120 $ 9,564 $ 76,684 Deferred 61,486 14,941 76,427 -------- -------- -------- $130,606 $ 24,505 $155,111 ======== ======== ======== -30- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (9) INCOME TAXES continued ------------ Deferred tax expenses (credits) for 2002, 2001, and 2000 result from the following temporary differences:

2002 2001 2000 ---- ----~~---~~ ----~~-------~~ ~~Land~~California ~~and~~franchise ~~improvements~~tax $ 4416,~~500~~823 $ 44(15,~~500~~590) ~~Buildings~~$ 5(7,~~832,326~~167) ~~5,575,593~~Depreciation ~~Equipment~~and 9amortization 53,~~527~~036 92,~~590~~708 884,~~302,909~~089 ~~Construction~~Allowance infor ~~progress~~bad ~~875~~debts (214,~~916~~720) ~~204~~(30,~~707~~623) ~~-----------~~29,221 ~~-----------~~Vacation 16accrual 7,~~280~~178 (31,~~332~~992) 14(32,~~127,709~~700) ~~Accumulated~~Correction ~~depreciation~~of ~~and~~deferred ~~amortization~~tax ~~10,479,310~~liability ~~9,683,862~~ --~~---------~~ (14,996) --~~---------~~ Net ~~property~~operating ~~and~~loss ~~equipment $ 5~~(96,~~801,022~~460) $-- ~~4,443,847~~-- ~~===========~~Other ~~=========== Capitalized interest of $58~~5,~~535~~405 ~~is included in construction in progress for the year ended June 30~~(9,857) ~~2001 Property and equipment include certain capitalized leases~~2,984 ~~as follows: 2001 2000~~ ----------- ----------- ~~Equipment $ 1,678,984 $ 975,913 Less accumulated amortization 415,360 223,218~~ ----------- ~~-----------~~$(228,738) $ 1(10,~~263,624~~350) $ ~~752~~76,~~695~~427 ========= == ======= =========

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, 2002 and 2001 was $(184,139) and $(218,635), respectively. Recorded income tax expense (benefit) differs from that computed by applying the statutory income tax rates for the following reasons:

~~Balance~~2002 2001 2000 ---- ---- ---- Computed tax at statutory rate $(445,387) ~~Charged~~$ ~~Charged~~255,610 ~~Balance~~$ 298,325 ~~beginning~~Increases to(decreases) toresulting ~~other~~from: ~~end~~California offranchise ~~year~~tax ~~income~~(272) ~~accounts~~(18,498) ~~Deductions~~(8,108) ofDomestic ~~year~~dividend exclusion allowance (15,850) (18,740) (18,165) Cash surrender value -- -- (112,833) Entertainment deduction 8,406 10,016 11,093 Net operating loss carryover -- -- (18,043) Other (13,779) (14,232) 2,842 --------- --------- ------- --~~-----~~ ~~Allowance for doubtful receivables: 2001~~ $ ~~157~~(466,~~532~~882) $~~1,223,545~~ $1214,~~152,064~~156 $ ~~229~~155,~~013~~111 ~~2000~~========= ~~230,699~~========= ~~1,723,497 1,796,664 157,532 1999 292,723 1,176,463 1,238,487 230,699~~=========

The Company has a net operating loss carryforward of $259,464 for federal taxes and $435,904 for state taxes which expire in the year ending 2023. -31- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (9) INCOME TAXES continued ------------ Principal components of the net asset/(liability) representing deferred income tax balances are as follows: 2002 2001 ---- ---- Allowance for bad debts $ 337,532 $ 98,109 Vacation accrual 285,515 293,521 Depreciation and amortization (704,241) (645,802) Net operating loss 127,212 -- Unrealized holding gains (718,369) (902,508) Other (17,232) 53,014 ----------- ----------- Net deferred income tax liability $ (689,583) $(1,103,666) =========== =========== (10) 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, 2002 and 2001, was $1,277,955 and $1,278,382, 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 is at the option of the Company. (11) (LOSS) EARNINGS PER COMMON SHARE -------------------------------- Basic (loss) earnings per common share were computed by dividing the net (loss) income after deduction of preferred stock dividend requirements of $92,942, $92,973 and $93,657, by the weighted average number of common shares outstanding (222,465, 223,092 and 224,298) for 2002, 2001 and 2000, respectively. Diluted earnings per common share were computed by dividing net income by the weighted average number of common shares outstanding, after redemption of preferred stock, (315,588 and 317,255) for 2001 and 2000, respectively. For 2002, there was an anti-dilutive effect for all shares. -32- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (12) 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. (13) 401(K) PLAN ----------- The Plan is a defined contribution plan to which all employees are permitted to make salary deferrals under the 401(k) provision. Such contributions are credited directly to their accounts. Based on the Plan document, the Company can make discretionary contributions for the participants. The Company made a $34,636 contribution to the plan for the year ended June 30, 2002. No Company contribution was made for any of the two years ended June 30, 2001. (14) 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, 2002 and 2001, was as follows: 2002 2001 ---- ---- Medicare 44.1% 38.8% Medi-Cal 18.9 11.6 Other third-party payors 29.1 39.0 Patients 7.9 10.6 ----- ----- 100.0% 100.0% ===== ===== -33- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONTINUED (15) SELF-INSURANCE PROGRAM ---------------------- The Hospital has elected to self-insure for health care benefits to its employees. Amounts charged to expense are based on claims processed and approved by a third-party administrator, Capital Administrators. Claims incurred but not recorded are estimated and charged to expense. Management believes that amounts provided are sufficient to cover claims and costs incurred through June 30, 2002. The rates used to determine the amounts charged to expense for claims and costs are adjusted periodically, as appropriate, to reflect actual experience. The Hospital has insurance coverage for individual claim expenses in excess of $75,000 and for aggregate claim expenses in excess of $1,739,750. Health care benefit expense was $1,867,391, $1,498,230 and $830,022 for the years ended June 30, 2002, 2001 and 2000, respectively. (16) COMMITMENTS AND CONTINGENCIES ----------------------------- COMMITMENTS. The Company has entered into an agreement for approximately $1,140,000 to construct the exterior shell of a medical building adjacent to the Hospital. In that regard, the Company is pursuing a real estate loan of approximately $4,000,000. The proceeds from the proposed financing will be used to pay off the term loan and finish construction of the medical building. As of June 30, 2002, approximately $508,000 has been paid on the construction contract for the building shell. Total rental expense for the years ended June 30, 2002, 2001, and 2000, was $296,277, $386,346, and $388,708, respectively. All leases are currently month to month obligations. With the completion of the medical building, the Company anticipates that certain departments currently occupying leased office space will occupy the medical building which will result in an approximate $21,000 reduction in monthly lease cost. LITIGATION. The Hospital is involved in litigation and regulatory investigations arising in the course of business. After consultation with legal counsel and insurance carriers, management estimates that these matters will be resolved without material adverse effect on the Hospital's future financial position or results from operations. SEISMIC REGULATIONS. The state of California has passed legislation requiring hospitals to perform structural evaluations of their buildings and upgrade facilities to meet certain minimum seismic standards by 2008. The Hospital has performed the initial evaluations and will meet seismic standards by the required date. -34- AMERICAN HOSPITAL MANAGEMENT CORPORATION NOTES TO FINANCIAL STATEMENTS, CONCLUDED (17) 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. (18) 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, 2002, 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. -35- Item 9. Changes in and disagreements with accountants on ------- ------------------------------------------------ Accounting and Financial Disclosure ----------------------------------- None. -36- PART III Item 10. Directors and Executive Officers of the Registrant -------- --------------------------------------------------

~~Related~~Name ~~Accumulated~~and ~~Useful~~principal ~~Description~~occupation ~~debt~~during ~~Land~~last ~~Buildings~~five ~~Total~~years ~~Depreciation~~Since ~~Life~~Age Office Occupation ----------- ---- ---- --- ------ ----- ------ ------ ---- ~~Rental~~Lawrence ~~property $131~~Senffner,~~623~~ ~~$482,346~~M.D. ~~$1,126,725~~2001 ~~$1,609,071~~62 ~~$487,018~~Director 25Physician ~~Investment~~Internal ~~None~~Medicine ~~832,189~~Allen ~~832~~E. Shaw,~~189~~ ~~---------------------------------------------------------------------------~~President ~~$131~~1960 84 President & President of of the Company Director Company Douglas A. Shaw,~~623~~ $1Vice President 1981 51 Vice President Hospital Administrator & Director Administrator Christopher Lee,~~314,535~~ $1M.D. 2001 55 Director Physician Internal Medicine Michael Young,~~126,725~~ $2Controller 1978 54 Treasurer Hospital & Director Controller Donald J. Krpan,~~441,260~~ ~~$487~~D.O. 1988 66 Director University Provost,~~018~~ ~~===========================================================================~~Western University of Health Sciences Steven Paine 2001 50 Director Business Owner

-37- 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, 2002, 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 were no contractual agreements with any directors regarding compensation, pensions or stock options. Directors, from time to time, are compensated for attendance at meetings for their general administrative duties although there is no required payment. Total director compensation for 2002 was $6,850. There have not been any payments made to officers or directors for severance of relationship. -38- Item 12. Security Ownership of Certain -------- ----------------------------- Beneficial Owners and Management -------------------------------- Owners of 5% or more of outstanding voting securities at June 30, 2002, were as follows:

* Arcata Hospital Corporation is 98% owned by shareholders of the Company, principally by the Allen E. Shaw Family. Item 13. Certain Relations and -------- --------------------- Related Transactions -------------------- None. -39- 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, 2002 and 2001 Statements of Operations Years ended June 30, 2002, 2001 and 2000 Statements of Comprehensive Income Years ended June 30, 2002, 2001 and 2000 Statements of Stockholders' Equity Years ended June 30, 2002, 2001 and 2000 Statements of Cash Flows Years ended June 30, 2002, 2001 and 2000 Notes to Financial Statements (2) The following financial schedules for the Years 2002, 2001 and 2000 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, 2002. -40- SCHEDULE II AMERICAN HOSPITAL MANAGEMENT CORPORATION VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2002, 2001 AND 2000

-41- SCHEDULE III AMERICAN HOSPITAL MANAGEMENT CORPORATION REAL ESTATE AND ACCUMULATED DEPRECIATION YEARS ENDED JUNE 30, 2002, 2001 AND 2000

-42- 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: October 31, 2002 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:

-43-

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