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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-27654
LONG ISLAND PHYSICIAN HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
New York 11-3232989
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Huntington Quadrangle Suite 4C-01
Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 454-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.001
Class B Common Stock, par value $.001
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the issuer 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 [X].
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date: As of December 31,
2000 there were 1,506 shares of Class A common stock and 4,333 shares of Class B
common stock outstanding.
The aggregate market value of the Registrant's common stock held by
non-affiliates of the Registrant (assuming for this purpose that all officers,
directors and holders of more than 10% of the Company's outstanding voting stock
are affiliates) cannot be determined since there is no trading market for such
stock.
Documents incorporated by reference: Portions of the Registrant's proxy
statement for its 2001 annual meeting of shareholders are incorporated by this
reference into Part III of this report.
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PART I
Item 1. BUSINESS
Company Overview
Long Island Physician Holdings Corporation (the "Company" or "LIPH") is a
New York corporation formed in December 1994 and owned by physicians residing
and practicing in New York State. The Company conducts no operating activities
of its own. The Company's principal asset is 67% of the stock in MDNY
Healthcare, Inc. ("MDNY"), an independent practice association-model health
maintenance organization ("HMO"), that currently operates in Nassau and Suffolk
counties, New York. The financial statements of MDNY are consolidated into the
audited financial statements of the Company. Catholic Healthcare Network of Long
Island, Inc. ("CHNLI") owns the remaining 33% of the stock in MDNY. MDNY
commenced operations in 1996. At December 31, 2000, MDNY had approximately
76,700 members ("Members"), comprised of individuals and families, enrolled in
its health maintenance plans, point-of-service plans and Medicare plans.
The Company is affiliated with LIPH, LLC (the "LLC"), a New York limited
liability company formed in December 1996. Upon the formation of the LLC, the
shareholders of the Company owned all of the membership interests in the LLC.
The assets of the LLC consist of the stock in three independent practice
associations, Island Practice Association, IPA, Inc. ("Island IPA"), Island
Behavioral Health Association IPA, Inc. and Island Dental Professional
Association IPA, Inc. (the "IPAs"). Additionally, the LLC owns minority
interests in NextStage Healthcare Management of New York, Inc. ("NextStage") and
Mainstreet Dental Management Corporation. MDNY has entered into various
risk-sharing arrangements (the "Professional Services Agreements") with the IPAs
for the provision of applicable healthcare and administrative services to the
Members of MDNY. In December 1995, the Company, CHNLI, MDNY and NextStage
entered into a management services agreement (the "Management Services
Agreement") whereby NextStage provided a variety of management, administrative
and operational services to MDNY and the IPAs. The Management Services Agreement
expired on October 10, 2000. MDNY has hired certain former employees of
NextStage and is performing the management and administrative functions
previously provided by NextStage.
Certain statements in this Annual Report on Form 10-K are forward-looking
statements and are not based on historical facts but are management's
projections or best estimates. Actual results may differ from these projections
due to risks and uncertainties. These risks and uncertainties include a variety
of factors, including but not limited to the following: MDNY's and the IPAs'
ability to continue as going concerns; the inability of MDNY to meet HMO
statutory net worth requirements; that increased regulation will increase health
care expenses or require additional or increased levels of statutory reserve
requirements; that increased competition in MDNY's markets or a change in
product mix will unexpectedly reduce premium revenue; that MDNY will not be
successful in increasing membership growth; that health care costs in any given
period may be greater than expected due to unexpected incidence of major cases,
natural disasters, epidemics, changes in physician practices, and new
technologies; and that major health care providers that have assumed capitation
risk from MDNY will be unable to maintain their operations and reduce or
eliminate their accumulated deficits and MDNY will correspondingly be unable to
maintain an adequate provider network.
Legislative and regulatory proposals have been made at the federal and
state government levels related to the health care system, including but not
limited to limitations on managed care organizations (including benefit
mandates) and reform of the Medicare program. Such legislative or regulatory
action could have the effect of reducing the premiums paid to MDNY by
governmental programs or increasing
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MDNY's medical costs or both. The Company is unable to predict the specific
content of any future legislation, action or regulation that may be enacted or
when any such future legislation or regulation will be adopted. Therefore, the
Company cannot predict the effect of such legislation, action or regulation on
MDNY's business.
Recent Developments
Certain Regulatory Matters. On December 29, 1999, MDNY agreed, pursuant to
a consent (the "Consent") with the Superintendent of the New York State
Insurance Department ("NYSID"), to a specified schedule of actions toward the
receipt by MDNY by March 31, 2000 of investments from one or more qualified
parties of at least $5 million. MDNY also consented, upon its failure to comply
with such conditions, to the entry of a court order for rehabilitation pursuant
to Article 74 of the New York Insurance Law. Such an order would allow NYSID, as
rehabilitator, to take possession of MDNY's assets and assume control of MDNY's
business. After the entry of such an order, NYSID would also have the right,
pursuant to Article 74, to apply for a court order to liquidate MDNY if it
determined that further efforts to rehabilitate MDNY would be futile. Any
liquidation of MDNY would have a material adverse effect on the value of LIPH's
investment in MDNY. Inasmuch as such investment is the principal asset of LIPH,
a material diminution in the value of such investment would have a material
adverse effect on LIPH's financial position (including, potentially,
insolvency), and the shareholders of LIPH could lose all or part of their
investment in LIPH.
As of December 31, 2000, MDNY has not met the schedule of actions
specified in the Consent. In particular, MDNY failed to obtain a letter of
intent and to execute definitive agreements regarding the required investment by
the applicable deadlines therefor. MDNY has had further consultations with
NYSID. As of September 30, 2001, NYSID had not acted upon the Consent.
In May 2000, MDNY, CHNLI, LIPH and Island IPA entered into a
Reconciliation Agreement ("Reconciliation Agreement") whereby certain
intercompany balances of approximately $5.9 million owed by MDNY and Island IPA
to each other were eliminated. As a result of discussions during September 2000,
NYSID indicated to MDNY that NYSID did not object to the Reconciliation
Agreement. MDNY thereafter submitted statutory financial statements for the
quarter ended June 30, 2000, that MDNY believes were in compliance at that date
with all NYSID reserve requirements.
The New York State Department of Health ("NYSDOH") and NYSID require MDNY
to maintain reserves in the form of cash and statutory net worth.
On May 10, 2001, MDNY received from NYSID a Draft Report on Examination of
MDNY as of June 30, 2000 (the "Draft Report"). The Draft Report states, among
other things, NYSID's determinations that, as of June 30, 2000, MDNY was
insolvent in the amount of $4,311,487 and that MDNY's required contingency
reserves were impaired in the amount of $12,231,333. These determinations result
from NYSID's position that MDNY should report the IPAs' obligations in MDNY's
financial statements. MDNY's position is that the IPAs are responsible for their
own obligations, not MDNY, and MDNY has disputed NYSID's attribution of IPA
liabilities to MDNY. MDNY continues to work with NYSID to obtain NYSID's
agreement that MDNY satisfies statutory reserve requirements.
Although the Company believes that MDNY is in compliance with applicable
cash reserve and capital requirements due to MDNY's positive financial
performance during 2000 and the effect of the Reconciliation Agreement, pursuant
to the Draft Report, at December 31, 2000, MDNY remains in non-compliance with
New York State reserve requirements. If NYSID were to definitively determine
that MDNY's financial statements must report the obligations of the IPAs, such
determination would have a material adverse effect on the Company's consolidated
financial statements. In addition, there can be no
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assurance that NYSID will accept the financial statements submitted by MDNY or
that NYSID will not enforce the Consent.
On August 22, 2001 NYSID published regulations setting forth standards for
financial risk transfer between insurers (including HMOs) and healthcare
providers, including certain intermediary entities (such as independent practice
associations) and individual providers who take risk (collectively "providers").
The regulations require providers to demonstrate their financial responsibility
and capability to insurers. Providers that receive annual capitation in excess
of $250,000 are required to make a security deposit equal to 12.5% of the
estimated annual capitation to be received by the provider from its insurer
under the financial risk sharing agreement between them, with a minimum deposit
of $100,000. At NYSID's request, effective January 1, 2001, MDNY began making
payments to participating providers on a fee-for-service rather than on a
capitation basis. This conversion of MDNY's payment methodology remains subject
to approval by NYSDOH. The Company anticipates that NYSDOH will approve such
conversion and that MDNY will continue to pay participating providers on a
fee-for-service rather than on a capitation basis. Accordingly, the Company is
determining what effect, if any, such NYSID regulations will have on MDNY.
The continued failure of MDNY to meet reserve requirements, the failure of
MDNY or the IPAs to comply with other existing laws and regulations or a
significant change in such laws or regulations could materially and adversely
affect the operations, financial condition and prospects of the Company and
MDNY.
Certain Changes in Management. On January 18, 2000, Richard Radoccia
resigned as Chief Executive Officer of MDNY and was replaced by Paul Accardi,
who, prior thereto, had been MDNY's Chief Financial Officer since March 1997.
Suspension of Expansion Activities. NYSID has permitted MDNY to withdraw
all HMO products from the Erie and Niagara county marketplace. Since June 1,
2000, MDNY has ceased offering group or individual policies in Erie and Niagara
counties, and all expansion efforts of MDNY have been suspended.
Certain Financial Information. The consolidated financial statements of
the Company as of December 31, 2000 and for the year then ended have been
prepared assuming that the Company will continue as a going concern. The
auditor's report states that "the [NYSID] has not released the Company's
majority owned subsidiary, [MDNY], from a consent decree with the NYSID. In
addition, MDNY received from the NYSID a Draft Report of MDNY as of June 30,
2000 which states, among other things, the NYSID's determination that, as of
June 30, 2000, MDNY was insolvent in the amount of $4,311,487 and that MDNY's
required contingency reserves were impaired in the amount of $12,231,333. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty."
Pursuant to the Professional Services Agreements, total revenues paid to
the IPAs in 2000 were capitated at 82.5% and 84% of net premium for commercial
and Medicare enrollees, respectively, for the period January 1, 2000 through
March 31, 2000 and 83% and 92% of net premium for commercial and Medicare
enrollees, respectively, for the period April 1, 2000 through December 31, 2000.
During 2000, in addition to the capitated payments, MDNY incurred an additional
healthcare service obligation to the IPAs for $6 million. During 1999, revenues
paid to the IPAs were capitated at 82.5% and 84% of net premium for commercial
and Medicare enrollees, respectively. Revenues paid to the IPAs were capitated
at 80% of net premium in 1998. As of December 31, 2000, the IPAs had an
accumulated deficit of approximately $25 million. The IPAs have incurred losses
from operations for 2000, 1999 and 1998 and
5
had working capital deficiencies for such years primarily resulting from
Medicare claims exceeding related revenue. Pursuant to the Draft Report, NYSID
has attributed the IPAs' liabilities to MDNY. If NYSID fails to revise or
reverse this determination, MDNY could be responsible for the settlement of
outstanding claims to providers contracted through the IPAs. In such event,
there can be no assurance that MDNY would be able to settle such claims in whole
or part, or that MDNY's additional obligations in respect thereof would not have
a material adverse effect on MDNY's, and, in turn, the Company's, business,
financial condition, results of operations or prospects.
Effective January 1, 2000, MDNY received approval from NYSID for an
average premium rate increase of 9.9%. MDNY has received approval from NYSID for
additional commercial premium rate increases of approximately 22%, effective on
January 1, 2001.
During 2000, MDNY paid NextStage a management fee equal to 100% of costs
incurred under the Management Services Agreement. The Management Services
Agreement expired in October 2000.
Business Strategy
During 2000, MDNY took the following steps to provide liquidity and
achieve profitability:
o Management initiated efforts to reduce operating expenses, primarily
through staffing reductions.
o MDNY revised its reimbursement methodology to the IPAs and is in the
process of revoking delegation to the IPAs of medical management and
claims processing services.
o MDNY terminated the development of licensed expansion initiatives in
additional counties in New York State and withdrew from Erie and
Niagara counties.
o MDNY engaged in negotiations to obtain additional capital from
potential outside investors.
o MDNY allowed the Management Services Agreement to expire in order to
reduce administrative expenses.
While management believes that implementation of its plans to achieve
profitability will provide MDNY with the ability to continue as a going concern,
there is no assurance that such actions will achieve positive results from
operations or adequate working capital and equity.
MDNY's business strategy for 2001 includes the following goals:
o expanding its small group business through increased sales.
o continuing the reduction in administrative costs while improving
operating performance.
o increasing premium rates with an effective date of January 1, 2001.
o withdrawing from the Company's Medicare risk contract effective
January 1, 2001.
Potential Restructuring
The Company owns all the shares of Class A common stock of MDNY and CHNLI
owns all of the Class B voting common stock of MDNY. The Company, MDNY and CHNLI
have agreed that to
6
facilitate potential future expansion, they would effect a restructuring whereby
the shareholders of the Company would, in the aggregate, receive voting and
non-voting stock in MDNY Holdings, Inc. ("Holdings") in the same proportion as
the Company's ownership in MDNY, CHNLI would own the same proportion of stock in
Holdings as it currently holds in MDNY, and MDNY would become a wholly-owned
subsidiary of Holdings (the "Restructuring"). The Restructuring was approved by
the shareholders of LIPH on April 15, 1997. The Restructuring was intended to
facilitate expansion and has not been effected. The Company may seek to effect
the Restructuring at a later date.
Competition
The health care industry, both generally and in the New York metropolitan
area, is characterized by intense competition. MDNY competes with independent
HMOs, such as Health Insurance Plan of New York, Vytra Healthcare, Inc. and
Oxford Health Plans, Inc., which have significant enrollment in the New York
metropolitan area. MDNY also competes with HMOs and managed care plans sponsored
by large health insurance companies, such as CIGNA Corporation, Aetna U.S.
Healthcare Inc., United Health Group and Blue Cross/Blue Shield. These
competitors have large enrollment in MDNY's service areas. Certain of these
competitors have been in existence for longer periods of time than MDNY, are
better established than MDNY, and have greater financial resources, management
experience and product development programs than MDNY. In addition, other
organizations with resources greater than those of MDNY may enter into
competition with MDNY by providing, for example, alternative healthcare delivery
systems or by offering greater benefits for a smaller premium payment.
Additional competitors may enter MDNY's markets in the future.
The Company believes that the network of providers under contract with
MDNY is an important competitive advantage. However, the cost of providing
benefits is in many instances the controlling factor in obtaining and retaining
employer groups, and certain of MDNY's competitors have set premium rates at
levels below MDNY's rates for comparable products. Although MDNY's service area
has recently experienced large premium rate increases, the Company anticipates
that premium pricing will continue to be highly competitive. There can be no
assurance that MDNY will be able to compete effectively for the business of
employer groups. If MDNY is unable to attract subscribers for its medical
services, it will adversely affect MDNY's ability to generate revenues, thereby
limiting MDNY's ability to make provider payments to the IPAs.
MDNY
Business Overview
MDNY is an independent practice association-model HMO that is licensed by
the State of New York to operate in Nassau and Suffolk counties, New York. MDNY
ceased operations in Erie and Niagara counties during 2000. At December 31,
2000, MDNY had 172 full-time employees, including its Chief Executive Officer
and Chief Financial Officer and its Chief Medical Officer. Since July 2000, MDNY
has hired additional employees to perform the management and administrative
functions previously provided by NextStage pursuant to the Management Services
Agreement, which expired in October 2000. MDNY's operations commenced on January
1, 1996. MDNY provides comprehensive health care services to its Members for a
fixed monthly premium, plus a co-payment, as applicable, by the Member to a
participating physician for each office visit generally, and a dispensing fee or
co-payment to the pharmacy for each prescription filled. The basic benefits
provided within a Member's benefit plan consist of primary and specialty
physician care, inpatient and outpatient hospital services, emergency and
preventive health care, laboratory and radiology services, ambulance services,
eye care, physical and rehabilitative therapy services, chiropractic services,
mental health care, and alcohol and substance abuse counseling. For an increased
monthly premium, Members have the option to receive prescription drugs
7
and other supplemental benefits. At December 31, 2000, MDNY had approximately
76,700 Members, comprised of individuals and families, enrolled in its health
maintenance plans. MDNY's primary product line includes point-of-service plans,
traditional HMO plans and Medicare plans. A significant portion of MDNY's
premium revenue, approximately 29%, is derived from entities affiliated with
CHNLI. CHNLI owns 33% of the stock in MDNY. Management currently monitors and
evaluates MDNY's financial performance based on the combined service area of
Nassau and Suffolk counties.
MDNY entered into the Professional Services Agreements for the provision
of applicable healthcare services to Members, pursuant to which Island IPA
provides medical and surgical services; Island Behavioral Health Association
IPA, Inc. provides behavioral health services including psychiatry; and Island
Dental Professional Association IPA, Inc. provides dental services. Each IPA is
responsible for contracting with individual healthcare providers. The IPAs are
responsible for overseeing the initial and continuous screening of participating
healthcare providers. MDNY compensates each IPA according to the number of
Members the IPA serves and the type of policy covering each Member the IPA
serves based on a percent of net revenues derived by MDNY. Pursuant to the
Professional Services Agreements, MDNY has agreed to pay the IPAs a negotiated
contracted rate ("Risk Sharing Payments") that are limited to 82.5% and 84% of
net premium for commercial and Medicare enrollees, respectively, for the period
January 1, 2000 through March 31, 2000 and 83% and 92% of net premium for
commercial and Medicare enrollees, respectively, for the period April 1, 2000
through December 31, 2000. Amounts paid by MDNY to the IPAs are used by the IPAs
to pay claims for professional and ancillary services rendered to Members by
participating physician providers.
All physicians in MDNY's provider network are required to participate in
quality improvement and utilization review programs. The quality improvement
program is designed not only to maintain but to continually improve the delivery
of proper medical care and includes:
o Utilization reviews, management programs and outcome studies, which
evaluate statistical information with respect to services used by
Members and prescribed by participating physician providers and
include such topics as preventive care services, prescription drugs,
physician visits, emergency room use, hospital admissions and
referrals made by primary care physicians to specialists;
o Quality of care reviews, which identify issues affecting Members,
including physician availability, physician treatment patterns and
the structure and content of medical records;
o Periodic peer reviews, which evaluate the quality and
appropriateness of medical care provided by a particular physician
and review, among other things, diagnoses, tests, prescription drug
usage and the utilization level of the physician by the Members; and
o A physician committee infrastructure to oversee medical policy and
the quality improvement program.
The quality improvement program utilizes computerized claims information
as well as medical records which are maintained by the physicians and to which
MDNY has access. In addition and as required by state law, MDNY has an
established complaints and appeals procedure for Members and participating
physician providers to formally register concerns. These concerns are then
investigated and resolved pursuant to the procedures established by the HMO.
Additionally, the Company believes that educating MDNY's Members with
respect to health care is a critical component in health care cost containment.
MDNY's quarterly newsletter to its Members contains, among other items,
information on preventive health care. MDNY also distributes newsletters
8
to participating providers. To further promote Member participation in
controlling health care costs, MDNY requires co-payments by its Members for most
office visits and some other services. Certain contracts also require Members to
pay co-payments for inpatient services.
MDNY Products
HMO Product
MDNY's HMO products are offered through three programs: MDValue, MDSelect
and MDClassic each designed to meet specific needs and health benefit objectives
("HMO Product"). In the MDValue program, the Member must stay within MDNY's
local network for specialty care. The MDSelect program requires the Member to
select a personal physician who specializes in primary care (a primary care
physician or "PCP") and will oversee their healthcare needs. The PCP is the
Member's link to MDNY's network of medical professionals and specialists. In the
MDClassic program, at the time of enrollment, Members select their PCP and also
have immediate access to MDNY's network of specialists, without referral from
the PCP.
HMO Product premiums accounted for approximately 52%, 50% and 58% of total
premiums earned by MDNY in 2000, 1999 and 1998, respectively.
POS Product
MDNY's point-of-service product allows Members direct access to MDNY's
preferred network and gives Members the additional option to select any
physician outside the MDNY preferred network, even without a referral ("POS
Product"). Members who choose the POS Product must meet an annual deductible and
pay the appropriate coinsurance amount. POS Products are offered through the
MDValue, MDSelect and MDClassic programs.
POS Product premiums accounted for approximately 27%, 26% and 26% of total
premiums earned in 2000, 1999 and 1998, respectively.
Medicare Product
Prior to MDNY's withdrawal from Medicare effective January 1, 2001, MDNY's
Medicare product allowed Medicare-eligible individuals residing in Nassau and
Suffolk counties access to MDNY's network ("Medicare Product"). MDNY offered two
Medicare Products: MDSelect65 (a zero-premium plan modeled after MDSelect) and
MDClassic65. MDClassic65 Members paid a small monthly premium and receive a
range of enhanced benefits, including the ability to self-refer to certain
medical and surgical specialists without obtaining a referral from the PCP.
Pursuant to a contract with the Health Care Financing Administration
("HCFA"), MDNY was paid a fixed per member per month capitation amount by HCFA
based upon a formula of the projected medical expense of each Medicare Member.
MDNY bore the risk that the actual costs of the provision of healthcare services
to Medicare Members exceed the capitation amount received by MDNY. Medicare
contracts provide revenues that are generally higher per member than contracts
for non-Medicare members. Such contracts, however, also carry certain risks such
as higher comparative medical costs and regulatory and reporting requirements
per member.
Effective January 1, 2001, MDNY withdrew from the Medicare program and its
Medicare members transferred to alternate health plans. At December 31, 2000,
MDNY had approximately 6,100 Medicare members enrolled in its Medicare plans
compared with approximately 6,800 members at the
9
end of 1999. Medicare accounted for approximately 9% of total premiums earned
for the year ended December 31, 2000 compared with 24% and 16% in 1999 and 1998,
respectively. The associated medical claims expenses related to Medicare plans
resulted in IPA losses of approximately $12 million in 2000 and $7 million in
1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MDNY responded to losses from its Medicare Products by: (i) implementing a
non-deficit reimbursement methodology effective September 1, 1998, under which
reimbursement rates for in-network physician costs are prospectively adjusted to
ensure that payments do not exceed related revenues; (ii) obtaining a waiver
from HCFA for 1999 which limited the number of new Medicare enrollees MDNY was
obligated to enroll for 1999 to a maximum of 2,190; and (iii) establishing
greater controls on medical management, including shifting more of the Medicare
risk for medical losses to MDNY's hospital and physician providers.
Workers' Compensation Product
In January 1997, MDNY formed MDNY CompGuard, Inc., a workers' compensation
managed care PPO. Pursuant to the NYSDOH's managed workers' compensation
guidelines, MDNY CompGuard was certified by the NYSDOH to operate as an
occupational health and workers' compensation PPO in February 1998. At December
31, 2000, MDNY CompGuard, Inc. had no significant financial activity.
Marketing
MDNY has a network of general agents and brokers that market MDNY's
products to small-employer groups and associations. MDNY also maintains an
in-house sales force for direct marketing to non-brokered accounts.
In March 1997, MDNY formed MDNY Preferred Network, Inc. to market PPO
products. MDNY has begun marketing PPO products to large employer groups and
unions that desire to offer medical or dental benefits on either an insured or
self-insured basis to their employees or members. At December 31, 2000, MDNY
Preferred Network, Inc. had no significant operations or financial activity.
Government Regulation
The operations of MDNY and the IPAs are subject to substantial regulation
and to risks associated with changes in such regulations.
State Regulation
New York State regulates HMOs pursuant to Article 44 of the Public Health
Law. Subject to Article 44, HMOs are exempt from the New York Insurance Law and
regulations. New York State law requires that MDNY obtain a Certificate of
Authority from NYSDOH in order to operate as an HMO. MDNY obtained a Certificate
of Authority in December 1995.
As an HMO, MDNY is subject to extensive regulatory requirements imposed by
the State of New York, including requirements governing reporting, quality
assurance, provider contracting, management agreements, financial and solvency
issues, rate-setting, scope of benefits, marketing and related matters. State
regulatory authorities exercise oversight regarding the provider networks,
medical care delivery and quality assurance programs, contract forms and
financial condition of MDNY. State regulations require MDNY to maintain
restricted cash or available cash reserves, a minimum net worth and impose
restrictions on MDNY's ability to make dividend payments, loans or other
transfers. Applicable state
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statutes and regulations require an HMO to file periodic reports with the
relevant state agencies, and contain requirements relating to the HMO's
operation including its rates and benefits applicable to its products. MDNY is
also subject to periodic examination by the relevant state regulatory
authorities. Applicable federal and state regulations also contain licensing and
other requirements relating to the offering of MDNY's products in new markets,
which may restrict MDNY's ability to expand its business.
As a New York State certified HMO, MDNY is required to maintain a cash
reserve equal to the greater of 5% of expected annual medical costs or $100,000.
Additionally, MDNY is required to maintain a contingent reserve which must be
increased annually by an amount equal to at least 1% of statutory premiums
earned limited, in total, to a maximum of 5% of statutory premiums earned for
the most recent calendar year and which may be offset by the cash reserve. The
cash reserve is calculated at December 31 of each year and is maintained
throughout the following calendar year.
Certain Federal and New York State laws limit the extent to which
healthcare providers may refer patients to businesses or facilities in which the
health care provider has a financial interest. In pursuing healthcare-related
business opportunities and investments, MDNY is required to limit its ownership,
investment and payment practices and procedures and may be unable to invest in,
contract with, or own certain healthcare entities unless the proposed
arrangement satisfies the terms of applicable Federal and New York State laws.
Fees paid by MDNY for management services provided by NextStage pursuant to the
Management Services Agreement were based on a percentage of premium revenues and
subject to NYSDOH approval.
On January 1, 1997, New York State enacted the Health Care Reform Act of
1996 (the "HCRA"), which allows all private healthcare payors to negotiate
payment rates for inpatient hospital services. Prior to enactment of HCRA, only
HMO's could negotiate rates for these services. The enactment of HCRA adversely
affected the ability of HMO's to negotiate rates. Also, beginning in January
1997, MDNY elected to make payments to state funding pools to finance hospital
bad debt and charity care, graduate medical education and other state programs
under the HCRA. Previously, hospital bad debt and charity care and graduate
medical education were financed by surcharges on payments to hospitals for
inpatient services. On December 30, 1999, the HCRA was extended through June 30,
2003.
It is difficult to predict whether additional regulatory requirements may
apply to the operations of HMOs. It should be assumed, however, that the health
care delivery system in New York State will continue to be subject to a high
level of regulatory control, which may impose additional limitations on the
ability of HMOs (including MDNY) to engage in various financial transactions.
Effective July 1, 1999, New York enacted a new law establishing a right
for health care consumers to obtain an external review of determinations made by
HMOs and insurers when coverage of health care has been denied on the grounds
that the service is not medically necessary or that such service is experimental
or investigational and establishing standards for the certification of the
external review agents. In addition, the law requires provider contracts to
include an explanation of provider payment methodologies; the time periods for
provider payments; the information to be relied upon to calculate payments and
adjustments; and the process to be employed to resolve disputes concerning
provider payments. In 2000, seven claims were submitted for external review. Of
the claims reviewed, six were upheld and one was denied.
In 1998, New York enacted a law requiring the current Consumer Guide
published by NYSID, which ranks health plans based on the ratio of complaints
found to be valid and the ratio of appeals made through the grievance and
Utilization Review process, including the number of times a health plan reverses
a decision, to also include, effective September 1, 1999, the rate of physician
board certification; provider turnover rates; the percentage of enrollees who
have been seen for ambulatory or preventive care
11
visits during the previous three years of enrollment; methods used to compensate
providers; accreditation status of plans and indices of quality, including rates
of mammography, prostate and cervical cancer screening, prenatal care,
immunization; other information collected through the Health Plan Employer Data
Information Set; and the results of a consumer satisfaction survey conducted by
the State Superintendent of Insurance.
HMOs are required to pay providers within 45 calendar days of receipt of
undisputed claims submitted for services provided. In the event a claim is not
undisputed, the insurer or HMO must notify the provider within 30 calendar days
of receipt and request additional information if necessary. In addition the
imposition of interest on late claims, penalties of up to $500 per day per claim
may be imposed upon an HMO that does not comply with the prompt payment
guidelines.
Effective January 1998, New York laws also require coverage of the
following benefits: (i) HMOs are required to cover individuals undergoing
mastectomies for a period to be determined by the attending physicians and the
patient; (ii) out-of-network second opinions for cancer; (iii) all stages of
reconstruction of the breast on which a mastectomy has been performed, and
surgery and reconstruction of the other breast to produce a symmetrical
appearance; and (iv) unlimited chiropractic care rendered in certain
circumstances by a licensed doctor of chiropractics upon referral by a PCP.
Effective January 1998, coverage for enteral formulas is required for all
plans which provide a pharmacy benefit. The modified food component of this
mandated coverage is capped at $2,500 per member per year.
Federal Regulation
One of the most significant applicable federal laws is the Health
Maintenance Organization Act of 1973, as amended (the "HMO Act"), and the rules
and regulations promulgated thereunder. The HMO Act governs federally qualified
HMO's, and prescribes the manner in which such HMO's must be organized and
operated.
Prior to MDNY's withdrawal from Medicare effective January 1, 2001, MDNY's
health plans that had Medicare risk contracts, MDSelect65 and MDClassic65, were
subject to regulation by HCFA. HCFA has the right to audit health plans
operating under Medicare risk contracts to determine each health plan's
compliance with HCFA's contracts and regulations and the quality of care being
rendered to Medicare members. Health plans that offer a Medicare risk product
must also comply with quality assurance and utilization review procedure
requirements established by peer review organizations under contract with HCFA
which monitor the quality of health care received by Medicare members.
Medicare+Choice (Part C) Legislation and the Balanced Budget Act of 1997
have affected risk contractors. Beginning in 1999, Medicare beneficiaries had
more options for health care coverage (PSO, PPO, MSAs), and HCFA undertook an
educational effort paid for by Medicare managed care plans. Another major impact
will be the changes to the rate methodology, and new time frames for submitting
rate and benefit filings.
The federal Women's Health and Cancer Rights Act of 1998 (the "WHCR Act")
mandates coverage of reconstructive surgery and other treatments associated with
mastectomy. New York State's mastectomy and reconstruction mandates in effect
since January 1, 1998, match or exceed the WHCR Act's requirements with the
exception of the federal requirement for coverage of prostheses in group market
products. The WHCR Act also prohibits the Federal Employees Health Benefits
Program from using federal funds to contract with any health plan that provides
coverage for prescription drugs unless that plan also provides coverage for
contraceptives, including devices.
12
Proposed Federal and State Legislation
New York State and Federal policymakers are continually considering
changes to laws and regulations applicable to HMOs. During 2000, bills were
introduced in the New York legislature which would require HMOs to allow any
physician to participate in the HMO regardless of geographic need and would
subject HMOs to liability for delays in patient treatment pending HMO
authorization therefor. Another bill being considered by the State Assembly
would hold HMOs legally liable for the consequences of their decisions in
providing health care to their members. Additionally, other bills are being
considered by the State legislature which could significantly affect MDNY.
Congress is also considering significant changes to both the Medicare and
Medicaid programs. The proposed regulatory changes described above, if enacted,
could increase health care costs to HMO enrollees and administrative expenses of
the HMO. In addition, the various bills introduced in Congress and the state
legislature contain provisions, which may facilitate entry of competing managed
care organizations into MDNY's service areas. The Company is reviewing the
proposed regulatory changes to assess the potential effect of such changes on
MDNY's operations.
The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") may have a significant effect on MDNY's operations. Regulations
promulgated under HIPAA seek to (i) ensure portability of health insurance to
individuals changing jobs or moving to individual coverage by limiting
application of preexisting condition exclusions, (ii) guarantee availability of
health insurance to employees in the small group market and (iii) prevent
exclusion of individuals from coverage under group plans based on health status.
New York State has a similar law. Effective January 2001, HIPAA will impose new
standards of protection against inappropriate use and disclosure of
patient-identifiable health information that are applicable to health plans,
their contracted entities and business partners. Violations of this regulation
will be subject to significant penalties. Finally, to the extent HIPPA does not
provide for complete federal preemption of state laws, it may increase MDNY's
burden of compliance.
Item 2. PROPERTIES
The offices of the Company and MDNY are located in premises leased by MDNY
at One Huntington Quadrangle, Suite 4C01, Melville, NY 11747. The lease expires
February 15, 2007. Annual rent is $610,000. The Company believes that such
offices are adequate and suitable for the business of the Company and of MDNY as
currently conducted and as currently proposed to be conducted.
Item 3. LEGAL PROCEEDINGS
In 1998, Kathy Kenny, a former employee, commenced an action against
NextStage and MDNY in New York State Supreme Court, Queens County. The complaint
alleges breach of contract, breach of fiduciary duty, and breach of certain
health care confidentiality statutory provisions and employment statutes. Kenny
also named various individuals as defendants in the suit (who are or were
affiliated with NextStage and/or MDNY. Kenny seeks to recover $25 million in
compensatory damages and $25 million in punitive damages. Settlement
negotiations have commenced, and the Company anticipates that any amounts
payable by MDNY in connection with any such settlement will be covered by MDNY's
insurance.
In December 1999, Innovative Clinical Solutions Ltd., formerly known as
PhyMatrix Corp. ("ICSL"), commenced an action against MDNY, NextStage, CHNLI and
Richard Radoccia (then President and Chief Executive Officer of MDNY) in New
York State Supreme Court, New York County, alleging various causes of action
against one or more of the defendants, including claims of fraud, tortious
interference with contract, breach of contract, unfair competition and
enforcement of a security
13
agreement. By a decision dated December 11, 2000, the Court granted the
defendants' motions to dismiss and dismissed the complaint in its entirety.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000 through the solicitation of proxies or otherwise.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the shares of the
Company's Common Stock. The Company's Common Stock is subject to various
transfer restrictions. Under certain circumstances, the Company has the right,
pursuant to the Company's Certificate of Incorporation, but not the obligation,
to purchase stock of the Company which a shareholder desires to transfer, at a
price based on the per share value determined by an independent certified public
accountant.
The Company has never paid any dividends on its Common Stock, and does not
anticipate that dividends on the Common Stock will be declared and paid at any
time in the foreseeable future. Payment of dividends will be contingent upon the
Company's revenues and earnings, if any, and the capital requirements and
general financial condition of the Company and of its subsidiaries. The payment
of dividends in the future is entirely within the discretion of the Company's
Board of Directors. It is the present intention of the Company's Board of
Directors to retain all earnings, if any, for use in connection with its
business operations. Accordingly, the Board does not anticipate declaring any
dividends in the foreseeable future.
At December 31, 2000 there were 1,506 shareholders of record of the
Company's Class A Common Stock and 3,377 holders of record of the Company's
Class B Common Stock. "See Certain Relationships and Related Transactions."
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from the Company's
audited consolidated financial statements and should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included elsewhere herein.
The selected financial data in the table as of December 31, 2000, 1999,
1998, 1997 and 1996 are derived from the consolidated financial statements of
the Company which have been audited by PricewaterhouseCoopers, LLP, independent
auditors, as indicated in their report included elsewhere in this Form 10-K. The
audit report includes an explanatory paragraph regarding certain conditions
which raise substantial doubt about the Company's ability to continue as a going
concern. See "Consolidated Financial Statements."
14
Statement of Operations Data:
(in thousands, except per share data)
Year ended December 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenue:
Premiums earned $188,930 $146,339 $90,273 $49,419 $23,298
Investment income 2,744 404 419 343 491
-------- -------- ------- ------- -------
Total revenue $191,673 $146,743 90,692 49,762 23,789
Expenses:
IPA medical expenses 152,829 117,682 71,293 39,536 19,360
Excess IPA capitation 6,000 -- -- -- --
Commission expense 6,412 4,149 2,105 1,121 374
Reinsurance, net 594 500 336 96 84
Management fees 11,264 19,430 15,390 11,542 7,363
General and admin expenses 9,771 6,121 2,934 810 855
Depreciation 167 -- -- -- --
Total expenses 187,037 147,882 92,058 53,105 28,036
Operating income (loss) 4,636 (1,139) (1,366) (3,343) (4,247)
Loss on operations of
spun-off subsidiary -- -- -- -- (654)
Loss in equity investment -- -- -- -- (20)
Income (loss) before
minority interest 4,636 (1,139) (1,366) (3,343) (4,921)
Provision for income taxes (91) -- -- -- --
Minority interest in
(income) loss of subsidiary (1,573) 337 439 1,015 1,008
Net income (loss) 2,972 (802) (927) (2,328) (3,913)
Basic and diluted income
(loss) per share $ 509 $ (137) $ (159) $ (399) $ (670)
Basic and diluted
weighted average shares 5,839 5,839 5,839 5,839 5,839
Balance sheet data:
(in thousands)
Year ended December 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Working capital/
(deficiency) 334 (2,397) (911) (434) 2,400
Total assets 25,279 20,573 16,859 11,926 10,601
Long-term debt 2,969 2,746 2,554 1,404 --
Total liabilities 20,258 20,286 15,191 8,944 5,926
Minority interest 2,213 640 977 1,416 781
Shareholders' equity/
(Deficiency in assets) 2,808 (353) 691 1,566 3,894
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
The Company's financial statements as of December 31, 2000 and for the
year then ended have been prepared assuming that the Company will continue as a
going concern. The auditor's report states that "the [NYSID] has not released
the Company's majority owned subsidiary, [MDNY], from a consent decree with the
NYSID. In addition, MDNY received from the NYSID a Draft Report of MDNY as of
June 30, 2000 which states, among other things, the NYSID's determination that,
as of June 30, 2000, MDNY was insolvent in the amount of $4,311,487 and that
MDNY's required contingency reserves were impaired in the amount of $12,231,333.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty." See Consolidated Financial
Statements.
Certain statements in this Annual Report on Form 10-K are forward-looking
statements and are not based on historical facts but are management's
projections or best estimates. Actual results may differ from these projections
due to risks and uncertainties. These risks and uncertainties include a variety
of factors, including but not limited to the following: MDNY's and the IPAs'
ability to continue as going concerns; the inability of MDNY to meet HMO
statutory net worth requirements; that increased regulation will increase health
care expenses or require additional or increased levels of statutory reserve
requirements; that increased competition in MDNY's markets or a change in
product mix will unexpectedly reduce premium revenue; that MDNY will not be
successful in increasing membership growth; that health care costs in any given
period may be greater than expected due to unexpected incidence of major cases,
natural disasters, epidemics, changes in physician practices, and new
technologies; and that major health care providers that have assumed capitation
risk from MDNY will be unable to maintain their operations and reduce or
eliminate their accumulated deficits and MDNY will correspondingly be able to
maintain an adequate provider network.
Legislative and regulatory proposals have been made at the federal and
state government levels related to the health care system, including but not
limited to limitations on managed care organizations (including benefit
mandates) and reform of the Medicare program. Such legislative or regulatory
action could have the effect of reducing the premiums paid to MDNY by
governmental programs or increasing the MDNY's medical costs or both. The
Company is unable to predict the specific content of any future legislation,
action or regulation that may be enacted or when any such future legislation or
regulation will be adopted. Therefore, the Company cannot predict the effect of
such legislation, action or regulation on MDNY's business.
General Overview
The Company owns 67% percent of the stock in MDNY. The Company is a
holding company whose principal asset is its investment in MDNY and conducts no
operating activities of its own, other than legal costs which are funded by
MDNY.
MDNY's principal source of revenue is premiums earned. Other revenue
consists principally of interest and rental income. Premiums earned represented
98.6% and 99.7% of MDNY's total revenue for the years ended December 31, 2000
and 1999, respectively.
16
MDNY's ability to achieve profitability depends principally on reducing
its medical expenses as a percentage of its premium revenue (the "medical loss
ratio" or "MLR") and sufficiently reducing its administrative costs. During
2000, MDNY initiated programs to reduce administrative costs. As of December 31,
2000, these programs, together with reduced capitation payments to the IPAs had
generated improvements sufficient to return MDNY to profitability.
MDNY seeks to control medical expenses through capitation arrangements
with its affiliated IPAs and with non-IPA primary care physicians, capitation
arrangements with certain specialty providers, and through its quality
improvement programs, utilization management and review of hospital inpatient
and outpatient services, and educational programs on effective managed care for
its providers. MDNY has limited its medical claims expense to 82.5% and 84% of
net premium for commercial and Medicare enrollees, respectively, for the period
January 1, 2000 through March 31, 2000 and 83% and 92% of net premium for
commercial and Medicare enrollees for the period April 1, 2000 through December
31, 2000 by capitating its exposure under the Professional Services Agreements
with the IPAs.
During 2000, working capital improved as a result of the various measures
and developments described above. For the year ended December 31, 2000, MDNY
realized operating profits of approximately $3.0 million.
17
Results of Operations
The following table provides certain statement of operations data
expressed as a percentage of total revenue and other statistical data for the
years indicated:
Year Ended December 31,
-----------------------
Statement of Operations Data:
Revenue: 2000 1999 1998
---- ---- ----
Premiums Earned 98.6% 99.7% 99.5%
Investment and other income 1.4 .3 .5
------- ------- -------
Total revenue 100.0 100.0 100.0
Expenses:
IPA medical expenses 79.7 80.2 78.6
Excess IPA capitation 3.1 0 0
Commissions expense 3.3 2.8 2.3
Reinsurance expense, net .3 .3 .4
Management fees 5.9 13.2 17.0
General and administrative expenses 5.1 4.2 3.2
Depreciation .1 0 3.2
------- ------- -------
Total expenses 97.5 100.7 101.5
Operating income (loss) 2.5 (.7) (1.5)
Provision for income taxes 0.1 0 0
Income (loss) before minority
interest 2.4 (.7) (1.5)
Minority interest in subsidiary (.8) .2 .5
------- ------- -------
Net income (loss) 1.6 (.5) (1.0)
Statistical Data:
Enrollment 76,700 80,500 46,800
Member months 911,200 882,400 477,575
*Medical loss ratio 84.4% 80.8% 79.3%
**Administrative loss ratio 14.6% 20.3% 22.6%
* Medical loss ratio - Medical expense and net reinsurance expense divided by
total premium revenue.
**Administrative loss ratio - Commission expense, management fees, depreciation
expense, and general and administrative expense divided by total premium
revenue.
18
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues for the year ended December 31, 2000 and 1999 were $191,673,166
and $146,742,536, respectively, generated primarily through health premiums
earned. At December 31, 2000, MDNY's commercial enrollees totaled approximately
70,600 as compared to approximately 73,700 in 1999. At December 31, 2000, MDNY's
Medicare enrollees totaled approximately 6,100 as compared to approximately
6,800 in 1999. Revenue increased $45 million or 31% in 2000 compared to 1999 as
a result of increased member months and premium rates in 2000 compared with
1999. Total member months for 2000 increased approximately 28,800 or 3.3% from
1999. The remaining increase in premium revenue was a result of premium rate
increases during 2000.
Total expenses for the year ended December 31, 2000 were $187,036,840 as
compared to $147,882,424 for the year ended December 31, 1999. This 26% increase
in expenses is consistent with the 31% increase in revenue in 2000 as compared
to 1999 as a result of increases in member months and cost savings associated
with the termination of the Management Services Agreement in October 2000.
Health care service expense stated as a percentage of premium revenues was
84.4% for 2000 compared with 80.8% for 1999. Medical expenses paid to the IPAs
increased approximately 35%. This increase is consistent with the overall
increase in premiums and consistent with MDNY's contracted payment rates due to
the IPAs as well as a $6,000,000 increased capitation payment made by MDNY to
the IPAs during 2000. Excluding the $6,000,000 increased capitation payment made
to the IPAs during 2000, the medical loss ratio was 81.2% for 2000.
Administrative expenses stated as a percentage of premium revenue (the
"administrative loss ratio") was 14.6% for 2000 compared with 20.3% for 1999.
The reduction in administrative expenses is attributable primarily to the
expiration of the Management Services Agreement in October 2000, after which,
MDNY began performing internally the functions previously performed by
NextStage.
Net income for the year ended December 31, 2000 was $2,972,587 compared to
a net loss of $802,006 for 1999. The increase in net income of $3,774,593 was
primarily a result of increased member months, increased premiums, as well as
$2,382,027 of income received from CHNLI pursuant to an agreement between MDNY
and Catholic Health Services of Long Island, Inc. ("CHSLI"), an affiliate of
CHNLI, whereby CHSLI agreed to pay one-third of the deficit that occurs in each
year, beginning with 1999, of the hospital risk pool relating to MDNY's
commercial enrollees, and reductions in administrative expenses, offset by a $6
million increased capitation payment incurred relating to the IPAs.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues for the year ended December 31, 1999 and 1998 were $146,742,536
and $90,692,204, respectively, generated primarily through health premiums
earned. At December 31, 1999, MDNY's commercial enrollees totaled approximately
73,700 as compared to approximately 43,200 in 1998. With the start of the
Medicare program in 1998, Medicare enrollment totaled approximately 6,800 with
corresponding $34,944,874 in premiums earned at December 31, 1999. Consistent
with the increase in enrollment, MDNY's gross revenues increased in 1999.
Investment income for 1999 was $403,952 as compared to $419,285 in 1998 as a
result of slightly lower average invested cash balances during the year.
Total expenses for the year ended December 31, 1999 were $147,882,424 as
compared to $92,058,595 for the year ended December 31, 1998. This 61% increase
in expenses is consistent with the 62% increase in revenue in 1999 as compared
to 1998 as a result of increases in enrollment. Approximately 83%, or
$46,390,000, of the overall increase in expenses is the result of medical
expenses
19
paid to the IPAs. This increase is consistent with the overall increase in
premiums from increased enrollment and consistent with MDNY's contracted payment
rates due to the IPAs.
The remaining portion of the overall increase in expenses is due to
increases in management service expenses. The most significant component of
management services in 1999 were salaries, which approximated $11,961,000 as
compared to $9,074,000 in 1998. During 1998, NextStage hired additional
marketing and support staff to develop the Medicare product line and to address
the overall increase in enrollment. In 1999, the remaining management fees,
other than salaries, totaled approximately $7,467,000 as compared to $6,317,000
in 1998. Primary increases related to advertising, commissions, and general
support expenses such as member handbooks and postage that are directly related
to the increased enrollment levels realized during 1999. In addition,
development of the MDNY product lines (Workers Compensation and the PPO) and
continued expansion efforts accounted for $793,105 for management service
expenses in 1998. These efforts were significantly reduced in 1999.
Net loss for the year ended 1999 was $802,006 compared to $927,412 for
1998. The reduction in the loss of $125,406 was primarily a result of increased
membership in 1999.
Liquidity and Capital Resources
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Cash flows used in operating activities, investing and financing
activities of $5,151,553, $221,461, and $9,087, respectively in 2000 resulted in
an overall decrease in cash and cash equivalents in 2000 of $5,382,101, The
decrease in net cash and cash equivalents was primarily the result of increased
premiums receivable due to increased premium revenue and collection and timing
issues.
Working capital was $334,472 at December 31, 2000 compared with
$(2,396,809) at December 31, 1999. The increase is attributable primarily to
increases in accounts receivable resulting from increased premium revenue and
collection and timing issues. MDNY's liquidity is substantially contingent on
the collection of premium receivable balances (primarily from CHNLI controlled
entities) to meet its operating needs. At December 31, 2000 MDNY had no
outstanding lines of credit. Although MDNY anticipates that its current
operations will produce sufficient cash flows to meet its business obligations,
there can be no assurance that in the event that adequate cash is not provided
from operations, outside funding could be obtained.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Cash flows provided by operating activities in 1999 of $3,862,741 was
offset by net cash used in investing activities of $312,683, which contributed
to the net increase in cash and cash equivalents of $3,550,058 in 1999 compared
to a net increase in cash and cash equivalents of $5,012,756 in 1998. The
increase in net cash provided by operating activities is primarily the result of
increased liabilities to the IPAs and vendors due to delays in payments to these
entities in order to preserve cash.
Cash flows provided from operating, investing and financing activities of
$3,738,890, $273,866 and $1,000,000, respectively in 1998 resulted in the
overall increase in cash and cash equivalents from January 1, 1998 to December
31, 1998 of $5,012,756. The $5,012,756 increase in cash and cash equivalents was
a result of increases in amounts due to IPAs of $3,573,523 and receiving a
$1,400,000 loan from CHNLI under Section 1307 of New York State Insurance Law in
1998. Repayment of Section 1307 loans is subject to approval by NYSID.
20
Capital Reserves and Liquidity
MDNY has incurred losses from operations in all previous years since
inception and has used substantially all of the cash raised in its initial
equity infusion.
In May 2000, MDNY, CHNLI, LIPH and Island IPA entered into the
Reconciliation Agreement whereby certain intercompany balances of approximately
$5.9 million owed by MDNY and Island IPA to each other were eliminated. As a
result of discussions during September 2000, NYSID indicated to MDNY that NYSID
did not object to the Reconciliation Agreement. MDNY thereafter submitted
statutory financial statements for the quarter ended June 30, 2000 that MDNY
believes were in compliance at that date with NYSID reserve requirements.
The NYSDOH and NYSID require MDNY to maintain reserves in the form of cash
and statutory net worth.
On May 10, 2001, MDNY received the Draft Report from NYSID. The Draft
Report states, among other things, NYSID's determinations that, as of June 30,
2000, MDNY was insolvent in the amount of $4,311,487 and that MDNY's required
contingency reserves were impaired in the amount of $12,231,333. These
determinations result from NYSID's position that MDNY should report the IPAs'
obligations in MDNY's financial statements. MDNY's position is that the IPAs are
responsible for their own obligations, not MDNY, and MDNY has disputed NYSID's
attribution of IPA liabilities to MDNY. MDNY continues to work with NYSID to
obtain NYSID's agreement that MDNY satisfies statutory reserve requirements.
Although the Company believes that MDNY is in compliance with applicable
cash reserve and capital requirements due to MDNY's positive financial
performance during 2000 and the effect of the Reconciliation Agreement, pursuant
to the Draft Report, at December 31, 2000, MDNY remains in non-compliance with
New York State reserve requirements. If NYSID were to definitively determine
that MDNY's financial statements must report the obligations of the IPAs, such
determination would have a material adverse effect on the Company's consolidated
financial statements. In addition, there can be no assurance that NYSID will
accept the financial statements submitted by MDNY or that NYSID will not enforce
the Consent.
The continued failure of MDNY to meet reserve requirements, the failure of
MDNY or the IPAs to comply with other existing laws and regulations or a
significant change in such laws or regulations could materially and adversely
affect the operations, financial condition and prospects of the Company, MDNY
and the IPAs.
The consolidated financial statements of the Company as of December 31,
2000 and for the year then ended have been prepared assuming that the Company
will continue as a going concern. The auditor's report states that "the Company
has suffered recurring losses from operations in all previous years since
inception and has a working capital deficiency. The Company is responsible for
ensuring that an adequate provider panel is maintained to service the Company's
enrollees. To service the Company's enrollees, the Company contracts with both
individual providers of health care services (e.g., hospitals, laboratories and
pharmacies) as well as "networks" comprised of individual providers (i.e.,
independent practice associations). Pursuant to these contracts, the Company
remits compensation to its individual providers of health care services and the
networks in consideration for rendering health care services to enrollees of the
Company. Regardless of the financial position of any of the individual providers
or networks, the Company maintains its responsibility to make available to its
enrollees a panel of health care providers for the period of time for which
premium has been paid. The Company is not, however, responsible for the
liabilities, financial or otherwise, of any such individual or network. In
addition,
21
[NYSID] has not formally released the Company from [the Consent] with NYSID.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty."
Pursuant to the Professional Services Agreements, total revenues paid to
the IPAs in 2000 were capitated at 82.5% and 84% of net premium (net of bad
debt, retroactive enrollment adjustment and external brokerage commissions) for
commercial and Medicare enrollees, respectively, for the period January 1, 2000
through March 31, 2000 and 83% and 92% of net premium for commercial and
Medicare enrollees, respectively, for the period April 1, 2000 through December
31, 2000. Revenues paid to the IPAs were capitated 82.5% and 84% of net premium
for commercial and medicare enrollees, and at 80% of net premiums in 1999 and
1998, respectively. As of December 31, 2000 and 1999, the IPAs had an
accumulated deficit of approximately $12 million and $25 million, respectively.
The IPAs have incurred losses from operations for 2000, 1999 and 1998 and had
working capital deficiencies for such years primarily resulting from Medicare
claims exceeding related revenue. Pursuant to the Draft Report, NYSID has
attributed the IPAs' liabilities to MDNY. If NYSID fails to revise or reverse
this determination, MDNY could be responsible for the settlement of outstanding
claims to providers contracted through the IPAs. In such event, there can be no
assurance that MDNY would be able to settle such claims in whole or part, or
that MDNY's additional obligations in respect thereof would not have a material
adverse effect on MDNY's, and, in turn, the Company's, business, financial
condition, results of operations or prospects
MDNY has received approval from NYSID for premium rate increases of
approximately 20%, effective on January 1, 2001.
The Management Services Agreement expired in October 2000. During 2000,
MDNY paid NextStage fees based on 100% of expenses incurred by NextStage in
providing management services to MDNY. During 1999, MDNY paid NextStage a
management fee equal to 100% of costs incurred until MDNY reached 50,000 covered
lives, excluding PPO and dental, after which the management fee was based on a
percentage of premiums. Membership exceeded 50,000 in the first quarter of 1999.
The resulting change in fee structure permitted the IPAs and their Providers to
contract for different levels of management services provided by NextStage and
allowed the IPAs greater ability to contract with management companies other
than NextStage. The management fee paid by MDNY to NextStage for 1999 was based
on 12% of net commercial and Medicare premiums earned by the MDNY plus 100% of
costs incurred relating to servicing commercial enrollees in MDNY's expanded
counties.
MDNY's long term liquidity depends upon its ability to improve its
operations and financial performance in order to meet its financial obligations,
achieve statutory compliance, and achieve profitability. There remains
uncertainty as to whether the actions described above will be sufficient to
ensure the long-term viability of MDNY and the Company. As a result of MDNY's
withdrawal from Medicare effective January 1, 2001, the Company anticipates that
MDNY will experience a temporary reduction in cash flow as a result of payments
for medical services incurred by not yet reported to be made in the first
quarter of 2001.
MDNY obtained a Section 1307 loan from LIPH, LLC for $1 million in 1997
and another from CHNLI for $1.4 million in 1998. Interest on these loans accrues
at the prime rate and are payable quarterly. See Note 7 to the Consolidated
Financial Statements included elsewhere herein. These loans brought MDNY's
December 31, 1998 statutory net worth to $3.9 million compared to the NYSID
required net worth of $6.0 million. (Under Section 1307, the principal and
interest are treated as equity capital for regulatory purposes and are repayable
out of free and divisible surplus, subject to the prior approval of NYSID).
22
Inflation
Medical costs have been rising at a higher rate than that for consumer
goods as a whole. The Company believes that MDNY's premium increases, capitation
arrangements and other cost control measures mitigate, but do not wholly offset,
the effects of medical cost inflation on MDNY's operations. MDNY's inability to
increase premiums could negatively effect MDNY's future earnings.
Quantitative and Qualitative Disclosure about Market Risk
In the normal course of operations, MDNY is exposed to market risks
arising from adverse changes in interest rates primarily through its borrowing
activities and minimally through its short-term investments. Market risk is
defined for these purposes as the potential change in the fair value of debt
instruments resulting from an adverse movement in interest rates. As of December
31, 2000, MDNY's only borrowings were under two promissory notes from LIPH, LLC
and CHNLI, in the aggregate principal amount of $2.4 million, which both bear
interest at 9.5%, the prime rate at December 31, 2000. A 100 basis point
increase in interest rates, applied to MDNY's borrowings at December 31, 2000,
would result in an increase in annual interest expense and a corresponding
reduction in cash flow of approximately $240,000. MDNY's short-term working
capital borrowings have historically borne interest based on the prime rate. The
Company believes that MDNY's exposure to market risk relating to interest rate
risk is not material.
MDNY has no derivative financial instruments or derivative commodity
instruments, nor does MDNY generally have any financial instruments entered into
for trading or hedging purposes. The Company believes that MDNY's business
operations are not exposed in any material respect to market risk relating to
foreign currency exchange risk or commodity price risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Index to Financial Statements and Schedules elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Company
The required information is to be set forth in the Company's Proxy
Statement for the 2001 Annual Meeting of Stockholders ("Proxy Statement") under
the caption "Directors and Executive Officers," which information is hereby
incorporated herein by reference.
(b) Executive Officers of the Company
The required information is to be set forth in the Proxy Statement under
the caption "Directors and Executive Officers," which information is hereby
incorporated herein by reference.
23
(c) Section 16(a) Beneficial Ownership Reporting Compliance
The required information is to be set forth in the Proxy Statement under
the caption"Section 16(a) Beneficial Ownership Reporting Compliance," which
information is hereby incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The information required by this Item is to be set forth in the Proxy
Statement under the caption "Directors and Executive Officers," which
information is hereby incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is to be set forth in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
of Management," which information is hereby incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Proxy Statement
under the caption "Directors and Executive Officers," which information is
hereby incorporated herein by reference.
24
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
I. List of Documents Filed as Part of this Report
A. Financial Statements: Independent Auditors' Report; Consolidated
Balance Sheets as of December 31, 2000 and 1999; Consolidated
Statements of Operations for the years ended December 31, 2000, 1999
and 1998; Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999, and 1998; Consolidated
Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998; Notes to the Consolidated Financial Statements.
B. Schedules:
Schedule II--Valuation and Qualifying Accounts
II. Reports on Form 8-K
A report on Form 8-K was filed on December 6, 2000 with respect to the
last quarter of 2000.
III. Exhibits
Exhibit No. Description
- ----------- -----------
3.1.1 Certificate of Incorporation of Long Island Physician Holdings
Corporation ("LIPH")(1)
3.1.2 Certificate of Incorporation of MDNY Healthcare, Inc. ("MDNY")(5)
3.1.3 Form of Second Certificate of Amendment of the Certificate of
Incorporation of LIPH(3)
3.2 By-Laws of LIPH(6)
3.3 Form of Proposed Certificate of Restated Articles of Organization of
MDNY Holdings, LLC ("Holdings")(3)
3.4 By-laws of MDNY(6)
4 Shareholders Agreement dated December 11,1995 among MDNY, LIPH and
Catholic Healthcare Network of Long Island, Inc. ("CHNLI")(1)
4.1 Form of Amended and Restated Operating Agreement of Holdings(3)
4.2 Form of First Amendment to the Amended and Restated Operating Agreement
of Holdings(3)
10.1 Management Services Agreement dated December 11, 1995, among MDNY,
LIPH, CHNLI and NextStage Healthcare Management of New York, Inc.
(f/k/a NextStage Healthcare Management, Inc., "NextStage")(2)
10.1.1 First Amendment to Management Services Agreement dated as of January
__, 1998 among Holdings, MDNY, NextStage, Long Island Physician
Holdings, LLC, CHNLI and Island Practice Association I.P.A, Inc.(6)
10.2 Form of Option Agreement between LIPH and each of the directors
thereof(2)
10.3 Form of Proposed Agreement and Plan of Merger among LIPH, Holdings and
MDNY Holdings Delaware, Inc.(3)
10.4 Option Agreement between LIPH and NextStage Healthcare, Inc. dated
September 18, 1995(3)
10.5 Letter dated December 29, 1999 from MDNY to the Superintendent of
Insurance, State of New York(4)
10.6 Stock Subscription and Purchase Agreement made as of October 11, 1995
among LIPH, CHNLI and MDNY(5)
25
10.7 Section 1307 Loan Agreement between MDNY and LIPH, LLC dated July __,
1998, as amended(5)
10.8 Section 1307 Loan Agreement between LIPH and CHNLI dated December 18,
1997(5)
10.9 Subordinated Note dated December 18, 1997 made by MDNY in favor of
CHNLI(5)
10.10 IPA Participation Agreement dated as of January 26, 1998 between MDNY
and Island Practice Association, IPA, Inc.(5)
10.11 Reinsurance Agreement between Preferred Life Insurance Company of New
York and MDNY, January 1, 1999 Renewal(5)
10.12 Reinsurance Agreement between Preferred Life Insurance Company of New
York and MDNY, for Point of Service Enrollees, January 1, 1999
Renewal(5)
10.13 Reconciliation Agreement dated as of May __, 2000 among MDNY, Island
Practice Association, I.P.A., Inc., CHNLI and LIPH(5)
10.14 Agreement dated May 10, 1999 between MDNY and Catholic Health Services
of Long Island, Inc. ("CHSLI")(6)
10.15 Agreement dated August 13, 1999 between MDNY and CHSLI(5)
10.16 Separation Agreement and General Release, effective April 15, 2000,
between Richard Radoccia and NextStage Healthcare, Inc. and MDNY
guaranty(6)
10.16.1 Credentialing Services Agreement with CVONet, Inc.; Website Maintenance
and Hosting Agreement with Neptune Technologies, Inc.(5)
10.17 Employment Agreement dated January 1, 2001 between MDNY and Paul T.
Accardi(6)
10.18 Employment Agreement dated January 1, 2001 between MDNY and Ronald R.
Perrone(6)
11 Statement re Computation of per share earnings
21 Subsidiaries of Registrant(1)
- ------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form 10-SB,
File No. 0-27654, and incorporated herein by this reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form
10-SB/A-2, File No. 0-27654, and incorporated herein by this reference.
(3) Filed as an Exhibit to the Company's Proxy Statement for the Annual
Meeting of Shareholders held on January 19, 1997, and incorporated herein
by this reference.
(4) Filed as an Exhibit to the Company's Report on Form 8-K dated March 2,
2000 and incorporated herein by this reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 dated April 11, 2001 and incorporated herein
by this reference.
(6) Filed herewith.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on November 26, 2001.
LONG ISLAND PHYSICAN HOLDINGS CORPORATION
By: /s/ David J. Weissberg,
-----------------------------------------
Name: David J. Weissberg,
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ David J. Weissberg, M.D. Chairman of the Board, November 26, 2001
- --------------------------------- President
David J. Weissberg, M.D. (Principal Executive
Officer)
/s/ Paul Kolker, M.D. Director, Treasurer November 26, 2001
- --------------------------------- (Principal Financial and
Paul Kolker, M.D. Accounting Officer)
/s/ William Brennan, M.D. Director November 26, 2001
- ---------------------------------
William Brennan, M.D.
/s/ Salvatore J. Caravella, M.D. Director November 26, 2001
- ---------------------------------
Salvatore J. Caravella, M.D.
/s/ Franco Gallo, M.D. Director November 26, 2001
- ---------------------------------
Franco Gallo, M.D.
/s/ Robert A. Jason, M.D. Director November 26, 2001
- ---------------------------------
Robert A. Jason, M.D.
27
Signature Title Date
--------- ----- ----
/s/ Gregory W. Kalmar, D.D.S. Director November 26, 2001
- ---------------------------------
Gregory W. Kalmar, D.D.S.
/s/ Amy Koreen, M.D. Director November 26, 2001
- ---------------------------------
Amy Koreen, M.D.
/s/ Ronald R. Perrone, M.D. Director November 26, 2001
- ---------------------------------
Ronald R. Perrone, M.D.
/s/ Rosario Romano, M.D. Director November 26, 2001
- ---------------------------------
Rosario Romano, M.D.
/s/ Robert E. Sarnataro, M.D. Director November 26, 2001
- ---------------------------------
Robert E. Sarnataro, M.D.
/s/ Gary Wohlberg, M.D. Director November 26, 2001
- ---------------------------------
Gary Wohlberg, M.D.
28
LONG ISLAND PHYSICIAN HOLDINGS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Accountants ...................................... F-2
Consolidated Balance Sheets as of December 31, 2000
and December 31, 1999 ................................................ F-3
Consolidated Statements of Operations and Accumulated
Deficit for the three years ended December 31, 2000 .................. F-4
Consolidated Statements of Comprehensive Income (Loss)
for the three years ended December 31, 2000 .......................... F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 2000 ........................................ F-6
Notes to Consolidated Financial Statements ............................. F-7
Valuation and Qualifying Accounts for the three years
ended December 31, 2000 .............................................. F-17
F-1
Report of Independent Accountants
To the Shareholders and Board of Directors
of Long Island Physician Holdings Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and accumulated deficit, comprehensive
income (loss) and cash flows present fairly, in all material respects, the
financial position of Long Island Physician Holdings Corporation (the "Company")
and its subsidiary at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the accompanying
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the New York State Insurance Department ("the NYSID") has
not released the Company's majority owned subsidiary, MDNY Healthcare, Inc.
("MDNY"), from a consent decree with the NYSID. In addition, MDNY received from
the NYSID a Draft Report of MDNY as of June 30, 2000 which states, among other
things, the NYSID's determination that, as of June 30, 2000, MDNY was insolvent
in the amount of $4,311,487 and that MDNY's required contingency reserves were
impaired in the amount of $12,231,333. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
April 9, 2001
F-2
Long Island Physician Holdings Corporation
Consolidated Balance Sheets
As of December 31, 2000 and 1999
- --------------------------------------------------------------------------------
Assets 2000 1999
Current assets:
Cash and cash equivalents $ 4,115,212 $ 9,497,313
Premium receivables, net of allowances
of approximately $1,700,000
in 2000 and $1,800,000 in 1999 10,638,475 4,350,746
Reinsurance recoverable, net of
allowances of approximately
$1,000,000 in 2000 and
$600,000 in 1999 1,382,876 1,023,326
Prepaids and other current assets 1,422,024 272,289
------------ ------------
Total current assets 17,558,587 15,143,674
Property, plant and equipment (less
accumulated depreciation of
$2,761,330 in 2000) 1,167,227 --
Goodwill -- 199,523
Restricted cash and investments 4,171,162 3,977,697
Due from Catholic Health Services
of Long Island 2,382,027 --
Management fee retainer -- 1,252,349
------------ ------------
Total assets $ 25,279,003 $ 20,573,243
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Due to independent practice
associations (IPAs) $ 7,325,793 $ 12,465,400
Excess IPA capitation 6,000,000 --
Deferred revenue 986,152 3,510,673
Accounts payable and accrued
expenses 2,829,364 1,564,410
Current portion of capital
lease obligations 82,809 --
------------ ------------
Total current liabilities 17,224,118 17,540,483
Note payable and accrued interest 2,968,826 2,746,088
Capital lease obligations 65,176 --
------------ ------------
Total liabilities 20,258,120 20,286,571
------------ ------------
Minority interest in MDNY
Healthcare, Inc. 2,212,634 639,803
------------ ------------
Stockholders' equity:
Class A common stock, $.001 par
value; 10,000 shares authorized,
1,506 issued and outstanding 2 2
Class B common stock, $.001 par
value; 25,000 shares authorized,
4,333 issued and outstanding 4 4
Additional paid-in capital 11,478,536 11,478,536
Unrealized gain on investments (705) (189,498)
Accumulated deficit (8,669,588) (11,642,175)
------------ ------------
Total stockholders' equity 2,808,249 (353,131)
------------ ------------
Total liabilities and
stockholders' equity $ 25,279,003 $ 20,573,243
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
Long Island Physician Holdings Corporation
Consolidated Statements of Operations and Accumulated Deficit
For the years ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
Revenue:
Premiums earned $ 188,929,522 $ 146,338,584 $ 90,272,919
Investment and other income 2,743,644 403,952 419,285
------------- ------------- -------------
Total revenue 191,673,166 146,742,536 90,692,204
------------- ------------- -------------
Expenses:
Independent practice association (IPA)
medical services expense 153,423,154 118,182,414 71,629,176
Excess IPA capitation 6,000,000 -- --
Commissions expense 6,412,070 4,148,656 2,105,128
Management fees and delegated service charges
paid to related parties 11,263,697 19,430,331 15,390,747
General and administrative expenses 9,770,972 6,121,023 2,933,544
Depreciation 166,947 -- --
------------- ------------- -------------
Total expenses 187,036,840 147,882,424 92,058,595
------------- ------------- -------------
Operating income (loss) 4,636,326 (1,139,888) (1,366,391)
Provision for income taxes (90,908) -- --
Minority interest in (income) loss of subsidiary (1,572,831) 337,882 438,979
------------- ------------- -------------
Net income (loss) 2,972,587 (802,006) (927,412)
Accumulated deficit, beginning of year (11,642,175) (10,840,169) (9,912,757)
------------- ------------- -------------
Accumulated deficit, end of year $ (8,669,588) $ (11,642,175) $ (10,840,169)
============= ============= =============
Basic and diluted income (loss) per share $ 509 $ (137) $ (159)
============= ============= =============
Basic and diluted weighted average shares 5,839 5,839 5,839
============= ============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
Long Island Physician Holdings Corporation
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
Net income (loss) $ 2,972,587 $ (802,006) $ (927,412)
Unrealized gain (loss) on securities 188,793 (241,826) 52,328
----------- ----------- -----------
Comprehensive income (loss) $ 3,161,380 $(1,043,832) $ (875,084)
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
Long Island Physician Holdings Corporation
Consolidated Statements of Cash Flows
For the years ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
Cash flows from operating activities:
Net income (loss) $ 2,972,587 $ (802,006) $ (927,412)
Adjustments to reconcile net income (loss) to net cash flows
(used in) provided by operating activities:
Change in unrealized gain (loss) on investments 188,793 (241,826) 52,328
Gain on net assets transferred from NextStage (389,712) -- --
Depreciation 166,947 -- --
Write-off of goodwill 199,523
Amortization of goodwill -- 16,627 16,627
Minority interest in loss of subsidiary 1,572,831 (337,882) (438,979)
Changes in assets and liabilities:
Due from CHSLI (2,382,027) -- --
Reinsurance recoverables (359,550) 249,835 (653,907)
Management fee retainer -- -- (603,692)
Premium receivable (6,287,729) (203,250) 331,237
Prepaid expenses and other current assets (656,780) 32,054 50,441
Due to/from independent practice associations (IPAs) (5,139,607) 3,483,934 3,573,523
Excess IPA capitation 6,000,000
Deferred revenue (2,524,521) 930,762 1,757,656
Accounts payable and accrued expenses 1,487,692 681,160 (84,909)
Net advances to NextStage Healthcare Management, Inc. -- 53,333 665,977
----------- ----------- -----------
Net cash (used in) provided by operating activities (5,151,553) 3,862,741 3,738,890
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant, and equipment (27,996) -- --
Increase in restricted cash and investments (193,465) (312,683) 273,866
----------- ----------- -----------
Net cash (used in) provided by investing activities (221,461) (312,683) 273,866
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings -- -- 1,000,000
Payments on capital lease obligations (9,087) -- --
----------- ----------- -----------
Net cash (used by) provided by financing activities (9,087) -- 1,000,000
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (5,382,101) 3,550,058 5,012,756
Cash and cash equivalents, beginning of year 9,497,313 5,947,255 934,499
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,115,212 $ 9,497,313 $ 5,947,255
=========== =========== ===========
Supplemental disclosure of cash flow information:
State income taxes paid $ (7) $ 4,704 $ 4,704
Net transactions with NextStage $ 389,712 $ -- $ --
----------- ----------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization
Long Island Physician Holdings Corporation (the "Company" or "LIPH") was
incorporated on October 11, 1994 in the State of New York as a holding
company for purposes aimed at advancing the delivery of healthcare on Long
Island, New York (Queens, Nassau and Suffolk Counties). The Company is
controlled by individual physicians residing in New York State. The
accompanying consolidated financial statements include the activity of the
Company and its majority owned subsidiary, MDNY Healthcare, Inc. ("MDNY"),
a health maintenance organization.
2. Going Concern
The Company's financial statements have been presented on the basis that
it will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The New York State Insurance Department ("the NYSID") has not
released MDNY from a consent decree with the NYSID. Furthermore, MDNY has
utilized substantially all of the cash raised in its initial equity
infusion in funding its operations. On May 10, 2001, MDNY received from
the NYSID a Draft Report on Examination of MDNY as of June 30, 2000 (the
"Draft Report"). The Draft Report states, among other things, the NYSID's
determinations that, as of June 30, 2000, MDNY was insolvent in the amount
of $4,311,487 and that MDNY's required contingency reserves were impaired
in the amount of $12,231,333. These determinations result from the NYSID's
position that MDNY should report its affiliated independent practice
associations' (IPAs) obligations in MDNY's financial statements. MDNY's
position is that the IPAs are responsible for their own obligations, not
MDNY, and MDNY has disputed the NYSID's attribution of IPA liabilities to
MDNY. MDNY continues to work with the NYSID to obtain the NYSID's
agreement that MDNY satisfies statutory reserve requirements.
Although the Company believes that MDNY is in compliance with applicable
cash reserve and capital requirements due to MDNY's positive financial
performance during 2000 and other factors, pursuant to the Draft Report,
at December 31, 2000, MDNY remains in non-compliance with New York State
reserve requirements. If the NYSID were to definitively determine that
MDNY's financial statements must report the obligations of the IPAs, such
determination would have a material adverse effect on the Company's
consolidated financial statements. In addition, there can be no assurance
that the NYSID will accept the financial statements submitted by MDNY or
that the NYSID will not enforce the consent decree. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The ability to continue as a going concern is dependent, among
other things, upon MDNY and its affiliated IPAs achieving profitable
results from operations and obtaining adequate working capital.
MDNY's affiliated IPAs continued to incur operating losses in 2000
resulting primarily from Medicare claims exceeding related premiums. MDNY
pays these IPAs for covered services and the IPAs are then responsible for
the payment of medical claims incurred. MDNY is responsible for ensuring
that an adequate provider panel is maintained to service the Company's
enrollees. To service MDNY's enrollees, the MDNY contracts with both
individual providers of healthcare services (e.g., hospitals, laboratories
and pharmacies) as well as "networks" comprised of individual providers
(i.e., independent practice associations). Pursuant to these contracts,
MDNY remits compensation to its individual providers of health care
services and the networks, or their designee, in consideration for
rendering health care services to enrollees of MDNY. Regardless of the
financial position of any of the individual providers or networks, MDNY
maintains its responsibility to make available to its enrollees a panel of
health care providers for the period of
F-7
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
time for which premium has been paid. MDNY is not, however, responsible
for the liabilities, financial or otherwise, of any such individual or
network. As of December 31, 2000, these IPAs had an accumulated deficit of
approximately $25,000,000 (unaudited) and losses in 2000 of approximately
$12,000,000 (unaudited).
In May 2000, MDNY, Catholic Health Services of Long Island ("CHS"), LIPH
and Island Practice Association, IPA, Inc. ("Island IPA") entered into a
Reconciliation Agreement ("Reconciliation Agreement") whereby certain
intercompany balances of approximately $5.9 million owed by MDNY and
Island IPA to each other were eliminated. As a result of discussions
during September 2000, the NYSID indicated to MDNY that the NYSID did not
object to the Reconciliation Agreement. MDNY thereafter submitted
statutory financial statements for the quarter ended June 30, 2000 that
MDNY believes were in compliance at that date with all of the NYSID
reserve requirements.
Although MDNY believes that, as a result of its positive financial
performance during 2000 and the effect of the Reconciliation Agreement,
MDNY is now in compliance with the NYSID's cash reserve and capital
requirements, there can be no assurance that the NYSID will accept the
financial statements submitted by MDNY or that the NYSID will not enforce
the NYSID consent decree against MDNY. In addition, if the ultimate
determination is that the obligations of the IPAs should be recognized by
MDNY, this will have a material negative impact on the Company's
consolidated financial statements.
During 2001, MDNY and its affiliated IPAs are in the process of
negotiating certain transactions and have implemented certain plans in
order to provide liquidity to MDNY and achieve combined profitability. A
summary of these transactions and plans is as follows:
o MDNY withdrew from its Medicare risk contract effective December 31,
2000.
o MDNY received a premium rate increase of 22%, effective January 1,
2001 and is currently seeking further premium enhancements.
o Management has initiated efforts to reduce operating and medical
expenses during 2001, primarily relating to staffing reductions, and
renegotiation of provider contracts.
While management believes that implementation of its plans to achieve
profitability will provide them with the ability to continue as a going
concern, there is no assurance that such actions will achieve positive
results from operations or adequate working capital and equity.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiary, MDNY. Intercompany balances and
activities have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers investments in highly liquid debt instruments with
an original maturity of three months or less to be cash equivalents.
F-8
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Restricted Cash
In accordance with the NYSID regulations, MDNY is required to maintain
certain amounts on deposit in an escrow account for the protection of
enrollees (see Note 5). MDNY had $4,171,162 and $3,977,697 of U.S.
Government Bonds, and money markets on deposit in escrow at December 31,
2000 and 1999, respectively.
Investments
The Company accounts for its investments using Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115"). This standard requires that
certain debt and equity securities be adjusted to market value at the end
of each accounting period. At December 31, 2000 and 1999, all securities
covered by SFAS No. 115 were designated as available for sale.
Accordingly, these securities are stated at fair value, with unrealized
gains and losses reported in the consolidated statement of other
comprehensive income (loss), net of income tax effects. Realized gains and
losses are included in the consolidated statements of operations. At
December 31, 2000, fair value of all investments approximated cost.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
provided on the straight-line method over the estimated useful lives of
the assets. 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. Upon sale or retirement of capital
assets, the cost and related accumulated depreciation are eliminated from
the accounts and the resulting gain or loss, if any, is reported in the
statement of operations.
Intangible Assets
As a result of the purchase of additional shares in MDNY in 1996, the
Company had recorded goodwill for the excess of purchase price over the
net book value of the acquired investment. Such goodwill was amortized
using the straight-line method over a fifteen-year period. Periodically,
the Company reviewed the carrying value of the goodwill to determine if
facts and circumstances suggest that it may be impaired or that the
amortization period may need to be changed. The Company considered
external factors, including enrollment changes, local market developments,
national healthcare trends, and other publicly available information. If
these external factors indicate that the goodwill will not be recoverable,
as determined upon undiscounted cash flows before interest charges of the
business acquired over the amortization period, or the carrying value of
the goodwill will be reduced. During 2000, the Company determined that the
goodwill balance was impaired, and wrote off the remaining balance. For
the year ended December 31, 1999 and 1998, amortization expense was
$16,627. Accumulated amortization at December 31, 1999 was approximately
$50,000.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recovered.
If the sum of the expected future undiscounted cash flows is less than the
carrying amount of the assets, a loss is recognized for the difference
between the fair value and carrying value of the assets.
Concentration of Credit Risk
Concentration of credit risk exists with cash and cash equivalents. For
cash balances held greater than the FDIC insured amount, the Company
assumes a certain degree of associated risk.
F-9
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
However, MDNY places its cash and cash equivalents with high credit
quality institutions. Substantially all cash and cash equivalents are
currently with a major New York bank.
Premium Revenue
Commercial membership contracts are written on an annual basis subject to
cancellation by the employer group upon thirty days written notice.
Medicare revenues are received based on a fixed amount per enrolled member
per month as mandated under the federal Medicare Managed Care Program.
Premiums are due monthly and are recognized as revenue during the period
in which MDNY is obligated to provide services to subscribers. Premiums
collected in advance are deferred and recorded as unearned premium
revenue.
Reinsurance
Reinsurance premiums are included as healthcare costs and reinsurance
recoveries, net of allowance for uncollectible accounts, and are reported
as a reduction of related healthcare costs.
Healthcare Service Costs
MDNY and its affiliated IPAs contract with various healthcare providers
for the provision of certain medical care services to its members. Under
various risk-sharing arrangements with related IPAs, MDNY is obligated to
pay the IPAs a percentage of commercial and Medicare premiums, net
provision for uncollectible accounts and commission expenses. During 2000,
MDNY was obligated to pay the IPAs 82.5% and 86% of net commercial and
Medicare premiums, respectively, for the period January 1, 2000 through
March 31, 2000 and 83% and 92% of net commercial and Medicare premiums,
respectively, for the period April 1, 2000 through December 31, 2000.
During 2000, in addition to the capitated obligations, MDNY incurred an
additional healthcare service obligation to the IPAs for $6 million.
During 1999, MDNY was obligated to pay the IPAs 82.5% and 84% of
commercial and Medicare premiums, respectively, net of provision for
uncollectible accounts and commission expenses. These related IPAs are
then responsible for all reimbursements to its members and other
non-member third-party providers ("Non-member Providers") that MDNY has
contracted with, at contracted amounts, for healthcare services provided
as incurred. The costs of inpatient hospitalization and outpatient medical
services provided or contracted for are accrued in the period they are
incurred. The costs of claims incurred but not reported are estimated
based on historical data, current enrollment statistics, patient census
data and other information. Such estimates and the resulting reserves are
continually reviewed and updated, and any adjustments resulting therefrom
are reflected in earnings currently. The liability for the costs relating
to MDNY's arrangement with the IPAs are recorded as amounts due to
independent practice associations.
Income Taxes
Under the balance sheet-based liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes",
("SFAS 109"), deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when the differences reverse.
As of December 31, 2000 and 1999, the Company's net operating loss for tax
purposes will differ from the loss for financial reporting purposes as a
result of certain costs being capitalized and expensed over a five-year
period for tax purposes and the timing of bad debt write-offs. The Company
has recorded a full valuation allowance against the potential future
benefit of such deferred tax assets to reduce deferred taxes to amounts
expected to be realized.
F-10
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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 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. The most significant estimate
relates to allowances for uncollectible accounts which was approximately
$2,700,000 and $2,400,000 at December 31, 2000 and 1999, respectively.
Basic and Diluted Income (Loss) Per Share
Basic and diluted income (loss) per share is based on the number of shares
of Class A common stock and Class B common stock outstanding during the
period. At December 31, 2000 and 1999, the Company had outstanding stock
options to purchase 1,041 shares of Class B common stock that were not
included in the computation of diluted EPS because the exercise price was
greater than the average market price of common shares.
Reclassification
Certain prior year balances have been reclassified to conform with the
current year presentation.
4. MDNY Healthcare, Inc.
At December 31, 2000, the Company holds 907 shares of MDNY's $.001 par
value Class A common stock, for which it paid $9,070,000. CHS holds the
remaining 451 shares of MDNY's $.001 par value Class B common stock for
which it paid $4,510,000. CHS's ownership interest in MDNY is reflected as
minority interest in the accompanying consolidated financial statements.
The holders of Class A common stock, voting as a class, shall elect ten
directors by the affirmative vote of the majority of the issued and
outstanding Class A common stock entitled to vote thereon. The holders of
Class B common stock, voting as a class, shall elect four directors by the
affirmative vote of the majority of the issued and outstanding Class B
common stock entitled to vote thereon. The holders of Class A and Class B
common stock, voting together, shall elect four directors by the
affirmative vote of the majority of the issued and outstanding Class A and
Class B common stock entitled to vote thereon.
CHS shall have the following additional rights:
o CHS, being the owner of 100% of MDNY's Class B common stock, shall
have the right to nominate and elect four members of the MDNY board
of directors, and have representation on certain key committees of
the MDNY board.
o A supermajority voting provision is included in the MDNY by-laws
with respect to (i) the selection and inclusion of network
hospitals, (ii) amendment, modification or change to the MDNY
by-laws, (iii) any modification or change to risk pool funding
methodologies, (iv) the issuance of additional shares of MDNY stock,
and (v) the transfer by either CHS or the Company of any MDNY stock
held by either entity. The separate and affirmative vote of (1) at
least a majority of the CHS elected directors and (2) at least a
majority of the non-CHS-appointed directors shall be required to
effect any of the foregoing actions of the MDNY board.
F-11
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. State Reserve Requirements
As a condition of continued licensure by the State of New York, MDNY must
maintain certain reserve requirements to protect its subscribers in the
event MDNY is unable to meet its obligations. As discussed in Note 2, the
NYSID has stated that MDNY is deficient in its contingency reserve
requirement as of December 31, 2000 and 1999.
6. Reinsurance
MDNY entered into a stop-loss insurance agreement with an insurance
company to limit its losses on individual claims. In 2000, under the terms
of this agreement, a portion of paid claims in excess of $125,000 for
hospital services and $25,000 for physician services are reimbursed to
MDNY. During 1999, MDNY was reimbursed for paid claims in excess of
$100,000 for hospital services and $20,000 for physician services.
Stop-loss insurance premiums of approximately $1,214,000 in 2000 and
$1,428,000 in 1999 are included in healthcare costs in the consolidated
statements of operations. Approximately $620,000 in 2000 and $928,000 in
1999 of stop-loss recoveries, net of provision for uncollectible accounts,
were deducted from healthcare costs.
Reinsurance recoverables at December 31, 2000 and 1999 are $1,382,876 and
$1,023,326, respectively.
7. Property, Plant and Equipment
The major components of property, plant and equipment as of December 31,
2000 are as follows:
2000
Equipment $ 334,225
Furniture and Fixtures 520,825
Leasehold improvements 483,333
Computer equipment and software 2,590,174
----------
3,928,557
Less accumulated depreciation 2,761,330
----------
Property, plant and equipment, net $1,167,227
==========
8. Notes Payable
During 1998, MDNY obtained a note from LIPH LLC for $1,205,699 (including
accrued interest), which has been approved by the Superintendent of
Insurance of the State of New York (the "Superintendent"). Interest on
this amount accrues at the prime rate and is payable quarterly commencing
October 1, 1998. The entire principal balance plus any accrued interest
was originally due on July 1, 1999, but payment is subject to prior
approval by the Superintendent.
In April 1999, MDNY and LIPH, LLC amended the note agreement to provide
LIPH, LLC with the unilateral right to convert the note to an equity
investment in MDNY. In August 1999, the Company's Board authorized the
conversion of the outstanding balance of the LIPH, LLC note to shares of
common stock in MDNY. The outstanding balance has not yet been converted
as
F-12
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
MDNY has not yet received approval from the Superintendent nor have
additional shares been issued.
During 1997, MDNY obtained a note from CHS for $1,763,127 (including
accrued interest), which has been approved by the Superintendent. Interest
on this amount accrues at the prime rate and is payable quarterly
commencing April 1, 1998. The entire principal balance under the note plus
any accrued interest is due in full upon approval by the Superintendent.
Repayment of the principal and payment of accrued interest on the note
shall be made only out of the free and divisible surplus of MDNY and all
amounts to be paid or repaid are subject to the prior approval of the
Superintendent.
9. Income Taxes
The Company files corporate Federal income tax returns, as well as
corporate income tax returns for the state in which the Company operates.
The Company has a cumulative net operating loss as a result of incurring
losses since inception.
As of December 31, 2000, the Company has a net deferred tax asset,
primarily relating to its net operating loss carryforwards. The Company's
income tax expense for 2000 represents its estimated alternative minimum
tax expense as a result of its utilization of net operating loss
carryforwards during 2000.
At December 31, 2000 and 1999, the Company has a net operating loss
carryforward for federal income tax purposes of approximately $5.4 million
and $13 million, respectively, which is available through the year 2010.
10. Stockholder's Equity
During 1995, the Company offered its shares through a private placement
offering to various office based physicians, psychologists, podiatrists
and dentists practicing on Long Island, New York (Queens, Nassau and
Suffolk Counties, New York).
Shares of Class A and Class B common stock were offered to physicians
based on their service specialty at a price of $2,000 per share. The Class
A common stock is voting stock and has been offered only to primary care
physicians, specialty care physicians, anesthesiologists and oral
surgeons. The Class B common stock is non-voting stock. Holders of Class B
common stock will not be entitled to vote their shares of Class B common
stock at meetings of the Company's stockholders, except as provided by the
Business Corporation Law of the State of New York with respect to certain
extraordinary corporate transactions.
During 1996, the Company issued 39 Class A shares and 63 Class B shares
for $204,000. During 1996, the Company reserved for issuance upon exercise
of "non-qualified" stock options that number of shares of Class B common
stock equal to no more than fifteen (15%) of the total number of shares
currently outstanding. The Company has issued to certain organizers 1,041
options to purchase a share of Class B common stock at $2,000 per share,
exercisable at any time after July 1, 1998. The options are
non-transferable and expire on July 1, 2005. At December 31, 2000, no
options have been exercised.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation, ("SFAS 123")." In accordance
F-13
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
with SFAS No. 123, the Company continues to apply Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," "APB No.
25" and related Interpretations to account for stock-based compensation
using the intrinsic value method for its stock option plans and,
accordingly, does not recognize compensation expense based on the fair
value of the options at grant date as prescribed by SFAS No. 123, the
change to reported net (loss) income and net (loss) earnings per share
would be insignificant.
On November 12, 1996, the Company formed a wholly-owned subsidiary, LIPH,
LLC, and contributed all of the Company's stock interests in Island IPA,
Island Behavioral Health Association IPA, Inc., Island Dental Professional
Association IPA, Inc., NextStage Healthcare, Inc., Mainstreet Practice
Management Inc., Mainstreet Dental Management Corporation, as well as
certain other assets to LIPH, LLC.
On November 14, 1996, the Company declared a dividend and distributed to
all shareholders of record on November 17, 1996, all of the Membership
Interests in LIPH, LLC in the amount of $733,526.
11. Related Parties
MDNY had a management services agreement with NextStage Healthcare
Management of New York, Inc. ("NextStage"), an entity owned primarily by
LIPH and CHS. This agreement stipulated that NextStage would provide
management and consulting services to MDNY for a five year period that
ended October 10, 2000.
Under the terms of the agreement, fees charged by NextStage during 2000
and 1998 were based on 100% of expenses incurred by NextStage relating to
providing management services to MDNY. During 1999 fees charged by
NextStage were based on 12% of net commercial and Medicare premiums earned
by MDNY plus 100% of the costs incurred relating to servicing commercial
employees in MDNY's expanded counties.
A component of total management fees for 1999 include costs incurred by
MDNY related to services performed by NextStage on behalf of the IPAs
("IPA Delegated Services"). These IPA Delegated Services include primarily
utilization management, provider relations and claims processing and
adjudication. These costs, which totaled $3,858,550 in 1999 are charged to
MDNY, then passed through to the IPAs at the same amount in the form of
reduced healthcare cost expenses.
Total management fee expenses incurred, inclusive of IPA delegated
services were $11,263,697, $19,430,331 and $15,390,747 at December 31,
2000, 1999 and 1998, respectively.
F-14
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Expenses incurred by NextStage to service its management contract with
MDNY are as follows:
2000 1999 1998
Salaries and related costs $ 5,894,467 $ 11,960,695 $ 9,073,838
Consulting and professional fees 1,538,352 3,125,422 1,885,853
Selling, general and administrative expenses 3,378,017 4,389,831 3,807,573
Write-off of advance from NextStage Healthcare, Inc. -- 2,732,376 --
Depreciation expense 452,861 735,572 623,483
------------ ------------ ------------
11,263,697 22,943,896 15,390,747
Expenses incurred by NextStage not charged to MDNY -- (3,513,565) --
------------ ------------ ------------
Management fees charged to MDNY $ 11,263,697 $ 19,430,331 $ 15,390,747
============ ============ ============
Under the management service agreement with NextStage, MDNY was required
to deposit a management fee retainer. The amount on deposit with NextStage
at December 31, 1999 was $1,252,349. NextStage Healthcare, Inc. had
collateralized its obligations to MDNY for the management fee retainer by
pledging all of its property and equipment.
Upon expiration of the management service agreement on October 10, 2000,
NextStage transferred all of its property, plant and equipment as well as
its capital lease obligations, security deposits and note receivable to
satisfy the management fee retainer due to MDNY.
Shareholders of LIPH, primarily physicians who are members of practice
associations, and CHS provide the majority of healthcare services to MDNY
enrollees.
As part of the agreement between the Company and the IPAs, the IPAs have
agreed to assume responsibility for payment of IPA Delegated Services and
all payments related to the New York State Market Stabilization Pools
("Stabilization Pools"). The cost of Stabilization Pool payments passed
through to the IPAs during 2000 and 1999 approximated $3,200,000 and
$6,900,000, respectively.
Amounts due from the IPAs, net of expenses paid for by MDNY on behalf of
the IPAs, are included in due to independent practices associations in the
consolidated balance sheets.
MDNY also provides health care services for employees of CHS. The premiums
from these services are included in premiums earned on the consolidated
statements of operations and outstanding receivables for these services
are part of premiums receivable on the consolidated balance sheets. CHS
premiums represented approximately 29% and 24% of total premiums earned by
the Company during 2000 and 1999, respectively.
12. Commitments and Contingencies
In April 1999, Innovative Clinical Solutions Ltd., formerly known as
PhyMatrix Corporation, ("ICSL") filed a lawsuit against MDNY and its
related parties for breach of contract, claims of fraud and unfair
competition. Such actions stem from a dispute between Island IPA and its
management agent, PhyMatrix of Long Island, LLC ("PhyLI") regarding
alleged management
F-15
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
fees due to PhyLI and alleged contractual non-performance by PhyLI and
ICSL. The management agreement between Island IPA and PhyLI was part of a
larger agreement in which MDNY participated in assigning management
contracts to ICSL in exchange for consideration. MDNY had previously
assigned management services to Island IPA, but had withdrawn citing
deficiencies in Island IPA performance. On December 11, 2000, the New York
State Supreme Court dismissed the lawsuit in all respects and there has
been no motion by ICSL to appeal the verdict. The Company believes that
the ultimate liability, if any, will be within the policy limits of its
insurance, and will not have a material adverse effect on MDNY or the
Company's financial position, cash flows or results of operations.
On August 22, 2001 the NYSID published a regulation setting forth
standards for financial risk transfer between insurers and healthcare
providers (including health maintenance organizations) that requires
intermediary entities (including MDNY independent practice associations)
and certain individual providers who take capitated risk ("Providers") to
demonstrate their financial responsibility and capability. Demonstration
of financial responsibility is evidenced by providing a security deposit
equivalent to 12.5% of their estimated annual capitation received from the
insurer under the current financial risk sharing agreement. The
requirement is applicable to those Providers who receive annual capitation
exceeding $250,000. The regulation stems from the NYSID's efforts to
prevent HMO failures in conjunction with their contracts with Providers.
In assessing the insurer's ability to fulfill its non-transferable
obligation to provide healthcare services to subscribers, the NYSID will
give consideration to the financial condition of the insurer and Provider
as well as the financial security deposit. The Company is determining the
impact this regulation could have on MDNY's continued operations.
As part of the Company's risk-sharing arrangement with its related IPAs,
MDNY pays, collectively as payment for covered services, these IPAs a
portion of premiums, then these IPAs are responsible for all
reimbursements to its participating providers and other Non-member
Providers. If the IPAs are unable to make payments relating to its
outstanding Non-member Provider obligations, the IPAs have agreed that
such Non-member Provider obligations will be paid by the Company directly
and will reduce the outstanding amount due to the IPAs. (See Note 3).
13. Subsequent Event
At the NYSID's request, effective January 1, 2001, MDNY has converted from
a capitation based contract with its affiliated IPAs to a fee for service
(full-risk) based contract.
F-16
Long Island Physician Holdings Corporation
Financial Statement Schedule - Valuation and Qualifying Accounts
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other End
Description of Period Expenses Accounts Deductions of Period
Year ended December 31, 2000
Estimated uncollectible amount of
premium and accounts receivable $1,802,398 $3,231,374 -- $3,307,878 $1,725,894
Year ended December 31, 1999
Estimated uncollectible amount of
premium and accounts receivable 1,836,918 3,103,443 -- 3,137,963 1,802,398
Year ended December 31, 1998
Estimated uncollectible amount of
premium and accounts receivable 723,297 3,611,026 -- 2,497,405 1,836,918
F-17
Exhibit No. Description
- ----------- -----------
3.1.1 Certificate of Incorporation of Long Island Physician Holdings
Corporation ("LIPH")(1)
3.1.2 Certificate of Incorporation of MDNY Healthcare, Inc. ("MDNY")(5)
3.1.3 Form of Second Certificate of Amendment of the Certificate of
Incorporation of LIPH(3)
3.2 By-Laws of LIPH(6)
3.3 Form of Proposed Certificate of Restated Articles of Organization of
MDNY Holdings, LLC ("Holdings")(3)
3.4 By-laws of MDNY(6)
4 Shareholders Agreement dated December 11,1995 among MDNY, LIPH and
Catholic Healthcare Network of Long Island, Inc. ("CHNLI")(1)
4.1 Form of Amended and Restated Operating Agreement of Holdings(3)
4.2 Form of First Amendment to the Amended and Restated Operating Agreement
of Holdings(3)
10.1 Management Services Agreement dated December 11, 1995, among MDNY,
LIPH, CHNLI and NextStage Healthcare Management of New York, Inc.
(f/k/a NextStage Healthcare Management, Inc., "NextStage")(2)
10.1.1 First Amendment to Management Services Agreement dated as of January
__, 1998 among Holdings, MDNY, NextStage, Long Island Physician
Holdings, LLC, CHNLI and Island Practice Association I.P.A, Inc.(6)
10.2 Form of Option Agreement between LIPH and each of the directors
thereof(2)
10.3 Form of Proposed Agreement and Plan of Merger among LIPH, Holdings and
MDNY Holdings Delaware, Inc.(3)
10.4 Option Agreement between LIPH and NextStage Healthcare, Inc. dated
September 18, 1995(3)
10.5 Letter dated December 29, 1999 from MDNY to the Superintendent of
Insurance, State of New York(4)
10.6 Stock Subscription and Purchase Agreement made as of October 11, 1995
among LIPH, CHNLI and MDNY(5)
10.7 Section 1307 Loan Agreement between MDNY and LIPH, LLC dated July __,
1998, as amended(5)
10.8 Section 1307 Loan Agreement between LIPH and CHNLI dated December 18,
1997(5)
10.9 Subordinated Note dated December 18, 1997 made by MDNY in favor of
CHNLI(5)
10.10 IPA Participation Agreement dated as of January 26, 1998 between MDNY
and Island Practice Association, IPA, Inc.(5)
10.11 Reinsurance Agreement between Preferred Life Insurance Company of New
York and MDNY, January 1, 1999 Renewal(5)
10.12 Reinsurance Agreement between Preferred Life Insurance Company of New
York and MDNY, for Point of Service Enrollees, January 1, 1999
Renewal(5)
10.13 Reconciliation Agreement dated as of May __, 2000 among MDNY, Island
Practice Association, I.P.A., Inc., CHNLI and LIPH(5)
10.14 Agreement dated May 10, 1999 between MDNY and Catholic Health Services
of Long Island, Inc. ("CHSLI")(6)
10.15 Agreement dated August 13, 1999 between MDNY and CHSLI(5)
10.16 Separation Agreement and General Release, effective April 15, 2000,
between Richard Radoccia and NextStage Healthcare, Inc. and MDNY
guaranty(6)
10.16.1 Credentialing Services Agreement with CVONet, Inc.; Website Maintenance
and Hosting Agreement with Neptune Technologies, Inc.(5)
10.17 Employment Agreement dated January 1, 2001 between MDNY and Paul T.
Accardi(6)
10.18 Employment Agreement dated January 1, 2001 between MDNY and Ronald R.
Perrone(6)
11 Statement re Computation of per share earnings
21 Subsidiaries of Registrant(1)
- ------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form 10-SB,
File No. 0-27654, and incorporated herein by this reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form
10-SB/A-2, File No. 0-27654, and incorporated herein by this reference.
(3) Filed as an Exhibit to the Company's Proxy Statement for the Annual
Meeting of Shareholders held on January 19, 1997, and incorporated herein
by this reference.
(4) Filed as an Exhibit to the Company's Report on Form 8-K dated March 2,
2000 and incorporated herein by this reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 dated April 11, 2001 and incorporated herein
by this reference.
(6) Filed herewith.