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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
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
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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 whether the registrant is an accelerated filer (as
defined under Rule 12b-2 of the Act). Yes __ No 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 March 31,
2003 there were 1,506 shares of Class A common stock and 4,333 shares of Class B
common stock outstanding.
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Operations and Accumulated Deficit 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
CERTIFICATIONS
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Long Island Physician Holdings Corporation
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(unaudited)
March 31, December 31,
2003 2002
------ ----
Assets
Current assets:
Cash and cash equivalents $ 1,133,337 $ 694,449
Premium receivables (net of allowances of
approximately $1,825,449 in 2003 and
$961,000 in 2002)
11,009,065 8,699,338
Reinsurance recoverable 546,780 635,420
Payments in excess of capitation 2,999,251 2,999,251
Other assets 3,108,718 3,205,406
------------ ------------
Total current assets 18,797,151 16,233,864
------------ ------------
Restricted cash and investments 5,674,456 5,657,135
Property and equipment 345,816 392,245
Payments in excess of capitation 18,696,998 19,215,858
Due from CHSLI 2,382,027 2,382,027
------------ ------------
Total Assets $ 45,896,448 $ 43,881,129
------------ ------------
Liabilities and stockholder's equity
Current Liabilities:
Medical claims payable $ 28,644,779 $ 28,967,021
Public goods payable 6,214,359 5,367,150
Unearned premium revenue 2,710,861 1,955,180
Accounts payable and accrued expenses 2,646,459 2,246,652
Current portion of capital leases 10,315 14,324
------------ ------------
Total current liabilities 40,226,773 38,550,327
Long term debt and accrued interest 3,272,300 3,247,150
------------ ------------
Total liabilities 43,499,073 41,797,477
Minority interest 1,350,843 1,247,315
Stockholder's equity:
Common stock 6 6
Additional paid in capital 11,478,536 11,478,536
Accumulated deficit (10,432,010) (10,642,205)
------------ ------------
Total stockholder's equity 1,046,532 836,337
------------ ------------
Total Liabilities and
Stockholder's Equity $ 45,896,448 $ 43,881,129
------------ ------------
The accompanying notes are an integral part of those statements
2
Long Island Physician Holdings Corporation
Consolidated Statements of Operations and Accumulated Deficit
Three Months Ended March 31, 2003 and 2002
(unaudited)
Three months ended March 31,
2003 2002
---- ----
Revenues:
Premiums earned $ 40,287,643 $ 38,160,851
Investment and other income 49,427 223,430
------------ ------------
Total revenues 40,337,070 38,384,281
------------ ------------
Expenses:
Medical claims expense 34,404,249 32,461,583
Commissions expense 1,729,819 1,718,446
General and administrative expenses 3,809,350 4,009,554
Depreciation 46,429 103,162
------------ ------------
Total expenses 39,989,847 38,292,745
------------ ------------
Operating income before taxes 347,223 91,536
Income tax expense 33,500 32,040
------------ ------------
Net income before minority interest 313,723 59,496
Minority interest in (income) of subsidiary (103,528) (19,632)
------------ ------------
Net income 210,195 39,864
Accumulated deficit, beginning of period (10,642,205) (9,677,627)
------------ ------------
Accumulated deficit, end of period $(10,432,010) $ (9,637,763)
============ ============
Basic and diluted income per share $ 36.00 $ 6.83
Basic and diluted weighted average shares 5,839 5,839
The accompanying notes are an integral part of those statements
3
Long Island Physician Holdings Corporation
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002
(unaudited)
Three months ended March 31,
2003 2002
---- -----
Cash flows from operating activities:
Net income $ 210,195 $ 39,864
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation 46,429 103,162
Minority interest in income of subsidiary 103,528 19,633
Payments in excess of capitation 518,860 (260,926)
Reinsurance recoverable 88,640 14,407
Premium receivables (2,309,727) (1,221,792)
Other current assets 96,688 107,294
Medical claims payable (322,242) 568,829
Public goods payable 847,209 1,040,415
Unearned premium revenue 755,681 910,449
Accounts payable and accrued 424,957 152,093
----------- -----------
Net cash provided by operating activities 460,218 1,473,428
----------- -----------
Cash flows from investing activities:
Increase in restricted cash and investments (17,321) (14,828)
----------- -----------
Net cash used in investing activities (17,321) (14,828)
----------- -----------
Cash flows from financing activities:
Payments on capital lease obligations (4,009) (15,790)
----------- -----------
Net cash used in financing activities (4,009) (15,790)
----------- -----------
Net change in cash and cash equivalents 438,888 1,442,810
Cash and cash equivalents, beginning of period 694,449 1,958,090
----------- -----------
Cash and cash equivalents, end of period $ 1,133,337 $ 3,400,900
=========== ===========
The accompanying notes are a integral part of those statements.
4
Long Island Physician Holdings Corporation
Notes to the Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
Background
Long Island Physician Holdings Corporation (the "Company" or "LIPH") was
formed in December 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
( Nassau and Suffolk counties). The Company is owned 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. The Company owns
67% of stock of MDNY. The Company is exclusively a holding company whose
principal assets is its investment in MDNY and conducts no operating activities
of its own. The Company's legal and other professional costs are funded by MDNY.
Basis of Presentation
The interim consolidated financial statements reflect all adjustments,
which, in the opinion of management, are necessary for a fair statement of
financial condition and results of operations for the periods presented. Except
as otherwise disclosed, all such adjustments are of a normal recurring nature.
The interim consolidated financial statements have been compiled without audit.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the full year. These interim consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's 2002 Annual Report on Form 10-K.
Certain amounts reported in the Company's consolidated statements of operations
for the three months ended March 31, 2002 have been reclassified to conform to
the 2003 presentation.
Earnings Per Share
Basic and diluted income per share is based on the number of shares of
Class A common stock and Class B common stock outstanding during the period. At
March 31, 2003 and 2002, 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 earnings per share because the exercise price was greater than the
average market price of common shares.
New Accounting Standards - In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" ("SFAS 4"), SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers" ("SFAS 44") and SFAS No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements" ("SFAS 64") and amends SFAS No. 13,
"Accounting for Leases" ("SFAS 13"). This statement updates, clarifies and
simplifies existing accounting pronouncements. As a result of rescinding SFAS 4
and SFAS 64, the criteria in APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", is
used to classify gains and losses from extinguishment of debt. SFAS 44 was no
longer necessary because the transitions under the Motor Carrier Act of 1980
were completed. SFAS 13 was amended to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and makes technical corrections to existing
pronouncements. The provisions of SFAS 145 are effective for fiscal years
beginning after May 15, 2002. The Company's adoption of SFAS 145 effective
January 1, 2003, did not have a material impact on the Company's results of
operations or financial position.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses the
recognition, measurement, and reporting of costs associated with exit or
disposal activities, and supercedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-
5
Long Island Physician Holdings Corporation
Notes to the Financial Statements
(unaudited)
3"). The principal difference between SFAS 146 and EITF 94-3 relates to the
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity, including those related to employee
termination benefits and obligations under operating leases and other contracts,
be recognized when the liability is incurred, and not necessarily the date of an
entity's commitment to an exit plan, as under EITF 94-3. SFAS 146 also
establishes that the initial measurement of a liability recognized under SFAS
146 be based on fair value. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
adopted SFAS 146 effective January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair value of
obligations it has undertaken in issuing the guarantee and also include more
detailed disclosures with respect to guarantees. FIN 45 is effective on a
prospective basis for guarantees issued or modified starting January 1, 2003 and
requires the additional disclosures in interim and annual financial statements
effective for the period ended December 31, 2002. The Company's adoption of the
initial recognition and measurement provisions of FIN 45 effective January 1,
2003, did not have a material impact on the Company's results of operations or
financial position.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 also requires disclosures about
variable interest entities that a company is not required to consolidate but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. On October 8, 2003, the FASB deferred the implementation date for FIN 46
as it relates to variable interest entities that existed prior to February 1,
2003. The consolidation requirements of FIN 46 will apply to variable interest
entities that existed prior to February 1, 2003 in financial statements issued
for periods ending after December 15, 2003 (December 31, 2003 for the Company).
Also, certain disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The adoption of this standard is not expected to have a material
impact on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of SFAS 149, effective July 1, 2003, did not
have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"),
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company's adoption of the initial
recognition and initial measurement provisions of SFAS 150, effective June 1,
2003, did not have a material impact on the Company's results of operations or
financial position.
6
Long Island Physician Holdings Corporation
Notes to the Financial Statements
(unaudited)
2. REGULATORY DEVELOPMENTS
As a condition of continued licensure by the New York State Insurance
Department ("NYSID"), MDNY Healthcare, Inc. must maintain certain reserve
requirements to protect its subscribers in the event the Company is unable to
meet its obligations. As of March 31, 2003, MDNY Healthcare, Inc. continued to
not satisfy its NYSID statutory net worth requirement of $7.8 million by
approximately $2.4 million, As a result of the impairment, NYSID directed MDNY
to take appropriate action to achieve net worth of at least $7 million (MDNY's
escrow deposit requirement) by July 10, 2003. On May 14, 2003, NYSID directed
MDNY to provide monthly financial statements. MDNY failed to meet the $7 million
funding requirement by July 10, 2003 and NYSID continues to monitor MDNY's
performance.
3. 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
Company has a substantial working capital deficit and has incurred cumulative
losses since inception. Furthermore, the Company has utilized substantially all
of the cash raised in its initial equity infusion in funding its operations and
currently is deficient in its contingent reserve fund (see footnote 5) by
approximately $3 million at December 31, 2002.
As a result of this deficiency, the New York State Insurance Department
("NYSID") issued a letter dated April 10, 2003 whereby the NYSID directed the
Company to fund the net worth to at least $7 million by July 10, 2003. The
Company has been and continues to explore investment alternatives to remedy its
impairment and will update the NYSID as to the Company's progress towards
meeting deadlines imposed by the NYSID.
During the second quarter 2000, the NYSID performed its first financial
audit of MDNY and its affiliated IPA's as of June 30, 2000. 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 stated, 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 resulted from NYSID's position
7
Long island Physician Holdings Corporation
Notes to Consolidated Financial Statements
that MIDNY should have reported that IPA's obligations in MDNY's financial
statements. MDNY's position was that the IPAs, not MDNY, are responsible for
their own obligations, and MDNY disputed NYSID's attribution of IPA liabilities
to MDNY.
On July 31, 2002, NYSID issued its Report on Examination of The MDNY
Healthcare, Inc. as of June 30, 2000 dated April 2, 2001 and revised July 31,
2002 (the "Final Report"). The Final Report states, among other things, that,
based on the execution of a Recovery and Subordination Agreement between the
Company and the NYSID, the NYSID permitted an IPA receivable to be recognized as
an admitted asset for medical claims paid by MDNY in excess of negotiated
Capitated Arrangement ("Payments in Excess of Capitation") and MDNY agrees to
enter into full-risk contracts with the IPA's and the examination insolvency was
eliminated.
Through 2001, MDNY continued to pay medical claims to Island IPA
participating providers relating to claims with dates to service prior to
January 1, 2001 in excess of capitated amounts for years prior to 2001. These
paid amounts have resulted in a net amount due from Island IPA of approximately
$22.2 million and $23.2 million, which is included in the balance sheet as
Payments in Excess of Capitation as of December 31, 2002 and 2001, respectively.
In accordance with the Recovery and Subordination Agreement, these amounts
owed to MDNY are being reduced as follows:
o Island IPA for itself and on behalf of each of its participating
providers and Catholic Health Services of Long Island ("CHS") and
its hospital affiliates (collectively the "Subordinating Parties")
agree to subordinate their rights to payment of outstanding claims
(including IBNR) owed by MDNY to all other creditors in the event of
MDNY's insolvency. The aggregate amounts owed to these Subordinating
Parties in the form of medical claims payable as of December 31,
2002 and 2001 were approximately $25,000,000 and $24,600,000,
respectively. The aggregate amount of this subordination is equal to
the amounts owed to those Subordinating Parties in the form of
medical claims payable at the time MDNY becomes insolvent.
o Effective January 1, 2002, Island IPA began retaining a
non-distributable withhold in the amount of 5% of payments to
participating providers and Island IPA has remitted the entire
amount of the withheld on a monthly basis to MDNY. During 2002, the
amount remitted to MDNY reduced the payments in excess of capitation
receivable by approximately $2 million.
o Island IPA is obligated to pay MDNY a portion of all income it
receives from sources other than MDNY. Such payments will be in an
amount equal to gross collections minus operational and
administrative expenses (the "Net Revenues") received by Island IPA
from such sources.
o The withhold remittances, network access fee and net fee described
above will remain in effect until such time as the repayment of the
debt to MDNY has been fully satisfied.
8
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
During 2003, the Company is in the process of negotiating certain
transactions that includes a potential transaction with a third party and has
implemented certain plans in order to provide liquidity to the Company and
achieve combined profitability. A summary of these transactions and plans is as
follows:
o The Company received a premium rate increase of 20%, effective
January 1, 2003.
o Management has initiated efforts to reduce operating and medical
expenses during 2003, 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.
As of March 31, 2003 MDNY reported a net operating gain of $313,724 and a GAAP
net worth of $2.4 million; a statutory net worth of $5.4 million. The contingent
reserve requirement at March 31, 2003 and December 31, 2002 was $7.8 million.
(NYSID reserve requirements are calculated, at December 31 and is based upon the
greater of the contingent reserve or escrow deposit. The contingent reserve is
calculated by incrementally adding 1% of premiums written not to exceed 5%
(i.e., $7.8 million). The escrow deposit is calculated as 5% of the following
year's expected medical costs.
In June 2003, NYSID revised and finalized its Market Conduct Report on
Examination of MDNY as of September 30, 2002 and made recommendations regarding
certain operational deficiencies found in MDNY's policies and procedures. MDNY
continues to file a report every 90 days updating NYSID of progress made on
deficiencies noted in the report.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
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 March 31, 2003, MDNY had approximately 57,206
members ("Members"), comprised of individuals and families, enrolled in its
health maintenance plans and point-of-service plans. As of December 31, 2002
membership was approximately 62,000.
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. (currently inactive) and Island Dental
Professional Association IPA, Inc. (the "IPAs"). MDNY has entered into various
contractual arrangements (the "Professional Services Agreements") with the IPAs
to arrange for the provision of applicable health care and administrative
services to the Members of MDNY. During 2001 certain other single specialty IPAs
whose providers were also participating providers to Island IPA were dissolved.
MDNY's principal source of revenue is premiums earned. Premiums earned
represented 99% of MDNY's total revenue for the quarters ended March 31, 2003
and 2002, respectively.
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
2002, MDNY continued to implement programs to reduce administrative costs.
Although MDNY was able to reduce its administrative costs by $4 million or 22%,
(on a per member per month basis) as a result of the increase in membership
associated with sole proprietors which historically have higher medical costs
than the small group market, medical costs increased 9% and commissions
increased 19%. Commissions paid to general agents and associations increased
over 2002 because the sole proprietor market prior to June 2002 could only
enroll through associations. These increases offset any savings realized on
administrative costs resulting in a net loss reported at December 31, 2002 of
$1.4 million.
As of March 31, 2003, the reported profit of $313,000 is the result of
administrative savings realized in the last half of 2002 together with the loss
in POS membership. The Company believes limiting the marketing of the POS plan
in 2003 because of historic losses helped achieve profitability in the first
quarter 2003.
MDNY seeks to control medical expenses through arrangements with its
affiliated IPAs and with non-IPA primary care physicians, 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's medical loss ratio
was 85.3% and 84.6%, respectively, for quarters ended March 2003 and 2002. As of
March 31, 2003 and 2002 enrollment was 57,206 and 56, 794 respectively.
The MDNY working capital deficit decreased from $22.3 million at December
31, 2002 to $21.4 million at March 31, 2003 primarily due to earnings generated
in the first quarter 2003.
10
Recent Developments
Certain Regulatory Matters
The New York State Department of Health ("NYSDOH") and the New York State
Insurance Department ("NYSID"), require MDNY to maintain reserves in the form of
cash and statutory net worth.
During the second quarter 2000, the NYSID performed its first financial
audit of MDNY and the IPAs as of June 30, 2000. 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 stated, 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 resulted from NYSID's position that MDNY
should have reported the IPAs' obligations in MDNY's financial statements.
MDNY's position was that the IPAs, not MDNY, are responsible for their own
obligations, and MDNY disputed NYSID's attribution of IPA liabilities to MDNY.
With respect to years prior to 2001, MDNY was contractually obligated to
pay a capitated amount to Island IPA for covered services provided by
participating providers. Through 2001, however, MDNY continued to pay medical
claims to Island IPA relating to claims with dates of service prior to January
1, 2001 in excess of capitated amounts for years prior to 2001. These payments
resulted in a net amount due from Island IPA of approximately $24 million as of
December 31, 2001. This amount due from Island IPA has been reduced to $21.6
million and $22.2 million, as reflected in MDNY's financial statements as
payments in excess of capitation as of March 31, 2003 and December 2002,
respectively. The reduction in amounts due from Island IPA is the result of a 5%
withhold on all IPA participating provider claims, described below. NYSID's
position was that this receivable, payments in excess of capitation, should be
written off, causing MDNY to be deficient in its reserves.
In order to meet NYSID's concerns, MDNY converted the capitation-based
contract with Island IPA to a fee for service based IPA Participation Agreement
effective January 1, 2001.
In addition with NYSID's approval, MDNY, Island IPA and the Catholic
Health System of Long Island, Inc. ("CHSLI"), an affiliate of CHNLI, on behalf
of five catholic hospitals that act as providers to MDNY (the "Hospitals"),
entered into a Recovery and Subordination Agreement (the "Recovery Agreement"),
dated July 12, 2001 and effective January 1, 2002. Pursuant to the Recovery
Agreement: (i) Island IPA is required to pay the Island Debt pursuant to a
Repayment Plan, whereby MDNY is obligated to withhold 5% of all revenues payable
to Island IPA participating providers, Island IPA is required to pay MDNY a
$1.50 per member per month network access fee, and Island IPA is required to pay
to MDNY the net revenue it receives from sources other than MDNY; (ii) until the
Island Debt is repaid, Island IPA, Island IPA's participating providers and the
Hospitals agreed that if MDNY becomes insolvent (pursuant to a court approved
order or admits its inability to pay its debts), their claims against MDNY will
be subordinated to all other outstanding claims in an amount equal to the amount
of the then outstanding Island Debt, and that, after payment of third party
claims, the claims of Island IPA and its providers will be subordinated to the
claims of the Hospitals; and (iii) the amount of the Island Debt outstanding
from time to time will be carried on the financial statements of MDNY as an
admitted asset.
On July 31, 2002, NYSID issued its Report on Examination of The MDNY
Healthcare, Inc. as of June 30, 2000 dated April 2, 2001 and revised July 31,
2002 (the "Final Report"). The Final Report states, among other things, that,
based on the execution of the Recovery Agreement, "the IPA receivable will be
allowed as an admitted asset and the examination insolvency will be eliminated.
[NYSID] will monitor the impact of the [Recovery] Agreement."
In January 2003, NYSID notified MDNY that MDNY was impaired by the amount
of $850,332 at September 30, 2002 and required MDNY to submit a restoration plan
to remedy the impairment. (Impairment is the amount by which reported net worth
is less than the amount of required reserves). In February 2003, MDNY submitted
a remedial plan (the "MDNY Remedial Plan") to NYSID whereby: MDNY would continue
negotiations with certain potential acquirors regarding a proposed sale of MDNY;
MDNY would engage an investment banking firm; the Company and CHNLI, as the
stockholders in MDNY, would be offered the alternative of making additional
capital contributions to MDNY or selling all or part of MDNY; and the IPA
providers had agreed to reduce the physician fee schedule effective April 1,
2003. In April 2003, NYSID accepted the MDNY Remedial Plan.
11
As of March 31, 2003 MDNY reported a net operating gain of $313,724 and a GAAP
net worth of $2.4 million; a statutory net worth of $5.4 million. The contingent
reserve requirement at March 31, 2003 and December 31, 2002 was $7.8 million.
(NYSID reserve requirements are calculated, at December 31 and is based upon the
greater of the contingent reserve or escrow deposit. The contingent reserve is
calculated by incrementally adding 1% of premiums written not to exceed 5%
(i.e., $7.8 million). The escrow deposit is calculated as 5% of the following
year's expected medical costs.
On April 1, 2003, with the filing of the December 31, 2002 Annual Report,
NYSID was notified that MDNY was impaired by $3 million. As a result of the
impairment NYSID directed MDNY to take appropriate action to achieve net worth
of at least $7 million (MDNY's escrow deposit requirement) by July 10, 2003. On
May 14 2003, NYSID directed MDNY to provide monthly financial statements. As of
March 31, 2003, MDNY was impaired by $1.6 million from the directed reserve
requirements of 7.0 million.
In June 2003, NYSID revised and finalized its Market Conduct Report on
Examination of MDNY as of September 30, 2002 and made recommendations regarding
certain operational deficiencies found in MDNY's policies and procedures. As of
November 2003, NYSID continues to monitor MDNY's performance.
The 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.
Business Strategy
In order to improve liquidity and achieve profitability, MDNY reduced the
IPA's physician fee schedule effective April 1, 2003 in order to support
improved operating results in 2003. The fee schedule reduction was implemented
effective May 15, 2003. In addition, NYSID approved an additional 10% rate
increase for MDNY's sole proprietor Members effective June 1, 2003.
In addition, MDNY historically had negative operating results on its POS
plans while achieving profitability on its HMO plans. As a result of the
significant premium rate increases on POS plans for 2003 (approximately 40%), as
of March 2003, POS membership decreased 30% and the HMO decreased 3% from
December 31, 2002. The significant decrease in POS products should help achieve
profitability for MDNY for the year ending December 31, 2003.
While the Company believes that implementation of MDNY's plans will
achieve profitability in 2003, there is no assurance that such actions will
achieve positive results from operations or adequate working capital and equity.
In accordance with the MDNY Remedial Plan, MDNY is actively pursuing the
sale of its business and assets. However, there can be no assurance that any
such sale will be completed on terms acceptable to MDNY, if at all.
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As of March 31, 2003 MDNY reported a net operating gain of $313,724 and a GAAP
net worth of $2.4 million; a statutory net worth of $5.4 million. The contingent
reserve requirement at March 31, 2003 and December 31, 2002 was $7.8 million.
(NYSID reserve requirements are calculated, at December 31 and is based upon the
greater of the contingent reserve or escrow deposit. The contingent reserve is
calculated by incrementally adding 1% of premiums written not to exceed 5%
(i.e., $7.8 million). The escrow deposit is calculated as 5% of the following
year's expected medical costs.
The following table provides certain statement of operations data
expressed as a percentage of total revenue and other statistical data for the
period ended March 31, 2003 and 2002:
2003 2002
---- ----
Revenues:
Premiums earned 99.9% 99.4%
Investment and other income 0.1 0.6
------- -------
Total revenue 100.0 100.0
------- -------
Medical claims expense 85.3 84.6
Commissions expense 4.3 4.5
General and administrative 9.4 10.4
Expenses 0.1
Depreciation -- 0.3
Total Expenses 99.1 99.8
------- -------
Operating income before taxes 0.9 0.2
Income Tax Expense 0.1 0.1
------- -------
Net Income before minority interest .8 0.2
Minority interest in income of subsidiary (0.3) (0.1)
------- -------
Net income 0.5% 0.1%
------- -------
Statistical data:
Enrollment (HMO and POS) 57,206 56,794
HMO enrollment 47,025 42,286
POS enrollment 10,181 14,508
ASO enrollment 3,723 3,434
^Member months 172,804 169,300
*Medical Loss Ratio 85.2 84.6
**Administrative Loss Ratio 13.8 15.2
*Medical loss ratio- Medical expense and net reinsurance divided by total
premium
**Administrative loss ratio-Commission expense, depreciation, and general
administrative expense divided by total premium
^ does not include ASO member months which is dental only.
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Comparison of Three Months Ended March 31, 2003 and 2002
Revenues for the period ended March 31, 2003 and 2002 were $40,337,070 up 5.1%
from $38,384,281 for the same period in the prior year respectively. At March
31, 2003, MDNY's commercial enrollees totaled approximately 57,206 as compared
to approximately 56,794 for the same period in 2002. Revenue increased $2.0
million or 5.1% in the first quarter of 2003 compared to the same period in 2002
as a result of higher premium rates increases in the first quarter of 2003
compared with the same period in 2002. Total member months for the first quarter
of 2003 increased approximately 3,504 or 2% from the same period in 2002.
Total expenses for the period ended March 31, 2003 were $39,989,847, up
4.4% from $38,292,745 for the same period in the prior year. This 4.4% increase
in expenses is the result of an increase in medical expenses. As of December 31,
2002 MDNY had approximately 62,000 members. As of March 31, 2003 enrollment had
declined to 57.206 members. Although membership dropped as a result of POS
enrollment declines, the amount of recognized claim expense in the first quarter
did not drop correspondingly due to claim development trends.
Medical claim expense stated as a percentage of premium revenues was 85.2%
for the quarter ended March 31, 2003 compared with 84.6% for the quarter ended
March 31, 2002.
Administrative expenses stated as a percentage of premium revenue was
13.8% for the first quarter of 2003 compared with 15.2% for the first quarter of
2002. This reduction was the result of reductions in staffing realized in the
first quarter of 2003 together with operational efficiencies focused on by MDNY
throughout 2002 to help offset increasing medical and commission costs.
Net gain for the quarter ended March 31, 2003 was $210,195 compared to a
net income of $39,864 for the first quarter of 2002. This increase was primarily
the result of lower administrative costs realized during the last half of 2002.
Liquidity and Capital Resources
Cash flows provided in operating activities, investing and financing
activities resulted in an overall increase in cash and cash equivalents in the
first quarter of 2003 of $438,888. The increase in net cash and cash equivalents
is directly related to the timing of payment of claims and other liabilities.
MDNY had a negative working capital of $21,430,000 at March 31, 2003
compared to a negative working capital of $22,316,000 at December 31, 2002. The
negative working capital decreased in the first quarter of 2003 primarily due to
earnings generated in the first quarter of 2003. The Company anticipates that
2003 rate increases together with the other operating initiatives described
above under the caption "Business--Business Strategy" will produce sufficient
cash flows to meet MDNY's business obligations. There can be no assurance that
MDNY will be able to achieve sufficient cash flows.
Capital Reserves and Liquidity
Certain matters relating to MDNY's regulatory status, its compliance with
applicable reserve and statutory net worth requirements and liquidity are
discussed above under the captions "Business--Recent Developments" and
"--Business Strategy."
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.
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 together with the
accrued interest brought MDNY's March 31, 2003 to a statutory net worth of $5.4
million compared to the NYSID required net worth of $7.8 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).
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, as
14
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
While many operational aspects of MDNY's business are subject to complex
federal, state and local regulations, the accounting for the Company's business
is generally straightforward with revenues primarily recognized during the
period in which MDNY Healthcare, Inc. is obligated to provide services to
subscribers. Premiums collected in advance are deferred and recorded as unearned
premium revenue in the balance sheet. Due to the nature of MDNY's business,
several of the Company's accounting policies, primarily relating to costs of
claims incurred but not reported and allowance for doubtful accounts associated
with premium and reinsurance receivables, involve significant estimates and
judgments. These accounting policies have been described in the Company's Annual
Report on Form 10-K.
Factors affecting future results
Health Insurance Portability and Accountability Act of 1996
The Secretary of the Department of Health and Human Services, or HHS, has
issued final regulations under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), designed to improve the efficiency and
effectiveness of the health care system by facilitating the electronic exchange
of information in certain financial and administrative transactions while
protecting the privacy and security of the information exchanged. Three
principal regulations have been issued: privacy regulations, security
regulations, and standards for electronic transactions.
MDNY implemented the HIPAA privacy regulations by April 2003, as required,
and is evaluating the costs of upgrading its systems and procedures to fully
comply with the security regulations by the compliance deadline of April 20,
2005.
The HIPAA regulations on electronic transactions, which the Company refers
to as the transaction standards, establish uniform standards for electronic
transactions and code sets, including the electronic transactions and code sets
used for claims, remittance advices, enrollment and eligibility. The transaction
standards became effective in October 2002, although covered entities were
eligible to obtain a one-year extension if approved through an application to
the Secretary of HHS. MDNY received this one-year extension through October 16,
2003 from HHS.
HHS issued Guidance on July 24, 2003 that it will not penalize a covered
entity for post-implementation date transactions that are not fully compliant
with the transactions standards, if the covered entity can demonstrate its good
faith efforts to comply with the standards. HHS' stated purpose for this
flexible enforcement position was to "permit health plans to mitigate unintended
adverse effects on covered entities' cash flow and business operations during
the transition to the standards, as well as on the availability and quality of
patient care."
There is a divergence of interpretation as to how the new transaction
standards are to be implemented and as a result, MDNY could face increased costs
and complexity, a temporary disruption in MDNY's business processes. MDNY is
continuing to make good faith efforts to comply with the standards. At this
time, the Company cannot estimate the potential impact of implementing (or
failing to implement) the HIPAA transaction standards on cash flows and results
of operations.
Impact of New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections". In July 2002, the FASB issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities". In April
2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". In May 2003, the FASB issued SFAS No. 150,
" Accounting for Certain Instruments with Characteristics of both Liabilities
and Equity".
The impact of the above referenced accounting standards is discussed in
Note 1 to the interim consolidated financial statements.
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, provider
reimbursement 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.
15
Certain Factors Affecting Future Operating Results
Certain statements in this Quarterly Report on Form 10-Q are forward-looking
statements and are not based on historical facts but are management's
projections or best estimates. Such forward-looking statements include but are
not limited to, statements concerning future or prospective: results of
operations or financial position, liquidity, health care and administrative
costs, premium rates and yields for commercial business, growth and retention of
membership and development of new lines of business, health care benefits,
provider networks, provider utilization rates, medical loss ratio levels, claims
payment, service performance and other operations matters, administrative loss
ratio levels, proposed efforts to control health care and administrative costs,
impact of agreements with health care providers and related organizations of
providers, reinsurance coverage for risk-transfer arrangements, enrollment
levels, government regulation such as HIPAA, PBOR, the impact of new laws and
regulation, the future of the health care industry, and the impact on MDNY of
regulatory investigations and examinations. Actual results may differ materially
from those expressed or implied by such forward-looking statements due to risks
and uncertainties, including but not limited to the following: MDNY's and the
IPAs' ability to continue as going concerns; the inability of MDNY to meet
applicable reserve and statutory net worth requirements; that MDNY will be
unable to obtain adequate capital investment or effect a sale of its business
and assets on terms acceptable to MDNY, or its shareholders, as the case may be,
if at all; that increased regulation or modification of existing regulations
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 CHNLI could reconsider
its ability to own stock in MDNY or the Diocese of Rockville Center or any of
the Hospitals affiliated with CHS could elect not to renew their respective
subscriber contracts with MDNY upon expiration in 2005 or 2006, as the case may
be, in light of MDNY's obligation to comply with the New York Women's Health and
Wellness Act, which obligates MDNY to offer contraceptive drugs and devices to
members, in conflict with the ethical policies of the Diocese of Rockville
Center; that health care costs in any given period may be greater than expected
due to general unanticipated increases in health care costs, unexpected
incidence of major cases, national emergencies, natural disasters, epidemics,
changes in physician practices, and new technologies; and that major health care
providers that previously 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.
See also the discussion under "Risks and Uncertainties" in Note 3 of the Notes
to Condensed Consolidated Financial Statements included in this Report and
matters referred to throughout Item 1 of the Company's Annual Report on Form 10K
for the fiscal year ended December 31, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Part I -- Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative
Disclosure About Market Risk."
Item 4. Controls and Procedures
Based upon an evaluation by the Company's President and Chairman of the
Board and its Chief Financial Officer within 90 days prior to the filing of this
Quarterly Report on Form 10-Q, they have concluded that the Company's disclosure
controls and procedures, as defined in Rule 15d-14(c) under the Securities
Exchange Act of 1934, as amended, are effective for gathering, analyzing and
disclosing information contained in the Company's periodic reports provided to
the Securities and Exchange Commission.
Subsequent to the Evaluation Date referred to in paragraph 4 of the
Certifications of the Company's principal executive officer and its principal
financial officer included in this report, the Company has not made any change
to its internal controls referred to in paragraph 5 of the Certifications and
there has been no change in other factors that could significantly affect these
controls.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None.
a. Exhibits
31(a) Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification
31(b) Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification
32(a) Chief Executive Officer Section 1350 Certification
32(a) Chief Financial Officer Section 1350 Certification
b. Reports on Form 8-K.
None.
(1) Filed herewith.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Long Island Physician Holdings Corporation
By: /s/ PAUL KOLKER, M.D.
--------------------------------------------
Name: Paul Kolker, M.D.,
Title: President and Chief Executive Officer
Date: February 3, 2004
18