-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TUZbXUauIaILF1bA+IwkX9SduTLxTJNM2c/kE5FvoWYHX2bFW4EvuVcLp3igPpBX VOyQBTC3fny7Bo1tMDbfVw== 0000891092-04-001837.txt : 20040422 0000891092-04-001837.hdr.sgml : 20040422 20040422113703 ACCESSION NUMBER: 0000891092-04-001837 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONG ISLAND PHYSICIAN HOLDINGS CORP CENTRAL INDEX KEY: 0001006868 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 113232989 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27654 FILM NUMBER: 04747353 BUSINESS ADDRESS: STREET 1: ONE HUNTINGTON QUADRANGLE STREET 2: SUITE 4C 01 CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5164541900 MAIL ADDRESS: STREET 1: ONE HUNTINGTON QUADRANGLE STREET 2: SUITE 4C 01 CITY: MELVILLE STATE: NY ZIP: 11747 10-K/A 1 e17584_10k.txt FORM 10-K/A 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, 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 - -------------------------------------------------------------------------------- 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 [X] No [ ] 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 [ ]. 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 December 31, 2003 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 as ownership and transfer thereof is restricted pursuant to the Registrant's By-laws, and there is no trading market for such stock. Documents incorporated by reference: Portions of the Registrant's Proxy Statement for its 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. 2 Explanatory Note The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (the "Annual Report") was inadvertently filed initially as a Form 10-K/A. This Form 10-K/A is filed for the sole purpose of revising the cover page of the Annual Report to reflect the Company's intention to file the Annual Report initially as a Form 10-K and not as a Form 10-K/A. The cover page of the Annual Report filed herewith has been so revised and identifies the Annual Report as a Form 10-K. There are no other differences between the Annual Report as filed herewith and the Annual Report as initially filed. 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. 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: the inability of MDNY to meet applicable reserve and statutory net worth requirements; that CHNLI has notified the Company and MDNY that CHNLI desires to withdraw as an MDNY shareholder by December 31, 2004; that the Diocese of Rockville Center and the Hospitals affiliated with CHSLI may elect not to renew their respective subscriber contracts with MDNY upon expiration thereof effective January 1 2005 and 2006, respectively, 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 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; and 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 general unanticipated increases in health care costs, unexpected incidence of major cases, national emergencies, natural disasters, epidemics, changes in physician practices, and new technologies. PART I Item 1. Business Company Overview Long Island Physician Holdings Corporation (the "Company" or "LIPH") is a New York corporation formed in 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, 2003, MDNY had approximately 47,000 members ("Members"), comprised of individuals and families, enrolled in its health maintenance plans and point-of-service plans. 4 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. 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 from medical claim obligations due by Island IPA to providers of approximately $23.2 million at December 31, 2001, reflected in MDNY's financial statements as payments in excess of capitation as of December 31, 2001 (the "Island Debt"). NYSID's position was that the Island Debt should be carried on the financial statements of MDNY as a liability of MDNY and not of Island IPA, 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 Services 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 and Subordination Agreement"), dated July 12, 2001 and effective January 1, 2002. The Recovery and Subordination Agreement provides, among other things, as follows: (i) Island IPA is required to pay the Island Debt pursuant to a Repayment Plan whereby Island IPA is obligated to withhold, and remit to MDNY, 5% of all payments due to Island IPA 5 participating providers (the "IPA Withhold"), MDNY will make claims payments to Island IPA or its participating providers on a fee-for-service basis, 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 (a), in the event that MDNY becomes insolvent (pursuant to a court approved order or admits its inability to pay its debts), to subordinate their rights to payment by MDNY of outstanding claims (including IBNR) to all other outstanding claims in an amount equal to the amount of the then outstanding Island Debt, and (b) 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. The aggregate amount owed by MDNY to the subordinating parties in the form of medical claims payable was approximately $20 million and $25 million as of December 31, 2003 and 2002, respectively. In 2003 and 2002 the Island Debt was adjusted for additional claims and reduced by the IPA Withhold pursuant to the Recovery and Subordination Agreement. The Island Debt was approximately $20.0 million and $22.2 million at December 31, 2003 and 2002, respectively. 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 and Subordination 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 and Subordination] 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 agreed to reduce the physician fee schedule effective April 1, 2003. In April 2003, NYSID accepted the MDNY Remedial Plan. In accordance with the MDNY Remedial Plan, MDNY engaged an outside financial adviser to pursue the sale of its business and assets. No such sale is currently anticipated. On April 10, 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. 6 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 December 31, 2003 MDNY reported a net operating gain of $1.3 million and statutory net worth of $6.3 million. The contingent reserve requirement at December 31, 2003 was $7.7 million. (NYSID reserve requirements are calculated 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., $7.7 million)). The escrow deposit is calculated as 5% of the following year's expected medical costs. MDNY's contingent reserve is currently capped at 5% of current billed premium. 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. According to the NYSID Final Report, the composition of MDNY's Board of Directors does not comply with Part 98-1.11(f) of the Administrative Rules and Regulations of the NYSDOH, which requires that at least 20% of MDNY's directors must be enrollees of MDNY. The NYSID Final Report recommends that the requisite number of "enrollee representatives" be elected to MDNY's Board of Directors. MDNY and its shareholders, LIPH and CHNLI, are in the process of changing the composition and number of MDNY's Directors so as to include the requisite number of enrollee representatives and of effecting corresponding amendments to MDNY's certificate of incorporation and by-laws. Recent Developments MDNY is subject to the New York Women's Health and Wellness Act, which, as of January 1, 2003, obligates MDNY to provide contraceptive drugs and devices to its members, in conflict with the ethical policies of the Diocese, to which CHNLI and CHSLI are subject. In light of this conflict, CHNLI has notified the Company and MDNY of CHNLI's desire to withdraw as an MDNY shareholder by December 31, 2004, and that the Diocese and CHSLI, on behalf of the Hospitals, will not renew their respective current subscriber contracts with MDNY upon expiration thereof effective January 1, 2005 and 2006, respectively. MDNY provides health care insurance to the employees of the Diocese of Rockville Center (the "Diocese") and employees of the Hospitals affiliated with CHSLI. At December 31, 2003, a total of 13,429 Members in MDNY were enrolled from CHSLI and the Diocese. Premiums from the Diocese and the Hospitals represented approximately 27% and 30% of total premiums earned by MDNY during both 2003 and 2002. If MDNY's subscriber contracts with the Diocese and CHSLI were to expire, the loss of business could have a material adverse effect on MDNY's business and financial condition. During the first quarter of 2004, the Company and MDNY had preliminary discussions with CHNLI and CHSLI regarding a potential restructuring whereby CHNLI would exit as an MDNY shareholder and MDNY would act as a third party administrator of benefits to employees of the Diocese and the Hospitals, which would become self-insured upon expiration of their 7 respective subscriber contracts with MDNY. In such event, MDNY would receive a monthly fee for providing underwriting, medical management, claims processing and other administrative services to the Diocese and the Hospitals but would not assume insurance risk for the cost of providing health care benefits to employees of the Diocese and the Hospitals. There can be no assurance that the Company and MDNY will be able to effect such a restructuring of CHNLI's status as a shareholder in MDNY and of MDNY's provision of health care benefits or administrative services to employees of the Diocese and the Hospitals on terms acceptable to the Company and MDNY, if at all. As a result of incurring deficits of approximately $2.4 million in hospital risk pools during 1997 and 1998 relating to risk sharing agreements between MDNY and CHSLI, MDNY and CHSLI entered into agreements dated May 10, 1999 and August 13, 1999 whereby CHSLI agreed to pay MDNY $2.4 million by December 31, 2003. CHSLI paid such amount to MDNY on March 30, 2004. Business Strategy MDNY is focusing on the following six areas in 2004 to achieve profitability and enrollment growth: o Applying for an Article 42 (accident and health company) license to allow MDNY to develop new products and benefit plan designs and match increased cost sharing provisions that certain of MDNY's competitors have marketed to their customers. o Achieving administrative efficiencies by, among other things, increased use of automation and electronic transmission. o Marketing to brokers in Nassau and Suffolk Counties, New York to increase name recognition and promote enrollment growth. o Expanding into Queens County, New York, where MDNY has an established provider network. o Expanding marketing of MDNY's self-insured products. o Reduced marketing of MDNY's POS products, which have historically been unprofitable. Effective January 1, 2004, NYSID approved additional 10% and 12% rate increases for MDNY's HMO and POS sole proprietor products respectively. The Company anticipates that the increased differential on the sole proprietor POS Products should help offset historical negative operating results of MDNY's POS Products. While the Company believes that implementation of MDNY's plans will achieve profitability in 2004, there is no assurance that such actions will achieve positive results from operations or adequate working capital and equity. 8 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 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 levels in MDNY's service area. These competitors generally 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, by offering greater benefits for a smaller premium payment, or by offering products outside of the scope of MDNY's licensure. Additional competitors may enter MDNY's markets at any time 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 developed products with premium rates below MDNY's based upon benefit plan designs that are outside of the scope of MDNY's licensure. 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 payments to the IPAs' participating providers. 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. At December 31, 2003, MDNY had 103 full-time employees, including its Chief Executive Officer, Chief Financial Officer and Chief Medical Officer. MDNY's operations commenced on January 1, 1996. MDNY provides health care insurance 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 and other supplemental benefits through the purchase of benefit plan "riders". At December 31, 2003, MDNY had approximately 47,000 Members, comprised of individuals and families, enrolled in its health maintenance plans. MDNY's primary product lines include point-of-service plans and traditional HMO plans. A significant component of MDNY's membership and, therefore, 9 premium revenue is derived from small groups and sole proprietors enrolling through associations or, after June 1, 2003, directly. This Member group has traditionally experienced higher medical loss ratios than the other groups in MDNY's Member base. Effective January 1, 2003, NYSID approved a 10% rate increase with respect to HMO sole proprietor products and a 12% differential to POS sole proprietor members to help offset the higher medical loss ratio associated with this Member group. MDNY's 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 arranges for the provision of medical and surgical services and Island Dental Professional Association IPA, Inc. arranges for the provision of dental services. Island Behavioral Health Association IPA, Inc., which arranged for the provision of behavioral health services including psychiatry, became inactive in 2002. Each IPA is responsible for contracting with individual health care providers and for overseeing the initial and continuous screening of participating health care providers. MDNY made direct payments to IPA participating providers in 2003 for professional and ancillary services rendered to Members. All physicians who, through their contractual relationship with an IPA, participate in MDNY's provider network are required to participate in MDNY's quality improvement and utilization review programs. The quality improvement program is designed not only to maintain but also to continually improve the delivery of necessary 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 relating to 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, such as 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 appeals, complaints and procedures for members and participating physician providers. All appeals, complaints, and grievances are investigated and resolved pursuant to the procedures established by MDNY in accordance with New York State regulations. 10 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 information by telefax 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. The Company is subject to the risk of disruption in MDNY's health care provider network. Network hospitals and other health care providers could terminate their contracts with MDNY. All MDNY contracts with hospitals that serve a significant portion of its business are generally subject to multiple year contracts. All hospital contracts can be terminated on specified notice. MDNY is routinely engaged in negotiations with health care providers, including various hospitals and hospital systems, involving payment arrangements and other contract terms. During such negotiations, hospitals, hospital systems, physicians and other providers may threaten to or, in fact, provide notice of termination of their agreement with MDNY as part of their negotiation strategy. These disputes could adversely affect MDNY or could expose MDNY to regulatory or other liabilities. Cost-containment arrangements entered into by MDNY could be adversely affected by difficulties encountered in the implementation or administration of such agreements, regulatory actions, contractual disputes, or the failure of the providers to comply with the terms of such agreements. Furthermore, the effect of mergers and consolidations of health care providers or potential unionization of, or concerted action by, physicians, hospitals or other providers in MDNY's service areas, could enhance the providers' bargaining power with respect to higher reimbursement levels and changes to MDNY's utilization review and administrative procedures. MDNY has contracts with approximately 30 hospitals in its Long Island, New York service area providing for inpatient and outpatient care to MDNY's members. MDNY reimburses hospitals under these contracts based on negotiated per diems, diagnostic related groups ("DRGs"), case rates and fee schedules and, to a lesser extent, at prices discounted from the hospital's billed charges. The Company believes that the rates in these contracts are generally competitive. MDNY has various multi-year agreements subject to annual price negotiation with hospitals and hospital systems that are designed to provide predictability with respect to hospital costs and is currently negotiating with other hospital and hospital systems for similar multi-year arrangements. Contract pricing with 24 hospitals is subject to renegotiation in 2004. In addition, there has been significant consolidation among hospitals in MDNY's service area, which tends to enhance the combined entity's bargaining power with managed care payors. As a result, MDNY has the risk that certain hospitals may seek higher rates or seek to impose limitations on MDNY's utilization management efforts. The Company cannot guaranty that MDNY will be able to continue to secure multi-year agreements in the future. 11 MDNY Products Provided below are summary descriptions of MDNY's main products. The benefits actually provided to MDNY Members with respect to such products may vary depending upon the certificate of coverage filed by MDNY with NYSID. HMO Product MDNY's HMO products are offered through two plan designs: MDFlex and MDFocus, which were previously marketed as MDValue, MDSelect and MDClassic ("HMO Product"). Although currently there are members enrolled in MDValue, MDSelect and MDClassic plans, MDNY stopped actively marketing these plans as of January 1, 2001. MDFocus and MDFlex plans are offered with a comprehensive selection of copays and require the Member to select a personal physician who specializes in primary care (a primary care physician or "PCP") to oversee their healthcare needs. In the MDFlex program, the Member must stay within MDNY's extensive participating provider network for healthcare services and is required to obtain referrals for out-of-network care. In the MDFocusplan, members have access to a more defined, selective network. All MDNY plans allow members direct access to specialists without a referral. HMO Product premiums accounted for approximately 79%, 72% and 68% of total premiums earned by MDNY in 2003, 2002 and 2001, 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 MDFlex and MDFocus programs. POS Product premiums accounted for approximately 21%, 28% and 32% of total premiums earned in 2003, 2002 and 2001, respectively. Individual Products MDNY provides HMO and POS Products to individuals who reside or work in Nassau or Suffolk County, New York. New York State regulations require HMOs in the community-rated small group market to offer products with mandated benefits. Individual Members in the small group market have access to MDNY's flex network. At December 31, 2003 and 2002 MDNY had 599 and 722 individual Members, respectively, who accounted for 2% of total premiums earned in both 2003 and 2002. Sole Proprietor Products MDNY provides HMO and POS Products to sole proprietors. New York law requires health insurers that issue coverage through associations to offer the same coverage to sole 12 proprietors. New York law permits health insurers to classify sole proprietors in their own community rating category and prohibits rates for sole proprietor coverage from exceeding 120% of the rates established for identical coverage issued to a group. MDNY has approval for a 10% and 12% rate differential between sole proprietors and associations on its HMO and POS Products, respectively. MDNY has contracts with approximately 10 associations for which MDNY offers both small group and sole proprietor coverage. Members who meet eligibility requirements as sole proprietors have access to products sold through the association or directly from internal sales representatives. At December 31, 2003 and 2002, MDNY had approximately 16,200 and 20,200 sole proprietor Members, respectively, who accounted for 34% and 37% of total premiums earned in 2003 and 2002, respectively. HNY (Healthy New York) Products As required by the Health Care Reform Act 2000 ("HCRA"), MDNY offers two HMO products that offer a specified benefit package designed by the State of New York. Healthy New York is a program designed to make reduced cost comprehensive health insurance available to small businesses (including sole proprietors) that currently do not provide health insurance to their employees. Qualified individuals who work for employers that do not provide health insurance may also purchase these products. Specific participation criteria must be met to purchase these products. At December 31, 2003 and 2002, MDNY had approximately 496 and 196 Members, respectively, who purchased these products, which accounted for less than 1% and 0.2% of total premiums earned in 2003 and 2002, respectively. Marketing MDNY markets its products through 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. 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, 2003, MDNY Preferred Network, Inc. had no operations or financial activity. Mdnyhealthcare.org MDNY's website, www.mdnyhealthcare.org, provides on-line access to MDNY for its members, brokers, employer groups and providers. During 2003 and 2004, MDNY Members continued to increase their use of the website. Government Regulation Federal and state laws and regulations impose substantial requirements on MDNY regarding such matters as licensure, provider networks, medical care delivery and quality assurance programs, provider contracts (including but not limited to contracts that involve risk sharing or transfer), certain administrative services contracts, approval of contracts with health 13 care providers and administrative services providers, claims payment standards, minimum coverage obligations, including mandatory benefits, policy language, mandatory product offerings, utilization review standards and procedures, including internal and external member and provider appeals and financial condition, and disclosures to members and providers. In addition, MDNY is subject to state and federal laws and regulations relating to financial requirements and regulations relating to premium rates, loss ratios, cash reserves, minimum net worth, participation in certain state-wide risk spreading pools among insurers, and transactions between affiliated companies, including dividends. Recently enacted state and federal laws and regulations impose additional requirements on MDNY relating to security and confidentiality of health care information. As part of the regulatory process, MDNY is required to file periodic reports with the relevant state agencies relating to, among other things, operations, premium rates and covered benefits, financial condition and marketing practices. 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 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. As a New York State certified HMO, MDNY is subject to the New York Women's Health and Wellness Act. The Act provides, among other things, that, subject to certain exceptions (including for certain Religious Employers, as defined in the Act) all policies issued, renewed, 14 modified or altered on or after January 1, 2003 must provide FDA approved contraceptive drugs and devices as part of prescription drug coverage through the addition of a rider. 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. MDNY is also affected by certain state regulated risk allocation pools and state health care public policy initiatives. The risk allocation pools are designed primarily to spread the claims risk. New York also impose assessments that are used to fund the state health and insurance departments and other state initiatives. Examples of these programs include, but are not limited to: the New York Market Stabilization Pools, which require insurers participating in the small group and individual insurance market in New York to contribute certain amounts to, or receive certain amounts from, the New York Stabilization Pools based upon certain criteria outlined in the applicable regulations; and the New York Stop Loss Pools, which provide insurers participating in certain mandated programs in New York with a limited amount of stop loss insurance for claims paid under these programs. In 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 ("BDCC"), graduate medical education ("GME") 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. HCRA, GME and BDCC assessments were reauthorized effective July 1, 2003 through June 30, 2005. The state of the economy has affected individual states' budgets, which could result in New York attempting to defray these costs through increased taxes, new taxes, increased assessments and new assessments on the programs in which MDNY participates such as the New York GME and BDCC programs and other programs. The New York State 2003-2004 budget includes, among other things, a premium tax increase of 75%, a 10% increase in the BDCC assessment, an increase in excess of 5% in the GME assessment, and an approximate 19% increase in the assessment for the NYSID and NYDOH budgets (to which MDNY is required to contribute). Although MDNY could attempt to mitigate or cover its exposure from such increased costs through, among other things, increases in premiums, there can be no assurance that MDNY will be able to mitigate or cover all of such costs resulting from the New York State budget. Although MDNY has attempted to modify its product offerings to address the changing needs of its membership, there can be no assurance that the effects of the current downturn in economic conditions will not cause its existing membership to seek health coverage alternatives that MDNY does not offer or will not result in significant membership loss, lower average premium yields or decreased margins on continuing membership. 15 During the past several years, New York has enacted significant pieces of legislation relating to managed care plans which contain provisions relating to, among other things, consumer disclosure, utilization review, removal of providers from the network, appeals processes for both providers and members, mandatory benefits and products, including infertility and clinical trials, state funding pools, prompt payment and provider contract requirements. NYSID has re-interpreted existing law and regulations to limit the ability to apply contract exclusions. The impact of this re-interpretation is that additional claims will be reviewed for demonstration of medical necessity, and more appeals may be submitted to external review. 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 2003, five claims were submitted and closed for external review. 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 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 Quality Assurance Reporting Requirements; and the results of a consumer satisfaction survey conducted by MDNY. Pursuant to the prompt payment guidelines established under New York law, 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 disputed, the insurer or HMO must notify the provider within 30 calendar days of receipt and request additional information if necessary. In addition, interest on late claims and 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 16 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. MDNY is a federally qualified HMO. 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. The federal Health Insurance Portability and Accountability Act of 1996 ("HIPAA") has had a significant effect on MDNY's operations. Regulations promulgated under HIPAA seek, among other things, 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. HIPAA also imposed 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 associates. The U.S. Department of Health & Human Services ("DHHS") was directed to develop rules for standardizing electronic transmission of health care information and to protect its security and privacy. Under these rules, health plans, clearinghouses and providers will now be required to (a) comply with a variety of requirements concerning their use and disclosure of individuals' protected health information, (b) establish rigorous internal procedures to protect health information and (c) enter into business associate contracts with those companies to whom protected health information is disclosed. Violations of these rules will be subject to significant penalties. The final privacy rules do not provide for complete federal preemption of state laws, but rather preempt all contrary state laws unless the state law is more stringent. HIPAA privacy rules could expose MDNY to additional liability for, among other things, violations by its business associates. HIPAA's requirements with regard to privacy and confidentiality became effective as of April 2003. Also as part of HIPAA, DHHS issued final rules, effective October 2003, standardizing electronic transactions between health plans, providers and clearinghouses. Health plans, providers and clearinghouses, including MDNY, are required to conform their electronic and data processing systems with HIPAA's electronic transaction requirements. MDNY's incremental costs for HIPAA 17 compliance were $210,000 in 2003 and MDNY believes that it will incur additional costs in 2004 and beyond. However, the Company cannot predict the ultimate impact HIPAA will have on MDNY's business and results of operations in future periods. The Employee Retirement Income Security Act of 1974 ("ERISA") governs employee welfare plans, including self-funded plans. There have been recent legislative attempts to limit ERISA's preemptive effect on state laws. If such limitations are enacted, they might increase MDNY's exposure under state law claims that relate to self-funded plans administered by MDNY and may permit greater state regulation of other aspects of those business operations. The Mental Health Parity Act of 1996 prohibits group health plans and health insurance issuers providing mental health benefits from imposing lower aggregate annual or lifetime dollar-limits on mental health benefits than any such limits for medical or surgical benefits. These requirements do not apply to small employers who have no more than 50 employees or to any group health plan whose costs increase one per cent or more due to the application of these requirements. The Newborns' and Mothers' Health Protection Act of 1996 generally prohibits group health plans and health insurance issuers from restricting benefits for a mother's or newborn child's hospital stay in connection with childbirth to less than 48 hours for vaginal delivery and to less than 96 house for cesarean section. Proposed Federal and State Legislation State and federal government authorities are continually considering changes to laws and regulations applicable to MDNY. Over the past several years there has been significant controversy over allegations that payment for care has been inappropriately withheld or delayed by health care plans. This has led to significant public and political support for reform of health care regulation. The U.S. Congress and New York routinely consider regulation or legislation relating to mandatory coverage of certain benefits, provider compensation arrangements, health plan liability in cases when members do not receive appropriate or timely care, disclosure and composition of physician networks, health plan solvency standards and procedures dictating health plan utilization management and claim payment standards, among other matters. In recent years, bills have been introduced in the legislature in New York, including some form of the so-called "Any Willing Provider" initiative which would require HMOs to allow any provider or facility meeting their credentialing criteria and willing to accept the HMOs reimbursement and conditions of participation to join their network regardless of geographic need, hospital admitting privileges and other important factors. Certain of these bills have also included provisions relating to mandatory disclosure of medical management policies and physician reimbursement methodologies. Numerous other health care proposals have been introduced in the U.S. Congress and in the state legislature. These include provisions which place limitations on premium levels, impose liability on health plans in cases when members do not receive appropriate or timely care, increase minimum capital and reserves and other financial viability requirements, prohibit or limit capitated arrangements or provider financial incentives, mandate benefits (including coverage of early intervention services, mandatory length of stay with surgery or emergency room coverage), define medical necessity and an antitrust exemption to permit competing health care professionals to bargain collectively with health plans and other entities. 18 Congress is also considering proposals relating to health care reform, including a comprehensive package of requirements on managed care plans called the Patient Bill of Rights ("PBOR") legislation. These proposals seek to hold health plans liable for claims regarding health care delivery and accusations of improper denial of care, among other items. PBOR, if enacted, could expose MDNY to significant litigation risk. Such litigation could be costly to the Company and could have a significant effect on the Company's results of operations. Although the Company could attempt to mitigate or cover the effects of such costs through, among other things, increases in premiums, there can be no assurance that the Company will be able to mitigate or cover the costs stemming from such PBOR legislation or the other costs incurred in connection with complying with such PBOR legislation. In addition, on June 19, 2003, the United States House of Representatives passed legislation permitting small businesses to pool together as Association health Plans ("AHPs") to purchase or self-fund health care coverage. The legislation provides AHPs with significant regulatory and rating advantages which would prevail over state and federal law applicable to most insurers and HMOs, including the Company. The United States Senate has not taken any action on the legislation. Recently enacted legislation and the proposed regulatory and legislative changes described above, if enacted, could increase health care costs and administrative expenses and otherwise adversely affect the business, results of operations and financial condition of the Company and its competitors. Availability of SEC Reports The Company does not maintain an internet web site and therefore does not make its periodic and current reports available on the internet. Upon written request, the Company will make available electronic or paper copies of its filings free of charge. 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 March 31, 2008. Annual rent is $476,000. 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 MDNY is party to a number of claims and lawsuits arising out of the normal course of business. Certain of these actions seek damages in various amounts. In most cases, such claims are covered by insurance. The Company believes that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows. 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 2003 through the solicitation of proxies or otherwise. 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters There is no trading market for the shares of the Company's Common Stock, as ownership thereof is restricted pursuant to the Company's By-laws to certain physicians and other medical practitioners resident in and licensed by New York State with office-based practices on Long Island, New York, and transfer thereof is restricted pursuant to the Company's By-laws. Under certain circumstances, the Company has the right, pursuant to the Company's By-laws, 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, 2003 there were 1,506 shareholders of record of the Company's Class A Common Stock and 4,333 holders of record of the Company's Class B Common Stock. The Company made no repurchase of any of its securities during the fourth quarter of 2003. Item 6. Selected Consolidated Financial Data The following selected financial data for each year in the five-year period ended December 31, 2003 have been derived from the Company's audited consolidated financial statements. The information below is qualified by reference to and should be read in conjunction with the audited consolidated financial statements and related notes, and other financial information included elsewhere herein. 20 Statement of Operations Data: (in thousands, except per share data)
Year ended December 31, ------------------------------------------------------------- Revenue: 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Premiums earned $ 153,276 $ 158,310 $ 146,505 $ 188,929 $ 146,339 --------- --------- --------- --------- --------- Expenses: IPA medical expenses 131,793 137,161 123,401 152,829 117,682 Excess IPA capitation -- -- -- 6,000 -- Commission expense 6,245 6,731 5,611 6,412 4,149 Reinsurance, net 409 609 300 594 500 Management fees -- -- -- 11,264 19,430 General and admin expenses 13,528 15,541 20,150 9,771 6,121 Depreciation 162 337 498 167 -- --------- --------- --------- --------- --------- Total expenses 152,137 160,379 149,960 187,037 147,882 --------- --------- --------- --------- --------- Operating income (loss) 1,139 (2,069) (3,455) 1,892 (1,543) Investment income 394 676 1,957 2,744 404 Income (loss) before income taxes/minority interest 1,533 (1,393) (1,498) 4,636 (1,139) Provision for income taxes (87) (46) -- (91) -- Minority interest in (income) loss of subsidiary (436) 475 490 (1,573) 337 Net income (loss) $ 1,010 $ (964) $ (1,008) $ 2,972 $ (802) ========= ========= ========= ========= ========= Basic and diluted income (loss) per share $ 173 $ (165) $ (173) $ 509 $ (137) 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, ---------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Working capital/(deficiency) (16,951) (19,934) (19,014) 334 (2,397) Total assets 45,994 43,881 45,199 25,279 20,573 Long-term debt 3,346 3,247 3,135 2,969 2,746 Total liabilities 42,465 41,798 41,676 20,258 20,286 Minority interest 1,683 1,247 1,722 2,213 640 Shareholders' equity/(Deficiency in assets) 1,846 836 1,801 2,808 (353)
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. 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 21 of its own. The Company's administrative, legal, accounting and insurance costs are funded by MDNY. Total costs funded by MDNY were $219,171 as of December 31, 2003. MDNY's principal source of revenue is premiums earned from its HMO and POS Products. Other revenue consists principally of interest income for 2003. 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 2003, MDNY continued to implement programs to reduce administrative costs. Although MDNY was able to reduce its administrative costs by $2 million from 2002, these costs, stated on a per member per month ("pmpm") basis, remained approximately $21 pmpm at December 31, 2003 and 2002, respectively. This was primarily due to MDNY's overall 25% drop in enrollment. Results for 2003 were positively affected by NYSID's approval of a 10% sole proprietor differential in premium yields in June 2003, together with a loss of members subscribing for POS Products, which historically had negative operating results. Premium yields were sufficient to offset the increase in HCRA surcharges (31% on a pmpm basis) and fee for service medical expenses (8.5% on a pmpm basis) in 2003 from 2002 and achieve a profit of $1.3 million for 2003. The following tables show plan statistics, revenues earned, and certain other selected information: 2003 2002 %inc(dec) %inc(dec) ---- ---- --------- --------- Enrollment 47,029 62,640 (15,611) (25%) Enrollment (months) 626,106 712,660 (86,554) (12%) Premiums $153,276 $158,310 (5,034) (3.2%) Medical Expenses (excl. HCRA surcharge) $127,110 $133,365 (6,255) (5%) HCRA surcharge $ 5,092 $ 4,405 687 16% Total Medical $132,202 $137,770 5,566 (4.0%) Administrative $ 13,528 $ 15,541 (2,013) (13)% Commissions $ 6,245 $ 6,731 (486) (7)% 22 2003 2002 %inc(dec) ---- ---- --------- Premium pmpm $ 244.81 $ 222.14 10% Medical pmpm $ 203.02 $ 187.14 8.5% HCRA pmpm 8.13 6.18 31.6% Total medical pmpm $ 211.15 $ 193.32 9.2% Administrative pmpm $ 21.61 $ 21.81 (.9%) Commissions pmpm $ 9.97 $ 9.45 5.5% 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, including the HCRA surcharge was 86% and 87%, respectively, for 2003 and 2002. During 2003, MDNY's working capital deficit decreased by $2.9 million from 2002 as Island IPA continued to pay the IPA Withhold to MDNY under the Recovery and Subordination Agreement, thereby reducing the Island Debt. See "Business-Certain Regulatory Matters" in Item 1 above. Positive operating results for the year ended December 31, 2003 further contributed to the overall decrease in the working capital deficit. The New York State Insurance Department has created Market Stabilization Pools (the "New York Stabilization Pool") for the small group and individual insurance markets. This pool operates on a calendar year basis. According to state regulations, certain insurers participating in the small group and/or individual markets will be required to make payments to the New York Stabilization Pool, and other insurers will receive payments from the New York Stabilization Pool. For the years 1999 and prior, two separate pools operated. Demographic data submitted by insurers was used to determine payments to and payments from one pool. Data related to the incidence of certain specified medical conditions was used to determine payments to and/ or from another pool. For the years subsequent to 1999, a single pool operates based on the experience of each insurer with respect to specified medical conditions. At December 31, 2003, MDNY had recorded a receivable of approximately $618,000 associated with the demographic pools for years 1998 and 1999. At December 31, 2003, MDNY had not established reserves or receivables as a result of the new methodology effective for fiscal years ended 1999-2003. Regional factors published by the NYSID have not been released to indicate whether MDNY would be a payor or payee based upon the revised methodology and submissions. Based upon the uncertainty at December 31, 2003, the Company is not able to quantify this contingency. MDNY has also established a receivable of approximately $833,400 at December 31, 2003 related to certain stop loss pools (together with the New York Stabilization Pool, the "Pools") established by the State of New York under the Health Care Reform Act of New York which provides a limited amount of stop loss insurance funds to cover 90% of certain paid claims for certain New York Mandated Plans and for the Healthy New York Plan. The regulations 23 governing the stop loss pools were extended by the New York State legislature until June 30, 2005. While MDNY has established its recoveries under the Pools based on its interpretations of the regulations, the amounts recorded related to the Pools may differ materially from the amounts that will ultimately be paid or received from the Pools based on final reconciliations. There can be no assurance that MDNY will receive additional funds in the future related to the Pools. 24 Results of Operations The following table provides certain statement of operations data expressed as a percentage of total premium revenue and other statistical data for the years indicated: Statement of Operations Data Year ended December 31, -------------------------------- Revenue: 2003 2002 2001 ---- ---- ---- Premiums earned 100.0% 100.0% 100.0% Expenses: IPA medical expenses 86.0 86.6 84.2 Commissions expense 4.1 4.2 3.8 Reinsurance expense, net -- .4 .2 General and administrative expenses 8.8 9.8 13.7 Depreciation .1 .2 .3 Total expenses (99.3) (101.3) (102.4) Operating income (loss) .7 (1.3) (2.4) Investment and other income .3 .4 1.3 Income (loss) before income taxes/ minority interest 1.0 (.9) (1.0) Provision for income taxes .05 .03 -- Minority interest in subsidiary (.3) .3 .3 Net income (loss) .7 (.6) (.7) Statistical Data: Enrollment 47,029 62,853 55,361 Member months 626,106 713,714 695,596 * Medical loss ratio 86.0% 87.0% 84.4% ** Administrative loss ratio 13.0% 14.2% 17.7% - -------------------------------------------------------------------------------- * 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. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Premiums earned for the year ended December 31, 2003 and 2002 were approximately $153,276,000 and $158,310,000, respectively. At December 31, 2003, MDNY's commercial enrollees totaled approximately 47,000, as compared to approximately 62,000 at December 31, 2002. Revenue decreased $5,316,000 or 3.3% in 2003 compared to 2002 as a result of decreased member months of 12% partially offset by increases in premium yields of approximately 10% 25 in 2003 compared with 2002. Overall membership decreased at December 31, 2003 primarily due to annual premium rate increases of 30% on POS Products and 10% on HMO Products. Total expenses for the year ended December 31, 2003 were $152,136,657 as compared to $160,379,021 for the year ended December 31, 2002. This 5% decrease in expenses is the result of lower medical expenses consistent with the overall 25% decrease in enrollment partially offset by an increase in overall medical costs of 9.2%. In addition, total administrative costs decreased 13% from 2002 consistent with MDNY's continued focus on streamlining administrative functions as enrollment declined in 2003. Health care service expense stated as a percentage of premium revenues was 86% for 2003 compared with 87% for 2002. Total medical expenses for the year ended December 31, 2003 decreased $5,567,000 or 4% from 2002. This decrease is primarily the result of the overall 25% decrease in enrollment from 2002. This decrease in medical expenses was offset by an increase in HCRA public goods expense for the year ended December 31, 2003 of $688,000 or 15.6% from 2002. This increase is consistent with percentage increases on 2003 BDCC and GME assessments imposed by HCRA effective July 1, 2003. - -------------------------------------------------------------------------------- Expenses: December 31, 2003 December 31, 2002 % change - -------------------------------------------------------------------------------- Medical fee for service claims $127,109,852 $133,364,255 5% - -------------------------------------------------------------------------------- HCRA public goods expense $5,092,376 $4,404,680 15.6% - -------------------------------------------------------------------------------- Total medical expense $132,202,228 $137,768,935 (4.0)% - -------------------------------------------------------------------------------- Administrative expenses stated as a percentage of premium revenue were 13% for 2003 compared with 14.2% for 2002. This reduction was the result of continued reductions in staffing throughout 2003 as a result of declining enrollment and operational efficiencies in 2003, which helped achieve profitability and offset increases in medical and commission costs. Net profit for the year ended December 31, 2003 was approximately $1,010,000, compared to a net loss of $(964,000) for 2002. This positive result in 2003 is primarily the result of higher premium yields (10%) over 2003 together with a change in membership mix and reductions in administrative costs realized in 2003. In 2003, 86% of the membership was comprised of HMO members as opposed to 77% in 2002. The HMO Products were profitable in 2003 and 2002. See the table below. 26 - -------------------------------------------------------------------------------- Product HMO POS Total - -------------------------------------------------------------------------------- Membership at Dec 31, 2003 40,357 6,672 47,029 - -------------------------------------------------------------------------------- Membership at Dec. 31, 2002 48,083 14,557 62,640 - -------------------------------------------------------------------------------- % Membership mix 2003 86% 14% 100% - -------------------------------------------------------------------------------- % Membership mix 2002 77% 23% 100% - -------------------------------------------------------------------------------- Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Premiums earned for the year ended December 31, 2002 and 2001 were approximately $158,310,000 and $146,505,000, respectively. At December 31, 2002, MDNY's commercial enrollees totaled approximately 62,000 as compared to approximately 55,000 at December 31, 2001. Revenue increased $10.5 million or 7.1% in 2002 compared to 2001 as a result of increased member months and premium rates in 2002 compared with 2001. Total member months for 2002 increased approximately 7,118 or 14.3% from 2001. The remaining increase in premium revenue was a result of premium rate increases during 2001. Total expenses for the year ended December 31, 2002 were $160,379,021 as compared to $149,960,087 for the year ended December 31, 2001. This 7% increase in expenses is the result of higher than anticipated medical costs and commissions as the membership growth in 2002 primarily consisted of sole proprietors. Prior to June 2002, this Member group was prohibited from directly enrolling for health insurance with MDNY and was required to enroll through associations. Health care service expense stated as a percentage of premium revenues was 87.0% for 2002 compared with 84.4% for 2001. Medical expenses paid to the IPAs on a fee for service basis increased approximately 11.1%. This increase is consistent with the overall increase in sole proprietor business. The medical loss ratio was 87.0% for 2002. Administrative expenses stated as a percentage of premium revenue was 14.2% for 2002 compared with 17.7% for 2001. This reduction was the result of reductions in staffing realized in the first quarter of 2002 together with operational efficiencies focused on by the Company throughout 2002 to help offset increasing medical and commission costs. Net loss for the year ended December 31, 2002 was $964,000 compared to a net loss of $1,008,000 for 2001. This loss is primarily the result of higher than anticipated medical and commission costs realized in 2002. Liquidity and Capital Resources Cash flows provided by (used in) operating activities, investing and financing activities of $878,790, $14,686, and $(12,845), respectively in 2003 resulted in an overall increase in cash 27 and cash equivalents in 2003 of $880,631. The increase in net cash and cash equivalents is directly related to the timing of when claims are paid. The Company had negative working capital of approximately $16,951,000 at December 31, 2003 compared to a negative working capital of approximately $19,934,000 at December 31, 2002. The amount of negative working capital decreased in 2003 as Island IPA continued to pay the IPA Withhold to MDNY under the Recovery and Subordination Agreement thereby reducing the Island Debt. MDNY's liquidity is substantially dependent upon its ability to meet its current obligations. MDNY does not have the ability to obtain a line of credit with financial institutions as MDNY is only authorized to borrow 5% of approved assets subject to approval by the NYSID. The Company anticipates that the 2003 rate increases together with the initiatives described above under the caption "Business--Business Strategy" will produce sufficient cash flows to meet its obligations in 2004. There can be no assurance that the Company will be able to achieve sufficient cash flows. Pursuant to the Recovery and Subordination Agreement, Island IPA, Island IPA's participating providers and the Hospitals have agreed, among other things, until the Island Debt is repaid (a), in the event that MDNY becomes insolvent (pursuant to a court approved order or admits its inability to pay its debts), to subordinate their rights to payment by MDNY of outstanding claims (including IBNR) to all other outstanding claims in an amount equal to the amount of the then outstanding Island Debt (i.e., payments in excess of capitation), and (b) that, after payment of third party claims, the claims of Island IPA and its providers will be subordinated to the claims of the Hospitals. The amount of Island Debt, and the amount of claims subject to potential subordination pursuant to the Recovery and Subordination Agreement, were approximately $20 million as of December 31, 2003. In the event of any such insolvency of MDNY, the effect of any such subordination would be to allow MDNY to pay current obligations that it would otherwise be unable to pay in an amount equal to the amount so subordinated, and allow MDNY to be sufficiently solvent to continue for a period of time in excess of one year. 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--Certain Regulatory Matters" and "--Recent Developments." The continued failure of MDNY to meet reserve requirements or 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, 2003 and for the year then ended have been prepared assuming that the Company will continue as a going concern. 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, 28 and achieve profitability. While the Company believes that implementation of MDNY's 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 sufficient to ensure the long-term viability of MDNY and the Company. Pursuant to 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, and there was no sale that the Company considered probable at December 31, 2003. 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 is payable quarterly. See Note 7 to the Consolidated Financial Statements included elsewhere herein. These loans together with the accrued interest and certain statutory items brought MDNY's statutory net worth at December 31, 2003 to $6.3 million compared to the NYSID required net worth of $7.7 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). Contractual Obligations MDNY is contractually obligated to make payments as follows:
Payments Due by Period ------------------------------------------------------------------ Contractual Obligations Total 1 Year 2-3 Years 4-5 Years After 5 Years - ----------------------- ----- ------ --------- --------- ------------- (Amounts in thousands) Operating leases 1,793,236 403,487 840,130 549,619 0 Obligations under capital lease agreement 1,479 1,479 0 0 0 --------- ------- ------- ------- -------- Total 1,794,715 404,966 840,130 549,619 0 ========= ======= ======= ======= ========
Operating lease terms generally range from one to ten years with certain early termination or renewal provisions at MDNY's option. MDNY is subject to various contracts with certain health care providers and facilities for the provision of health care services to its members. Such contracts involve payments to or from MDNY, generally on a monthly basis, in the ordinary course of business and are not included in the above table. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company's management to make a variety of estimates and assumptions. These estimates and assumptions affect, among other things, the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts 29 of revenues and expenses. Actual results can differ from the amounts previously estimated, which were based on the information available at the time the estimates were made. The critical accounting policies described below are those that the Company believes are important to the portrayal of the Company's financial condition and results, and which require management to make subjective and/or complex judgments. Critical accounting policies cover matters that are inherently uncertain because the future resolution of such matters is unknown. The Company's board of directors has discussed the development and selection of the critical accounting estimates and related disclosures with MDNY's management. The Company believes that its critical accounting policies include revenue recognition (including the estimation of bad debt and retroactivity reserves) and medical costs payable (including reserves for incurred but not reported or paid claims). Revenue Recognition Commercial membership contracts are generally established on an annual basis subject to cancellation by the employer group, individual or MDNY upon 30 days' written notice. Premiums are due monthly and are recognized as revenue during the month in which MDNY is obligated to provide services to subscribers. Premiums collected in advance of the coverage period are recorded as unearned revenue. Premiums receivable are presented net of valuation allowances for estimated uncollectible amounts, based on known activities and balances and on historical trends. MDNY evaluates the collectibility of its premiums receivable based on a combination of factors. These estimates are based on MDNY's assessment of the collectibility of specific accounts, the aging of premiums receivable, historical retroactivity trends, bad-debt write-offs and other known factors. If economic or industry trends change beyond MDNY's estimates or if there is a determination in financial condition of a major group or account, increases in the reserve for uncollectible accounts may result. Medical costs payable MDNY contracts with various health care providers for the provision of covered medical care services to its members and compensates those providers on a fee-for-service basis. MDNY also bears the risk of health care expenses for covered services provided by non-contracted providers to members. Costs of health care and medical costs payable for health care services provided to members are estimated by management based on evaluations of providers' claims submitted and provisions for IBNR. MDNY estimates the provision for IBNR using standard actuarial loss development methodologies applied to loss development data summarized on the basis of the month services are rendered and the month claims are paid, processed or received, and considers other items including, without limitation, historical levels of denied claims, medical cost trends, seasonal patterns and changes in membership mix. These estimates are reviewed by MDNY's external auditors and state regulatory authorities on a periodic basis. The estimates for submitted claims and IBNR are made on an accrual basis and adjusted in future periods as necessary. Adjustments to prior period estimates, if any, are included in the current period. 30 Separately identified as public goods payable are estimated liabilities for New York's Graduate Medical Education (GME) and hospital Bad Debt and Charity Care (BDCC) programs, which are state health care public policy initiatives aimed at defraying the costs of other health care providers, such as hospitals. Management believes that the amount of medical costs payable and Public Goods Payable are adequate to cover MDNY's ultimate liability for unpaid claims as of December 31, 2003; however, actual claim payments and other items may differ from established estimates. 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. Item 7A. 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, 2003, MDNY's only borrowings were under two promissory notes from LIPH, LLC and CHNLI, in the original aggregate principal amount of $2.4 million, which accrue interest at the prime rate. At December 31, 2003, total principal and interest due LIPH, LLC and CHNLI was approximately $1.36 million and $1.98 million, respectively. A 100 basis point increase in interest rates, applied to MDNY's borrowings at December 31, 2003, would result in an increase in annual interest expense and a corresponding reduction in cash flow (were such interest to be paid) of approximately $24,000. 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." Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. 31 Item 9A. Controls and Procedures (a) Based on an evaluation by the Company's President and Chairman of the Board and its Chief Financial Officer as of the end of the period covered by this Annual Report, 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. The Company was delinquent in filing its Annual Report on Form 10-K for the fiscal year ended December 31, 2000, failed to file an Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and was delinquent in filing its Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The Company failed to file Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2001 and for the quarters ended March 31, June 30 and September 30, 2002. The Company was delinquent in filing its Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2002. The Company failed to hold an Annual Meeting of Shareholders in 2002 or 2003. The Company also failed to make, or was delinquent in making, certain filings with respect to periods ending prior to December 31, 2000. (b) 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. 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 2004 Annual Meeting of Stockholders ("Proxy Statement") under the caption "Directors and Executive Officers," which information is hereby incorporated herein by this 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 this reference. (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 this reference. 32 (d) Code of Ethics The required information is to be set forth in the Proxy Statement under the caption "Code of Ethics," which information is hereby incorporated herein by this 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--Compensation of Executive Officers," which information is hereby incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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 and Related Stockholder Matters," which information is hereby incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions The information required by this Item is set forth in the Proxy Statement under the caption "Certain Relationship and Related Transactions," which information is hereby incorporated herein by this reference. Item 14. Principal Accounting Fees and Services The required information is to be set forth in the Proxy Statement under the caption "Independent Auditor Fees," which information is hereby incorporated herein by this reference. PART IV Item 15. Exhibits, 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, 2003 and 2002; Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001; Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001; Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001; Notes to the Consolidated Financial Statements. B. Schedules: Schedule II--Valuation and Qualifying Accounts 33 II. Reports on Form 8-K No reports on Form 8-K were filed with respect to the last quarter of 2003. III. Exhibits Exhibit No. Description - ---------- ---------- 3.1.1 Certificate of Incorporation of Long Island Physician Holdings Corporation ("LIPH") (8) 3.1.2 Certificate of Incorporation of MDNY Healthcare, Inc. ("MDNY") (6) 3.2 By-Laws of LIPH (5) 3.4 By-laws of MDNY (5) 4 Shareholders Agreement dated December 11, 1995 among MDNY, LIPH and Catholic Healthcare Network of Long Island, Inc. ("CHNLI") (1) 10.1 Form of Option Agreement between LIPH and each of the directors thereof (2) 10.2 Letter dated December 29, 1999 from MDNY to the Superintendent of Insurance, State of New York (3) 10.3 Stock Subscription and Purchase Agreement made as of October 11, 1995 among LIPH, CHNLI and MDNY (4) 10.4 Section 1307 Loan Agreement between MDNY and LIPH, LLC dated July __, 1998, as amended (4) 10.5 Section 1307 Loan Agreement between LIPH and CHNLI dated December 18, 1997 (4) 10.6 Subordinated Note dated December 18, 1997 made by MDNY in favor of CHNLI (5) 10.7 Form of IPA Participation Agreement between MDNY and Island Practice Association, IPA, Inc. ("Island IPA") (6) 10.8 Reinsurance Agreement between Preferred Life Insurance Company of New York and MDNY, January 1, 1999 Renewal (4) 10.9 Reinsurance Agreement between Preferred Life Insurance Company of New York and MDNY, for Point of Service Enrollees, January 1, 1999 Renewal (4) 10.10 Reconciliation Agreement dated as of May __, 2000 among MDNY, Island IPA, CHNLI and LIPH (4) 34 10.11 Agreement dated May 10, 1999 between MDNY and Catholic Health Services of Long Island, Inc. ("CHSLI") (5) 10.12 Agreement dated August 13, 1999 between MDNY and CHSLI (4) 10.13 Employment Agreement dated January 1, 2001 between MDNY and Paul T. Accardi(5)(7) 10.14 Employment Agreement dated January 1, 2001 between MDNY and Ronald R. Perrone(5)(7) 10.15 Recovery and Subordination Agreement dated July 12, 2001 and effective January 1, 2002 among MDNY, Island IPA and CHSLI (6) 21 Subsidiaries of Registrant (1) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (8) 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (8) 32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (8) 32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (8) ------------------------------------------------------------------------ (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 Report on Form 8-K dated March 2, 2000 and incorporated herein by this reference. (4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 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, 2000 and incorporated herein by this reference. (6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by this reference. (7) This Exhibit is a management compensatory plan or arrangement. (8) Filed herewith. 35 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: April 14, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Paul Kolker, M.D. Chairman of the Board, April 14, 2004 - ---------------------------- (Principal Executive Officer) Paul Kolker, M.D. /s/ Concetta Pryor Chief Financial Officer April 14, 2004 - ---------------------------- (Principal Financial and Concetta Pryor Accounting Officer) /s/ William Brennan, D.C. Director April 14, 2004 - ---------------------------- William Brennan, D.C. Director April __, 2004 - ---------------------------- Salvatore J. Caravella, M.D. Director April __, 2004 - ---------------------------- Franco Gallo, M.D. Director April __, 2004 - ---------------------------- Robert A. Jason, M.D. /s/ Gregory Kalmar, D.D.S. Director April 14, 2004 - ---------------------------- Gregory Kalmar, D.D.S. 36 Director April __, 2004 - ---------------------------- Amy Koreen, M.D. /s/ Ronald Perrone, M.D. Director April 14, 2004 - ---------------------------- Ronald Perrone, M.D. /s/ Rosario Romano, M.D. Director April 14, 2004 - ---------------------------- Rosario Romano, M.D. /s/ Robert Sarnataro, M.D. Director April 14, 2004 - ---------------------------- Robert Sarnataro, M.D. /s/ Gary Wohlberg, M.D. Director April 14, 2004 - ---------------------------- Gary Wohlberg, M.D. 37 Long Island Physician Holdings Corporation Consolidated Financial Statements December 31, 2003 and 2002 Long Island Physician Holdings Corporation Index December 31, 2003 and 2002 - -------------------------------------------------------------------------------- Page(s) Report of Independent Auditors.................................................1 Consolidated Financial Statements Consolidated Balance Sheets....................................................2 Consolidated Statements of Operations and Accumulated Deficit..................3 Consolidated Statements of Comprehensive Income (Loss).........................4 Consolidated Statements of Cash Flows..........................................5 Notes to Consolidated Financial Statements..................................6-16 Schedule of Valuation and Qualifying Accounts.................................17 Report of Independent Auditors 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the accompanying financial statement schedule of valuation and qualifying accounts 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 our opinion. PRICEWATERHOUSECOOPERS LLP New York, New York March 30, 2004 Long Island Physician Holdings Corporation Consolidated Balance Sheets December 31, 2003 and 2002 - -------------------------------------------------------------------------------- 2003 2002 ---- ---- Assets, Cash and cash equivalents $ 1,575,080 $ 694,449 Premium receivables, net of allowances of approximately $959,000 in 2003 and $961,000 in 2002 12,544,775 8,699,338 Reinsurance recoverables 450,549 635,42O Payments in excess of capitation 2,O74,163 2,999,251 Prepaid expenses and other current assets 3,142,168 3,205,406 Due from Catholic Health Services of Long Island 2,382,027 2,382,027 ----------- ------------ Total current assets 22,168,762 18,615,891 =========== ============ Property, plant and equipment, net 272,134 392,245 Restricted cash and cash equivalents 5,600,790 5,657,135 Payments in excess of capitation, net of current portion 17,953,057 19,215,858] ----------- ------------ Total assets $45,994,743 $ 43,881,129 =========== ============ Liabilities and Stockholders' Equity Medical claims payable $27,542,261 $ 28,967,021 Public goods payable 6,779,734 5,367,150 Unearned premium revenue 1,862,367 1,955,180 Accounts payable and accrued expenses 2,933,560 2,246,652 Current portion of capital lease obligations 1,479 14,324 ----------- ------------ Total current liabilities 39,119,401 38,550,327 =========== ============ Note payable and accrued interest 3,346,059 3,247,150 Total liabilities 42,465,460 41,797,477 Minority interest in MDNY Healthcare, Inc. 1,682,934 1,247,315 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 and outstanding Additional paid-in capital 11,478,536 111,478,536 Accumulated deficit (9,632,193) (10,642,205) Total stockholders' equity 1,846,349 836,337 ----------- ------------ Total liabilities and stockholders' equity $45,994,743 $ 43,881,129 =========== ============ The accompanying notes are an integral part of these consolidated financial statements. 2 Long Island Physician Holdings Corporation Consolidated Statements of Operations and Accumulated Deficit Years Ended December 31, 2003, 2002 and 2001 - --------------------------------------------------------------------------------
2003 2002 2001 ---- ---- ---- Revenue Premiums earned $153,276,616 $158,310,155 $ 146,505,139 Total revenue 153,275,616 158,310,155 146,505,139 Expenses Medical services expense 132,202,229 137,768,935 123,701,510 Commissions expense 6,244,726 6,731,587 5,610,672 General and administrative expenses 13,527,932 15,540,781 20,150,287 Depreciation 161,770 337,718 497,618 ------------ ------------ ------------- Total expenses 152,136,657 160,379,021 149,960,087 ============ ============ ============= Operating income (loss) 1,138,959 (2,068,866) (3,454,948) Investment and other income 394,409 675,923 1,956,680 Income (loss) before income taxes and minority interest 1,533,368 (1,392,943) (1,498,268) Provision for income taxes (87,737) (46,725) -- Minority interest in (income) loss of subsidiary (435,619) 475,090 490,229 Net income (loss) 1,010,012 (964,578) (1,008,039) Accumulated deficit Beginning of year (10,642,205) (9,677,627) (8,669,588) ------------ ------------ ------------- End of year $ (9,632,193) $(10,642,205) $ (9,677,627) ============ ============ ============= Basic and diluted income (loss) per share 173 (165) (173) Basic and diluted weighted average shares 5,839 5,839 5,839
The accompanying notes are an integral part of these consolidated financial statements. 3 Long Island Physician Holdings Corporation Consolidated Statements of Comprehensive Income (Loss) Years Ended December 31, 2003, 2002 and 2001 - -------------------------------------------------------------------------------- 2003 2002 2001 ---- ---- ---- Net income (loss) $ 1,010,012 $ (964,578) $ (1,008,039) Change in unrealized gain on securities -- -- 705 Comprehensive income (loss) $ 1,010,012 $ (964,578) $ (1,007,334) ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4 Long Island Physician Holdings Corporation Consolidated Statements of Cash Flows Years Ended December 31, 2003, 2002 and 2001 - --------------------------------------------------------------------------------
2003 2002 2001 ---- ---- ---- Cash flows from operating activities Net income (loss) $ 1,010,012 $ (964,578) $(1,008,039) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation 161,770 337,718 497,618 Minority interest in income (loss) of subsidiary 435,619 (475,090) (490,229) Changes in operating assets and liabilities: Premium receivables, net (3,845,437) 1,309,179 629,958 Reinsurance recoverables 184,871 420,058 327,398 Prepaid expenses and other current assets 63,238 (954,269) (829,113) Due to/from independent practice associations (IPAs) and medical claims payable 763,129 (1,305,311) (5,268,570) Public goods payable 1,412,584 2,712,535 2,654,615 Unearned premium revenue (92,813) 1,239,902 (270,874) Accounts payable and accrued expenses 785,817 (1,428,699) 1,124,309 ----------- ----------- ----------- Net cash provided by (used in) operating activities 878,790 891,445 (2,632,927) ----------- ----------- ----------- Cash flows from investing activities Purchase of property, plant, and equipment (41,659) (39,592) (20,760) Decrease (increase) in restricted cash and cash equivalents] 56,345 (2,059,510) 574,242 ----------- ----------- ----------- Net cash provided by (used in) investing activities 14,686 (2,099,102) 553,482 ----------- ----------- ----------- Cash flows from financing activities Payments on capital lease obligations (12,845) (55,984) (77,677) ----------- ----------- ----------- Net cash used in financing activities (12,845) (55,984) (77,677) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 880,631 (1,263,641) (2,157,122) Cash and cash equivalents Beginning of year 694,449 1,958,090 4,115,212 ----------- ----------- ----------- End of year $ 1,575,080 694,449 1,958,090 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 5 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- 1. Organization Long Island Physician Holdings Corporation (the "Company" or "LIPH Corp") was incorporated on October 11, 1994 in the State of New York as a holding company for purposes to advance 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. Catholic Health Network of Long Island ("CHNLI") is the minority owner of MDNY. The majority of healthcare services are provided by Catholic Health Services of Long Island ("CHSLI"), an affiliate of CHNLI, and physicians who are members of affiliated independent practice associations ("IPAs"). Island Professional Association IPA, Inc. ("Island IPA") is the primary affiliated IPA, and is owned by Long Island Physician Holdings, LLC ("LIPH, LLC"). Island IPA participating providers who hold membership interests in LIPH, LLC also own shares in LIPH, Corp (see note 7). 2. 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. Minority interest represents the proportionate share of the equity in the subsidiary that is attributable to the minority owner. Basis of Presentation The accompanying consolidated financial statements have been prepared on the accrual method of accounting in conformity with accounting principles generally accepted in the United States. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. Included in cash and cash equivalents are amounts on deposit at two financial institutions in excess of $100,000, which is the maximum insured by the Federal Deposit Insurance Company. Management believes that the institutions are viable entities and no risk of loss exists. The Company routinely invests its restricted funds in money market accounts. These funds generally invest in highly liquid securities. Medical Services Expense Medical services expense, as recorded in the consolidated statements of operations and accumulated deficit, includes the cost of inpatient hospitalization and outpatient medical services provided or contracted for and 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. Amounts owed to Island IPA participating providers, CHS hospitals and all other providers of medical services are recorded as medical claims payable in the consolidated balance sheets. Medical services expense relating to CHS and Island IPA were approximately $85 million, $81 million and $77 million for the years ended December 31, 2003, 2002 and 2001, respectively. 6 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- Property, Plant and Equipment Property, plant and equipment, including leasehold improvements, are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years. Equipment recorded under capital leases is amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the equipment. When assets are retired or otherwise disposed of, the cost and the related depreciation are reversed from the account and any gain or loss is reflected in the consolidated statement of operations and accumulated deficit. Repairs and maintenance expenditures are expensed as incurred. Premium Revenue Commercial membership contracts are written on an annual basis subject to cancellation by the employer group upon thirty days written notice. Premiums are due monthly and are recognized as revenue during the period in which the Company is obligated to provide services to subscribers. Premiums collected in advance are deferred and recorded as unearned premium revenue in the consolidated balance sheets. Reinsurance Reinsurance premiums are reported as medical services expense, and reinsurance recoveries, when collection is deemed probable, are reported as a reduction of medical services expense in the consolidated statements of operations and accumulated deficit. 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 income taxes recorded by the Company reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2003 and 2002, the Company's net operating income (loss) for tax purposes will differ from the income (loss) for financial reporting purposes primarily as a result of the timing of bad debt write-offs, accrued interest and depreciation expense. The Company has recorded a full valuation allowance against the potential future benefit of such net deferred tax assets to the amount expected to be realized. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. The most significant estimates relate to allowances for uncollectible accounts, medical claims payable and receivables and payables recorded relating to New York public goods and stabilization pools. Actual results could differ from those estimates. Segment Reporting The Company currently operates in one reportable business segment. All of the Company's services are provided within the United States, and all of the Company's assets are located within the United States. 7 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- Reclassifications Certain reclassifications have been made to amounts previously reported to conform to current year's presentation. Such reclassifications had no effect on changes in stockholders' equity. Stock-based Compensation Plan SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure and amendment of FASB Statement No. 123" ("SFAS 148") encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value. In addition, SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensations, and amends the disclosure requirements of SFAS 123 to require prominent disclosures in financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The Company has chosen to adopt only the disclosure provisions of SFAS No. 148 and continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. The Company's stock option plan is described in note 13. Recent Accounting Pronouncements In November 2002, the FASB issued FASB 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 the financial statements effective for the period ended December 31, 2002. The Company has adopted the initial recognition and initial measurement provisions of FIN 45 effective January 1, 2003. In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"), as revised in December 2003 ("FIN 46R"). The primary objective of FIN 46 is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as variable-interest entities ("VIEs"). Although the FASB's initial focus was on special-purpose entities ("SPEs"), the final guidance applies to a wide range of entities. FIN 46 has far-reaching effects and applies to new entities that are created after the effective date, as well as to existing entities. Guidance under FIN 46 will provide for the determination of (1) whether consolidation is required under the "controlling financial interest" model of Accounting Research Bulletin No. 51 "Consolidated Financial Statements," ("ARB 51"), or other existing authoritative guidance, or alternatively, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements. 3. Recovery and Subordination Agreement In 2000 and prior years, the Company had various risk-sharing participation arrangements with affiliated IPAs in which the Company was obligated to pay the IPAs a percentage of commercial and Medicare premiums, net of provision for uncollectible accounts and commission expenses ("Capitated Arrangement"). These related IPAs were responsible for all healthcare service 8 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- reimbursements to its members and other non-member third-party providers with whom the Company had contracted. During 2000, the New York State Insurance Department ("NYSID") performed its first financial audit of MDNY and its affiliated IPA's as of June 30, 2000. On May 10, 2001, the Company 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 approximately $4.3 million and that MDNY's required contingency reserves were impaired in the amount of approximately $12.2 million. These determinations resulted from NYSID's position that MDNY should have reported certain obligations of the IPAs in MDNY's financial statements. Effective January 1, 2001, the Company entered into a new financial arrangement with affiliated IPAs. Under this arrangement, IPA participating physicians are reimbursed on a fee for service basis for covered services, as defined in the applicable subscriber agreement. Furthermore, during 2001, as part of the agreement between the Company and the IPAs, the Company agreed to assume responsibility for payments related to the New York State Public Goods Pools (see note 11). Since the Company agreed to assume responsibility for medical services provided to its members, it therefore bears full risk under this financial arrangement. On July 31, 2002, NYSID issued its Report on Examination of 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 a receivable to be recognized from Island IPA as an admitted asset for medical claims paid by MDNY in excess of the negotiated Capitated Arrangement ("Payments in Excess of Capitation"). MDNY agreed to enter into non-risk contracts with the IPA's and the examination insolvency was eliminated. The Company recognized an initial receivable of approximately $23.2 million, which represented actual claims paid in 2001 to Island IPA participating providers with dates of service prior to January 1, 2001. Subsequent to the initial recognition, the receivable has been adjusted for additional claims paid after 2001, and reduced by a 5% withhold of payments as stipulated in the Recovery and Subordination Agreement. The net amount due from Island IPA, which is classified in the balance sheet as payments in excess of capitation, was approximately $20.0 million and $22.2 million as of December 31, 2003 and 2002, respectively. In accordance with the Recovery and Subordination Agreement: o Island IPA for itself and on behalf of each of its participating physicians and CHS and its hospital affiliates (collectively the "Subordinating Parties") agree to subordinate their rights to payment of outstanding claims, including claims incurred but not reported ("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, 2003 and 2002 were approximately $20 million and $25 million, respectively. o Effective January 1, 2002, Island IPA began retaining a non-distributable withhold in the amount of 5% of payments to participating providers and has remitted the entire amount of the withhold to the Company. During 2003 and 2002, the amount remitted to the Company 9 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- reduced the payments in excess of capitation receivable by approximately $2.2 million and $2.1 million, respectively. o Also effective January 1, 2002, the Company is obligated to make payment to Island IPA for unrestricted access to its network of participating providers in amount equal to $1.50 per member per month ("network access fee"). The amounts owed by the Company to Island IPA for the network access fee are to be used to reduce the payments in excess of capitation. As of December 31, 2003, no payment has been made or will be required to be made to Island IPA for network access fees relating to 2003 or prior. o Island IPA is obligated to pay the Company a portion of all income it receives from sources other than the Company. Such payments would be in an amount equal to gross collections minus operational and administrative expenses ("net revenue") received by Island IPA from such sources. Since the effective date of the agreement, Island IPA has not received any income from other sources, and therefore, the Company has not received any such payments as of December 31, 2003. o The withhold remittances, net revenue remittances, and network access fees described above will remain in effect until such time as the repayment of the debt to the Company has been fully satisfied. 4. Financial Condition The Company had a negative working capital of approximately $17 million and $20 million at December 31, 2003 and 2002, respectively. In accordance with the Recovery and Subordination Agreement, if MDNY admits its inability to pay its debts at any point in time, Island IPA's participating providers and CHSLI have agreed to the subordination of the portion of outstanding medical claim obligations they are owed, up to the amount these providers owe as payments in excess of capitation (see note 4). This amount of potential subordination was approximately $20 million and $25 million as of December 31, 2003 and 2002, respectively. 5. NYSID Reserve Requirements As a condition of continued licensure by NYSID, the Company must maintain certain reserve requirements to protect its subscribers in the event the Company is unable to meet its obligations. Escrow Deposit Reserve Requirement In accordance with the NYSID regulations, the Company is required to maintain certain amounts on deposit in an escrow account for the protection of enrollees, equal to 5% of projected medical expenditures of the following year or $100,000, whichever is greater. The Company had approximately $5,601,000 and $5,657,000 of money market funds on deposit in escrow as of December 31, 2003 and 2002, respectively. These funds are included in the consolidated balance sheets as restricted cash and cash equivalents. The Company did not meet the escrow deposit requirement of $5.8 million at December 31, 2003, calculated as 5% of an approximate $116 million in projected medical expenditures. Contingent Reserve Requirement The Company is required to maintain a contingent reserve fund which should be increased in an amount equal to 1% of net premium revenue at year end but not to exceed 5% of net premium 10 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- revenue reported for the year. This contingent reserve requirement shall be deemed to have been met if the statutory net worth of the Company equals or exceeds the contingent reserve requirement. According to New York Codes of Rules and Regulations, if the contingent reserve fund is less than the escrow deposit account, the escrow deposit account may be used to offset the contingent reserve fund. At December 31, 2003, the contingent reserve fund requirement was greater than the escrow deposit account. As statutory net assets of the Company were $6.3 million, the Company did not meet the contingent reserve fund requirement of $7.7 million at December 31, 2003. In April 2003, the NYSID accepted a remedial plan submitted by MDNY which detailed MDNY's plans to remedy the statutory reserve impairment. Subsequent to the acceptance of the remedial plan, the NYSID directed MDNY to take appropriate action to achieve net worth of at least $7 million. As part of their directive, the NYSID required MDNY to provide monthly financial statements, and continues to monitor MDNY's financial performance. 6. Concentration of Credit Risk The mix of receivables from related parties and others at December 31, 2003 and 2002, are as follows: 2003 2002 ---- ---- Related parties 50% 30% Other 50 70 --- --- 100% 100% === === 7. Related Parties The Company had the following material transactions with related parties: Catholic Health Services of Long Island ("CHSLI") and the Diocese of Rockville Centre ("Diocese") The Company also provides health care services for employees of CHSLI and its affiliated entity, the Diocese. The premiums from these services are included in premiums earned in the consolidated statements of operations and accumulated deficit, and outstanding receivables for these services are part of premiums receivable in the consolidated balance sheets. CHSLI and Diocese premiums represented approximately 27% of total premiums earned by the Company during 2003 and 30% during 2002 and 2001. In addition, CHSLI premium receivables outstanding as of December 31, 2003, 2002 and 2001 were approximately $6.5 million, $3.0 million and $5.4 million, respectively. There were no outstanding premium receivables due from the Diocese at December 31, 2003 and 2002. MDNY is subject to the New York Women's Health and Wellness Act, which, as of January 1, 2003, obligates MDNY to provide contraceptive drugs and devices to its members, in conflict with the ethical policies of the Diocese to which CHNLI and CHSLI are subject. In light of this conflict, CHNLI has notified the Company of CHNLI's desire to withdraw as a MDNY shareholder, and the Diocese and CHSLI have notified the Company that they will not renew their current subscriber contracts with MDNY upon expiration thereof effective January 1, 2005 and 11 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- 2006, respectively. CHSLI and CHNLI have notified the Company that a restructuring plan would be considered whereby CHNLI would exit as a shareholder and CHSLI and the Diocese would enter into a self-insured contract with the Company, whereby the Company would act as a third party administrator of the health benefits of the each entity's respective employees. As a result of incurring deficits of approximately $2.4 million in hospital risk pools during 1997 and 1998 relating to risk sharing agreements between the Company and CHS, a receivable from CHS of approximately $2.3 million was recorded in the consolidated balance sheets at December 31, 2003 and 2002. The receivable was due December 31, 2003 (see note 16). 8. Reinsurance The Company entered into a stop-loss insurance agreement with an insurance company to limit its losses on individual claims. In 2003, 2002 and 2001, under the terms of this agreement, a portion of paid claims in excess of $100,000 for hospital services were reimbursed to the Company. Effective January 1, 2001, the Company cancelled the portion of the stop-loss agreement relating to claims for physician services. Reinsurance premiums of approximately $528,000 in 2003, $948,000 in 2002 and $609,000 in 2001 are included in medical services expense on the consolidated statements of operations and accumulated deficit. Any reinsurance recoveries are also included in medical services expense. Reinsurance recoverables at December 31, 2003 and 2002 were approximately $451,000 and $635,000, respectively, of which $289,000 and $349,000 were related to the years ended December 31, 2003 and 2002, respectively. 9. Property, Plant and Equipment The major components of property, plant and equipment as of December 31, 2003 and 2002 are as follows: 2003 2002 ---------- ---------- Equipment $ 337,050 $ 324,000 Furniture and fixtures 535,197 535,197 Leasehold improvements 484,207 484,207 Computer equipment and software 2,674,115 2,645,505 ---------- ---------- 4,030,569 3,988,909 ---------- ---------- Less accumulated depreciation 3,758,435 3,596,664 ---------- ---------- Property, plant and equipment, net $ 272,134 $ 392,245 ========== ========== 10. Notes Payable During 1998, with the approval of the NYSID, the Company obtained a loan from LIPH, LLC. The outstanding balance, including accrued interest, was approximately $1,363,000 and $1,322,000 at December 31, 2003 and 2002, respectively. Interest on this amount accrues at the prime rate (4.00% at December 31, 2003) and is payable quarterly commencing October 1, 1998. The entire 12 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- principal balance plus any accrued interest was originally due on July 1, 1999, but is subject to prior approval by the NYSID. In April 1999, the Company 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, MDNY'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, nor have additional shares been issued, as the Company has not yet received approval from the NYSID. During 1997, with the approval of the NYSID, the Company obtained a loan from CHS. The outstanding balance, including accrued interest, was approximately $1,983,000 and $1,925,000 at December 31, 2003 and 2002, respectively. 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 NYSID. Repayment of the principal and payment of accrued interest on the note shall be made only out of the free and divisible surplus of the Company and all amounts to be paid or repaid are subject to the prior approval of the NYSID. 11. Commitments and Contingencies Public Goods Pool The Company makes payments to New York State funding pools to finance hospital bad debt and charity care ("BDCC"), graduate medical education ("GME") and other state programs under the Health Care Reform Act of 1996 ("HCRA"). Outstanding liabilities related to the pools are included within public goods payable on the consolidated balance sheets. Expenses related to these pools were approximately $4.4 million, $4.1 million, and $4 million for the years ended December 31, 2003, 2002 and 2001, respectively, and are included within medical services expense on the consolidated statements of operations and accumulated deficit. Stabilization Pools The Company is also affected by certain state regulated risk allocation pools, which are designed primarily to spread claims risk between insurers. Certain insurers participating in the small group and individual insurance market in New York are required to contribute certain amounts to the New York Stabilization Pools, while others receive certain amounts from the New York Stabilization Pools, based upon the criteria outlined in the applicable regulations. For the years ended December 31, 1999 and prior, two separate pools were in operation; one determined by demographic data and the other determined by the incidence of certain specified medical conditions. For years subsequent to 1999, a single pool operates based on the experience of each insurer with respect to specified medical conditions. The Company has recorded a receivable of approximately $618,000 at December 31, 2003 and 2002, relating to the demographic pool for the years 1998 and 1999, which is included in prepaid expenses and other current assets on the consolidated balance sheets. The Company has not established reserves or receivables for the years 1999 through 2003, as regional factors published by the NYSID have not been released to indicate whether the Company would be a payer or a recipient based upon the revised methodology and submissions for each of these years. 13 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- Other Programs Under HCRA, New York State provides a limited amount of stop loss insurance funding to cover 90% of certain paid claims for specified New York Mandated Plans and for the Healthy New York Plan. The Company has recorded a receivable of approximately $883,000 and $981,000 at December 31, 2003 and 2002, respectively, which is included in prepaid expenses and other current assets on the consolidated balance sheets. Additionally, New York State imposes assessments that are used to fund the state health and insurance departments and other state initiatives. Lease Commitments Future minimum rental expense commitments to be paid under operating leases, for office space and other facilities, are as follows for each of the next five years and in aggregate: Year Amount - ---- ------ 2004 $ 403,487 2005 414,430 2006 425,700 2007 437,305 2008 112,314 ---------- $1,793,236 ========== Litigation The Company is involved in litigation arising in the course of business. After consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Company's future financial position or results from operations. 12. Income Taxes The components of the income tax expense are as follows: 2003 2002 ------- ------- Current Federal $21,522 $ -- State 66,215 46,725 Deferred -- -- State -- -- ------- ------- Total $87,737 $46,725 ======= ======= 14 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- The differences between the provision for federal income taxes and the expected income taxes computed using statutory income tax rates are as follows: 2003 2002 ----------- ----------- Federal income tax expense at statutory rate $ 478,650 $ (473,600) State income taxes, net of federal tax benefit 43,702 30,839 Change in valuation allowance (612,270) 553,186 Permanent differences 82,643 52,982 Other 95,012 (116,682) ----------- ----------- Total income tax expense $ 87,737 $ 46,725 =========== =========== Significant components of the Company's deferred tax liabilities and assets as of December 31, were as follows: 2003 2002 ----------- ----------- Deferred tax assets Fixed assets $ 68,823 $ 119,058 Receivables 383,305 384,021 Accrued interest 378,043 338,519 29,161,189 3,535,797 Net operating losses Other 133 136 114,370 Valuation allowance (3,879,496) (4,491,765) ----------- ----------- Net deferred tax asset -- -- =========== =========== Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. As of December 31, 2003 and 2002, the Company has determined that it is more likely than not that the future tax benefit of the deferred tax assets will not be realized. As such, a valuation allowance has been recorded against the full value of the net deferred tax asset. As of December 31, 2003 and 2002, the Company has a net operating loss carryforward for Federal income tax purposes of approximately $7.3 million and $9 million, respectively, which will begin to expire in 2011. 13. Stockholders' 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 specialties 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 are not 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. 15 Long Island Physician Holdings Corporation Notes to Consolidated Financial Statements December 31, 2003 and 2002 - -------------------------------------------------------------------------------- During 1996, the Company issued 39 Class A shares and 63 Class B shares for $204,000. 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 shares 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, 2003, no options have been exercised. 14. MDNY Healthcare, Inc. At December 31, 2003, the Company holds 907 shares of MDNY's $.001 par value Class A common stock, for which it paid $9,070,000. CHNLI holds the remaining 451 shares of MDNY's $.001 par value Class B common stock, for which it paid $4,510,000. CHNLI'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 issue and outstanding Class A and Class B common stock entitled to vote thereon. CHNLI shall have the following additional rights: o CHNLI, 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 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 CHNLI or the Company of any MDNY stock held by either entity. The separate and affirmative vote of (1) at least a majority of the CHNLI elected directors and (2) at least a majority of the non-CHNLI-appointed directors shall be required to effect any of the foregoing actions of the MDNY board. 15. 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, 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 EPS because the exercise price was greater than the average market price of common shares. 16. Subsequent Event On March 30, 2004 the CHSLI receivable of $2.4 million was received in full. 16 Long Island Physician Holdings Corporation Schedule of Valuation and Qualifying Accounts December 31, 2003, 2002 and 2001 - --------------------------------------------------------------------------------
Provision for Doubtful Balance at Accounts and Balance at Beginning Billing End Description of Period Adjustments Deductions of Period ----------- --------- ----------- ---------- --------- Year ended December 31, 2003 Allowance for doubtful accounts and billing adjustments $ 961,019 $3,743,879 $3,745,672 $ 959,226 Year ended December 31, 2002 Allowance for doubtful accounts and billing adjustments 1,549,253 1,937,953 2,526,187 961,019 Year ended December3l, 2001 Allowance for doubtful and billing adjustments 1,725,894 5,261,91O 5,438,551 1,549,253
17 EXHIBIT INDEX Exhibit No. Description - ---------- ----------- 3.1.1 Certificate of Incorporation of Long Island Physician Holdings Corporation ("LIPH") (8) 3.1.2 Certificate of Incorporation of MDNY Healthcare, Inc. ("MDNY") (6) 3.2 By-Laws of LIPH (5) 3.4 By-laws of MDNY (5) 4 Shareholders Agreement dated December 11, 1995 among MDNY, LIPH and Catholic Healthcare Network of Long Island, Inc. ("CHNLI") (1) 10.1 Form of Option Agreement between LIPH and each of the directors thereof (2) 10.2 Letter dated December 29, 1999 from MDNY to the Superintendent of Insurance, State of New York (3) 10.3 Stock Subscription and Purchase Agreement made as of October 11, 1995 among LIPH, CHNLI and MDNY (4) 10.4 Section 1307 Loan Agreement between MDNY and LIPH, LLC dated July __, 1998, as amended (4) 10.5 Section 1307 Loan Agreement between LIPH and CHNLI dated December 18, 1997 (4) 10.6 Subordinated Note dated December 18, 1997 made by MDNY in favor of CHNLI (4) 10.7 Form of IPA Participation Agreement between MDNY and Island Practice Association, IPA, Inc. ("Island IPA") (6) 10.8 Reinsurance Agreement between Preferred Life Insurance Company of New York and MDNY, January 1, 1999 Renewal (4) 10.9 Reinsurance Agreement between Preferred Life Insurance Company of New York and MDNY, for Point of Service Enrollees, January 1, 1999 Renewal (4) 10.10 Reconciliation Agreement dated as of May __, 2000 among MDNY, Island IPA, CHNLI and LIPH (4) 10.11 Agreement dated May 10, 1999 between MDNY and Catholic Health Services of Long Island, Inc. ("CHSLI") (5) 10.12 Agreement dated August 13, 1999 between MDNY and CHSLI (4) 10.13 Employment Agreement dated January 1, 2001 between MDNY and Paul T. Accardi(5)(7) 10.14 Employment Agreement dated January 1, 2001 between MDNY and Ronald R. Perrone(5)(7) 10.15 Recovery and Subordination Agreement dated July 12, 2001 and effective January 1, 2002 among MDNY, Island IPA and CHSLI (6) 21 Subsidiaries of Registrant (1) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (8) 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (8) 32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (8) 32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (8) - -------------------------------------------------------------------------------- (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 Report on Form 8-K dated March 2, 2000 and incorporated herein by this reference. (4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 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, 2000 and incorporated herein by this reference. (6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by this reference. (7) This Exhibit is a management compensatory plan or arrangement. (8) Filed herewith. EX-3.1.1 3 e17584ex3-1_1.txt CERTIFICATE INCORPORATION OF LIPH Exhibit 3.1.1 CERTIFICATE OF INCORPORATION OF LIPC, INC UNDER SECTION 402 OF THE BUSINESS CORPORATION LAW The undersigned, for the purpose of forming a corporation pursuant to Section 402 of the Business Corporation Law of the State of New York, do hereby certify: 1. The name of the corporation is LIPC, Inc. 2. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York. The corporation is not formed to engage in any act or activity requiring the approval of any state official, department, board, agency or other body without such consent or approval first being obtained. The corporation may purchase, acquire, hold and dispose of the stocks, shares, bonds and other evidences of indebtedness of any corporation, domestic or foreign, and issue in exchange therefor its shares, bonds or other obligations. 3. The office of the corporation is to be located in the Town of Roslyn, County of Nassau, State of New York. 4. The aggregate number of shares which this corporation shall have authority to issue is One Thousand (1000) shares of one class only, which shares are without par value. 5. The Secretary of State of the State of New York is hereby designated the agent of this corporation upon whom process against this corporation may be served. The post office address to which the Secretary of State shall mail a copy of any process against this corporation served upon him as agent of this corporation is: LIPC, Inc., 1800 Northern Blvd., Roslyn, New York 11576. IN WITNESS WHEREOF, the undersigned has executed. signed and acknowledged this Certificate of Incorporation this 6th day of October, 1994. WHITEMAN OSTERMAN & HANNA By: /s/ James Lytle ------------------------ James W. Lytle, Esq. One Commerce Plaza Albany, New York 12260 (518) 87-7600 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF LIPC, INC. Under Section 805 of the Business Corporation Law The undersigned, being the Sole Incorporator of LIPC, Inc., a New York corporation (the "Corporation"), for the purpose of amending the Corporation's Certificate of Incorporation pursuant to Section 805 of the Business Corporation Law of the State of New York, does hereby certify: 1. The name of the Corporation is LIPC, Inc. 2. The Certificate of Incorporation of the Corporation was filed by the Secretary of State of the State of New York on October 11, 1994 state of the State of New York on October 11, 1994. 3. The Certificate of Incorporation of the Corporation is hereby amended to change the corporate name of the Corporation from "LIPC, Inc." to "Long Island Physician Holdings Corporation." The foregoing amendment to the Corporation's Certificate of Incorporation shall be effected by deleting paragraph 1 of the Certificate of Incorporation of-the Corporation in its entirety and substituting the following in lieu thereof: "1. The name of the corporation is Long Island Physician Holdings Corporation." 4. The Certificate of Incorporation of the Corporation is hereby amended to provide for an increase in the aggregate number of shares of common stock the Corporation is authorized to issue from One Thousand (1,000) shares of common stock without par value, none of which are issued and outstanding as of the date hereof, to Twelve Million Five Hundred Thousand (12,500,000) shares of common stock, par value $.001 per share. The foregoing amendment to the Corporation's authorized capital shall be effected by (i) changing 500 shares of the Corporation's 1000 authorized and unissued shares of common stock, without par value, to 2,500,000 shares of Class A Common Stock, par value $ 001 per share, in a 5000-for-1stock split and (ii) changing 500 shares of the Corporation's 1000 authorized and unissued shares of common stock, without par value, to 10,000,000 shares of Class B Common Stock, par value $.0G1 per share, in a 20,000-for-l stock -split. The Corporation's Certificate of Incorporation is hereby amended to reflect the foregoing stock splits by deleting paragraph 4 of the Certificate of Incorporation of the Corporation in its entirety and substituting the following in lieu thereof: "4. The aggregate number of .shares which this Corporation shall have authority to issue is Twelve Million Five `Hundred Thousand (12,500,000) shares consisting of: (i) 2,500,000 shares of Class A Common Stock, par value $ .001 per share (the "Class A Common Stock"), all of which shares shall have full voting rights; and (ii) 10,000,000 shares of Class B Common Stock, par value $.001 per share (the "Class B Common Stock"), none of which shares shall have any voting rights. In all other respects except voting, the shares of Class A Common Stock and Class B Common Stock shall be identical." 5. The foregoing amendment to the Certificate of Incorporation of the Corporation was authorized by written consent of the Sole Incorporator of the Corporation. The Corporation does not have any shareholders of record or any subscribers for whose subscriptions have been accepted and no directors. IN WITNESS WHEREOF, the undersigned has executed signed and acknowledged this certificate of amendment this 16th day of December, 1994 . /s/ James Lytle ------------------------------- JAMES W. LYTLE, ESQ. Whiteman Osterman & Hanna One Commerce Plaza Albany, New York 12260 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF LONG ISLAND PHYSICIAN HOLDINGS CORPORATION Under Section 805 of the Business Corporation Law The undersigned, being the President and Secretary, respectively, of Long Island Physician Holdings Corporation, a New York corporation (the "Corporation"), for the purpose of amending the Corporation's Certificate of Incorporation pursuant to Section 805 of the Business Corporation Law of the State of New York does hereby certify: 1. The name of the Corporation is Long Island Physician Holdings Corporation. The name under which the Corporation was originally formed was LIPC, Inc. 2. The Certificate of Incorporation of the Corporation was filed by the Secretary of State of the State of the State of New York on October 11, 1994. 3. The Certificate of Incorporation of the Corporation is hereby amended to provide for a decrease in the aggregate number of shares of common stock the Corporation is authorized to issue from Twelve Million Five Hundred Thousand (12,500,000) shares of common stock, par value $.001 per share, none of which are issued and outstanding as of the date hereof, to Thirty Five Thousand (35,000) shares of common stock, par value $.001 per share. The foregoing amendment to the Corporation's authorized capital shall be effected by (i) changing 2,500,000 of the Corporation's authorized and unissued shares of Class A Common Stock, par value $.001 per share, to 10,000 shares of Class A Common Stock, par value $.001, in a 1-for-250 reverse stock split and (ii) changing 10,000,000 shares of the Corporation's authorized and unissued shares of Class B Common Stock, par value $.001 per share, to 25,000 shares of Class B Common Stock, par value $.001 per share, in a 1-for-400 reverse stock split. The Corporation's Certificate of Incorporation is hereby amended to reflect the foregoing reverse stock splits by deleting paragraph 4 of the Certificate of Incorporation of the Corporation in its entirety and substituting the following in lieu thereof: "4. The aggregate number of shares which this Corporation shall have authority to issue is Thirty-Five Thousand (35,000) shares consisting of: (i) 10,000 shares of Class A Common Stock, par value $.001 per share (the `Class A Common Stock"), all of which shares shall have full voting rights; and (ii) 25,000 shares of Class B Common Stock, par value $.001 per share (the "Class B Common Stock"), none of which shares shall have any voting rights. In all other respects except voting, the shares of Class A Common Stock and Class B Common Stock shall be identical." 4. The foregoing amendment to the Certificate of Incorporation of the Corporation was authorized by an affirmative vote of the Board of Directors of the Corporation. The Corporation does not have any shareholders of record or any subscribers for shares whose subscriptions have been accepted. IN WITNESS WHEREOF, the undersigned have executed, signed and acknowledged this certificate of amendment this 31st day of July, 1995, and affirm that the contents are true under penalties of perjury. LONG ISLAND PHYSICIAN HOLDINGS CORPORATION By: /s/ David Weissberg ---------------------------- David Weissberg, M.D. President By: /s/ Bala Hari Pillai ---------------------------- Bala Hari Pillai, M.D. Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF LONG ISLAND PHYSICIAN HOLDINGS CORPORATION Under Section 805 of the Business Corporation Law The undersigned, being the President and Secretary, respectively of Long Island Physician Holdings Corporation, a New York corporation (the "Corporation"), for the purpose of amending the Company's Certificate of Incorporation pursuant to Section 805 of the Business Corporation Law of the State of New York, does hereby certify: 1. The name of the Corporation is Long Island Physician Holdings Corporation. The corporation was originally incorporated as LIPC, Inc. 2. The Certificate of Incorporation of the Corporation was filed by the Secretary of State of the State of New York on October 11, 1994. The Certificate of Incorporation was amended pursuant to a Certificate of Amendment filed on December 19, 1994 and a Certificate of Amendment filed on August 8, 1995. 3. The Certificate of Incorporation of the Corporation, as amended, is hereby amended to provide for an increase in the aggregate number of shares of common stock the Company is authorized to issue and to authorize a new class of common stock. The Corporation is authorized to issue Ten Thousand (10,000) shares of Class A Common Stock, par value $.001 per share, all of which shares of Class A Common Stock have full voting rights and Twenty Five (25,000) shares of Class B Common Stock, par value $.001 per share, non of which shares of Class B Common Stock have any voting rights. This amendment to the Corporation's authorized capital shall be effected by amending the Corporation's authorized capital stock so that as amended, such authorized capital stock shall consist of Fifteen Million (15,000,000) shares of Common Stock, par value $.001 per share, Two Million Five Hundred Thousand (2,500,000) of which shares are designated Class A Common Stock with full voting rights, Ten Million (10,000,000) of which shares are designated Class B Common Stock with no voting rights, and Two Million Five Hundred Thousand (2,500,000) of which shares are designated Class C Common Stock, par value $.001 per share, with voting rights except that holders of the Class C Common Stock may not vote in the election of the Corporation's Board of Directors. The Corporation's Certificate of Incorporation is hereby amended to reflect the foregoing by deleting paragraph 4 of the Certificate of Incorporation of the Corporation in it entirety and substituting the following in lieu thereof: "4. The aggregate number of shares which the Corporation shall have authority to issue is Fifteen Million (15,000,000) shares consisting of: (i) 2,500,000 shares of Class A Common Stock, par value $.001 per share (the "Class A Common Stock"), all of which shares shall have full voting rights; and ( ii) 10,000,000 shares of Class B Common Stock, par value $.001 per share (the "Class B Common Stock") none of which shares shall have any voting rights; and (iii) 2,500,000 shares of Class C Common Stock, par value $.001 per share (the "Class C Common Stock"), all of which shares shall have voting rights except the right to vote for the election of the Corporation's Board of Directors. In all other respects except voting, the shares of Class A Common Stock, Class B. Common Stock and Class C Common Stock shall be identical." 4. The foregoing amendment to the Certificate of Incorporation of the Corporation was authorized by the Board of Directors of the Corporation followed by the affirmative vote of the holders of a majority of the issued and outstanding shares of the Class A Common Stock and a majority of the issued and outstanding shares of the Class B Common Stock, present in person or represented by proxy at the Annual Meeting of the Company's Shareholders. 5. The Certificate of Incorporation of the Corporation, as amended, is hereby amended to eliminate preemptive rights currently available to the Corporation's shareholders. The Corporation's Certificate of Incorporation is hereby amended to reflect the foregoing by adding a new paragraph 6 to the Certificate of Incorporation as follows: "6. No holder of any claims of common stock of the Corporation shall be entitled to any preemptive rights to purchase any capital stock of the Corporation or to acquire any option, warrant, right or other instrument (including debt instruments) entitling the holder thereof to acquire any capital stock of the Corporation upon the exercise, conversion or exchange thereof or otherwise." 6. The foregoing amendment to the Certificate of Incorporation of the Corporation was authorized by the Board of Directors of the Corporation followed by the affirmative vote of the holders of a majority of the issued and outstanding shares of the Class A Common Stock and a majority of the issued and outstanding shares of the Class B Common Stick, present in person or represented by proxy at the Annual Meeting of the Corporation's Shareholders. IN WITNESS WHEREOF, I hereunto sign my name and affirm that the statements made herein are true under the penalties of perjury, this 30st day of December, 1997. /s/ David J. Weissberg ------------------------------- Name: David J. Weissberg, M.D. Title: President IN WITNESS WHEREOF, I hereunto sign my name and affirm that the statements made herein are true under the penalties of perjury, this 31st day of December, 1997. /s/ Paul Kolker ------------------------------- Name: Paul Kolker, M.D. Title: Secretary EX-31.1 4 e17584_ex31-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 Certification I, Paul Kolker, Chief Executive Officer of Long Island Physician Holdings Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Long Island Physician Holdings Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2004 /s/ Paul Kolker - ----------------------------------- Paul Kolker, President and Chairman of the Board (Principal Executive Officer) EX-31.2 5 e17584_ex31-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 Certification I, Concetta Pryor, Chief Financial Officer of Long Island Physician Holdings Corporation, certify that: 1. I have reviewed this annual report on Form 10-K of Long Island Physician Holdings Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 14, 2004 /s/Concetta Pryor - --------------------------------------- Concetta Pryor, Chief Financial Officer (Principal Financial Officer) EX-32.1 6 e17584_ex32-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Long Island Physician Holdings Corporation (the "Company") on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul Kolker, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Paul Kolker - -------------------------------- Paul Kolker, President, Chairman of the Board (Principal Executive Officer) April 14, 2004 This certification accompanies the above-described Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-32.2 7 e17584_ex32-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 Certification CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Long Island Physician Holdings Corporation (the "Company") on Form 10-K for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Concetta Pryor, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Concetta Pryor - ----------------------- Concetta Pryor Chief Financial Officer April 14, 2004 This certification accompanies the above-described Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----