UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-27654
LONG ISLAND PHYSICIAN HOLDINGS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-3232989
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Huntington Quadrangle Suite 4C-01
Melville, New York 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 454-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.001
Class B Common Stock, par value $.001
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes |_| No |X|
Indicate by check mark 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 August 13, 2004 there
were 1,506 shares of Class A common stock and 4,333 shares of Class B common
stock outstanding.
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations and Accumulated Deficit 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Long Island Physician Holdings Corporation
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(unaudited)
June 30, December 31,
2004 2003
------------ ------------
Assets
Cash and cash equivalents $ 2,555,272 $ 1,575,080
Premium receivables (net of allowances of approximately
$1,500,000 in 2004 and $959,000 in 2003) 10,181,890 12,544,775
Reinsurance recoverables 113,024 450,549
Payments in excess of capitation 2,074,163 2,074,163
Prepaid expenses and other current assets 1,778,141 2,523,543
Due from Catholic Health Services of Long Island -- 2,382,027
------------ ------------
Total current assets 16,702,490 21,550,137
Property plant and equipment, net 317,934 272,134
Restricted cash and cash investments 5,762,273 5,600,790
Payments in excess of capitation, net of current portion 17,157,494 17,953,057
Other assets 618,625 618,625
------------ ------------
Total assets $ 40,558,816 $ 45,994,743
============ ============
Liabilities and Stockholders' Equity:
Medical claims payable $ 22,133,070 $ 27,542,261
Public goods payable 6,999,738 6,779,734
Unearned premium revenue 1,927,702 1,862,367
Accounts payable and accrued expenses 2,428,833 2,933,560
Current portion of capital lease obligations -- 1,479
------------ ------------
Total current liabilities 33,489,343 39,119,401
Note payable and accrued interest 3,393,927 3,346,059
------------ ------------
Total liabilities 36,883,270 42,465,460
Minority interest in MDNY Healthcare, Inc. 1,717,365 1,682,934
Stockholders' equity
Class A common stock, $.001 par value;
10,000 shares authorized, 1,506 issued
and outstanding 2 2
Class B common stock, $.001 par value;
25,000 shares authorized, 4,333 issued 4 4
and outstanding
Additional paid-in capital 11,478,536 11,478,536
Accumulated deficit (9,520,361) (9,632,193)
------------ ------------
Total stockholders' equity 1,958,181 1,846,349
------------ ------------
Total liabilities and stockholders' equity $ 40,558,816 $ 45,994,743
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
Long Island Physician Holdings Corporation
Consolidated Statements of Operations and Accumulated Deficit
Three Months and Six Months Ended June 30, 2004 and 2003
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Premiums earned $ 33,612,580 $ 38,106,118 $ 68,691,443 $ 78,393,761
Total revenue 33,612,580 38,106,118 68,691,443 78,393,761
------------ ------------ ------------ ------------
Expenses:
Medical services expense 29,229,768 32,787,918 58,996,924 67,192,167
Commissions expense 1,343,810 1,562,971 2,737,116 3,292,790
General and administrative expenses 3,312,692 3,542,382 6,784,391 7,351,732
Depreciation 25,870 37,478 51,174 83,907
------------ ------------ ------------ ------------
Total expenses 33,912,140 37,930,749 68,569,605 77,920,596
------------ ------------ ------------ ------------
Operating (loss) income (299,560) 175,369 121,838 473,165
Investment and other income (80,713) 336,944 88,556 386,371
------------ ------------ ------------ ------------
Income (loss) before income taxes
and minority interest (380,273) 512,313 210,394 859,536
Provision for income taxes 31,500 31,500 64,131 65,000
Minority interest in (income) loss
of subsidiary 133,577 (158,670) (34,431) (262,198)
------------ ------------ ------------ ------------
Net income (loss) (278,196) 322,143 111,832 532,338
Accumulated deficit, beginning of period (9,242,165) (10,432,010) (9,632,193) (10,642,205)
------------ ------------ ------------ ------------
Accumulated deficit, end of period $ (9,520,361) $(10,109,867) $ (9,520,361) $(10,109,867)
============ ============ ============ ============
Basic and diluted income per share $ (47.64) $ 55.17 $ 19.15 $ 91.17
Basic and diluted weighted average shares 5,839 5,839 5,839 5,839
The accompanying notes are an integral part of these consolidated financial
statements.
4
Long Island Physician Holdings Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
(unaudited)
Six months ended
June 30,
2004 2003
----------- -----------
Cash flows from operating activities:
Net income $ 111,832 $ 532,338
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation 51,174 83,907
Minority interest in income of subsidiary 34,431 262,198
Due from Catholic Health Services of Long Island 2,382,027 --
Payments in excess of capitation 795,563 941,410
Reinsurance recoverable 337,525 43,388
Premium receivables 2,362,885 (2,723,125)
Prepaid expenses and other current assets 745,402 (421,727)
Medical claims payable (5,409,191) 96,660
Public goods payable 220,004 1,619,614
Unearned premium revenue 65,335 (77,402)
Accounts payable and accrued expenses and accrued interest (456,859) 276,577
----------- -----------
Net cash provided by operating activities 1,240,128 633,838
----------- -----------
Cash flows from investing activities:
Decrease/Increase in restricted cash and investments (161,483) 255,874
Purchase of property and equipment (96,974) --
----------- -----------
Net cash (used in) provided by investing activities (258,457) 255,874
----------- -----------
Cash flows from financing activities:
Payments on capital lease obligations (1,479) (8,142)
----------- -----------
Net cash used in financing activities (1,479) (8,142)
----------- -----------
Net change in cash and cash equivalents 980,192 881,570
----------- -----------
Cash and cash equivalents, beginning of period 1,575,080 694,449
----------- -----------
Cash and cash equivalents, end of period $ 2,555,272 $ 1,576,019
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
Long Island Physician Holdings Corporation
Notes to the Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
Background
Long Island Physician Holdings Corporation (the "Company" or "LIPH") was
formed in December 1994 in the State of New York as a holding company for
purposes aimed at advancing the delivery of healthcare on Long Island, New York
(Nassau and Suffolk counties). The Company is owned by individual physicians
residing in New York State. The accompanying consolidated financial statements
include the activity of the Company and its majority owned subsidiary, MDNY
Healthcare, Inc. ("MDNY"), a health maintenance organization. The Company owns
67% of stock of MDNY. The Company is exclusively a holding company whose
principal assets is its investment in MDNY and conducts no operating activities
of its own. The Company's legal and other professional costs are funded by MDNY.
Year to date costs as of June 30, 2004 were $195,300. Total costs incurred by
MDNY on behalf of LIPH were $414,571. These amounts are fully reserved for as of
June 30, 2004.
Basis of Presentation
The interim consolidated financial statements reflect all adjustments,
which, in the opinion of management, are necessary for a fair statement of
financial condition and results of operations for the periods presented. Except
as otherwise disclosed, all such adjustments are of a normal recurring nature.
The interim consolidated financial statements have been compiled without audit.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the full year. These interim consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's 2003 Annual Report on Form 10-K.
Certain amounts reported in the Company's consolidated statements of operations
for the six months ended June 30, 2004 have been reclassified to conform to the
2003 presentation.
Earnings Per Share
Basic and diluted income per share is based on the number of shares of
Class A common stock and Class B common stock outstanding during the period. At
June 30, 2004 and 2003, the Company had outstanding stock options to purchase
1,041 shares of Class B common stock that were not included in the computation
of diluted earnings per share because the exercise price was greater than the
average market price of common share.
New Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", as revised in December 2003. ("FIN 46"). FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. Historically, entities generally were not consolidated unless
the entity was controlled through voting interests. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. The adoption of
FIN 46 did not have an impact on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133. SFAS 149 is effective for contracts entered
into or modified after September 30, 2003, and for hedging relationships
designated after September 30, 2003. The adoption of SFAS 149, effective July 1,
2003, did not have a material impact on the Company's results of operations or
financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"),
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after September 15, 2003. The Company's adoption of the initial
recognition and initial measurement provisions of SFAS 150, effective September
1, 2003, did not have a material impact on the Company's results of operations
or financial position.
6
Long Island Physician Holdings Corporation
Notes to the Financial Statements
(unaudited)
2. REGULATORY DEVELOPMENTS
As a condition of continued licensure by the New York State Insurance
Department ("NYSID"), MDNY must maintain certain reserve requirements to protect
its subscribers in the event MDNY is unable to meet its obligations. NYSID
directed MDNY to take appropriate action to achieve net worth of at least $7
million, MDNY's escrow deposit requirement determined as of December 31, 2003,
by July 10, 2003. MDNY failed to meet the $7 million statutory net worth
requirement by July 10, 2003. As of June 30, 2004, MDNY failed to satisfy its
NYSID statutory net worth requirement of $7.7 million (MDNY's contingent reserve
requirement determined as of December 31, 2003) by approximately $1.2 million.
NYSID has directed MDNY to provide monthly financial statements and NYSID
continues to monitor MDNY's financial performance.
7
Long island Physician Holdings Corporation
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Company Overview
Long Island Physician Holdings Corporation (the "Company" or "LIPH") is a
New York corporation formed in December 1994 and owned by physicians residing
and practicing in New York State. The Company conducts no operating activities
of its own. The Company's principal asset is 67% of the stock in MDNY
Healthcare, Inc. ("MDNY"), an independent practice association-model health
maintenance organization ("HMO"), that currently operates in Nassau and Suffolk
counties, New York. The financial statements of MDNY are consolidated into the
audited financial statements of the Company. Catholic Healthcare Network of Long
Island, Inc. ("CHNLI") owns the remaining 33% of the stock in MDNY. MDNY
commenced operations in 1996. At June 30, 2004, MDNY had approximately 42,000
members ("Members"), comprised of individuals and families, enrolled in its
health maintenance plans and point-of-service plans. As of December 31, 2003
membership was approximately 47,000.
The Company is affiliated with LIPH, LLC (the "LLC"), a New York limited
liability company formed in December 1996. Upon the formation of the LLC, the
shareholders of the Company owned all of the membership interests in the LLC.
The assets of the LLC consist of the stock in three independent practice
associations, Island Practice Association, I. P. A., 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.
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, increased
from $21 pmpm at December 31, 2003, respectively, to $26 pmpm at June 30, 2004.
This was primarily due to MDNY's continued decline 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.
As of June 30, 2004, the reported profit of approximately $112,000 is the
result of the overall increase in premium yields that became effective in 2004.
MDNY seeks to control medical expenses through arrangements with its affiliated
IPAs and with non-IPA primary care physicians, with certain specialty providers,
and through its quality improvement programs, utilization management and review
of hospital inpatient and outpatient services, and educational programs on
effective managed care for its providers. MDNY's medical loss ratio was 85.9%
and 85.7%, respectively, for the six months ended June 30, 2004 and 2003. As of
June 30, 2004 and 2003 enrollment was 41,788 and 53,453 respectively.
MDNY's working capital deficit decreased from $17.6 million at December
31, 2003 to $16.8 million at June 30, 2004 primarily due to earnings generated
during 2004.
8
Recent Developments
Certain Regulatory Matters.
The New York State Department of Health ("NYSDOH") and the New York State
Insurance Department ("NYSID") require MDNY to maintain reserves in the form of
cash and statutory net worth.
During the second quarter 2000, the NYSID performed its first financial
audit of MDNY and the IPAs as of June 30, 2000. On May 10, 2001, MDNY received
from NYSID a Draft Report on Examination of MDNY as of June 30, 2000 (the "Draft
Report"). The Draft Report stated, among other things, NYSID's determinations
that, as of June 30, 2000, MDNY was insolvent in the amount of $4,311,487 and
that MDNY's required contingency reserves were impaired in the amount of
$12,231,333. These determinations resulted from NYSID's position that MDNY
should have reported the IPAs' obligations in MDNY's financial statements.
MDNY's position was that the IPAs, not MDNY, are responsible for their own
obligations, and MDNY disputed NYSID's attribution of IPA liabilities to MDNY.
With respect to years prior to 2001, MDNY was contractually obligated to
pay a capitated amount to Island IPA for covered services provided by
participating providers. Through 2001, however, MDNY continued to pay medical
claims to Island IPA relating to claims with dates of service prior to January
1, 2001 in excess of capitated amounts for years prior to 2001. These payments
resulted 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 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. As of June 30, 2004 the Island Debt
was $19.2 million. The $769,000 reduction of the Island Debt since December 31,
2003 is the result of the IPA Withhold paid for the six months ended June 30,
2004.
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;
9
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. MDNY terminated
this financial advisor in the second quarter 2004. No sale of MDNY 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.
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.
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 intention 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 June 30, 2004 and
December 31, 2003, a total of 11,645 and 13,429 members were enrolled from CHSLI
and the Diocese respectively. Premiums from the Diocese and the Hospitals
represented approximately 28% and 27% of total premiums earned by MDNY as of
June 30, 2004 and December 31, 2003 respectively. 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
The Company and MDNY have ongoing 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 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.
10
Business Strategy
MDNY is focusing on the following six areas in 2004 to achieve
profitability and enrollment growth:
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.
o Applying to NYSDOH for an Article 43 (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. During the
first quarter of 2004, NYSDOH indicated its preliminary
unwillingness to grant this license as the Company continues to be
impaired.
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.
11
The following table provides certain statement of operations data
expressed as a percentage of total revenue and other statistical data for the
six-month period ended June 30, 2004 and 2003:
2004 2003
------- -------
Revenues:
Premiums earned 100.0% 100.0%
------- -------
Total revenue 100.0 100.0
------- -------
Medical claims expense 85.9 85.7
Commissions expense 4.0 4.2
General and administrative expenses 9.8 9.4
Depreciation .1 .1
------- -------
Total expenses 99.8 99.4
Operating income .2 .6
Investment and other income .1 .5
Operating income before income taxes .3 1.1
Net income before income taxes minority interest .2 1.0
------- -------
Income tax expense .1 0.1
Minority interest in income of subsidiary (0.1) (0.3)
------- -------
Net income .1% 0.7%
------- -------
Statistical data:
Enrollment (HMO and POS) 41,788 53,453
HMO enrollment 38,217 44,888
POS enrollment 3,571 8,565
ASO enrollment -- 3,651
^Member months 254,607 330,825
*Medical loss ratio 85.9 85.7
**Administrative loss ratio 13.9 13.6
* Medical loss ratio- Medical expense and net reinsurance divided by total
premium
** Administrative loss ratio-Commission expense, depreciation, and general
administrative expense divided by total premium
^ does not include ASO member months which is dental only
Comparison of three months ended June 30, 2004 and 2003
Revenues for the three months ended June 30, 2004 were $33,612,580 down
12% from $38,106,118 during the same period in the prior year. Enrollment
totaled 41,788 at June 30, 2004 down 22% from 53,453 at June 30, 2003. Premium
revenues decreased $4,493,538 or 12% as a result of the decline in enrollment
offset by premium rate increases. In addition, although enrollment in the POS
products dropped to 3,571 from 8,565 at June 30, 2004, MDNY was approved for a
10% differential in sole proprietor rates effective June 1, 2003, which helped
offset anticipated declines in premium related to the drop in enrollment.
Premium yields for the second quarter increased 12% to $269.03 on a pmpm (per
member per month) basis from $241.15 compared to the second quarter 2003.
Total expenses for the quarter ended June 30, 2004 were $33,912,140 down
11% from $37,930,749 for the same period in the prior year. This decrease in
expenses is the result of enrollment declines realized during the second
quarter.
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Medical claim expense as a percent of premium revenues was 85.9% for the
second quarter 2004 compared to 85.7% for the second quarter 2003. Medical costs
stated on a pmpm basis increased to $233.95 for the second quarter 2004 from
$207.49 during the same period in the prior year a 13% increase.
Commissions as a percent of premium remained at approximately 4% for the
second quarter 2004 and second quarter 2003. Although enrollment decreased
during the second quarter 2004, the percentage of enrollment generated through
associations remained approximately 4%.
Net loss for the second quarter of 2004 totaled $278,196 compared with a
net income of $322,143 for the second quarter 2003. Higher than anticipated
medical costs realized in the first quarter 2004 restated in May 2004
contributes to the overall net loss reported in the second quarter.
Comparison of six months ended June 30, 2004 and 2003
Total revenues for the six months ended June 30, 2004 were $68,691,443,
down 12% from $78,393,761 during the same period in the prior year. MDNY's
commercial enrollees totaled approximately 41,788 as compared to approximately
53,453 for the same period in 2003. Revenue decreased $9.7 million for the six
months ended 2004 compared to the same period in 2003; a decline of 12%. This
revenue decrease was primarily the result of the overall 23% decrease in member
months partially offset by premium rate increases. In addition ,premium yields
on the POS products are approximately 59% higher than the HMO products therefore
further contributing to the overall decrease in premium. Total member months for
the period ended June 30, 2004 decreased approximately 76,000 or 23% from the
same period in 2003.
Total expenses for the period ended June 30, 2004 were $68,569,605, down
12% from $77,920,596 for the same period in the prior year. This 12% decrease in
expenses is the result of a decrease in medical expenses resulting from the 23%
drop in member months.
Medical claim expense stated as a percentage of premium revenues was 85.9%
for the six month period ended June 30, 2004 compared with 85.7% for the six
month period ended June 30, 2003.
Commissions and administrative expenses stated as a percentage of premium
revenue was 13.8% for the period ended June 30, 2004 compared with 13.6% for the
same period in the prior year. Total administrative costs decreased
approximately $1.2 million as of June 30, 2004 down 12% from the same period in
the prior year. The increase in administrative costs stated as a percent of
premium revenue increased as a result of declining enrollment.
Net income for the period ended June 30, 2004 was $111,832 compared to a
net income of 532,338 for the same period in the prior year. This decrease is
primarily the result of higher than anticipated medical expenses restated for
the first quarter offset by better than expected second quarter 2004.
Liquidity and Capital Resources
Cash and cash equivalents for the six months ended June 30, 2004 increased
to $2,555,272 from $1,575,080 at December 31, 2003. The increase of
approximately $980,192 in net cash and cash equivalents is related to the timing
of the receipt of premium payments.
MDNY had a negative working capital of $16.8 million at June 30, 2004
compared to a negative working capital of $17.6 million at December 31, 2003.
The negative working capital decreased as of June 30, 2004 primarily due to
earnings generated during 2004. The Company anticipates that 2004 rate increases
together with the other operating initiatives described above under the caption
"Business Strategy" will produce sufficient cash flows to meet MDNY's
obligations. There can be no assurance that MDNY will be able to achieve
sufficient cash flows.
Capital Reserves and Liquidity
Certain matters relating to MDNY's regulatory status, its compliance with
applicable reserve and statutory net worth requirements and liquidity are
discussed above under the captions "--Recent Developments" and "--Business
Strategy."
The continued failure of MDNY to meet reserve requirements, the failure of
MDNY or the IPAs to comply with other existing laws and regulations or a
significant change in such laws or regulations could materially and adversely
affect the operations, financial condition and prospects of the Company, MDNY
and the IPAs.
13
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 brought MDNY's June 30, 2004 statutory net worth to $6.5
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).
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
While many operational aspects of MDNY's business are subject to complex
federal, state and local regulations, the accounting for the Company's business
is generally straightforward with revenues primarily recognized during the
period in which MDNY is obligated to provide services to subscribers. Premiums
collected in advance are deferred and recorded as unearned premium revenue in
the balance sheet. Due to the nature of MDNY's business, several of the
Company's accounting policies, primarily relating to costs of claims incurred
but not reported and allowance for doubtful accounts associated with premium and
reinsurance receivables, involve significant estimates and judgments. These
accounting policies have been described in our 2003 Annual Report on Form 10-K.
Factors Affecting Future Results
Health Insurance Portability and Accountability Act of 1996
The Secretary of the Department of Health and Human Services, or HHS, has
issued final regulations under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), designed to improve the efficiency and
effectiveness of the health care system by facilitating the electronic exchange
of information in certain financial and administrative transactions while
protecting the privacy and security of the information exchanged. Three
principal regulations have been issued: privacy regulations, security
regulations, and standards for electronic transactions.
MDNY implemented the HIPAA privacy regulations by April 2003, as required,
and is evaluating the costs of upgrading its systems and procedures to fully
comply with the security regulations by the compliance deadline of April 20,
2005.
The HIPAA regulations on electronic transactions, which the Company refers
to as the transaction standards, establish uniform standards for electronic
transactions and code sets, including the electronic transactions and code sets
used for claims, remittance advices, enrollment and eligibility. The transaction
standards became effective in October 2002, although covered entities were
eligible to obtain a one-year extension if approved through an application to
the Secretary of HHS. MDNY received this one-year extension through October 16,
2003 from HHS.
HHS issued Guidance on July 24, 2003 that it will not penalize a covered
entity for post-implementation date transactions that are not fully compliant
with the transactions standards, if the covered entity can demonstrate its good
faith efforts to comply with the standards. HHS' stated purpose for this
flexible enforcement position was to "permit health plans to mitigate unintended
adverse effects on covered entities' cash flow and business operations during
the transition to the standards, as well as on the availability and quality of
patient care."
There is a divergence of interpretation as to how the new transaction
standards are to be implemented and as a result, MDNY could face increased costs
and complexity, and a temporary disruption in MDNY's business processes. MDNY is
continuing to make good faith efforts to comply with the standards. At this
time, the Company cannot estimate the potential impact of implementing (or
failing to implement) the HIPAA transaction standards on cash flows and results
of operations.
Impact of New Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", as revised in December 2003. In April 2003, the
FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
14
and Hedging Activities". In May 2003, the FASB issued SFAS No. 150, " Accounting
for Certain Instruments with Characteristics of both Liabilities and Equity".
The impact of the above referenced accounting standards is discussed in
Note 1 to the interim consolidated financial statements.
Inflation
Medical costs have been rising at a higher rate than that for consumer
goods as a whole. The Company believes that MDNY's premium increases, provider
reimbursement arrangements and other cost control measures mitigate, but do not
wholly offset, the effects of medical cost inflation on MDNY's operations.
MDNY's inability to increase premiums could negatively effect MDNY's future
earnings.
Certain Factors Affecting Future Operating Results
Certain statements in this Report on Form 10-Q are forward-looking
statements and are not based on historical facts but are management's
projections or best estimates. Such forward-looking statements include but are
not limited to, statements concerning future or prospective: results of
operations or financial position, liquidity, health care and administrative
costs, premium rates and yields for commercial business, growth and retention of
membership and development of new lines of business, health care benefits,
provider networks, provider utilization rates, medical loss ratio levels, claims
payment, service performance and other operations matters, administrative loss
ratio levels, proposed efforts to control health care and administrative costs,
impact of agreements with health care providers and related organizations of
providers, reinsurance coverage for risk-transfer arrangements, enrollment
levels, government regulation such as HIPAA, PBOR, the impact of new laws and
regulation, the future of the health care industry, and the impact on MDNY of
regulatory investigations and examinations. Actual results may differ materially
from those expressed or implied by such forward-looking statements due to risks
and uncertainties, including but not limited to the following: 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 will not 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.
See also the discussion under "Risks and Uncertainties" in Note 3 of the
Notes to Condensed Consolidated Financial Statements included in this Report and
matters referred to throughout Item 1 of the Company's Annual Report on Form 10K
for the fiscal year ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Part I -- Item 2 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quantitative and Qualitative Disclosure
About Market Risk."
Item 4. Controls and Procedures
Based upon an evaluation by the Company's President and Chairman of the
Board and its Chief Financial Officer as of the end of the period covered by
this report, they have concluded that the Company's disclosure controls and
procedures, as
15
defined under rules 13a-15(e) and 15d-15(e) of 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.
During the most recent fiscal quarter, there have been no significant
changes in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification
32.1 Chief Executive Officer Section 1350 Certification
32.2 Chief Financial Officer Section 1350 Certification
b. Reports on Form 8-K.
None.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LONG ISLAND PHYSICIAN HOLDINGS CORPORATION
By: /s/ PAUL KOLKER, M.D.
--------------------------------------------
Name: Paul Kolker, M.D.
Title: President and Chief Executive Officer
Date August 16, 2004
By: /s/ CONCETTA PRYOR
--------------------------------------------
Name: Concetta Pryor
Title: Chief Financial Officer
(Principal Financial Officer)
Date August 16, 2004
18