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 September 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
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(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 November 12, 2004 there
were 1,795 shares of Class A common stock and 4,044 shares of Class B common
stock outstanding, after giving effect to the exchange of 289 shares of Class B
common stock for an equal number of shares of Class A common stock by certain
qualifying non-physicians pursuant to the Registrant's June 2004 exchange offer.
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
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 16
SIGNATURES 18-22
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Long Island Physician Holdings Corporation
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
September 30, December 31,
2004 2003
------------ ------------
Assets
Cash $ 1,050,091 $ 1,575,080
Premium receivables (net of allowances of approximately
$1,400,000 in 2004 and $959,000 in 2003) 8,698,880 12,544,775
Reinsurance recoverables 150,000 450,549
Payments in excess of capitation 2,074,163 2,074,163
Prepaid expenses and other current assets 2,371,961 2,523,543
Due from Catholic Health Services of Long Island -- 2,382,027
------------ ------------
Total current assets 14,345,095 21,550,137
Property plant and equipment, net 317,974 272,134
Restricted cash and cash investments 5,790,821 5,600,790
Payments in excess of capitation, net of current portion 16,866,847 17,953,057
Other assets 618,625 618,625
------------ ------------
Total assets $ 37,939,362 $ 45,994,743
============ ============
Liabilities and Stockholders' Equity:
Medical claims payable $ 22,164,849 $ 27,542,261
Public goods payable 5,208,352 6,779,734
Unearned premium revenue 1,924,980 1,862,367
Accounts payable and accrued expenses 2,761,552 2,933,560
Current portion of capital lease obligations -- 1,479
------------ ------------
Total current liabilities 32,059,733 39,119,401
Note payable and accrued interest 3,420,788 3,346,059
------------ ------------
Total liabilities 35,480,521 42,465,460
Minority interest in MDNY Healthcare, Inc. 1,312,224 1,682,934
Stockholders' equity
Class A common stock, $.001 par value;
10,000 shares authorized, 1,795 issued
and outstanding 2 2
Class B common stock, $.001 par value;
25,000 shares authorized, 4,044 issued 4 4
and outstanding
Additional paid-in capital 11,478,536 11,478,536
Accumulated deficit (10,331,925) (9,632,193)
------------ ------------
Total stockholders' equity 1,146,617 1,846,349
------------ ------------
Total liabilities and stockholders' equity $ 37,939,362 $ 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 Nine Months Ended September 30, 2004 and 2003
Three months ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenue:
Premiums earned $ 33,348,500 $ 38,188,274 $ 102,039,943 $ 116,582,035
Total revenue 33,348,500 38,188,274 102,039,943 116,582,035
Expenses:
Medical services expense 29,463,507 31,951,760 88,460,431 99,143,927
Commissions expense 1,283,374 1,551,353 4,020,490 4,844,143
General and administrative expenses 3,793,404 3,370,226 10,577,795 10,721,958
Depreciation 27,750 46,593 78,924 130,500
------------- ------------- ------------- -------------
Total expenses 34,568,035 36,919,932 103,137,640 114,840,528
------------- ------------- ------------- -------------
Operating (loss) income (1,219,535) 1,268,342 (1,097,697) 1,741,507
Investment and other income 36,783 190,449 125,339 576,820
------------- ------------- ------------- -------------
Income (loss) before income taxes
and minority interest (1,182,752) 1,458,791 (972,358) 2,318,327
Provision for income taxes 33,953 31,743 98,084 96,743
Minority interest in (income) loss
of subsidiary 405,141 (478,053) 370,710 (740,251)
------------- ------------- ------------- -------------
Net income (loss) (811,564) 948,995 (699,732) 1,481,333
Accumulated deficit, beginning of period (9,520,361) (10,109,867) (9,632,193) (10,642,205)
------------- ------------- ------------- -------------
Accumulated deficit, end of period $ (10,331,925) $ (9,160,872) $ (10,331,925) $ (9,160,872)
============= ============= ============= =============
Basic and diluted income per share $ (138.99) $ 162.53 $ (199.84) $ 253.7
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
Nine Months Ended September 30, 2004 and 2003
Nine months ended
September 30,
2004 2003
----------- -----------
Cash flows from operating activities:
Net (loss) income $ (699,732) $ 1,481,333
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation 78,924 130,500
Minority interest in income of subsidiary (370,710) 740,251
Changes in operating assets and liabilities:
Due from Catholic Health Services of Long Island 2,382,027
Payments in excess of capitation 1,086,210 1,517,041
Reinsurance recoverable 300,549 117,083
Premium receivables 3,845,895 (4,047,441)
Prepaid expenses and other current assets 151,582 (180,049)
Medical claims payable (5,377,412) (2,812,736)
Public goods payable (1,571,382) 1,830,907
Unearned premium revenue 62,613 (156,482)
Accounts payable and accrued expenses and accrued interest (97,279) 698,989
----------- -----------
Net cash used in operating activities (208,715) (680,604)
----------- -----------
Cash flows from investing activities:
(Increase)/decrease in restricted cash and investments (190,031) 70,452
Purchase of property and equipment (124,764) (33,794)
----------- -----------
Net cash (used in) provided by investing activities (314,795) 36,658
----------- -----------
Cash flows from financing activities:
Payments on capital lease obligations (1,479) (12,398)
----------- -----------
Net cash used in financing activities (1,479) (12,398)
----------- -----------
Net decrease in cash and cash equivalents (524,989) (656,344)
----------- -----------
Cash beginning of period 1,575,080 694,449
----------- -----------
Cash end of period $ 1,050,091 $ 38,105
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements
5
Long Island Physician Holdings Corporation
Notes to Consolidated Financial Statements
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 the stock of MDNY. The Company is exclusively a holding company whose
principal asset is its investment in MDNY and conducts no operating activities
of its own.
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 nine months ended September 30, 2004 have been reclassified to conform
to the 2003 presentation. The Company's legal and other professional costs are
funded by MDNY. Year to date costs as of September 30, 2004 were $228,503. Total
costs incurred by MDNY on behalf of LIPH were $500,596. These amounts are fully
reserved for as of September 30, 2004.
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
September 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
Going Concern
The Company's financial statements have been presented on the basis that
it will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has a substantial working capital deficit and has incurred cumulative
losses since inception. Furthermore, on October 6, 2004, the Diocese of
Rockville Center (the "Diocese") notified MDNY that the Diocese will not renew
its subscriber contract with MDNY upon expiration thereof effective January 1,
2005 and that the Diocese had chosen another entity to act as its third party
administrator to administer the Diocesan lives on a self insured basis from and
after January 1, 2005. The Diocese has 3,874 members as of September 30, 2004
and represents approximately 10% of MDNY's premiums. In addition to the
continued decline in enrollment, the loss of the Diocesan members could have a
material adverse affect on MDNY's business and financial condition.
Management has initiated efforts to reduce operating and medical expenses
primarily relating to staffing reductions and renegotiation of provider
contracts. However, without the investment of sufficient additional capital to
enable MDNY to compete effectively, it is uncertain whether MDNY's business and
financial condition will improve.
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 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 September 30, 2004, MDNY had approximately 40,800 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 $28 pmpm at September 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 Point of Service Products, ("POS") 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.
For the nine months ended September 30, 2004, the reported loss of
$699,732 is the result of the higher than anticipated medical costs coupled with
increased administrative costs associated with advertising and overall declining
enrollment. MDNY is seeking reductions in administrative costs and other ways 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 86.7% and 85%,
respectively, for the nine months ended September 30, 2004 and 2003. As of
September 30, 2004 and 2003 enrollment was 40,815 and 50,125 respectively.
7
MDNY's negative working capital deficit remained approximately $17 million at
December 31, 2003 and September 30, 2004 respectively. Although the $2.3 million
received by CHSLI in April 2004 improved MDNY's cash position, this improvement
was offset by losses incurred in the third quarter 2004.
Recent Developments
As a condition to continued licensure by the New York State Insurance
Department ("NYSID"), MDNY must maintain certain required reserves to protect
its subscribers in the event MDNY is unable to meet its obligations. Reserve
requirements are calculated based upon the greater of a contingent reserve or an
escrow deposit. The contingent reserve is calculated by incrementally adding 1%
of premiums written, subject to a cap. MDNY's contingent reserve is currently
capped at 5% of current billed premiums, and its contingent reserve requirement
under this cap is $7.7 million. The escrow deposit is calculated at 5% of the
following year's expected medical costs.
On August 17, 2004, NYSID notified MDNY that MDNY was required to increase
and restate its contingent reserve requirement to approximately $9.4 million
from $7.7 million pursuant to applicable state laws because MDNY writes POS
coverage other than the direct program mandated by New York State law. In such
circumstances, applicable state law requires an increase to the cap on an HMO's
billed premium by 2% (i.e., to 7% from 5%).
On September 22, 2004, MDNY requested that NYSID approve a reduction in
MDNY's contingent reserve fund pursuant to Part 98 of the Public Health Law.
Under Part 98, NYSID may approve a reduction in MDNY's contingent reserve fund
requirement if MDNY can demonstrate fluctuations in enrollment and expenses and,
limitations on out-of network costs either through reinsurance or other
financial arrangements. MDNY believes that it can demonstrate certain
operational factors that would support a reduction in the amount of MDNY's
contingent reserve fund requirement. On November 5, 2004, NYSID informed MDNY
that, pending a final determination by NYSID on MDNY's request, NYSID will
continue to allow MDNY's contingent reserve, as reported in its September 30,
2004 quarterly statements, to be calculated using 5% of MDNY's 2003 premium,
i.e., $7.7 million. There can be no assurance that NYSID will grant MDNY the
requested relief, if any.
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.
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 and Religious Directives for Catholic
Health Care Services of the United State Conference of Catholic Bishops, to
which CHNLI, Catholic Health Services of Long Island ("CHSLI"), on behalf of
five Catholic hospitals that act as providers to MDNY (the "Hospitals"), and the
Diocese of Rockville Center (the "Diocese") 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. In
addition, on October 6, 2004, the Diocese notified MDNY that the Diocese will
not renew its subscriber contract with MDNY upon expiration thereof effective
January 1, 2005 and that the Diocese had chosen another entity to act as its
third party administrator to administer the Diocesan lives on a self insured
basis after January 1, 2005. The Diocese has 3,874 members as of September 30,
2004 and represents approximately 10% of MDNY's premiums. The loss of the
Diocesan lives could have a material adverse affect on MDNY's business and
financial condition.
MDNY also provides health care insurance to the employees of the Hospitals
affiliated with CHSLI. There can be no assurance that CHSLI, on behalf of the
Hospitals, will renew its current subscriber contract with MDNY upon expiration
thereof effective January 1, 2006, or that, if the current subscriber contract
expires, and CHSLI becomes self-insured, MDNY and CHSLI would agree on the terms
and conditions on which CHSLI would act as a third party administrator to
employees of the Hospitals. As a third party administrator, MDNY would receive a
monthly fee for providing underwriting, medical management, claims processing
and other administrative services to the Hospitals but would not assume
insurance risk for the cost of providing health care benefits to employees of
the Hospitals. CHSLI and the Hospitals have 7,504 members as of September 30,
2004 and represent approximately 18% of MDNY's premiums. If CHSLI fails to renew
its subscriber contract in January 2006 and MDNY does not become the third party
administrator for CHSLI, the loss of business would have a material adverse
effect on MDNY's business and financial condition.
At September 30, 2004 and December 31, 2003, a total of 11,378 and 13,429
members were enrolled from CHSLI and the Diocese, respectively. Premiums from
the Diocese and the Hospitals represented an aggregate of approximately 28% and
27% of total premiums earned by MDNY as of September 30, 2004 and December 31,
2003 respectively.
8
The Company and CHNLI are negotiating the terms and conditions upon which
the Company would purchase CHNLI's stock in MDNY for a nominal consideration and
grant CHNLI a contingent interest in the proceeds of any future sale of MDNY.
There can be no assurance that the Company and MDNY will be able to affect such
a purchase on terms acceptable to the Company, if at all.
In October 2003, MDNY agreed to pay each of Salvatore Caravella, M.D., the
President and a Director of MDNY, and Rosario Romano, M.D., President of Island
Practice Association, IPA, Inc., $5,000 per month commencing with September 2004
in consideration of their participation in reviewing with other officers and
employees MDNY's utilization management, credentialing and operations processes.
In addition, MDNY agreed to pay Paul Kolker, M.D., a Director of MDNY and
President and Chairman of the Board of LIPH, $5,000 per month commencing with
September 2004 in consideration of Dr. Kolker's participation in negotiations
regarding potential strategic transactions by MDNY (including, without
limitation, equity investments in MDNY by third parties, the disposition of the
assets or stock of MDNY and related commercial transactions (collectively,
"Strategic Transactions")) as well as negotiations among MDNY, LIPH, CHNLI, the
Diocese and CHSLI regarding CHNLI's withdrawal as a shareholder of MDNY and
MDNY's contractual relationships with CHSLI and the Diocese (collectively
"Shareholder Transactions"). MDNY agreed to pay to Dr. Kolker $3,871 per month
retroactive to June 2002 (the month Dr. Kolker became President and Chairman of
LIPH) by means of a lump sum payment of $104,523 in consideration of Dr.
Kolker's participation from and after June 2002 in negotiations regarding
potential Strategic Transactions and Shareholder Transactions.
Despite generating a small profit in 2003, MDNY has incurred $699,732 in
losses through September 30, 2004. This loss is the result of higher than
anticipated medical costs coupled with increased administrative costs associated
with advertising and overall declining enrollment. The Company believes that the
decline in enrollment is largely attributable to the fact that MDNY lacks the
resources and capacity to compete with larger, better capitalized competitors
and that MDNY's Article 44 HMO license restricts MDNY from offering innovative,
competitive products. In order to offer competitive products, the Company
believes that MDNY would need to obtain an Article 42 license, which would
require additional capital to meet Article 42 reserve requirements. Financial
advisors and potential investors have informed MDNY that any investment by a
third party in MDNY might require a significant restructuring of MDNY including
CHNLI's prior withdrawal as an MDNY shareholder and might entail the reduction
of LIPH's equity interest in MDNY to a minority position. Without the investment
of sufficient additional capital to enable MDNY to compete effectively, the
Company believes that MDNY's business and financial condition is unlikely to
improve. MDNY is in the process of engaging a financial advisor to assist in
effecting an investment in or acquisition of MDNY that would result in the
adequate capitalization of MDNY and the possible reduction of LIPH's equity
interest in MDNY to a minority position. No such transaction is currently under
negotiation and there can be no assurance that the Company and MDNY will be able
to effect any such transaction on terms satisfactory to the Company, if at all.
MDNY is seeking reductions in administrative costs and other ways 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. There is no assurance that such actions will achieve
positive results from operations or adequate working capital and equity.
Recovery and Subordination Agreement
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.
With NYSID's approval, MDNY, Island IPA and CHSLI, 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, MDNY is
required to pay Island IPA 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
9
(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 September 30, 2004 the Island
Debt was $19 million. The $1.0 million reduction of the Island Debt since
December 31, 2003 is the result of the IPA Withhold paid for the nine months
ended September 30, 2004. As of September 30, 2004 and December 31, 2003, no
payment by MDNY to Island IPA for network access fees has been made or will be
required to be made to Island IPA. In addition, Island IPA has not received any
income from other sources as of September 30, 2004 and December 31, 2003
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 "NYSID 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."
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 New York State Department of Health ("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. LIPH and CHNLI have
approved amendments to MDNY's certificate of incorporation and bylaws that
reduce the number of MDNY's board of directors from MDNY from 18 to 12. It is
anticipated that in the event LIPH purchases CHNLI's stock in MDNY, the
composition of MDNY's board of directors would be changed to comply with the 20%
enrollee representation requirement.
10
The following table provides certain statement of operations data
expressed as a percentage of total revenue and other statistical data for the
nine-month period ended September 30, 2004 and 2003:
2004 2003
----- -----
Revenues:
Premiums earned 100% 100.0%
----- -----
Total revenue 100.0 100.0
----- -----
Medical claims expense 86.7 85.0
Commissions expense 3.9 4.2
General and administrative expenses 10.4 9.2
Depreciation .1 .1
----- -----
Total expenses 101.1 98.5
Operating (loss) income (1.0) 1.5
Investment and other income .1 .5
Operating (loss) income before income taxes (1.0) 2.0
Net (loss) income before income taxes minority interest
----- -----
Income tax expense .1 0.1
Minority interest in (income) loss of subsidiary .4 (0.6)
----- -----
Net (loss) income (.7)% 1.3%
----- -----
Statistical data:
Enrollment (HMO and POS) 40,815 50,125
HMO enrollment 37,552 42,656
POS enrollment 3,263 7,559
ASO enrollment 0 3,640
^Member months 377,353 482,183
*Medical loss ratio 86.7 85.0
**Administrative loss ratio 14.4 13.5
* 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 September 30, 2004 and 2003
Revenues for the three months ended September 30, 2004 were $33,348,500
down 13% from $38,188,274 during the same period in the prior year. Enrollment
totaled 40,815 at September 30, 2004 down 19% from 50,215 at September 30, 2003.
Premium revenues decreased $4,839,744 or 13% as a result of the decline in
enrollment offset by premium rate increases in 2004. Premium yields for the
third quarter increased 8% to $272 on a pmpm (per member per month) basis from
$252 compared to the third quarter 2003.
Total expenses for the quarter ended September 30, 2004 were $34,568,035
down 6% from $36,919,932 for the same period in the prior year. This decrease in
expenses is the result of declines in medical costs associated with the decline
in enrollment and increased administrative costs associated with approximately
$300,000 of advertising costs incurred in the third quarter.
Medical claim expense as a percent of premium revenues was 88.4% for the
third quarter 2004 compared to 83.7% for the third quarter 2003. Medical costs
stated on a pmpm basis increased to $240 for the third quarter 2004 from $211
during
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the same period in the prior year, a 14% increase. This increase in medical
costs is the result of higher medical costs incurred in June 2004 restated in
July 2004 which approximated 700,000.
Commissions as a percent of premium remained at approximately 4% for the
third quarter 2004 and 2003. Although enrollment decreased during the third
quarter 2004, the percentage of enrollment generated through associations
remained approximately 38%.
Net loss for the third quarter of 2004 totaled $811,564 compared with a
net income of $948,995 for the third quarter 2003. Higher than anticipated
medical costs realized in the second quarter 2004 restated in July 2004 combined
with additional losses reported in the third quarter contribute to the overall
net loss reported.
Comparison of nine months ended September 30, 2004 and 2003
Total revenues for the nine months ended September 30, 2004 were
$102,039,943, down 12% from $116,582,035 during the same period in the prior
year. MDNY's enrollees totaled approximately 40,815 for the nine months ended
September 30, 2004 as compared to approximately 50,125 for the same period in
2003. Revenue decreased $14.5 million for the nine months ended September 30,
2004 compared to the same period in 2003; a decline of 12%. This revenue
decrease was primarily the result of the overall 22% 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 September 30, 2004 decreased approximately 104,830 or 22% from
the same period in 2003.
Total expenses for the period ended September 30, 2004 were $103,137,630,
down 10% from $114,840,528 for the same period in the prior year. This 10%
decrease in expenses is the result of a decrease in medical expenses resulting
from the 22% drop in member months.
Medical claim expense stated as a percentage of premium revenues was 86.7%
for the nine month period ended September 30, 2004 compared with 85% for the
nine month period ended September 30, 2003.
Commissions stated as a percentage of premium revenue was 3.9% for the
period ended September 30, 2004 compared with 4.2% for the same period in the
prior year. Total administrative costs remained approximately $10.6 million as
of September 30, 2004 and 2003 respectively. As of September 30, 2004
administrative costs stated as a percent of premium revenue increased to 14.4%
from 13.5% for the same comparative time period as a result of declining
enrollment.
Net loss for the period ended September 30, 2004 was $699,732 compared to
a net income of $1,481,333 for the same period in the prior year. This decrease
is primarily the result of higher than anticipated medical expenses restated for
the second quarter combined with higher administrative costs as enrollment
decline throughout the third quarter 2004.
Liquidity and Capital Resources
Cash and cash equivalents for the nine months ended September 30, 2004
decreased to $1,050,091 from $1,575,080 at December 31, 2003. The decrease of
approximately $525,000 in net cash and cash equivalents is related to the timing
of the receipt of premium payments.
MDNY had a negative working capital of $17.7 million at September 30, 2004
compared to a negative working capital of $17.6 million at December 31, 2003.
Although the $2.3 million received by CHSLI in April 2004 improved MDNY's cash
position this improvement was offset by losses incurred in the third quarter
2004.
There can be no assurance that the 2005 rate increases together with the
other operating initiatives will produce sufficient cash flows to meet MDNY's
obligations.
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 caption - "Recent Developments."
The continued failure of MDNY to meet reserve requirements, the failure of
MDNY or the IPAs to comply with other existing laws and regulations or a
significant change in such laws or regulations could materially and adversely
affect the operations, financial condition and prospects of the Company, MDNY
and the IPAs.
MDNY obtained a Section 1307 loan from LIPH, LLC for $1 million in 1997
and another from CHNLI for $1.4 million in 1998. Interest on these loans accrues
at the prime rate and is payable quarterly. These loans together with the
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accrued interest brought MDNY's September 30, 2004 statutory net worth to $5.3
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).
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.
The Company's revenues primarily recognized during the period in which
MDNY is obligated to provide services to subscribers. Premiums collected are 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 groups of 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
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
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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 affect 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 continued
inability of MDNY to meet applicable reserve and statutory net worth
requirements; CHNLI's notice to the Company and MDNY that CHNLI will withdraw as
an MDNY shareholder by December 31, 2004; the decision by the Diocese of
Rockville Center not to renew its subscriber contract with MDNY effective
January 1, 2005, as a result 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 and Religious
Directives for Catholic Health Services of the American Conference of Bishops;
that the Hospitals affiliated with CHSLI will not renew their subscriber
contract with MDNY effective January 1, 2006, in light of MDNY's obligation to
comply with the New York Women's Health and Wellness Act, in light of such
conflict; increased regulation or modification of existing regulations which
will increase health care expenses or require additional or increased levels of
statutory reserve requirements; increased competition in MDNY's markets or a
change in product mix will reduce premium revenue; MDNY will continue to lose
members; the Company and MDNY will not be successful in obtaining additional
capital necessary for MDNY to compete effectively; 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 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
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
September 30, 2004, 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 September 30, 2004, total principal
and interest due LIPH, LLC and CHNLI was approximately $1.39 million and $2.03
million, respectively. A 100 basis point increase in interest rates, applied to
MDNY's borrowings at September 30, 2004, 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 4. Controls and Procedures
Based upon an evaluation under the supervision and with the participation
of the Company's President and Chairman of the Board and its Chief Financial
Officer of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as of the end of the period covered by this
report, they have concluded that the Company's disclosure controls and
procedures, as defined under rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended,
14
are effective for gathering, analyzing and disclosing information in the Company
is required to disclose in its periodic reports filed under such Act.
During the most recent fiscal quarter, there has been no significant
change in the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 6. Exhibits
3.1.2 Certificate of Incorporation of MDNY Healthcare, Inc., as amended
3.4 By-laws of MDNY Healthcare, Inc., as amended
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
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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: November 15, 2004
17
Exhibit Index
Exhibit No. Description
3.1.2 Certificate of Incorporation of MDNY Healthcare, Inc., as amended
3.4 By-laws of MDNY Healthcare, Inc., as amended
31.1 Chief Executive Officer Rule 13a-14(a)/Rule 15d-14(a) Certification
31.2 Chief Financial Officer Rule 13a-14(a)/Rule 15d-14(a) Certification
32.1 Chief Executive Officer Section 1350 Certification
32.2 Chief Financial Officer Section 1350 Certification
18