10-Q 1 e18865_10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q ---------- |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. -------- 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)

~~Three~~June ~~months ended Nine months ended September~~ 30, ~~September~~December 3031, 2004 2003 ------------~~------------------~~ ------------~~------------------~~ ~~2003~~Assets ~~2002~~Cash ~~2003~~and ~~2002~~cash ~~----~~equivalents ~~----~~$ ~~----~~2,555,272 ~~----~~$ ~~Revenues:~~1,575,080 ~~Premiums~~Premium ~~earned~~receivables 38(net of allowances of approximately $1,~~188~~500,~~274~~000 40in 2004 and $959,~~591~~000 in 2003) 10,~~591~~181,890 ~~116~~12,~~582~~544,~~035~~775 ~~117~~Reinsurance recoverables 113,~~466~~024 450,~~539~~549 ~~Investment~~Payments ~~and~~in ~~other~~excess ~~income~~of ~~190,449~~capitation ~~745~~2,~~417 576~~074,~~820~~163 12,~~061~~074,~~243~~163 ~~-------------~~Prepaid ~~-------------~~expenses ~~-------------~~and ~~-------------~~other ~~Total~~current ~~revenues~~assets 381,~~378~~778,~~723~~141 412,~~337~~523,~~062~~543 ~~117,158,855~~Due ~~118,527,782~~from ~~-------------~~Catholic Health Services of Long Island --~~-----------~~ 2,382,027 ------------- ------------- ~~Expenses:~~Total ~~Medical~~current ~~claims~~assets ~~expense 31~~16,~~951~~702,~~760~~490 3621,~~919~~550,~~343~~137 99Property plant and equipment,~~143~~ net 317,~~927~~934 ~~102~~272,~~427,675~~134 ~~Commissions~~Restricted ~~expense~~cash ~~1,551,353~~and ~~1,710,625~~cash 4investments 5,~~844~~762,~~143~~273 45,~~814~~600,~~363~~790 ~~General~~Payments ~~and~~in ~~administrative~~excess ~~expenses~~of 3capitation,~~370,226~~ ~~3,852,229~~net 10of current portion 17,~~721~~157,~~958~~494 1117,~~936~~953,~~316~~057 ~~Depreciation~~Other ~~46,593~~assets 97618,~~828~~625 ~~130~~618,~~500~~625 ~~273,279~~ ------------- ------------- ~~------------- -------------~~ Total ~~expenses~~assets 36$ 40,~~919~~558,~~932~~816 42$ 45,~~580~~994,~~025~~743 ~~114~~============ ============ Liabilities and Stockholders' Equity: Medical claims payable $ 22,~~840~~133,~~528~~070 ~~119~~$ 27,~~451~~542,~~633~~261 ~~-------------~~Public ~~-------------~~goods ~~-------------~~payable ~~-------------~~6,999,738 ~~Operating~~6,779,734 ~~income~~Unearned ~~before~~premium ~~taxes~~revenue 1,~~458~~927,~~791~~702 (1,~~243~~862,~~017)~~367 Accounts payable and accrued expenses 2,~~318~~428,~~327~~833 ~~(923~~2,~~851)~~933,560 ~~Income~~Current ~~tax~~portion ~~expense~~of ~~31,743~~capital ~~44,320~~lease ~~96,743~~obligations ~~109~~-- 1,~~760~~479 ------------- ------------- Total current liabilities 33,489,343 39,119,401 Note payable and accrued interest 3,393,927 3,346,059 ------------- ------------- ~~Net~~Total ~~income(loss)~~liabilities 136,~~427~~883,~~048~~270 (142,~~287~~465,~~337)~~460 2Minority interest in MDNY Healthcare,~~221~~ Inc. 1,~~584~~717,365 (1,~~033~~682,~~611)~~934 ~~Minority~~Stockholders' ~~interest~~equity inClass ~~(income)~~A ~~loss~~common ofstock, ~~subsidiary~~$.001 ~~(478,053)~~par ~~393~~value; 10,~~812~~000 ~~(740~~shares authorized,~~251)~~ ~~310~~1,~~083~~506 ~~-------------~~issued ~~-------------~~and ~~-------------~~outstanding ~~-------------~~2 ~~Net~~2 ~~income~~Class ~~(loss)~~B ~~948~~common stock,~~995~~ ~~(893~~$.001 par value; 25,~~525)~~000 1shares authorized,~~481~~ 4,333 ~~(723,528)~~issued ~~Accumulated~~4 ~~deficit,~~4 ~~beginning~~and ofoutstanding ~~period~~Additional ~~(10~~paid-in capital 11,~~109~~478,~~867)~~536 (911,~~507~~478,~~630)~~536 Accumulated deficit (109,~~642~~520,~~205~~361) (9,~~677~~632,~~627~~193) ------------- ------------- Total stockholders' equity 1,958,181 1,846,349 ------------- ------------- ~~Accumulated~~Total ~~deficit,~~liabilities ~~end~~and ofstockholders' ~~period~~equity $ (940,~~160~~558,~~872)~~816 $ ~~(10~~45,~~401~~994,~~155)~~743 ~~$ (9,160,872) $ (10,401,155)~~ ============= ============~~= ============= ============= Basic and diluted income per share $ 162.53 $ (153.03) $ 253.7 $ (123.91) 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. 3 Long Island Physician Holdings Corporation Consolidated Statements of Operations and Accumulated Deficit Three Months and Six Months Ended June 30, 2004 and 2003

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)

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. 12 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

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