UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB/A
Amendment Number 1
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2005
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From ___________ to ____________
COMMISSION FILE NUMBER: 0-30018
MERIDIAN HOLDINGS,INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
COLORADO 52-2133742
------------------------------- ------------------------
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
6201 Bristol Parkway, Culver City, California 90230
----------------------------------------------------------------
(Address of Principal Executive Offices)
(213) 627-8878
----------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
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 preceding 12 months and, (2) has been subject to such filing
requirements for the past 90 days. Yes ( X ) No ( )
As of June 30, 2005, Meridian Holdings, Inc., Registrant had 14,370,200
shares of its $0.001 par value common stock outstanding, with a total
market value of $718,500
Page 1 of 14 sequentially numbered pages
Form 10-Q
Second Quarter 2005
MERIDIAN HOLDINGS, INC.
INDEX
This Amendment Number 1 to our quarterly report on Form 10-QSB, for the quarter
ended June 30, 2005, includes some minor changes to improve our disclosures,
specifically in item8a regarding Controls and Procedures, Changes in
Internal Control over Financial Reporting and Exhibit 31. Except as required
to reflect the changes noted above, this Form 10-QSB/A does not attempt
to modify or update any other disclosures set forth in the original filing.
Additionally this Form 10-QSB/A does not purport to provide a general update
or discussion of any other developments at the Company subsequent to the
original filing.
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements for Period Ended June 30, 2005
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 Controls and Procedures 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
Signature 13
2
MERIDIAN HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS
As of June 30, December 31
2005 2004
(Restated)
========== ==========
Current assets
Cash and cash equivalents $ 42,427 $ 173,628
Restricted cash 223,904 217,283
Accounts receivable, net of allowance for
doubtful accounts of $179,812 and $198,813
respectively 1,997,588 1,645,838
Other current assets 8,302 11,420
------------ --------------
Total current assets 2,272,191 2,048,170
Fixed assets, net of accumulated depreciation 24,663 33,944
Investments 3,424,997 3,424,997
----------- -----------
Total assets $ 5,721,851 $ 5,507,111
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accrued Expense 633,839 299,504
Reserve for incurred but not reported claims 75,738 201,311
Line of credit 47,514 50,263
Current portion of long term debt 4,117 4,117
------------ ----------
Total current liabilities 761,208 555,195
Long Term liabilities
Long-term debt 350,326 391,821
--------- ----------
Total liabilities 1,111,534 947,016
--------- ----------
Commitments and contingencies
Stockholders' equity
Preferred stock (20,000,000 shares authorized,
par value $0.001; no shares issued and - -
outstanding) Common stock (100,000,000 shares
authorized, par value $0.001; 14,370,200 shares
issued and outstanding at June 30, 2005
and December 31, 2004 respectively) 14,370 14,370
Additional paid-in capital 5,526,760 5,526,760
Accumulated deficit (930,813) (981,035)
------------- -------------
Total stockholders' equity 4,610,317 4,560,095
------------- ------------
Total liabilities and stockholders' equity $ 5,721,851 $ 5,507,111
============ ============
See accompanying notes to Condensed consolidated financial statements
3
MERIDIAN HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
(Restated) (Restated)
===== ==== ==== ====
Revenues
Capitation $ 126,253 $ 321,638 329,480 700,821
Risk Pool 60,713 148,792 179,678 316,833
Fee For Service 410,068 1,365 548,154 1,806
--------- ----------- ------------- ----------
597,034 471,795 1,059,034 1,019,460
Cost of revenues (114,000) (187,078) (273,603) (392,374)
--------- ------- ----------- -----------
Gross margin 483,039 284,717 783,709 627,086
--------- ------- ------------ -----------
Operating expenses
General and administrative (267,152) (429,138) (718,135) (801,733)
--------- ------- ------------ ---------
(Loss)Income from
Operations 215,882 (137,421) 65,574 (174,647)
---------- ------- ------------ ----------
Other income and expense
Stock option issued - (500,000) - (500,000)
Other expense (1,141) (3,161) (15,352) (5,425)
------------ ----------- ------------ ------------
Total other income/expense (1,141) (503,161) (15,352) (505,425)
Net Income/Expense 214,741 (640,582) 50,222 (680,072)
=========== =========== =========== ==========
Net income per share $ 0.03 $ (0.07) $ 0.004 $ (0.06)
Weighted average
shares outstanding 14,370,200 9,383,149 14,370,200 11,870,200
See accompanying notes to Condensed consolidated financial statements
4
MERIDIAN HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
Six Months Ended June 30, Three Months Ended June 30
2005 2004 2005 2004
(restated) (restated)
===== ====== ======= ==========
Cash flows from operating activities
Net income/(loss) $ 50,222 (680,072) $ 214,741 (640,582)
Adjustments to reconcile net Loss/income to net
cash used in operating activities:
Stock Option issued - 500,000 - 500,000
Depreciation and amortization 18,199 8,908 4,626 596
(Increase) decrease in:
Restricted cash (6,621) 98,777 (34,341) 70,402
Accounts receivable (351,720) (131,761) (232,835) (44,609)
Other current liabilities 3,118 - - 46,780
Accounts payable 239,005 170,351 171,035 -
Accrued expense 80,277 - 44,277 -
Incurred but not reported reserve (125,573) (26,509) (125,573) -
--------- --------- -------- -------
Net cash used in operating activities (93,093) (60,306) 41,930 (67,413)
Cash flow from investing activities
Acquisition of fixed assets 8,917 (8,918) - -
---------- --------- ------ --------
Net cash used in investing activities (8,917) (8,918) - -
---------- --------- -------- --------
Cash flow from financing activities
Borrowings from majority stockholder/officer - (31,459) - 31,098
Repayment on long-term debt - 38,025 (20,082) 36,000
Repayment on line of credit (2,749) 1,300 (1,870) 2,340
Repayment of shareholder loan (11,314) - - -
Borrowings of long term debt (15,128) - - -
-------- --------- ------- ------
Net cash (used in) provided by financing activities (29,191) 70,784 (21,952) 69,438
--------- --------- -------- ------
Increase/(Decrease) in cash and cash equivalents (131,201) 1,560 19,978 2,025
Cash and cash equivalents, beginning of period 173,628 1,218 22,449 753
---------- ------- ----- -----
Cash and cash equivalents, end of period $ 42,427 2,778 42,427 2,778
========== ======== ======= ======
Supplemental Disclosure of non-cash investing and financing activities
Stock Issued 500,000 500,000
See accompanying notes to Condensed consolidated financial statements
5
MERIDIAN HOLDINGS, INC.
Notes to Consolidated Financial Statements
1. General
Basis of Reporting
The interim accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal, recurring accruals) considered necessary for
a fair presentation have been included. For further information, management
suggests that the reader refer to the audited financial statements for the year
ended December 31, 2004 included in its Annual Report on Form 10-KSB. Operating
results for the six-month period ended June 30, 2005 are not necessarily
indicative of the results of operations that may be expected for the year ending
December 31, 2005.
Nature of Operations
Meridian Holdings, Inc. (the "Company") was incorporated under the laws of the
State of Colorado on October 13, 1998. The Company is located in the City of
Los Angeles, California, U.S.A. and contracts with physicians to provide health
care services primarily within the area of Los Angeles County.
The Company is an acquisition-oriented holding company focused on building,
operating, and managing a portfolio of business-to-business companies. It seeks
to acquire majority or controlling interests in companies engaged in e-commerce,
e-communication, and e-business services, which will allow the holding company
to actively participate in management, operations, and finances. The Company's
network of affiliated companies is designed to encourage maximum leverage of
information technology, operational excellence, industry expertise, and
synergistic business opportunities.
The Company also provides medical services management to its' Capnet IPA health
care provider network. We provide the following services:
- disease management -- a method to manage the costs and care of high risk
patients and produce better patient care
- quality management -- a review of overall patient care measured against
best medical practice patterns
- utilization management -- a daily review of statistical data created by
encounters, referrals, hospital, admissions and nursing home information
- claims adjudication and payment
Cash And Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents ( e.g. restricted cash). From time
to time, the Company maintains cash balances with financial institutions in
excess of federally insured limits.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
The most significant area requiring estimates relate to the Company's
Global Risk arrangement with County of Los Angeles Community Health Plan,
(CHP) and Tenet Healths Systems, such estimates are based on knowledge of
current events and anticipated future events, and accordingly, actual
results may ultimately differ materially from those estimates.
6
Fiscal Year
The Company operates on a December 31st year end.
Revenue Recognition
The Company prepares its financial statements and federal income taxes on the
accrual basis of accounting. The Company recognizes capitation revenue on a
monthly basis from managed care plans that contract with the Company for the
delivery of health care services. This capitation revenue is at the
contractually agreed-upon per-member, per-month rates.
With regard to revenues, expenses and receivables arising from global risk
agreements with CHP and TENET, the Company estimates amounts it believes will
ultimately be realizable based in part upon estimates of claims incurred but
not reported (IBNR) and estimates of retroactive adjustments or unsettled
costs to be applied by CHP and/or Cap Management Systems. The IBNR estimates
are made by CAP-Management Systems, utilizing actuarial methods and are
continually evaluated by management of the Company based upon its specific
claims experience. It is reasonably possible that some or all of these
estimates could change in the near term by an amount that could be
material to the financial statements.
The Company is a party to a Risk Pool Agreement (the "Agreement") with Tenet
HealthSystem Hospitals, Inc. ("Tenet"). Pursuant to the Agreement, 50% of the
monthly capitation revenue is received directly by the Company, and the
remaining 50% is deposited into an escrow account from which Cap-Management
Systems, Inc., a subsidiary of Tenet pays all claims expenses, reinsurance
expenses, make allowance for IBNR reserve, and retains a management fee.
The Company is responsible for 50% of Profit (loss) after all institutional
claims reinsurance and management fees are paid, and Incurred But Not Reported
("IBNR") reserve have been accounted for.
As of December 2004, Centinela Hospital, one of Tenets facilities under global
risk contract with the Company, was sold to Centinela Freeman Health
Systems, Inc. A replacement contract between the Company, CHP and Centinela
Freeman Health System has been established. All IBNR calculations and
estimates for the previous contracts with Tenet is now suspended. A new IBNR
calculation and estimate has been established for the replacement contracts
between the Company, and the new owners of the hospitals, while letting the
previous IBNR to run-out over a six months period.
From time to time, CHP charges the Company for certain medical expenses, which
the Company believes are erroneous or are not supported by its underlying
agreements with CHP. Management's estimate of recovery on these contestations
is based upon its judgment and its consideration of several factors including
the nature of the contestations, historical recovery rates and other
qualitative factors.
Non-HMO accounts receivable (Fee for Service Revenue), aggregating
approximately $548,154 as at June 30, 2005, relate principally to medical
services provided on a fee for service basis, and are reduced by amounts
estimated to be uncollectible. These receivables are typically
uncollateralized customer obligations due under normal trade terms requiring
payment within 30-90 days from the invoice date. The Company does not charge
late fees or penalties on delinquent invoices, however it continually
evaluates the need for a valuation allowance. Management's estimate of
uncollectible amounts is based upon its analysis of historical
collections and other qualitative factors.
Costs of Revenues
The Company recognizes costs of revenues paid to physicians on a monthly basis
who contract with the Company for the delivery of health care services. These
costs are at the contractually agreed-upon per-member, per-month rates
or at the California Medi-cal fee for service rates. During the period ended
June 30, 2005, the Company has resorted to paying fee for service for all the
Physician services as a result of increase withholding of the capitation fees by
CHP. The Company has accrued $114,000 as an estimate of cost of revenue in the
7
Income statement pending the receipt of the encounter data from our primary
Care providers.The Company is contesting these withholdings, and is pursuing
all available remedies for recovery.
Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying amounts of cash, receivables, accounts payables and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial statements.
Equity Method
Investments in certain companies whereby the Company owns 20 percent or more
interest are carried at cost, adjusted for the Company's proportionate share of
their undistributed earnings or losses, because the Company exercises
significant influence over their operating and financial activities. Such
investee entity is CGI Communications Services, Inc. ("CGI").
2. Investments
CGI
On December 10, 1999, the Company agreed to acquire a 20% equity interest in CGI
for common stock. On December 20, 1999, the board of directors authorized the
issuance of 4,000,000 pre-split (adjusted to 12,000,000 post-split) shares of
common stock in consideration for the 20% of the interest in CGI. At the date
of the transaction, the Company's shares opened at a price of $3 per share.
Between September 1, 1999 and the acquisition date, the Company's stock sold
within a range of $.25 to $3.25 per share (an average of $.97 per share).
Because of the limited trading history of the Company, the six-month average was
deemed to be a fair valuation of the transaction, resulting in a total
investment balance of $3,880,000 as of December 31, 2000 and 1999. The
shareholders of CGI were also issued warrants to purchase an additional
1,000,000 pre-split (adjusted to 3,000,000 post-split) shares of common stock at
$2 pre-split share (or approximately $0.67 on a post-split basis) over a five
year period as a hedge against any fluctuation of the share price of the common
stock in the immediate future. These warrants expired on December 30, 2004.
3. Fixed Assets
Fixed assets consist of the following:
As of
June 30, 2005 June 30,2004
Computer equipment $ 111,155 $ 111,155
Leasehold improvements 6,500 6,500
Office furniture, fixtures and equipment 61,916 61,916
Software 25,803 25,803
Medical equipment 6,654 6,654
-------- -------
212,027 212,027
Less accumulated depreciation (187,364) (168,759)
--------- --------
$ 24,663 $ 43,268
========= ==========
4. Line of Credit
The Company has a $50,000 line of credit with a financial institution. Related
advances bear interest at 11%, and interest is payable monthly. The line of
credit expires March 21, 2006.
5. Long-term Debt
The Company has various loans with financial institutions with interest rates
ranging from 4% to 15% and maturity dates ranging from 2015 to 2024.
8
6. Risk Pool Agreement
The Company is a party to a Risk Pool Agreement (the "Agreement") with Tenet
HealthSystem Hospitals, Inc. ("Tenet"). Pursuant to the Agreement, 50% of the
monthly capitation revenue is received directly by the Company, and the
remaining 50% is deposited into an escrow account from which Cap-Management
Systems, Inc., a subsidiary of Tenet pays all claims expenses, reinsurance
expenses, make allowance for Incurred But Not Reported ("IBNR") reserve, and
retains a management fee. The Company is responsible for 50% of Profit (loss)
after all institutional claims reinsurance and management fees are paid, and
("IBNR") reserve have been accounted for.
These revenues and expenses have been reflected in the accompanying Consolidated
statements of operations for the quarters ended June 30, 2005 and 2004
respectively.
The Company has also reflected the monies in the escrow account as of June 30,
2005 and 2004, respectively as restricted cash in the accompanying consolidated
balance sheets.
7. Judgment Receivable
On January 8, 2004, a default judgment was entered in favor of the registrant,
by the Los Angeles County Superior Court in a case titled Meridian Holdings,
Inc. versus Sirius Technologies of America, a Delaware Corporation Case Number
BC256860. The amount of the judgment including damages, court cost and punitive
damages are $30,687,926, with a pre-judgment interest at the annual rate of 10%.
Management is pursuing all collections options regarding this judgment.
8. Recent Events
The registrant re-stated it financials for the year ended December 31, 2004 to
reflect the loss in its' investment in CGI Communication services, Inc.
(Subsidiary) and the removal of judgment receivable which is a gain contingency
from the account, and instead placing it in the note to the financial
statements, in accordance with GAAP, so as not to recognize revenue prior to
realization. Every effort is being made by the management to collect on this
judgment.
9. Subsequent Events
On August 8, 2005, the board directors authorized the issuance of 3,750,000
shares of common stock of the registrant at a fair-market value of 0.08 cents
per share (based on closing Asking price of registrants' common stock as of
August 5, 2005) to Anthony C. Dike, MD, our Chairman and CEO, in exchange for
extinguishing $300,000 debts owed to him by the registrant as at December 31,
2004.
9
MERIDIAN HOLDINGS, INC.
THE COMPANY
Meridian Holdings, Inc. (the "Company") was incorporated under the laws of the
State of Colorado on October 13, 1998. The Company is located in the City of
Culver City California, U.S.A. and contracts with physicians to provide health
care services primarily within greater of Los Angeles County.
The Company became fully reporting under Securities & Exchange Commission
guidelines on March 31, 1999. The Company's common stock started trading on
the OTCBB on August 26, 1999. The Company is an acquisition-oriented holding
company focused on building, operating and managing a portfolio of business
-to-business companies. It seeks to acquire majority or controlling interests
in companies engaged in e-commerce, e-communication, and e-business services,
which will allow the holding company to actively participate in management,
operations, and finances. The Company's network of affiliated companies is
designed to encourage maximum leverage of information technology, operational
excellence, industry expertise, and synergistic business opportunity.
The Company also provides medical services management to its Capnet IPA health
care provider network. We provide the following services:
- disease management -- a method to manage the costs and care of high risk
patients and produce better patient care
- quality management -- a review of overall patient care measured against
best medical practice patterns
- utilization management -- a daily review of statistical data created by
encounters, referrals, hospital, admissions and nursing home information
- claims adjudication and payment
Under our model, the primary care physicians maintain their independence
but are aligned with a professional staff to assist in providing cost effective
medicine. Each primary care physician provides direct patient services as a
primary care doctor including referrals to specialists, hospital admissions and
referrals to diagnostic services. These physicians are compensated on a per
member per month capitation basis.
We believe our expertise allows us to provide a service and manage the risk that
health insurance companies cannot provide on an efficient and economic level.
Health insurance companies are typically structured as marketing entities
to sell their products on a broad scale. Due to mounting pressures from the
industry, managed care organizations have altered their strategy, returning to
the traditional model of selling insurance and transferring the risk to a
provider service network such as us. Under such arrangements, managed care
organizations receive premiums from the Center for Medicare and Medicaid
Services, State Medicaid programs and other commercial groups and pass a
significant percentage of the premium on to a third party such as us, to provide
covered benefits to patients, including sometimes pharmacy and other enhanced
services. After all medical expenses are paid, any surplus or deficit remains
with the provider service network. When managed properly, accepting this risk
can create significant surpluses.
SELECTED FINANCIAL DATA
The Company had net working capital of $1,510,983 as at June 30, 2005
compared to $ 1,492,975 at December 31, 2004. This represents an increase in
working capital of 1%.
The selected financial data set forth above should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS:
The following section contains forward-looking statements that involve risks and
uncertainties, including those referring to the period of time the Company's
existing capital resources will meet the Company's future capital needs, the
Company's future operating results, the market acceptance of the services of the
Company, the Company's efforts to develop new products and services, and the
Company's planned investment in the marketing of its current services and
research and development with regard to future endeavors. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including domestic
and global economic patterns and trends.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY.
We believe that we will be able to fund our capital commitments, operating cash
requirements and satisfy our obligations as they become due from a combination
of cash on hand, expected operating cash flow improvements through HMO premium
increases and improvements in the benefit structure of HMO contracts as well
as increase in our fee for service revenue. There can be no assurances that
these sources of funds will be sufficient to fund our operations and satisfy
our obligations as they become due.
Long-term cash requirements, other than normal operating expenses, are
anticipated for the continued development of the Company's business plans. The
Company will need to raise additional funds from investors in order to complete
these business plans.
If we need additional capital to fund our operations, there can be
no assurance that such additional capital can be obtained or, if obtained, that
it will be on terms acceptable to us. The incurring or assumption of additional
indebtedness could result in the issuance of additional equity and/or debt which
could have a dilutive effect on current shareholders and a significant effect on
our operations.
RESULTS OF OPERATIONS
THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF MERIDIAN
HOLDINGS FOR THE THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 2005 AS
COMPARED TO THE THREE MONTHS ENDED AND SIX MONTHS ENDED JUNE 30, 2004.
REVENUE
Capitation revenues from our CHP contract decreased by 155% from $ 321,638
for the three months ended June 30, 2004 to $ 126,253 for the three
months ended June 30, 2005, and by 113% from $ 700,821 for the six months
ended June 30, 2004 to $ 329,480 for the six months ended June 30, 2005.
The decrease in capitation revenue was due in part to the termination of some of
our Managed care contracts with CHP, delay in procuring a replacement contracts
for the new hospital owners, disenrollment of members, and increased withholding
of our capitation fees by CHP. Management is pursuing all its available options
to mitigate further losses. There can be no guarantee that these efforts will be
successful in reversing these losses.
Non-CHP accounts receivable (Fee for Service Revenue), aggregating
approximately $548,154 for six months ended June 30, 2005, as oppose to
$1,806 for comparable period in 2004. This receivable relates principally, to
medical services provided on a fee-for-service basis, and are reduced by
amounts estimated to be uncollectible. These receivables are typically
uncollateralized customer obligations due under normal trade terms requiring
payment within 30-90 days from the invoice date. The Company does not charge
late fees or penalties on delinquent invoices, however it continually
evaluates the need for a valuation allowance. Management's estimate of
uncollectible amounts is based upon its analysis of historical
collections and other qualitative factors.
Of the $597,034 total medical services revenue generated for the three months
ended June 30, 2005, $410,068 was from the fee for service component, and
11
$186,966 was from capitated managed care contract.
The increased in fee for Service revenue from negligible amount during the
quarter ended June 30, 2004 to current amount of $410,068 for the period ended
June 30, 2005 is as a result of the recent acquisition of two large clinics
from Centinela Medical Center Clinics, Inc., as of January 1, 2005. These
clinic facilities provides a wide array of medical and diagnostic services
to the patient population they serve.
With regard to revenues, expenses and receivables arising from global risk
agreements with CHP and TENET, the Company estimates amounts it believes will
ultimately be realizable based in part upon estimates of claims incurred but
not reported (IBNR) and estimates of retroactive adjustments or unsettled
costs to be applied by CHP and/or Cap Management Systems. The IBNR estimates
are made by CAP-Management Systems, utilizing actuarial methods and are
continually evaluated by management of the Company based upon its specific
claims experience. It is reasonably possible that some or all of these
estimates could change in the near term by an amount that could be
material to the financial statements.
As of December 2004, Centinela Hospital, one of Tenets facilities under global
risk contract with the Company, was sold to Centinela Freeman Health
Systems, Inc. A replacement contract between the Company, CHP and Centinela
Freeman Health System has been established. All IBNR calculations and
estimates for the previous contracts with Tenet is now suspended. A new IBNR
calculation and estimate has been established for the replacement contracts
between the Company, and the new owners of the hospitals, while letting the
previous IBNR to "run-out" over a six months period.
The IBNR reserve as of June 30, 2005, is $75,738. The decrease in IBNR reserve
is due to the IBNR "run-out" as discussed above, with resultant payment
of newly reported medical claims as well as decrease in overall membership in
Capnet IPA. Adjustments will be made to the IBNR reserve, as our medical
claims volume increases with new membership enrollment in the IPA. Management
will continue to monitor these reserve on a monthly basis.
EXPENSES
General and administrative expenses were $267,152 or 38% of total revenues
for the three months ended June 30, 2005 compared to $429,506 or 91% of total
revenues for three months ended June 30, 2004. This decrease in expense is due
to outsourcing of our Manage Contract management to Cap Management systems, as
well as laying off of some personnel in order to reduce operational expenses,
as well as increased efficiency.
Medical claims paid after giving account to IBNR reserves, for the three
month period ended June 30,2005 were $ 150,540 compared to $ 187,633 for the
three month period ended June 30, 2004. The decrease in medical services
expense for the three months ended June 30, 2005 was due to the termination
of our primary care only contracts with CHP, as well as payment of claims from
our IBNR reserve for the terminated contracts with TENET.
Of the $150,540 medical claims expense for the period ended in June, 30, 2005
$125,573 was paid out of the IBNR reserve, as part of the IBNR "run-out" as
discussed above.
Direct medical costs includes all costs associated with providing services for
CAPNET IPA contracted members, including direct medical payment to physician
providers, hospitals and ancillary services on capitated and fee for service
basis. For the quarter ended June 30, 2005, these costs represents 17% of total
revenue. This is referred to as Medical Loss Ratio (MLR). Our Medical Loss
Ratio varies from quarter to quarter due to fluctuations in utilization,
the timing of claims paid by the HMOs on our behalf, as well as increases in
medical costs without counter-balancing increases in capitation revenues.
Our claim loss ratio varies from quarter to quarter due to fluctuations
in utilization, the timing of claims paid by the HMOs on our behalf, as well as
increases in medical costs without counterbalancing increases in capitation
revenues.
12
For the three months ended June 30, 2005 and 2004, payroll and employee benefits
for administrative personnel was $240,718, compared to $128,113 respectively.
The increase in employee payroll expenses for the six months ended June 30,
2005 was due to hiring of additional support staff for the operation of the
clinics.
Management anticipates that general operating expenses will increase, as it
pursues, vigorously, its acquisition of new business opportunities and the
integration of the existing ones.
Costs of Revenues
The Company recognizes costs of revenues paid to physicians on a monthly basis
who contract with the Company for the delivery of health care services. These
costs are at the contractually agreed-upon per-member, per-month rates
or at the California Medi-cal fee for service rates. During the period ended
June 30, 2005, the company resorted to paying fee for service for all the
physician services as a result of increase withholding of the capitation fees by
CHP. The Company has accrued $114,000 as an estimate of cost of revenue in the
income statement pending the receipt of the encounter data from our primary
care providers. The Company is contesting these withholdings, and is pursuing
all available remedies for recovery.
From time to time, CHP charges the Company for certain medical expenses, which
the Company believes are erroneous or are not supported by its underlying
agreements with CHP. Management's estimate of recovery on these contestations
is based upon its judgment and its consideration of several factors including
the nature of the contestations, historical recovery rates and other
qualitative factors.
INCOME/LOSS FROM OPERATIONS
The registrant recorded a income from operations for the three months ended
June 30, 2005 of $215,882, or 64% of total revenues, compared to net loss of
$144,789, or 31% of total revenues, for the three months ended June 30, 2004.
During the six months ended June 30, 2005, the registrant recorded a net
income from operations of $65,574 or 8% of total revenues compared to net loss
from operations of $174,647 or 17% of total revenues for the six months ended
June 30, 2004. The increase in net income from operations is due to increase
in the fee for service revenue for the period ended June 30, 2005.
NET INCOME (LOSS)
The net income for the three months ended June 30, 2005 was $214,741 compared
to net loss for the three months June 30, 2004 of $647,950. The Net income for
six months ended June 30, 2005 and June 30, 2004 was $50,222 and $680,072
respectively. The increase in net income from operations is due to increase
in the fee for service revenue for the period ended June 30, 2005.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-QSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-Q, the words
"believe," "anticipate," "think," "intend," "plan," "will be," and similar
expressions, identify such forward-looking statements. Such statements regarding
future events and/or the future financial performance of our Company are subject
to certain risks and uncertainties, which could cause actual events or our
actual future results to differ materially from any forward-looking statement.
Certain factors that might cause such a difference are set forth in our Form
10-K for the period ended December 31, 2004, including the following: our
success or failure in implementing our current business and operational
strategies; the availability, terms and access to capital and customary trade
credit; general economic and business conditions; competition; changes in our
business strategy; availability, location and terms of new business development;
availability and terms of necessary or desirable financing or refinancing; labor
relations; the outcome of pending or yet-to-be instituted legal proceedings;
and labor and employee benefit costs.
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Medical claims payable include estimates of medical claims expenses incurred
by our members but not yet reported to us. These estimates are based on a number
of factors, including our prior claims experience and pre-authorizations
of treatment. Adjustments, if necessary, are made to medical claims expenses in
the period the actual claims costs are ultimately determined. We cannot assure
that actual medical claims costs in future periods will not exceed our
estimates. If these costs exceed our estimates, our profitability in future
periods will be adversely affected.
Pursuant to the Medicaid program, the federal government supplements
funds provided by the various states for medical assistance to the medically
indigent. Payment for such medical and health services is made to providers in
an amount determined in accordance with procedures and standards established by
state law under federal guidelines. Significant changes have been and may
continue to be made in the Medicaid program which could have an adverse effect
on our financial condition, results of operations and cash flows.
During certain fiscal years, the amounts appropriated by state legislatures
for payment of Medicaid claims have not been sufficient to reimburse providers
for services rendered to Medicaid patients. Failure of a state to pay Medicaid
claims on a timely basis may have an adverse effect on our cash flow, results
of operations and financial condition.
PLAN OF OPERATIONS
The Company intends to embark on more aggressive marketing campaign to increase
its enrollment of membership into its Capnet IPA Healthy Family Program contract
with the County of Los Angeles Community Health Plan.
The Company through it's CGI Communications, Services, Inc., has embarked on a
global telemedicine initiative, which we believe will expand our operational
network to key strategic countries all over the world, and will increase our
operational capacity and revenues.
Recent Invents
The registrant re-stated it financials for the June 30 2004 and December 31,
2004 year end to reflect the loss in its' investment in CGI Communication
services, Inc. (Subsidiary) and the removal of judgment receivable which is a
gain contingency from the account and instead placing it in the note to the
financial statements, in accordance with GAAP, so as not to recognize revenue
prior to realization. Every effort is being made by the management to collect
on this judgment.
Subsequent events
On July 18, 2005, CGI Communications Services, Inc., an applications services
provider specializing in Telemedicine and Telehealth services to the
healthcare community, iuused a press release announcing that it has entered into
a memorandum of understanding (MOU) with ITeMAX, a technology Company based in
Riverside California , that specialized in providing ITenabled services to the
global marketplace
Under the terms of the MOU, the two companies have mutually decided to explore
and develop the following business opportunities:
1 Preferred IT Services Partnership: Under this term, ITeMAX will identify
IT service and implementation opportunities within its target marketplace and
will team up with CGI to develop the necessary solution and provide the
associated service
2 IT Services Business Venture: Under this concept the two companies will
jointly develop an IT services business infrastructure to serve target
customers world-wide. They will set up a joint venture company with mutually
acceptable operating terms and conditions to execute this business
3 Co-operative Marketing: The two companies will develop a co-operative
marketing program. Under this arrangement, each party agrees to list the other
as a strategic partner in their advertising, promotional, product description
and corporate and sales literature
On August 8, 2005, the board directors authorized the issuance of 3,750,000
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shares of common stock of the registrant at a fair-market value of 0.08 cents
per share (based on closing Asking price of our common stock as of August 5,
2005) to Anthony C. Dike, MD, our Chairman and CEO, in exchange for
extinguishing $300,000 debts owed to him by the registrant as at December 31,
2004.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act" ), the Company carried out an evaluation under the
Supervision and with the participation of the Company's management, including
the Chief Executive Officer and President and the Principal Financial Officer,
of the effectiveness of the Company's disclosure controls and procedures as of
the end of this reporting period. In designing and evaluating the Company's
disclosure controls and procedures, the Company and its management recognize
that there are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error
and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their desired control objectives.
Additionally, in evaluating and implementing possible controls and procedures,
the Company's management was required to apply its reasonable judgment. Based
upon the required evaluation, the Management concluded that as of June 30,
2005, the Company's disclosure controls and procedures were effective
(at the "reasonable assurance" level mentioned above) to ensure that
information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
From time to time, the Company and its management have conducted and will
continue to conduct further reviews and, from time to time put in place
additional documentation, of the Company's disclosure controls and procedures,
as well as its internal control over financial reporting. The Company may from
time to time make changes aimed at enhancing their effectiveness, as well as
changes aimed at ensuring that the Company's systems evolve with, and meet the
needs of, the Company's business. These changes may include changes necessary or
desirable to address recommendations of the Company's management, its counsel
and/or its independent auditors, including any recommendations of its
independent auditors arising out of their audits and reviews of the Company's
financial statements. These changes may include changes to the Company's own
systems, as well as to the systems of businesses that the Company has acquired
or that the Company may acquire in the future and will, if made, be intended to
enhance the effectiveness of the Company's controls and procedures. The Company
is also continually striving to improve its management and operational
efficiency and the Company expects that its efforts in that regard will from
time to time directly or indirectly affect the Company's disclosure controls
and procedures, as well as the Company's internal control over financial
reporting.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal controls or in other
factors that could significantly affect internal controls as of June 30, 2005.
PART II - OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
From time to time, we may be engaged in litigation in the ordinary course of
our business the cumulative effect of which litigation our management does not
believe may reasonably be expected to be materially adverse. With respect to
existing claims or litigation, our management does not believe that they will
have a material adverse effect on our consolidated financial condition,
results of operations, or future cash flows.
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Item 6. Exhibits and Reports on Form 8-K
31.1 Certification pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
of Anthony C. Dike
32.1 Certification pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
of Anthony C. Dike
SIGNATURE
Pursuant to the requirements of Section 12 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.
Date: September 27, 2005 By: /s/ Anthony C. Dike
____________________________________Signature
Anthony C. Dike
Chief Executive officer
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