UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-KSB/A Amendment Number 2 ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Period Ended December 31, 2004 ( ) 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 former 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 ( ) The Registrant's revenues for the year ended December 31, 2004 were $2,295,047 As of December 31, 2004, the Registrant had 14,370,649 shares of its $0.001 par value common stock outstanding with a market capitalization of $574,826 Page 1 of 28 sequentially numbered pages Form 10-KSB Annual Report For The Fiscal Year Ended December 31, 2004 1 TABLE OF CONTENTS EXPLANATORY NOTE The Company has to restate its financials to correct errors in the accounting for a judgment receivable and the corresponding income from this judgment. Page Number PART I Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . .3 Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . 7 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 4. Submission of Matters to a Vote of Security Holders Our . . . ... . . 8 PART II Item 5. Market for Common Equity and Related Stockholder matters . . . . . .. 8 Item 6. Management's Discussion and Analysis . . . . . . . . . . . . . . . . . 9 Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .13 Item 8. Changes In and Disagreements With Accountants on Accounting and .. . .13 Financial Disclosure PART III Item 9. Directors, Executive Officers, Promoters and Control Persons . . . . .13 Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . .17 Item 11. Security Ownership of Certain Beneficial Owners and Management . . . 18 Item 12. Certain Relationships and Related Transaction . . . . . . . . . . .. 19 Item 13. Exhibits and Reports on Form 8-k . . . . . . . . . . . . . . . . . .19 2 PART I ITEM 1. DESCRIPTION OF BUSINESS BUSINESS 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 establish and the development of new 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. 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 provides management services to its' Affiliated group of Companies. Meridian Holdings, Inc., assigns a dedicated team to each affiliated company and actively assists in their management, operations and finances. The Company seeks to maximize shareholder value by actively providing operational assistance and expertise to help its partner companies grow and develop and by giving its shareholders the opportunity to participate in the initial public offerings of its partner companies while retaining a significant ownership interest after the initial public offering. Its network of partner companies creates an environment through which companies can leverage one another's information technology, operational experience, business contacts and industry expertise. We plan to hire additional senior management personnel to lend expert guidance in further development of our business plan. Also, we will actively seek opportunities for strategic transactions intended to raise capital to develop our emerging business strategy, potentially including issuance of additional equity or debt instruments. In addition, we will continue to evaluate and may enter into strategic transactions, including mergers and acquisitions. BUSINESS UNITS AND AFFILIATED PARTNERS The Company has under management the following business units: 1. Capnet IPA 2. InterCare DX, Inc. 3. CGI Communications Services, Inc. 4. Meridian Energy Corporation 5. Meridian Health Systems CAPNET IPA Capnet IPA ("Independent Physician Association"), with over 300 physicians, 15 community hospitals, 4 teaching Hospitals and other ancillary service companies contracted within its network, is the core component of Meridian Holdings, Inc. healthcare management division business. The linkage of these entities is imminent as the convergence of technology brings to bear the burden of information overload, currently one of the most critical problems in the healthcare industry. The Company believes that by using currently available 3 Software technology, most of the healthcare industry information processing could be handled more efficiently. To be competitive, the Company must license leading technologies, enhance its existing services and content, develop new technologies that address the increasingly sophisticated and varied needs of healthcare professionals and healthcare consumers and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. InterCare DX, Inc. InterCare DX, Inc. formerly known as Inter-Care Diagnostics, Inc., is organized in the State of California. The company is an innovative software products and services company specializing in providing healthcare management and information system solutions. The Company recently completed the development of ICE(tm) software, which comprises of three primary layers: The strength of ICE(tm) application is derived from differentiated core technologies consisting of: Mainstream SQL Database with full open architecture ;human anatomy and graphical user interfaces that simplify documentation and information access; data mining and data query tools; end-user tool sets; and interface capabilities to facilitate peaceful coexistence with other systems. Over 10 years of research and development have been spent in the development of ICE(tm) software. Benefits of ICE(tm) Products to Healthcare Payors and Providers: ICE(tm) can seamlessly integrate with legacy systems (utilizing any off- the- shelf interface engine) through both HL7 and proprietary legacy interfaces. A 12-tier security paradigm offers industry leading confidentiality and control of information. Security "behavior" rules are fully configurable by privileged system administrator(s), without programming, through the underlying knowledge bases. ICE(tm)'s embedded security will be fully HIPAA (Health Insurance Portability and Accountability Act of 1996) compliant when the final rulings are released, and supports data compartmentalization down to the level of specific value in any data field. CGI COMMUNICATIONS SERVICES, INC. CORPORATE INFORMATION CGI Communications Services, Inc., was incorporated under Delaware law on April 12, 1997. Its executive offices are at 900 Wilshire Blvd., Suite 500, Los Angeles, California 90017. Its telephone number is (213) 627-8878. Its fax number is (213) 627-9183. On December 10, 1999, Meridian Holdings, Inc., acquired 20% equity interest in the Company, in exchange for an aggregate of $12,000,000 equity investment over 5 years. By combining enabling technology with industry leading companies supplying telecommunications, medical products and services, CGI is poised to make InterCare, DX Inc.'s ICE(tm) suite of clinical applications, the global leader in providing comprehensive telemedicine and telecare solutions. CGI will now begin a Pilot-testing of this technology among over 300 healthcare providers affiliated with CAPNET IPA, an integrated healthcare delivery system, located in Los Angeles, California, managed by Meridian Holdings, Inc., the ASP version of ICE(tm) when released. BUSINESS STRATEGY CGI Communications Services, Inc., intends to capitalize on the enormous public attention focused on the Internet and the need for increased bandwidth by increasing its' telemarketing sales and technical support staff, targeting its advertising to its core audience, and by providing the most efficient, lowest-cost high speed Internet service in its service corridor. CGI is focusing 4 its marketing efforts to specialty and small business entities. Meridian Energy Corporation Meridian Energy Corporation is a wholly owned subsidiary of Meridian Holdings, Inc., both Colorado Corporation., is a diversified energy and natural resource Company, seeking high returns with minimal risk, in the field of Electricity, Oil and Gas market. Meridian Operates, backs and invests in major exploration and exploitation organized by highly regarded geologist, geophysicists and other energy executives. The Company seeks highly visible opportunities in countries around the globe with a history of natural resource production that offer exciting and attractive propositions the company will seek to minimize risk by bringing in either joint venture, carried or working interest partners, depending on the size and scale of the project. Meridian Health System Meridian Health System,(VIP Concierge Medical Services Company) is a division of Meridian Holdings focusing on provision of tertiary medical specialty care for the international clientele in the U.S.A. The Company's mission is to provide access to the very best US physicians and hospitals for international patients and providers as well as reduce and mitigate access barriers to US healthcare. The Company serves as a single point of contact and accountability for patients, families, physicians, allied health, hospitals and vendors. MANAGEMENT OF POTENTIAL GROWTH The Company has rapidly and significantly expanded its operations and anticipates that further expansion will be required to address potential growth in its customer base, to expand its product and service offerings and its international operations and to pursue other market opportunities. The projected expansion of the Company's operations and employee base will place a significant strain on the Company's management, operational and financial resources. To manage the expected growth of its operations and personnel, the Company will be required to improve existing and implement new transaction-processing, operational and financial systems, procedures and controls and to expand, train and manage its growing employee base. There can be no assurance that the Company's current and planned personnel, systems, procedures and controls will be adequate to support the Company's future operations, that management will be able to hire, train, retain, motivate and manage required personnel or that Company management will be able to successfully identify, manage and exploit existing and potential market opportunities. If the Company is unable to manage growth effectively, such inability could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. NEW BUSINESS AREAS The Company intends to expand its operations by promoting new or complementary products or sales formats and by expanding the breadth and depth of its product or service offerings. Expansion of the Company's operations in this manner would require significant additional expenses, development, operations and editorial resources and would strain the Company's management, financial and operational resources. Furthermore, the Company may not benefit from the first-mover advantage that it will experience in the online high technology market and gross margins attributable to new business areas may be lower than those associated with the Company's existing business activities prior to the introduction of new products or line of business. There can be no assurance that the Company will be able to expand its operations in a cost-effective or timely manner. Furthermore, any new business launched by the Company that is not favorably received by consumers could damage the Company's reputation or the Bolingo.com brand. The lack of market acceptance of such efforts or the Company's inability to generate satisfactory revenues from such expanded services or products to offset their cost could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. 5 INTERNATIONAL EXPANSION The Company intends to expand its presence in foreign markets. To date, the Company has only limited experience in sourcing, marketing and distributing products on an international basis and in developing localized versions of its Web site and other systems. The Company expects to incur significant costs in establishing international facilities and operations, in promoting its brand internationally, in developing localized versions of its Web site and other systems and in sourcing, marketing and distributing products in foreign markets. There can be no assurance that the Company's international efforts will be successful. If the revenues resulting from international activities are inadequate to offset the expense of establishing and maintaining foreign operations, such inadequacy could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. In addition, there are certain risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, export and import restrictions, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, political instability, fluctuations in currency exchange rates, seasonal reductions in business activity in other parts of the world and potentially adverse tax consequences, any of which could adversely impact the success of the Company's international operations. There can be no assurance that one or more of such factors will not have a material adverse impact on the Company's future international operations and, consequently, on the Company's business, prospects, financial condition and results of operations. BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES The Company may choose to expand its operations or market presence by entering into business combinations, investments, joint ventures or other strategic alliances with third parties. Any such transaction would be accompanied by the risks commonly encountered in such transactions. These include, among others, the difficulty of assimilating the operations, technology and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, additional expenses associated with amortization of acquired intangible assets, the maintenance of uniform standards, controls and policies and the impairment of relationships with existing employees and customers. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered in connection with such business combinations, investments, joint ventures or other strategic alliances, or that such transactions will not have a material adverse effect on the Company's business, prospects, financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of the its Internet websites. The Internet and the online commerce industry are characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render the Company's existing Web site and proprietary technology and systems obsolete. The Company's success will depend, in part, on its ability to license leading technologies useful in its business, enhance its existing services, develop new services and technology that address the increasingly sophisticated and varied needs of its prospective customers and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of Web site and other proprietary technology entails significant technical, financial and business risks. There can be no assurance that the Company will successfully implement new technologies or adapt its Web site, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards. If the Company is unable, for 6 technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, such inability could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. The Company's future success also depends on its ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial, editorial, merchandising, marketing and customer service personnel. Competition for such personnel is intense and there can be no assurance that the Company will successfully attract, assimilate or retain sufficiently qualified personnel. In particular, the Company has encountered difficulties in attracting a sufficient number of qualified software developers for its Web site and transaction-processing systems and there can be no assurance that the Company will retain and attract such developers. The failure to retain and attract the necessary technical, managerial, editorial, merchandising, marketing and customer service personnel could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. ACQUISITIONS If appropriate opportunities present themselves, the Company intends to acquire businesses, technologies, services or products that the Company believes are strategic. The Company currently has no understandings, commitments or agreements with respect to any other material acquisition and no other material acquisition is currently being pursued. There can be no assurance that the Company will identify, negotiate or finance future acquisitions successfully, or to integrate such acquisitions with its current business. EMPLOYEES As of December 31, 2004, the Company had approximately 15 full-time employees. Of the total,10 were employed at the Company's executive offices. No employee of the Company is covered by a collective bargaining agreement or is represented by a labor union. The Company considers its employee relations to be good. ITEM 2. DESCRIPTION OF PROPERTY The Company's corporate offices are located at 900 Wilshire Boulevard, Suite 500, Los Angeles, California 90017. The Company is required to pay $5,791.00 per month rental. The Company was required to make a lease deposit of $5,186.00. The lease expires on February 28, 2005. The telephone number is (213) 627-8878. The Company has additional office space located at 1601 Centinela Avenue, Inglewood, California 90302. The Company is required to pay $1,560.00 per month rental. The Company was not required to make a lease deposit. This lease is on a month to month basis. ITEM 3. LEGAL PROCEEDINGS On July 19, 2001, Ventures & Solutions, LLC, filed a lawsuit against the company, styled Ventures & Solutions, LLC, Plaintiff v. Meridian Holdings, Inc., Defendant, Circuit Court of Alexandria, Virginia, Case No. C10517. The company was served with a copy of the Complaint on August 6, 2001. Plaintiff has alleged that the company owes it approximately $29,000.00, pre and post judgment interest, and attorneys' fees and costs. The Virginia court ruled in favor of the plaintiff, for the actual amount claimed owed in April 2003. The Company is currently in negotiation with the Judgment Creditor On May 6, 2003, the registrant was served with a summons for a lawsuit filed in the District Court of Jerusalem, Case No A3359/01(BSA 1646/03) titled "Dr. Danny Basel vs Corsys Group LTD; Meridian Holdings, Inc., and Anthony C. Dike." The plaintiff is seeking amongst other things: enforcement of contract, compensation, negligent misrepresentation, cause in breach of contract and equitable relief.The registrant has been advised that Dr. Basel's employment was terminated for cause by Corsys Group LTD, due to intentional interference with contract and other economic relationship; and negligent 7 interference with economic relationship; breach of fiduciary duty and other complicity in the Sirius/MedMaster matter as disclosed previously with SEC, which resulted in significant loss of income and future business opportunities. The Company is awaiting the final court ruling in this matter. 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%. This amount and potential interest has been reflected in the balance sheet and the income statement as a judgment receivable. Management is pursuing all collections options regarding this judgment. From time to time, we may be engaged in litigation in the ordinary course of our business or in respect of which we are insured or 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On March 6, 2004 the shareholders voted to re-appoint Mr. Andrew Smith CPA, as the Company's independent accountant for the fiscal year ended December 31, 2003. Also, the shareholders re-approved the Registrants' 2001 stock option plan for 2004, as well as the election of the following directors for another one year term: Mr. James Truher Mr. Michael Muldavin Mr. Randy Simpson Mrs Marcelina Offoha PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTER The Common Stock is currently quoted on the OTC Bulletin Board, maintained by the National Association of Security Dealers, Inc. under the Symbol: MRDH, and there is presently only a very limited market for the Common Stock. Historically the spread between the bid and asked price of the Company's Common Stock has been large, reflecting limited trading in the stock. The price range of the Company's Common Stock has varied significantly in the past months, ranging from a high bid of $1.00 and a low bid of $0.04 per share. The trading price for the Common Stock has fluctuated widely in the recent past. The above prices represent inter-dealer quotations without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. The following information with respect to the high and low bid price of our shares was obtained from the National Quotation Bureau.High Low Calendar 2004 Quarter ended March 31 0.20 0.20 Quarter ended June 30 0.10 0.10 Quarter ended September 30 0.06 0.06 Year ended December 31, 2004 0.04 0.04 8 High Low Calendar 2003 Quarter ended March 31 0.02 0.02 Quarter ended June 30 0.07 0.07 Quarter ended September 30 0.08 0.08 Year ended December 31, 2003 0.15 0.15 At December 31, 2004, the company had approximately 800 shareholders of record for its common stock. Our preferred shares have never been offered to the public, therefore have never been publicly traded. SELECTED FINANCIAL DATA The Company had net working capital of $1,187,221 as at December 31 2004 compared to $1,279,979 at December 31, 2003.This represents a 7% decrease in working capital. 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. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE 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 capitation payments. However, 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. 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 impact on our operations. RESULTS OF OPERATIONS THE FINANCIAL RESULTS DISCUSSED BELOW RELATE TO THE OPERATION OF MERIDIAN HOLDINGS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2004 AS COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 2003. 9 REVENUE Medical services revenues decreased by 9.8% from $2,624,135 for the twelve months ended December 31, 2003 to $2,365,048 for the twelve months ended December 31, 2004. The decrease in medical services revenue is attributed to decrease in membership in the Capnet IPA due to dis-enrollment. Revenue generated from our managed care contracts with HMOs as a percentage of medical services revenue was approximately 99% during the two consecutive period. Cost of Revenues The cost of revenue for twelve months ended December 31, 2004 is $1,288,208, compared to $900,203 for twelve months ended December 31, 2003. This represents a 43% increase in cost of revenue. The increase in cost of revenue is due to increase in volume medical claims paid in 2004 fiscal year. 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 year ended December 31, 2004, these cost represents 56% of total revenue compared to 59% for the year ended December 31, 2003. This is referred to as Medical Loss Ratio (MLR). The decrease in Medical Loss Ratio is due to increase in volume of claims paid to contracted providers and hospitals for services rendered. Medical claims represent the costs of medical services provided by other healthcare providers other than our contracted primary care providers, but which are to be paid by us for individuals covered by our capitated risk contracts with HMOs. 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 counterbalancing increases in capitation revenues. EXPENSES General and administrative expenses is $1,549,824 or 66 % of total revenues for the twelve months ended December 31, 2004, compared to $1,515,505 or 43% of total revenues for twelve months ended December 31, 2003. The increase in general and administrative expense is due increase in fees paid to consultants as well as other corporate expenses.. The company continues to implement cost cutting measures started in 2001 during the twelve months ended December 31, 2004. Of the $1,549,824 General and administrative expense for the period ended December 31, 2004, $574,865 was for employee salaries and wages, $90,102 was for rent and lease payments, $29,030 was for insurance including stop-loss, D&O liability, general and liability, Medical Mal-practice, Workermans' Compensation, employees health and dental insurance, $223,402 was for payment of outside consultants, and the rest was for other corporate purposes. INCOME/LOSS FROM OPERATIONS The registrant recorded a net loss from operations for the twelve months ended December 31, 2004 of $522,227 compared to a net income of $138,566 during comparable period in 2003. The net loss from operations is due to decrease in revenue following the disenrollment of some of our members from our managed care contract and non-renewal of the TENET component of our Managed care contract with Los Angeles County Community Health Plan. OTHER INCOME/EXPENSE The Company recorded a net loss of $33,568 from its equity investments in CGI Communications Services subsidiary for the period ended December 31, 2004, Compared to $45,316 for comparable period in 2003. 10 CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS This Form 10-KSB 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, 2003, 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. 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. The state of California has stopped all marketing activities for the Healthy Family Program, and this will impact our revenue from this line of business due to membership attrition. PLAN OF OPERATIONS The Company intends to embark on more aggressive marketing campaign to increase the 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. In August, 2004, Tenet HealthSystem Hospitals, Inc, (Tenet) announced that it has entered into an agreement to transfer one of the hospitals contracted with CAPNET IPA and County of Los Angeles Community Health Plan to Centinela Freeman HealthSystem. This transaction is expected to close sometime in November 2004. Subsequently, Capnet IPA has signed a release and assignment of the contract with Tenet to Centinela Freeman HealthSystem. 11 Management is the process of launching the International Preferred Provider Network program, through the Meridian Health Systems division, which will be official launched during the second quarter of 2005, which we believe will significantly enhance our revenue generation. The Company continues to look into various business opportunities that will help to increase its revenue and the results of operation. There can be no assurance that such an effort will materialize in any meaningful results. RECENT EVENTS 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%. This amount and potential interest has been reflected in the balance sheet and the income statement as a judgment receivable. Management is pursuing all collections options regarding this judgment, with allowance for impairment recorded accordingly. On December 8,2004, the registrant entered into a judgment collection agreement with Surgimed Funds, a legal collections agency. Under the terms of the agreement, the Company will pay Surgimed 45% of net collectible. (See note 14 of the financial statements.) On March 6 2004, the following board members were re-elected to serve as Directors of the company until the next annual meeting or until their Successors are elected and qualified : 1. Michael Muldavin 2. James Truher 3. Randy Simpson 4. Marcellina Offoha Additionally, shareholders ratified the reappointment of Andrew Smith, CPA, as the independent auditor for the fiscal year ending December 31, 2003 and re-approved the Company's 2001 Joint Incentive and Non-Qualified Stock Option Plan for fiscal year 2004. On April 26, 2004 the registrant issued 5,000,000 shares of common stock with a fair market value of 0.10 cents per share as of June 30, 2004, to consultant and employees of the registrant, under the 2003 qualified and non-qualified stock option plan, following an S8 registration statement filing with the SEC. In August, 2004, Tenet HealthSystem Hospitals, Inc, (Tenet) announced that it has entered into an agreement to transfer one of the hospitals contracted with CAPNET IPA and County of Los Angeles Community Health Plan to Centinela Freeman HealthSystem. This transaction is expected to close sometime in November 2004. Subsequently, Capnet IPA has signed a release and assignment of the contract with Tenet to Centinela Freeman HealthSystem. RISKS ASSOCIATED WITH MANAGING GROWTH The Company's anticipated level of growth, should it occur, will challenge the Company's management and its sales and marketing, customer support, research and development and finance and administrative operations. The Company's future performance will depend in part on its ability to manage any such growth, should it occur, and to adapt its operational and financial control systems, if necessary, to respond to changes resulting from any such growth. There can be no assurance that the Company will be able to successfully manage any future growth or to adapt its systems to manage such growth, if any, and its failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. 12 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's securities may be deemed "penny stock" as defined in Rule 3a51-1 of the Securities and Exchange Act of 1934, as amended, since the average bid price has remained consistently below $2. Such a designation could have a material adverse effect on the development of the public market for shares of the Company's common stock or, if such a market develops, its continuation, since broker-dealers are required to personally determine whether an investment in such securities is suitable for customers prior to any solicitation of any offer to purchase these securities. Compliance with procedures relating to sale by broker-dealers of "penny stock" may make it more difficult for purchasers of the Company's common stock to resell their shares to third parties or to otherwise dispose of such shares. ITEM 7. FINANCIAL STATEMENTS Please refer to Exhibit 99.1 for the Independent Auditors' Reports and Consolidated Financial Statements. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 8a. 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 March 31, 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. Occasionally, 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 provisions 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 13 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 significant changes in the Company's internal controls or in other factors that could significantly affect internal controls as of December 31, 2004 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The Board of Directors, which consists of five directors, four of which are outside members and one of which is an officer of the Company, establishes the general compensation policies of the Company and the compensation plans and specific compensation levels for executive officers. The Company does not have a separate Compensation Committee of its Board of Directors. The Company's objective is to ensure that executive compensation be directly linked to ongoing improvement in corporate performance and increasing shareholder value. The following objectives are guidelines for compensation decisions: Job Classification. The Company assigns a job grade to each salaried position, and each job grade has a salary range, which is based on national salary surveys. These salary ranges are reviewed annually to determine parity with national compensation trends, and to ensure that the Company maintains a competitive compensation structure. Competitive Salary Base. Actual salaries are based on individual performance contributions within a competitive salary range for each position established through job evaluation and market comparisons. The salary of each corporate officer is reviewed annually by the Board of Directors. Stock Option Programs. The purposes of the Company's ESOP and SOP are to provide additional incentives to employees to work to maximize shareholder value. The ESOP is open to all full-time employees of the Company and the SOP is open to participation by key employees and other persons as determined by the Board, based upon a subjective evaluation of the key employee's ability to influence the Company's long-term growth and profitability. Stock options under the ESOP may be granted at the current market price at the time of the grant or under the SOP at prices as determined by the Board. With specific reference to the Chief Executive Officer, the Board attempts to exercise great latitude in setting salary and bonus levels and granting stock options. Philosophically, the Board attempts to relate executive compensation to those variables over which the individual executive generally has control. The Chief Executive officer has the primary responsibility for improving shareholder value for the whole Company. The Board believes that its objectives of linking executive compensation to corporate performance results in alignment of compensation with corporate goals and shareholder interest. When performance goals are met or exceeded, shareholder value is increased and executives are rewarded commensurately. The Board believes that compensation levels during 2003/2004 adequately reflect the Company's compensation goals and policies. In 1993, the Internal Revenue Code was amended to add section 162(m), which generally disallows a tax deduction for compensation paid to a company's senior executive officers in excess of $1 million per person in any year. Excluded from the $1 million limitation is compensation which meets pre-established performance criteria or results from the exercise of stock options which meet certain criteria. While the Company generally intends to qualify payment of compensation under section 162(m), the Company reserves the right to pay compensation to its executives from time to time that may not be tax deductible. The Company will compensate the members of the Board of Directors for each meeting he/she attends, in the amount of $250 cash or equivalent in the form of the Company's Common Stock at the fair market value. 14 TERM AND CLASSIFICATION OF BOARD OF DIRECTORS The Board of Directors has determined that there will be two Classes of Directors (Class A and Class B). Class A Directors are also officers of the Company. Class B Directors are outside directors. The full Board shall consist of five directors. Directors are elected each year for one-year term, except for Class "A" directors, who are elected for a period of three years. The stockholders will elect five directors for the coming year. The business of the Company is managed under the direction of the Board. The Board members will serve until their successors are elected at the Annual Shareholder meeting, unless they earlier resign or are removed as provided in the Bylaws. The following is the list of members of the board of directors elected during the annual shareholders meeting held on March 6, 2004. James W. Truher ----------------- Mr. Truher, aged 69, has been a Director of the Company since August 19, 1999. Mr. Truher has over 40 years management and engineering experience in the telecommunications industry. He is currently, the Chairman and Chief Executive officer of Superwire.Com, an Internet services and content provider company. Mr. Truher owns Columbia Management Corp., a telecommunications services and investment company. In 1988, Mr. Truher founded and served as Chairman of the Board and Chief Executive officer of SelecTel Corporation, which prior to a merger with a public company, was an AT&T Co-Marketing Partner and system integration company. Mr. Truher then served as Chairman and Chief Executive officer of two publicly traded NASDAQ telecom companies and has worked extensively with foreign PTT telephone companies. In 1981, Mr. Truher founded and was the Chief Executive officer of Polaris Intelcom, the first shared tenant service company in California. Marcellina Offoha, Ph.D. -------------------------- Ms. Offoha, age 49, a director of the Company in October 1999, Ms. Offoha has extensive experience in teaching and counseling. Ms. Offoha has taught at several universities such as Shaw University, Ithaca College, State University of New York, Philadelphia College of Pharmacy & Science, Temple University, and Morgan State University. Ms. Offoha holds a Ph.D. in Sociology from Temple University, Philadelphia, Pennsylvania. Michael Muldavin, J.D. --------------------- Mr. Michael Muldavin, age 81 is the Chairman of Sandock Fund, Sandock Investment Trust and Benchmark Company Group. He was formerly the associate dean and clinical professor of medicine at The University of California, Irvine, College of Medicine. He was also a Medical Economist for California State Department of Public Health, and assisted in the drafting of Medi-Cal legislation in 1967-1968 period. Earlier in his career as a WWII veteran, he served as the Chief of Labor Administration in Japan, under General MacArthur. Mr. Muldavin holds a Bachelors of Science degree in Mathematics and Engineering, Masters of Science degree in Economics and Public Health, Juris Doctorate degree with specialization in administrative law, all degrees from Harvard University. He also holds a Masters in Public Health degree from UCLA School of Public Health. Randy Simpson ------------ Mr. Randy Simpson, age 48, a Certified Public Accountant with nearly 30 15 years' experience, began his career with Ernst & Young's Salt Lake City office. He has served in a variety of finance and accounting capacities, including chief financial officer for Rocky Mountain Helicopters (medical helicopters) and controller (Gulf Energy). In conjunction with his independent accounting practice, he has provided registration work and financial advisory assistance to a number of North American public companies. He received a BS in marketing and an MS in accounting from Utah State University. There are no family relationships between any directors or executive officers. The election of the nominees requires the affirmative vote of a majority of the shares of Common Stock represented at the Annual Meeting and entitled to vote thereon. COMMITTEES OF THE BOARD OF DIRECTORS FUNCTIONS OF COMMITTEES AUDIT AND ETHICS COMMITTEE: - Has general powers relating to accounting disclosure and auditing matters; - Recommends the selection and monitors the independence of our independent auditors; - Reviews the scope and timing of the independent auditors' work; - Reviews the financial accounting and reporting policies and principles appropriate for the Corporation, and recommendations to improve existing practices; - Reviews the financial statements to be included in the Corporation's Annual Report on Form 10-KSB - Reviews accounting and financial reporting issues, including the adequacy of disclosures; - Monitors compliance with the Code of Ethics and Standards of Conduct; - Reviews and resolves all matters presented to it by our Ethics office; - Reviews and monitors the adequacy of our policies and procedures, and the organizational structure for ensuring general compliance with environmental, health and safety laws and regulations; - Reviews with the General Counsel the status of pending claims, litigation and other legal matters; - Meets separately and independently with the Chief Financial officer, Internal Audit and our independent auditors. It is composed of Messrs. Simpson, Truher, Muldavin and Ms. Offoha EXECUTIVE COMMITTEE: The Executive Committee may exercise the power of the Board of Directors in the management of the business and affairs of the Corporation at any time when the Board of Directors is not in session. The Executive Committee shall, however, be subject to the specific direction of the Board of Directors and all actions must be by unanimous vote. It is composed of Messrs. Dike, Truher, and Robert L. Smith. Meetings of the Board of Directors During the fiscal year ended December 31, 2004, the Company's Board of Directors acted five times by a unanimous written consent in lieu of a meeting. Each member of the Board participated in each action of the Board. AUDIT AND ETHICS COMMITTEE REPORT Management has the primary responsibility for the financial reporting process and the audited consolidated financial statements, including the systems of internal controls. The Corporation's independent auditors, Mr. Andrew 16 Smith CPA, is responsible for expressing an opinion on the quality and conformity of consolidated financial statements with accounting principles generally accepted in the United States. In our capacity as members of the Audit and Ethics Committee and on behalf of the Board of Directors, we oversee the Corporation's financial reporting process and monitor compliance with its Code of Ethics and Business Conduct. The Audit Committee has not adopted a written charter, which has been approved by the Board of Directors The members of the Audit and Ethics Committee are independent as defined by the listing standards of the National Association of Securities Dealers(NASD) In connection with our oversight responsibilities, we have: - discussed with the internal and independent auditors the overall scope and plans for their audits; - reviewed and discussed the audited consolidated financial statements included in Meridian Holdings 2003 Annual Report with management and the independent auditors; - discussed with the independent auditors the matters (including the quality of the financial statements and clarity of disclosures) required to be discussed under the American Institute of Certified Public Accountants' Statement on Auditing Standards No. 61, Communications with Audit Committees, which generally requires that certain matters related to the performance of an audit be communicated to the audit committee; - received from the independent auditors and reviewed the written disclosures and the letter required from the independent auditors required by the Independence Standards Board, and have discussed with them their independence from management and the Corporation; - considered the nature of the nonaudit services performed by the independent auditors and the compatibility of those services with their independence; and - met with the internal and independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Corporation's internal controls, and the overall quality of the Corporation's financial reporting. Based on the reviews and discussions referred to above, we recommended to the Board of Directors (and the Board has approved) the inclusion of the audited Consolidated financial statements referred to above in the Corporation's Annual Report on Form 10-KSB for the year ended December 31, 2004 and 2003, for filing with the Securities and Exchange Commission. Members of the Audit and Ethics Committee: James Truher Michael Muldavin Randy Simpson Marcellina Offoha Capnet IPA Management Team Anthony C. Dike, M.D. Chairman/CEO Wesley Bradford, M.D., M.P.H.,M.B.A, Chief Medical Officer Elizabeth Campos, Vice President IPA Operations Foday Conteh, BSc.(Accounting) Director of Finance David Cutler, MSc, Director of Medical Information Systems 16 ITEM 10. EXECUTIVE COMPENSATION Executive Officers The executive officers of the Company are as follows: Anthony C. Dike, Chairman/CEO Wesley Bradford Chief Medical Officer EXECUTIVE COMPENSATION The table below shows information concerning the annual and long-term compensation for services in all capacities to the Company for the Chief Executive Officer and other full-time employee executive officers of the Company: Annual Compensation Name Year Salary Bonus Stock Option All Other Compensation Stock Awards Anthony C. Dike (1) 2004 $144,000 0 150,000 0 Wesley Bradford (2) 2004 $ 35,000 0 100,000 100,000 1. As of December 31, 2003, Anthony C. Dike has not received any salary from the registrant, and has deferred such payment until the registrant can afford to pay after meeting all other obligations. 2. Dr. Bradford's salary is based on a part-time employment, with a base salary and other non-cash compensation such as stock and stock option award. He is also a member of the Board of Directors of InterCare DX, Inc., an affiliated entity. Indemnification The Company's Certificate of Incorporation eliminates or limits the personal financial liability of the Company's directors, except in situations where there has been a breach of the duty of loyalty, failure to act in good faith, intentional misconduct or knowing violation of the law. In addition, the Company's by-laws include provisions to indemnify its officers and directors and other persons against expenses, judgments, fines and amounts paid in settlement in connection with threatened, pending or completed suits or proceedings against such persons by reason of serving or having served as officers, directors or in other capacities, except in relation to matters with respect to which such persons shall be determined to have acted not in good faith, unlawfully or not in the best interest of the Company. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten (10%) percent of the outstanding Common Stock, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership on Form 3 and reports of changes in ownership of Common Stock on Forms 4 or 5. Such persons are required by SEC regulation to furnish the Company with copies of all such reports they file. Based solely on its review of the copies of such reports furnished to the Company or written representations that no other reports were required, the Company believes that all Section 16(a) filing requirements applicable to its officers, directors and greater than (10%) percent beneficial owners were complied with during the twelve months ended December 31, 2004. 18 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 31, 2004 to the extent known to the Company, certain information regarding the ownership of the Company's Common Stock by (i) each person who is known by the Company to own of record or beneficially more than five percent of the Company's Common Stock, (ii) each of the Company's directors and executive officers and (iii) all directors and executive officers as a group. Except as otherwise indicated, the shareholders listed in the table have sole voting and investment powers with respect to the shares indicated. Name and Address of Amount and Nature of Beneficial Owner Title Beneficial Ownership Status Percent of Class ------------------------- -------- -------------------- -------- ----------------- Anthony C. Dike, M.D. (1,2) Director 8,590,270 Active 58% Michael Muldavin (2) Director 125,000 Active 1% James W. Truher (2) Director 165,900 Active 1% Randy Simpson (2) Director 125,000 Active 1% Marcellina Offoha, Ph.D (2) Director 157,190 Active 1% All directors and Officers as a group (five persons) 9,162,460 62% Other Beneficial Owners CGI Communications Services, Inc. 961,501 6% Other public shareholders 4,746,689 32% Total Number of Shares Outstanding 14,870,650 100% 1. Includes 330,000 shares pledged to secure the asset purchased by the registrant from the Israeli Bankruptcy court. The said asset has been abandoned, every efforts are being made to recover these shares from the Israeli receiver. Meanwhile, a stop transfer order has been place on these securities. 2. The numbers shown include the shares of our Common Stock actually owned as of December 31, 2004 and the underlying options and warrants representing shares person has the right or will have the right to acquire based on the 2004 stock option plan table. 3. Anthony C. Dike, is the sole Director of MMG Investments, Inc, and an indirect beneficial owner of 267,000 shares of Common stock held by MMG Investments, Inc. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS On April 26, 2004 the registrant issued 5,000,000 shares of common stock with a fair market value of 0.10 cents per share as of June 30, 2004, to consultant and employees of the registrant, under the 2003 qualified and non-qualified stock option plan, following an S8 registration statement filing with the SEC. PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K Item Description Exhibit 99.1 Independent Auditors' Report and Consolidated Financial Statements 19 ADDITIONAL INFORMATION 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 31.2 Certification pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 of Foday Sorsor Conteh 32.1 Certification pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 of Anthony C. Dike and Foday Sorsor Conteh Signatures 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. Meridian Holdings, Inc. Date: September 1, 2005 By: /s/ Anthony C. Dike ____________________________________Signature Anthony C. Dike Chief Executive officer 20 EXHIBIT 99.1 Financial Statements and Independent Auditors' Reports MERIDIAN HOLDINGS, INC. YEARS ENDED DECEMBER 31, 2004 AND 2003 i MERIDIAN HOLDINGS, INC. TABLE OF CONTENTS Item Page Number INDEPENDENT AUDITORS' REPORTS F-1 RESATATED AUDITED FINANCIAL STATEMENTS Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1 To the Board of Directors Meridian Holdings, Inc. REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM ------------------------------------------------ We have audited the accompanying balance sheet of Meridian Holdings, Inc. as of December 31, 2004 and 2003 the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in note 14 to the financial statements, the Company has restated its financial statements to correct errors in the accounting for a judgment receivable and the corresponding income from this judgment. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Meridian Holdings, Inc., as of December 31, 2004, and 2003 and the results of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Madsen and Associates CPA's, Inc. Salt Lake City, Utah September 1, 2005 F-3 Meridian Holdings, Inc. Balance Sheets ASSETS As of December 31, ---------------------- 2004 2003 (Restated) ======= ======== Current assets Cash and cash equivalents $ 173,628 $ 1,218 Restricted cash (Note 8) 217,283 281,010 Accounts receivable, net of allowance for doubtful accounts of $198,030 and $179,813, respectively 1,645,838 1,497,982 Other current assets 11,420 8,302 ----------- ---------- Total current assets 2,048,170 1,790,012 Fixed assets, (net of accumulated depreciation 33,944 43,258 Intellectual property, net of accumulated amortization of $34,998 as of (Note 3) - - Investments (Notes 3 and 12) 3,424,997 3,448,564 ---------- ----------- Total assets $ 5,507,111 $ 5,281,834 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 110,925 - Accrued payroll and other 299,504 $ 233,301 Reserve for incurred but not reported claims (Note 8) 201,311 227,820 Line of credit (Note 5) 50,263 48,912 Current portion of long-term debt (Note 7) 4,117 - --------- -------- Total current liabilities 666,120 510,033 Long Term Liabilities Loan from Majority Stockholder/Office (Note 11) 235,775 - Long-term debt, net of current portion (Note 7) 45,121 189,479 ------- ------- Total Long Term Liabilities 280,896 189,512 ------- ------- Total liabilities 947,016 699,512 ======== ======= Commitments and contingencies (Notes 10) Stockholders' equity (Notes 2, 3, 10 and 14) Common stock (100,000,000 shares authorized, par value $0.001; 14,370,649 and 9,370,649 shares issued and outstanding at December 31, 2004 and 2003, respectively) 14,370 9,370 Paid-in capital $ 5,526,760 $ 5,031,760 Accumulated deficit (981,035) (458,808) -------------- ------------ Total stockholders' equity $ 4,560,095 $ 4,582,322 -------------- ------------ Total liabilities and stockholders' equity $ 5,507,111 $ 5,860,212 ============== ============ See accompanying notes to consolidated financial statements. F-3 Meridian Holdings, Inc. Consolidated Statements of Operations YEARS ENDED DECEMBER 31, --------------------------- 2004 2003 (Restated) ======= ========= Revenues Capitation $ 2,365,048 $ 2,624,135 --------- ---------- 2,365,048 2,624,135 Cost of revenues 1,288,208 900,203 --------- ------- Gross Profit 1,076,840 1,723,932 Operating expenses General and administrative 1,549,824 1,515,505 --------- ------- 1,549,824 1,515,505 Income (loss) from operations (472,984) 208,427 Other income and (expense) Equity interest in earnings of investment (33,568) (45,316) Other net (15,675) (24,545) ------- -------- (49,243) (69,861) Provision for income tax - - ------- --------- Net income (522,227) $ 138,566 ========= ========== Net income (loss) per share: Weighted Average Shares Common Stock Outstanding 13,120,649 9,383,146 ========== ========= Net Income(Loss) per Common Share (Basic and Fully diluted) $ (0.04) $ 0.01 ========= ========== See accompanying notes to consolidated financial statements. F-4 Meridian Holdings, Inc. Statements of Stockholders' Equity For the Years Ended December 31, 2004 (Restated) and 2003 Accumulated Common Stock Paid-in Earnings Shares Amount Capital (Deficit) ========= ====== ======== ========== Balances, December 31, 2001 93,706,485 $ 93,707 $ 4,947,424 $(553,571) Net Income/(Loss) (43,803) ----------- --------- --------- --------- Balance December 31, 2002 93,706,485 $ 93,707 $ 4,947,424 $(597,374) Net Income/(Loss) 138,566 Stock split reversal (84,335,836) (84,337) 84,337 - ----------- --------- --------- -------- Balance December 31, 2003 9,370,649 $ 9,370 $ 5,031,760 $(458,808) Net Income(Loss) Issuance of stock for services at $.10 per share 5,000,000 5,000 495,000 - Net loss for period - - - (522,227) ---------- ------- ------ ----------- Balance December 31, 2004 14,370,649 14,370 5,526,760 $ (981,035) ========== ========= =========== ============ See accompanying notes to consolidated financial statements. F-5 Meridian Holdings, Inc. Consolidated Statements of Cash Flows Years Ended December 31, ======================== 2004 2003 (Restated) ======== ========= Cash flows from operating activities Net income (loss) $ (522,227) $ 138,281 Adjustments to reconcile net income (loss) to net cash provided by operating expenses: Depreciation and amortization 18,232 33,030 Common stock issued for services 500,000 - Equity in loss of subsidiary 33,568 45,316 Changes to operating assets & liabilities (Increase) decrease in Restricted cash 63,727 119,983 Accounts receivable (147,857) (343,511) Other current assets (3,118) - Increase(Decrease) in: Accounts payable (59,171) (49,425) Accrued payroll and other 299,504 (391,697) Incurred but not reported reserve (26,509) (38,138) -------- ------- Net cash used in operating activities 156,149 (486,161) Cash flow from investing activities Purchase of fixed assets (8,918) (30,595) Disposition of fixed assets - 315,002 Investment in CGI (10,001) 417,331 --------- --------- Net cash used in investing activities (18,919) 701,738 Cash flow from financing activities Borrowing from majority stockholder/officer 37,839 - Advances from line of credit 1,351 (146,050) Repayment of long term debt (4,010) (91,348) ---------- ----------- Net cash provided by financing activities 35,180 (237,398) ---------- ----------- Increase (decrease)in cash and cash equivalents 172,410 (21,821) Cash and cash equivalents, beginning of period 1,218 23,039 ---------- ---------- Cash and cash equivalents, end of period $ 173,628 $ 1,218 ========== ========== Cash Paid for interest $ 4,750 $ 6,118 Supplemental Disclosure of non-cash investing and financing activities Stock Issued 500,000 Reclassification of accounts payable as long term debt 63,205 See accompanying notes to consolidated financial statements. F-6 MERIDIAN HOLDINGS, INC. Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies 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. 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. 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 includes CGI Communications Services, Inc. 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. Actual results could differ from those estimates. Fiscal Year The Company operates on a December 31 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. For the year ended December 31, 2004, approximately 99% of capitation revenues are derived from one Los Angeles county managed care plans. 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. F-7 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. Fixed Assets and Depreciation Property and equipment are stated at cost. Acquisitions having a useful life in excess of one year are capitalized and depreciated over their estimated useful, 1 Summary of Significant Accounting Policies (continued) life using the straight line method (normally 5-7 years). Repairs and maintenance are expensed in the year incurred. The Company provides for depreciation over estimated useful lives ranging from three to five years, using the straight-line method. Leaseholds are amortized over the life of the related, noncancelable lease, or the related asset's useful life, whichever is shorter. Repair and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense, as incurred. Gains and losses on dispositions of property and equipment are included in the related period's statement of operations. Research and Development Costs Costs incurred in the Software research and development are expensed as incurred Long-Lived Assets The Company reviews the carrying amount of its long-lived assets and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Earnings Per Share Earnings per share is calculated pursuant to Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings per share ("EPS") includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of the Company. Accounting for Stock-based Compensation The Company adopted SFAS No. 123, "Accounting for Stock-based Compensation," which establishes financial accounting and reporting standards for stock-based compensation. SFAS No. 123 generally suggests, but does not require, stock-based employee compensation transactions be accounted for based on the fair value of the consideration received, or the fair value of the equity instruments issued, whichever is more reliably measurable. Companies that do not elect to change their accounting for employee stock-based compensation are required to disclose the effect on net income as if the provisions of SFAS No. 123 were followed. The Company has decided to retain the provisions of APB Opinion No. 25, and related interpretations thereof, for recognizing stock-based compensation expense for employees, which includes members of the board of directors. Non-employee stock compensation is recorded at fair value in accordance with SFAS No. 123. F-8 During the second quarter of 2004, the company issued 5,000,000 shares of its common stock to its', employees and directors for a non cash consideration. Income Taxes The Company utilizes the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are recognized based on the differences between financial statement and income tax bases of assets and liabilities using the enacted statutory rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. 2. Capitalization The Company has established one class of preferred stock, one class of common stock and has established two classes of warrants. 1,000,000 Class "A" Redeemable Common Stock Purchase Warrants have been established, exercising into Common Shares at an exercise price of $3.00 per share. 1,000,000 Class "B" Redeemable Common Stock Purchase Warrants have been established, exercising into Common Shares at an exercise price of $4.50 per share. There were no such warrants outstanding as of December 31, 2004 and 2003. In April 2000, the board of directors approved the authorization of 20,000,000 shares of $0.001 par value preferred stock. The preferred stock may be issued from time to time in one or more series, and the board of directors, without further approval of the stockholders, is authorized to fix the dividend rates and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges, and restriction applicable to each series of preferred stock. There are no shares of preferred stock outstanding, and no series of shares have yet been designated as of December 31, 2004. 3. Investments and Business Port-Folio: Capnet The Company completed the acquisition of the Capnet Group of Companies ("Capnet") on May 25, 1999 through the issuance of 25,000,000 pre-split shares of common stock to the Company's majority stockholder/officer with an estimated fair value of approximately $527,000. During 1999, the Company incurred a write-off of approximately $518,000 due to the impairment of certain assets acquired. Capnet currently operates as a division of the Company. 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 $3,911,511 and $3,880,000 as of December 31, 2002 and 2001 respectively. 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. F-9 4. Fixed Assets Property plant and equipment are stated at cost. Acquisitions having a useful life in excess of one (1) year are capitalized. Repairs and maintenance are expensed in the year incurred. Capital assets are depreciated by the straight-line method over estimated useful lives of the related assets, normally five (5) to seven (7)years. Property and equipment consists of the following as of December 31, 2004 and 2003 respectively and is summarized as follows: 2004 2003 ====== ====== Computer equipment $ 111,155 $ 102,237 Leasehold improvements 6,500 6,500 Office furniture and fixtures 36,603 36,603 Office equipment 25,313 25,313 Software 25,803 25,803 Medical equipment 6,654 6,654 ------- -------- 212,028 203,110 Less accumulated depreciation (178,084) (159,852) $ 33,944 $ 43,258 5. Line of Credit During 2004 and 2003, the Company had a $50,000 line of credit with a financial institution. Approximately $50,263 and $48,912 was outstanding under this facility as of December 31, 2004 and 2003, respectively. Related advances bear interest at 11%, and interest is payable monthly. The line of credit expired March 21, 2005, and has been subsequently renewed through March 21, 2006. 6. Lease Obligations The Company's corporate offices are located at 900 Wilshire Boulevard, Suite 500 Los Angeles, California 90017. The lease expires in May 2005 and provides the option to renew for one three-year term. Monthly rents range from $4,761 to $5,786 per month. In addition, the Company leases office space on a month-to-month basis. The Company also entered into a five-year vehicle lease agreement in September 2002. Monthly rents on these leases are $1,560 and $1,050, respectively. 7. 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. Income Taxes The Company utilizes the liability method of accounting for income taxes. Under The liability method deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws that will be in effect, when the differences are expected to reverse. An allowance against deferred tax assets is recorded, when it is more likely than not, that such tax benefit will not be realized. On December 31, 2004 and 2003, the Company had a net operating losses available For carry forward of $981,035 and $458,808 respectively. The tax benefit of This loss carryforward has been fully offset by a valuation reserve because the F-10 use to the tax benefit is undetermined since there is no reasonable method to determine the usage of this carryforward in the future. The loss carryforward will start to expire in 2018. 9. 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 facility related 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. These revenues and expenses have been reflected in the accompanying consolidated statements of operations for the for the periods ended December 31, 2004 and 2003 respectively.. The Company has also reflected the monies in the escrow account as of December 31, 2004 and December 31, 2003 as restricted cash in the accompanying Consolidated balance sheets. Additionally, Cap-Management Systems, Inc., provides the Company with an estimate as to the incurred but not reported reserve, which has been recorded as such in the accompanying consolidated balance sheets. 10. Stock Option Plan In January 2001, the stockholders of the Company approved a stock option plan for the directors of the Company (the "Plan"). The Plan provides for issuance of up to 5,000,000 shares of its common stock. Options to directors are granted based on attendance at board meetings. During the second quarter of 2004, the company issued 5,000,000 shares of its common stock to its', employees and directors for a non cash consideration. As at December 31, 2004, no shares were available for grant under the terms of this plan. The purchase price per share (the "Option Price") of the shares of Common Stock underlying each Option shall be not less than the fair market value of such shares on the date of granting of the Option. Such fair market value shall be determined by the Option Committee on the basis of reported closing sales price on such date or, in the absence of reported sales price on such date, on the basis of the average of reported closing bid and asked prices on such date. In the absence of either reported sales price or reported bid and asked prices, the Option Committee shall determine such market value on the basis of the best available evidence. Each Option shall be exercisable for the full number of shares of Common Stock subject thereto, or any part thereof, in such installments and at such intervals as the Option Committee may determine in granting such Option, provided that (i) each Option shall become fully exercisable no later than five years from the date the Option is granted, (ii) the number of shares of Common Stock subject to each Option shall become exercisable at the rate of at least 20% per year each year until the Option is fully exercisable, and (iii) no option may be exercisable subsequent to its termination date. Each Option shall terminate and expire, and shall no longer be subject to exercise, as the Option Committee May determine in granting such Option, but in no event, later than ten years after the date of grant thereof. F-10 2004 2003 ===== ===== Fixed Options Fixed Options Shares Weighted Shares Weighted Average Average Price Price ======== ======== ======= ======== Outstanding at beginning of Year 1,094,000 $0.57 1,500,000 $ 1.45 Granted 3,906,000 0.20 1,500,000 $ 0.46 Exercised (5,000,000) 0.10 (406,000) 0.17 Forfeitures/Cancelled - - (1,500,000) (1.45) ---------- ------ --------- ------ Outstanding at end of the year 0 $ 0.00 1,094,000 $ 0.57 ========== ====== ========= ======= Exercisable at end of year 0 $ 0.00 1,094,000 $ 0.57 ========== ====== ========= ======= Weighted average fair value per Options Granted during the year $ 0.29. $ 1.95 Proforma disclosure of the effect of accounting for stock options under Statement of Financial Accounting Standard (FAS 123) is required. The Company accounts for its stock options in accordance with APB 25 " Accounting for Stock Issued to Employees". Under APB 25, no compensation is recognized when the exercise price of employee options is equal to the fair market value of the underlying stock on the date of the grant. For each of the Company's stock options the exercise price was equal to the estimated fair market value of the shares at the date of grant. 11. Related Party Transactions On April 26, 2004 the registrant issued 5,000,000 shares of common stock with a fair market value of 0.10 cents per share as of June 30, 2004, to consultant and employees of the registrant for non cash consideration, under the 2003 qualified and non-qualified stock option plan, following an S8 registration statement filing with the SEC. 12. Equity Method Investments Summary financial information for CGI as of and for the two years ended December 31, 2004 and 2003 respectively is presented in the following table. 2004 2003 (unaudited) (unaudited) Long-term assets $ 5,273,128 $ 5,273,128 Total assets 5,273,128 5,273,128 Current liabilities 1,588,932 1,857,097 Total liabilities 1,588,923 1,857,097 Revenues - - Gross margin - - Net income (loss) (250,792) (462,647) The differences in the underlying net equity of the above-described investees and the investment balances recorded at December 31, 2004 and 2003 respectively are a result of the initial acquisition accounting of the Company's percentage interests. F-12 13 Legal Proceedings 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%. This amount and potential interest has been reflected in the balance sheet and the income statement as a judgment receivable. Management is pursuing all collections options regarding this judgment. 14. Restatement of financials statements The Company has restated its financial statements as of and for the year ended December 31, 2004. The Company originally had recorded a judgment receivable and Income from judgment award in the amount of $350,000 (See Note 13-Legal Proceedings). Although management is actively pursuing this judgment, according to accounting pronouncement FASB No. 5, this judgment award has been treated as a gain contingency and the income will not be recognized until the amount is collected. Originally Reported Restatement Restated on June 25, 2005 Adjustment Septemebr 1, 2005 Total Assets $ 5,857,111 $ 350,000 $ 5,507,111 Net Loss 172,227 350,000 522,227 Weighted Average Shares-Common Stock Outstanding 13,120,649 13,120,649 13,120,649 Net Loss Per Share $ (0.01) $(0.03) $().04) Other Events In August, 2004, Tenet HealthSystem Hospitals, Inc, (Tenet) announced that it has entered into an agreement to transfer one of the hospitals contracted with CAPNET IPA and County of Los Angeles Community Health Plan to Centinela Freeman HealthSystem. This transaction closed sometime in November 2004. Subsequently, Capnet IPA has signed a release and assignment of the contract with Tenet to Centinela Freeman HealthSystem. F-13