SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
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PACIFIC HEALTH CARE ORGANIZATION INC.
-------------------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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PACIFIC HEALTH CARE ORGANIZATION, INC.
1280 Bison, Suite B9-596
Newport, California 92660
NOTICE OF SPECIALANNUAL MEETING OF STOCKHOLDERS
The SpecialAnnual Meeting of Stockholders of Pacific Health Care
Organization, Inc., (the "Company") will be held at the Little America
Hotel, located at 500 South Main Street in Salt Lake City, Utah on November
18, 2004,2005, at 7:00 a.m., local time, for the following purposes:
1. To elect one directorthree directors to the Company's Board of Directors, as
required by the Utah Revised Business Corporation Act to fill the
vacancy created by the death of director Rudy LaRusso;Directors;
2. To appointratify the appointment of Chisholm, Bierwolf & Nilson as the
independent registered public accounting firm of the Company for the
20042005 fiscal year;
and
3. To ratifyapprove the Pacific Health Care Organization, Inc., 20022005 Stock
Option PlanPlan; and
4. To transact any other business as previously adopted bymay properly come before the
meeting or at any adjournment thereof.
Our Board of Directors of
the Company.
Company President, Tom Kubota, has fixed the close of business on October 11, 2004,21,
2005, as the record date for determining stockholders entitled to notice
of, and to vote at, the meeting. A list of stockholders eligible to vote
at the meeting will be available for inspection at the meeting and for a
period of 10 days prior to the meeting during regular business hours at the
Company's headquarters, 1280 Bison, Suite B9-596, Newport Beach, California
92660.
All Company stockholders are cordially invited to attend the meeting
in person. Whether or not you expect to attend the SpecialAnnual Meeting of
Stockholders, your proxy vote is important. To assure your representation
at the meeting, please sign and date the enclosed proxy card and return it
promptly in the enclosed envelope, which requires no additional postage if
mailed in the United States. Should you receive more than one proxy
because your shares are registered in different names or addresses, each
proxy should be signed and returned to assure that all your shares will be
voted. You may revoke your proxy at any time prior to the meeting. If you
attend the meeting and vote by ballot, your proxy will be revoked
automatically and only your vote at the meeting will be counted.
YOUR VOTE IS IMPORTANT
IF YOU ARE UNABLE TO BE PRESENT PERSONALLY, PLEASE MARK, SIGN AND DATE THE
ENCLOSED PROXY, WHICH IS BEING SOLICITED BY THE BOARD OF DIRECTORS, AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
By order of the President,
--------------------------------------/S/ Tom Kubota
October 21, 200420, 2005 Tom Kubota, President
2
PACIFIC HEALTH CARE ORGANIZATION, INC.
1280 Bison, Suite B9-596
Newport, California 92660
PROXY STATEMENT
GENERAL
SOLICITATION OF PROXIES. This proxy statement is being furnished to
the stockholders of Pacific Health Care Organization, Inc., a Utah
corporation, in connection with the solicitation of proxies by our
President for use at a Specialthe Annual Meeting of Stockholders to be held at the
Little America Hotel, located at 500 South Main Street in Salt Lake City,
Utah at 7:00 a.m., local time, on November 18, 2004,2005, or at any adjournment
thereof. A copy of the notice of meeting accompanies this proxy statement.
It is anticipated that the mailing of this proxy statement will commence on
or about October 25, 2004.27, 2005.
COST OF SOLICITATION. The Company will bear the costs of soliciting
proxies. In addition to the use of the mails, certain directors or
officers of our Company may solicit proxies by telephone, telegram,
facsimile, cable or personal contact. Upon request, the Company will
reimburse brokers, dealers, banks and trustees, or their nominees, for
reasonable expenses incurred by them in forwarding proxy material to
beneficial owners of shares of Company common stock.
OUTSTANDING VOTING SHARES. Company stockholders of record at the
close of business on October 11, 2004,21, 2005, the record date for the meeting,
will be entitled to notice of and to vote at the meeting. On the record
date, the Company had 15,427,73215,427,759 shares of common stock outstanding, which
are its only securities entitled to vote at the meeting, each share being
entitled to one vote.
VOTE REQUIRED FOR APPROVAL. Shares of common stock will vote with
respect to each proposal. Under the Company's Bylaws, Proposals 2, 3 and 34
each require the affirmative vote of a majority of the votes eligible to be
voted by holders of shares represented at the Special Meeting in person or
by proxy. With respect to Proposal 1 votes may be cast by a stockholder in
favor of the nominee or withheld or an alternative candidate may be written
in. With respect to Proposals 2, 3 and 34 votes may be cast by a
stockholder in favor or against the Proposals or a stockholder may elect to
abstain. Since votes withheld and abstentions will be counted for quorum
purposes and are deemed to be present for purposes of the respective
proposals, they will have the same effect as a vote against each matter.
Under the NASD Rules of Fair Practice, brokers who hold shares in
street name have the authority, in limited circumstances, to vote on
certain items when they have not received instructions from beneficial
owners. A broker will only have such authority if (i) the broker holds the
shares as executor, administrator, guardian, trustee or in a similar
representative or fiduciary capacity with authority to vote or (ii) the
broker is acting under the rules of any national securities exchange of
which the broker is also a member. Broker abstentions or non-votes will be
counted for purposes of determining the presence or absence of a quorum at
the meeting. Abstentions are counted in tabulations of the votes cast on
proposals presented to stockholders, but broker non-votes are not counted
for purposes of determining whether a proposal has been approved
VOTING YOUR PROXY. Proxies in the accompanying form, properly
executed and received by the President of the Company prior to the SpecialAnnual
Meeting and not revoked, will be voted as directed. In the absence of
direction from the stockholder, properly executed proxies received prior to
the special meetingAnnual Meeting will be voted FOR the nomineenominees of the Company PresidentBoard of Directors
and FOR Proposals 2, 3 and 3.4. You may revoke your proxy by giving written
notice of revocation to the Company Secretary at any time before it is
voted, by submitting a later-dated proxy or by attending the SpecialAnnual Meeting
and voting your shares in person. Stockholders are urged to sign and date
the enclosed proxy and return it as promptly as possible in the envelope
enclosed for that purpose.
PROPOSAL ONE
ELECTION OF DIRECTOR
Section 16-10a-803 of the Utah Revised Business Corporation Act
requiresOur Bylaws provide that the Company have at least three directors on itsour Board of Directors. WithDirectors will consist of not
less than two nor more than seven persons, the recent death of Mr. Rudy LaRusso, a Company officer
and director, the Board currently consists of only two members, Tom Kubota
and Tom Roush, leaving a vacancy onexact number to be fixed
from time-to-time by the Board of Directors. Additionally,
in connection with the enactment of the Sarbanes-Oxley Act of 2002, and
changes in the listing requirements of some stock exchanges, companies are
being required to have independent directors to serve on their Boards of
Directors and audit committees. The term "independent" in this context
means an individual who does not, other than in his capacity as a member of
the audit committee or board of directors, accept any consulting, advisory
or other compensatory fee from the corporation or an affiliate of the
corporation or any subsidiary. Another anticipated change resulting from
the Sarbanes-Oxley Act will be the required disclosure by reporting
companies of whether at least one member of the Company's audit committee,
(orCurrently, the Board of
Directors inhas four members. The Directors have decided to fix the absencenumber
of an audit committee), isdirectorships at three for the upcoming year. Management has nominated
three individuals to serve as Directors to serve as Directors for a financial expert. Theone-
year term "financial expert" refers to a person with
experience as a CFO, CPA or other accounting experience such as a
comptroller or principal accounting officer. Ifexpiring on the date of the Annual Meeting of Shareholders of the
Company does notto be held in 2006, and until their successors are duly elected and
qualified. Mr. Tom Kubota, Mr. Donald Hellwig and Mr. Thomas Iwanski, have
a financial expert, it will be requiredbeen nominated by management to disclose that fact and the
reason therefore in its periodic filings with the Securities and Exchange
Commission. Although notstand for election as Directors, all of
these requirements arewhom currently applicableserve as directors of the Company. Mr. Roush has not been
nominated by the management to the Company, the Company President believes it would be good
corporate governance practicestand for re-election to elect an individual who is independent and
may qualify as a financial expert to serve on the Board of
Directors.
To comply with the requirements of the Utah Revised Business
Corporation Act and to fulfill good corporate governance practice, the
Company's President has nominated Thomas Iwanski to fill the vacancy left
by Mr. LaRusso for the remainder of Mr. LaRusso's term and until his
successor shall be elected by shareholders of the Company. Mr. Iwanski is
believed to be independent of the Company and should qualify as a financial
expert.
2
DIRECTORS, EXECUTIVE OFFICERS AND NOMINEESNominees
Set forth below is certain information as of October 11, 2004,2005,
concerning the Company's current executive officers and directors and the
nomineenominees for election at the Special2005 Annual Meeting and our
current officers, including the business experience of each for at least
the past five years:
Present Position Director
Name Age With the Company Since
- ---- ---- ---------------- ------------------
Tom Kubota 6566 Director September 2000
President and Interim Secretary
Tom Roush 47 Director April 2003
Donald Hellwig 5164 Director January 2005
Chief Financial Officer
Thomas Iwanski 46 Nominee for47 Director November 2004
2
TOM KUBOTA. Mr. Kubota has thirty years of experience in the
investment banking, securities and corporate finance field. He held the
position of Vice President at Drexel Burnham Lambert; at Stem, Frank, Meyer
and Fox; and at Cantor Fitzgerald. Mr. Kubota is the president of Nanko
Corporation, which specializes in capital formation services for high
technology and natural resources companies. He has expertise in counseling
emerging public companies and has previously served as a director of both
private and public companies. For the last five years, Mr. Kubota has been
primarily engaged in running his consulting firm Nanko Investments, Inc.
TOM ROUSH.the Company and Fabrics International. Mr.
Roush graduated from Ohio Wesleyan University in 1978
with a Bachelors of Arts in history and communications. For the last four
years Mr. Roush has been principally engaged as an account manager for a
software company. Prior to that Mr. Roush served asKubota is currently the CEO of Medex
Healthcare, Inc., a wholly owned subsidiary of the Company.Fabrics International.
DONALD HELLWIG. Mr. Hellwig has been primarily engaged as a self-
employed accountant for the last fifteen years working with various
businesses and high net worth individuals. Mr. Hellwig received an
Associates of Arts in 1961 from Santa Monica City College and a Bachelors
of Science degree from UCLA in 1964 in Business Administration with an
emphasis in accounting. Prior to being self employed Mr. Hellwig held
various positions with several companies such as Chief Accountant at
Continental Airlines and the Manager of Accounting at Flying Tiger Lines.
THOMAS IWANSKI. Since February 2003, Mr. Iwanski has served as a
Special Advisor to the CEO of Procom Technology, Inc., where he plays a
prominent role in the development and implementation of business and
financial strategies. During the past five years Mr. Iwanski has also
served in various positions including, Vice President Finance, Chief
Financial Officer, Director and Secretary for a number of companies,
including Cognet, Inc., NetVantage, Inc., Kimalink, Inc., Xponent
Photonics, Inc., Prolong, Inc., and Memlink, Inc. Mr. Iwanski also has
approximately ten years of public accounting experience having worked for
KPMG, LLP, as a Senior Audit Manager and a Certified Public Accountant.
Mr. Iwanski received a Bachelor of Business Administration from the
University of Wisconsin-Madison in 1980.
There are no family relationships among the current members of the
Board of Directors nor with the nomineenominees to the Board of Directors.
3
The Company's PresidentManagement does not expect that any of the nomineenominees will become
unavailable for election as a director, but, if for any reason that should
occur prior to the SpecialAnnual Meeting, the person named in the proxy will vote
for such substitute nominee, if any, as may be recommended by the Company's
President.management.
VOTE REQUIRED
Directors are elected by a plurality of votes cast at the SpecialAnnual
Meeting. Unless contrary instructions are set forth in the proxies, the
persons with full power of attorney to act as proxies at the SpecialAnnual Meeting
will vote all shares represented by such proxies for the election of the
nominee named therein as director. Should any of the nominee become unable
or unwilling to accept nomination or election, it is intended that the
person acting under the proxy will vote for the election, in the nominee's
stead, of such other person as the President of the Company may recommend.
The President has no reason to believe that the nominee will be unable or
unwilling to stand for election or to serve if elected. Should you desire
to elect an individual other than the nominee listed in this proxy
statement, you may write in that individual in the space provided on your
proxy.
THE COMPANY'S PRESIDENT3
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOUOUR STOCKHOLDERS
VOTE "FOR" THOMAS
IWANSKIEACH OF THE NOMINEES LISTED ABOVE TO FILL THE VACANT DIRECTORSHIPSERVE ON THE
COMPANY'S BOARD OF DIRECTORS
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND NOMINEES
As of October 11, 2004,2005, the Company had 15,427,73215,427,759 shares of its
common stock issued and outstanding. The following table sets forth the
beneficial ownership of Company common stock as of that date, of each
director, nominee, the President, the other executive officers, and for all
directors and executive officers as a group.
___________________________________________________________________________
- ---------------------------------------------------------------------------
Shares of Percentage
Name Common Stock of Class
___________________________________________________________________________- ---------------------------------------------------------------------------
Tom Kubota* 2,153,931 13.9%
Tom Roush 1,083,333 7.0%
Donald Hellwig 3,000 0.0%
Thomas Iwanski 0 0.0%
___________________________________________________________________________- ---------------------------------------------------------------------------
All directors, nominees and executive
officers as a group (4(3 persons): 3,240,364 20.9%
___________________________________________________________________________2,156,931 13.9%
- ---------------------------------------------------------------------------
*The number of shares attributed to Mr. Kubota include 1,702,305
shares held of record by Nanko Investments, Inc. Mr. Kubota is the
president of Nanko Investments, Inc. As such, Mr. Kubota may be deemed to
have voting and/or investment power over the shares held by Nanko
Investments and therefore may be deemed to be the beneficial owner of those
shares.
4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of October 11, 2004,2005, the persons named below were, to the knowledge
of the PresidentBoard of Directors of the Company, the only beneficial owners of
more than 5% of the outstanding common stock, other than directors,
nominees and executive officers whose beneficial ownership is described in
the above table.
___________________________________________________________________________- ---------------------------------------------------------------------------
Shares of Percentage
Name Common Stock of Class
___________________________________________________________________________- ---------------------------------------------------------------------------
Peter G. Alexakis 1,083,333 7.0%
Amafin Trust 1,500,000 9.7%
Eurifa Anstalt 900,000 5.8%
Donald P. Balzano 1,083,335 7.0%
Manfred Heeb 1,445,982 9.4%
Auric Stiftung 1,500,000 9.7%
Marvin Teitelbaum 1,083,333 7.0%
William Rifkin 1,083,333 7.0%
Janet Zand 1,083,333 7.0%
___________________________________________________________________________- ---------------------------------------------------------------------------
TOTAL 10,762,649 69.6%
___________________________________________________________________________- ---------------------------------------------------------------------------
4
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors, executive officers and beneficial owners of greater than
10% of the Company's outstanding common stock are required to comply with
Section 16(a) of the Securities Exchange Act of 1934, which requires
generally that such persons file reports regarding ownership of and
transactions in securities of the Company on Forms 3, 4, and 5. Form 3 is
an initial statement of ownership of securities, Form 4 is to report
changes in beneficial ownership and Form 5 is an annual statement of
changes in beneficial ownership.
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5
and amendments thereto furnished to the Company with respect to the most
recent fiscal year, it appears that Mr. Kubota, Mr. Roush, Mr. Iwanski and
Mr. Hellwig inadvertently failed to timely file Form 3s disclosing the
initial statement of ownership. Messers. Kubota, Iwanski and Hellwig
intend to file such statements. To the Company's knowledge none of the
aforementioned individuals purchased or sold shares during the year ended
December 31, 2004
EXECUTIVE COMPENSATION
The following chart sets forth the compensation paid to each Executive
Officer and Director of the Company during the last three fiscal years:
SUMMARY COMPENSATION TABLE
AnnualLong Term Compensation Long Term Compensation
Awards Payouts
Other Restr All
Name and Annual& icted LTIP Other
Principal Compen Stock Options LTIPPayout Compen
Position Year Salary Bonus sation Awards /SARs Payout# ($) sation
- ------------- ---- ------- ------- ------- ------- ------- ------- --------------------------------------------------------------------------------------------
Tom Kubota 2004 -0- -0- -0- -0- -0- -0- -0-
President, CEO 2003 $ 3,700 $-0- $-0- $-0- $-0- $-0- $9,600
(1)
President3,700(1) -0- -0- -0- -0- -0- -0-
Director 2002 -0- -0- -0- -0- -0- -0- -0-
Director 2001 -0- 23,000 35,000 1,754Donald Hellwig 2004 -0- -0- -0- (2)
Donald Hellwig-0- -0- -0- -0-
CFO 2003 -0- -0- -0- -0- -0- -0- -0-
CFO 2002 -0- -0- -0- -0- -0- -0- -0-
2001 -0- -0- -0- -0- -0- -0- -0-
Donald Balzano 2003 132,0002004 165,338 -0- -0- -0- -0- -0- -0-
CEO of Company 2003 132,000 -0- -0- -0- -0- -0- -0-
Subsidiary Medex 2002 104,000 -0- -0- -0- -0- -0- -0-
Subsidiary
Medex 2001Doug Hikawa 2004 135,234 -0- -0- -0- 350,000(2) -0- -0-
-0- -0-
5
Doug HikawaVP of Company 2003 100,000 -0- -0- -0- -0- -0- -0-
VP of CompanySubsidiary Medex 2002 70,000 -0- -0- -0- 50,000 -0- -0-
Subsidiary (3)
Medex 2001 -0- -0- -0- -0- -0- -0- -0-
Rudy LaRusso 2003 3,700 -0- -0- -0- -0- -0- -0-
Former Secretary 2002 -0- -0- -0- -0- -0- -0- -0-
Former Director 2001 -0- -0- -0- 330 -0- -0- -0-
Peter Alexakis 2003 -0- -0- -0- -0- -0- -0- -0-
Former Director 2002 700 -0- -0- -0- -0- -0- -0-
2001 -0- -0- -0- -0- -0-50,000(3) -0- -0-
5
(1) This amount represents medical insurance premiums.
(2) Tom Kubota provided consulting services to the Company through
Nanko Investments, Inc., his private consulting business.business, which services
were performed and payments disbursed prior to the reverse acquisition of
Medex. This amount represents funds paid by the Company to Nanko
Investments, Inc. These services were provided on terms at least as
favorable as could have been negotiated with an independent third party.
(2) Doug Hikawa was issued stock options to purchase up to 350,000
shares of restricted common stock in October 2004. The option are
exercisable over a three year term, with the right to purchase 100,000
restricted shares for $.05 per share vesting upon the date of grant; the
right to purchase an additional an additional 100,000 restricted shares for
$.10 per share vesting one year from the date of grant and the right to
purchase the remaining 150,000 restricted shares for $.20 per share vesting
on the two years from the date of grant. None of Mr. Hikawa's options have
been exercised to date.
(3) Doug Hikawa was granted stock options to purchase up to 50,000
shares of restricted common stock in August of 2002 pursuant to the Company's
stock option plan. Fifty percent50% or 25,000 of the options granted vested upon the
date of grant and an additional 25% of the options granted vested on the
one year anniversary of the grant. Thegrant and the remaining 25% of the options
granted will vest on the two year anniversary of the date of grant. The
options are exercisable at $.05 per share. None of Mr. Hikawa's options
have been exercised to date.
No other compensation has been paid directly or accrued to any other
officer or director ofCOMPENSATION OF DIRECTORS
Beginning in the Company to date. The Company has no policy for
compensating its directors for attendance at Board of Directors meetings or
for other services as directors.2005 fiscal year, we have compensated each board
member $300 per board meeting he attends.
Compensation of officers and directors is determined by the Company's
Board of Directors and is not subject to shareholder approval. None of the
officers and directors of the Company have employment agreements with the
Company.
In the past three years no executive officer has received any amounts
in connection with his resignation, retirement, or other termination. No
executive officer received any amounts in the last three years in
connection with a change in control of the Company of a change in the
executive officer's responsibilities after a change in control.
6
The Company has no retirement, pension, or benefit plan at the present
time, however, the Board of Directors may adopt plans as it deems to be
reasonable under the circumstances.
6
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our business is managed under the direction of our Board of Directors
pursuant to the Utah Revised Business Corporations Act and our Bylaws. Our
Board has responsibility for establishing broad corporate policies and for
the overall performance of the Company. Our Board is kept advised of the
Company's business through regular interaction with the President and other
officers of the Company and through reviewing materials provided to them
and by participating in Board meetings.
During fiscal year ended December 31, 2003,2004, there were tenthree meetings
of the Board of Directors. Mr. Roush did not attend two of the meetings,
otherwise other meetings of the Board of Directors were fully attended.
Currently,Our shares are quoted on the OTC Bulletin Board. Since we are not a
listed issuer, we are not subject to various requirements of the Securities
and Exchange Commission or certain self-regulatory bodies such as Nasdaq or
the American Stock Exchange, which require our Board of Directors currently has noto
establish and maintain an audit committee, compensation committee and
nominating committee. As a result, we do not have standing committees.audit,
nominating or compensation committees of our Board of Directors, or
committees performing similar functions.
PROPOSAL TWO
APPOINTRATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTSACCOUNTANTING FIRM
The firm of Chisholm, Bierwolf & Nilson served as the Company's
independent registered public accounting firm for the fiscal year ended
December 31, 2003. The Company's President2004. Management recommends the Company retain the services
of Chisholm, Bierwolf & Nilson to continue in their capacity as the
Company's independent registered public accounting firm for the 2004 fiscal
year is submitting this matter to shareholders for their approval.
AUDIT FEES
Principal accounting fees for professional services rendered to the
Company by Chisholm, Bierwolf & Nilson for the years ended December 31,
20032004 and 2002,2003, are summarized as follows:
2003 2002
___________________________________________________________________________
Audit $43,357 $4,5002004 2003
- ---------------------------------------------------------------------------
Audit $31,574 $21,528
Audit related - -
Tax - -
___________________________________________________________________________
All other - -
Tax - -
All other $3,647 $1,296
- ---------------------------------------------------------------------------
Total $43,357 $22,824
===========================================================================
7
AUDIT FEES. Audit fees were for professional services rendered in
connection with the Company's annual financial statement audits and
quarterly reviews of financial statements for filing with the Securities
and Exchange Commission.
OTHER FEES. Other fees were for EDGAR filing services provided to the
Company.
BOARD OF DIRECTORS PRE-APPROVAL POLICIES AND PROCEDURES. At its
regularly scheduled and special meetings, the Board of Directors, in lieu
of an established audit committee, considers and pre-approves any audit and
non-audit services to be performed by the Company's independent
accountants. The Board of Directors has the authority to grant pre-
approvals of non-audit services.
In the event of a negative vote, the selection of another independent
certified public accounting firm will be made by the Board of Directors. A
representative of Chisholm, Bierwolf & Nilson is not expected to be present at
the SpecialAnnual Meeting. In the event a representative is present he or she
will be given an opportunity to make a statement if he or she desires and
if present, he or she is expected to be available to respond to appropriate
questions. Notwithstanding approval by the shareholders, the Board or
Directors shall have the right to replace the auditors at any time.
7
THE COMPANY'S PRESIDENTBOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL TWO, APPOINTING
CHISHOLM, BIERWOLF & NILSON AS THE COMPANY'S INDEPENDENT REGISTERED PUBLIC
ACCOUNTANTS FOR FISCAL 20042005.
PROPOSAL THREE
RATIFYAPPROVE THE PACIFIC HEALTH CARE ORGANIZATION, INC.,
20022005 STOCK OPTION PLAN AS ADOPTED BY THE BOARD OF DIRECTORS
DESCRIPTION OF THE PACIFIC HEALTH CARE ORGANIZATION, INC., 20022005 STOCK
OPTION PLAN
In November 2002, the Company'sThe Board of Directors adoptedhas drafted the Pacific Health Care
Organization, Inc., 20022005 Stock Option Plan, (the "Plan"), a copy of which
is attached to this proxy statement as Annex A.A, for approval by the
Company's stockholders. A copy of the plan will also be available for
inspection at the Company's principal executive offices for a period of ten
days preceding the date of the SpecialAnnual Meeting. Under the Plan, key
employees, advisors and consultants of the Company, (including directors
and officers who are employees) may be granted options to purchase shares
of Company common stock.
8
The Plan permits the granting of 1,000,000 shares of common stock,
none of which 85,000 have already been granted, at a price equal to one hundred percent
(100%) of the fair market value of the common stock on the date that the
option is granted provided, however, that the price shall not be less than
the par value of the common stock that is subject to the option. Further,
no Incentive Stock Option may be granted to an employee owning common stock
having more than 10% of the voting power of the Company unless the option
price for such employee's option is at least 110% of the fair market value
of the common stock subject to the option at the time the option is granted
and the option is not exercisable after the expiration of five years from
the date of granting. The par value of the Company's common stock is
presently $.001$0.001 per share. No option may be granted under the Plan after
the tenth anniversary of the adoption of the Plan. Unless otherwise
specified by the Board, options granted under the Plan are Incentive Stock
Options under the provisions and subject to the limitations of Section 422
of the Internal Revenue Code.
ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Board until such time as a
Compensation Committee is appointed. Subject to the provisions of the
Plan, the Board determines the employees who will receive options under the
Plan, the number of shares subject to each option and the terms of those
options, and interprets the Plan and makes such rules or procedures as the
Board may deem proper.
8
Upon the granting of any option, the optionee must enter into a
written agreement with the Company setting forth the terms upon which the
option may be exercised. Such an agreement will set forth the length of
the term of the option and the timing of its exercise as determined by the
Board. The Compensation Committee, or if there is none, the Board, in its
sole discretion will determine the vesting schedule and exercise dates of
any equity security granted under the Plan at the time each grant is made.
No equity security granted under the Plan shall be exercisable within six
months of the date of grant without approval of the Compensation Committee
or the Board. In no event shall the length of an option extend beyond ten
years from the date of its grant. An optionee may exercise an option by
delivering payment to the Company in cash.
Under the Plan, if the employment of any person to whom an option has
beenis
granted is terminated for any reason other than the death or disability of
the optionee, the option shall automatically terminate. If the termination
is by reason of retirement, the optionee may exercise such portion of the
option as has vested, within three months of termination or within the
remaining term of the option, whichever is shorter. If the optionee dies
while employed by the Company or its subsidiaries, or during a period after
termination of employment in which the optionee could exercise an option,
the optionee's beneficiary may exercise the option within one year of the
date of the optionee's death but in no event may the option be exercised
later than the date on which the option would have expired if the optionee
had lived. If the termination is by reason of disability, the optionee may
exercise the option, in whole or in part, at any time within one year
following such termination of employment but in no event may the option be
exercised later than the date on which the option would have expired had
the optionee not become disabled.
9
FEDERAL INCOME TAX CONSEQUENCES
With respect to the tax effects of non-qualified stock options, since
the options granted under the Plan do not have a "readily ascertainable
fair market value" within the meaning of the Federal income tax laws, an
optionee of an option will realize no taxable income at the time the option
is granted. When a non-qualified stock option is exercised, the optionee
will generally be deemed to have received compensation, taxable at ordinary
income tax rates, in an amount equal to the excess of the fair market value
of the shares of our Common Stock on the date of exercise of the option
over the option price. The Company will withhold income and employment
taxes in connection with the optionee's recognition of ordinary income as a
result of the exercise by an optionee of a non-qualified stock option. The
Company generally can claim an ordinary deduction in the fiscal year that
includes the last day of the taxable year of the optionee which includes
the exercise date or the date on which the optionee recognizes income. The
amount of such deduction will be equal to the ordinary income recognized by
the optionee. When stock acquired through the exercise of a non-qualified
stock option is sold, the difference between the optionee's basis in the
shares and the sale price will be taxed to the optionee as a capital gain
(or loss).
9
With respect to the tax effects of Incentive Stock Options, the
optionee does not recognize any taxable income when the option is granted
or exercised. If no disposition of shares issued to an optionee pursuant
to the exercise of an Incentive Stock Option is made by the optionee within
two years after the date the option was granted or within one year after
the shares were transferred to the optionee, then (a) upon sale of such
shares, any amount realized in excess of the option price (the amount paid
for the shares) will be taxed to the optionee as long-term capital gain and
any loss sustained will be a long-term capital loss and (b) we will be
allowed no deduction for Federal income tax purposes. The exercise of an
Incentive Stock Option will give rise to an item of tax preference that may
result in alternative minimum tax liability for the optionee.
If shares of Common Stock acquired upon the exercise of an Incentive
Stock Option are disposed of prior to the expiration of the two year and
one year holding periods described above (a "Disqualifying Disposition")
generally (a) the optionee will realize ordinary income in the year of
disposition in an amount equal to the excess (if any) of the fair market
value of the shares at exercise (or, if less, the amount realized upon the
sale of such shares) over the option price thereof, and (b) we will be
entitled to deduct such amount, subject to applicable withholding
requirements. Any further gain realized will be taxed as short-term or
long-term capital gain and will not result in any deduction by our company.
A Disqualifying Disposition will eliminate the item of tax preference
associated with the exercise of the Incentive Stock Option.
10
CHANGES IN PLAN
The Plan may be terminated, suspended, or modified at any time by the
Board, but no amendment increasing the maximum number of shares for which
options may be granted (except to reflect a stock split, stock dividend or
other distribution), reducing the option price of outstanding options,
extending the period during which options may be granted, otherwise
materially increasing the benefits accruing to optionees or changing the
class of persons eligible to be optionees shall be made without first
obtaining approval by a majority of the Company's shareholders. No
termination, suspension or modification of the Plan shall adversely affect
any right previously acquired by the optionee or other beneficiary under
the Plan.
Options granted under the Plan may not be transferred other than by
will or by the laws of descent and distribution and, during the optionee's
lifetime may be exercised only by the optionee.
All of the Options
previously issued under the prior plan remain unchanged and outstanding.
THE COMPANY'S PRESIDENTBOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL THREE TO
RATIFYAPPROVE THE PACIFIC HEALTH CARE ORGANIZATION, INC.,
20042005 STOCK OPTION PLAN
OTHER MATTERS
The Company's PresidentBoard of Directors knows of no other matters that are to be
presented for action at the SpecialAnnual Meeting of Stockholders other than those
set forth above. If any other matters properly come before the SpecialAnnual
Meeting of Stockholders, the person named in the enclosed proxy form will
vote the shares represented by proxies in accordance with their best
judgment on such matters.
10
20042005 SHAREHOLDER PROPOSALS
If you wish to include a proposal in the Proxy Statement for the 20042005
Annual Meeting of Stockholders, your written proposal must be received by
the Company no later than OctoberSeptember 15, 2005.2006. The proposal should be
mailed by certified mail, return receipt requested, and must comply in all
respects with applicable rules and regulations of the Securities and
Exchange Commission, the laws of the State of Utah and our Bylaws.
Stockholder proposals may be mailed to the Corporate Secretary, Pacific
Health Care Organization, Inc., 1280 Bison, Suite B9-596, Newport Beach,
California 92660.
For each matter that you wish to bring before the meeting, provide the
following information:
(a) a brief description of the business and the reason for bringing
it to the meeting;
(b) your name and record address;
(c) the number of shares of Company stock which you own; and
(d) any material interest (such as financial or personal interest)
that you have in the matter.
11
SELECTED INFORMATION FROM OUR ANNUAL REPORT ON FORM 10-KSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 14, 2004 AND OUR QUARTERLY REPORT ON
FORM 10-QSB FILED ON AUGUST 15, 2005
DESCRIPTION OF BUSINESS
- -----------------------
History of the CompanyHISTORY OF THE COMPANY
----------------------
Pacific Health Care Organization, Inc. (the "Company") was
incorporated under the laws of the stateState of Utah on April 17, 1970 under
the name Clear Air, Inc. The Company was organized and authorized to
pursue any lawful purpose or purposes. The Company amended its Articles of
Incorporation on September 26, 2000, to effect a seventy-five for one
reverse split, and to change the authorized common stock to 50,000,000
shares, par value of $0.001. The Company later amended its Articles of
Incorporation on October 30, 2000, changing its name to Immunoclin
International, Inc. Due to complications in the proposed business, the
Company again amended its Articles of Incorporation on January 31, 2001,
changing its name to Pacific Health Care Organization, Inc. In connection
with the January 2001 name change, a new board of directors was put in
place and new management was subsequently appointed.
11
The Company has had limited business operations since the early
1990's, has not generated any significant revenues and was engaged in
searching for business opportunities until 2001. Management believes that
the Company has identified a significant opportunity within the Workers'
Compensation industry in the State of California.
On February 26, 2001, the Company acquired Medex Healthcare, Inc.
("Medex"), a California corporation organized March 4, 1994, in a share for
share exchange in which the Company acquired all of the outstanding shares
of Medex in exchange for 6,500,000 shares of the Company. The acquisition
of Medex by the Company was accounted for as a reverse acquisition, with
Medex being considered the accounting acquirer. Medex had limited
operations and was primarily engaged in making application for California
State licenses to operate as a Health Care Organization for the three years
prior to the acquisition. Medex is now a wholly owned subsidiary of the
Company. In addition, the Company formed WorkersWorkers' Compensation Assistance,
Inc. ("WCA"), a California corporation on August 14, 2001, which is also a
wholly owned subsidiary. WCA does not have any operations to date, and the
principal business of the Company is the business of Medex.
INDUSTRY BACKGROUND
-------------------
The California legislature passed Assembly Bill 110 ("AB 110" or the
"bill") in July of 1993 and later deregulated the premiums paid by
employers for Workers' Compensation insurance. These two events have given
rise to the business of the Company.
12
AB 110 was a collaboration of efforts from both employers and
organizations, such as plaintiffs' attorneys who represent injured workers,
in an effort to curtail employers from leaving California due to escalating
Workers' Compensation costs. The bill addresses the problem of rising
medical costs associated with poor quality care to the injured worker. Two
of the major problems with the existing system, as identified by the
legislature, were fraud and the lack of a managed care program that allowed
control of the quality of medical care of an injured worker beyond thirty
days. As a result, the bill created a new health care delivery body to
solve the unique medical and legal issues of Workers' Compensation. These
new entities are called Health Care Organizations ("HCO"). The HCOs are
networks of health care professionals specializing in the treatment of
workplace injuries and in back-to-work rehabilitation and training. An HCO
does not waive the statutory obligation of companies to either possess
workers' compensation insurance or qualify as self- insured.
HCOs were created to appeal to employees, while providing substantial
savings to employers. This is accomplished by providing high quality
medical care and increasing the length of time employers are involved in
the medical care provided to injured workers. The increased length in
control is designed to decrease the incidence of fraudulent claims and
disability awards and is also based upon the notion that if there is more
control over medical treatment there will be more control over costs, and
subsequently, more control over getting injured workers back on the job.
This increase in control is intended to reduce the costs of claims and
thereby reduce workers' compensation premiums.
12
In addition, the legislature requires that employers who use HCOs give
employees a choice of HCOs or managed care physicians for treatment. It is
anticipated that this will increase quality and give employees a fair say
in their treatment.
Prior to the passing of the bill, premiums paid by employers were
fixed by law at a rate that was only dependent upon the occupation of the
workers covered under the policy. An additional measure enacted by the
California legislature deregulated the premiums paid by employers. This
encouraged competition for market share of the Workers' Compensation
insurance business. The increased competition initially drove premiums
down to levels that were not sustainable. In response, insurers have hiked
insurance premiums. Drastically rising premiums are forcing employers to
search for alternative Workers' Compensation programs such as the HCOs
created by AB 110.
CERTIFICATION PROCESS
---------------------
All applications for HCO license certification are processed by the
California Department of Industrial Relations ("DIR"). The application
process is time consuming and requires descriptions of applicant's
organization and planned methods of operation.
13
The applicant for the HCO licencelicense must develop a contracted network of
providers for all of the necessary medical services that injured workers
may need. This network must be developed to the satisfaction of the DIR.
Given the wide range of medical providers needed over a large geographical
area, this is a significant undertaking. The network of providers must be
under contract with the HCO applicant and be willing to provide the various
services in their specialty. All contracts must be approved by the DIR so
as to assure the best of care will be provided to the injured worker.
Next, the HCO applicant must develop committees of providers that will
ensure the injured worker receives the best of care. This requirement
includes the development of Quality Assurance, Utilization, Work Safety,
Educational and Grievance committees.
Finally, an HCO applicant must demonstrate to the DIR's satisfaction
that it has the resources necessary to manage and administer a large
network of providers. To establish the HCO applicant's ability to
administer a network, it requires the applicant to furnish the details of
its operating system to the DIR in writing.
The Company's wholly owned subsidiary Medex received its first HCO
license on March 15, 1997, for its network of primary care providers.
Medex later received a second HCO license on October 10, 2000, for its
network of primary and specialized care providers.
BUSINESS OF THE COMPANY
-----------------------
The principle business of the Company is that of its wholly owned
subsidiary Medex. Medex is in the business of managing and administering
Health Care Organizations. As mentioned previously, these HCOs are
networks of medical providers established to serve the Workers'
Compensation industry. The California legislature mandated that if an
employer contracts services from an HCO, the injured workers must be given
a choice between at least two HCOs. The Company recognized early on that
two HCO certifications are necessary to be competitive. Instead of
aligning with a competitor, the Company elected to go through the lengthy
application process with the DIR twice and has subsequently received
certification to operate two separate HCOs. While there is no longer a
statutory requirement to offer two HCOs to employers Medex continues to
retain its two certifications, so that employer clients have the option of
offering one or two HCOs to their employees. The Company anticipates this
requirementbelieves its
ability to offer two HCOs gives potential clients greater choice, which
is to be eliminated on January 1, 2004, which may reduce the
competitive advantagefavored by a number of having two HCO licenses.
13employers, especially those with certified
bargaining units.
Through the two licenses to operate HCOs, the Company offers the
injured worker a choice of enrolling in an HCO with a network managed by
primary care providers requiring a referral to specialists or a second HCO
where injured workers do not need any prior authorization to be seen and
treated by specialists.
The two HCO certifications obtained by the Company cover seven
counties in Southern California containing over nine million workers,
approximately 52%the entire
state of the State's workforce.California. This geographical area has a multi-billion dollar
annual medical and indemnity Workers' Compensation cost. The two HCO
networks have contracted with over 2,7003,200 individual providers 62and clinics,
as well as, hospitals, 200 pharmacies, rehabilitation centers and other
ancillary services making the Company's HCOs capable of providing
comprehensive medical services throughout this region. The Company is
developing these networks and further extending its Workers' Compensation
business into a statewide entity.
14
The Company, by virtue of its continued certification as an HCO, is
statutorily deemed to be qualified as an approved Medical Provider Network
(MPN) as created by SB 899, and are effective as of January 1, 2005. It is
anticipated that a significant number of employer clients will avail
themselves of the MPN program rather than the HCO program; others will
utilize the provisions of the HCO program, while still others will use both
in conjunction with each other.
The Company is currently in continued discussions with insurance
brokers, of health
insurancecarriers, third party administrators, managed care organizations
and with representatives of larger employers.employers, both as partners and
potential clients. Based on potential cost savings to employers and the
large workforce inapproximately fourteen million workers eligible for the seven counties
whereservices of the
Company, is licensed, approximately nine million workers, the Company expects that a significant number of employers will
sign contracts with the Company to provide services. The Company expects
the amount per enrollee it will charge employers will likely vary based
upon factors such as employer history and exposure to risk; for instance, a
construction company would likely pay more than a payroll service company.
In addition, employers who have thousands of enrollees are more likely to
get a discount. Because of the relatively new HCO market, and even though
the Company makes every effort to charge a sufficient enrollee fee to cover
costs and to make a profit, however, there is no assurance that the Company
will always properly evaluate the risks associated with each employer or
charge sufficient enrollee fees to cover its operational costs and/or be
profitable. The Company carefully analyzes each employer prior to quoting
an enrollee fee. In the event the Company charges per enrollee fees that
are inadequate to cover operational costs, then the Company may not be able
to continue business operations.
The Company does not anticipate large capital expenditures. Rather,
it has contracted with many medical providers, and therefore, equipment
such as x-ray machines are not paid for by the Company. The Company will
have fixed costs such as liability insurance and other usual costs of
running an office.
PhysiciansPHYSICIANS
----------
The Company strives to select physicians known for excellence and
experience in providing Workers' Compensation care. Two of the Company's
founders have been active in the southern California medical community for
many years, and as a result, the Company has been able to recruit
physicians with superlative credentials and reputations.
14
The Company has also recruited physicians and allied health workers
who reflect the ethnic and cultural diversity of California, thus enabling
injured workers to readily find a physician who speaks their native tongue.
The Company has contracts with over 300 primary care Hispanic physicians,
175 primary care African-American physicians, and many other minority
physicians. The Company believes this is a benefit for injured workers and will assist
in ensuring a prompt return to the workplace.
To date, the
Company has contracted with approximately 2,700 physicians.
PHCO15
HCO COMMITTEES
-----------------------------
The Company has organized seven committees in compliance with AB
110 to provide the best possible care to injured workers. The following
briefly describes each committee:
Quality Assurance.
- ------------------
As the name implies this committee is charged with the responsibility of
monitoring the quality of care that the HCO providers are delivering to the
employees. The Company's Quality Assurance committee consists of fifteen
separate functioning entities. The ultimate oversight and responsibility
for this committee is maintained by the Medical Director.
Utilization Review.
- -------------------
This committee is responsible for monitoring Provider/Enrollee utilization
of health care services under the plan. The activities are reflected in
reports documenting examinations of procedures, provider use patterns and
other matters. This committee is comprised of seven provider physicians.
Case Management.
- ----------------
The Case Management committee ("CMC") is charged with working with both the
injured worker and the employers to coordinate return to work issues. For
example, seeking light duties for an injured worker rather than allowing a
protracted period of disability. The Company's ability to compress the
time frame between an injured worker's first report of injury and return to
work is the most critical factor in the management of Workers' Compensation
care. The number of work days the employee misses due to disability
translates into great costs to the employer, through medical costs, loss of
productivity, the need to hire temporary help and disability insurance
indemnity payments. The case workercaseworker will become an intermediary between the
physician, employer and employee by coordinating the return of the worker
to a position he or she is capable of carrying out while recovering.
Work Safety.
- ------------
The Company believes that the best method to treat work related injuries is
to prevent them from occurring. This committee is a workplace safety
conditions and health committee that makes suggestions for ways to improve
workplace conditions and to promote healthy habits. This committee seeks
to promote safety and health by providing training workers and employers in
methods of avoiding work place injuries. For instance, training may
include safe methods to lift heavy objects, proper use of safety equipment
and safe operation of machinery. In addition, if agreeable to employer and
employee, the Company can provide drug and alcohol testing to attempt to
mitigate injuries that may be caused by these problems. Furthermore, the
Company may provide anonymous referral service for drug and alcohol
treatment services.
15
Grievance.
- ----------
This committee informs employees upon enrollment and annually thereafter of
procedures for processing and resolving grievances. This includes the
location and telephone number where grievances may be submitted and where
complaint forms are available to employees. The Company establishes
procedures for continuously reviewing the quality of care, performance of
medical personnel and utilization of services to prevent causes for
complaint.
16
Provider Licensing & Performance Review.
- ----------------------------------------
Contracting with a high quality professional staff is critical in creating
a Workers' Compensation health care delivery system because in Workers'
Compensation the physician performs additional unique tasks. A Workers'
Compensation physician must understand the requirements of a patient's job
to make informed return-to-work recommendations and the physician needs to
know how to make impairment ratings and be willing to testify in disputed
cases. In addition, the physician must be a healer and patient's advocate.
These additional demands make it necessary to use different criteria to
select Workers' Compensation physicians. The Company monitors the
performance of network physicians. Physicians who produce high quality,
cost effective health care are provided with more patients, while
physicians who do not are eliminated from the network.
Physicians' Continuing Education.
- ---------------------------------
Physicians are trained in the latest theories and techniques in treating
workplace injuries. Protocols and treatment plan suggestions are
distributed to providers on the basis of results of outcome studies as
established by the State of California's Division of Workers' Compensation,
the Medical Disability Advisor and through the State of California's
Industrial Medical Protocols as they are published.
HOSPITALS
---------
The Company has been successful in creating relationships with some of
the premier medical centers of Southernthroughout California. The relationships
established with medical centers are not for access or service as they
provide access and service to all. Rather, these relationships are
maintained by the Company to provide services to the Company's HCO
enrollees.
ANCILLARY SERVICES
------------------
The Company has contracted a full range of ancillary services to cover
all requirements of the California Department of Corporations and
Department of Industrial Relations. This includes interpreter services,
ambulances, physical therapy, occupational therapy, pharmacies and much
more. The ancillary services are vital to ensure there is a complete
network capable of independently providing all care that may be necessary.
16
COMPETITION
-----------
Although the Company is one of the first commercial enterprises
capable of offering HCO services, there are new companies that are
currently setting up similar services as those being offered by the
Company. Many of these competitors may have greater financial, research
and marketing experience and resources than the Company, and will represent
substantial long-term competition. In California there are currently
sixteennineteen certified health care organization licenses (two of which belong
to the Company) issued to approximately ten companies.twelve companies, although only eight are
actively utilizing their HCO certifications. This translates into approximately nineseven
direct HCO competitors, with Comp Partners being the largest.
The Company plans to gain a competitive advantage by marketing itself
as a legal medical organization not just a medical company. The Company's
CEO and Medical Director are both attorneys.attorneys and members of the California
Bar. In addition, the Company is the only HCO that ownsdirectly contracts with
a network of providers as opposed to leasing a
network.based on quality determinations rather than the
provision of discounted medical services. The Company believes this is
advantageous because they can market a direct relationship with providers
who have demonstrated expertise in treating work related injuries and
writing credible medical reports, rather than relying on third party
relationships.relationships or those based upon discounts alone.
17
SB 899, signed on April 19, 2004, created Medical Provider Networks
(MPNs), to be effective on and after January 1, 2005. The statute deems
the Medex network, as a certified HCO is already approved as an MPN. It is
anticipated that Medex will offer both HCO and MPN programs to potential
clients, as well as an HCO/MPN hybrid model that will give Medex a
competitive advantage, because of the manner in which the network was
created.
EMPLOYEES
---------
The Company, through its subsidiary, currently has fiveeight full time
employees and tentwelve part-time employees. In addition, the officers and
directors work on a part time, as needed, basis with no commitment for full
time employment. Over the next twelve months, the Company anticipates
hiring additional employees as needed and as revenues and operations
warrant.
DESCRIPTION OF PROPERTY
- -----------------------
PROPERTY & FACILITIES
---------------------
The Company's executive offices are located in Newport Beach,
California. The Company's subsidiary Medex leases approximately 3,504
square feet of office space in Long Beach, California. Under the terms of
the lease Medex is required to pay $6,189.70 per month through February of
2004, $6,307.20 from March of 2004 through February of 2005 and $6,482.40
from March of 2005 through February of 2006. There is no provision in the
lease for extension or renewal but the Company anticipates it will be able
to renew or secure other office space on similar terms if it is required to
do so. The Company does not anticipate needing any additional office space
in the next twelve months. If the need arises, the Company believes it will
be able to secure additional office space on acceptable terms. The Company
does not own or lease any other property.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND OTHER SHAREHOLDER
MATTERS
- -------------------------------------------------------------------------
The Company's shares are currently traded on the Pink Sheets under the
symbol "PHCO". The Company plans to apply for a listing on the Over-the-
CounterOver-the-Counter Bulletin
Board ("OTCBB") inunder the next twelve months. Thesymbol PHCO. As of October 11, 2005, the Company
currently has 15,427,732 shares outstanding held byhad approximately 1080 shareholders.shareholders holding 15,427,759 common shares.
18
The following table shows the historicalpublished bid and ask price
data for PHCO:
17quotations from January 1, 2003, through
December 31, 2004, are included in the chart below. These quotations
represent prices between dealers and do not include retail markup, markdown
or commissions. In addition, these quotations do not represent actual
transactions.
BID PRICES ASK PRICES
HIGH LOW HIGH LOW
2003
----
2004
First Quarter $.05 $.05 $1.01 $1.01.16 .16 1.01 1.01
Second Quarter .16 .16 1.01 1.01
Third Quarter .16 .16 1.01 1.01
Fourth Quarter .16 .16 1.01 .50
2003
First Quarter .05 .05 1.01 1.01
Second Quarter .05 .05 1.01 1.01
Third Quarter .06 .05 1.01 1.01
Fourth Quarter .16 .06 1.01 1.01
2002
----
First Quarter .45 .45 1.01 1.01
Second Quarter .45 .15 1.15 1.01
Third Quarter 2.00 1.75 2.25 2.25
Fourth Quarter 1.75 .45 2.25 1.00
The above quotations, as provided by the Pink Sheets, LLC., represent
prices between dealers and do not include retail markup, markdown or
commission. In addition, these quotations do not represent any actual
transactions.
Approximately 884,214CASH DIVIDENDS
- --------------
The Company has not declared a cash dividend on any class of common
equity in the last two fiscal years. There are no restrictions on the
Company's ability to pay cash dividends, other than state law that may be
applicable; those limit the ability to pay out all earnings as dividends.
The Board of Directors does not, however, anticipate paying any dividends
in the foreseeable future; it intends to retain the earnings that could be
distributed, if any, for the operations, expansion and development of its
business.
SECURITIES FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
- -------------------------------------------------------
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding for future issuance
outstanding options, options, warrants under equity
warrants and rights and rights compensation plans
(excluding
securities reflected
in columns (a))
19
- -------------------------------------------------------------------------------------
(a) (b) (c)
- -------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 66,250 $0.05 915,000
- -------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders 1,167,964 $3.18 -0-
- -------------------------------------------------------------------------------------
Total 1,234,214 $3.01 915,000
- -------------------------------------------------------------------------------------
On October 11, 2004, the Company granted stock options to Doug Hikawa,
an officer of the Company's unissuedsubsidiary, Medex Healthcare to purchase up to
350,000 restricted common shares are
subject to outstanding options or warrants to purchase, or securities
convertible into, common equity of the Company. OfThe options are
exercisable as follows: 100,000 shares the 15,427,732
outstandingfirst year with an exercise
price of $.05 per share; 100,000 shares the second year with an exercise
price of common stock$.10 per share; and 150,000 shares the third year with an exercise
price of $.20 per share. The options expire three years from the date of
grant.
In August 2002, the Company granted options to purchase approximately
13,434,944 are85,000 restricted common shares of the Company and approximately 154,277 shares are eligible
for resaleto four employees pursuant
to Rule 144 every 90 days.the PHCO 2002 Stock Option Plan, the adoption of which was recently
ratified by the shareholders of the Company. 50% of the options granted
vested upon grant, 25% vested on the first annual anniversary of the grant
date and the remaining 25% will vested on the second annual anniversary of
the grant date. The exercise price of the options is $0.05. The options
expire five years from the grant date. To date, options to purchase 18,750
restricted common shares have been exercised.
In April 2001 and August 2002, the Company has no
agreementsissued approximately
807,964 warrants ("Warrants") comprised of 408,982 A Warrants and 408,982 B
Warrants to register shares on behalfcertain investors and debt holders of shareholders currently holding
unregistered securities. Thethe Company. Each A
Warrant represents the right to purchase one share of restricted common
stock of the Company has not paid, nor declared, any
dividends since its inception and does not intendat an exercise price of $3.00 per share for a period
through August of 2006. Each B Warrant represents the right to declare any such
dividends inpurchase
one share of restricted common stock of the foreseeable future. The Company's ability to pay dividend
is subject to limitations imposed by Utah law. Under Utah law, dividends
may be paid to the extent that the corporation's assets exceed it
liabilities and it is able to pay its debts as they become due in the usual
courseCompany at an exercise price of
business.$6.00 per share also for a period through August of 2006.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS FOR THE YEARS
DECEMBER 31, 2004 AND 2003
- ----------------------------------------------------------------------------------------------------------------------------------------
The following information contained in this analysis should be read in
conjunction with the audited condensed consolidated financial statements
and related disclosures contained in the Company's Annual Report on Form
10-KSB.
20
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has limited liquidity and capital resources.
The Company does not currently possess a financial institution source
of financing and the Company cannot be certain that its existing sources of
cash will be adequate to meet its liquidity requirements.
The Company's future capital requirements will depend on its ability
to successfully implementcontinue to develop its business, plan and other factors, including (i) the ability of the
Company to maintain its existing customer base and to expand its customer
base, and (ii) overall financial market conditions where the Company might
seek potential investors.
18
AtAs of December 31, 2003,2004, the Company had cash on hand of $398,352$506,675,
compared to $201,875$398,352 at the December 31, 2002, year end.2003. The $108,323 increase of
$196,477 in cash
on hand is due to additional revenue generated from the Company's growing
customer base. Because of the conversion of debt to
equity, managementManagement believes that cash on hand and anticipated
revenues will be sufficient to cover operating costs over the next twelve
months. Therefore, theThe Company does not anticipate needing to find other sources of
capital at this time. If the Company's revenues, however, are less than
anticipated the Company will need to find other sources of capital to
continue operations. The Company would then seek additional capital in the
form of debt and/or equity. While the Company believes that it is capable
of raising additional capital, there is no assurance that the Company will
be successful in locating other sources of capital on favorable terms or at
all.
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2004 AND 2003
-------------------------------------------------------
Workers' compensation costs in California have continued to remain
excessive which has continued to motivate employers to search for ways to
control this cost. Due to the high workers' compensation costs and the
Company's marketing efforts, revenues increased $574,064 to $1,671,994 for
the year ended December 31, 2004 compared to $1,097,930 for the year ended
December 31, 2003. While the Company believes that revenues will continue
to increase, it also believes that expenses will continue to increase.
Total expenses incurred in the year ended December 31, 2004 totaled
$1,517,190, compared to $1,040,071 for the corresponding period ended
December 31, 2003, which included increases in consulting fees, salaries &
wages, professional fees, insurance and employment enrollment and general &
administrative expenses.
During the year ended December 31, 2004, consulting fees increased to
$109,796 from $84,081 during the year ended December 31, 2003. As the HCO
industry in California continues to develop, the Company believes it is
important to be as involved as possible in the legislative and policy-
making process. Therefore, from time to time, the Company will hire
lobbyist and other consultants to represent its interests. The $25,715
increase in 2004 is partially the result of such activities by the Company
during 2004. The Company anticipates significant fluctuations in
consulting fee expenses from quarter to quarter and year to year as the
applicable legislative and rule-making bodies overseeing the HCO industry
consider changes that may affect the industry. During 2004, the Company
also incurred the costs of approximately $35,500 for retaining a computer
consultant to assist in the ongoing development and maintenance of the
Company's information systems compared to only $15,000 during 2003. The
Company anticipates an ongoing need to retain consultants to assist with
its information technology needs in the upcoming year.
21
Salaries & wages increased $162,723 during the year ended December 31,
2004, to $663,832, compared to $501,109 during the year ended December 31,
2003. The increase in salaries & wages in the year ended 2004 is
attributable to the increased number of employees employed by Medex
Healthcare, the Company's subsidiary, as well as payments of approximately
$30,600 in retroactive salary increases and payment for unused vacation to
certain executive officers of Medex. The Company expects increases in
salaries & wages to continue at about the same rate in 2005.
In the year ended December 31, 2004, the Company incurred professional
fees of $228,184 compared to $84,492 during the year ended December 31,
2003. The increase in professional fees in 2004 is largely attributable to
increased legal and other professional fees incurred during the year ended
December 31, 2004, in connection with compliance with the reporting
obligations of the Company under the Exchange Act of 1934, and the cost of
defending itself against the legal proceeding brought Marvin Teitelbaum and
Peter Alexakis. If the lawsuit against the Company goes to trial, the
Company anticipates professional fees in the upcoming year may be
significantly greater than those incurred in 2004.
During the year ended December 31, 2004, the Company incurred
insurance expenses of $85,364, an $11,223 increase over the prior year.
The increase in 2004, is largely related to the increased number of Company
employees and increases in group medical rates as compared to the 2003
fiscal year. The Company anticipates increases in insurance expense in
2005 to be similar to those experienced in 2004.
Employment enrollment expenses increased $76,328 to $170,528 during
the year ended December 31, 2004, compared to the year ended December 31,
2003. As an HCO, the Company is required to pay a fee to the State of
California Division of Workers' Compensation for each person it enrolls.
The increase in employment enrollment expenses in the year ended December
31, 2004, reflects the increased number of persons enrolled with the
Company when compared to the same period ended 2003, including increased
fees to the State of California and expenses to its enrollment and tracking
technology partner, Harbor Healthcare. The Company anticipates employee
enrollment expenses to increase in 2005 at a rate consistent with
enrollment increases.
For the year ended December 31, 2004, general & administrative
expenses increased $52,402 to $237,174, compared to $184,772 for the year
ended December 31, 2003. This 28% increase in general & administrative
expense was largely attributable to increases in general & administrative
expenses resulting from the Company's increased operations, combined with
certain expenses not incurred in 2003, including costs incurred in
connection with the special meeting of stockholders of approximately
$12,600 and costs of replacing computers and equipment stolen from the
Company's offices of approximately $4,500. Because the Company does not
expect to incur some of these same expenses in 2005, it anticipates general
& administrative expenses will remain fairly consistent with expenses
incurred in 2004, as these one time expenses are offset by increasing
general & administrative expenses resulting from growth in the Company's
business and inflation.
22
As a result of increasing revenue, which was partially offset by
increases in depreciation, consulting fees, salaries & wages, professional
fees, insurance, employment enrollment and general and administrative
expense, the Company realized net income of $154,404 for the year ended
December 31, 2004, compared to net income of $57,859 during the year ended
December 31, 2003.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 AND 2002.
--------------------------------------------------------
The Company generated $1,097,930 in revenue for the year ended
December 31, 2003, compared to revenue of $653,427 for the same period of
2002. This increase is largely due to the growth in the number of
employers and enrollees using the Company's services in 2003 as compared to
2002. During the year ended December 31, 2003, the Company generated
revenue from approximately 51 employers representing approximately 73,700
enrollees compared to ten employers and approximately 13,000 enrollees
during the year ended December 31, 2002. As revenues increased, however,
the expenses incurred in providing HCO services also increased from
$689,257 during the year ended December 31, 2002, to $1,040,071 for the
same period 2003. The increases in expenses were largely attributable to
significant increases in salaries and wages, insurance, employment
enrollment and general and administrative expenses, offset in part by a
decrease in consulting fees.
During the year ended December 31, 2003, salaries & wages paid by the
Company increased $352,682 to $501,109 compared to $148,427 for the year
ended December 31, 2002. This significant increase in salaries and wages
was the result of three primary factors. First, the Company employed more
employees in 2003 than 2002. Second, during 2002, the CEO of Medex was
compensated as a consultant. In 2003, the Company began paying the CEO as
an employee of the Company. Third, the CEO and the Vice President of Medex
each received pay increases in 2003.
Insurance expenses increased from $31,678 in the twelve months ended
December 31, 2002, to $74,141 in the twelve months ended December 31, 2003.
This $42,463 increase was largely the result of the increased number of
person employed by the Company who were receiving health, dental and other
insurance benefits and increases in the cost of insurance.
In the twelve months ended December 31, 2003, employment enrollment
expenses were $94,200, a $37,648 increase over the comparable twelve month
period ended December 31, 2002. As discussed above, as an HCO, the Company
is required to pay a per enrollee fee to the State of California. This
increase is consistent with the increase in the number of enrollees using
our services in 2003, compared to 2002.
1923
General and administrative expenses for the year ended December 31,
2003, increased $81,504, to $184,772 compared to $103,268 for the year
ended December 31, 2002. The increase in general and administrative
expenses were primarily attributable to increased expenses resulting from
the growth in the Company's operations, including increases in office
supply, printing, telephone, equipment rentals and parking expenses
accounting for a $35,300 increase and $35,200 increase in office rental
expense in the year ended December 31, 2003.
During the twelve month period ended December 31, 2003, the Company
reduced consulting fees paid to $84,081, compared to $271,968 for the
twelve month period ended December 31, 2002. During 2002, the CEO of Medex
was compensated for his services as a consultant. In 2003, he was treated
as an employee and paid a salary. The reduction in consulting fees is
partially attributable to this change. As discussed above, the Company
anticipates consulting expenses to fluctuate from year to year and the
decrease in consulting expenses from 2002 to 2003 should not be viewed as a
trend.
The Company realized net income of $57,973 for the fiscal year ended
December 31, 2003, compared to a net loss of $35,262 during fiscal 2002.
The realization of net income in 2003, compared to a net loss in 2002,
resulted from the increased revenue and decreased consulting fees offset by
increases in salaries & wages, insurance, employment enrollment and general
& administrative expenses as discussed above.
The increased revenue and the realization of net income in 2003 is
primarily the result of increased demand for HCO services as a result of
escalating workers' compensation costs in California. The Company
anticipates demand for its service will remain strong through 2004 and
therefore management believes revenues and expenses will continue to
increase at a similar pace to that of 2003 over the next twelve months.
PLAN OF OPERATIONS
------------------
As mentioned previously, the business of the Company is that of its
wholly owned subsidiary Medex. Over the next twelve months the Company
plans to focus its efforts on increasing enrollment in the Medex HCOs
throughout southern California. The Company is currently in discussions
with a number of businesses and continues to distribute marketing packets
to potential customers. The Company will maintain and continue to
establish relationships with doctors, nurses and other ancillary services
who have experience in the workers' compensation industry. These
relationships are vital to the success of the Company as these people and
services will help up keep costs down by ensuring proper care.
Due to escalating workers' compensation costs in the State of
California and the HCO's ability to assist employers to control and reduce
this cost, management believes that additional California employers may
contract the services of an HCO. The Company is actively positioning
itself to contract as many employers as possible. Any additional employees
enrolled will also cause costs and expenses to proportionately increase.
The Company has expanded the executive offices and plans to hire additional
employees as they are needed to meet any increase in enrollment.
2024
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
- ---------------------------------------------------------------------------
The following information contained in this analysis should be read in
conjunction with the unaudited condensed consolidated financial statements
and related disclosures contained in the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has limited liquidity and capital resources. The Company
does not currently possess a financial institution source of financing and
the Company cannot be certain that its existing sources of cash will be
adequate to meet its liquidity requirements.
The Company's future capital requirements will depend on its ability
to successfully implement its business plan and other factors, including
(i) the ability of the Company to maintain its existing customer base and
to expand its customer base, and (ii) overall financial market conditions
where the Company might seek potential investors.
As of June 30, 2005, the Company had cash on hand of $296,436,
compared to $489,566 at June 30, 2004. This $193,130 decrease in cash on
hand is due to increased legal fees and the hiring of a new public
relations firm. Management believes that cash on hand and anticipated
revenues will be sufficient to cover operating costs over the next twelve
months. Therefore, the Company does not anticipate needing to find other
sources of capital at this time. If the Company's revenues, however, are
less than anticipated the Company will need to find other sources of
capital to continue operations. The Company would then seek additional
capital in the form of debt and/or equity. While the Company believes that
it is capable of raising additional capital, there is no assurance that the
Company will be successful in locating other sources of capital on
favorable terms or at all.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
---------------------------------------------------------
Workers' compensation costs in California continue to remain excessive
which motivates employers to search for ways to control this cost.
Although revenues for the six months ended June 30, 2005 fell short versus
the same period of 2004, the Company expects to see new growth in the sign-
up of MPN customers. In the six months ended June 30, 2005, revenues
decreased to $794,427 compared to $828,674 during the six months ended June
30, 2004. While the Company believes that revenues will increase
throughout the next two quarters of 2005, it also believes that expenses
will correspondingly increase at a similar rate, which the Company
anticipates will result in future increases in income from operations at a
rate less than increases in revenue. Total expenses incurred in the six
months ended June 30, 2005, were $993,647 compared to $731,678 during the
six month ended June 30, 2004, a 35% increase. The increases in total
expenses resulted primarily from increases in salaries & wages,
professional fees, employment enrollment and general & administrative
expense were only partially offset by decreases in consulting fees.
25
Salaries & wages increased $29,766 or 9% during the first six months
of 2005 to $349,833, compared to $320,067 during the first six months of
2004. The increase in salaries & wages in the six months 2005 is
attributable to the Company having more employees in the six months ended
2005 compared to the six months ended 2004.
In the six months ended June 30, 2005, the Company incurred
professional fees of $210,144 compared to $76,495 during the six months
ended June 30, 2004. The increase in professional fees in 2005 is largely
attributable to legal fees incurred by the Company associated with
defending itself against proceedings brought by Marvin Teitelbaum and Peter
Alexakis, the retention of a third party to provide nurse case management
services, and a public relations firm to direct the Company's marketing
efforts.
Employment enrollment increased $54,863 to $128,664 during the six
months ended June 30, 2005, compared to June 30, 2004. As an HCO, the
Company is required to pay a fee to the State of California for each person
it enrolls. The increase in employment enrollment expenses in the six
months ended June 30, 2005, reflects the increased number of persons
enrolled with the Company when compared to the same period ended 2004.
During the six month ended 2005, general & administrative expenses
rose 80% to $197,040 compared to $109,468 in the six month ended 2004.
This increase in general & administrative expenses is attributable to
several factors. During the six month ended 2005, the Company elected to
establish a bad debt reserve of $18,000 for non-payment of past due
invoices. The Company incurred no expenses for bad debt during the first
six months of 2004. Also during the six month ended 2005, the Company
spent in excess of $30,000 in printing and postage, as well as increased
travel expenses, to promote and advertise the Company's services. During
the six months ended June 30, 2005, the Company also spent approximately
$10,000 to acquire office equipment that was not capitalized. While the
Company anticipates general and administrative expenses will continue to
increase, it does not expect these expenses to increase at such a
significant rate.
Consulting fees have decreased from $100,190 during the six months
ended June 30, 2004 compared to $60,833 during the six months ended June
30, 2005, as the Company required fewer consulting services. The Company
anticipates consulting fees will continue to vary depending upon need, but
it expects consulting fees to be more consistent with the fees incurred
during the six months ended June 30, 2005.
As a result of increasing expenses and decreasing revenues during the
six months ended June 30, 2005, the Company realized a net loss of $198,140
compared to net income of $97,016 during the six months ended June 30,
2004. The Company anticipates profits to continue to be lower in 2005 than
2004.
26
Comparison of the three months ended June 30, 2005 and 2004
-----------------------------------------------------------
Revenues for the three months ended June 30, 2005 increased 10% to
$438,828 compared to the same period of 2004, as the Company experienced
new growth in the sign-up of MPN customers. The Company believes revenues
will continue to increase throughout the next two quarters of 2005. The
Company also expects that expenses will correspondingly increase at a
similar rate, which should result in future increases in income from
operations at a rate less than increases in revenue. Total expenses
incurred in the second quarter 2005, were $515,856 compared to $335,967
during the second quarter 2004, a 53% increase. The increases in total
expenses resulted primarily from increases in salaries & wages,
professional fees, employment enrollment and general & administrative
expense, which were only partially offset by decreases in consulting fees
and insurance.
Salaries & wages increased $16,989 or 10% during the three months
ended June 30, 2005 compared to the three months ended June 30, 2004. The
increase in salaries & wages in second quarter 2005 is attributable to the
Company having more employees in the second quarter 2005 compared to the
second quarter 2004.
During the three months ended June 30, 2005, professional fees
increased $107,497 compared to the three months ended June 30, 2004. The
increase in professional fees in 2005 is largely attributable to legal fees
incurred by the Company associated with defending itself against
proceedings brought by Marvin Teitelbaum and Peter Alexakis, the retention
of a third party to provide nurse case management services, and a public
relations firm to direct the Company's marketing efforts.
Employment enrollment increased 120% during the three months ended
June 30, 2005, compared to June 30, 2004. As an HCO, the Company is
required to pay a fee to the State of California for each person it
enrolls. The increase in employment enrollment expenses in the three
months ended June 30, 2005, reflects the increased number of persons
enrolled with the Company when compared to the same period ended 2004.
During the second quarter 2005, general & administrative expenses rose
118% to $94,380 compared to $43,343 during the second quarter 2004. As
discussed above, this increase in general & administrative expenses is
attributable to several factors including the establishment of a bad debt
reserve, significantly increased printing, postage and travel expenses and
the acquisition of office equipment. While the Company anticipates
general and administrative expenses will continue to increase in future
quarters, it does not expect these expenses to increase at such a
significant rate.
Consulting fees decreased from $70,019 during the three months ended
June 30, 2004 to $35,223 during the three months ended June 30, 2005, as
the Company required fewer consulting services. The Company anticipates
consulting fees will continue to vary depending upon need, but it expects
quarterly consulting fees to be more consistent with the fees incurred
during the second quarter 2005.
27
As a result of increasing expenses during the three months ended June
30, 2005, the Company realized a net loss of $76,538 compared to net income
of $62,073 during the three months ended June 30, 2004. The Company
anticipates profits to continue to be lower in third quarter of 2005 than
in the third quarter of 2004.
PLAN OF OPERATIONS
- ------------------
Over the next twelve months, the Company plans to continue focusing
its efforts on increasing enrollment in the HCO and MPN throughout
California. The Company is constantly in discussions with several
businesses and has distributed marketing packets to other potential
customers. The Company will maintain and continue to establish
relationships with doctors, nurses and other ancillary services that have
experience in the workers' compensation industry.
The Company believes that the excessive workers' compensation costs
will continue to motivate employers to search for ways to control this
cost. The Company believes that its HCO and MPN services offer an
effective way to help reduce the excessive workers' compensation costs and
as such employers will continue to utilize the Company's HCO and MPN
services.
FINANCIAL STATEMENTS
- --------------------
See Consolidated Financial Statement listed in the accompanying index
to the Consolidated Financial Statements on Page F-1 herein.
LEGAL PROCEEDINGS
- -----------------
A complaint was filed in Orange County Superior Court by plaintiffs
Marvin Teitelbaum, a shareholder of the Company, and Peter Alezakis,Alexakis, a
shareholder of the Company and former director (collectively "Plaintiffs")
on or about April 7, 2004 against the Company's president Tom Kubota,
secretary Rudy LaRusso and the Company (collectively "Defendants"). The
action seeks cancellation of a stock issuance, an order for Mr. Kubota to
pay the Company $150,000 and other damages to be determined based upon
allegations that Defendants breached various fiduciary duties. The Company
believes that the claims by plaintiffs are without merit. Defendants havehas retained the servicesLaw Offices of Joseph J. Nardulli, Newport Beach,
California, and Mr. Kubota and Mr. LaRusso have retained the Law Offices of
L. Scott Carlin, ofKarlin, Tustin, California, to represent them in this mattermatter.
The Defendants have answered the complaint and the parties are
currently engaged in discovery. The trial date, which was initially
scheduled for June 6, 2005, was recently rescheduled to February 2006. The
Defendants intend to contest thethis case vigorously.
28
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
- -------------------------------------------------------------------------
None.--------------------------------------------------------------------------
On February 17, 2004, our independent auditors, Bierwolf, Nilson &
Associates, Certified Public Accountants, informed us that on February 10,
2004, that their firm had merged its operations into Chisholm, Bierwolf &
Nilson, LLC ("CBN") and was therefore effectively resigning as our
auditors. Beirwolf, Nilson & Associates had audited our financial
statements for the fiscal years ended December 31, 2001 and 2002 and its
reports for each of the two fiscal years did not contain an adverse opinion
or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. There were no
disagreements between us and Bierwolf, Nilson & Associates on any matter
regarding accounting principles or practices, financial statement
disclosure, or auditing scope or procedure during the past two fiscal years
or any subsequent interim period of Bierwolf, Nilson & Associates as our
auditors.
WHERE STOCKHOLDERS CAN FIND MORE INFORMATION
We file annual and quarterly reports with the Securities and Exchange
Commission. Stockholders may obtain, without charge, a copy of the most
recent Form 10-KSB (without exhibits) by requesting a copy in writing from
us at the following address:
Pacific Health Care Organization
1280 Bison, Suite B9-596
Newport Beach, California 92660
The exhibits to the Form 10-KSB are available upon payment of charges
that approximate reproduction costs. If you would like to request
documents, please do so by November 1, 2004,2005, to receive them before the
SpecialAnnual Meeting of Stockholders.
By order of the President,
October 21, 2004/S/ Tom Kubota
October 20, 2005 Tom Kubota, President
21
STOCKHOLDERS ARE REQUESTED TO MARK, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT IN THE ENCLOSED, SELF-ADDRESSED ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. YOUR PROMPT RESPONSE
WILL BE HELPFUL, AND YOUR COOPERATION WILL BE APPRECIATED.
22
PACIFIC HEALTH CARE ORGANIZATION, INC.29
INDEX TO FINANCIAL STATEMENTS
Pacific Health Care Organization, Inc.
Audited Financial Statements
(In U.S. Dollars)
December 31, 2003
and
December 31, 2002
For the fiscal years ended December 31, 2003 and 2002
TablePage
----
Report of Contents . . . . . . . . . . . . . . . . . . . . . . . F-1
Report ofChisholm, Bierwolf & Nilson,
Independent Registered Public Accounting Firm . . . .F-1
Balance Sheets as of December 31, 2004 and 2003 F-2
Financial Statements
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statement of Operations . . . . . . . . . . . . . . . . . . . . F-5
Statementfor the year ended December 31,
2004 and 2003 F-4
Statements of Stockholders' Equity . . . . . . . . . . . . . . . F-6
Statementand Comprehensive Income
from January 1, 2003 to December 31, 2004 F-5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . F-7for the Years Ended December 31,
2004 and 2003 F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . F-8
F-1for the years ended
December 31, 2004 and 2003 F-7
Balance Sheets as of June 30, 2005 and December 31, 2004
(audited) F-20
Unaudited Statements of Operations for the three and six
months ended June 30, 2005 and 2004 F-22
Unaudited Statements of Stockholders Equity and Comprehensive
Income from January 1, 2004 to June 30, 2005 F-23
Unaudited Statements of Cash Flows for the Six Months Ended
June 30, 2005 and 2004 F-24
Notes to Unaudited Consolidated Financial Statements for the
six months ended June 30, 2005 F-25
/Letterhead/
Independent Auditor's Report
---------------------------------------------------------
To the Board of Directors and Stockholders
Pacific Health Care Organization, Inc.
We have audited the accompanying balance sheets of Pacific Health Care
Organization Inc., as of December 31, 20032004 and 2002,2003, and the related
statements of operations, stockholders' equity and comprehensive income retained earnings and
cash flows for the years then ended. These financial statements are the
responsibility of the Company'scompany's management. Our responsibility is to
express an opinion on these financial statements based on our audit.audits.
We conducted our audit in accordance with generally accepted auditingthe standards inof the United States of America.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 misstatements. The Company has
determined that it is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. 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 the significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that
our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of Pacific Health Care
Organization, Inc., as of December 31, 20032004 and 2002,2003, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted accounting principles, in the United States of America.
/S/ Chisholm, Bierwolf & Nilson, LLC
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
February 16, 2004
F-2
Pacific Health Care Organization, Inc.March 10, 2005
F-1
PACIFIC HEALTH CARE ORGANIZATION, INC.
Balance Sheets
December December
31, 2004 31, 2003
31, 2002
----------- ----------------------- ------------
ASSETS
Current Assets
- --------------
Cash $ 398,352506,675 $ 201,875398,352
Accounts Receivable 179,391 120,734 42,581
Prepaid Expenses 40,715 24,166
9,896
----------- ----------------------- ------------
Total Current Assets 726,781 543,252 254,352
Property & Equipment (Note 5)
- --------------------
Computer Equipment 60,922 55,830 41,927
Furniture & Fixtures 24,766 7,082
----------- -----------24,766
------------ ------------
Total Property & Equipment 85,688 80,596 49,009
Less: Accumulated Depreciation (54,436) (32,124)
(14,848)
----------- ----------------------- ------------
Net Property & Equipment 31,252 48,472
34,161
----------- ----------------------- ------------
Total Assets $ 758,033 $ 591,724
$ 288,513
=========== ======================= ============
F-3
Pacific Health Care Organization, Inc.The accompanying notes are an integral part of these financial statements.
F-2
PACIFIC HEALTH CARE ORGANIZATION, INC.
Balance Sheets
December December
31, 2004 31, 2003
31, 2002
----------- ----------------------- ------------
LiabilitiesLIABILITIES & Stockholders' EquitySTOCKHOLDERS' EQUITY
Current Liabilities
- -------------------
Accounts Payable $ 16,99321,813 $ 3,60016,993
Accrued Expenses 178,887 139,920 75,514
Unearned Revenue 119,608 165,001
-
----------- ----------------------- ------------
Total Current Liabilities 320,308 321,914
79,114Commitments - -
- ----------- ------------ ------------
Stockholders' Equity (Note 8)
- --------------------
Preferred Stock; 5,000,000 Shares
Authorized at $0.001 Par Value;
Zero Shares Issued and Outstanding - -
Common Stock; 50,000,000 Shares
Authorized at $0.001 Par Value;
15,427,732 and 15,408,98215,427,732 Shares Issued and
Outstanding, Respectively 15,428 15,40915,428
Additional Paid In Capital 463,475 449,964 447,545
Additional Paid In Capital - Warrants 122,694 122,694
Accumulated (Deficit) (163,872) (318,276)
(376,249)
----------- ----------------------- ------------
Total Stockholders' Equity 437,725 269,810
209,399
----------- ----------------------- ------------
Total Liabilities & Stockholders' Equity $ 758,033 $ 591,724
$ 288,513
=========== ======================= ============
F-4
Pacific Health Care Organization, Inc.
StatementThe accompanying notes are an integral part of these financial statements.
F-3
PACIFIC HEALTH CARE ORGANIZATION, INC.
Statements of Operations
December December
31, 2004 31, 2003
31, 2002
----------- ----------------------- ------------
Revenues $1,097,930 $ 653,4271,671,994 $ 1,097,930
- -------- ----------- ----------------------- ------------
Expenses
- --------
Depreciation 22,312 17,276 12,639
Consulting Fees 109,796 84,081 271,968
Salaries & Wages 663,832 501,109 148,427
Professional Fees 228,184 84,492
64,725
Insurance 85,364 74,141 31,678
Employment Enrollment 170,528 94,200 56,552
General & Administrative 237,174 184,772
103,268
----------- ----------------------- ------------
Total Expenses 1,571,190 1,040,071
689,257
----------- ----------------------- ------------
Income (Loss) From Operations 154,804 57,859 (35,830)
Other Income (Expenses)
- -----------------------
Interest Income 271 114
568
----------- ----------------------- ------------
Total Other Income (Expenses) 271 114
568
----------- ----------------------- ------------
Income (Loss) Before Taxes 155,075 57,973 (35,262)
Tax Expense 671 -
-
----------- ----------------------- ------------
Net Income (Loss) $ 154,404 $ 57,973
$ (35,262)
=========== ===========
Income (Loss) Per Share
- -----------------------
Basic $ 0.004 $ (.003)
Diluted 0.004 (.003)
Weighted Average Shares Outstanding
Basic 15,413,670 11,540,493
Diluted 15,413,670 11,540,493============ ============
F-5
Pacific Health Care Organization, Inc.
StatementThe accompanying notes are an integral part of these financial statements.
F-4
PACIFIC HEALTH CARE ORGANIZATION, INC.
Statements of Stockholders' Equity and Comprehensive Income
From January 1, 20022003 to December 31, 20032004
Preferred Stock Common Stock Paid Inin Accumulated
Shares Amount Shares Amount Capital Deficit
------------ ----------- --------- ----------- --------- ----------- -----------
Balance,
January
1, 2002 10,063,000 10,063 174,803 (340,987)
Conversion2003 - $- 15,408,982 $15,409 $570,239 $(376,249)
Exercise of
Note Payable
at $.70Stock Option - - 18,750 19 919 -
At $0.5 Per
Share
345,982 346 241,842
A Warrants Issued at $.20 Per
Warrant; B Warrants at $.10
Per Share 103,794
Contributed
Capital 4,800
Shares Issued for Services
at $.01 Per Share 500,000 500 4,500
Shares Issued for Services
at $.01 Per Share 4,500,000 4,500 40,500- - - - 1,500 -
Net LossIncome
for the
Year Ended
December
31, 2002 (35,262)
------------2003 - - - - - 57,973
----------- --------- ----------- -----------
Balance, December 31, 2002 15,408,982 15,409 570,239 (376,249)
Exercise of Stock Option
at $.05 Per Share 18,750 19 919
Contributed Capital 1,500
Net Income for the year ended
December 31, 2003 57,973
------------ -------------------- ----------- -----------
Balance,
December
31, 2003 $15,427,732- - 15,427,732 15,428 572,658 (318,276)
Issuance of
Stock
Options - - - - 13,511 -
Net Income
for the
Year Ended
December
31, 2004 - - - - - 154,404
----------- --------- ----------- --------- ----------- -----------
Balance,
December
31, 2004 - $ - 15,427,732 $ 15,428 $ 572,658586,169 $ (318,276)
============(163,872)
=========== ========= =========== ========= =========== ===========
F-6
Pacific Health Care Organization, Inc.
StatementThe accompanying notes are an integral part of these financial statements.
F-5
PACIFIC HEALTH CARE ORGANIZATION, INC.
Statements of Cash Flows
For the Years Ended December 31
2004 2003 2002
------------ ------------
Cash Flows from Operating Activities
- ------------------------------------
Net Income (Loss) $ 57,973154,404 $ (35,262)57,973
Adjustments to Reconcile Net Income to Net Cash:
Contributed Services - 1,500
4,800
Depreciation 22,312 17,276 12,639
Shares Issued for Services - 50,000-
Stock Options Issued for Services 13,511 -
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Prepaid Expenses (16,549) (14,270) (3,722)
(Increase) Decrease in Accounts Receivable (58,657) (78,153) 42,581)
Increase (Decrease) in Accounts Payable 4,820 13,393 3,600
Increase (Decrease) in Accrued Expenses 38,967 64,406 75,514
Increase (Decrease) in Unearned Revenue (45,393) 165,001 -
------------ ------------
Net Cash Provided by Operating Activities 113,415 227,126 64,988
Cash Flows from Investing Activities
- ------------------------------------
Purchase of Computer Equipment (5,092) (13,903) (24,726)
Purchase of Furniture & Fixtures - (17,684) (2,523)
------------ ------------
Net Cash Used by Investing Activities (5,092) (31,587) (27,249)
Cash Flows from Financing Activities
- ------------------------------------
Proceeds from Exercise of Stock Option - 938 -
------------ ------------
Net Cash Provided by Financing Activities - 938
------------- ------------
Increase (Decrease) in Cash 108,323 196,477 37,739
Cash at Beginning of Period 398,352 201,875 164,136
------------ ------------
Cash at End of Period $ 398,352506,675 $ 201,875398,352
============ ============
Supplemental Cash Flow Information
- ----------------------------------
Interest $ - $ -
Taxes -671 -
F-7
Pacific Health Care Organization, Inc.The accompanying notes are an integral part of thee financial statements.
F-6
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 20032004
NOTE 1 - Corporate History
- --------------------------CORPORATE HISTORY
Pacific Health Care Organization, Inc., was incorporated under the laws of
the state of Utah on April 17, 1970 under the name Clear Air, Inc. On
September 25, 2000, the Company changed its name to Pacific Health Care
Organization, Inc. On February 26, 2001, the Company acquired Medex
Healthcare, Inc. ("Medex"), a California corporation organized March 4,
1994, in a share for share exchange in which the Company acquired all of
the outstanding shares of Medex in exchange for 6,500,000 shares of the
Company. The acquisition of Medex by the Company was accounted for as a
reverse acquisition, and therefore Medex was considered the accounting
acquirer. The financial statements, contained herein, are those of Medex
Healthcare, Inc., for all periods presented.
The principle business of the Company is that of its wholly owned
subsidiary Medex. Medex is in the business of managing and administering
Health Care Organizations ("HCOs"). HCOs are networks of medical
providers established to serve the Workers' Compensation industry. The
California legislature mandated that if an employer contracts services from
an HCO, the injured workers must be given a choice between at least two
HCOs. The Company recognized early on that two HCO certifications were
necessary to be competitive. Instead of aligning with the competitor, the
Company elected to go through the lengthy application process with the
Department of Industrial Relations twice and subsequently received
certification to operate two separate HCOs.
Through the two licenses to operate HCOs, the Company offers the injured
worker a choice of enrolling in an HCO with a network managed by primary
care providers requiring a referral to specialists or a second HCO where
injured workers do not need any prior authorization to be seen and treated
by specialists.
The two HCO certifications obtained by the Company cover the entire state
of California. The geographical area has a multi-billion dollar annual
medical and indemnity Worker's Compensation cost. The two HCO networks
have contracted with over 3,800 provider locations making the Company's
HCOs capable of providing comprehensive medical services throughout this
region.
NOTE 2 - Significant Accounting Policies
- ----------------------------------------SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Accounting
-------------------
The Company uses the accrual method of accounting.
F-7
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 2004
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. Revenue Recognition
-------------------
The Company applies the provisions of SEC Staff Accounting Bulletin
("SAB") No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB
104"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The
SAB 104 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue
recognition policies. In general, the Company recognizes revenue
related to monthly contracted amounts for services provided when (i)
persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the fee is fixed or
determinable and (iv) collectibility is reasonably assured.
Health care service revenues are recognized in the period in which
fees are fixed or determinable and the related services are provided
to the subscriber.
The Company's subscribers generally pay in advance for their services
by check or electronic check payment, and revenue is then recognized
ratably over the period in which the related services are provided.
Advance payments from subscribers are recorded on the balance sheet as
deferred revenue. In circumstancescircumstance where payment is not received in
advance, revenue is only recognized if collectibility is reasonably
assured.
C. Cash Equivalents
----------------
The Company considers all short term, highly liquid investments that
are readily convertible, within three months, to known amounts as cash
equivalents. The Company currently has no cash equivalents.
F-8D. Concentrations
--------------
Financial instruments that potentially subject Pacific Health Care
Organization, Inc. (the Company) to concentrations of credit risks
consist of cash and cash equivalents. The Company places its cash and
cash equivalents at well-known, quality financial institutions.
F-8
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 20032004
NOTE 2 - Significant Accounting Policies (continued)
- ----------------------------------------
D.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. Net Earnings (Loss) Per Share -----------------------------of Common Stock
---------------------------------------------
The computation of net earningsearning (loss) per share of common stock is based
on the weighted average number of shares outstanding during each
period presented. The Company utilizesat the treasury stock method to
calculate net earnings (loss) per share.date of
the financial statements. Potentially issuable common shares totaling
691,964817,964 related to warrants and 66,250416,500 related to options were
excluded from the calculation of fully diluted loss per share because
their efforts wereinclusion would have been anti-dilutive.
The following is the calculation for a weighted average common shares
used in basic and dilutive net earnings (loss) per share:
For the Years Ended
December 31,
2004 2003 2002
------------ ------------
Basic Earning Per Share:Earnings per share:
Income (Loss) (Numerator)(numerator) $ 154,404 $ 57,973
$ (35,262)
Shares (Denominator)(demoninator) 15,427,732 15,413,670 11,540,493
------------ ------------
Per Share Amount $ .00.01 $ .00
============ ============
Fully Diluted Earnings Per Share:per share:
Income (Loss) (Numerator)(numerator) $ 154,404 $ 57,973
$ (35,262)
Shares (Denominator)(demoninator) 15,427,732 15,413,670 11,540,493
------------ ------------
Per Share Amount $ .00.01 $ .00
============ ============
E.F. Depreciation
------------
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. The cost of leasehold
improvements is depreciated over the lesser of the length of the lease
of the related assets for the estimated lives of the assets.
Depreciation is computed on the straight line method.
F.G. Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles, in the United States of
America, require management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-9
Pacific Health Care Organization, Inc.PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 20032004
NOTE 2 - Significant Accounting Policies (continued)
- ----------------------------------------
G.SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the company and itsit's wholly - owned subsidiary.
Intercompany transactions and balances have been eliminated in
consolidation.
HI. Fair Value of Financial Instruments
-----------------------------------
The fair value of the Company's cash and cash equivalents,
receivables, accounts payable and accrued liabilities approximate
carrying value based on their effective interest rates compared to
current market prices.
IJ. General and Administrative Costs
--------------------------------
General and administrative expenses include fees for office space,
insurance, compensated absences, travel expenses and entertainment
costs.
JK. Income Taxes
------------
The Company utilizes the liability method of accounting of income
taxes. Under the liability method, deferred income tax assets and
liabilities are provided based on the difference between the financial
statements and tax basis of assets and liabilities measured by the
currently enacted tax rates in effect for the years in which these
differences are expected to reverse. Deferred tax expense or benefit
is the result of changes in deferred tax assets and liabilities.
NOTE 3 - New Technical Pronouncements
- --------------------------------------
In December 2002,L. Capital Structure
-----------------
The Company has two classes of stock. Preferred stock, 5,000,000
shares authorized, zero issued. Voting rights and liquidation
preferences have not been determined. The Company also has voting
common stock of 50,000,000 shares authorized, with 15,427,732 shares
issued and outstanding. No dividends were paid in the FASB issued2004 and 2003
years.
M. Stock-Based Compensation
------------------------
As permitted by SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION TRANSITION AND DISCLOSURE AN AMENDMENT OF FAS 123.123, the Company has elected to measure and
record compensation cost relative to stock option costs in accordance
with SFAS NO.
148 AMENDS SFAS NO. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, TO
provide alternative methods of transition for an entity that voluntarily
changeswhich requires
the company to record compensation using the Black-Scholes pricing
model to estimate fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-
based employee compensation. This Statement also amends APB Opinion No.
28, Interim Financial Reporting, to require disclosure about those effects
in interim financial information. SFAS No. 148 is effective for annual and
interim periods beginning after December 15, 2002. The adoption of the interim disclosure provisions of SFAS No. 148 did not have an impact onoptions at the Company's financial position, results of operations or cash flows. The
Company is currently evaluating whether to adopt the fair value based
method of accounting for stock-based employee compensation in accordance
with SFAS No. 148 and its resulting impact on the Company's consolidated
financial statements.grant date.
F-10
Pacific Health Care Organization, Inc.PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 20032004
NOTE 3 - New Technical Pronouncements (continued)
- --------------------------------------NEW TECHNICAL PRONOUNCEMENTS
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES.
This consensus addresses certain aspects of accounting by a vendor for
arrangements under which it will perform multiple revenue-generating
activities, specifically, how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting. EITF
Issue No. 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003, or entities may elect to
report the change in accounting as a cumulative-effect adjustment. The
adoption of EITF Issue No. 00-21 did not have a material impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation ("FIN") No. 46,
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. Until this interpretation, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN
No. 46 requires a variable interest entity, as defined, to be consolidated
by a company if that company is subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns. FIN No. 46 is effective for
reporting periods ending after December 15, 2003. The adoption of FIN No.
46 did not have an impact on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. The adoption of SFAS No. 149 will not have an impact on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No.
150 changes the accounting guidance for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine"
equity by now requiring those instruments to be reported as liabilities.
SFAS No. 150 also requires disclosure relating to the terms of those
instruments and settlement alternatives. SFAS No. 150 is generally
effective for all financial instruments entered into or modified after May
31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 did not
have an impact on the Company's consolidated financial statements.
F-11
Pacific Health Care Organization, Inc.PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 20032004
NOTE 3 - New Technical Pronouncements (continued)
- --------------------------------------NEW TECHNICAL PRONOUNCEMENTS (CONTINUED)
In December 2003, the SEC issued SAB No. 104. SAB No. 104 revises or
rescinds portions of the interpretative guidance included in Topic 13 of
the codification of staff accounting bulletins in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. It also rescinds the
Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers document issued in conjunction with Topic 13. Selected portions of
that document have been incorporated into Topic 13. The adoption of SAB
No. 104 in December 2003 did not have an impact on the Company's financial
position, results of operations or cash flows.
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS. This
statement amends the guidance in ARB No. 43, Chapter 4, INVENTORY PRICING,
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). In addition, this
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The adoption of SFAS No. 151 did not have an impact on the
Company's consolidated financial statements.
In December 2004, the FASB issues SFAS No. 152, ACCOUNTING FOR REAL ESTATE
TIME-SHARING TRANSACTIONS. This Statement amends FASB Statement No. 66,
ACCOUNTING FOR SALES OF REAL ESTATE, to reference the financial accounting
and reporting guidance for real estate time-sharing transactions that is
provided in AICPA Statement of Position (SOP) 04-2, ACCOUNTING FOR REAL
ESTATE TIME-SHARING TRANSACTIONS. This Statement also amends FASB
Statement No. 67, ACCOUNTING FOR COSTS AND INITIAL RENTAL OPERATIONS OF
REAL ESTATE PROJECTS, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not
apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This
Statement is effective for financial statements for fiscal years beginning
after June 15, 2005. The adoption of SFAS No. 152 did not have an
impact on the Company's consolidated financial statements.
F-12
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 2004
NOTE 3 - NEW TECHNICAL PRONOUNCEMENTS (CONTINUED)
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY
ASSETS. The guidance in APB Opinion No. 29, ACCOUNTING FOR NONMONETARY
TRANSACTIONS, is based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged.
This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result
of the exchange. The adoption of SFAS No. 153 did not have an impact on the
Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123, SUMMARY OF STATEMENT NO.
123 (REVISED 2004). This Statement is a revision of FASB Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. This Statement supersedes
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its
related implementation guidance. This Statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does
not change the accounting guidance for share-based payment transactions
with parties other than employees provided in Statement 123 as originally
issued and EITF Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE
ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES. The Company is currently evaluating the
provisions of SFAS 123(R) and the impact that it will have on its share
based employee compensation programs.
NOTE 4 - Related Party
- -----------------------RELATED PARTY
During 2003 and 2002, the Company's President allowed the Company to
utilize office space at his personal residence. The President's secretary
used this space on a daily basis. In accordance with SFAS 57, "Related
Party Disclosures",RELATED
PARTY DISCLOSURES, the fair market value of the office space has been
charged to general expenses with a corresponding entry to contributed
capital. The fair market value of the office space was determined to be
$250 per month, resulting in a total capital contribution of $1,500 and
$3,000 for the years ending December 31, 2003 and 2002, respectively.
During June 30, 2003, the President ceased using his home for an office,
general expenses were charged through June only.
F-13
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 2004
NOTE 5 - Fixed Assets
- ---------------------FIXED ASSETS
The Company capitalizes the purchase of equipment and fixtures for major
purchases in excess of $1,000 per item. Capitalized amounts are
depreciated over the useful life of the assets using the straight line
method of depreciation.depreciation which is 3 and 7 years for the office equipment, and
furniture and fixtures, respectively. Scheduled below are the assets,
costs and accumulated depreciation at December 31, 20032004 and 2002.2003.
DepreciationAccumulated Accumulated
Cost Expense Depreciation
------------------ ------------------ ------------------
December December December December December December
Assets 31, 2003 31, 20022004 31, 2003 31, 20022004 31, 2003 31, 20022004 31, 2003
- ------------------ --------- --------- --------- --------- --------- ----------------------------------------------------------------------------------------------
Computer Equipment $ 60,922 $ 55,830 $41,927 $14,447 $13,512 $27,959 $11,792$ 18,776 $ 14,447 $ 46,735 $ 27,959
Furniture & Fixtures 24,766 7,08224,766 3,536 2,829 1,3367,701 4,165
847
- ------------------ --------- --------- --------- --------- --------- -------------------------------------------------------------------
Totals $ 85,688 $ 80,596 $ 49,00922,312 $ 17,276 $ 14,84854,436 $ 32,124
$ 12,639
========= ========= ========= ========= ========= ===================================================================
F-12
Pacific Health Care Organization, Inc.
Notes to Financial Statements
December 31, 2003
NOTE 6 - Income Taxes
- ---------------------
The Company has adopted FASB 109 to account for income taxes. The Company
currently has no issues that create timing differences that would mandate
deferred tax expense. Net operating losses would create possible tax
assets in future years. Due to the uncertainty as to the utilization of
net operating loss carryforwards an evaluation allowance has been made to
the extent of any tax benefit that net operating losses may generate.
The Company has incurred losses that can be carried forward to offset
future earnings if conditions of the Internal Revenue Codes are met. These
losses are as follows:
Year of Loss Amount Expiration Date
------------ ---------------------- ---------------
2000 $ 44,590 2020
2001 296,397 2021
2002 35,262 2022
2003 - -
2004 - -
2004 2003
2002
------------ ----------------------- -----------
Current Tax Asset Value of Net Operating Loss
Carryforwards at Current Prevailing Federal
Tax Rate $ 95,48355,716 $ 112,874108,214
Evaluation Allowance (95,483) (112,874)
------------ ------------(55,716) (108,214)
----------- -----------
Net Tax Asset $ - $ -
=========== ===========
Current Income Tax Expense $ - $ -
============ ============
Deferred Income Tax Benefit - -
The Company has remaining cumulative net operating loss carryforwards of
$318,276$163,872 to be offset against future earnings.
F-14
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 2004
NOTE 7 - Operating Leases
- -------------------------OPERATING LEASES
On March 1, 2001, the Company entered into a lease agreement to lease
office space at 5150 East Pacific Coast Highway, Long Beach, California
90804. The Company paid $2,020$6,307 and $1,962$2,020 per month for a 1,154 square
foot facility, for the periods ending February 28, 20032004 and 2002,2003,
respectively.
An amendment to the lease was entered into on January 29, 2003 and
commenced March 1, 2003, wherein the rentable square feet increased to
3,504 and the expiration date of the lease extended to February 28, 2006.
The monthly lease payments also increased to $4,133 during the early months
of the lease, to $6,482 at its expiration. A lease deposit of $6,174 was
required prior to signing. The space the Company is leasing is sufficiently
large enough to accommodate all of its administrative needs.
F-13
Pacific Health Care Organization, Inc.
Notes to Financial Statements
December 31, 2003
NOTE 7 - Operating Leases (continued)
- -------------------------
Total Lease Commitments;Commitments: Year Amounts
------Amount
---------- ----------
20042005 $ 75,451
2005 77,438
2006 12,965
2007 -
2008 -
Thereafter $ -
----------
Total $ 165,85490,403
==========
==========
Rent expense for the year ended December 31, 20032004 and December 31, 20022003 was
$61,832$76,973 and $24,862,$61,832, respectively.
NOTE 8 - Stockholders' Equity
- -----------------------------
In August of 2002, the Company issued 345,982 restricted common shares,
detachable A Warrants to purchase an additional 345,982 restricted common
shares and detachable B Warrants to purchase an additional 345,982
restricted common shares to Manfred Heeb to resolve debt in the amount of
$345,982. The shares were not publicly offered. The shares were issued
pursuant to exemptions from registration under Section 4(2) of the
Securities Act of 1933. The Company settled outstanding debt in the amount
of $345,982 for the shares and warrants.
During 2002, the Company issued 5,000,000 shares of common stock to a
shareholder in exchange for financial consulting services rendered on
behalf of the Company. In accordance with SFAS 123, "ACCOUNTING FOR STOCK-
BASED COMPENSATION", paragraph 8, "ACCOUNTING FOR TRANSACTIONS WITH OTHER
THAN EMPLOYEES", the fair market value of the services was used in
determining the value of the stock, because this value was more "reliably
measurable". At this time the Company's stock was not actively traded, and
the services performed resulted in an expense to the Company for $50,000.
Since there was no established fair market value of the securities, the
fair market value of the services performed was deemed appropriate. The
cost of services has been charged to operations. Capital stock and related
additional paid-in capital have been increased by $5,000 and $45,000
respectively.STOCKHOLDERS' EQUITY
During 2003, a shareholder of the Company exercised their stock option in
the Company. The Company issued 18,750 shares of common stock at a
exercise price of $.05 per share. Common stock and related additional
paid-in capital have been increased by $19 and $919, respectively.
F-14
Pacific Health Care Organization, Inc.During 2004, the Board of Directors of the Company authorized the grant of
350,000 common stock options to an officer of the company. The options
vest upon the grant dated and anniversary date of the grant at a rate of
100,000 on the date of grant, 100,000 after the first year, and 150,000 the
following year. The exercise price of the stock options is $.05, $.10, and
$.20 respectively.
F-15
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 20032004
NOTE 9 - Major Customers
- ------------------------MAJOR CUSTOMERS
The Company had two customers who, accounted for 10 percent, or more, of
the Company's total revenues during the year endedyears ending December 31, 2003,2004, and
one customer during the year ended
December 31, 2002.2003. The percentages of total revenues for the years ended
20032004 and 20022003 are as follows:
2004 2003
2002
------ ---------------- ----------
Customer A 14% 20%14%
Customer B 13% 14%
-
NOTE 10 - Net Earnings (Loss) Per Share
- ---------------------------------------
Basic earnings (loss) per common share (BEPS) is based on the weighted-
average number of common shares outstanding during each period. Diluted
earnings (loss) per common share is based on shares outstanding (computed
as under BEPS) and dilutive potential common shares. Issuable shares of
408,982 detachable A Warrants and 408,982 detachable B Warrants were not
included in the computation of diluted loss per share, because their
inclusion would have been antidilutive for the years ended December 31,
2003 and 2002.
The following data shows the shares used in the computing loss per common
share including dilutive potential common stock;
NOTE 10 - ACCRUED AND OTHER LIABILITIES
2004 2003
---------- ----------
Common shares outstanding during
Accrued liabilities consist of the entire period 15,413,670
Weighted-average shares paid for, but not issued
during the period.following:
Employment Enrollment Fees $ 117,000 $ 94,200
Compensated Absences 12,121 27,647
Legal Fees 41,125 18,073
Other 8,641 -
------------
Weighted-average number of common shares used in basic EPS 15,413,670
dilutive effect of options -
------------
Weighted-average number of common shares used in basic EPS -
dilutive effect of warrants -
------------
Weighted-average number of common shares and dilutive
potential common shares used in diluted EPS 15,413,670
============---------- ----------
Total $ 178,887 $ 139,920
========== ==========
NOTE 11 - Accrued and Other Liabilities
- ---------------------------------------
Accrued liabilities consist of the following:
2003
------------
Employment Enrollment Fees $ 94,200
Compensated Absences 27,647
Legal Fees 18,073
------------
Total $ 139,920
============
F-15
Pacific Health Care Organization, Inc.F-16
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 20032004
NOTE 1211 - Options for Purchase of Common Stock
- ----------------------------------------------OPTIONS FOR PURCHASE OF COMMON STOCK
In August 2002, the Company adopted a stock option plan. The Company
adopted a plan which provides for the grant of options to officers,
consultants and employees to acquire shares of the Company's common stock
at a purchase price equal to or greater than fair market value as of the
date of the grant. Options are exercisable six months after the grant
date and expire five years from the grant date. The exercise price of the
options is $.05. The fair market value of the options at the date of grant
was determined to be $.035 due to earlier issuances for cash of this stock.
The plan calls for a total of 1,000,000 shares to be held for grant. A
summary of activity follows;
2002 Stock Option Plan
2002
------------------------
Weighted
Average
Number Exercise
of Shares Price
----------- -----------
Outstanding at beginning of year
Weighted
Average
Number Exercise
of Shares Price
------------ ------------
Outstanding, December 31, 2002 85,000 $ .05
Granted - -
Exercised (18,750) -
Canceled - -
------------ ------------
Outstanding, December 31, 2003 66,250 $ .05
============= ============
Exercisable, December 31, 2003 66,250 $ .05
============= ============
Outstanding, December 31, 2003 66,250 $ .05
Granted - -
Exercised - -
Canceled - -
------------ ------------
Outstanding, December 31, 2004 66,250 $ .05
============= ============
Exercisable, December 31, 2004 66,250 $ .05
============= ============
F-17
PACIFIC HEALTH CARE ORGANIZATION, INC.
Notes to Financial Statements
December 31, 2004
NOTE 11 - $ -
Granted 85,000 .05
Exercised (18,750) -
Canceled - -
----------- -----------
Outstanding at end of year 66,250 $ .05
=========== ===========
Exercisable at end of year 66,250 $ .05
=========== ===========OPTIONS FOR PURCHASE OF COMMON STOCK (CONTINUED)
In accordance with SFAS 123, "Accounting for Stock-Based Compensation",ACCOUNTING FOR STOCK-BASED COMPENSATION, no
option expense was recognized for the year endedyears ending December 31, 2004 and
December 31, 2003, since the exercise priceresults of the valuation of the options was equal to, or greater than,with
the market
value of the Company's common stock..Black-Scholes model resulted in a zero value.
The fair value of the option grant was established at the date of the grant
using the Black-SholesBlack-Scholes option pricing model with the following weighted
average assumptions;
2003
------
Risk-free interest rate 3.0%
Dividend yield 0%
Volatility 0%
Average expected term (years to exercise date) 1/2
------assumptions:
2004
---------
Risk-free interest rate 4.0%
Dividend yield 0%
Volatility 20%
Average expected term (years to exercise date) 1/2
---------
Employee stock options outstanding and exercisable under this plan as of
December 31, 20032004 are:
F-16
Pacific Health Care Organization, Inc.
Notes to Financial Statements
December 31, 2003
NOTE 12 - Options for Purchase of Common Stock (continued)
- ----------------------------------------------
Stock Option Plan
Weighted
Weighted Average Weighted
Range of Average of Remaining Average of
Exercise Exercise Contractual Exercise
Price Options Price Life (years) Options Price
-------- -------- ---------- ------------ --------- ---------------------- ------------ ------------ ------------ ------------
$ .05 66,250 $ .05 3.582.58 66,250 $ .05
F-17
F-18
Pacific Health Care Organization, Inc.
Notes to Financial Statements
December 31, 2004
NOTE 12 - Stock Option Agreement
On April 20, 2004, the board of directors agreed to a stock option
agreement with an officer of the Company, effective as of October 11, 2004.
The agreement calls for the grant of 350,000 options that rest and are
exercisable as follows: 100,000 the first year, with an exercise price of
$.05; 100,000 the second year, with an exercise price of $.10; and 150,000
the third year, with an exercise price of $.20. The options expire three
years from the date of grant.
2004 Stock Option Agreement
Weighted
Average
Number Exercise
of Shares Price
------------ ------------
Outstanding, December 31, 2003 - $ -
Granted 350,000 .11
Exercised - -
Canceled - -
------------ ------------
Outstanding, December 31, 2004 350,000 $ .11
============ ============
Exercisable, December 31, 2004 100,000 $ .05
============ ============
In accordance with SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
$13,511 has been charged to compensation expense for the year ended
December 31, 2004. The fair value of the option grant was established at
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
2004
---------
Risk-free interest rate 4.0%
Dividend yield 0%
Volatility 20%
Average expected term (years to exercise date) 1/2
---------
Employee stock options outstanding and exercisable under this plan as of
December 31, 2004 are:
Weighted
Weighted Average Weighted
Range of Average of Remaining Average of
Exercise Exercise Contractual Exercise
Price Options Price Life (years) Options Price
------------ ------------ ------------ ------------ ------------ ------------
$ .05 100,000 $ .05 2.78 100,000 $ .05
F-19
Pacific Health Care Organization, Inc.
Balance Sheets
June December
30, 2005 31, 2004
------------ ------------
(Unaudited)
Assets
Current Assets
- --------------
Cash $ 296,436 $ 506,675
Accounts Receivable (net allowance of $18,000) 230,650 179,391
Prepaid Expenses 41,432 40,715
------------ ------------
Total Current Assets 568,518 726,781
Property & Equipment (Note 5)
- --------------------
Computer Equipment 60,922 60,922
Furniture & Fixtures 24,766 24,766
------------ ------------
Total Property & Equipment 85,688 85,688
Less: Accumulated Depreciation (65,592) (54,436)
------------ ------------
Net Property & Equipment 20,096 31,252
------------ ------------
Total Assets $ 588,614 $ 758,033
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-20
Pacific Health Care Organization, Inc.
Balance Sheets
June December
30, 2005 31, 2004
------------ ------------
(Unaudited)
Liabilities & Stockholders' Equity
Current Liabilities
- -------------------
Accounts Payable $ 17,468 $ 21,813
Accrued Expenses 197,971 178,887
Unearned Revenue 129,555 119,608
------------ ------------
Total Current Liabilities 344,994 320,308
Commitments
- -----------
Stockholders' Equity (Note 8)
- -----------------------------
Preferred Stock; 5,000,000 Shares
Authorized at $0.001 Par Value;
Zero Shares Issued and Outstanding - -
Common Stock; 50,000,000 Shares
Authorized at $0.001 Par Value;
15,427,732 and 15,427,732 Shares Issued and
Outstanding, Respectively 15,428 15,428
Additional Paid In Capital 467,510 463,475
Additional Paid In Capital - Warrants 122,694 122,694
Accumulated (Deficit) (362,012) (163,872)
------------ ------------
Total Stockholders' Equity 243,620 437,725
------------ ------------
Total Liabilities & Stockholders' Equity $ 588,614 $ 758,033
============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-21
Pacific Health Care Organization, Inc.
Statements of Operations
(Unaudited)
For Three Months Ended For Six Months Ended
June June June June
30, 2005 30, 2004 30, 2005 30, 2004
------------ ------------ ------------ ------------
Revenues $ 438,828 $ 398,031 $ 794,427 $ 828,674
- -------- ------------ ------------ ------------ ------------
Expenses
- --------
Depreciation 5,578 5,578 11,156 11,156
Consulting Fees 35,223 70,019 60,833 100,190
Salaries & Wages 176,776 159,787 349,833 320,067
Professional Fees 105,705 (1,792) 210,144 76,495
Insurance 19,462 23,170 35,977 40,501
Employment Enrollment 78,732 35,862 128,664 73,801
General & Administrative 94,380 43,343 197,040 109,468
------------ ------------ ------------ ------------
Total Expenses 515,856 335,967 993,647 731,678
Income (Loss) From Operations (77,028) 62,064 (199,220) 96,996
------------ ------------ ------------ ------------
Other Income (Expenses)
- -----------------------
Interest Income 490 9 1,080 20
------------ ------------ ------------ ------------
Total Other Income (Expenses) 490 9 1,080 20
Income (Loss) Before Taxes (76,538) 62,073 (198,140) 97,016
Tax Expense - - - -
------------ ------------ ------------ ------------
Net Income (Loss) $ (76,538) $ 62,073 $ (198,140) $ 97,016
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-22
Pacific Health Care Organization, Inc.
Statements of Stockholders' Equity and Comprehensive Income
From January 1, 2004 to June 30, 2005
Preferred Stock Common Stock Paid in Accumulated
Shares Amount Shares Amount Capital Deficit
-------- ------- ---------- -------- ----------- ----------
Balance,
January 1, 2004 - $ - 15,427,732 $ 15,428 $ 572,658 $ (318,276)
Valuation of
Stock Options - - - - 13,511 -
Net Income for the
Year Ended
December 31, 2004 - - - - - 154,404
-------- ------- ---------- -------- ----------- ----------
Balance,
December 31, 2004 - - 15,427,732 15,428 586,169 (163,872)
Valuation of
Stock Options - - - - 4,035 -
Net Loss for the
Six Month Ended
June 30, 2005 - - - - - (198,140)
-------- ------- ---------- -------- ----------- ----------
Balance,
June 30, 2005 - $ - 15,427,732 $ 15,428 $ 590,204 $(362,012)
======== ======= ========== ======== =========== ==========
The accompanying notes are an integral part of
these consolidated financial statements
F-23
Pacific Health Care Organization, Inc.
Statements of Cash Flows
For the Six Months Ended June 30,
2005 2004
------------ ------------
(Unaudited)
Cash Flows from Operating Activities
- ------------------------------------
Net Income (Loss) $ (198,140) $ 97,016
Adjustments to Reconcile Net Income to Net Cash:
Depreciation 11,156 11,156
Stock Options Issued for Services 4,035 -
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Prepaid Expenses (717) (22,721)
(Increase) Decrease in Accounts Receivable (51,259) (45,358)
Increase (Decrease) in Accounts Payable (4,345) (15,493)
Increase (Decrease) in Accrued Expenses 19,084 56,421
Increase (Decrease) in Unearned Revenue 9,947 15,285
------------ ------------
Net Cash Provided by Operating Activities (210,239) 96,306
Cash Flows from Investing Activities
- ------------------------------------
Purchase of Computer Equipment - (5,092)
Purchase of Furniture & Fixtures - -
------------ ------------
Net Cash Used by Investing Activities - (5,092)
Cash Flows from Financing Activities
- ------------------------------------
Net Cash Provided by Financing Activities - -
------------ ------------
Increase (Decrease) in Cash (210,239) 91,214
Cash at Beginning of Period 506,675 398,352
------------ ------------
Cash at End of Period $ 296,436 $ 489,556
============ ============
Supplemental Cash Flow Information
- ----------------------------------
Interest $ - $ -
Taxes 293 77
The accompanying notes are an integral part of
these consolidated financial statements
F-24
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 1 - Corporate History
Pacific Health Care Organization, Inc., was incorporated under the laws of
the state of Utah on April 17, 1970 under the name Clear Air, Inc. On
September 25, 2000, the Company changed its name to Pacific Health Care
Organization, Inc. On February 26, 2001, the Company acquired Medex
Healthcare, Inc. ("Medex"), a California corporation organized March 4,
1994, in a share for share exchange in which the Company acquired all of
the outstanding shares of Medex in exchange for 6,500,000 shares of the
Company. The acquisition of Medex by the Company was accounted for as a
reverse acquisition, and therefore Medex was considered the accounting
acquirer. The financial statements, contained herein, are those of Medex
Healthcare, Inc., for all periods presented.
The principle business of the Company is that of its wholly owned
subsidiary Medex. Medex is in the business of managing and administering
Health Care Organizations ("HCOs"). HCOs are networks of medical
providers established to serve the Workers' Compensation industry. The
California legislature mandated that if an employer contracts services from
an HCO, the injured workers must be given a choice between at least two
HCOs. The Company recognized early on that two HCO certifications were
necessary to be competitive. Instead of aligning with the competitor, the
Company elected to go through the lengthy application process with the
Department of Industrial Relations twice and subsequently received
certification to operate two separate HCOs.
Through the two licenses to operate HCOs, the Company offers the injured
worker a choice of enrolling in an HCO with a network managed by primary
care providers requiring a referral to specialists or a second HCO where
injured workers do not need any prior authorization to be seen and treated
by specialists.
The two HCO certifications obtained by the Company cover the entire state
of California. The geographical area has a multi-billion dollar annual
medical and indemnity Worker's Compensation cost. The two HCO networks
have contracted with over 3,800 provider locations making the Company's
HCOs capable of providing comprehensive medical services throughout this
region.
NOTE 2 - Significant Accounting Policies
A. Basis of Accounting
-------------------
The Company uses the accrual method of accounting.
F-25
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 2 - Significant Accounting Policies (continued)
B. Revenue Recognition
-------------------
The Company applies the provisions of SEC Staff Accounting Bulletin
("SAB") No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB
104"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The
SAB 104 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue
recognition policies. In general, the Company recognizes revenue
related to monthly contracted amounts for services provided when (i)
persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the fee is fixed or
determinable and (iv) collectibility is reasonably assured.
Health care service revenues are recognized in the period in which
fees are fixed or determinable and the related services are provided
to the subscriber.
The Company's subscribers generally pay in advance for their services
by check or electronic check payment, and revenue is then recognized
ratably over the period in which the related services are provided.
Advance payments from subscribers are recorded on the balance sheet as
deferred revenue. In circumstance where payment is not received in
advance, revenue is only recognized if collectibility is reasonably
assured.
C. Cash Equivalents
----------------
The Company considers all short term, highly liquid investments that are
readily convertible, within three months, to known amounts as cash
equivalents. The Company currently has no cash equivalents.
D. Concentrations
--------------
Financial instruments that potentially subject Pacific Health Care
Organization, Inc. (the Company) to concentrations of credit risks
consist of cash and cash equivalents. The Company places its cash and
cash equivalents at well-known, quality financial institutions.
F-26
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 2 - Significant Accounting Policies (continued)
E. Net Earnings (Loss) Per Share of Common Stock
---------------------------------------------
The computation of earning (loss) per share of common stock is based
on the weighted average number of shares outstanding at the date of
the financial statements. Potentially issuable common shares totaling
817,964 related to warrants and 416,500 related to options were
excluded from the calculation of fully diluted loss per share because
their inclusion would have been anti-dilutive.
For the Six Month Ended
June 30,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Basic Earnings per share:
Income (Loss) (numerator) $ (198,140) $ 97,016
Shares (demoninator) 15,427,732 15,427,732
------------ ------------
Per Share Amount $ (.01) $ .01
============ ============
Fully Diluted Earnings per share:
Income (Loss) (numerator) $ (198,140) $ 97,016
Shares (demoninator) 15,427,732 15,427,732
------------ ------------
Per Share Amount $ (.01) $ .01
============ ============
F. Depreciation
------------
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. The cost of leasehold
improvements is depreciated over the lesser of the length of the lease
of the related assets for the estimated lives of the assets.
Depreciation is computed on the straight line method.
G. Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles, in the United States of
America, require management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
H. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the company and it's wholly - owned subsidiary.
Intercompany transactions and balances have been eliminated in
consolidation.
F-27
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 2 - Significant Accounting Policies (continued)
I. Fair Value of Financial Instruments
-----------------------------------
The fair value of the Company's cash and cash equivalents,
receivables, accounts payable and accrued liabilities approximate
carrying value based on their effective interest rates compared to
current market prices.
J. General and Administrative Costs
--------------------------------
General and administrative expenses include fees for office space,
insurance, compensated absences, travel expenses and entertainment
costs.
K. Income Taxes
------------
The Company utilizes the liability method of accounting of income
taxes. Under the liability method, deferred income tax assets and
liabilities are provided based on the difference between the financial
statements and tax basis of assets and liabilities measured by the
currently enacted tax rates in effect for the years in which these
differences are expected to reverse. Deferred tax expense or benefit
is the result of changes in deferred tax assets and liabilities.
L. Capital Structure
-----------------
The Company has two classes of stock. Preferred stock, 5,000,000
shares authorized, zero issued. Voting rights and liquidation
preferences have not been determined. The Company also has voting
common stock of 50,000,000 shares authorized, with 15,427,732 shares
issued and outstanding. No dividends were paid in the 2005 and 2004
quarters.
M. Stock-Based Compensation
------------------------
As permitted by SFAS No. 123, the Company has elected to measure and
record compensation cost relative to stock option costs in accordance
with SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires
the company to record compensation using the Black-Scholes pricing
model to estimate fair value of the options at the grant date.
F-28
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 3 - New Technical Pronouncements
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS. This
statement amends the guidance in ARB No. 43, Chapter 4, INVENTORY PRICING,
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). In addition, this
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The adoption of SFAS No. 151 did not have an impact on the
Company's consolidated financial statements.
In December 2004, the FASB issues SFAS No. 152, ACCOUNTING FOR REAL ESTATE
TIME-SHARING TRANSACTIONS. This Statement amends FASB Statement No. 66,
ACCOUNTING FOR SALES OF REAL ESTATE, to reference the financial accounting
and reporting guidance for real estate time-sharing transactions that is
provided in AICPA Statement of Position (SOP) 04-2, ACCOUNTING FOR REAL
ESTATE TIME-SHARING TRANSACTIONS. This Statement also amends FASB
Statement No. 67, ACCOUNTING FOR COSTS AND INITIAL RENTAL OPERATIONS OF
REAL ESTATE PROJECTS, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not
apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This
Statement is effective for financial statements for fiscal years beginning
after June 15, 2005. The adoption of SFAS No. 152 did not have an impact
on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY
ASSETS. The guidance in APB Opinion No. 29, ACCOUNTING FOR NONMONETARY
TRANSACTIONS, is based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged.
This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result
of the exchange. The adoption of SFAS No. 153 did not have an impact on the
Company's consolidated financial statements.
F-29
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 3 - New Technical Pronouncements (continued)
In December 2004, the FASB issued SFAS No. 123, SUMMARY OF STATEMENT NO.
123 (REVISED 2004). This Statement is a revision of FASB Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. This Statement supersedes
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its
related implementation guidance. This Statement establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. This Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does
not change the accounting guidance for share-based payment transactions
with parties other than employees provided in Statement 123 as originally
issued and EITF Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE
ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES. The Company is currently evaluating the
provisions of SFAS 123(R) and the impact that it will have on its share
based employee compensation programs.
In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS. This Statement replaces APB No. 20, ACCOUNTING CHANGES and
FASB No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS,
and changes the requirements for the accounting for and reporting of a
change in accounting principle. This Statement applies it all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement
include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of
the change. The adoption of SFAS No. 154 did not have an impact on the
Company's consolidated financial statements.
NOTE 4 - Fixed Assets
The Company capitalizes the purchase of equipment and fixtures for major
purchases in excess of $1,000 per item. Capitalized amounts are
depreciated over the useful life of the assets using the straight line
method of depreciation which is 3 and 7 years for the office equipment, and
furniture and fixtures, respectively. Scheduled below are the assets,
costs and accumulated depreciation at June 30, 2005 and December 31, 2004.
F-30
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
Depreciation Accumulated
Cost Expense Depreciation
--------------------- ---------------------- ---------------------
June December June December June December
Assets 30, 2005 31, 2004 30, 2005 31, 2004 30, 2005 31, 2004
---------- ---------- ---------- ---------- ---------- ----------
Computer
Equipment $ 60,922 $ 60,922 $ 9,388 $ 18,776 $ 56,123 $ 46,735
Furniture &
Fixtures 24,766 24,766 1,768 3,536 9,469 7,701
---------- ---------- ---------- ---------- ---------- ----------
Totals $ 85,688 $ 85,688 $ 11,156 $ 22,312 $ 65,592 $ 54,436
========== ========== ========== ========== ========== ==========
NOTE 5 - Income Taxes
The Company has adopted FASB 109 to account for income taxes. The Company
currently has no issues that create timing differences that would mandate
deferred tax expense. Net operating losses would create possible tax
assets in future years. Due to the uncertainty as to the utilization of
net operating loss carry forwards an evaluation allowance has been made to
the extent of any tax benefit that net operating losses may generate.
The adoption of SFAS No. 153 did not have an impact on the Company's
consolidated financial statements.
The Company has incurred losses that can be carried forward to offset
future earnings if conditions of the Internal Revenue Codes are met. These
losses are as follows:
Year of Loss Amount Expiration Date
------------ ----------- ---------------
2000 $ 44,590 2020
2001 296,397 2021
2002 35,262 2022
2003 - -
2004 - -
2005 198,140 2025
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
Current Tax Asset Value of Net
Operating Loss $ - $ -
Carry forwards at Current Prevailing
Federal Tax Rate $ 123,084 $ 55,716
------------ ------------
Evaluation Allowance (123,084) (55,716)
============ ============
Net Tax Asset $ - $ -
Current Income Tax Expense $ - $ -
Deferred Income Tax Benefit - -
The Company has remaining cumulative net operating loss carry forwards of
$357,977 to be offset against future earnings.
F-31
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 6 - Operating Leases
On March 1, 2001, the Company entered into a lease agreement to lease
office space at 5150 East Pacific Coast Highway, Long Beach, California
90804. The Company paid $6,307 and $2,020 per month for a 1,154 square
foot facility, for the periods ending February 28, 2004 and 2003,
respectively.
An amendment to the lease was entered into on January 29, 2003 and
commenced March 1, 2003, wherein the rentable square feet increased to
3,504 and the expiration date of the lease extended to February 28, 2006.
The monthly lease payments also increased to $4,133 during the early months
of the lease, to $6,482 at its expiration. A lease deposit of $6,174 was
required prior to signing. The space the Company is leasing is sufficiently
large enough to accommodate all of its administrative needs.
Total Lease Commitments: Year Amount
---------- ------------
2005 $ 77,438
2006 12,965
2007 -
2008 -
Thereafter -
------------
Total $ 90,403
============
Rent expense for the six months ended June 30, 2005 and December 31, 2004
was $40,247 and $76,973, respectively.
NOTE 7 - Stockholders' Equity
During 2004, the Board of Directors of the Company authorized the grant of
350,000 common stock options to an officer of a subsidiary company. The
options vest upon the grant date and anniversary date of the grant at a
rate of 100,000 on the date of grant, 100,000 after the first year, and
150,000 the following year. The exercise price of the stock options is
$.05, $.10, and $.20 respectively.
F-32
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 8 - Major Customers
The Company had two customers who, accounted for 10 percent, or more, of
the Company's total revenues during the six months ended June 30, 2005 and
the year ended December 31, 2004. The percentages of total revenues for
the six months ended June 30, 2005 and the year ended December 31, 2004 are
as follows:
June 30, December 31,
2005 2004
----------- ------------
(Unaudited)
Customer A 14% 14%
Customer B 12% 13%
NOTE 9 - Accrued and Other Liabilities
June 30, December 31,
2005 2004
----------- ------------
(Unaudited)
Accrued liabilities consist of the following:
Employment Enrollment Fees $ 141,000 $ 117,000
Compensated Absences 33,110 12,121
Legal Fees 21,954 41,125
Other 1,907 8,641
----------- ------------
Total $ 197,971 $ 178,887
=========== ============
NOTE 10 - Options for Purchase of Common Stock
In August 2002, the Company adopted a stock option plan. The Company
adopted a plan which provides for the grant of options to officers,
consultants and employees to acquire shares of the Company's common stock
at a purchase price equal to or greater than fair market value as of the
date of the grant. Options are exercisable six months after the grant
date and expire five years from the grant date. The exercise price of the
options is $.05. The fair market value of the options at the date of grant
was determined to be $.035 due to earlier issuances for cash of this stock.
The plan calls for a total of 1,000,000 shares to be held for grant. A
summary of activity follows;
F-33
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 10 - Options for Purchase of Common Stock (continued)
2002 Stock Option Plan
Weighted
Average
Number Exercise
of Shares Price
----------- ------------
Outstanding, December 31, 2003 66,250 $ .05
Granted - -
Exercised - -
Canceled - -
----------- ------------
Outstanding, December 31, 2004 66,250 $ .05
Granted - -
Exercised - -
Canceled - -
----------- ------------
Outstanding, June 30, 2005 66,250 $ .05
=========== ============
Exercisable, June 30, 2005 66,250 $ .05
=========== ============
In accordance with SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
$1,879 and $0 has been changed to compensation expense for the six months
ended December 31, 2005 and December 31, 2004, respectively.
The fair value of the option grant was established at the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
2005
------------
Risk-free interest rate 4.125%
Dividend yield 0%
Volatility 121%
Average expected term (years to exercise date) 1/2
------------
Employee stock options outstanding and exercisable under this plan as of
June 30, 2005 are:
Weighted
Weighted Average Weighted
Range of Average of Remaining Average of
Exercise Exercise Contractual Exercise
Price Options Price Life (years) Options Price
------------ ------------ ------------ ------------ ----------- ------------
$ .05 66,250 $ .05 2.08 66,250 $ .05
F-34
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 11 - Stock Option Agreement
On April 20, 2004, the board of directors agreed to a stock option
agreement with an officer of a subsidiary company, effective as of October
11, 2004. The agreement calls for the grant of 350,000 options that rest
and are exercisable as follows: 100,000 the first year, with an exercise
price of $.05; 100,000 the second year, with an exercise price of $.10; and
150,000 the third year, with an exercise price of $.20. The options expire
three years from the date of grant.
2004 Stock Option Agreement
Weighted
Average
Number Exercise
of Shares Price
----------- ------------
Outstanding, December 31, 2003 - $ -
Granted 350,000 .11
Exercised - -
Canceled - -
----------- ------------
Outstanding, December 31, 2004 350,000 $ .11
----------- ------------
Granted - -
Exercised - -
Canceled - -
----------- ------------
Outstanding, June 30, 2005 350,000 $ .11
=========== ============
Exercisable, June 30, 2005 100,000 $ .05
=========== ============
In accordance with SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
$2,156 and $13,511 has been charged to compensation expense for the six
months ended June 30, 2005 and the year ended December 31, 2004,
respectively. The fair value of the option grant was established at the
date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
2005
------------
Risk-free interest rate 4.125%
Dividend yield 0%
Volatility 121%
Average expected term (years to exercise date) 1
F-35
Pacific Health Care Organization, Inc.
Notes to Financial Statements
For the Six Months Ended June 30, 2005
NOTE 11 - Stock Option Agreement (continued)
Employee stock options outstanding and exercisable under this agreement as
of June 30, 2005 are:
Weighted
Weighted Average Weighted
Range of Average of Remaining Average of
Exercise Exercise Contractual Exercise
Price Options Price Life (years) Options Price
------------ ------------ ------------ ------------ ----------- ------------
$ .05-.11 350,000 $ .11 2.28 100,000 $ .05
NOTE 12 - Contingencies
The Company, its president and secretary are named defendants in a lawsuit
filed by two shareholders, one of which was a former director of the
Company. The action seeks cancellation of a stock issuance, an order for
the Company's President to pay the Company $150,000 and other damages to be
determined based upon allegations of breach of fiduciary duties. The
Company, and its president, believe the suit is completely without merit
and intend to vigorously defend its position.
NOTE 13 - Unaudited Information
The financial statements for the six months ended June 30, 2005, was taken
from the books and records of the Company without audit. However, such
information reflects all adjustments which are in the opinion of
management, necessary to properly reflect the results of the six months
ended June 30, 2005, and are of a normal, recurring nature. The
information presented is not necessarily indicative of the results from
operations expected for the full fiscal year.
F-36
Pacific Health Care Organization, Inc.
2005 Stock Option Plan
SECTION 1. PURPOSE; DEFINITIONS.
1.1 Purpose. The purpose of the Pacific Health Care Organization,
Inc. (the "Company") 2005 Stock Option Plan (the "Plan") is to enable the
Company to offer to its key employees, officers, directors, consultants,
advisors and sales representatives whose past, present and/or potential
contributions to the Company and its subsidiaries have been, are or will be
important to the success of the Company, an opportunity to acquire a
proprietary interest in the Company. The various types of long-term
incentive awards which may be provided under the Plan will enable the
Company to respond to changes in compensation practices, tax laws,
accounting regulations and the size and diversity of its business.
1.2 Definitions. For purposes of the Plan, the following terms shall
be defined as set forth below:
(a) "Agreement" means the agreement between the Company and the
Holder setting forth the terms and conditions of an award under the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto and the regulations
promulgated thereunder.
(d) "Committee" means the Compensation Committee of the Board or
any other committee of the Board, which the Board may designate to
administer the Plan or any portion thereof. If no Committee is so
designated, then all references in this Plan to "Committee" shall mean the
Board.
(e) "Common Stock" means the Common Stock of the Company, par
value $.001 per share.
(f) "Company" means Pacific Health Care Organization, Inc., a
corporation organized under the laws of the State of Utah.
(g) "Deferred Stock" means Stock to be received, under an award
made pursuant to Section 9, below, at the end of a specified deferral
period.
(h) "Disability" means disability as determined under procedures
established by the Committee for purposes of the Plan.
(i) "Effective Date" means the date set forth in Section 13.1,
below.
(j) "Employee" means any employee, director, general partner,
trustee (where the registrant is a business trust), officer or consultant
or advisor.
(k) "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations issued thereunder,
means, as of any given date: (i) if the Common Stock is listed on a
national securities exchange or quoted on the Nasdaq National Market or
Nasdaq SmallCap Market, the last sale price of the Common Stock in the
principal trading market for the Common Stock on the last trading day
preceding the date of grant of an award hereunder, as reported by the
exchange or Nasdaq, as the case may be; (ii) if the Common Stock is not
listed on a national securities exchange or quoted on the Nasdaq National
Market or Nasdaq SmallCap Market, but is traded in the over-the-counter
market, the closing bid price for the Common Stock on the last trading day
preceding the date of grant of an award hereunder for which such quotations
are reported by the OTC Bulletin Board or the National Quotation Bureau,
Incorporated or similar publisher of such quotations; and (iii) if the fair
market value of the Common Stock cannot be determined pursuant to clause
(i) or (ii) above, such price as the Committee shall determine, in good
faith.
(l) "Holder" means a person who has received an award under the
Plan.
(m) "Incentive Stock Option" means any Stock Option intended to
be and designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
(n) "Nonqualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
(o) "Normal Retirement" means retirement from active employment
with the Company or any Subsidiary on or after age 65.
(p) "Other Stock-Based Award" means an award under Section 10,
below, that is valued in whole or in part by reference to, or is otherwise
based upon, Stock.
(q) "Parent" means any present or future parent corporation of
the Company, as such term is defined in Section 424(e) of the Code.
(r) "Plan" means the Pacific Health Care Organization, Inc.,
2005 Stock Option Plan, as hereinafter amended from time to time.
(s) "Restricted Stock" means Stock, received under an award made
pursuant to Section 8, below, that is subject to restrictions under said
Section 8.
(t) "SAR Value" means the excess of the Fair Market Value (on
the exercise date) of the number of shares for which the Stock Appreciation
Right is exercised over the exercise price that the participant would have
otherwise had to pay to exercise the related Stock Option and purchase the
relevant shares.
2
(u) "Stock" means the Common Stock of the Company.
(v) "Stock Appreciation Right" means the right to receive from
the Company, on surrender of all or part of the related Stock Option,
without a cash payment to the Company, a number of shares of Common Stock
equal to the SAR Value divided by the exercise price of the Stock Option.
(w) "Stock Option" or "Option" means any option to purchase
shares of Stock that are granted pursuant to the Plan.
(x) "Stock Reload Option" means any option granted under Section
6.3, below, as a result of the payment of the exercise price of a Stock
Option and/or the withholding tax related thereto in the form of Stock
owned by the Holder or the withholding of Stock by the Company.
(y) "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined in Section 424(f) of
the Code.
SECTION 2. ADMINISTRATION.
2.1 Committee Membership. The Plan shall be administered by the
Board or a Committee. Committee members shall serve for such terms as the
Board may in each case determine, and shall be subject to removal at any
time by the Board.
2.2 Powers of Committee. The Committee shall have full authority,
subject to Section 4, below, to award, pursuant to the terms of the Plan:
(i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock,
(iv) Deferred Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based
Awards. For purposes of illustration and not of limitation, the Committee
shall have the authority (subject to the express provisions of this Plan):
(a) to select the officers, key employees, directors,
consultants, advisors and sales representatives of the Company or any
Subsidiary to whom Stock Options, Stock Appreciation Rights, Restricted
Stock, Deferred Stock, Reload Stock Options and/or Other Stock-Based Awards
may from time to time be awarded hereunder.
(b) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, number of shares, share price, any restrictions or limitations,
and any vesting, exchange, surrender, cancellation, acceleration,
termination, exercise or forfeiture provisions, as the Committee shall
determine);
(c) to determine any specified performance goals or such other
factors or criteria which need to be attained for the vesting of an award
granted hereunder;
(d) to determine the terms and conditions under which awards
granted hereunder are to operate on a tandem basis and/or in conjunction
with or apart from other equity awarded under this Plan and cash awards
made by the Company or any Subsidiary outside of this Plan;
3
(e) to permit a Holder to elect to defer a payment under the
Plan under such rules and procedures as the Committee may establish,
including the crediting of interest on deferred amounts denominated in cash
and of dividend equivalents on deferred amounts denominated in Stock;
(f) to determine the extent and circumstances under which Stock
and other amounts payable with respect to an award hereunder shall be
deferred which may be either automatic or at the election of the Holder;
and
(g) to substitute (i) new Stock Options for previously granted
Stock Options, which previously granted Stock Options have higher option
exercise prices and/or contain other less favorable terms, and (ii) new
awards of any other type for previously granted awards of the same type,
which previously granted awards are upon less favorable terms.
2.3 Interpretation of Plan.
(a) Committee Authority. Subject to Section 4 and 12, below,
the Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable, to interpret the terms and
provisions of the Plan and any award issued under the Plan (and to
determine the form and substance of all Agreements relating thereto), to
otherwise supervise the administration of the Plan. Subject to Section 12,
below, all decisions made by the Committee pursuant to the provisions of
the Plan shall be made in the Committee's sole discretion and shall be
final and binding upon all persons, including the Company, its Subsidiaries
and Holders.
(b) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term or provision of the Plan relating to
Incentive Stock Options (including but not limited to Stock Reload Options
or Stock Appreciation rights granted in conjunction with an Incentive Stock
Option) or any Agreement providing for Incentive Stock Options shall be
interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the Holder(s) affected,
to disqualify any Incentive Stock Option under such Section 422.
SECTION 3. STOCK SUBJECT TO PLAN.
3.1 Number of Shares. The total number of shares of Common Stock
reserved and available for distribution under the Plan shall be one million
(1,000,000) shares. Shares of Stock under the Plan may consist, in whole
or in part, of authorized and unissued shares or treasury shares. If any
shares of Stock that have been granted pursuant to a Stock Option cease to
be subject to a Stock Option, or if any shares of Stock that are subject to
any Stock Appreciation Right, Restricted Stock, Deferred Stock award,
Reload Stock Option or Other Stock-Based Award granted hereunder are
forfeited or any such award otherwise terminates without a payment being
made to the Holder in the form of Stock, such shares shall again be
available for distribution in connection with future grants and awards
under the Plan. Only net shares issued upon a stock-for-stock exercise
(including stock used for withholding taxes) shall be counted against the
number of shares available under the Plan.
4
3.2 Adjustment Upon Changes in Capitalization, Etc. In the event of
any merger, reorganization, consolidation, recapitalization, dividend
(other than a cash dividend), stock split, reverse stock split, or other
change in corporate structure affecting the Stock, such substitution or
adjustment shall be made in the aggregate number of shares reserved for
issuance under the Plan, in the number and exercise price of shares subject
to outstanding Options, in the number of shares and Stock Appreciation
Right price relating to Stock Appreciation Rights, and in the number of
shares and Stock Appreciation Right price relating to Stock Appreciation
Rights, and in the number of shares subject to, and in the related terms
of, other outstanding awards (including but not limited to awards of
Restricted Stock, Deferred Stock, Reload Stock Options and Other Stock-
Based Awards) granted under the Plan as may be determined to be appropriate
by the Committee in order to prevent dilution or enlargement of rights,
provided that the number of shares subject to any award shall always be a
whole number.
SECTION 4. ELIGIBILITY.
Awards may be made or granted to key employees, officers, directors,
consultants, advisors and sales representatives who are deemed to have
rendered or to be able to render significant services to the Company or its
Subsidiaries and who are deemed to have contributed or to have the
potential to contribute to the success of the Company. No Incentive Stock
Option shall be granted to any person who is not an employee of the Company
or a Subsidiary at the time of grant.
SECTION 5. REQUIRED SIX-MONTH HOLDING PERIOD.
Any equity security issued under this Plan may not be sold prior to
six months from the date of the grant of the related award without the
approval of the Company.
SECTION 6. STOCK OPTIONS.
6.1 Grant and Exercise. Stock Options granted under the Plan may be
of two types: (i) Incentive Stock Options and (ii) Nonqualified Stock
Options. Any Stock Option granted under the Plan shall contain such terms,
not inconsistent with this Plan, or with respect to Incentive Stock
Options, not inconsistent with the Code, as the Committee may from time to
time approve. The Committee shall have the authority to grant Incentive
Stock Options, Non-Qualified Stock Options, or both types of Stock Options
and which may be granted alone or in addition to other awards granted under
the Plan. To the extent that any Stock Option intended to qualify as an
Incentive Stock Option does not so qualify, it shall constitute a separate
Nonqualified Stock Option. An Incentive Stock Option may be granted only
within the ten-year period commencing from the Effective Date and may only
be exercised within ten years of the date of grant or five years in the
case of an Incentive Stock Option granted to an optionee ("10%
Stockholder") who, at the time of grant, owns Stock possessing more than
10% of the total combined voting power of all classes of stock of the
Company.
5
6.2 Terms and Conditions. Stock Options granted under the Plan shall
be subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
purchasable under an Incentive Stock Option shall be determined by the
Committee at the time of grant and may not be less than 100% of the Fair
Market Value of the Stock as defined above; provided, however, that the
exercise price of an Incentive Stock Option granted to a 10% Stockholder
shall not be less than 110% of the Fair Market Value of the Stock. The
exercise price per share of Stock purchasable under any options granted
that are not Incentive Stock Option, shall be determined by the Committee
at the time of grant.
(b) Option Term. Subject to the limitations in Section 6.1,
above, the term of each Stock Option shall be fixed by the Committee.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee and as set forth in Section 11, below. If the
Committee provides, in its discretion, that any Stock Option is exercisable
only in installments, i.e., that it vests over time, the Committee may
waive such installment exercise provisions at any time at or after the time
of grant in whole or in part, based upon such factors as the Committee
shall determine.
(d) Method of Exercise. Subject to whatever installment,
exercise and waiting period provisions are applicable in a particular case,
Stock Options may be exercised in whole or in part at any time during the
term of the Option, by giving written notice of exercise to the Company
specifying the number of shares of Stock to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, which shall
be in cash or, unless otherwise provided in the Agreement, in shares of
Stock (including Restricted Stock and other contingent awards under this
Plan) or, partly in cash and partly in such Stock, or such other means
which the Committee determines are consistent with the Plan's purpose and
applicable law. Cash payments shall be made by wire transfer, certified or
bank check or personal check, in each case payable to the order of the
Company; provided, however, that the Company shall not be required to
deliver certificates for shares of Stock with respect to which an Option is
exercised until the Company has confirmed the receipt of good and available
funds in payment of the purchase price thereof. Payments in the form of
Stock shall be valued at the Fair Market Value of a share of Stock on the
day prior to the date of exercise. Such payments shall be made by delivery
of stock certificates in negotiable form which are effective to transfer
good and valid title thereto to the Company, free of any liens or
encumbrances. Subject to the terms of the Agreement, the Committee may, in
its sole discretion, at the request of the Holder, deliver upon the
exercise of a Nonqualified Stock Option a combination of shares of Deferred
Stock and Common Stock; provided that, notwithstanding the provision of
Section 9 of the Plan, such Deferred Stock shall be fully vested and not
subject to forfeiture. A Holder shall have none of the rights of a
stockholder with respect to the shares subject to the Option until such
shares shall be transferred to the Holder upon the exercise of the Option.
6
(e) Transferability. Unless otherwise determined by the
Committee, no Stock Option shall be transferable by the Holder other than
by will or by the laws of descent and distribution, and all Stock Options
shall be exercisable, during the Holder's lifetime, only by the Holder.
(f) Termination by Reason of Death. If a Holders' employment by
the Company or a Subsidiary terminates by reason of death, any Stock Option
held by such Holder, unless otherwise determined by the Committee at the
time of grant and set forth in the Agreement, shall be fully vested and may
thereafter be exercised by the legal representative of the estate or by
the legatee of the Holder under the will of the Holder, for a period of one
year (or such other greater or lesser period as the Committee may specify
at grant) from the date of such death or until the expiration of the stated
term of such Stock Option, which ever period is the shorter.
(g) Termination by Reason of Disability. If a Holder's
employment by the Company or any Subsidiary terminates by reason of
Disability, any Stock Option held by such Holder, unless otherwise
determined by the Committee at the time of grant and set forth in the
Agreement, shall be fully vested and may thereafter be exercised by the
Holder for a period of one year (or such other greater or lesser period as
the Committee may specify at the time of grant) from the date of such
termination of employment or until the expiration of the stated term of
such Stock Option, whichever period is the shorter.
(h) Other Termination. Subject to the provisions of Section
14.3, below, and unless otherwise determined by the Committee at the time
of grant and set forth in the Agreement, if a Holder is an employee of the
Company or a Subsidiary at the time of grant and if such Holder's
employment by the Company or any Subsidiary terminates for any reason other
than death or Disability, the Stock Option shall thereupon automatically
terminate, except that if the Holder's employment is terminated by the
Company or a Subsidiary without cause or due to Normal Retirement, then the
portion of such Stock Option which has vested on the date of termination of
employment may be exercised for the lesser of three months after
termination of employment or the balance of such Stock Option's term.
(i) Additional Incentive Stock Option Limitation. In the case
of an Incentive Stock Option, the aggregate Fair Market Value of Stock
(determined at the time of grant of the Option) with respect to which
Incentive Stock Options become exercisable by a Holder during any calendar
year (under all such plans of the Company and its Parent and Subsidiary)
shall not exceed $100,000.
(j) Buyout and Settlement Provisions. The Committee may at any
time, in its sole discretion, offer to buy out a Stock Option previously
granted, based upon such terms and conditions as the Committee shall
establish and communicate to the Holder at the time that such offer is
made.
7
(k) Stock Option Agreement. Each grant of a Stock Option shall
be confirmed by and shall be subject to the terms of, the Agreement
executed by the Company and the Holder.
6.3 Stock Reload Option. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after
the time of grant in the case of a Nonqualified Stock Option) a Stock
Reload Option up to the amount of shares of Stock held by the Holder for at
least six months and used to pay all or part of the exercise price of an
Option and, if any, withheld by the Company as payment for withholding
taxes. Such Stock Reload Option shall have an exercise price equal to the
Fair Market Value as of the date of the Stock Reload Option grant. Unless
the Committee determines otherwise, a Stock Reload Option may be exercised
commencing one year after it is granted and shall expire on the date of
expiration of the Option to which the Reload Option is related.
SECTION 7. STOCK APPRECIATION RIGHTS.
7.1 Grant and Exercise. The Committee may grant Stock Appreciation
Rights to participants who have been, or are being granted, Options under
the Plan as a means of allowing such participants to exercise their Options
without the need to pay the exercise price in cash. In the case of a
Nonqualified Stock Option, a Stock Appreciation Right may be granted either
at or after the time of the grant of such Nonqualified Stock Option. In
the case of an Incentive Stock Option, a Stock Appreciation Right may be
granted only at the time of the grant of such Incentive Stock Option.
7.2 Terms and Conditions. Stock Appreciation Rights shall be subject
to the following terms and conditions:
(a) Exercisability. Stock Appreciation Rights shall be
exercisable as determined by the Committee and set forth in the Agreement,
subject to the limitations, if any, imposed by the Code, with respect to
related Incentive Stock Options.
(b) Termination. A Stock Appreciation Right shall terminate and
shall no longer be exercisable upon the termination or exercise of the
related Stock Option.
(c) Method of Exercise. Stock Appreciation Rights shall be
exercisable upon such terms and conditions as shall be determined by the
Committee and set forth in the Agreement and by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
Holder shall be entitled to receive a number of Option Shares equal to the
SAR Value divided by the exercise price of the Option.
(d) Shares Affected Upon Plan. The granting of a Stock
Appreciation Rights shall not affect the number of shares of Stock
available for awards under the Plan. The number of shares available for
awards under the Plan will, however, be reduced by the number of shares of
Stock acquirable upon exercise of the Stock Option to which such Stock
Appreciation right relates.
8
SECTION 8. RESTRICTED STOCK.
8.1 Grant. Shares of Restricted Stock may be awarded either alone or
in addition to other awards granted under the Plan. The Committee shall
determine the eligible persons to whom, and the time or times at which,
grants of Restricted Stock will be awarded, the number of shares to be
awarded, the price (if any) to be paid by the Holder, the time or times
within which such awards may be subject to forfeiture (the "Restriction
Period"), the vesting schedule and rights to acceleration thereof, and all
other terms and conditions of the awards.
8.2 Terms and Conditions. Each Restricted Stock award shall be
subject to the following terms and conditions:
(a) Certificates. Restricted Stock, when issued, will be
represented by a stock certificate or certificates registered in the name
of the Holder to whom such Restricted Stock shall have been awarded.
During the Restriction Period, certificates representing the Restricted
Stock and any securities constituting Retained Distributions (as defined
below) shall bear a legend to the effect that ownership of the Restricted
Stock (and such Retained Distributions), and the enjoyment of all rights
appurtenant thereto, are subject to the restrictions, terms and conditions
provided in the Plan and the Agreement. Such certificates shall be
deposited by the Holder with the Company, together with stock powers or
other instruments of assignment, each endorsed in blank, which will permit
transfer to the Company of all or any portion of the Restricted Stock and
any securities constituting Retained Distributions that shall be forfeited
or that shall not become vested in accordance with the Plan and the
Agreement.
(b) Rights of Holder. Restricted Stock shall constitute issued
and outstanding shares of Common Stock for all corporate purposes. The
Holder will have the right to vote such Restricted Stock, to receive and
retain all regular cash dividends and other cash equivalent distributions
as the Board may in its sole discretion designate, pay or distribute on
such Restricted Stock and to exercise all other rights, powers and
privileges of a holder of Common Stock with respect to such Restricted
Stock, with the exceptions that (i) the Holder will not be entitled to
delivery of the stock certificate or certificates representing such
Restricted Stock until the Restriction Period shall have expired and unless
all other vest requirements with respect thereto shall have been fulfilled;
(ii) the Company will retain custody of the stock certificate or
certificates representing the Restricted Stock during the Restriction
Period; (iii) other than regular cash dividends and other cash equivalent
distributions as the Board may in its sole discretion designate, pay or
distribute, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Stock (and
such Retained Distributions will be subject to the same restrictions, terms
and conditions as are applicable to the restricted Stock) until such time,
if ever, as the Restricted Stock with respect to which such Retained
Distributions shall have been made, paid or declared shall have become
vested and with respect to which the Restriction Period shall have expired;
(iv) a breach of any of the restrictions, terms or conditions contained in
this Plan or the Agreement or otherwise established by the Committee with
respect to any Restricted Stock or Retained Distributions will cause a
forfeiture of such Restricted Stock and any Retained Distributions with
respect thereto.
9
(c) Vesting; Forfeiture. Upon the expiration of the Restriction
Period with respect to each award of Restricted Stock and the satisfaction
of any other applicable restrictions, terms and conditions (i) all or part
of such Restricted Stock shall become vested in accordance with the terms
of the Agreement, subject to Section 11, below, and (ii) any Retained
Distributions with respect to such Restricted Stock shall become vested to
the extent that the Restricted Stock related thereto shall have become
vested, subject to Section 11, below. Any such Restricted Stock and
Retained Distributions that do not vest shall be forfeited to the Company
and the Holder shall not thereafter have any rights with respect to such
Restricted Stock and Retained Distributions that shall have been so
forfeited.
SECTION 9. DEFERRED STOCK.
9.1 Grant. Shares of Deferred Stock may be awarded either alone or
in addition to other awards granted under the Plan. The Committee shall
determine the eligible persons to whom and the time or times at which
grants of Deferred Stock shall be awarded, the number of shares of Deferred
Stock to be awarded to any person, the duration of the period (the
"Deferral Period") during which, and the conditions under which, receipt of
the shares will be deferred, and all the other terms and conditions of the
awards.
9.2 Terms and Conditions. Each Deferred Stock award shall be subject
to the following terms and conditions:
(a) Certificates. At the expiration of the Deferral Period (or
the Additional Deferral Period referred to in Section 9.2 (d) below, where
applicable), shares certificates shall be issued and delivered to the
Holder, or his legal representative, representing the number equal to the
shares covered by the Deferred Stock award.
(b) Rights of Holder. A person entitled to receive Deferred
Stock shall not have any rights of a stockholder by virtue of such award
until the expiration of the applicable Deferral Period and the issuance and
delivery of the certificates representing such Stock. The shares of Stock
issuable upon expiration of the Deferral Period shall not be deemed
outstanding by the Company until the expiration of such Deferral Period and
the issuance and delivery of such Stock to the Holder.
(c) Vesting; Forfeiture. Upon the expiration of the Deferral
Period with respect to each award of Deferred Stock and the satisfaction of
any other applicable restrictions, terms and conditions all or part of such
Deferred Stock shall become vested in accordance with the terms of the
Agreement, subject to Section 11, below. Any such Deferred Stock that does
not vest shall be forfeited to the Company and the Holder shall not
thereafter have any rights with respect to such Deferred Stock.
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(d) Additional Deferral Period. A Holder may request to, and
the Committee may at any time, defer the receipt of an award (or an
installment of an award) for an additional specified period or until a
specified event (the "Additional Deferral Period"). Subject to any
exceptions adopted by the Committee, such request must generally be made at
least one year prior to expiration of the Deferral Period for such Deferred
Stock awards (or such installment).
SECTION 10. OTHER STOCK-BASED AWARDS.
10.1 Grant and Exercise. Other Stock-Based Awards may be awarded,
subject to limitations under applicable law, that are denominated or
payable, in value in whole or in part by reference to, or otherwise based
on, or related to, shares of Common Stock, as deemed by the Committee to be
consistent with the purposes of the Plan, including, without limitation,
purchase rights, shares of Common Stock awarded which are not subject to
any restrictions or conditions, convertible or exchangeable debentures, or
other rights convertible into shares of Common Stock and awards valued by
reference to the value of securities of or the performance of specified
subsidiaries. Other Stock-Based Awards may be awarded either alone or in
addition to or in tandem with any other awards under this Plan or any other
plan of the Company.
10.2 Eligibility for Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which
grants of such other stock-based awards shall be made, the number of shares
of Common Stock to be awarded pursuant to such awards, and all other terms
and conditions of the awards.
10.3 Terms and Conditions. Each Other Stock-Based Award shall be
subject to such terms and conditions as may be determined by the Committee
and to Section 11, below.
SECTION 11. ACCELERATED VESTING AND EXERCISABILITY.
If (i) any person or entity other than the Company and/or any
stockholders of the Company as of the Effective Date acquire securities of
the Company (in one or more transactions) having 25% or more of the total
voting power of all the Company's securities then outstanding and (ii) the
Board of Directors of the Company does not authorize or otherwise approve
such acquisition, then, the vesting periods of any and all Options and
other awards granted and outstanding under the Plan shall be accelerated
and all such Options and awards will immediately and entirely vest, and the
respective holders thereof will have the immediate right to purchase and/or
receive any and all Stock subject to such Options and awards on the terms
set forth in this Plan and the respective agreements respecting such
Options and awards.
SECTION 12. AMENDMENT AND TERMINATION.
Subject to Section 4 hereof, the Board may at any time, and from time
to time, amend, alter, suspend or discontinue any of the provisions of the
Plan, but no amendment, alteration, suspension or discontinuance shall be
made which would impair the rights of a Holder under any Agreement
theretofore entered into hereunder, without the Holder's consent.
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SECTION 13. TERM OF PLAN.
13.1 Effective Date. The Plan shall be effective as of November 18,
2005. ("Effective Date").
13.2 Termination Date. Unless terminated by the Board, this Plan
shall continue to remain effective until such time no further awards may be
granted and all awards granted under the Plan are no longer outstanding.
Notwithstanding the foregoing, grants of Incentive Stock Options may only
be made during the ten-year period following the Effective Date.
SECTION 14. GENERAL PROVISIONS.
14.1 Written Agreements. Each award granted under the Plan shall be
confirmed by, and shall be subject to the terms of the Agreement executed
by the Company and the Holder. The Committee may terminate any award made
under the Plan if the Agreement relating thereto is not executed and
returned to the Company within 10 days after the Agreement has been
delivered to the Holder for his or her execution.
14.2 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to
any payments not yet made to a Holder by the Company, nothing contained
herein shall give any such Holder any rights that are greater than those of
a general creditor of the Company.
14.3 Employees.
(a) Engaging in Competition With the Company. In the event a
Holder's employment with the Company or a Subsidiary is terminated for any
reason whatsoever, and within one year after the date thereof such Holder
accepts employment with any competitor of, or otherwise engages in
competition with, the Company, the Committee, in its sole discretion, may
require such Holder to return to the Company the economic value of any
award which was realized or obtained by such Holder at any time during the
period beginning on that date which is six months prior to the date of such
Holder's termination of employment with the Company.
(b) Termination for Cause. The Committee may, in the event a
Holder's employment with the company or a Subsidiary is terminated for
cause, annul any award granted under this Plan to return to the Company
the economic value of any award which was realized or obtained by such
Holder at any time during the period beginning on that date which is six
months prior to the date of such Holder's termination of employment with
the Company.
(c) No Right of Employment. Nothing contained in the Plan or in
any award hereunder shall be deemed to confer upon any Holder who is an
employee of the Company or any Subsidiary any right to continued employment
with the Company or any Subsidiary, nor shall it interfere in any way with
the right of the Company or any Subsidiary to terminate the employment of
any Holder who is an employee at any time.
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14.4 Investment Representations. The Committee may require each
person acquiring shares of Stock pursuant to a Stock Option or other award
under the Plan to represent to and agree with the Company in writing that
the Holder is acquiring the shares for investment without a view to
distribution thereof.
14.5 Additional Incentive Arrangements. Nothing contained in the Plan
shall prevent the Board from adopting such other or additional incentive
arrangements as it may deem desirable, including, but not limited to, the
granting of Stock Options and the awarding of stock and cash otherwise than
under the Plan; and such arrangements may be either generally applicable or
applicable only in specific cases.
14.6 Withholding Taxes. Not later than the date as of which an amount
must first be included in the gross income of the Holder for Federal income
tax purposes with respect to any option or other award under the Plan, the
Holder shall pay to the Company, or made arrangements satisfactory to the
Committee regarding the payment of, any Federal, state and local taxes of
any kind required by law to be withheld or paid with respect to such
amount. If permitted by the Committee, tax withholding or payment
obligations may be settled with Common Stock, including Common Stock that
is part of the award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditioned upon such
payment or arrangements and the Company or the Holder's employer (if not
the Company) shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
Holder from the Company or any Subsidiary.
14.7 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws
of the State of Utah (without regard to choice of law provisions).
14.8 Other Benefit Plans. Any award granted under the Plan shall not
be deemed compensation for purposes of computing benefits under any
retirement plan of the Company or any Subsidiary and shall not affect any
benefits under any other benefit plan now or subsequently in effect under
which the availability or amount of benefits is related to the level of
compensation (unless required by specific reference in any such other plan
to awards under this Plan).
14.9 Non-Transferability. Except as otherwise expressly provided in
the Plan, no right or benefit under the Plan may be alienated, sold,
assigned, hypothecated, pledged, exchanged, transferred, encumbranced or
charged, and any attempt to alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void.
14.10 Applicable Laws. The obligations of the Company with
respect to all Stock Options and awards under the Plan shall be subject to
(i) all applicable laws, rules and regulations and such approvals by any
governmental agencies as may be required, including, without limitation,
the Securities Act of 1933, as amended, and (ii) the rules and regulations
of any securities exchange on which the Stock may be listed.
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14.11 Conflicts. If any of the terms or provisions of the Plan or
an Agreement (with respect to Incentive Stock Options) conflict with the
requirements of Section 422 of the Code, then such terms or provisions
shall be deemed inoperative to the extent they so conflict with the
requirements of said Section 422 of the Code. Additionally, if this Plan
or any Agreement does not contain any provision required to be included
herein under Section 422 of the Code, such provision shall be deemed to be
incorporated herein and therein with the same force and effect as if such
provision had been set out at length herein and therein. If any of the
terms or provision of any Agreement conflict with any terms or provision of
the Plan, then such terms or provision shall be deemed inoperative to the
extent they so conflict with the requirements of the Plan. Additionally,
if any Agreement does not contain any provision required to be included
therein under the Plan, such provision shall be deemed to be incorporated
therein with the same force and effect as if such provision had been set
out at length therein.
14.12 Non-Registered Stock. The shares of Stock to be distributed
under this Plan have not been, as of the Effective Date, registered under
the Securities Act of 1933, as amended, or any applicable state or foreign
securities laws and the Company has no obligation to any Holder to register
the Stock or to assist the Holder in obtaining an exemption from the
various registration requirements, or to list the Stock on a national
securities exchange.
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PROXY - PACIFIC HEALTH CARE ORGANIZATION, INC.
ANNUAL MEETING OF STOCKHOLDERS NOVEMBER 18, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Tom Kubota and Don Hellwig, severally, as
Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote, as designated on the reverse
side, all of the shares of Common Stock of PACIFIC HEALTH CARE
ORGANIZATION, INC., of record in the name of the undersigned at the close
of business on October 21, 2005, which the undersigned is entitled to vote
at the Annual Meeting of Stockholders of the Company and at any and all
adjournments thereof, with respect to the matters set forth on the reverse
side and described in the Notice of Annual Meeting and Proxy Statement
dated October 20, 2005, receipt of which is acknowledged.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO INDICATION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED POSTAGE PRE-PAID ENVELOPE.
(Please See Reverse Side)
PROXY - PACIFIC HEALTH CARE ORGANIZATION, INC.
ANNUAL MEETING OF STOCKHOLDERS NOVEMBER 18, 2005
[Name and address of shareholder]
[ ] Mark this box with an X if you have made
changes to your name or address details
above.
[A] PROPOSAL FOR THE ELECTION OF DIRECTOR
1. The Board of Directors recommends a vote FOR the listed nominees. If
you wish to nominate and vote for someone other than the nominee
listed below, please do so in the blank space below.
For Withhold For Withhold
Tom Kubota [ ] [ ] Thomas Iwanski [ ] [ ]
Donald Hellwig [ ] [ ] ______________ [ ] [ ]
[B] Other Proposals
The Board of Directors recommends a vote FOR the following proposals.
For Against Abstain
2. APPOINT CHISHOLM, BIERWOLF & NILSON AS
THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR THE 2004 FISCAL YEAR. [ ] [ ] [ ]
3. APPROVE THE PACIFIC HEALTH CARE
ORGANIZATION, INC., 2005 STOCK OPTION PLAN. [ ] [ ] [ ]
4. IN THEIR DISCRETION, THE PROXIES ARE
AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING OR
ANY AND ALL ADJOURNMENTS THEREOF. [ ] [ ] [ ]
[C] Authorized Signatures - Sign Here - This section must be completed
for your instructions to be executed.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as an attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
Signature 1 - Please keep signature within the box (mm/dd/yyyy)
[ ] [ / / ]
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Signature 2 - Please keep signature within the box Date (mm/dd/yyyy)
[ ] [ / / ]
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