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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-
|_| Definitive Additional Materials
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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 SPECIAL MEETING OF STOCKHOLDERS
The Special 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, at 7:00 a.m., local time, for the following purposes:
1. To elect one director 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;
2. To appoint Chisholm, Bierwolf & Nilson as the independent
registered public accounting firm of the Company for the 2004 fiscal
year; and
3. To ratify the Pacific Health Care Organization, Inc., 2002
Stock Option Plan as previously adopted by the Board of Directors of
the Company.
Company President, Tom Kubota, has fixed the close of business on
October 11, 2004, 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 Special 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,
--------------------------------------
October 21, 2004 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 Special Meeting of Stockholders to be held at the
Little America Hotel, located at 500 South Main Street, Salt Lake City,
Utah, at 7:00 a.m., local time, on November 18, 2004, 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.
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, 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 15,427,732 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 and 3
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 and 3 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 Special
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 meeting will be voted FOR the nominee of the Company President
and FOR Proposals 2 and 3. 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 Special
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
requires that the Company have at least three directors on its Board of
Directors. With 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 on 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,
(or the Board of Directors in the absence of an audit committee), is a
financial expert. The 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. If the Company does not have
a financial expert, it will be required to disclose that fact and the
reason therefore in its periodic filings with the Securities and Exchange
Commission. Although not all of these requirements are currently
applicable to the Company, the Company President believes it would be good
corporate governance practice 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 NOMINEES
Set forth below is certain information as of October 11, 2004,
concerning the Company's current executive officers and directors and the
nominee for election at the Special Meeting, including the business
experience of each for at least the past five years:
<Table>
Present Position Director
Name Age With the Company Since
- ---- ---- ---------------- ----------
Tom Kubota 65 Director September 2000
President and Interim Secretary
Tom Roush 47 Director April 2003
Donald Hellwig 51 Chief Financial Officer
Thomas Iwanski 46 Nominee for Director
</Table>
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. 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 as the CEO of Medex
Healthcare, Inc., a wholly owned subsidiary of the Company.
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 nominee to the Board of Directors.
3
The Company's President does not expect that the nominee will become
unavailable for election as a director, but, if for any reason that should
occur prior to the Special Meeting, the person named in the proxy will vote
for such substitute nominee, if any, as may be recommended by the Company's
President.
VOTE REQUIRED
Directors are elected by a plurality of votes cast at the Special
Meeting. Unless contrary instructions are set forth in the proxies, the
persons with full power of attorney to act as proxies at the Special
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 PRESIDENT RECOMMENDS THAT YOU VOTE "FOR" THOMAS
IWANSKI TO FILL THE VACANT DIRECTORSHIP ON THE
COMPANY'S BOARD OF DIRECTORS
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS
As of October 11, 2004, the Company had 15,427,732 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.
___________________________________________________________________________
<Table>
<Caption>
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 persons): 3,240,364 20.9%
___________________________________________________________________________
</Table>
*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, the persons named below were, to the knowledge
of the President 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.
<Table>
<Caption>
___________________________________________________________________________
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%
___________________________________________________________________________
</Table>
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:
<Table>
<Caption>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other Restr All
Name and Annual icted Other
Principal Compen Stock Options LTIP Compen
Position Year Salary Bonus sation Awards /SARs Payout sation
- ------------- ---- ------- ------- ------- ------- ------- ------- -------
Tom Kubota 2003 $ 3,700 $-0- $-0- $-0- $-0- $-0- $9,600
(1)
President 2002 -0- -0- -0- -0- -0- -0- -0-
Director 2001 -0- 23,000 35,000 1,754 -0- -0- -0-
(2)
Donald Hellwig 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 132,000 -0- -0- -0- -0- -0- -0-
CEO of Company 2002 104,000 -0- -0- -0- -0- -0- -0-
Subsidiary
Medex 2001 -0- -0- -0- -0- -0- -0- -0-
5
Doug Hikawa 2003 100,000 -0- -0- -0- -0- -0- -0-
VP of Company 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- -0- -0-
</Table>
(1) This amount represents medical insurance premiums.
(2) Tom Kubota provided consulting services to the Company through
Nanko Investments, Inc., his private consulting business. 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.
(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 percent 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. 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 of 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.
Compensation of officers and directors is determined by the Company's
Board of Directors and is not subject to shareholder approval. 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
During fiscal year ended December 31, 2003, there were ten 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, the Board of Directors currently has no standing committees.
PROPOSAL TWO
APPOINT INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
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 President 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,
2003 and 2002, are summarized as follows:
<Table>
<Caption>
2003 2002
___________________________________________________________________________
Audit $43,357 $4,500
Audit related - -
Tax - -
___________________________________________________________________________
All other - -
===========================================================================
</Table>
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.
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 Special 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 PRESIDENT RECOMMENDS A VOTE "FOR" PROPOSAL TWO,
APPOINTING CHISHOLM, BIERWOLF & NILSON AS THE COMPANY'S INDEPENDENT
REGISTERED PUBLIC ACCOUNTANTS FOR FISCAL 2004
PROPOSAL THREE
RATIFY THE PACIFIC HEALTH CARE ORGANIZATION, INC.,
2002 STOCK OPTION PLAN AS ADOPTED BY THE BOARD OF DIRECTORS
DESCRIPTION OF THE PACIFIC HEALTH CARE ORGANIZATION, INC., 2002 STOCK
OPTION PLAN
In November 2002, the Company's Board of Directors adopted the Pacific
Health Care Organization, Inc., 2002 Stock Option Plan, (the "Plan"), a
copy of which is attached to this proxy statement as Annex A. 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
Special 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.
The Plan permits the granting of 1,000,000 shares of common stock, 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 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
been 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.
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.
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 PRESIDENT RECOMMENDS A VOTE "FOR" PROPOSAL THREE TO
RATIFY THE PACIFIC HEALTH CARE ORGANIZATION, INC.,
2004 STOCK OPTION PLAN
OTHER MATTERS
The Company's President knows of no other matters that are to be
presented for action at the Special Meeting of Stockholders other than
those set forth above. If any other matters properly come before the
Special 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
2004 SHAREHOLDER PROPOSALS
If you wish to include a proposal in the Proxy Statement for the 2004
Annual Meeting of Stockholders, your written proposal must be received by
the Company no later than October 15, 2005. 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.
SELECTED INFORMATION FROM OUR ANNUAL REPORT
ON FORM 10-KSB FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 14, 2004
DESCRIPTION OF BUSINESS
- -----------------------
History of the Company
----------------------
Pacific Health Care Organization, Inc. (the "Company") was
incorporated under the laws of the state 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 Workers 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.
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.
The applicant for the HCO licence 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. The Company anticipates this
requirement is to be eliminated on January 1, 2004, which may reduce the
competitive advantage of having two HCO licenses.
13
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% of the State's workforce. This geographical area has a
multi-billion dollar annual medical and indemnity Workers' Compensation
cost. The two HCO networks have contracted with over 2,700 providers, 62
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.
The Company is currently in discussions with brokers of health
insurance and with representatives of larger employers. Based on potential
cost savings to employers and the large workforce in the seven counties
where 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.
Physicians
----------
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.
PHCO 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 worker 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.
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 Southern 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
sixteen certified health care organization licenses (two of which belong to
the Company) issued to approximately ten companies. This translates into
approximately nine direct 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. In addition, the Company is
the only HCO that owns a network of providers as opposed to leasing a
network. The Company believes this is advantageous because they can market
a direct relationship with providers rather than relying on third party
relationships.
EMPLOYEES
---------
The Company, through its subsidiary, currently has five full time
employees and ten 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-
Counter Bulletin Board ("OTCBB") in the next twelve months. The Company
currently has 15,427,732 shares outstanding held by approximately 1080
shareholders. The following table shows the historical bid and ask price
data for PHCO:
17
<Table>
<Caption>
BID PRICES ASK PRICES
HIGH LOW HIGH LOW
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
</Table>
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 actual
transactions.
Approximately 884,214 of the Company's unissued common shares are
subject to outstanding options or warrants to purchase, or securities
convertible into, common equity of the Company. Of the 15,427,732
outstanding shares of common stock approximately 13,434,944 are restricted
common shares of the Company and approximately 154,277 shares are eligible
for resale pursuant to Rule 144 every 90 days. The Company has no
agreements to register shares on behalf of shareholders currently holding
unregistered securities. The Company has not paid, nor declared, any
dividends since its inception and does not intend to declare any such
dividends in 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
course of business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
- -------------------------------------------------------------
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.
18
At December 31, 2003, the Company had cash on hand of $398,352
compared to $201,875 at the December 31, 2002, year end. The 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, 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 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.
19
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.
20
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, 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 have
retained the services of the Law Offices of L. Scott Carlin, of Tustin
California, to represent them in this matter and intend to contest the case
vigorously.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
- -------------------------------------------------------------------------
None.
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, to receive them before the
Special Meeting of Stockholders.
By order of the President,
October 21, 2004 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.
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
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . F-1
Report of Independent Registered Public Accounting Firm . . . . F-2
Financial Statements
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statement of Operations . . . . . . . . . . . . . . . . . . . . F-5
Statement of Stockholders' Equity . . . . . . . . . . . . . . . F-6
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements . . . . . . . . . . . . . . . . . F-8
F-1
/Letterhead/
Independent Auditor's Report
-----------------------------
To the Board of Directors
Pacific Health Care Organization, Inc.
We have audited the accompanying balance sheets of Pacific Health Care
Organization, as of December 31, 2003 and 2002, and the related statements
of income, retained earnings and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards, in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. 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 provides 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, 2003 and 2002, and the results of
its operations and its cash flows for the years then ended, in conformity
with 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.
Balance Sheets
<Table>
<Caption>
December December
31, 2003 31, 2002
----------- -----------
ASSETS
Current Assets
- --------------
Cash $ 398,352 $ 201,875
Accounts Receivable 120,734 42,581
Prepaid Expenses 24,166 9,896
----------- -----------
Total Current Assets 543,252 254,352
Property & Equipment (Note 5)
- --------------------
Computer Equipment 55,830 41,927
Furniture & Fixtures 24,766 7,082
----------- -----------
Total Property & Equipment 80,596 49,009
Less: Accumulated Depreciation (32,124) (14,848)
----------- -----------
Net Property & Equipment 48,472 34,161
----------- -----------
Total Assets $ 591,724 $ 288,513
=========== ===========
</Table>
F-3
Pacific Health Care Organization, Inc.
Balance Sheets
<Table>
<Caption>
December December
31, 2003 31, 2002
----------- -----------
Liabilities & Stockholders' Equity
Current Liabilities
- -------------------
Accounts Payable $ 16,993 $ 3,600
Accrued Expenses 139,920 75,514
Unearned Revenue 165,001 -
----------- -----------
Total Current Liabilities 321,914 79,114
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 15,408,982 Shares Issued
and Outstanding, Respectively 15,428 15,409
Additional Paid In Capital 449,964 447,545
Additional Paid In Capital - Warrants 122,694 122,694
Accumulated (Deficit) (318,276) (376,249)
----------- -----------
Total Stockholders' Equity 269,810 209,399
----------- -----------
Total Liabilities & Stockholders' Equity $ 591,724 $ 288,513
=========== ===========
</Table>
F-4
Pacific Health Care Organization, Inc.
Statement of Operations
<Table>
<Caption>
December December
31, 2003 31, 2002
----------- -----------
Revenues $1,097,930 $ 653,427
- -------- ----------- -----------
Expenses
- --------
Depreciation 17,276 12,639
Consulting Fees 84,081 271,968
Salaries & Wages 501,109 148,427
Professional Fees 84,492 64,725
Insurance 74,141 31,678
Employment Enrollment 94,200 56,552
General & Administrative 184,772 103,268
----------- -----------
Total Expenses 1,040,071 689,257
----------- -----------
Income (Loss) From Operations 57,859 (35,830)
Other Income (Expenses)
- -----------------------
Interest Income 114 568
----------- -----------
Total Other Income (Expenses) 114 568
----------- -----------
Income (Loss) Before Taxes 57,973 (35,262)
Tax Expense - -
----------- -----------
Net Income (Loss) $ 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
</Table>
F-5
Pacific Health Care Organization, Inc.
Statement of Stockholders' Equity
From January 1, 2002 to December 31, 2003
<Table>
<Caption>
Common Stock Paid In Accumulated
Shares Amount Capital Deficit
------------ ----------- ----------- -----------
Balance, January 1, 2002 10,063,000 10,063 174,803 (340,987)
Conversion of Note Payable
at $.70 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
Net Loss for the Year Ended
December 31, 2002 (35,262)
------------ ----------- ----------- -----------
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 $ 15,428 $ 572,658 $ (318,276)
============ =========== =========== ===========
</Table>
F-6
Pacific Health Care Organization, Inc.
Statement of Cash Flows
For the Years Ended December 31
<Table>
<Caption>
2003 2002
------------ ------------
Cash Flows from Operating Activities
- ------------------------------------
Net Income (Loss) $ 57,973 $ (35,262)
Adjustments to Reconcile Net Income to Net Cash:
Contributed Services 1,500 4,800
Depreciation 17,276 12,639
Shares Issued for Services - 50,000
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Prepaid Expenses (14,270) (3,722)
(Increase) Decrease in Accounts Receivable (78,153) 42,581)
Increase (Decrease) in Accounts Payable 13,393 3,600
Increase (Decrease) in Accrued Expenses 64,406 75,514
Increase (Decrease) in Unearned Revenue 165,001 -
------------ ------------
Net Cash Provided by Operating Activities 227,126 64,988
Cash Flows from Investing Activities
- ------------------------------------
Purchase of Computer Equipment (13,903) (24,726)
Purchase of Furniture & Fixtures (17,684) (2,523)
------------ ------------
Net Cash Used by Investing Activities (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 196,477 37,739
Cash at Beginning of Period 201,875 164,136
------------ ------------
Cash at End of Period $ 398,352 $ 201,875
============ ============
Supplemental Cash Flow Information
- ----------------------------------
Interest $ - $ -
Taxes - -
</Table>
F-7
Pacific Health Care Organization, Inc.
Notes to Financial Statements
December 31, 2003
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.
NOTE 2 - Significant Accounting Policies
- ----------------------------------------
A. Basis of Accounting
-------------------
The Company uses the accrual method of accounting.
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 circumstances 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-8
Pacific Health Care Organization, Inc.
Notes to Financial Statements
December 31, 2003
NOTE 2 - Significant Accounting Policies (continued)
- ----------------------------------------
D. Net Earnings (Loss) Per Share
-----------------------------
The computation of net earnings (loss) per share of common stock is
based on the weighted average number of shares outstanding during each
period presented. The Company utilizes the treasury stock method to
calculate net earnings (loss) per share. Potentially issuable common
shares totaling 691,964 related to warrants and 66,250 related to
options were excluded from the calculation of diluted loss per share
because their efforts were anti-dilutive.
The following is the calculation for a weighted average common shares
used in basic and dilutive net earnings (loss) per share:
<Table>
<Caption>
For the Years Ended
December 31,
2003 2002
------------ ------------
Basic Earning Per Share:
Income (Loss) (Numerator) $ 57,973 $ (35,262)
Shares (Denominator) 15,413,670 11,540,493
------------ ------------
Per Share Amount $ .00 $ .00
============ ============
Fully Diluted Earnings Per Share:
Income (Loss) (Numerator) $ 57,973 $ (35,262)
Shares (Denominator) 15,413,670 11,540,493
------------ ------------
Per Share Amount $ .00 $ .00
============ ============
</Table>
E. 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. 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.
Notes to Financial Statements
December 31, 2003
NOTE 2 - Significant Accounting Policies (continued)
- ----------------------------------------
G. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the company and its wholly - owned subsidiary.
Intercompany transactions and balances have been eliminated in
consolidation.
H 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.
I General and Administrative Costs
--------------------------------
General and administrative expenses include fees for office space,
insurance, compensated absences, travel and entertainment costs.
J 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, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION TRANSITION AND DISCLOSURE AN AMENDMENT OF FAS 123. SFAS NO.
148 AMENDS SFAS NO. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, TO
provide alternative methods of transition for an entity that voluntarily
changes to the 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 on 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.
F-10
Pacific Health Care Organization, Inc.
Notes to Financial Statements
December 31, 2003
NOTE 3 - New Technical Pronouncements (continued)
- --------------------------------------
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.
Notes to Financial Statements
December 31, 2003
NOTE 3 - 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.
NOTE 4 - 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", 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.
NOTE 5 - 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. Scheduled below are the assets, costs and
accumulated depreciation at December 31, 2003 and 2002.
<Table>
<Caption>
Depreciation Accumulated
Cost Expense Depreciation
December December December December December December
Assets 31, 2003 31, 2002 31, 2003 31, 2002 31, 2003 31, 2002
- ------------------ --------- --------- --------- --------- --------- ---------
Computer Equipment $ 55,830 $41,927 $14,447 $13,512 $27,959 $11,792
Furniture & Fixtures 24,766 7,082 2,829 1,336 4,165 847
- ------------------ --------- --------- --------- --------- --------- ---------
Totals $ 80,596 $ 49,009 $ 17,276 $ 14,848 $ 32,124 $ 12,639
========= ========= ========= ========= ========= =========
</Table>
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:
<Table>
<Caption>
Year of Loss Amount Expiration Date
------------ ---------- ---------------
2000 $ 44,590 2020
2001 296,397 2021
2002 35,262 2022
2003 - -
</Table>
<Table>
<Caption>
2003 2002
------------ ------------
Current Tax Asset Value of Net Operating Loss
Carryforwards at Current Prevailing Federal
Tax Rate $ 95,483 $ 112,874
Evaluation Allowance (95,483) (112,874)
------------ ------------
Net Tax Asset $ - $ -
Current Income Tax Expense $ - $ -
============ ============
Deferred Income Tax Benefit - -
</Table>
The Company has remaining cumulative net operating loss carryforwards of
$318,276 to be offset against future earnings.
NOTE 7 - 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 and $1,962 per month for a 1,154 square
foot facility, for the periods ending February 28, 2003 and 2002,
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)
- -------------------------
<Table>
<Caption>
Total Lease Commitments; Year Amounts
------ ----------
2004 $ 75,451
2005 77,438
2006 12,965
2007 -
2008 -
----------
Total $ 165,854
</Table> ==========
Rent expense for the year ended December 31, 2003 and December 31, 2002 was
$61,832 and $24,862, 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.
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.
Notes to Financial Statements
December 31, 2003
NOTE 9 - Major Customers
- ------------------------
The Company had two customers who, accounted for 10 percent, or more, of
the Company's total revenues during the year ended December 31, 2003, and
one customer during the year ended December 31, 2002. The percentages of
total revenues for the years ended 2003 and 2002 are as follows:
<Table>
<Caption>
2003 2002
------ ------
Customer A 14% 20%
Customer B 14% -
</Table>
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;
<Table>
<Caption>
Common shares outstanding during the entire period 15,413,670
Weighted-average shares paid for, but not issued
during the period. -
------------
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
============
</Table>
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.
Notes to Financial Statements
December 31, 2003
NOTE 12 - 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 plan calls for a total
of 1,000,000 shares to be held for grant. A summary of activity follows;
Stock Option Plan 2002
------------------------
Weighted
Average
Number Exercise
of Shares Price
----------- -----------
Outstanding at beginning of year - $ -
Granted 85,000 .05
Exercised (18,750) -
Canceled - -
----------- -----------
Outstanding at end of year 66,250 $ .05
=========== ===========
Exercisable at end of year 66,250 $ .05
=========== ===========
In accordance with SFAS 123, "Accounting for Stock-Based Compensation", no
option expense was recognized for the year ended December 31, 2003 since
the exercise price of the options was equal to, or greater than, the market
value of the Company's common stock..
The fair value of the option grant was established at the date of grant
using the Black-Sholes 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
------
Employee stock options outstanding and exercisable under this plan as of
December 31, 2003 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
<Table>
<Caption>
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 3.58 66,250 $ .05
</Table>
F-17