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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23181
PAULA FINANCIAL
(Exact name of registrant as specified in its charter)
DELAWARE 95-4640368
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
PAULA FINANCIAL
300 NORTH LAKE AVENUE, SUITE 300
PASADENA, CA 91101
(Address of principle executive offices)
(626) 304-0401
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Number of shares of Common
Stock, $.01 par value, outstanding as of close of business on October 30, 1998:
5,985,315 shares.
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PAULA FINANCIAL
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets as of
December 31, 1997 and September 30, 1998 (unaudited) ......................2
Condensed consolidated statements of operations for the three and nine
months ended September 30, 1997 and 1998 (unaudited).......................3
Condensed consolidated statements of comprehensive income (loss) for
the three and nine months ended September 30, 1997 and 1998
(unaudited)................................................................4
Condensed consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1998 (unaudited)..............................5
Notes to condensed consolidated financial statements for the three and
nine months ended September 30, 1998 (unaudited) ..........................6
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations........................................8
PART II. OTHER INFORMATION
Item 2. Changes in Use of Proceeds................................................17
Item 6. Exhibits and Reports on Form 8-K..........................................17
SIGNATURE...................................................................................18
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1998
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(*) (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities, available for sale, at market
(amortized cost: 1997, $112,294; 1998, $157,500) $114,525 $159,122
Equity securities, at market
Preferred stock (cost: 1997, $3,019; 1998, $999) 3,112 1,035
Common stock (cost: 1997, $5,546; 1998, $5,138) 5,545 5,015
Invested cash, at cost (approximates market) 14,682 5,449
-------- --------
Total investments 137,864 170,621
-------- --------
Cash (restricted: 1997, $1,491; 1998, $1,591) 4,770 8,884
Accounts receivable, net of allowance for uncollectible
accounts (1997, $600; 1998, $742) 24,320 29,264
Reinsurance recoverable on paid and unpaid losses and
loss adjustment expenses 6,394 8,220
Deferred income taxes 3,247 5,746
Other assets 11,669 14,032
-------- --------
-------- --------
$188,264 $236,767
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 77,784 $124,826
Unearned premiums 15,390 22,764
Accrued policyholder dividends -- 253
Accounts payable and accrued expenses 9,814 12,316
Notes payable 456 92
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103,444 160,251
-------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value. Authorized 4,058,823
shares, none issued and outstanding -- --
Common stock, $0.01 par value
(Authorized 15,000,000 shares, issued: 1997,
6,321,177; 1998, 6,337,815) 63 64
Additional paid-in-capital 67,176 67,386
Retained earnings 16,048 9,949
Accumulated other comprehensive income:
Net unrealized gain on investments 1,533 1,013
-------- --------
84,820 78,412
Treasury stock, at cost (1998, 252,500 shares) -- (1,896)
-------- --------
84,820 76,516
-------- --------
$188,264 $236,767
-------- --------
-------- --------
</TABLE>
* Derived from audited financial statements.
See notes to condensed consolidated financial statements.
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PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INCOME:
Premiums earned:
Workers' compensation $ 23,190 $ 40,569 $ 64,492 105,430
Group medical and life 228 214 703 582
Commissions 890 780 2,607 2,410
Net investment income 1,351 2,437 3,850 6,610
Net realized investment gains 173 1,784 173 1,731
Other 182 311 529 671
--------- --------- --------- ---------
26,014 46,095 72,354 117,434
--------- --------- --------- ---------
EXPENSES:
Losses and loss adjustment
expenses incurred 16,051 32,997 44,498 96,531
Dividends provided for policyholders 436 87 745 594
Operating 7,620 10,954 22,372 29,507
--------- --------- --------- ---------
24,107 44,038 67,615 126,632
--------- --------- --------- ---------
Income (loss) before income taxes 1,907 2,057 4,739 (9,198)
Income tax expense (benefit) 636 423 1,174 (3,854)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 1,271 $ 1,634 $ 3,565 ($5,344)
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings (loss) per share $ 0.67 $ 0.26 $ 1.87 ($0.85)
Weighed average shares outstanding 1,898,793 6,276,451 1,901,582 6,309,895
Earnings (loss) per share - assuming $0.30 $0.25 $0.87 ($0.85)
dilution
Weighted average shares outstanding -
assuming dilution 4,197,408 6,506,654 4,098,244 6,309,895
</TABLE>
See notes to condensed consolidated financial statements.
3
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PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $1,271 $1,634 $3,565 ($5,344)
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains
arising during period (tax impact:
1997: $199 and $208; 1998: $206
and $169) 387 400 405 328
Reclassifications adjustment for gains
(losses) included in net income
(tax impact: 1997: $58 and $24;
1998: $510 and $437) (114) (990) (48) (848)
------ ------ ------ -------
273 (590) 357 (520)
------ ------ ------ -------
COMPREHENSIVE INCOME (LOSS) $1,544 $1,044 $3,922 ($5,864)
------ ------ ------ -------
------ ------ ------ -------
</TABLE>
See notes to condensed consolidated financial statements.
4
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PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,565 ($5,344)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 965 1,074
Amortization of fixed maturity premium, net 477 600
Loss on sale of property and equipment 21 7
Loss on sales and calls of investments (173) (1,731)
Increase in accounts receivable (8,858) (7,767)
(Increase) decrease in deferred income taxes 106 (2,231)
Increase in unpaid losses and loss adjustment expenses 12,614 47,042
Increase in accrued policyholder dividends 41 253
Increase in accounts payable and accrued expenses 7,046 2,502
Increase in unearned premiums 4,050 7,374
Other, net (819) (650)
------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,035 41,129
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of common and preferred stocks 499 6,423
Proceeds from sale of available for sale fixed maturities -- 77,879
Proceeds from maturities and calls of available for sale fixed 11,605 7,026
maturities
Proceeds from sale of property and equipment 30 15
Purchase of preferred and common stocks (3,202) (4,231)
Purchase of available for sale fixed maturities (19,326) (128,744)
Purchase of property and equipment (813) (1,430)
Purchase of insurance agency (41) (378)
------- ---------
NET CASH USED IN INVESTING ACTIVITIES (11,248) (43,440)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreement, net 2,471 --
Payments on notes payable (1,721) (364)
Dividends paid -- (754)
Exercise of stock options -- 206
Repurchase of common stock -- (1,896)
Sale of common stock 46 --
Retirement of common stock (62) --
------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 734 (2,808)
------- ---------
NET INCREASE (DECREASE) IN CASH AND INVESTED CASH 8,521 (5,119)
Cash and invested cash at beginning of period 10,707 19,452
------- ---------
------- ---------
CASH AND INVESTED CASH AT END OF PERIOD $19,228 $14,333
------- ---------
------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
5
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PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
PAULA Financial and subsidiaries (the "Company") is an integrated insurance
organization specializing in the production, underwriting and servicing of
workers' compensation and accident and health insurance primarily for
agribusiness clients in California, Arizona, Oregon, Idaho, Alaska, Texas,
Florida, New Mexico and Nevada.
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments, including normally
occurring accruals, considered necessary for a fair presentation have been
included.
Operating results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the year ended
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE B - ADOPTION OF NEW ACCOUNTING STANDARDS
During the first quarter of 1998, the Company adopted the provisions of
Financial Accounting Standards Board ("FASB") Statement No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 requires companies to report
comprehensive income and its components in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
stockholders and distributions to stockholders. In accordance with the interim
reporting requirements of SFAS 130, the Company has included condensed
consolidated statements of comprehensive income in the accompanying condensed
consolidated financial statements.
Also, during the first quarter of 1998, the Company adopted the provisions of
FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information: ("SFAS 131"). This statement specifies revised guidelines for
determination of an entity's operating segments and the type and level of
financial information to be disclosed. Based on the guidance included in
SFAS 131, the Company has determined that it operates in a single segment:
the production, underwriting and servicing of workers' compensation and
accident and health insurance.
6
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PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE C - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
During the fourth quarter of 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments" ("SOP 97-3"). SOP 97-3
addresses the recognition and measurement of assets and liabilities related to
guaranty funds and other assessments. SOP 97-3 is effective for fiscal years
beginning after December 31, 1998, although early adoption is encouraged. The
Company has not determined the impact of SOP 97-3 and has not yet adopted
SOP 97-3.
7
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PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a California-based specialty underwriter and distributor of
commercial insurance products which, through its subsidiary PAULA Insurance
Company ("PICO"), is one of the largest underwriters specializing in workers'
compensation insurance products and services for the agribusiness industry. The
Company sells complementary products through the Company's insurance agency
subsidiaries (collectively "Pan Am"), including group health and life products
provided by the Company's subsidiary PAULA Assurance Company ("PACO"), and
third-party claims administration services provided by the Company's subsidiary
Pan Pacific Benefit Administrators, Inc.
The Company's revenues have consisted primarily of premiums earned from workers'
compensation insurance underwriting, premiums earned from group medical
insurance, commission income, net investment income and other income. Premiums
earned during a period represent the portion of direct premiums written for
which all or a portion of the coverage period has expired, net of reinsurance.
Premiums written for the three months ended September 30, 1998 and 1997, were
$38.9 million and $25.5 million, respectively. Premiums written for the nine
months ended September 30, 1998 and 1997, were $116.7 million and $71.4 million,
respectively. Commission income is earned from Pan Am's distribution of
insurance for insurers other than PICO and PACO. Net investment income
represents earnings on the Company's investment portfolio, less investment
expenses. Other income consists of third party administration fees and other
miscellaneous items.
The Company's expenses have consisted of losses and loss adjustment expenses
incurred, dividends provided for policyholders and operating expenses. Losses
include reserves for future payments for medical care and rehabilitation costs
and indemnity payments for lost wages. Loss adjustment expenses include expenses
incurred in connection with services provided by third parties, including
expenses of independent medical examinations, surveillance costs, and legal
expenses as well as staff and related expenses incurred to administer and settle
claims. Loss and loss adjustment expenses are offset in part by estimated
recoveries from reinsurers under reinsurance treaties. Operating expenses
include commission expenses to third party insurance agencies and other expenses
that vary with premium volume, such as premium taxes, state guaranty fund
assessments and underwriting and marketing expense, as well as general and
administrative expenses, which are less closely related to premium volume.
The Company's revenues are seasonal, and have tended to be highest in the second
and third quarters of each year. This is due primarily to the seasonality of the
size of the workforce employed by the Company's agribusiness clients.
8
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998:
PREMIUMS WRITTEN. The Company's growth rate for premiums written slowed in the
third quarter. The Company's premiums written for the three months ended
September 30, 1998 increased 52.5% to $38.9 million from $25.5 million for the
comparable 1997 period. The majority of this growth reflects activity from prior
periods. During the third quarter of 1998, policy count increased 2.4% from
10,886 as of June 30, 1998 to 11,148 as of September 30, 1998. The Company's
premiums written for the nine months ended September 30, 1998 increased 63.5% to
$116.7 million from $71.4 million for the comparable 1997 period. The growth in
premiums written was primarily attributable to the net addition of new
policyholders and increased policyholder payrolls. The Company's growth was
particularly strong in Texas during the third quarter.
PREMIUMS EARNED. For the reasons described above for premiums written, the
Company's premiums earned for the three months ended September 30, 1998
increased 74.2% to $40.8 million from $23.4 million for comparable 1997 period
and increased 62.6% to $106.0 million for the nine months ended September 30,
1998 from $65.2 million for comparable 1997 period.
COMMISSION INCOME. For the three months ended September 30, 1998 commission
income was $0.8 million compared to $0.9 million for the comparable 1997 period.
Commission for the nine months ended September 30, 1998 was $2.4 million
compared to $2.6 million for the comparable 1997 period. The decreases are
primarily a result of decreased premiums placed with carriers other than PICO
and PACO due to a Company decision to focus on writing PICO workers compensation
insurance. Commissions paid to Pan Am on PICO and PACO business are eliminated
in the Company's consolidated financial statements.
NET INVESTMENT INCOME. Net investment income increased 80.4% to $2.4 million for
the three months ended September 30, 1998 from $1.4 million for the comparable
1997 period. Net investment income increased 71.7% to $6.6 million for the nine
months ended September 30, 1998 from $3.9 million for the comparable 1997
period. The increase was the result of significant cash flow increases from
PICO's underwriting activity and the proceeds from the Company's initial public
offering in October 1997. Average invested assets increased to $152.3 million
for the nine months ended September 30, 1998 from $93.4 million for the
comparable period in 1997. The Company's average yield on its portfolio was 5.8%
for the nine month period in 1998 and 5.5% for the nine month period in 1997.
NET REALIZED INVESTMENT GAINS. Net realized investment gains increased to
$1.8 million for the three months ended September 30, 1998 from $0.2 million
for the comparable 1997 period. Net realized investment gains increased to
$1.7 million for the nine months ended September 30, 1998 from $0.2 million
for the comparable 1997 period. The increase is a result of a tax planning
strategy to reposition a portion of the investment portfolio from tax exempt
to taxable securities which was effected in the third quarter of 1998.
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED. The Company's loss ratio for the
three months ended September 30, 1998 increased to 80.9% from 68.5% for the
comparable 1997 period. The Company's loss ratio for the nine months ended
September 30, 1998 increased to 91.1% from 68.3% for the comparable 1997 period.
The increase in the 1998 loss ratios is due to higher 1998 losses on
9
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the Company's California book of business. Additionally, the increase in the
nine month loss ratio compared to the 1997 period is largely attributable to
actions taken by the Company to increase loss reserves on the 1997 and 1998
accident years by a total of $14.8 million in the second quarter of 1998.
In the first two quarters of 1998, the Company saw reserve development on the
1997 accident year for California business in excess of its expectations, given
prior year reserving trends. The Company's second quarter 1998 reserve
adjustment, expressed as a percentage of 1997 and six month 1998 combined
premiums, implied a pricing deficiency for those periods. The Company began to
address this pricing deficiency early in 1998 through rate increases and
non-renewal activity.
DIVIDENDS PROVIDED FOR POLICYHOLDERS. Dividends provided for policyholders as a
percentage of premiums earned for the three months ended September 30, 1998 was
0.2% compared to 1.9% for the comparable 1997 period. Dividends provided for
policyholders as a percentage of premiums earned for the nine months ended
September 30, 1998 was 0.6% compared to 1.1% for the comparable 1997 period.
During the first quarter of 1998, the Company paid $0.3 million in policyholder
dividends related to certain Arizona policies in which the loss experience
developed better than anticipated.
OPERATING EXPENSES. Operating expenses increased 43.8% to $11.0 million for the
three months ended September 30, 1998 from $7.6 million for the comparable 1997
period, primarily due to a $2.5 million increase in variable expenses,
principally commissions paid to unaffiliated agencies. Operating expenses
increased 31.9% to $29.5 million for the nine months ended September 30, 1998
from $22.4 million for the comparable 1997 period largely due to a $5.9 million
increase in variable expenses, principally commissions paid to unaffiliated
agencies.
INCOME TAXES. Income tax expense for the three months ended September 30, 1998
was $0.4 million compared to an income tax expense of $0.6 million for the
comparable 1997 period. Income tax benefit for the nine months ended
September 30, 1998 was $3.9 million compared to income tax expense of
$1.2 million for the comparable 1997 period. The effective combined income
tax rates for the three months ended September 30, 1998 and 1997 were 20.6%
and 33.4%, respectively. The effective combined income tax rates for the nine
months ended September 30, 1998 and 1997 were (41.9%) and 24.8%,
respectively. These rates vary from the combined statutory rate due to the
investment income on tax-exempt securities.
NET INCOME (LOSS). Net income for the three months ended September 30, 1998 was
$1.6 million compared to net income of $1.3 million for the comparable 1997
period. Net loss for the nine months ended September 30, 1998 was $5.3 million
compared to net income of $3.6 million for the comparable 1997 period. The net
loss for the nine months of 1998 is primarily attributable to actions taken by
the Company to increase loss reserves on the 1997 and 1998 accident years by a
total of $14.8 million in the second quarter of 1998.
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LIQUIDITY AND CAPITAL RESOURCES:
As a holding company, PAULA Financial's principal sources of funds are dividends
and expense reimbursements from its operating subsidiaries, proceeds from the
sale of its capital stock and income from its investment portfolio. PAULA
Financial's principal uses of funds are capital contributions to its
subsidiaries, payment of operating expenses, dividends to its stockholders and
repurchase of Company common stock.
California law places significant restrictions on the ability of the insurance
subsidiaries to pay dividends to PAULA Financial. Based on these restrictions
and the Company's results for the year ended December 31, 1997, PAULA Financial
would be able to receive $6.4 million in dividends in 1998 from its insurance
subsidiaries without obtaining prior regulatory approval from the California
Department of Insurance ("DOI"). No dividends were paid by the insurance
subsidiaries to PAULA Financial during the nine months ended September 30, 1998.
Through June 30, 1998, the Company retained $16.6 million from the proceeds of
its initial public offering at the parent company level in various investment
grade securities. In August 1998, the Company contributed $8.2 million to PICO
to support its underwriting activities. An additional $3.7 million was
contributed to PICO in September 1998. Management believes that the remaining
offering proceeds, funds available under the Credit Agreement described below,
and expense reimbursements and dividends from its operating subsidiaries will be
sufficient to meet the parent company's normal operating cash needs for at least
twelve months.
In March 1997, PAULA Financial entered into the Credit Agreement with a
commercial bank providing PAULA Financial with a revolving credit facility of
$15.0 million until December 31, 1999. At such time PAULA Financial may elect to
convert all or a portion of the borrowings then outstanding under such facility
into a term loan payable in quarterly installments and maturing on December 31,
2001. Each of PAULA Financial's non-insurance subsidiaries has guaranteed all
obligations of PAULA Financial under the Credit Agreement. As of October 30,
1998, $2.0 million was outstanding under this facility. This use of the Credit
Agreement was for repurchase of the Company's common stock.
On August 12, 1998, the Company announced the approval by the Board of Directors
of a 500,000 share stock repurchase program. On October 29, the Board authorized
an additional 500,000 shares, bringing the total authorization under the program
to 1,000,000 shares. The shares are expected to be repurchased over the next 33
months through open market and/or privately negotiated purchases. As of October
30, 1998, the Company had repurchased 352,500 shares.
The Company's investments consist primarily of taxable and tax-exempt United
States government and other investment grade securities and investment grade
fixed maturity commercial paper and, to a lesser extent, equity securities. The
Company does not generally invest in below investment grade fixed maturity
securities, mortgage loans or real estate. During the third quarter of 1998, the
Company repositioned a substantial portion of the investment portfolio from tax
exempt to taxable securities. The overall asset quality and duration of the
portfolio was unchanged. The repositioning was done for tax planning purposes.
The Company has invested in the equity securities of two founders of the PAULA
Trading Company (an affiliated agency) other than Pan Am as a part of the parent
company's investment portfolio.
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As of September 30, 1998, the carrying value of the Company's fixed maturity
securities portfolio was $159.1 million of which $150.8 million was rated. Of
the rated fixed maturities portfolio 97.1% was rated "A" or better by S&P,
Moody's or Fitch.
California workers' compensation insurance companies are required to maintain
some of their investments on deposit with the California DOI for the protection
of policyholders. Other states in which PICO is licensed have also required PICO
to post deposits for the protection of those states' policyholders. Pursuant to
applicable state laws, PICO had, as of September 30, 1998, securities with a par
value of $86.1 million held by authorized depositories pursuant to these deposit
requirements. In addition to the deposits, the Company's insurance company
operating subsidiaries must maintain regulated levels of capital and surplus in
relation to premiums written and the risks retained by the subsidiaries.
Effective October 1, 1998, the Company entered into a excess of loss
reinsurance agreement with a retention of $50,000. Concurrent with this
agreement, the Company entered into an excess of loss agreement which covers
a portion of losses in the $40,000 excess of $10,000 layer and a quota share
agreement which covers a portion of losses below $10,000. In addition,
effective July 1, 1998, the Company modified its prior existing excess of
loss reinsurance treaty coverage on the $250,000 excess of $250,000 layer to
retain the first $2.0 million in aggregate losses, with a corresponding
reduction in the Company's reinsurance rate.
YEAR 2000 CONSIDERATIONS
OVERVIEW. The Company's Year 2000 Project (the "Project") is proceeding on
schedule. The Project involves resolving the potential impact of the Year 2000
on the processing of date-sensitive information by the Company's internal
computer systems and equipment and by the computer systems and equipment
utilized by third parties with whom the Company maintains material
relationships.
The Company believes that it has identified substantially all of its own
information technology systems ("IT Systems") and non-information technology
(embedded technology) systems ("Non-IT Systems") which require modification in
order to become Year 2000 compliant. In addition, the Company believes that it
has identified those third parties whose inability to handle date-sensitive
processing could materially and adversely impact the Company if corrective
action is not taken in a timely manner.
The Company has identified five major internal IT Systems which require
attention as part of the Project: General Ledger ("GL"), Agency Operations
("Agency"), Underwriting, which includes policy issuance, maintenance of policy
records, billing and auditing ("Underwriting"), Claims Adjudication ("Claims")
and Third Party Administration, which includes life insurance and accident and
health insurance policy issuance, maintenance and billing operations ("TPA").
The Company's approach to each of these systems differs based on the Company's
use of the system and whether the system was purchased from a third party or
developed in-house.
GL SYSTEM. The Company has completed in-house construction and testing of a new
GL system. The new GL system was made Year 2000 compliant as part of its
construction. The Company has completed all work on this system.
12
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AGENCY SYSTEM. The Company's in-house developed Agency System is not Year 2000
compliant. The Company has chosen not to correct the in-house system and instead
to outsource Agency System processing to a third party. The Company began the
process of out-sourcing its Agency System needs to James G. Parker Insurance
Associates ("Parker"), one of the founders of the PAULA Trading Company, in
1997. Parker utilizes an agency software system provided by a third party vendor
which is Year 2000 compliant. The Company has received oral assurance of this
fact from the software provider and expects written confirmation soon. The
Company intends to have outsourced all of its Agency System functions by the end
of 1998.
UNDERWRITING SYSTEM. The Company's in-house Underwriting system is not Year 2000
compliant. Correcting this situation is the Company's most significant Year 2000
project. The Company is currently constructing a new in-house Underwriting
system that will be Year 2000 compliant, but this new system is not expected to
address the Year 2000 issues in a timely fashion.
The Company has chosen to make its existing Underwriting system Year 2000
compliant using a technique known as "windowing," which is a solution that will
work for many years, but not permanently. Windowing is faster and requires less
testing than permanent solutions. The Company believes permanent solutions are
not necessary in light of the new system under development.
The Company has purchased a software tool to perform the windowing project and
has retained several consultants familiar with the software tool to perform the
project. The consultants will work under the supervision of the Company's
information services staff. The Company has identified the programs to be
modified, prioritized those programs based on their earliest expected date of
failure and has begun customizing the software tool to perform the correction to
the programs. The Company has prepared a testing environment to perform the
corrective procedures.
The Company expects phase I of the windowing project to be completed by November
15, 1998. This phase involves correcting and testing programs utilizing policy
expiration dates. The Company expects to begin to issue policies with 2000
expiration dates commencing November 16, 1998. Due to the short time frame, the
Company is performing the windowing procedure on the phase I programs manually
rather than using the software tool.
The Company expects the software tool to be configured and ready to work on
phase II programs by mid-January 1999. Phase II programs are involved in
month-end calculations and reporting. The Company expects correction and testing
of phase II programs to be completed prior to month-end January 1999. The
Company expects phase III of the windowing project, involving correction and
testing of all other Underwriting system programs, to be completed during the
second quarter of 1999.
CLAIMS SYSTEM. The Company's Claims system is licensed from a third party
vendor. The Claims system uses two distinct products, one for claims reporting
and one for claims adjudication. The Company has added custom features to the
standard version of each of the products provided by the vendor.
The Company has licensed and expects delivery of an upgrade to its Claims
adjudication system in late December 1998 which will be Year 2000 compliant.
However, that upgrade will not include all of the features added to the older
version of the Claims adjudication system. The Company is working with the
vendor to identify the features which must be added to the upgraded Claims
13
<PAGE>
adjudication system after delivery in December 1998. The vendor has agreed to
perform the customization. The features identification will be completed during
the fourth quarter of 1998. The Company expects the customization to be
completed during the first quarter of 1999 and final installation, testing and
training to be complete by the end of the second quarter of 1999.
The Company does not believe that utilizing the non-Year 2000 compliant version
of the Claims adjudication system through the second quarter of 1999 will
materially impair operations. The Company is performing ongoing testing to
verify this belief, which it will complete during the fourth quarter. In the
event that the Company determines that the Claims adjudication system must be
made Year 2000 compliant prior to the completion of testing of the customized
upgrade, the Company intends to modify the programs of the existing version of
the Claims system to make it Year 2000 compliant. The Company would utilize the
windowing technique, the software tool and the outside consultants described
above under "Underwriting System" if correcting the Claims adjudication system
programs becomes necessary. The Company will decide whether to take this
alternative step by the end of 1998. The Company is currently performing testing
to ascertain how long it would take to correct the existing version of the
Claims adjudication system.
The Company's Claims reporting system will not be made Year 2000 compliant by
the vendor. The Company has chosen to outsource the claims reporting function to
the vendor which maintains a Year 2000 compliant version on its internal
mainframe computer and personnel to perform initial claim input on behalf of the
Company. The outsource will be effective at the beginning of the second quarter
of 1999. The Company's Claims reporting system must be corrected to properly
process certain claims prior to January 1, 1999. The Company has identified a
corrective procedure which involves the windowing technique described above
under "Underwriting System." If the Company does not receive a better procedure
from the vendor, the Company will implement its procedure beginning mid-November
1998 and believes it will be fully implemented and tested by December 31, 1998.
TPA SYSTEM. The Company has licensed a third party claims administration
software product that the Company uses for all TPA functions. The Company has
been informed by the vendor that a Year 2000 upgrade to the version used by the
Company will be delivered during the fourth quarter of 1998. The Company has
added some features to the older version of the standard product supplied by the
vendor. The Company is currently evaluating the differences between the features
of the Company's existing version and the upgraded version. The Company is also
evaluating whether to customize the upgraded version in-house or retain the
vendor to perform the customization. The Company expects to complete the
features assessment and make the decision as to which enterprise will perform
the customization by the end of 1998. The Company believes that the
customization, installation and testing of the Year 2000 upgrade will be
completed during the first quarter of 1999 regardless of the party performing
the customization.
NON-IT SYSTEMS. The Company has addressed its primary Year 2000 issues relating
to Non-IT Systems by purchasing a new IBM mainframe computer to run its IT
Systems. The Company intends to purchase a new second mainframe from IBM to
extend the Company's computing capacity during the first quarter of 1999. At
that time, the Company's old IBM mainframe will be relegated to a back-up role.
The Company has obtained satisfactory evidence that the operating system of the
Company's new mainframe computers are Year 2000 compliant from IBM's Internet
website.
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<PAGE>
The Company is beginning to inventory its other Non-IT Systems as part of the
Project. These systems include the Company's personal computer network,
telephone switching equipment and other office equipment. Once these systems are
inventoried, the Company will prioritize the impact of their failure due to Year
2000 issues and then begin testing and correcting to bring them into Year 2000
compliance. The Company expects the inventory and prioritization phases to be
completed by year-end 1998 and corrective action to be completed during the
second quarter of 1999.
The Company does not believe that it is materially exposed to any
Company-specific Non-IT System Year 2000 issues other than those addressed by
purchasing new mainframe computers due to the nature of the Company's business.
The Company has no material property, plant or equipment.
THIRD PARTY YEAR 2000 ISSUES. The Company has begun a process to obtain Year
2000 compliance assurances from third parties with whom the Company has material
trading arrangements, or upon whom the Company relies to a material extent in
its normal operations. These third parties include third party utilization
review companies, third party claims administrators, claims adjudication tool
vendors and others. The Company will endeavor to satisfy itself that each third
party performing important functions for the Company has taken necessary
measures to ensure that their IT and Non-IT Systems will be Year 2000 compliant
in a timely manner. To the extent that the Company concludes this not to be
possible, the Company will either change to new third party suppliers or assist
the existing third parties' compliance efforts with staff, financial assistance
or outsourcing alternatives. The Company cannot project the cost of such
assistance at this time. The Company's priorities in addressing third party
compliance are those third parties who assist the Company with policy issuance,
policy maintenance and claims adjudication.
COSTS. The total cost associated with required program modifications, software
upgrades and equipment purchases to become Year 2000 compliant is not expected
to be material to the Company's financial position, results of operations or
cash flows. The Company's total budget for its Year 2000 compliance program,
which began in 1997, is $875,000. This estimate does not include the Company's
potential share of Year 2000 costs that may be incurred by the Company's trading
partners which the Company may choose to bear to increase the likelihood of
their timely Year 2000 compliance.
Of the total budget amount, $80,000 was spent in 1997, $175,000 has been
spent in 1998 through September 30, 1998, $155,000 is expected to be spent in
the fourth quarter of 1998 and $465,000 will be spent during 1999.
Approximately $105,000 of the expenditures through September 30, 1998 have
been for new hardware, $50,000 has been spent to support Parker's start-up of
Agency IT system operations, $30,000 has been spent on the Underwriting
system windowing project, and $70,000 has been spent on all other aspects of
the Project. The costs associated with the Company's new Underwriting System
are not included in the Year 2000 budget. The Company is utilizing cash flow
from operations to fund its Year 2000 budget needs.
CONTINGENCIES. The Company is currently reviewing its alternatives in the
event that it is not able to complete its Year 2000 compliance plans in a
timely manner. These alternatives include, without limitation, purchasing
third party insurance company software packages, acceleration of the
construction of the Company's new Underwriting system and outsourcing the
non-compliant Company functions to third parties. Each of these alternatives
is less advantageous to the Company than its current Year 2000 compliance
plan and, if required, could have a material adverse effect on the Company's
financial position, results of operations or cash flows.
15
<PAGE>
RISKS. The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, financial condition and cash flow. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, financial condition or cash flows. The Company believes the Project
will significantly reduce the Company's level of uncertainty about the Year 2000
problem.
CONSULTANTS. The Company has not used the services of independent Year 2000
consultants to assess its IT System and Non-IT System needs, although the
Company is utilizing the services of independent consultants in its Underwriting
System windowing project and in constructing its new Underwriting system.
FORWARD-LOOKING STATEMENTS
The discussions above contain statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
The words "believe," "estimate," "expect," "intend," "anticipate," and similar
expressions and variations thereof identify certain of such forward-looking
statements, which speak only as of the dates on which they are made. PAULA
Financial undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future
events, or otherwise. Readers are cautioned that any such forward-looking
statements are no guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
indicated in the forward-looking statements as a result of various factors.
Readers are cautioned not to place undue reliance on these forward-looking
statements.
16
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PART II. OTHER INFORMATION
Item 2: Changes in Use of Proceeds.
In August 1998, the Company contributed $8.2 million of initial public
offering proceeds to PICO to support underwriting activities. An additional
$3.7 million of initial public offering proceeds was contributed to PICO in
September 1998. As of September 30, 1998 all initial public offering proceeds
had been utilized for the purposes intended.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits.
3.2 Certificate of Designations of Series B Junior
Participating Cumulative Preferred Stock of PAULA
Financial.
4.2 Specimen certificate for Common Stock, par value $.01
per share, including legend evidencing attached Stock
Purchase Rights.
10.18 Sixth Amendment, dated May 11, 1998, and Seventh
Amendment, dated September 17, 1998, to the Company's
Lease for its Pasadena, California office dated
January 1, 1989, as amended and as assigned to date,
between LACERA Gateway Property, Inc., as lessor and
PAULA Insurance Company, as lessee.
10.19 Endorsement 8, dated March 9, 1998, and Endorsement
9, dated August 28, 1998, to Agreement of Reinsurance
No. 7448 dated February 16, 1990, as amended and
endorsed to date, between General Reinsurance
Corporation and PAULA Insurance Company.
11. Computation of Earnings Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1998, the Company filed
a report on Form 8-K dated September 24, 1998 relating to the
adoption of the Company's Stockholder Rights Plan.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: November 12, 1998 PAULA FINANCIAL
By: /s/ James A. Nicholson
--------------------------------------
Senior Vice President and Chief Financial
Officer
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<PAGE>
CERTIFICATE OF DESIGNATIONS
OF
SERIES B JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
OF
PAULA FINANCIAL
(Pursuant to Section 151 of the Delaware General Corporation Law)
<PAGE>
PAULA Financial, a Delaware corporation (the "Company"), hereby certifies
that the following resolution was adopted by the Board of Directors of the
Company as required by Section 151 of the General Corporation Law at a meeting
duly called and held on September 24, 1998.
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Company (the "Board of Directors" or the "Board") in
accordance with the provisions of the Certificate of Incorporation, the Board of
Directors hereby creates a series of preferred stock of the Company and hereby
states the designation and number of shares, and fixes the relative rights,
preferences and limitations thereof as follows:
SERIES B JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series B Junior Participating Cumulative Preferred Stock" (the
"Series B Preferred Stock") and the number of shares constituting the Series B
Preferred Stock shall be 63,339. Such number of shares may be increased or
decreased by resolution of the Board of Directors; PROVIDED, HOWEVER, that no
decrease shall reduce the number of shares of Series B Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Company convertible into Series B Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
B Preferred Stock with respect to dividends, the holders of shares of Series B
Preferred Stock, in preference to the holders of shares of Common Stock, par
value $0.01 per share (the "Common Stock"), of the Company, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June, September and
December in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series B Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (i) $.25 per share ($1.00 per annum) or (ii) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share amount of
all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series B Preferred Stock. In the event the
Company shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser
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<PAGE>
number of shares of Common Stock, then in each such event the amount to which
the holder of each share of Series B Preferred Stock was entitled immediately
prior to such event under clause (ii) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Company shall declare a dividend or distribution on the Series B
Preferred Stock as provided in paragraph (a) of this Section 2 immediately after
it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); PROVIDED, HOWEVER, that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.25 per share ($1.00
per annum) on the Series B Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series B Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which event dividends on such shares shall begin to accrue from the
date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Series B Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall cumulate
but shall not bear interest. Dividends paid on the shares of Series B Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares of
Series B Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series B Preferred
Stock shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
share of Series B Preferred Stock shall entitle the holder thereof to one
hundred (100) votes on all matters submitted to a vote of the stockholders of
the Company.
(b) Except as otherwise provided herein, in the Certificate of
Incorporation, in any other Certificate of Designations creating a series of
preferred stock or any similar stock or by law, the holders of shares of Series
B Preferred Stock and the holders of shares of Common Stock and any other
capital stock of the Company having general voting rights shall vote together as
one class on all matters submitted to a vote of stockholders of the Company.
2
<PAGE>
(c) Except as set forth herein, or as otherwise provided by law, holders
of Series B Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. CERTAIN RESTRICTIONS.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series B Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series B Preferred Stock outstanding shall have
been paid in full, the Company shall not, directly or indirectly:
(i) declare or pay dividends on, or make any other distributions
with respect to any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series B Preferred Stock;
(ii) declare or pay dividends on, or make any other distributions
with respect to any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series B Preferred
Stock, except dividends paid ratably on the Series B Preferred Stock and all
such parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series B Preferred Stock, provided that the
Company may at any time redeem, purchase or otherwise acquire shares of any such
junior stock in exchange for shares of any stock of the Company ranking junior
(either as to dividends or upon dissolution, liquidation or winding up) to the
Series B Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series B Preferred Stock, or any shares of stock ranking on a parity
with the Series B Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective Series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(b) The Company shall not permit any subsidiary of the Company to purchase
or otherwise acquire for consideration, directly or indirectly, any shares of
stock of the Company unless the Company could, under paragraph (a) of this
Section 4, purchase or otherwise acquire such shares at such time and in such
manner.
Section 5. REACQUIRED SHARES. Any shares of Series B Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of preferred
stock and may be reissued as part of a new series of
3
<PAGE>
preferred stock subject to the conditions and restrictions on issuance set forth
herein, in the Certificate of Incorporation, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the Company, no distribution shall be made to: (i)
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Preferred Stock unless,
prior thereto, the holders of shares of Series B Preferred Stock shall have
received the greater of (A) $1.00 per share ($.01 per one one-hundredth of a
share), plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, or (B) an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to 100 times the aggregate amount to be distributed per share
to holders of shares of Common Stock; or (ii) the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series B Preferred Stock, except distributions made ratably
on the Series B Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.
In the event the Company shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such event the aggregate amount to which each holder of a share of Series B
Preferred Stock was entitled immediately prior to such event under the proviso
in clause (i) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event, and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 7. CONSOLIDATION, MERGER OR OTHER. In the event the Company shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, or otherwise changed, then in any
such event each share of Series B Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the aggregate
amount of stock, securities, cash and/or any other property (payable in kind),
as the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Company shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such event the amount set forth in the preceding sentence with respect
to the exchange or change of shares of Series B Preferred Stock shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event, and
4
<PAGE>
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. NO REDEMPTION. The shares of Series B Preferred Stock shall
not be redeemable.
Section 9. RANK. The Series B Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Company's preferred stock whether issued before or after
the issuance of the Series B Preferred Stock.
Section 10. AMENDMENT. The Certificate of Incorporation of the Company
shall not be amended in any manner that would materially alter or change the
powers, preferences or special rights of the Series B Preferred Stock without
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of Series B Preferred Stock, voting together as a single class.
IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Company by a Senior Vice President of the Company this 28th day of
September, 1998.
By: /s/ Bradley K. Serwin
-----------------------
Name: Bradley K. Serwin
Title: Senior Vice President
5
<PAGE>
FRONT
COMMON STOCK [LOGO] COMMON STOCK
PF PAULA FINANCIAL
[GRAPHIC] [GRAPHIC]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 703588 10 3
THIS CERTIFIES THAT
SPECIMEN
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
PAULA FINANCIAL
CERTIFICATE OF STOCK
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered
by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
[ILLEGIBLE] [SEAL] [ILLEGIBLE]
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
BACK
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of stock of
the Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made
to the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -................... Custodian..................
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act............................................
in common (State)
UNIF TRF MIN ACT -.............. Custodian (until age..).........
(Cust)
........... under Uniform Transfers
(Minor)
to Minors Act..................................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
---------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares of the common stock represented by the within Certificate, and do hereby
- -------------------------------------------------------------------------------
irrevocably constitute and appoint
- -------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named
- -------------------------------------------------------------------------------
Corporation with full power of substitution in the premises.
Dated
----------------------
X
------------------------------------------
X
------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
-----------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
This certificate also represents Rights that entitle the holder hereof
to certain rights as set forth in a Rights Agreement dated as of October 1,
1998 by and between the Corporation and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent (as it may be amended from time to time, the "Rights
Agreement"), the terms and conditions of which are hereby incorporated herein
by reference and a copy of which is on file at the principal executive
offices of the Corporation.
Under certain circumstances specified in the Rights Agreement, such
Rights will be represented by separate certificates and will no longer be
represented by this certificate. Under certain circumstances specified in
the Rights Agreement, Rights beneficially owned by certain persons may become
null and void. The Corporation will mail to the holder of this certificate a
copy of the Rights Agreement without charge promptly following receipt of a
written request therefor.
<PAGE>
SIXTH AMENDMENT TO GATEWAY
PLAZA OFFICE BUILDING LEASE
THIS SIXTH AMENDMENT to GATEWAY PLAZA Office Building lease ("Amendment")
is made as of the 11th day of May, 1998, by and between LACERA Gateway Property,
Inc., a California corporation ("Landlord") and PAULA INSURANCE COMPANY, a
California corporation ("Tenant").
RECITALS
A. Landlord's predecessor-in-interest, PASADENA GATEWAY PLAZA, a
California limited partnership and Tenant's predecessor-in-interest PAN AMERICAN
UNDERWRITERS, INC., a Nevada corporation, entered into that certain Gateway
Plaza Office Lease (the "Original Lease") dated January 1, 1989, pursuant to
which Tenant's predecessor-in-interest leased from Landlord's
predecessor-in-interest approximately 28,862 rentable square feet (the "Original
Premises") on the second and third floors of that certain office building (the
"Building") located at 300 North Lake Avenue, Pasadena, California 91101.
B. Landlord's predecessor-in-interest and Tenant's
predecessor-in-interest entered into that certain Lease Amendment to Gateway
Plaza Office Lease, dated September 28, 1989 (the "First Amendment"), pursuant
to which Article 2.2(a) of the Original Lease was modified to reflect the
addition of 1,255 rentable square feet, located on the second floor of the
Building, to the Original Premises (such additional space plus the Original
Premises to be collectively referred to as the "Expanded Premises").
C. PAN AMERICAN UNDERWRITERS, INC's right, title and interest under the
Original Lease, as amended by the First Amendment, was assigned to Tenant
effective May 1, 1993, in accordance with the provisions set forth in the
attached Gateway Plaza Assignment and Assumption of Lease and Consent (the
"Assignment").
D. Landlord and Tenant entered into that certain Lease Amendment to
Gateway Plaza Office Lease, dated April 27, 1993 (the "Second Amendment"),
pursuant to which Article 28.24 was included to surrender an area on the
second floor containing approximately 4,788 rentable square feet from the
Revised Original Lease (the Expanded Premises less the reduced space to be
collectively referred to as the "Revised Original Premises").
E. Landlord and Tenant entered into that certain Lease Amendment to
Gateway Plaza Office Lease, dated September 15, 1994 (the "Third Amendment"),
pursuant to which Article 1.6 was amended to incorporate an area on the second
floor, commonly referred to as Suite 202, containing approximately 1,405
rentable square feet to the Revised Original Premises (the Revised Original
Premises plus the additional space to be collectively referred to as the
"Revised Premises").
F. Landlord and Tenant entered into that certain Fourth Amendment to
Office Lease dated May 12, 1995 (the "Fourth Amendment") pursuant to which the
Basic Rent for the Premises was modified and certain other modifications were
made to the Lease.
G. Landlord and Tenant entered into that certain Fifth Amendment to
Gateway Plaza Office Building Lease (the "Fifth Amendment") pursuant to which
Tenant leased temporary expansion premises in the Building.
<PAGE>
H. The Original Lease, as amended by the First Amendment, Assignment,
Second Amendment, Third Amendment, Fourth Amendment, and Fifth Amendment, are
hereinafter collectively referred to as the "Lease".
I. Tenant desires, and Landlord has agreed, to lease certain temporary
expansion premises (the "Second Temporary Expansion Area") in the Building.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties, the parties agree as
follows:
1. DEFINED TERMS. Each capitalized term used in this Amendment shall
have the same meaning ascribed to such term in the Lease, except that the
following terms shall have the following meanings:
(a) "Premises" shall mean those spaces commonly known as Suite 200,
Suite 202, Suite 205, Suite 210 and Suite 250 on the second floor and Suite 300
on the third floor, as outlined in the floor plan attached as Exhibit "A" to the
Fourth Amendment.
(b) "Rentable Area of the Premises" shall be deemed to be Suite 200
which contains approximately 3,248 rentable square feet, Suite 202 which
contains approximately 1,405 rentable square feet, Suite 205 which contains
approximately 963 rentable square feet, Suite 210 which contains approximately
2,504 rentable square feet, Suite 250 which contains approximately 3,650
rentable square feet and Suite 300 which contains approximately 22,103 rentable
square feet, thus reflecting a total of approximately 33,873 rentable square
feet.
(c) "Tenant's Share" for the Premises shall be deemed to be 11.44%.
2. LEASE OF SECOND TEMPORARY EXPANSION AREA. Tenant hereby agrees to
lease from Landlord and Landlord agrees to lease to Tenant certain expansion
area in the Building commonly know as Suite 204 and comprised of approximately
1,121 rentable square feet (the "Second Temporary Expansion Area") as shown as
the cross-hatched area on Exhibit "A" attached hereto.
3. TEMPORARY EXPANSION AREA LEASE TERM. The lease term for the Second
Temporary Expansion Area (the "Second Temporary Term") shall commence May 15,
1998 (the "Second Commencement Date") if Tenant shall execute and deliver to
Landlord this Amendment no later than May 8, 1998. The Second Commencement Date
shall be delayed one (1) day for each day past May 8, 1998 that Tenant shall not
deliver the Tenant-executed Amendment to Landlord. The expiration date of the
Second Temporary Term (the "Second Expiration Date") shall be April 30, 1999,
unless sooner terminated pursuant to the terms of the Lease, as amended hereby.
4. BASIC RENT FOR SECOND TEMPORARY EXPANSION AREA. (a) The Basic Rent
for the Second Temporary Expansion Area shall be $2,410.15 per month,
pro-rated for any partial month's tenancy, (b) The first installment of Basic
Rent for the Second Temporary Expansion Area shall be due and payable on the
commencement date of the Second Temporary Term, with subsequent installments
of Basic Rent applicable to the Second Temporary Expansion Area, due and
payable on the first day of each month thereafter, (c) The Basic Rent for the
Premises is not affected by this Amendment, (d) Tenant confirms that the
Second Temporary Expansion Area will be used for general and administrative
offices and for no other purpose whatsoever, and that no toxic or hazardous
materials will be stored, kept or used in the Second Temporary Expansion
Area, (e) "Tenant's Share" for the Second Temporary Expansion
<PAGE>
Area shall be 0.40%, (f) The Base Year for determining Tenant's Share of
Operating Expenses and Taxes, as defined in the Original Lease, as amended,
shall be the Calendar Year 1998.
5. CONDITION OF THE SECOND TEMPORARY EXPANSION AREA; IMPROVEMENT
ALLOWANCE. No promises by Landlord to alter, remodel, improve, repair,
redecorate or clean the Second Temporary Expansion Area, or any part thereof,
have been made, and no representation respecting the condition of the Second
Temporary Expansion Area of the Building or with respect to the suitability or
fitness of either for any purpose, has been made to Tenant. Execution of this
Amendment shall service as Tenant's acceptance of the Second Temporary Expansion
Area "As is, with all faults", and Tenant shall not be entitled to receive any
credit, allowance, or other concession from Landlord in respect to the Second
Temporary Expansion Area.
6. BROKERS. Tenant represents that except for Heitman Properties Ltd.,
Tenant has not retained, contracted or dealt with any real estate broker,
salesperson or finder in connection with this Amendment. Tenant shall agree to
indemnify and hold Landlord and Heitman Properties Ltd. Harmless from and
against any and all liabilities and claims for commissions and fees arising out
of a breach of the foregoing representation. Landlord shall be responsible for
the payment of any commissions or fees due to Heitman Properties ltd.
7. PARKING. Tenant shall be granted parking rights for three (3)
additional unreserved parking spaces in Landlord's parking structure at rates
that may be posted or quoted to the public for the parking spaces so
requested.
8. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.
9. AMENDMENTS. Except as modified by this Amendment, the provisions of
the Lease shall remain in the full force and effect.
10. CONFLICT. If any conflict exits between the terms or provisions
of the Lease and the terms or provisions of this Amendment, the terms and
provisions of this Amendment shall govern and control.
11. SUBMISSION OF INSTRUMENT. The submission of this Amendment by
Landlord to Tenant or its broker or other agent does not constitute an offer
to Tenant to lease the Second Temporary Expansion Area. This Amendment shall
have no force and effect until it is executed and delivered by Tenant to
Landlord and executed by Landlord; provided, however, that upon execution of
this Amendent by Tenant and delivery to Landlord, such execution and delivery
by Tenant shall, in consideration of the time and expense incurred by
Landlord in reviewing the Amendment and proposed use of the Second Temporary
Expansion Area, constitute an offer by Tenant to lease the Second Temporary
Expansion Area upon the terms and conditions set forth herein (which offer to
lease shall be irrevocable for twenty (20) business days following the date
of delivery).
12. EXCULPATION OF LANDLORD AND HEITMAN. Notwithstanding anything to the
contrary contained in this Amendment or in any riders or addenda hereto attached
(collectively the "Lease Document"), it is expressly understood and agreed by
and between the parties that:
(a) The recourse of Tenant or its successors or assigns against Landlord
with respect to the alleged breach by or on the part of landlord of any
representation, warranty, covenant, undertaking or agreement contained in any
of the Lease Documents (collectively, "Landlord's
<PAGE>
Lease Undertakings") shall extend only to Landlord's interest in the real estate
of which the premises are demised under the Lease Documents are a part
("Landlord's Real Estate") and not to any other assets of Landlord or its
constituent partners;
(b) Neither Heitman Capital Management Corporation nor Heitman
Properties Ltd., nor any of their respective directors, officers, employees
or agents shall have any personal liability whatsoever with respect to any
breach by Landlord of any of Landlord's Lease Undertakings; and
(c) Except to the extent of Landlord's interest in Landlord's Real
Estate, no personal liability or personal responsibility of any sort with
respect to any of Landlord's Lease Undertakings is assumed by, or shall at any
time be asserted or enforceable against, Landlord, Heitman Capital Management
Corporation or Heitman Properties Ltd., or against any of their respective
directors, officers, shareholders, employees, agents constituent partners,
beneficiaries, trustees or representatives.
IN WITNESS WHEREOF, the parties have executed this Sixth Amendment to
Gateway Plaza Office Building Lease as of the day and year first written.
LANDLORD:
LACERA Gateway Property, Inc.,
a California corporation
By: HEITMAN CAPITAL MANAGEMENT CORPORATION,
an Illinois corporation, its agent
By: /s/ [ILLEGIBLE]
-----------------------
Its: VICE PRESIDENT
----------------------
TENANT:
PAULA INSURANCE COMPANY,
a California corporation
By: /s/ [ILLEGIBLE]
-------------------------
Its: Chief Financial Officer
------------------------
By: /s/ Bradley K. Serwin
-------------------------
Its: Secretary
------------------------
<PAGE>
SEVENTH AMENDMENT TO GATEWAY
PLAZA OFFICE BUILDING LEASE
THIS SEVENTH AMENDMENT to GATEWAY PLAZA Office Building Lease
("Amendment") is made as of the 17th day of September, 1998, by and between
LACERA Gateway Property, Inc., a California corporation ("Landlord") and
PAULA INSURANCE COMPANY, a California corporation ("Tenant").
RECITALS
A. Landlord's predecessor-in-interest, PASADENA GATEWAY PLAZA, a
California limited partnership and Tenant's predecessor-in-interest PAN
AMERICAN UNDERWRITERS, INC., a Nevada corporation, entered into that certain
Gateway Plaza Office Lease (the "Original Lease") dated January 1, 1989,
pursuant to which Tenant's predecessor-in-interest leased from Landlord's
predecessor-in-interest approximately 28,862 rentable square feet (the
"Original Premises") on the second and third floors of that certain office
building (the "Building") located at 300 North Lake Avenue, Pasadena,
California 91101.
B. Landlord's predecessor-in-interest and Tenant's
predecessor-in-interest entered into that certain Lease Amendment to Gateway
Plaza Office Lease, dated September 28, 1989 (the "First Amendment"),
pursuant to which Article 2.2(a) of the Original Lease was modified to
reflect the addition of 1,255 rentable square feet, located on the second
floor of the Building, to the Original Premises.
C. PAN AMERICAN UNDERWRITERS, INC's right, title and interest under the
Original Lease, as amended by the First Amendment, was assigned to Tenant
effective May 1, 1993, in accordance with the provisions set forth in that
certain Gateway Plaza Assignment and Assumption of Lease and Consent (the
"Assignment").
D. Landlord and Tenant entered into that certain Lease Amendment to
Gateway Plaza Office Lease, dated April 27, 1993 (the "Second Amendment"),
pursuant to which Article 28.24 was included to surrender an area on the
second floor, containing approximately 4,766 rentable square feet, from the
Original Lease, as amended.
E. Landlord and Tenant entered into that certain Lease Amendment to
Gateway Plaza Office Lease, dated September 16, 1994 (the "Third Amendment"),
pursuant to which Article 1.6 was amended to incorporate into the Original
Lease, as amended, an area on the second floor, commonly referred to as Suite
202, containing approximately 1,405 rentable square feet.
F. Landlord and Tenant entered into that certain Fourth Amendment to
Office Lease dated May 12, 1995 (the "Fourth Amendment") pursuant to which
the Basic Rent in the Original Lease, as amended, was modified, and certain
other modifications were made to the Original Lease, as amended.
G. Landlord and Tenant entered into that certain Fifth Amendment to
Gateway Plaza Office Building Lease (the "Fifth Amendment") pursuant to which
Tenant leased temporary expansion premises in the Building.
Page 1 of 5
<PAGE>
H. Landlord and Tenant entered into that certain Sixth Amendment to
Gateway Plaza Office Building Lease (the "Sixth Amendment") pursuant to which
Tenant leased temporary expansion premises (the "Second Temporary Expansion
Area") in the Building.
I. The Original Lease, as amended by the First Amendment, Assignment,
Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment and
Sixth Amendment is hereinafter collectively referred to as the "Lease".
J. Tenant desires, and Landlord has agreed, to (i) lease certain
temporary expansion premises (the "Third Temporary Expansion Area") in the
Building; (ii) extend the term of the Lease an additional 12 months (the
"Twelve Month Extension Of Lease Term"); and (iii) adjust the Basic Rent
provision of the Lease (the "Basic Rent Adjustment").
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties
agree as follows:
1. LEASE OF THIRD TEMPORARY EXPANSION AREA. Tenant hereby agrees to
lease from Landlord and Landlord agrees to lease to Tenant certain expansion
area in the Building commonly known as Suite 206 and comprised of
approximately 1,706 rentable square feet (the "Third Temporary Expansion
Area") as shown as the cross-hatched area on Exhibit "A" attached hereto;
provided however, if Tenant does not execute and deliver to Landlord this
Amendment by September 14, 1998, this Amendment shall be null and void and
shall have no further force and effect.
2. DEFINED TERMS. Each capitalized term used in this Amendment shall
have the same meaning ascribed to such term in the Lease, except that the
following terms shall have the following meanings:
(a) "Main Premises" shall mean the Premises less the Third
Temporary Expansion Area.
(b) "Premises" shall mean those spaces commonly known as Suite 200,
Suite 202, Suite 204, Suite 205, Suite 206, Suite 210 and Suite 250 on the
second floor and Suite 300 on the third floor, as outlined in the floor plans
attached as exhibit "A" and exhibit "A-1".
(c) "Rentable Area of the Premises" shall be deemed to be: Suite 200
which contains approximately 3,248 rentable square feet, Suite 202 which
contains approximately 1,405 rentable square feet, Suite 204 which contains
approximately 1,121 rentable square feet, Suite 205 which contains
approximately 963 rentable square feet, Suite 206 which contains
approximately 1,706 rentable square feet, Suite 210 which contains
approximately 2,504 rentable square feet, Suite 250 which contains
approximately 3,650 rentable square feet and Suite 300 which contains
approximately 22,103 rentable square feet, thus reflecting a total of
approximately 36,700 rentable square feet.
(d) "Tenant's Share" for the Main Premises shall be deemed to be
11.84%.
Page 2 of 5
<PAGE>
3. TEMPORARY EXPANSION AREA LEASE TERM. The lease term for the Third
Temporary Expansion Area (the "Third Temporary Term") shall commence
September 15, 1998 (the "Third Commencement Date") and shall expire on April
30, 1999 (the "Third Temporary Term Expiration Date"), unless sooner
terminated pursuant to the terms of the Lease, as amended hereby.
4. BASIC RENT AND OTHER CHARGES FOR THE THIRD TEMPORARY EXPANSION
AREA. (a) The Basic Rent for the Third Temporary Expansion Area shall be
$3,667.90 per month, pro-rated for any partial month's tenancy. (b) The first
installment of Basic Rent for the Third Temporary Expansion Area shall be due
and payable on or before the Third Commencement Date, with subsequent monthly
installments of Basic Rent for the Third Temporary Expansion Area due and
payable on or before the first day of each month thereafter. (c) The Basic
Rent for the Main Premises shall not be affected by the addition of the Third
Temporary Expansion Area. (d) "Tenant's Share" for the Third Temporary
Expansion Area shall be 0.60%. (e) The Base Year for the Third Temporary
Expansion Area for determining Tenant's Share of Operating Expenses and Taxes
(as defined in the Original Lease, as amended) for the Third Temporary
Expansion Area shall be the Calendar Year 1998.
5. USE. Tenant confirms that the Third Temporary Expansion Area will
be used for general and administrative offices and for no other purpose
whatsoever, and that no toxic or hazardous materials will be stored, kept or
used in the Third Temporary Expansion Area.
6. CONDITION OF THE THIRD TEMPORARY EXPANSION AREA; IMPROVEMENT
ALLOWANCE. No promises by Landlord to alter, remodel, improve, repair,
redecorate or clean the Third Temporary Expansion Area, or any part thereof,
have been made, and no representation or warranty respecting the condition of
the Third Temporary Expansion Area or Building, or with respect to the
suitability or fitness of either for any purpose, has been made to Tenant.
Execution of this Amendment shall serve as Tenant's acceptance of the Third
Temporary Expansion Area "As Is, with all faults", and Tenant shall not be
entitled to receive any credit, allowance, or other concession from Landlord
in respect to the Third Temporary Expansion Area.
7. TWELVE MONTH EXTENSION OF LEASE TERM. Article 1.5 of the Lease shall
be amended as follows: Effective May 1, 1999 the phrase "Lease Term" shall
mean the term of this Lease, with respect to the Premises (including the
Third Temporary Expansion Area) which shall be a period of twelve months,
commencing on May 1, 1999 unless the Lease Term is terminated earlier
pursuant to any of the provisions of this Lease or pursuant to law.
8. BASIC RENT ADJUSTMENT. Effective May 1, 1999 Article 1.6 of the
Lease shall be deleted in its entirety and replaced with the following:
Commencing May 1, 1999 through and including April 30, 2000 the Basic Rent
for the Premises (including the Third Temporary Expansion Area) shall be
Seventy-eight thousand nine hundred and five dollars ($78,905.00), per month.
9. BROKERS. Tenant represents that except for Heitman Properties Ltd
and CB Richard Ellis, Tenant has not retained, contracted or dealt with any
real estate broker, salesperson or finder in connection with this Amendment.
Tenant shall agree to indemnify and hold Landlord and Heitman Properties Ltd.
harmless from and against any and all liabilities and claims for commissions
and fees arising out of a breach of the foregoing representation. Landlord
shall be
Page 3 of 5
<PAGE>
responsible for the payment of any commissions or fees due to Heitman
Properties Ltd. and CB Richard Ellis.
10. PARKING. Tenant shall be granted parking rights for four (4)
additional unreserved parking spaces in Landlord's parking structure at rates
that may be posted or quoted to the public from time to time to be rented at
Tenants option.
11. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.
12. AMENDMENTS. Except as modified by this Amendment, the provisions of
the Lease shall remain in full force and effect.
13. CONFLICT. If any conflict exists between the terms or provisions of
the Lease and the terms or provisions of this Amendment, the terms and
provisions of this Amendment shall govern and control.
14. SUBMISSION OF INSTRUMENT. The submission of this Amendment by
Landlord to Tenant or its broker or other agent does not constitute an offer
to Tenant to lease the Third Temporary Expansion Area. This Amendment shall
have no force and effect until it is executed and delivered by Tenant to
Landlord and executed by Landlord; provided, however, that upon execution of
this Amendment by Tenant and delivery to Landlord, such execution and
delivery by Tenant shall, in consideration of the time and expense incurred
by Landlord in reviewing the Amendment and proposed use of the Third
Temporary Expansion Area, constitute an offer by Tenant to lease the Third
Temporary Expansion Area upon the terms and conditions set forth herein
(which offer to lease shall be irrevocable for twenty (20) business days
following the date of delivery).
15. EXCULPATION OF LANDLORD AND HEITMAN. Notwithstanding anything to the
contrary contained in the Lease, this Amendment or in any riders or addenda
attached thereto (collectively the "Amended Lease Documents"), it is
expressly understood and agreed by and between the parties that:
(a) The recourse of Tenant or its successors or assigns against Landlord
with respect to the alleged breach by or on the part of Landlord of any
representation, warranty, covenant, undertaking or agreement contained in any
of the Amended Lease Documents (collectively, "Landlord's Lease
Undertakings") shall extend only to Landlord's interest in the real estate of
which the Premises are a part ("Landlord's Real Estate") and not to any other
assets of Landlord or its constituent partners;
(b) Neither Heitman Properties Ltd., nor any of their respective
directors, officers, employees or agents shall have any personal liability
whatsoever with respect to any breach by Landlord of any of Landlord's Lease
Undertakings; and
(c) Except to the extent of Landlord's interest in Landlord's Real
Estate, no personal liability or personal responsibility of any sort with
respect to any of Landlord's Lease Undertakings is assumed by, or shall at any
time be asserted or enforceable against, Landlord, or Heitman Properties
Ltd., or against any of their respective directors, officers, shareholders,
employees, agents constituent partners, beneficiaries, trustees or
representatives.
Page 4 of 5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Seventh Amendment to
Gateway Plaza Office Building Lease as of the day and year first written.
LANDLORD: TENANT:
LACERA Gateway Property, Inc., PAULA INSURANCE COMPANY,
a California corporation a California corporation
By: /s/ David L. Muir By: /s/ [ILLEGIBLE]
------------------------- --------------------------
Its: DAVID L. MUIR Its: Sr. V.P./C.F.O.
VICE PRESIDENT --------------------------
& GENERAL COUNSEL By: /s/ Bradley K. Serwin
------------------------- --------------------------
Its: Sr. V.P.
--------------------------
Page 5 of 5
<PAGE>
ENDORSEMENT NO. 8
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
IT IS MUTUALLY AGREED that, only as respects reports rendered for the
months of January, 1998 through October, 1998, paragraph (a) of Section 6 -
REPORTS AND REMITTANCES of Exhibit A is amended to read:
"(a) REINSURANCE PREMIUM
Within 25 days after the close of each month, the Company shall render
to the Reinsurer a report of the reinsurance premium by state for the
month. The Company shall deduct $5,000 from the First Excess
reinsurance premium and the remaining amount due the Reinsurer shall
be remitted within 60 days after the close of the month."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be
executed in duplicate this 9th day of March, 1998.
GENERAL REINSURANCE CORPORATION
/s/ Anthony J. Auastanio
Vice President
Attest: /s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin /s/ [ILLEGIBLE]
Please return this copy to
GENERAL REINSURANCE CORPORATION
after Execution.
GENERAL REINSURANCE CORPORATION
<PAGE>
ENDORSEMENT NO. 9
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7448
between
GENERAL REINSURANCE CORPORATION
and
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
IT IS MUTUALLY AGREED that, as respects new and renewal policies of the
Company becoming effective at and after 12:01 a.m., July 1, 1998, and policies
of the Company in force at 12:01 a.m., July 1, 1998, this Agreement is amended
as follows:
I - Section 4 of Exhibit A is amended to read as follows:
"SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer:
(a) For the First Excess Cover, a net rate of 0.39% of the Company's
earned premium for Workers' Compensation and Employers' Liability
Business;
(b) For the Second Excess Cover, a net rate of 1.19% of the Company's
earned premium for Workers' Compensation and Employers' Liability
Business."
II - Section 11 is added to Exhibit A as follows:
"SECTION 11 - ANNUAL AGGREGATE DEDUCTIBLE
In addition to the Company Retention set forth in the section entitled
LIABILITY OF THE REINSURER, the Company shall retain, as respects all accidents
taking place during each Annual Period that this Exhibit is in force, an annual
aggregate deductible equal to $2,000,000.
GENERAL REINSURANCE CORPORATION
<PAGE>
Such annual aggregate deductible shall be comprised of that portion of each
net loss and proportionate adjustment expense under this Exhibit which is in
excess of the Company Retention, but not exceeding the limit of the First Excess
Cover. The Reinsurer shall not be liable for net loss nor adjustment expense
which is within the First Excess Cover until such deductible is satisfied.
The term "Annual Period" shall mean each twelve month period commencing on
July 1."
III - Section 4 of Exhibit B is amended to read as follows:
"SECTION 4 - REINSURANCE PREMIUM
The Company shall pay to the Reinsurer 0.40% of the Company's earned
premium for Workers' Compensation and Employers' Liability Business."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be
executed in duplicate this 28th day of August, 1998.
GENERAL REINSURANCE CORPORATION
/s/ [ILLEGIBLE]
Vice President
Attest: /s/ [ILLEGIBLE]
PAULA INSURANCE COMPANY
AGRI-COMP INSURANCE COMPANY
Attest: /s/ Bradley K. Serwin /s/ [ILLEGIBLE]
-2-
Endorsement No. 9
Agreement No. 7448
GENERAL REINSURANCE CORPORATION
<PAGE>
Exhibit 11
PAULA FINANCIAL AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $1,271 $1,634 $3,565 ($5,344)
---------- --------- --------- ---------
---------- --------- --------- ---------
Weighted average shares outstanding for calculating
basic earnings per share 1,898,793 6,276,451 1,901,582 6,309,895
Convertible preferred stock 1,882,354 -- 1,882,354 --
Warrants 77,206 -- 60,345 --
Options 339,055 230,203 253,963 --
---------- --------- --------- ---------
Total shares for calculating diluted earnings
per share 4,197,408 6,506,654 4,098,244 6,309,895
---------- --------- --------- ---------
---------- --------- --------- ---------
Basic earnings (loss) per share $ 0.67 $0.26 $1.87 ($0.85)
---------- --------- --------- ---------
---------- --------- --------- ---------
Diluted earnings (loss) per share $ 0.30 $0.25 $0.87 ($0.85)
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
Options are excluded from the calculation of diluted loss per share as the
inclusion of such options would have an anti-dilutive effect.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUN-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<DEBT-HELD-FOR-SALE> 159,122 159,122
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 6,050 6,050
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 170,621 170,621
<CASH> 8,884 8,884
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 2,909 2,909
<TOTAL-ASSETS> 236,767 236,767
<POLICY-LOSSES> 124,826 124,826
<UNEARNED-PREMIUMS> 22,764 22,764
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 253 253
<NOTES-PAYABLE> 92 92
0 0
0 0
<COMMON> 64 64
<OTHER-SE> 76,452 76,452
<TOTAL-LIABILITY-AND-EQUITY> 236,767 236,767
40,783 106,012
<INVESTMENT-INCOME> 2,437 6,610
<INVESTMENT-GAINS> 1,784 1,731
<OTHER-INCOME> 1,091 3,081
<BENEFITS> 32,997 96,531
<UNDERWRITING-AMORTIZATION> 10,954 29,507
<UNDERWRITING-OTHER> 87 594
<INCOME-PRETAX> 2,057 (9,198)
<INCOME-TAX> 423 (3,854)
<INCOME-CONTINUING> 1,634 (5,344)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,634 (5,344)
<EPS-PRIMARY> 0.26 (0.85)
<EPS-DILUTED> 0.25 (0.85)
<RESERVE-OPEN> 102,316 71,390
<PROVISION-CURRENT> 32,849 89,692
<PROVISION-PRIOR> 148 6,839
<PAYMENTS-CURRENT> 8,795 20,033
<PAYMENTS-PRIOR> 9,912 31,282
<RESERVE-CLOSE> 116,606 116,606
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
