<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
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 JUNE 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 June 30, 1998:
6,337,815 shares.
<PAGE>
PAULA FINANCIAL
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets as of
December 31, 1997 and June 30, 1998 (unaudited) .......................... 2
Condensed consolidated statements of operations for the three and six
months ended June 30, 1997 and 1998 (unaudited)........................... 3
Condensed consolidated statements of comprehensive income (loss) for
the three and six months ended June 30, 1997 and 1998 (unaudited)......... 4
Condensed consolidated statements of cash flows for the six months
ended June 30, 1997 and 1998 (unaudited).................................. 5
Notes to condensed consolidated financial statements for the three and
six months ended June 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 4. Submission of Matters to a Vote of Security Holders .............. 13
Item 6. Exhibits and Reports on Form 8-K.................................. 13
SIGNATURE............................................................................. 14
</TABLE>
<PAGE>
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, June 30,
ASSETS 1997 1998
------------ -----------
(*) (Unaudited)
<S> <C> <C>
Investments:
Fixed maturities, available for sale, at market
(amortized cost: 1997, $112,294; 1998, $138,935) $114,525 $141,029
Equity securities, at market
Preferred stock (cost: 1997, $3,019; 1998, $7,204) 3,112 7,536
Common stock (cost: 1997, $5,546; 1998, $5,546) 5,545 5,549
Invested cash, at cost (approximates market) 14,682 7,927
-------- --------
Total investments 137,864 162,041
-------- --------
Cash (restricted: 1997, $1,491; 1998, $1,654) 4,770 1,848
Accounts receivable, net of allowance for uncollectible
accounts (1997, $600; 1998, $607) 24,320 32,355
Reinsurance recoverable on paid and unpaid losses and
loss adjustment expenses 6,394 7,844
Deferred income taxes 3,247 5,872
Other assets 11,669 13,902
-------- --------
$188,264 $223,862
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 77,784 $110,161
Unearned premiums 15,390 25,509
Accrued policyholder dividends - 165
Accounts payable and accrued expenses 9,814 10,272
Notes payable 456 139
-------- --------
103,444 146,246
-------- --------
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 and outstanding:
1997, 6,321,177; 1998, 6,337,815) 63 64
Additional paid-in-capital 67,176 67,386
Retained earnings 16,048 8,563
Accumulated other comprehensive income:
Net unrealized gain on investments 1,533 1,603
-------- --------
84,820 77,616
-------- --------
$188,264 $223,862
-------- --------
-------- --------
</TABLE>
* Derived from audited financial statements.
See notes to condensed consolidated financial statements.
2
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1998 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INCOME:
Premiums earned:
Workers' compensation $23,893 $37,041 $41,303 $64,861
Group medical and life 249 194 475 369
Commissions 782 913 1,716 1,630
Net investment income 1,282 2,119 2,499 4,173
Net realized investment losses - (83) - (53)
Other 198 161 347 360
--------- ---------- ---------- ----------
26,404 40,345 46,340 71,340
--------- ---------- ---------- ----------
EXPENSES:
Losses and loss adjustment
expenses incurred 16,999 42,736 28,447 63,534
Dividends provided for policyholders (202) 84 309 507
Operating 7,935 9,922 14,752 18,554
--------- ---------- ---------- ----------
24,732 52,742 43,508 82,595
--------- ---------- ---------- ----------
Income (loss) before income taxes 1,672 (12,397) 2,832 (11,255)
Income tax expense (benefit) 294 (4,396) 538 (4,277)
--------- ---------- ---------- ----------
NET INCOME (LOSS) $1,378 $(8,001) $2,294 $(6,978)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Earnings (loss) per share $0.72 $(1.26) $1.21 $(1.10)
Weighed average shares outstanding 1,902,077 6,331,285 1,903,000 6,326,894
Earnings (loss) per share - assuming dilution $0.34 $(1.26) $0.56 $(1.10)
Weighted average shares outstanding -
assuming dilution 4,098,739 6,331,285 4,099,662 6,326,894
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1998 1997 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $1,378 ($8,001) $2,294 ($6,978)
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains
arising during period (tax impact:
1997: $308 and $43; 1998: $14 and $45) 598 27 84 86
Reclassifications adjustment for gains
(losses) included in net income (tax
impact: 1997: $0 and $0; 1998:
$0 and $9) - - - (16)
--------- ---------- ---------- ----------
598 27 84 70
--------- ---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $1,976 ($7,974) $2,378 ($6,908)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1998
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,294 ($6,978)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 621 684
Amortization of fixed maturity premium, net 326 440
Loss on sale of property and equipment 13 4
Loss on sales and calls of investments - 53
Increase in accounts receivable (9,495) (10,383)
(Increase) decrease in deferred income taxes 757 (2,661)
Increase in unpaid losses and loss adjustment expenses 9,252 32,377
Increase (decrease) in accrued policyholder dividends (395) 165
Increase in accounts payable and accrued expenses 2,649 458
Increase in unearned premiums 2,709 10,119
Other, net (637) (1,167)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,094 23,111
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for sale fixed maturities - 3,787
Proceeds from maturities and calls of available for sale
fixed maturities 4,494 2,920
Proceeds from sale of property and equipment (29) 19
Purchase of preferred and common stocks (2,183) (4,231)
Purchase of available for sale fixed maturities (10,152) (33,795)
Purchase of property and equipment (588) (870)
Purchase of insurance agency (20) -
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,478) (32,170)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreement, net 1,871 -
Payments on notes payable (1,682) (317)
Dividends paid - (507)
Exercise of stock options - 206
Sale of common stock 14 -
Retirement of common stock (39) -
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 164 (618)
-------- --------
NET DECREASE IN CASH AND INVESTED CASH (220) (9,677)
Cash and invested cash at beginning of period 10,707 19,452
-------- --------
CASH AND INVESTED CASH AT END OF PERIOD $10,487 $9,775
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 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 and New Mexico.
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 six months ended June 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
<PAGE>
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 June 30, 1998 and
1997, were $38.8 million and $23.4 million, respectively. Premiums written
for the six months ended June 30, 1998 and 1997, were $77.8 million and $45.9
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 excess of loss 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
<PAGE>
RESULTS OF OPERATIONS:
PREMIUMS WRITTEN. The Company's premiums written for the three months ended
June 30, 1998 increased 66.1% to $38.8 million from $23.4 million for the
comparable 1997 period. The Company's premiums written for the six months
ended June 30, 1998 increased 69.6% to $77.8 million from $45.9 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 is particularly strong in
California and Texas.
PREMIUMS EARNED. For the reasons described above for premiums written, the
Company's premiums earned for the three months ended June 30, 1998 increased
54.2% to $37.2 million from $24.1 million for comparable 1997 period and
increased 56.1% to $65.2 million for the six months ended June 30, 1998 from
$41.8 million for comparable 1997 period.
COMMISSION INCOME. Commission income has remained consistent with the 1997
periods. For the three months ended June 30, 1998 commission income was $0.9
million compared to $0.8 million for the comparable 1997 period. Commission
for the six months ended June 30, 1998 was $1.6 million compared to $1.7
million for the comparable 1997 period.
NET INVESTMENT INCOME. Net investment income increased 65.3% to $2.1 million
for the three months ended June 30, 1998 from $1.3 million for the comparable
1997 period. Net investment income increased 67.0% to $4.2 million for the
six months ended June 30, 1998 from $2.5 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 $147.6
million for the six months ended June 30, 1998 from $88.8 million for the
comparable period in 1997. The Company's average yield on its portfolio was
5.7% for the six month period in 1998 and 5.6% for the six month period in
1997.
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED. The Company's loss ratio for
the three months ended June 30, 1998 increased to 114.8% from 70.4% for the
comparable 1997 period. The Company's loss ratio for the six months ended
June 30, 1998 increased to 97.4% from 68.1% for the comparable 1997 period.
The increase in loss ratios from the 1997 periods 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. Of
the total reserve increase, $5.0 million related to the 1997 accident year
with the remaining $9.8 million allocated to 1998.
In the last two quarters the Company has seen reserve development on the 1997
year for California business in excess of its expectations given prior year
reserving trends. The reserve adjustment, expressed as a percentage of 1997
and six months 1998 combined premiums implies a pricing deficiency for the
period. The Company began to address this early in 1998 through rate
increases and non-renewal activity. However, the Company will not begin to
see the benefit from these activities until the latter part of 1998 and 1999.
The reserve strengthening for the 1998 accident year assumes that 1997 trends
also impact 1998, as 1997 effective date policies continue to expire through
the end of this year.
9
<PAGE>
Taking into consideration this reserve strengthening, the Company's 1997
accident year loss ratio for its workers compensation business was 78.9% and
the 1998 accident year loss ratio through June 30, 1998 was 87.3%. The 1997
accident year loss ratio for the workers compensation business at December
31, 1997 was 72.1%.
DIVIDENDS PROVIDED FOR POLICYHOLDERS. With the advent of open rating in
California and an emphasis in most states in which the Company operates on,
among other things, competitive pricing at inception, the Company's dividends
provided for policyholders decreased significantly commencing in late 1995.
Dividends provided for policyholders as a percentage of premiums earned for
the three months ended June 30, 1998 was 0.2%. Because the ratio for the 1997
period includes a reduction in the accrual for prior policy years, a
comparison to the 1998 ratio is not meaningful. Dividends provided for
policyholders as a percentage of premiums earned for the six months ended
June 30, 1998 of 0.8% is consistent with 0.7% 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. The Company does not anticipate
paying significant policyholder dividends in the future.
OPERATING EXPENSES. Operating expenses increased 25.0% to $9.9 million for
the three months ended June 30, 1998 from $7.9 million for the comparable
1997 period primarily due to a $1.5 million increase in commissions paid to
unaffiliated agencies. Operating expenses increased 25.8% to $18.6 million
for the six months ended June 30, 1998 from $14.8 million for the comparable
1997 period largely due to a $3.4 million increase in variable expenses,
principally commissions.
INCOME TAXES. Income tax benefit for the three months ended June 30, 1998 was
$4.4 million compared to an income tax expense of $0.3 million for the
comparable 1997 period. Income tax benefit for the six months ended June 30,
1998 was $4.3 million compared to income tax expense of $0.5 million for the
comparable 1997 period. The effective combined income tax rates for the six
months ended June 30, 1998 and 1997 were (38.0%) and 19.0%, respectively.
These rates vary from the combined statutory rate due to the significant
portion of the Company's investment portfolio consisting of tax-exempt
securities.
NET INCOME (LOSS). Net loss for the three months ended June 30, 1998 was $8.0
million compared to net income of $1.4 million for the comparable 1997
period. Net loss for the six months ended June 30, 1998 was $7.0 million
compared to net income of $2.3 million for the comparable 1997 period. The
net loss in the 1998 periods is 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.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
As a holding company, PAULA Financial's principal sources of funds are
dividends and expense reimbursements from its operating subsidiaries, and
proceeds from the sale of its capital stock. PAULA Financial's principal uses
of funds are capital contributions to its subsidiaries, payment of operating
expenses and dividends to its stockholders.
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 six months ended
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.
The Company previously announced its intention to contribute $11.8 million of
this amount to PICO to support its underwriting activities. The Company will
make this contribution by the end of August 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 eighteen 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 June 30, 1998, no amounts were outstanding under this facility.
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. 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.
As of June 30, 1998, the carrying value of the Company's fixed maturity
securities portfolio was $141.0 million of which $131.5 million was rated. Of
the rated fixed maturities portfolio 96.5% 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 June 30,
1998, securities with a par value of $78.3 million held by authorized
depositories pursuant to these deposit requirements. In addition to the
deposits, the Company's insurance company operating subsidiaries must
maintain
11
<PAGE>
regulated levels of capital and surplus in relation to premiums written and
the risks retained by the subsidiaries.
YEAR 2000 CONSIDERATIONS
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information systems. The Company
believes that it has identified substantially all of its application software
programs which require modification in order to become year 2000 compliant
and has a formal plan to correct and test the programs affected by the
conversion from a two-digit year to a four-digit year. The Company expects
the early phases of the project to be completed during late 1998. The final
phase of the project is scheduled to be completed by the third quarter of
1999. The review of systems also included the identification of vendors that
may have a significant impact on the Company's operations and their expected
completion of any conversions. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company or its vendors are
unable to resolve such processing issues in a timely manner, it could result
in a material financial risk. Accordingly, the Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
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.
12
<PAGE>
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders.
The Company held its 1998 Annual Meeting of Stockholders on
Wednesday May 27, 1998 for the purpose of electing four directors. At the
Meeting, the Company's stockholders re-elected Messrs. Bradley K. Serwin,
Gerard Vecchio and Ronald W. Waisner to the Company's Board of Directors for
three year terms and elected Mr. Robert A. Puccinelli to the Company's Board
of Directors for a one year term. The other five members of the Company's
Board of Directors continue to serve the remainder of their respective three
year terms.
The election of directors was the only matter before the Meeting.
The following table shows the number of shares voted for each nominee for
director and the number of shares withheld for each director:
<TABLE>
<CAPTION>
Nominee Shares Voted for Election Shares Withheld
- ------- ------------------------- ---------------
<S> <C> <C>
Robert A. Puccinelli 5,574,615 18,221
Bradley K. Serwin 5,572,756 20,080
Gerard Vecchio 5,565,695 27,141
Ronald W. Waisner 5,574,013 18,823
</TABLE>
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits.
11. Computation of Earnings Per Share
27. Financial Data Schedule.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the three
months ended June 30, 1998.
13
<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: August 12, 1998 PAULA FINANCIAL
By: /s/ James A. Nicholson
-----------------------------------
Senior Vice President and Chief
Financial Officer
14
<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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $1,378 ($8,001) $2,294 ($6,978)
----------- --------- --------- ----------
----------- --------- --------- ----------
Weighted average shares outstanding for calculating
basic earnings per share 1,902,077 6,331,285 1,903,000 6,326,894
Convertible preferred stock 1,882,354 - 1,882,354 -
Warrants 60,345 - 60,345 -
Options 253,963 - 253,963 -
----------- --------- --------- ----------
Total shares for calculating diluted earnings
per share 4,098,739 6,331,285 4,099,662 6,326,894
----------- --------- --------- ----------
----------- --------- --------- ----------
Basic earnings (loss) per share $0.72 ($1.26) $1.21 ($1.10)
----------- --------- --------- ----------
----------- --------- --------- ----------
Diluted earnings (loss) per share $0.34 ($1.26) $0.56 ($1.10)
----------- --------- --------- ----------
----------- --------- --------- ----------
</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 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<DEBT-HELD-FOR-SALE> 141,029 141,029
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 13,085 13,085
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 162,041 162,041
<CASH> 1,848 1,848
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 3,315 3,315
<TOTAL-ASSETS> 223,862 223,862
<POLICY-LOSSES> 110,161 110,161
<UNEARNED-PREMIUMS> 25,509 25,509
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 165 165
<NOTES-PAYABLE> 139 139
0 0
0 0
<COMMON> 64 64
<OTHER-SE> 77,552 77,552
<TOTAL-LIABILITY-AND-EQUITY> 223,862 223,862
37,235 65,230
<INVESTMENT-INCOME> 2,119 4,173
<INVESTMENT-GAINS> (83) (53)
<OTHER-INCOME> 1,074 1,990
<BENEFITS> 42,736 63,534
<UNDERWRITING-AMORTIZATION> 9,922 18,554
<UNDERWRITING-OTHER> 84 507
<INCOME-PRETAX> (12,397) (11,255)
<INCOME-TAX> (4,396) (4,277)
<INCOME-CONTINUING> (8,001) (6,978)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,001) (6,978)
<EPS-PRIMARY> (1.26) (1.10)
<EPS-DILUTED> (1.26) (1.10)
<RESERVE-OPEN> 77,444 71,390
<PROVISION-CURRENT> 37,147 56,543
<PROVISION-PRIOR> 5,289 6,691
<PAYMENTS-CURRENT> 7,827 10,938
<PAYMENTS-PRIOR> 9,737 21,370
<RESERVE-CLOSE> 102,316 102,316
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
