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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 SEPTEMBER 30, 2000
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 principal 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 31, 2000:
5,341,979 shares.
--------------------------------------------------------------------------------
<PAGE>
PAULA FINANCIAL
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of
September 30, 2000 and December 31, 1999 (unaudited) .....................2
Condensed consolidated statements of operations for the
three and nine months ended September 30, 2000 and 1999
(unaudited)...............................................................3
Condensed consolidated statements of comprehensive income
(loss) for the three and nine months ended September 30,
2000 and 1999 (unaudited).................................................4
Condensed consolidated statements of cash flows for the nine
months ended September 30, 2000 and 1999 (unaudited)......................5
Notes to condensed consolidated financial statements for the
three and nine months ended September 30, 2000 (unaudited) ...............6
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations.......................................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk ......................12
PART II. OTHER INFORMATION
Item 5. Other Information................................................................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>
September 30, December 31,
ASSETS 2000 1999
------------------ ------------
(Unaudited) (*)
<S> <C> <C>
Investments:
Fixed maturities, available for sale, at market
(amortized cost: 2000, $156,997; 1999, $138,294) $ 153,312 $ 130,703
Equity securities, at market
Preferred stock (cost: 2000, $1,000; 1999, $999) 848 828
Common stock (cost: 2000, $2,615; 1999, $3,252) 1,792 2,357
Invested cash, at cost (approximates market) 1,324 948
--------- ---------
Total investments 157,276 134,836
--------- ---------
Cash (restricted: 2000, $1,819; 1999, $2,204) 7,002 6,323
Accounts receivable, net of allowance for uncollectible
accounts (2000, $804; 1999, $758) 24,598 28,196
Reinsurance settlement receivable -- 41,989
Reinsurance recoverable on paid and unpaid losses and
loss adjustment expenses 11,986 11,519
Deferred income taxes 17,803 17,547
Other assets 18,817 19,408
--------- ---------
$ 237,482 $ 259,818
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $ 145,056 $ 158,944
Unearned premiums 17,193 21,213
Accrued policyholder dividends 476 237
Accounts payable and accrued expenses 10,282 10,599
Notes payable 13,817 16,632
--------- ---------
186,824 207,625
--------- ---------
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: 2000,
6,337,079; 1999, 6,338,767) 63 63
Additional paid-in-capital 67,371 67,386
Accumulated deficit (7,420) (4,488)
Accumulated other comprehensive loss:
Net unrealized loss on investments (3,075) (5,715)
--------- ---------
56,939 57,246
Treasury stock, at cost (2000, 995,100; 1999, 631,300 shares) (6,281) (5,053)
--------- ---------
50,658 52,193
--------- ---------
$ 237,482 $ 259,818
========= =========
</TABLE>
* Derived from audited financial statements.
See notes to condensed consolidated financial statements.
2
<PAGE>
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,
2000 1999 2000 1999
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INCOME:
Premiums earned:
Workers' compensation $22,312 $18,519 $81,459 $52,522
Group medical and life 160 213 632 615
Commissions 1,842 1,302 4,565 3,278
Net investment income 2,648 2,278 7,821 7,419
Net realized investment losses (1,252) (31) (1,509) (1,585)
Other 64 315 401 662
------------ ------------ ----------- -----------
25,774 22,596 93,369 62,911
------------ ------------ ----------- -----------
EXPENSES:
Losses and loss adjustment
expenses incurred 20,044 12,067 70,251 34,481
Dividends provided for policyholders 68 (207) 245 219
Operating 7,712 7,511 26,709 21,562
------------ ------------ ----------- -----------
27,824 19,371 97,205 56,262
------------ ------------ ----------- -----------
Equity in net loss of unconsolidated
affiliate (45) (160) (704) (430)
------------ ------------ ----------- -----------
Income (loss) before income taxes (2,095) 3,065 (4,540) 6,219
Income tax expense (benefit) (717) 949 (1,608) 1,979
------------ ------------ ----------- -----------
NET INCOME (LOSS) ($1,378) $2,116 ($2,932) $4,240
============ ============ =========== ===========
Earnings (loss) per share ($0.26) $0.36 ($0.53) $0.72
Weighted average shares outstanding 5,392,509 5,833,625 5,519,891 5,895,139
Earnings (loss) per share - assuming dilution ($0.26) $0.36 ($0.53) $0.72
Weighted average shares outstanding -
assuming dilution 5,392,509 5,836,584 5,519,891 5,899,999
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $(1,378) $2,116 $(2,932) $4,240
Other comprehensive income (loss),
net of tax: Unrealized gains (losses) on
investments:
Unrealized holding gains (losses)
arising during period (tax
impact:
2000: $405 and $665; 1999: $496
and $2,073) 786 (962) 1,291 (4,022)
Reclassifications adjustment for gains
(losses) included in net income
(loss)
(tax impact: 2000: $642 and
$695; 1999: $10 and $54) 1,247 19 1,349 (106)
------------ ------------ ----------- -----------
2,033 (943) 2,640 (4,128)
------------ ------------ ----------- -----------
COMPREHENSIVE INCOME (LOSS) $655 $1,173 ($292) $112
============ ============ =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,932) $ 4,240
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 1,295 1,343
Amortization of fixed maturity premium, net 460 408
Equity in net loss of unconsolidated affiliate 704 430
Loss on sale of property and equipment 31 33
Loss on sales and calls of investments 1,509 1,585
(Increase) decrease in receivables 45,103 (29,879)
(Increase) decrease in deferred income taxes (1,616) 1,246
Increase (decrease) in unpaid losses and loss adjustment expenses (13,888) 546
Increase (decrease) in accrued policyholder dividends 239 (97)
Decrease in accounts payable and accrued expenses (317) (8,160)
Increase (decrease) in unearned premiums (4,020) 1,175
Other, net (606) 657
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 25,962 (26,473)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for sale fixed maturities 17,447 28,507
Proceeds from maturities and calls of available for sale fixed
maturities 5,859 4,345
Proceeds from sale of property and equipment 123 73
Purchase of available for sale fixed maturities (43,339) (5,645)
Purchase of property and equipment (938) (1,349)
Purchase of book of business -- (105)
Purchase of insurance agency -- (3,049)
Investment in unconsolidated affiliate -- (5,500)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (20,848) 17,277
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit agreement, net (2,815) 9,070
Issuance of notes payable -- 1,659
Payments on notes payable -- (69)
Dividends paid -- (703)
Repurchase of common stock (1,228) (1,840)
Retirement of common stock (16) (2)
Issuance of common stock -- 2
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,059) 8,117
-------- --------
NET INCREASE (DECREASE) IN CASH AND INVESTED CASH 1,055 (1,079)
Cash and invested cash at beginning of period 7,271 6,717
-------- --------
CASH AND INVESTED CASH AT END OF PERIOD $ 8,326 $ 5,638
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 (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, 2000 are not
necessarily indicative of the results to be expected for the year ended December
31, 2000. 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, 1999.
NOTE B - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and establishes standards for the reporting for
derivative instruments. It requires changes in the fair value of a derivative
instrument and the changes in fair value of assets or liabilities hedged by that
instrument to be included in income. To the extent that the hedge transaction is
effective, income is equally offset by both investments. Currently changes in
fair value of derivative instruments and hedged items are reported in net
unrealized gain (loss) on securities. The Company has not yet adopted SFAS 133.
However, the effect of adoption on the condensed consolidated financial
statements at September 30, 2000 would not have been material.
6
<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").
The Company's revenues consist 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.
Gross premiums written for the three months ended September 30, 2000 and 1999,
were $20.1 million and $31.2 million, respectively. Gross premiums written for
the nine months ended September 30, 2000 and 1999, were $81.6 million and $89.4
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 consist 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.
7
<PAGE>
The following combined ratio information is derived from the insurance
subsidiaries, PICO and PACO, GAAP operating results:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Adjusted Reported Adjusted Reported
9/30/00 9/30/99 9/30/99 9/30/00 9/30/99 9/30/99
----------- ------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Loss ratio 89.2% 78.2% 64.4% 85.6% 80.7% 64.9%
Expense ratio 25.8% 27.5% 31.3% 25.6% 28.4% 33.1%
Policyholder dividend ratio 0.3% (0.7%) (1.1%) 0.3% 0.3% 0.4%
----------- ------------- ------------- ----------- ------------- -------------
Combined ratio 115.3% 105.0% 94.6% 111.5% 109.4% 98.4%
=========== ============= ============= =========== ============= =============
</TABLE>
The "Adjusted 9/30/99" columns exclude the impact of low layer reinsurance
treaties which were not in effect in 2000.
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.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999:
GROSS PREMIUMS WRITTEN. The Company's gross premiums written for the three
months ended September 30, 2000 decreased 35.7% to $20.1 million from $31.2
million for the comparable 1999 period. The Company's gross premiums written for
the nine months ended September 30, 2000 decreased 8.7% to $81.6 million from
$89.4 million for the comparable 1999 period. The decrease in gross premiums
written in the third quarter relates primarily to a 26.8% decline in California
writings and a 56.5% decline in Texas writings. For the first nine months of
2000, a 12.4% decline in California gross premiums written was the most
significant factor in the overall decline.
NET PREMIUMS EARNED. The Company's net premiums earned for the three months
ended September 30, 2000 increased 20.0% to $22.5 million from $18.7 million for
comparable 1999 period and increased 54.5% to $82.1 million for the nine months
ended September 30, 2000 from $53.1 million for the comparable 1999 period.
Net premiums earned in the 2000 periods were reduced by $1.4 million related to
premiums ceded under a quota share agreement with the Insurance Corporation of
Hannover ("ICH"), which became effective July 1, 2000. The treaty terms allow
for a variable cession of premiums by PICO to ICH. Under the terms of the
agreement, PICO may cede no less than 10% and no more than $12.5 million of
premiums earned in fiscal year 2000 on polices that are effective on or after
January 1, 2000. In 2001 PICO may cede not less than 10% and up to 25% of earned
premiums to ICH.
Net premiums earned in the 1999 periods were reduced by $11.2 million in the
three month period and $32.9 million in the nine month period related to
premiums ceded under low layer reinsurance treaties which were not in effect
during the first nine months of 2000.
8
<PAGE>
COMMISSION INCOME. For the three months ended September 30, 2000 commission
income increased 41.5% to $1.8 million compared to $1.3 million for the
comparable 1999 period. For the nine months ended September 30, 2000 commission
income increased 39.3% to $4.6 million compared to $3.3 million for the
comparable 1999 period. The increase is primarily a result of increased premiums
placed with insurance carriers other than PICO and PACO, rates increases on
underlying workers' compensation and accident and health policies, and the
acquisition of two new branch offices effective May 1, 1999. 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 16.2% to $2.6 million for
the three months ended September 30, 2000 from $2.3 million for the comparable
1999 period. Net investment income increased 5.4% to $7.8 million for the nine
months ended September 30, 2000 from $7.4 million for the comparable 1999
period. Average invested assets decreased to $152.7 million for the nine months
ended September 30, 2000 from $163.5 million for the comparable period in 1999.
The Company's average yield on its portfolio was 6.8% for the nine month period
in 2000 and 6.1% for the nine month period in 1999. The 2000 average invested
assets and yield calculations are skewed by a significant increase in invested
assets in January 2000 following the receipt of the $42.0 million reinsurance
settlement.
NET REALIZED INVESTMENT LOSSES. Net realized investment losses were $1.3 million
for the three months ended September 30, 2000. In the comparable 1999 period
there were no significant net realized investment losses. Net realized
investment losses were $1.5 million for the nine months ended September 30, 2000
compared to $1.6 million for the comparable 1999 period. The net realized
investment losses in the 1999 periods are due to the realization of an "other
than temporary" decline of $1.6 million on a non-performing investment in the
second quarter of 1999.
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED. The Company's net loss ratio for
the three months ended September 30, 2000 was 89.2% compared to an adjusted loss
ratio for the 1999 period of 78.2%. The adjusted loss ratio for the 1999 period
does not include the impact of low layer reinsurance treaties, which were not in
effect in the 2000 period. The 1999 adjusted loss ratio includes 1.9% in
unfavorable development on prior accident years, while the 2000 loss ratio
includes the impact of 6.1% in unfavorable development on prior accident years.
The adverse development in the third quarter of 2000 was primarily attributable
to the Texas operation, which was substantially curtailed beginning in the
second quarter 2000.
The Company's net loss ratio for the nine months ended September 30, 2000 was
85.6% compared to an adjusted loss ratio for the 1999 period of 80.7%. The
adjusted loss ratio for the 1999 period does not include the impact of low layer
reinsurance treaties, which were not in effect in the 2000 period. While the
1999 adjusted loss ratio includes the benefit of 0.9% in favorable development
on prior accident years, the 2000 loss ratio includes the negative impact of
3.8% in unfavorable development on prior accident years. The majority of the
unfavorable prior year development in the 2000 period relates to the Texas and
Florida operations, both of which were substantially curtailed beginning in the
second quarter of 2000.
9
<PAGE>
OPERATING EXPENSES. Operating expenses increased 2.7% to $7.7 million for the
three months ended September 30, 2000 from $7.5 million for the comparable 1999
period. Operating expenses in 1999 included the benefit of $2.3 million in
ceding commissions received in conjunction with a low layer reinsurance
arrangement that was not in effect in 2000. The GAAP expense ratio for the
insurance company operations was 25.8% for the three months ended September 30,
2000 compared to a 1999 adjusted expense ratio of 27.5%. The adjusted expense
ratio for the 1999 period does not include the impact of low layer reinsurance
treaties, which were not in effect in the 2000 period. Expense reductions at the
insurance companies were largely offset by increased expenses at Pan Am.
Operating expenses increased 23.9% to $26.7 million for the nine months ended
September 30, 2000 from $21.6 million for the comparable 1999 period. Operating
expenses in 1999 include the benefit of $6.9 million in ceding commissions
received in conjunction with low layer reinsurance treaties which were not in
effect in 2000. The GAAP expense ratio for the insurance company operations was
25.6% for the nine months ended September 30, 2000 compared to a 1999 adjusted
expense ratio of 28.4%. The adjusted expense ratio for the 1999 period does not
include the impact of low layer reinsurance treaties, which were not in effect
in the 2000 period. Expense reductions at the insurance companies were largely
offset by increased expenses at Pan Am, principally related to the acquisition
of two new branch offices effective May 1, 1999.
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATE. The equity in net loss of
unconsolidated affiliate represents the Company's share of the net loss of
Montlake Insurance Holdings, LLC. The Company is accounting for this investment
using the equity method.
INCOME TAXES. Income tax benefit for the three months ended September 30, 2000
was $0.7 million compared to an income tax expense of $0.9 million for the
comparable 1999 period. Income tax benefit for the nine months ended September
30, 2000 was $1.6 million compared to an income tax expense of $2.0 million for
the comparable 1999 period. The effective combined income tax rates for the nine
months ended September 30, 2000 and 1999 were (35.4%) and 31.8%, respectively.
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, investments in new ventures,
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, 1999, PAULA Financial
would be able to receive $1.9 million in dividends in 2000 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, 2000.
In the second quarter of 2000, PAULA Financial received cash dividends totaling
$950,000 from Pan Am.
10
<PAGE>
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. On December 31, 1999, PAULA Financial
elected to convert all the borrowings into a term loan payable in quarterly
installments and maturing on December 31, 2001. At the date of conversion, the
line of credit had an outstanding balance of $15.0 million. As of October 31,
2000 balances under the term loan bear interest at 11.5%. The use of the Credit
Agreement was for repurchase of the Company's common stock and investments in
new ventures.
Since December 31, 1999, the Company has been out of compliance with certain of
its debt covenants. However, PAULA Financial is current on the term loan's
regularly scheduled principal and interest payments. Because of the covenant
compliance issues, under the terms of the Credit Agreement, the bank has the
right to call the note and demand its immediate payment. The Company continues
to negotiate with the bank in an effort to obtain waivers with respect to its
non-compliance and to amend the Credit Agreement, including modifications of
certain covenants. If these covenants are not amended, it is probable that the
Company will continue to be out of compliance with these covenants on
measurement dates at least through December 31, 2000. Each of PAULA Financial's
non-insurance subsidiaries has guaranteed all obligations of PAULA Financial
under the Credit Agreement.
As of September 30, 2000, the carrying value of the Company's fixed maturity
securities portfolio was $153.3 million of which $153.0 million was rated. Of
the rated fixed maturities portfolio 99.4% was rated "A" or better by S&P,
Moody's or Fitch. 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.
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, 2000, securities with a par
value of $152.4 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.
FORWARD-LOOKING STATEMENTS
In connection with, and because it desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers to recognize the existence of certain forward-looking
statements in this Form 10-Q and in any other statement made by, or on behalf
of, the Company, whether or not in future filings with the Securities and
Exchange Commission. Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results or other developments. Some forward-looking statements may be
identified by the use of terms such as "expects," "believes," "anticipates,"
"intends," or "judgment." Forward-looking statements are necessarily based upon
estimates and assumptions that are inherently subject to significant business,
economic and competitive uncertainties, many of which are beyond the Company's
control and many of which, with respect to
11
<PAGE>
future business decisions, are subject to change. Examples of such uncertainties
and contingencies include, among other important factors, those affecting the
insurance industry in general, such as the economic and interest rate
environment, legislative and regulatory developments and market pricing and
competitive trends, and those relating specifically to the Company and its
businesses, such as the level of its insurance premiums and fee income, the
claims experience of its insurance products, the performance of its investment
portfolio, acquisitions of companies or blocks of business, and the ratings by
major rating organizations of its insurance subsidiaries. These uncertainties
and contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. The Company disclaims any obligation to update
forward-looking information.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 1999.
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PART II. OTHER INFORMATION
Item 5: Other Information.
In October 2000, Mr. John B. Clinton, an outside director, resigned as a
director for the Company. Mr. Clinton's resignation was not a result of any
disagreement with the Company, its management or the Board of Directors.
Subsequent to Mr. Clinton's resignation, the Board of Directors made the
decision to reduce the number of directors from five to four.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits.
10.38 Workers' Compensation and Employer's Liability Quota
Share Reinsurance Contract Effective July 1, 2000
issued to PAULA Insurance Company by Insurance
Corporation of Hannover
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 September 30, 2000.
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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 13, 2000 PAULA FINANCIAL
By: /s/ JAMES A. NICHOLSON
--------------------------------
Senior Vice President and Chief
Financial Officer
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