<PAGE>
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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 JUNE 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 July 31, 2000:
5,414,967 shares.
--------------------------------------------------------------------------------
<PAGE>
PAULA FINANCIAL
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed consolidated balance sheets as of
June 30, 2000 and December 31, 1999 (unaudited) .............................2
Condensed consolidated statements of operations for the three
and six months ended June 30, 2000 and 1999 (unaudited)......................3
Condensed consolidated statements of comprehensive loss for
the three and six months ended June 30, 2000 and 1999 (unaudited)............4
Condensed consolidated statements of cash flows for the six months
ended June 30, 2000 and 1999 (unaudited).....................................5
Notes to condensed consolidated financial statements for the three
and six months ended June 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 ..........................11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................................12
Item 5. Other Information....................................................................12
Item 6. Exhibits and Reports on Form 8-K.....................................................12
SIGNATURE......................................................................................13
</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>
June 30, December 31,
ASSETS 2000 1999
------------------ -----------------
(Unaudited) (*)
<S> <C> <C>
Investments:
Fixed maturities, available for sale, at market
(amortized cost: 2000, $167,289; 1999, $138,294) $ 160,315 $130,703
Equity securities, at market
Preferred stock (cost: 2000, $999; 1999, $999) 820 828
Common stock (cost: 2000, $3,252; 1999, $3,252) 2,666 2,357
Invested cash, at cost (approximates market) 1,938 948
------------------ -----------------
Total investments 165,739 134,836
------------------ -----------------
Cash (restricted: 2000, $2,417; 1999, $2,204) 4,190 6,323
Accounts receivable, net of allowance for uncollectible
accounts (2000, $752; 1999, $758) 30,927 28,196
Reinsurance settlement receivable - 41,989
Reinsurance recoverable on paid and unpaid losses and
loss adjustment expenses 11,726 11,519
Deferred income taxes 18,133 17,547
Other assets 19,702 19,408
------------------ -----------------
$250,417 $259,818
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unpaid losses and loss adjustment expenses $152,679 $ 158,944
Unearned premiums 21,462 21,213
Accrued policyholder dividends 407 237
Accounts payable and accrued expenses 10,759 10,599
Notes payable 14,754 16,632
------------------ -----------------
200,061 207,625
------------------ -----------------
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,
6,336,867; 1999, 6,338,767) 63 63
Additional paid-in-capital 67,370 67,386
Accumulated deficit (6,042) (4,488)
Accumulated other comprehensive loss:
Net unrealized loss on investments (5,108) (5,715)
------------------ -----------------
56,283 57,246
Treasury stock, at cost (2000, 891,900; 1999, 631,300 shares) (5,927) (5,053)
------------------ -----------------
50,356 52,193
------------------ -----------------
$250,417 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INCOME:
Premiums earned:
Workers' compensation $31,732 $17,502 $59,147 $34,004
Group medical and life 261 217 472 402
Commissions 1,302 1,144 2,723 1,976
Net investment income 2,666 2,401 5,173 5,141
Net realized investment losses (140) (1,655) (257) (1,554)
Other 69 138 337 346
------------ ------------ ----------- -----------
35,890 19,747 67,595 40,315
------------ ------------ ----------- -----------
EXPENSES:
Losses and loss adjustment
expenses incurred 26,781 11,176 50,207 22,414
Dividends provided for policyholders (71) 276 177 427
Operating 9,452 6,874 18,997 14,051
------------ ------------ ----------- -----------
36,162 18,326 69,381 36,892
------------ ------------ ----------- -----------
Equity in net loss of unconsolidated
affiliate (564) (186) (658) (270)
------------ ------------ ----------- -----------
Income (loss) before income taxes (836) 1,235 (2,444) 3,153
Income tax expense (benefit) (315) 390 (890) 1,029
------------ ------------ ----------- -----------
NET INCOME (LOSS) ($521) $845 ($1,554) $2,124
============ ============ =========== ===========
Earnings (loss) per share ($0.09) $0.14 ($0.28) $0.36
Weighted average shares outstanding 5,532,445 5,923,846 5,584,282 5,926,406
Earnings (loss) per share - assuming dilution ($0.09) $0.14 ($0.28) $0.36
Weighted average shares outstanding -
assuming dilution 5,532,445 5,927,524 5,584,282 5,932,303
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
PAULA FINANCIAL AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $(521) $ 845 $(1,554) $ 2,124
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses)
arising during period (tax
impact: 2000: $215 and $260;
1999: $1,083 and $1,624) 419 (2,100) 505 (3,151)
Reclassifications adjustment for gains
(losses) included in net income
(loss)(tax impact: 2000: $27 and
$53; 1999: $113 and $17) 51 218 102 (34)
------------ ------------ ----------- -----------
470 (1,882) 607 (3,185)
------------ ------------ ----------- -----------
COMPREHENSIVE LOSS $ (51) $(1,037) $ (947) $(1,061)
============ ============ =========== ===========
</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,
2000 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ($1,554) $2,124
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 857 852
Amortization of fixed maturity premium, net 325 330
Equity in net loss of unconsolidated affiliate 658 270
Loss on sale of property and equipment 19 28
Loss on sales and calls of investments 257 1,554
(Increase) decrease in receivables 38,576 (23,294)
(Increase) decrease in deferred income taxes (899) 1,009
Decrease in unpaid losses and loss adjustment expenses (6,265) (17)
Increase in accrued policyholder dividends 170 344
Increase (decrease) in accounts payable and accrued expenses 160 (7,217)
Increase in unearned premiums 249 607
Other, net (790) 685
---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 31,763 (22,725)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available for sale fixed maturities 5,007 20,231
Proceeds from maturities and calls of available for sale fixed 4,369 3,924
maturities
Proceeds from sale of property and equipment 91 53
Purchase of available for sale fixed maturities (38,951) (4,980)
Purchase of property and equipment (654) (1,005)
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 (30,138) 9,569
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under line of credit agreement, net (1,878) 7,470
Issuance of notes payable - 1,659
Payments on notes payable - (43)
Dividends paid - (474)
Repurchase of common stock (874) (241)
Retirement of common stock (16) (2)
Issuance of common stock - 2
---------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,768) 8,371
---------------- ----------------
NET DECREASE IN CASH AND INVESTED CASH (1,143) (4,785)
Cash and invested cash at beginning of period 7,271 6,717
---------------- ----------------
CASH AND INVESTED CASH AT END OF PERIOD $6,128 $1,932
================ ================
</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, 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 six months ended June 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 June 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 June 30, 2000 and 1999, were
$28.1 million and $28.7 million, respectively. Gross premiums written for the
six months ended June 30, 2000 and 1999, were $61.6 million and $58.2 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 Six Months Ended
Adjusted Reported Adjusted Reported
6/30/00 6/30/99 6/30/99 6/30/00 6/30/99 6/30/99
----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loss ratio 83.7% 78.3% 63.1% 84.2% 82.1% 65.1%
Expense ratio 24.1% 28.1% 32.7% 25.6% 29.0% 34.0%
Policyholder dividend ratio (0.2)% 1.0% 1.6% 0.3% 0.8% 1.2%
----------- ------------- ----------- ----------- ------------- -----------
Combined ratio 107.6% 107.4% 97.4% 110.1% 111.9% 100.3%
=========== ============= =========== =========== ============= ===========
</TABLE>
The "Adjusted 6/30/99" 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 SIX MONTHS ENDED JUNE 30, 2000 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1999:
GROSS PREMIUMS WRITTEN. The Company's gross premiums written for the three
months ended June 30, 2000 decreased 2.1% to $28.1 million from $28.7 million
for the comparable 1999 period. The Company's gross premiums written for the six
months ended June 30, 2000 increased 5.7% to $61.6 million from $58.2 million
for the comparable 1999 period. The decrease in gross premiums written in the
second quarter relates primarily to a 15.7% decline in California writings. For
the first six months of 2000, a 5.4% decline in California gross premiums
written was offset by an increase in premiums written in other states.
NET PREMIUMS EARNED. The Company's net premiums earned for the three months
ended June 30, 2000 increased 80.6% to $32.0 million from $17.7 million for
comparable 1999 period and increased 73.3% to $59.6 million for the six
months ended June 30, 2000 from $34.4 million for the comparable 1999 period.
Net premiums earned in the 1999 periods were reduced by $11.2 million in the
three month period and $21.7 million in the six month period related to
premiums ceded under low layer reinsurance treaties which were not in effect
during the first six months of 2000.
COMMISSION INCOME. For the three months ended June 30, 2000 commission income
increased 13.8% to $1.3 million compared to $1.1 million for the comparable 1999
period. For the six months ended June 30, 2000 commission income increased 37.8%
to $2.7 million compared to $2.0 million for the comparable 1999 period. The
increase is primarily a result of increased premiums placed with insurance
carriers other than PICO and PACO, largely due 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.
8
<PAGE>
NET INVESTMENT INCOME. Net investment income increased 11.0% to $2.7 million for
the three months ended June 30, 2000 from $2.4 million for the comparable 1999
period. Net investment income increased 0.6% to $5.2 million for the six months
ended June 30, 2000 from $5.1 million for the comparable 1999 period. Average
invested assets decreased to $158.5 million for the six months ended June 30,
2000 from $166.7 million for the comparable period in 1999. The Company's
average yield on its portfolio was 6.5% for the six month period in 2000 and
6.2% for the six 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 $0.1 million
for the three months ended June 30, 2000 compared to $1.7 million for the
comparable 1999 period. Net realized investment losses were $0.3 million for the
six months ended June 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 June 30, 2000 was 83.7% compared to an adjusted loss
ratio for the 1999 period of 78.3%. 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 2.2% in favorable development on prior accident years, the 2000 loss
ratio includes the negative impact of 4.0% in unfavorable development on prior
accident years.
The Company's net loss ratio for the six months ended June 30, 2000 was 84.2%
compared to an adjusted loss ratio for the 1999 period of 82.1%. 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 1.5% in favorable development
on prior accident years, the 2000 loss ratio includes the negative impact of
2.9% in unfavorable development on prior accident years.
OPERATING EXPENSES. Operating expenses increased 37.5% to $9.5 million for the
three months ended June 30, 2000 from $6.9 million for the comparable 1999
period. Operating expenses in 1999 included the benefit of $2.4 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 24.1% for the three months ended June 30, 2000
compared to a 1999 adjusted expense ratio of 28.1%. 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 associated with
Pan Am's acquisition of two new branch offices effective May 1, 1999.
Operating expenses increased 35.2% to $19.0 million for the six months ended
June 30, 2000 from $14.1 million for the comparable 1999 period. Operating
expenses in 1999 include the benefit of $4.6 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 six months ended June 30, 2000 compared to a 1999 adjusted
expense ratio of 29.0%. The adjusted expense ratio for the 1999 period does
not include the impact of low layer
9
<PAGE>
reinsurance treaties, which were not in effect in the 2000 period. Expense
reductions at the insurance companies were largely offset by increased
expenses associated with Pan Am's acquisition of two new branch offices
effective May 1, 1999.
INCOME TAXES. Income tax benefit for the three months ended June 30, 2000 was
$0.3 million compared to an income tax expense of $0.4 million for the
comparable 1999 period. Income tax benefit for the six months ended June 30,
2000 was $0.9 million compared to an income tax expense of $1.0 million for the
comparable 1999 period. The effective combined income tax rates for the six
months ended June 30, 2000 and 1999 were (36.4%) and 32.6%, respectively.
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.
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 six months ended June 30, 2000. In
the second quarter of 2000, PAULA Financial received cash dividends totaling
$950,000 from Pan Am.
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 July 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. 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.
10
<PAGE>
As of June 30, 2000, the carrying value of the Company's fixed maturity
securities portfolio was $160.3 million of which $160.0 million was rated. Of
the rated fixed maturities portfolio 95.4% 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 June 30, 2000, securities with a par
value of $153.2 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 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.
11
<PAGE>
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders.
The Company held its 2000 Annual Meeting of Stockholders on Wednesday, May 24,
2000 for the purpose of electing two directors. At the Meeting, the Company's
stockholders re-elected Messrs. Jeffrey A. Snider and John B. Clinton to the
Company's Board of Directors for 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>
Jeffrey A. Snider 5,174,162 6,280
John B. Clinton 5,168,147 12,295
</TABLE>
The term of office of each of the following directors continued after the
meeting held May 24, 2000. They are Messrs. Jerry M. Miller, James A. Nicholson
and Ronald W. Waisner. Mr. Robert A. Puccinelli has resigned his position as
Director. (See Part II, Item 5: Other Information).
Item 5: Other Information.
In May 2000, the Board of Directors made the decision to reduce the number of
directors from six to five. Consequently, Mr. Robert A. Puccinelli, an outside
director, resigned as a director for the Company. Mr. Puccinelli's resignation
was not a result of any disagreement with the Company, its management or the
Board of Directors.
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, 2000.
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<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 11, 2000 PAULA FINANCIAL
By: /s/ James A. Nicholson
----------------------
Senior Vice President and Chief
Financial Officer
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