**SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549**

 

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**FORM 10-Q**

 

|                                                                                                                                                                                                                            | **(Mark One)** |                                                                                                |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|-----------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                            | **ý**     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|                                                                                                                                                                                                                            |
| **For the Quarterly Period Ended  March 31, 2003**                                                                                                                                                                              |
|                                                                                                                                                                                                                            |
| **OR**                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                            |           |                                                                                                |
|                                                                                                                                                                                                                            | **o**          | **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 ofregistrant as specified in its charter)

** **

| **Delaware**                                                     |   | **95-4640638**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  identification number) |

** **

**PAULA FINANCIAL**

**87 East Green Street, Suite 206**

**Pasadena, CA 91105**

(Address ofprincipal executive offices)

 

**(626) 844-7100**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

| Yes ý |   | No o |
|------------|--------|-----------|

 

Indicate by check markwhether the registrant is an accelerated filer (as defined by Rule 12b-2 of theExchange Act.

| Yes o |   | No ý |
|-------|--------|----------------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.  Number ofshares of Common Stock, $.01 par value, outstanding as of close of business onApril 30, 2003:  6,229,879 shares.

 

 

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PAULA FINANCIAL

INDEX TO FORM 10-Q

 
| PART I.   | FINANCIAL INFORMATION                                                 |   |
|-----------|-----------------------------------------------------------------------|--------|
|      |                                                                  |   |
| Item 1.   | Financial Statements                                                  |   |
|      |                                                                  |   |
|      | Condensed  consolidated balance sheets as of                          |   |
|      | March 31, 2003  (unaudited) and December 31, 2002                     |   |
|      |                                                                  |   |
|      | Condensed  consolidated statements of income for the three            |   |
|      | months  ended March 31, 2003 and 2002 (unaudited)                     |
|      |                                                                  |
|      | Condensed  consolidated statements of cash flows for the three months |
|      | ended  March 31, 2003 and 2002 (unaudited)                            |
|      |                                                                  |
|      | Notes  to condensed consolidated financial statements for the three   |   |
|      | months  ended March 31, 2003 (unaudited)                              |   |
|      |                                                                  |   |
| Item 2.   | Management’s Discussion and Analysis of  Consolidated Financial  |   |
|      | Condition and Results of  Operations                                  |
|      |                                                                  |
| Item 3.   | Quantitative and Qualitative Disclosures About  Market Risks          |
|      |
| Item 4.   | Controls and procedures                                               |
|      |
| PART II.  | OTHER INFORMATION                                                     |
|      |                                                                  |
| Item 6    | Exhibits and Reports on Form 8-K                                      |
|      |
| SIGNATURE |

 

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**PART I****        FINANCIAL INFORMATION**

**Item 1.****         Financial Statements**

 

**PAULA FINANCIAL AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

(In thousands,except share data)

 

 
|                                                                                                     |   | **March 31,  2003** |     | **December  31,  2002** |     |
|----------------------------------------------------------------------------------------------------------|--------|---------------------|----------|-------------------------|----------|
|                                                                                                     |   | **(Unaudited)**     |     | **(*)**                 |     |
| ***Assets***                                                                                             |   |                |     |                    |     |
| *Current  Assets:*                                                                                       |   |                | * * |                    | * * |
| Cash  (restricted: 2003, $1,229; 2002, $851)                                                             |   | $                   | 2,124    |                    | $        | 1,290 |   |
| Accounts  receivable, net of allowance for uncollectible accounts (2003, $140 and 2002,  $140)           |   | 1,344               |     | 875                     |     |
| Commissions  receivable                                                                                  |   | 1,283               |     | 1,284                   |     |
| Income  tax receivable                                                                                   |   | —              |     | 141                     |     |
| Other  receivables                                                                                       |   | 7                   |     | 92                      |     |
| Deferred  income taxes                                                                                   |   | 1,293               |     | 1,274                   |     |
| Other  assets                                                                                            |   | 385                 |     | 262                     |     |
|                                                                                                     |   | 6,436               |     | 5,218                   |     |
| *Non-Current  Assets:*                                                                                   |   |                | * * |                    | * * |
| Property  and equipment, net                                                                             |   | 260                 |     | 266                     |     |
| Investment  in related party                                                                             |   | 703                 |     | 703                     |     |
| Goodwill                                                                                                 |   | 1,905               |     | 1,452                   |     |
| Other  amortizable intangible assets, net                                                                |   | 1,840               |     | 1,194                   |     |
| Deferred  income taxes                                                                                   |   | 5,171               |     | 5,368                   |     |
| Other  assets                                                                                            |   | 198                 |     | 99                      |     |
|                                                                                                     |   | $                   | 16,513   |                    | $        | 14,300 |   |
|                                                                                                     |   |                |     |                    |     |
| ***Liabilities and  Stockholders’ Equity***                                                         |   |                |     |                    |     |
|                                                                                                     |   |                |     |                    |     |
| *Current  Liabilities:*                                                                                  |   |                |     |                    |     |
| Due  to underwriters and assureds                                                                        |   | $                   | 2,657    |                    | $        | 1,890 |   |
| Income  taxes payable                                                                                    |   | 16                  |     | —                  |     |
| Accounts  payable and accrued expenses                                                                   |   | 2,012               |     | 1,401                   |     |
| Notes  payable to bank                                                                                   |   | 1,300               |     | 1,300                   |     |
|                                                                                                     |   | 5,985               |     | 4,591                   |     |
| *Non-Current  Liabilities:*                                                                              |   |                |     |                    |     |
| Accounts  payable and accrued expenses                                                                   |   | 1,350               |     | 600                     |     |
| Notes  payable to bank                                                                                   |   | 1,125               |     | 1,450                   |     |
|                                                                                                     |   | $                   | 8,460    |                    | $        | 6,641 |   |
|                                                                                                     |   |                |     |                    |     |
| *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: 2003,  7,103,379; 2002, 7,023,379) |   | 71                  |     | 70                      |     |
| Additional  paid-in-capital                                                                              |   | 68,360              |     | 68,294                  |     |
| Accumulated  deficit                                                                                     |   | (54,109             | )        | (54,405                 | )        |
| Unearned  compensation                                                                                   |   | (67                 | )        | (26                     | )        |
| Employee  loans for stock purchase                                                                       |   | (325                | )        | (397                    | )        |
|                                                                                                     |   | 13,930              |     | 13,536                  |     |
| Treasury  stock, at cost (2003 and 2002, 873,500 shares)                                                 |   | (5,877              | )        | (5,877                  | )        |
|                                                                                                     |   | $                   | 8,053    |                    | $        | 7,659 |   |
|                                                                                                     |   | $                   | 16,513   |                    | $        | 14,300 |   |

 

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*                          Derivedfrom audited financial statements.

 

                                 Seenotes to condensed consolidated financial statements.

 

2

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**PAULA FINANCIAL AND SUBSIDIARIES**

**Condensed Consolidated Statements ofIncome**

(In thousands,except share and per share data)

 

 
|                                                                                                    |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                    |   | **2003**                           |   | **2002** |   |
|                                                                                                    |   | **(Unaudited )**                   |   |
| ***Income:***                                                                                           |   |                               |   |   |   |
| Commissions                                                                                             |   | $                                  | 3,470  |   | $ | 2,566 |   |
| Contingent  commissions                                                                                 |   | 1,065                              |   | 696 |   |
| Net  investment income                                                                                  |   | 2                                  |   | 4 |   |
| Service  fees                                                                                           |   | 75                                 |   | 10 |   |
| Other                                                                                                   |   | 7                                  |   | 6 |   |
|                                                                                                    |   | 4,619                              |   | 3,282 |   |
|                                                                                                    |   |                               |   |   |   |
| ***Expenses:***                                                                                         |   |                               |   |   |   |
| Salaries  and related expenses                                                                          |   | 2,346                              |   | 1,732 |   |
| Interest  expense                                                                                       |   | 43                                 |   | 68 |   |
| Other  expenses                                                                                         |   | 1,708                              |   | 1,035 |   |
|                                                                                                    |   | 4,097                              |   | 2,835 |   |
|                                                                                                    |   |                               |   |   |   |
| Income  from continuing operations before income taxes                                                  |   | 522                                |   | 447 |   |
| Income  tax expense                                                                                     |   | 226                                |   | 187 |   |
| Income  from continuing operations                                                                      |   | 296                                |   | 260 |   |
|                                                                                                    |   |                               |   |   |   |
| Discontinued  operations:                                                                               |   |                               |   |   |   |
| Loss  from operations of discontinued underwriting segment (including loss on  disposal in 2002 of $83) |   | —                             |   | (83 | ) |
| Income  tax benefit                                                                                     |   | —                             |   | (35 | ) |
| Loss  on discontinued operations                                                                        |   | —                             |   | (48 | ) |
|                                                                                                    |   |                               |   |   |   |
| ***Net income***                                                                                        |   | $                                  | 296    |   | $ | 212 |   |
|                                                                                                    |   |                               |   |   |   |
| Earnings  per share:                                                                                    |   |                               |   |   |   |
| Income  from continuing operations                                                                      |   | $                                  | 0.05   |   | $ | 0.04 |   |
| Loss  on discontinued operations                                                                        |   | —                             |   | (0.01 | ) |
| Net  income                                                                                             |   | $                                  | 0.05   |   | $ | 0.03 |   |
| Weighed  average shares outstanding                                                                     |   | 6,177,212                          |   | 6,092,585 |   |
|                                                                                                    |   |                               |   |   |   |
| Earnings  per share - assuming dilution                                                                 |   |                               |   |   |   |
| Income  from continuing operations                                                                      |   | $                                  | 0.05   |   | $ | 0.04 |   |
| Loss  on discontinued operations                                                                        |   | —                             |   | (0.01 | ) |
| Net  income                                                                                             |   | $                                  | 0.05   |   | $ | 0.03 |   |
| Weighted  average shares outstanding - assuming dilution                                                |   | 6,341,936                          |   | 6,092,585 |   |

 

See notes to condensedconsolidated financial statements.

 

3

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**PAULA FINANCIAL AND SUBSIDIARIES**

**Condensed Consolidated Statements ofCash Flows**

(In thousands)

 

 
|                                                                                 |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                 |   | **2003**                           |   | **2002** |   |
|                                                                                 |   | **(Unaudited )**                   |   |
| ***Cash flow from operating activities:***                                           |   |                               |   |   |   |
| Net  income                                                                          |   | $                                  | 296    |   | $ | 212 |   |
| Loss  from discontinued operations                                                   |   | —                             |   | 48 |   |
| Income  from continuing operations                                                   |   | 296                                |   | 260 |   |
| *Adjustments  to reconcile net income to net cash provided by operating activities:* |   |                               |   |   |   |
| Depreciation  and amortization                                                       |   | 118                                |   | 122 |   |
| Loss  on sale of property and equipment                                              |   | —                             |   | 3 |   |
| Increase  in receivables                                                             |   | (242                               | )      | (54 | ) |
| Decrease  in deferred income taxes                                                   |   | 178                                |   | 153 |   |
| Increase  in accounts payable and accrued expenses                                   |   | 1,205                              |   | 274 |   |
| Other,  net                                                                          |   | (146                               | )      | 231 |   |
| ***Net cash provided by operating activities***                                      |   | 1,409                              |   | 989 |   |
|                                                                                 |   |                               |   |   |   |
| ***Cash flows from investing activities:***                                          |   |                               |   |   |   |
| Purchase  of book of business                                                        |   | (247                               | )      | — |   |
| Purchase  of property and equipment                                                  |   | (25                                | )      | (39 | ) |
| ***Net cash used in  investing activities***                                    |   | (272                               | )      | (39 | ) |
|                                                                                 |   |                               |   |   |   |
| ***Cash flows from financing activities:***                                          |   |                               |   |   |   |
| Payments  on note payable to bank                                                    |   | (325                               | )      | (325 | ) |
| Repayment  of employee loans for stock purchase                                      |   | 22                                 |   | 65 |   |
| Funding  of discontinued operations                                                  |   | —                             |   | (83 | ) |
| ***Net cash used in financing activities***                                          |   | (303                               | )      | (343 | ) |
|                                                                                 |   |                               |   |   |   |
| ***Net increase in cash and invested cash***                                         |   | 834                                |   | 607 |   |
| Cash  and invested cash at beginning of period                                       |   | 1,290                              |   | 1,997 |   |
| ***Cash and invested cash at end of period***                                        |   | $                                  | 2,124  |   | $ | 2,604 |   |

 

See notes to condensedconsolidated financial statements.

 

4

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**PAULA FINANCIAL AND SUBSIDIARIES**

**Notes to Condensed ConsolidatedFinancial Statements**

**For the Three Months Ended March 31,2003 (Unaudited)**

 

**Note A - Basis of Presentation**

 

PAULA Financial andsubsidiaries (the “Company”) is a California-based specialty distributor ofcommercial insurance products.   TheCompany’s agency operations place a full array of commercial insurance productsfor their customers.  In addition, theCompany owns a third party administration operation which has minimaloperations.

 

The accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with generally accepted accounting principles (“GAAP”)for interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by GAAP for complete financial statements.  In the opinion of management, all adjustments, including normallyoccurring accruals, considered necessary for a fair presentation have beenincluded.

 

Operating results for thethree months ended March 31, 2003 are not necessarily indicative of the resultsto be expected for the year ended December 31, 2003.  For further information, refer to the consolidated financialstatements and footnotes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2002.

 

##### **NoteB – Change in Stockholders’ Equity**

 

In the first quarter of2003, the Company issued 80,000 shares of restricted stock.  As of March 31, 2003, 50,000 shares wereunvested.  Of the 80,000 shares issued,60,000 shares related to the addition to the Company’s crop insurance platformof Roudebush & Avina Insurance Agency, Inc. (“R&A”).  R&A is based in Modesto, California andspecializes in providing crop insurance to commercial wine grape growers.  Since 2002, the Company has made efforts todramatically expand crop insurance sales, primarily through producerrecruitment.  As part of the agreement,the Company will purchase R&A’s existing book of business.  Balances owing under the arrangement will bepaid over a five year period.  As ofMarch 31, 2003, the obligation related to this transaction was $826,000 with$126,000 of the balance due in the next twelve months.  Of the total purchase price, $503,000 hasbeen allocated to other amortizable intangible assets, with the remaining$323,000 allocated to goodwill.  Otheramortizable intangible assets relate to expiration lists and covenants not tocompete.

 

Additionally, in thefirst quarter of 2003, the Company received payments on employee loans forstock purchase totaling $22,000 and increased the valuation allowance on theseloans by $50,000.

 

##### **NoteC – Comprehensive Income**

 

The Company has notincluded a statement of comprehensive income in the accompanying consolidatedfinancial statements as the Company does not have any other comprehensiveincome adjustments.

 

5

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##### **NoteD – Discontinued Operations**

 

Historically,the Company also operated a workers’ compensation underwriting facility, PAULAInsurance Company (“PICO”).  As ofDecember 31, 2001, PICO’s Risk Based Capital fell into the “Mandatory ControlLevel.”  Consequently, on March 12, 2002,PICO and the California DOI entered into an Oversight Agreement which effectivelygave the California DOI control over PICO’s operations.  As a result of these events, in the fourthquarter of 2001, the Company began accounting for its investment in PICO usingthe equity method.  In the fourthquarter of 2001, the Company wrote its investment in PICO down to $-0-.  Consequently, no direct PICO operatingactivity is included in the consolidated financial statements for the 2002period.

 

OnApril 26, 2002, the California DOI obtained a conservation order for PICO whichwas followed on June 21, 2002 by a liquidation order.  Subsequent to the liquation order, the Company provided limitedoperation support to PICO.  Given thecontinued activity with PICO through the third quarter of 2002, the Company wasprecluded from treating PICO as a discontinued operation for accountingpurposes.

 

Inthe fourth quarter of 2002 the requirements of Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets” (“SFAS 144”) for treating a segment as a discontinuedoperation were met.  Consequently,operating activity related to workers’ compensation underwriting has beenreclassified as discontinued operations. As a result, certain financial information previously issued has beenadjusted to give effect to the classification of the PICO business asdiscontinued operations in accordance with SFAS 144.

 

Amountsrelated to discontinued operations in the 2002 period primarily relate toemployee severance costs associated with the discontinuance of PICO operations.

 

6

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**PART I        FINANCIAL INFORMATION**

**Item 2****.         Management’sDiscussion and Analysis of Consolidated Financial Condition and Results ofOperations**

 

**Overview**

 

The Company’s revenuesconsist of agency commission income, contingent commission income, and servicefees. Commission income is earned from Pan Am’s insurance sales activity.  Associated premiums are primarily billeddirectly by the insurance carrier. However, in certain instances, Pan Am will invoice the customer andremit the premiums, less commission, to the insurance carrier.  The Company focuses its sales efforts onagribusiness and rural markets in California and Arizona.  Contingent commission is related to volumeand profit sharing arrangements with insurance carriers.  Service fees are primarily received for theperformance of services related to loss control and claims advocacy.

 

The Company’s expensesconsist of salaries and related expenses, interest expense and other generaland administrative expenses.

 

**Results of Operations for the Three Months Ended March 31,2003 Compared to the Three Months Ended March 31, 2002:**

 

**Commission income.** For the three monthsended March 31, 2003 commission income increased 35.2% to $3.5 million comparedto $2.6 million for the comparable 2002 period.  Of the $0.9 million increase 50% is due to increases in theplacement of crop insurance while another 34% is due to increases in theworkers compensation line of business.

 

Since 2002, the Companyhas made efforts to dramatically expand crop insurance sales, primarily throughproducer recruitment.  In March 2003,R&A joined the Company.  R&A isbased in Modesto, California and specializes in providing crop insurance tocommercial wine grape growers.  The Companybelieves that its efforts to expand crop insurance production will help absorbsome of the changes recently announced by the California State CompensationInsurance Fund (“SCIF”).  CaliforniaInsurance Commissioner Garamendi and SCIF management have recently announced aplan to reduce commission rates to all approved agents beginning in August2003.

 

**Contingent commission income.** For the threemonths ended March 31, 2003 contingent commission income increased 53.0% to$1.1 million compared to $0.7 million for the comparable 2002 period.    Contingent commission fluctuates from yearto year based on the profitability of the underlying business.

 

**Service fees.**  Service fee income increased to $75,000 for the three monthsended March 31, 2003 from $10,000 for the comparable 2002 period.  The increase in service fees is due to newservice arrangements where the Company is paid for providing loss control andother field support services to selected accounts.

 

**Salaries and related expenses.**  Salaries and employee benefits increased35.5% to $2.3 million for the three months ended March 31, 2003 from $1.7million for the comparable 2002 period. The increase is due to three primary factors:  the transfer of selected employees from PICO’s payroll to Pan Amin early to mid-2002, the addition of new employees beginning in July 2002 andthe elimination of previous cost sharing arrangements that were in effect withPICO through mid-2002.

 

7

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**Interest expenses.**  Interest expense decreased 36.8% to $43,000for the three months ended March 31, 2003 from $68,000 for the comparable 2002period due to the decline in the outstanding balance of the related notepayable.

 

**Other expenses.**  Other expenses increased 65.0% to $1.7 million for the threemonths ended March 31, 2003 from $1.0 million for the comparable 2002period.   The increase is primarily dueto the elimination of previous cost sharing arrangements that were in effectwith PICO until mid-2002 as well as the costs associated with an increasednumber of employees, including insurance and facilities expenses.

 

**Income taxes on continuing operations.**  Income tax expense for the three monthsended March 31, 2003 was $226,000 compared to $187,000 for the comparable 2002period.  The effective combined incometax rates for the three months ended March 31, 2003 and 2002 were 43.3% and41.8%, respectively.

 

**Loss from discontinued operations before taxes.**  In 2002, these costs primarily includedemployee severance costs associated with the discontinuance of PICO operations.

 

**Income taxes on discontinued operations.**  Income tax benefit on discontinuedoperations for the three months ended March 31, 2002 was $35,000 for thecomparable 2002 period.  The effectivecombined income tax rates for the three months ended March 31, 2002 was 42.2%.

 

**Liquidity and Capital Resources:**

 

As a holding company,PAULA Financial’s principal sources of funds are dividends and expensereimbursements from its operating subsidiaries and proceeds from the sale ofits capital stock.  PAULA Financial’sprincipal uses of funds are capital contributions to its subsidiaries andpayment of operating expense.

 

As of December 31, 2002,the Company had an outstanding balance on its bank term loan of $2.8 million.Under the terms of the amended credit agreement, the loan balance will be paidover the next 21 months with the final principal payment due January 1,2005.  As of March 31, 2003, theoutstanding balance was $2.4 million. Management believes that funds currentlyavailable and expected to be generated by the agency operations will besufficient to meet the required principal and interest payments on the termloan.

 

Each of PAULA Financial’snon-insurance subsidiaries has guaranteed all obligations of PAULA Financialunder the credit agreement.

 

The Company’s Board ofDirectors had previously approved a 1,000,000 share repurchase program.  As of March 31, 2003, the Company held873,500 shares in treasury stock.  OnFebruary 20, 2003, the Board of Directors authorized an additional 2,000,000shares for the share repurchase program.  The Company’s current credit agreement restricts its ability torepurchase capital stock.

 

8

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**Forward-Looking Statements**

 

In connection with, andbecause it desires to take advantage of the “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995, the Company cautions readersto recognize the existence of certain forward-looking statements in this Form10-Q and in any other statement made by, or on behalf of, the Company, whetheror not in future filings with the Securities and Exchange Commission.  Forward-looking statements are statementsnot 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 termssuch as “expects,” “believes,” “anticipates,” “intends,” or “judgment.”Forward-looking statements are necessarily based upon estimates and assumptionsthat are inherently subject to significant business, economic and competitiveuncertainties, many of which are beyond the Company’s control and many ofwhich, with respect to future business decisions, are subject to change.  Examples of such uncertainties andcontingencies include, among other important factors, those affecting theinsurance industry in general, such as the economic and interest rateenvironment, legislative and regulatory developments and market pricing andcompetitive trends, and those relating specifically to the Company and itsbusinesses, such as the level of its commission and fee income, andacquisitions of companies or blocks of business.  These uncertainties and contingencies can affect actual resultsand could cause actual results to differ materially from those expressed in anyforward-looking statements made by, or on behalf of, the Company. The Companydisclaims any obligation to update forward-looking information.

 

Item 3:          Quantitative and Qualitative Disclosures About Market Risk.

 

There have been nosignificant changes since the annual report Form 10-K filed for the year endedDecember 31, 2002.

 

Item 4:          Controls and Procedures

 

**Controls and Procedures**

 

The Company’s ChiefExecutive Officer and Vice President Finance have evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934, asamended (the “Exchange Act”)) as of a date 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures are effectivein alerting them on a timely basis to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe Company’s periodic filings under the Exchange Act.

 

**Changes in Internal Controls**

 

Since the EvaluationDate, there have not been any significant changes in the Company’s internalcontrols or in other factors that could significantly affect such controls.

 

9

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**PART II.****                OTHER INFORMATION**

 
| Item 6: | Exhibits and Reports on  Form 8-K:                                                     |
|---------|----------------------------------------------------------------------------------------|
|    |                                                                                   |   |
|    | (a)                                                                                    | Exhibits. |
|    |
|    | 11.                                                                                    | Computation of Earnings  Per Share. |
|    |
|    | 99.1                                                                                   | Certification by the  Chief Executive Officer and Chief Financial Officer Relating to a Period  Report  Containing Financial Statements. |
|    |
|    | (b)                                                                                    | Reports on  Form 8-K. |
|    |
|    | There were no reports  filed on Form 8-K during the three months ended March 31, 2003. |
|         |                                                                                        |  |  |  |  |

 

10

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this Quarterly Report on Form 10-Q to be signed on its behalfby the undersigned thereunto duly authorized.

 
| Date:  May 15, 2003 |   | PAULA FINANCIAL           |
|--------------------------|--------|---------------------------|
|                     |   |                      |
|                     |   |                      |
|                     |   | By:                       |  /s/ Deborah S. Maddocks |   |
|                     |   | Vice President -  Finance |

 

11

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CERTIFICATION

 

I, Jeffrey A. Snider,certify that:

 

1.                     I havereviewed this quarterly report on Form 10-Q of PAULA Financial;

 

2.                     Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                     Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                     Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                    designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                   evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                    presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                     Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record,  process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                 any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                     Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  May 15, 2003 | By:                     | /s/ Jeffrey A. Snider |   |
|--------------------------|-------------------------|-----------------------|--------|
|                     | Chief Executive Officer |

 

 

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CERTIFICATION

 

I, Deborah S. Maddocks,certify that:

 

1.                     I havereviewed this quarterly report on Form 10-Q of PAULA Financial;

 

2.                     Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.                     Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                     Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                    designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                   evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                    presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                     Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                    allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record,  process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                 any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                     Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  May 15, 2003 | By:                       | /s/ Deborah S. Maddocks |   |
|--------------------------|---------------------------|-------------------------|--------|
|                     | Vice President -  Finance |

 

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