** **

**SECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C. 20549**

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**FORM 10-QSB**

**(Mark One)**

ý         **QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGEACT OF 1934**

**For the Quarterly Period Ended March 31, 2005**

**OR**

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

**Forthe Transition Period from        to       **

**Commission file****number 0-23181**

**PAULA FINANCIAL**(Exactname of small business issuer 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 of principal executive offices)

 

**(626) 844-7100**

(Issuer’s telephone number, including area code)

 

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch 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 ý  No o

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date. Number of shares of Common Stock, $.01 par value, outstanding as of closeof business on April 18, 2005:  6,346,145shares.

 

TransitionalSmall Business Disclosure Format (check one):

Yes ý  No o

 

 

 

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PAULA FINANCIAL

INDEXTO FORM 10-Q

 
| PART I.  FINANCIAL INFORMATION | ** ** | **Page**                                                                              |
|--------------------------------|------------|---------------------------------------------------------------------------------------|
| ** **                     | ** ** | ** **                                                                            | ** ** | ** ** |
| Item 1.                   |       | Financial Statements                                                                  |   |   |
|                           |       |                                                                                  |   |   |
|                           |       | Condensed  consolidated balance sheets as of March 31, 2005 (unaudited) and           |   |   |
|                           |       | December 31, 2004                                                                     |   | 2 |
|                           |       |                                                                                  |   |   |
|                           |       | Condensed  consolidated statements of income for the three months ended March 31,     |   |   |
|                           |       | 2005 and  2004 (unaudited)                                                            |   | 3 |
|                           |       |                                                                                  |   |   |
|                           |       | Condensed  consolidated statements of cash flows for the three months ended March 31, |   |   |
|                           |       | 2005  and 2004 (unaudited)                                                            |   | 4 |
|                           |       |                                                                                  |   |   |
|                           |       | Notes  to condensed consolidated financial statements for the three months ended      |   |   |
|                           |       | March  31, 2005 (unaudited)                                                           |   | 5 |
|                           |       |                                                                                  |   |   |
| Item 2.                        |       | Management’s  Discussion and Analysis of Consolidated Financial Condition and    |   |   |
|                           |       | Results  of Operations                                                                |   | 7 |
|                           |       |                                                                                  |   |   |
| Item 3.                        |       | Controls and  procedures                                                              |   | 10 |
|                           |       |                                                                                  |   |   |
| PART II. OTHER INFORMATION     |       |                                                                                  |
|                           |       |                                                                                  |   |   |
| Item 6.                        |       |  Exhibits and Reports on Form 8-K                                                |   | 11 |
|                           |       |                                                                                  |   |   |
| SIGNATURE                      |       | 12                                                                                    |

 

 

----

 

** **
| **PART I**  | ** ** | **FINANCIAL INFORMATION** |
|-------------|------------|---------------------------|
| **Item 1.** | ** ** | **Financial  Statements** |

 

**PAULA FINANCIAL AND SUBSIDIARIES**

**CondensedConsolidated Balance Sheets**

(In thousands, except share data)

 
| ** **                                                                                             | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ***Assets***                                                                                           | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                             | ** ** | **(Unaudited)** | ** ** | **(*)**          | ** ** |
| *Current Assets:*                                                                                      | * *   | * *        | * *   | * *         | * *   |
| Cash (restricted: 2005,  $1,673; 2004, $1,844)                                                         |       | $               | 4,540      |             | $          | 3,241 |   |
| Accounts receivable, net  of allowance for uncollectible accounts (2005 and 2004, $80)                 |       | 2,910           |       | 3,142            |       |
| Commissions receivable                                                                                 |       | 2,107           |       | 2,155            |       |
| Income tax receivable                                                                                  |       | —          |       | 15               |       |
| Other receivables                                                                                      |       | 24              |       | 20               |       |
| Deferred income taxes                                                                                  |       | 1,945           |       | 1,769            |       |
| Other assets                                                                                           |       | 252             |       | 188              |       |
|                                                                                                   |       | 11,778          |       | 10,530           |       |
| *Non-Current Assets:*                                                                                  | * *   | * *        | * *   | * *         | * *   |
| Property and equipment,  net                                                                           |       | 569             |       | 278              |       |
| Investment in related  party, at cost                                                                  |       | 703             |       | 703              |       |
| Goodwill, net                                                                                          |       | 2,017           |       | 2,017            |       |
| Other amortizable  intangible assets, net                                                              |       | 1,428           |       | 1,574            |       |
| Deferred income taxes                                                                                  |       | 2,961           |       | 3,465            |       |
| Other assets                                                                                           |       | 170             |       | 170              |       |
|                                                                                                   |       | $               | 19,626     |             | $          | 18,737 |   |
| ***Liabilities and Stockholders’ Equity***                                                        |       |            |       |             |       |
|                                                                                                   |       |            |       |             |       |
| *Current Liabilities:*                                                                                 |       |            |       |             |       |
| Due to underwriters and  assureds                                                                      |       | $               | 4,457      |             | $          | 4,800 |   |
| Accounts payable and  accrued expenses                                                                 |       | 430             |       | 395              |       |
| Employment related  accruals                                                                           |       | 1,049           |       | 478              |       |
| Acquisition related  accruals                                                                          |       | 685             |       | 772              |       |
| Income taxes payable                                                                                   |       | 116             |       | —           |       |
| Notes payable to bank                                                                                  |       | 1,176           |       | 1,276            |       |
|                                                                                                   |       | 7,913           |       | 7,721            |       |
| *Non-Current Liabilities:*                                                                             |       |            |       |             |       |
| Accounts payable and  accrued expenses                                                                 |       | 231             |       | —           |       |
| Acquisition related  accruals                                                                          |       | 625             |       | 752              |       |
|                                                                                                   |       | $               | 8,769      |             | $          | 8,473 |   |
| *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: 2005 and 2004, 7,270,879 shares) |       | 73              |       | 73               |       |
| Additional paid-in-capital                                                                             |       | 14,137          |       | 14,137           |       |
| Accumulated earnings,  after January 1, 2003                                                           |       | 2,661           |       | 2,095            |       |
| Unearned compensation                                                                                  |       | (33             | )          | (60              | )          |
| Employee loans for stock  purchase                                                                     |       | (23             | )          | (23              | )          |
| Treasury stock, at cost  (2005 and 2004, 924,734 shares)                                               |       | (5,958          | )          | (5,958           | )          |
|                                                                                                   |       | $               | 10,857     |             | $          | 10,264 |   |
|                                                                                                   |       | $               | 19,626     |             | $          | 18,737 |   |

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*Derived from audited financial statements.

 

Seenotes to condensed consolidated financial statements.

 

2

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**PAULA FINANCIAL AND SUBSIDIARIES**

**CondensedConsolidated Statements of Income**

(In thousands, except share and per sharedata)

 

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **March 31,**          | ** ** |
| ** **                                               | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(Unaudited)**        | ** ** |
| ***Income:***                                            |       |                   |       |   |   |
| Commissions and placement  fees                          |       | $                      | 3,454      |   | $ | 3,764 |   |
| Profit sharing income                                    |       | 1,991                  |       | 1,278 |   |
| Service fees                                             |       | 191                    |       | 96 |   |
| Other income                                             |       | 15                     |       | 14 |   |
|                                                     |       | 5,651                  |       | 5,152 |   |
|                                                     |       |                   |       |   |   |
| ***Operating  Expenses:***                               |       |                   |       |   |   |
| Salaries and related  expenses                           |       | 2,978                  |       | 2,674 |   |
| Interest expense                                         |       | 20                     |       | 27 |   |
| Amortization expense                                     |       | 146                    |       | 146 |   |
| Other expenses                                           |       | 1,387                  |       | 1,445 |   |
|                                                     |       | 4,531                  |       | 4,292 |   |
|                                                     |       |                   |       |   |   |
| Income from operations  before income taxes              |       | 1,120                  |       | 860 |   |
| Income tax expense                                       |       | 459                    |       | 302 |   |
| ***Net  income***                                        |       | $                      | 661        |   | $ | 558 |   |
|                                                     |       |                   |       |   |   |
| Earnings per share                                       |       | $                      | 0.10       |   | $ | 0.09 |   |
| Weighted average shares  outstanding                     |       | 6,592,750              |       | 6,305,152 |   |
|                                                     |       |                   |       |   |   |
| Earnings per share -  assuming dilution                  |       | $                      | 0.10       |   | $ | 0.08 |   |
| Weighted average shares  outstanding - assuming dilution |       | 6,830,852              |       | 6,610,916 |   |
|                                                     |       |                   |       |   |   |
| Dividends declared per  common share                     |       | $                      | 0.015      |   | — |   |
|                                                     |       |                   |       |   |   |

 

Seenotes to condensed consolidated financial statements.

 

3

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** **

** PAULA FINANCIAL AND SUBSIDIARIES**

**CondensedConsolidated Statements of Cash Flows**

(In thousands)

 

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                           | ** ** | **March 31,**          | ** ** |
| ** **                                                                           | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                                 |       | **(Unaudited)**        |       |
| ***Cash  flows from operating activities:***                                         |       |                   |       |   |   |
| Net income                                                                           |       | $                      | 661        |   | $ | 558 |   |
|                                                                                 |       |                   |       |   |   |
| *Adjustments to reconcile net  income to net cash provided by operating activities:* |       |                   |       |   |   |
| Depreciation                                                                         |       | 37                     |       | 35 |   |
| Amortization                                                                         |       | 146                    |       | 146 |   |
| Decrease in receivables                                                              |       | 291                    |       | 1,309 |   |
| Decrease in deferred  income taxes                                                   |       | 328                    |       | 290 |   |
| Increase (decrease) in  accounts payable and accrued expenses                        |       | 340                    |       | (385 | ) |
| Decrease in unearned  compensation                                                   |       | 27                     |       | 17 |   |
| Other, net                                                                           |       | (71                    | )          | (88 | ) |
| ***Net  cash provided by operating activities***                                     |       | 1,759                  |       | 1,882 |   |
|                                                                                 |       |                   |       |   |   |
| ***Cash  flows from investing activities:***                                         |       |                   |       |   |   |
| Purchase of property and  equipment                                                  |       | (51                    | )          | (32 | ) |
| Purchase of book of  business                                                        |       | (214                   | )          | (100 | ) |
| ***Net  cash used in investing activities***                                         |       | (265                   | )          | (132 | ) |
|                                                                                 |       |                   |       |   |   |
| ***Cash  flows from financing activities:***                                         |       |                   |       |   |   |
| Payments on line of credit                                                           |       | (100                   | )          | (200 | ) |
| Dividends paid                                                                       |       | (95                    | )          | — |   |
| Payments received on  employee loans for stock purchase                              |       | —                 |       | 9 |   |
| ***Net  cash used in financing activities***                                         |       | (195                   | )          | (191 | ) |
|                                                                                 |       |                   |       |   |   |
| ***Net  increase in cash and invested cash***                                        |       | 1,299                  |       | 1,559 |   |
| Cash and invested cash at  beginning of period                                       |       | 3,241                  |       | 3,110 |   |
| ***Cash  and invested cash at end of period***                                       |       | $                      | 4,540      |   | $ | 4,669 |   |

 

Seenotes to condensed consolidated financial statements.

** **

4

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** **

**PAULA FINANCIAL AND SUBSIDIARIES**

**Notesto Condensed Consolidated Financial Statements**

**For the Three Months Ended March 31, 2005 (Unaudited)**

 

 

**Note A** — **Basis ofPresentation**

 

PAULA Financial and subsidiaries (the “Company”) is a California-basedspecialty distributor of commercial insurance products.   The Company’s agency operations place a fullarray of commercial insurance products for their customers.

 

Theaccompanying unaudited condensed consolidated financial statements of theCompany have been prepared in accordance with accounting principles generallyaccepted in the United States (“GAAP”) for interim financial information andwith the instructions to Form 10-QSB and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financialstatements.  In the opinion ofmanagement, all adjustments, including normally occurring accruals, considerednecessary for a fair presentation have been included.

 

Where necessary, prior years’ information has beenreclassified to conform to the 2005 presentation.

 

TheCompany’s operating results tend to be cyclical. Consequently, operatingresults for the three months ended March 31, 2005 are not necessarilyindicative of the results to be expected for the year December 31, 2005.  For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-KSB for the year ended December 31, 2004.

 

InDecember 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standard (“SFAS”) No. 148, “Accounting for Stock BasedCompensation — Transition and Disclosure, an amendment of SFAS 123”.  Among other provisions, SFAS 148 amends thedisclosure requirements of SFAS 123 to require prominent disclosures in bothannual and interim financial statements. For the three months ended March 31, 2005, the differences between theas reported net income and income per share amounts and the related pro formaamounts are not material to the consolidated financial statements.  On December 16, 2004, SFAS 123 was revised torequire all share based payments to employees to be recognized in the incomestatement based on their fair values. The pro forma disclosure will no longer be an alternative.  This revised standard will be effective forthe Company in the first quarter of 2006.

 

##### **Note B — Comprehensive Income**

 

TheCompany has not included a statement of comprehensive income in theaccompanying consolidated financial statements as the Company does not have anyother comprehensive income adjustments.

##### ** **

##### ** **

5

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##### ** **

##### **Note C — Deferred Income Taxes**

 

Asof March 31, 2005 and December 31, 2004, the Company’s net deferred tax assetis comprised of the following:

 
| ** **                        | ** ** | **March 31**    | ** ** | **December 31** | ** ** |
|-----------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                        | ** ** | **2005**        | ** ** | **2004**        | ** ** |
| ** **                        | ** ** | **(unaudited)** | ** ** | ** **      | ** ** |
| Deferred tax assets:              |       |            |       |            |       |
| Net  operating loss carry forward |       | $               | 24,667     |            | $          | 25,203 |   |
| Other                             |       | 2,885           |       | 2,677           |       |
| Gross deferred tax assets         |       | 27,552          |       | 27,880          |       |
| Less valuation allowance          |       | (22,646         | )          | (22,646         | )          |
| Deferred tax assets               |       | $               | 4,906      |            | $          | 5,234 |   |
| Gross deferred tax  liabilities   |       | $               | —     |            | $          | — |   |
| Net deferred tax asset            |       | $               | 4,906      |            | $          | 5,234 |   |

 

Thenet operating loss carry forward includes losses generated by PAULA InsuranceCompany which are available to offset future taxable income of the Company.

 

Managementbelieves that it is more likely than not that the results of future operationswill generate sufficient taxable income in the periods necessary to realize thenet deferred tax asset.

 

##### **Note D — Acquisitions**

 

On February 28, 2005, the Company entered into anagreement to purchase the existing book of business of Integrated Financial(“Integrated”).  Integrated is based inSacramento, California and specializes in accident and health and financialproducts.  The ultimate purchase pricewill be based on revenue earned over the next three years.  The estimated purchase price is $800,000.  Although the purchase agreement was enteredinto on February 28, 2005, the actual implementation of the transaction wasdelayed until April 1, 2005.  Therefore,the asset purchase will not be recorded until the second quarter of 2005.  As of March 31, 2005, no payments have been maderelated to this acquisition.

 

##### **Note E — Other Matters**

 

In early 1999, PAULAFinancial made an investment in a start up specialty workers’ compensationinsurance company, Montlake Insurance Holdings, LLC (“Montlake”).  This investment was accounted for using theequity method.  During the initial set upof the Montlake operations, PAULA Financial provided assistance in severalareas including license application, insurance placement, humanresource matters and systems support.  Aspart of this support, PAULA Financial executed a guarantee related to certainaspects of the relationship between Montlake and the issuing company, RelianceInsurance Company (“Reliance”).  At thetime of the guarantee, Reliance did not retain any exposure associated with thepremiums fronted.   Reliance was theissuing carrier for Montlake from March 15, 1999 to July 31, 2000.

 

In October 2001, Reliance was placed inliquidation by the Pennsylvania Department of Insurance.  In October 2002, Montlake was liquidated bythe Superior Court of Washington for King County.

 

In May 2004, the Company received a demand forpayment from Reliance in Liquidation in the amount of $1.9 million related tounpaid deductibles by a policyholder placed under the Montlake frontingarrangement with Reliance.  The policy inquestion was effective March 2000 and was cancelled in September 2000.

 

The Company replied to the demand in a letter dated August 13,2004.  The Company has received nocommunication from Reliance in Liquidation in response to its letter.  The Company believes there are good andmeritorious arguments that the demand does not represent an obligation of theCompany.   The Company believes that theobligations subject to the guarantee were previously discharged.

 

6

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| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                     |
|-------------|------------|---------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                    |
| **Item 2**. | ** ** | **Management’s  Discussion and Analysis of Consolidated Financial Condition and Results of  Operations** |

 

**Overview**

 

The Company’s revenues consist of agency commission and placement feeincome, profit sharing income, and service fees. Commission and placement feeincome is earned from Pan American Underwriters’ (“Pan Am’s”) insurance salesactivity.  Associated premiums areprimarily billed directly by the insurance carrier.  However, in certain instances, Pan Am willinvoice the customer and remit the premium, less commission, to the insurancecarrier.  The Company focuses its salesefforts on agribusiness and rural markets in California and Arizona.  Profit sharing income is related to profitsharing arrangements with insurance carriers. Service fees are primarily received for the performance of servicesrelated to loss control and claims advocacy.

 

TheCompany’s expenses consist of salaries and related expenses, interest expense,amortization of intangibles and other general and administrative expenses.

 

**Results of Operations for the Three Months Ended March 31, 2005Compared to the Three Months Ended March 31, 2004:**

 

**Commission and placement fee income.** For the three months endedMarch 31, 2005 commission and placement fee income decreased 8.2% to $3.5million compared to $3.8 million for the comparable 2004 period.  The decrease in the first quarter of 2005 isprimarily related to a decline in the package line of business.   The package marketplace appears to beentering a “soft market” characterized in part by declines in premium ratescharged to policyholders.  As a result,the associated revenue to the agency, which is based on a percentage of premium, also declines.

 

**Profit sharing income.** For the threemonths ended March 31, 2005 profit sharing income increased 55.8% to $2.0million compared to $1.3 million for the comparable 2004 period.

 

 

7

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Profitsharing income fluctuates from year to year based on the profitability of theunderlying business and external market conditions which can result in changesto profit sharing programs offered by insurance carriers.

 

Historically,the Company has earned a large portion of its profit sharing income on businessplaced with the California State Compensation Insurance Fund (“SCIF”).  In the first quarter of 2005, SCIFrepresented approximately 60% of the Company’s profit sharing income comparedto 40% in the first quarter of 2004. In policy year 2005, SCIF is eliminatingits profit share arrangements.

 

**Service fees.**  For the three months ended March 31, 2005service fee income increased 99.0% to $191,000 from $96,000 for the comparable2004 period.  The Company receives feesrelated to providing loss control for a Bermuda insurance captive.  The volume of business placed with thismarket has increased, resulting in a corresponding increase in the associatedfees.

 

**Salaries and related expenses.**  For the three months ended March 31, 2005salaries and employee benefits increased 11.4% to $3.0 million from $2.7million for the comparable 2004 period. The increase is due to the restructure of executive compensation in2004.  Prior to the impact of executivecompensation, which is discussed below, for the three months ended March 31,2005 salaries and employee benefits decreased 8.3% to $2.5 million from $2.7million for the comparable 2004 period. The decrease is largely due to staff reductions.  Salaries and related expenses excluding theexecutive compensation bonus accrual discussed below was 43% of total revenuesfor the first three months of 2005 compared to 52% for the first three monthsof 2004.

 

In2004, the Company restructured its executive compensation program.  The restructure was discussed in detail inthe Company’s proxy statement for its 2004 Annual Meeting, where approval toincrease the number of shares available for grant under the Company’s stockincentive plan was received.  Thecompensation for the Company’s Chief Executive Officer, Jeffrey A. Snider, wasrestructured such that a larger portion of his compensation is equitydenominated.  Mr. Snider is only eligiblefor a cash bonus to the extent the Company’s operating results over-deliver oncertain pre-determined profitability goals. To wit, Mr. Snider did not receiveany cash bonus for the 2004 operating results.

 

Theoperating results in the first quarter of 2005 suggest that the Company is ontrack to exceed the established profitability goals for the currentperiod.  While the ultimate validation ofthe cash bonus for Mr. Snider will not be determined until the year end resultsare finalized, an accrual has been established relative to the first quarteroperating results.  Consistent with therestructured executive compensation plan approved by the Board of Directors in2004, the Company will adjust, up or down, the associated bonus accrual basedon operating results as the year progresses.

 

**Interest expense.**  For the three months ended March 31, 2005interest expense decreased 25.9% to $20,000 from $27,000 for the comparable2004 period.  The decrease is due to thedecline in the outstanding balance of the related note payable.

 

**Other expenses.**  For the three months ended March 31, 2005 and2004 other expenses declined $58,000.

 

 

8

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**Income tax expense.**  Income tax expense for the three months endedMarch 31, 2005 was $459,000 compared to $302,000 for the comparable 2004period.  The effective combined incometax rates for the three months ended March 31, 2005 and 2004 were 41.0% and35.1%, respectively.  The differences between the applicable Federal tax rate and theeffective tax rates is primarily due to the impact of state taxes.

 

**Net income.**  Net income increased 18.5% to $661,000 for thethree months ended March 31, 2005 from $558,000 for the comparable 2004period.  The increase is due to thefactors discussed above.

 

**Liquidity and Capital Resources:**

 

Asa holding company, PAULA Financial’s principal sources of funds are dividendsand expense reimbursements from its operating subsidiaries and proceeds fromthe sale of its capital stock. PAULA Financial’s principal uses of funds arecapital contributions to its subsidiaries, payment of operating expenses,dividends to shareholders and repurchase of Company common stock.

 

OnNovember 1, 2003, the Company refinanced its outstanding bank debt with a$1,800,000 reducing revolving line of credit (the “Line of Credit”) with USBank (the “Lender”).  The line of creditmatures on October 31, 2005.  As of March31, 2005, PAULA Financial was in compliance with all of the covenants.  Balances outstanding under the Line of Creditbear interest at the prime rate plus 1.0%. As of April 21, 2005, the interest rate was 6.75%.  PAULA Financial’s subsidiaries haveguaranteed the obligations of PAULA Financial under the Line of Credit.  Additionally, the Lender has a securityinterest in the assets of the Company.

 

TheCompany’s Board of Directors had previously approved a 1,000,000 sharerepurchase program.  On February 20,2003, the Board of Directors authorized an additional 2,000,000 shares for theshare repurchase program.   As of March31, 2005, the Company held 924,734 shares in treasury stock.

 

OnMay 28, 2004, the Company announced the reinstatement of a quarterly cashdividend in the amount of $0.015 per common share.  The first quarter 2005 dividend was paid toholders of record as of March 17, 2005 and was distributed on March 31, 2005.

 

**Off-Balance Sheet Arrangements**

 

TheCompany does not have any off-balance sheet arrangements.

 

**Forward-Looking Statements**

 

In connection with, and because it desires to take advantage of the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, theCompany cautions readers to recognize the existence of certain forward-lookingstatements in this Form 10-QSB and in any other statement made by, or on behalfof, the Company, whether or not in future filings with the Securities andExchange Commission.  Forward-lookingstatements are statements not based on historical information and which relateto future operations, strategies, financial results or other developments.  Some forward-looking statements may beidentified by the use of terms such as

 

 

9

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“expects,” “believes,” “anticipates,” “intends,”or “judgment.” Forward-looking statements are necessarily based upon estimatesand assumptions that are inherently subject to significant business, economicand competitive uncertainties, many of which are beyond the Company’s controland many of which, with respect to future business decisions, are subject tochange.  Examples of such uncertaintiesand contingencies 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 commission revenue and fee income, andacquisitions of companies or blocks of business.  These uncertainties and contingencies canaffect actual results and could cause actual results to differ materially fromthose expressed in any forward-looking statements made by, or on behalf of, theCompany. The Company disclaims any obligation to update forward-lookingstatements.

 

**Item 3.**** Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

TheCompany’s Chief Executive Officer and Vice President Finance have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a — 15(e) and 15d — 15(e) under the Securities Exchange Act of 1934)as of the end of the period covered by this quarterly report.  Based on this evaluation, such officers haveconcluded that the Company’s disclosure controls and procedures as of the endof the period covered by this quarterly report were effective for ensuring thatinformation required to be disclosed in the reports it files or submits underthe Exchange Act is recorded, processed, summarized and reported in a timelymanner.  There have not been anysignificant changes in the Company’s internal controls or in other factors thatcould significantly affect such controls.

## ** **

10

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## ** **

## **PARTII.** OTHER INFORMATION

**Item 6.****  Exhibits and Reports on Form8-K:**

** **
| (a)    | Exhibits.                                                                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                         |   |
| 11.    |                                                                                                                                                         | Computation of  Earnings Per Share. |
|   |                                                                                                                                                         |   |
| 31.1   |                                                                                                                                                         | Rule 13a -14a /15d  -14a Certification of Chief Executive Officer. |
|   |                                                                                                                                                         |   |
| 31.2   |                                                                                                                                                         | Rule 13a -14a /15d  -14a Certification of Chief Financial Officer. |
|   |                                                                                                                                                         |   |
| 32.1   |                                                                                                                                                         | Section 1350  Certifications of Chief Executive Officer. |
|   |                                                                                                                                                         |   |
| 32.2   |                                                                                                                                                         | Section 1350  Certifications of Chief Financial Officer. |
|   |                                                                                                                                                         |   |
| (b)    |                                                                                                                                                         | Reports on  Form 8-K. |
|   |                                                                                                                                                         |   |
|   |   On March  4, 2005, the Company filed a Form 8-K related to the press release announcing  a cash dividend declaration.                            |
|   |                                                                                                                                                         |   |
|   |   On April  5, 2005, the Company filed a Form 8-K related to the press release announcing  operating results for the year ended December 31, 2004. |
|        |                                                                                                                                                              |  |  |

 

11

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SIGNATURES

In accordance with the requirements of the Exchange,the Registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| Date: May 16, 2005 | PAULA FINANCIAL           |
|--------------------|---------------------------|
|               |                      |   |
|               | By:                       | /s/ Deborah S.  Maddocks |
|               | Vice President -  Finance |

 

12

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