<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended September 30, 1995
Commission file number: 0-18118
PAULSON CAPITAL CORP.
----------------------------------------------------
Exact name of registrant as specified in its charter
Oregon 93-0589534
------------------------ ----------------
(State of incorporation) (I.R.S. Employer
Identification)
811 S.W. Front Avenue
Portland, OR 97204
----------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number,
including area code: (503) 243-6000
-------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1995:
Common stock, no par value - 4,314,201 shares
<PAGE>2
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
-------
(unaudited)
<CAPTION>
9/30/95 12/31/94
------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 259,270 $ 145,417
Receivables from brokers or dealers and
clearing organizations 5,900,134 1,342,230
Notes and other receivables 249,436 482,776
Refundable income taxes -- 515,000
Trading securities and investments 652,928 1,563,674
Investment Securities 1,285,270 15,063
Prepaid and deferred expenses 195,604 169,268
Secured demand notes 100,000 100,000
Deferred income taxes 170,000 170,000
--------- ---------
Total current assets 8,812,642 4,503,428
--------- ---------
FURNITURE AND EQUIPMENT, net 117,848 137,254
--------- ---------
DEFERRED INCOME TAXES 12,700 12,700
--------- ---------
$8,943,190 $4,653,382
========= =========
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>3
<TABLE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(unaudited)
<CAPTION>
9/30/95 12/31/94
------- --------
<S> <C> <C>
CURRENT LIABILITIES
Bank Overdraft $ -- $ 51,888
Accounts payable 291,990 268,146
Brokers or dealers and clearing organ-
izations 419,542 1,750,193
Compensation, employee benefits
and payroll taxes 1,325,479 284,562
Securities sold, not yet purchased, at
market 115,252 197,820
Income taxes payable 1,823,876 --
Deferred income taxes -- --
Subordinated notes payable 100,000 100,000
--------- ---------
Total current liabilities 4,076,139 2,652,609
--------- ---------
COMMITMENTS AND CONTINGENCIES -0- -0-
SHAREHOLDERS' EQUITY
Preferred stock, no par value,
authorized, 500,000 shares;
issued and outstanding, no shares - -
Common stock, no par value, authorized,
10,000,000 shares; issued and outstand-
ing, 4,314,201 and 4,363,501,
respectively 725,389 775,730
Retained earnings 4,141,662 1,225,043
--------- ---------
4,867,051 2,000,773
--------- ---------
$8,943,190 $4,653,382
========= =========
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>4
<TABLE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
For the three month For the nine month
period ended Sept. 30 period ended Sept. 30
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Commissions $2,908,449 $1,658,334 $7,613,579 $6,117,788
Corporate Finance 506,479 552,816 1,873,490 1,301,951
Investment Income 5,612,826 (20,849) 5,939,082 246,676
Trading Income 292,078 109,679 405,828 378,299
Interest and Dividends 7,676 1,651 18,123 13,778
Other 3,280 5,237 14,405 11,361
--------- --------- --------- ---------
9,330,788 2,306,868 15,864,507 8,069,853
--------- --------- ---------- ---------
EXPENSES
Commissions
and Salaries 3,170,890 1,802,508 7,763,062 6,120,797
Underwriting Expense 56,666 116,598 488,131 276,392
Rent, telephone
and quotation 257,066 239,569 710,676 845,178
services
Interest expense 1,536 1,500 4,909 4,500
Professional fees 144,596 133,706 351,513 474,163
Bad debt expense 237,508 29,600 356,957 88,877
Travel and
entertainment 33,489 42,934 77,704 127,130
Settlements 437,500 67,500 586,750 216,501
Branch office expenses -- (16,976) -- 22,328
Other 345,850 167,069 708,186 654,625
--------- --------- --------- ---------
4,685,101 2,584,008 11,047,888 8,830,491
Earnings (loss)
before income
taxes and extra-
ordinary gain 4,645,687 (277,140) 4,816,619 (760,638)
Provision (credit)
for income taxes
Current 1,832,000 -- 1,900,000 --
Deferred -- -- -- --
--------- --------- --------- ---------
Net earnings $2,813,687 $ (277,140) $2,916,619 $ (760,638)
========= ========= ========= =========
Earnings (loss)
per share $ .65 $ (.064) $ .67 $ (.175)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>5
<TABLE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three year period ended December 31, 1994
and the nine months ended September 30, 1995 (unaudited)
<CAPTION>
Common Stock Retained
------------ Earnings
Shares Amount (Deficit)
-------- -------- ---------
<S> <C> <C> <C>
Balance at January 1, 1992 4,569,016 $990,573 $775,214
Issuance of common stock in
lieu of Directors' cash
compensation 10,080 17,500 -
Redemption of common stock (10,000) (10,600)
Net earnings for the year - - 693,815
--------- ------- ---------
Balance at December 31, 1992 4,569,096 $997,473 $1,469,029
Issuance of common stock in
lieu of Directors' cash
compensation 7,745 10,000 -
Redemption of common stock (128,300) (140,400)
Net earnings for the year - - 836,476
--------- ------- ---------
Balance at December 31, 1993 4,448,541 $867,073 $2,305,505
Issuance of common stock in
lieu of Directors' cash
compensation 21,960 16,500 -
Redemption of common stock (107,000) (107,843)
Net loss for the year - - (1,080,462)
--------- ------- ---------
Balance at December 31, 1994 4,363,501 $775,730 $1,225,043
Redemption of common stock (49,300) (50,341)
Net earnings for year to date - - 2,916,619
--------- ------- ---------
Balance at September 30, 1995 4,314,201 $725,389 $4,141,662
========= ======= =========
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>6
<TABLE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the nine month period ended Sept. 30, 1995 and Sept. 30, 1994
<CAPTION>
9/30/95 9/30/94
------- -------
<S> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings (loss) $2,916,619 $(760,638)
--------- --------
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities
Unrealized (appreciation) loss in
investment securities (529,739) (17,875)
Realized gain on investment
securities (5,406,780) (228,801)
Depreciation and amortization 37,485 38,155
(Gain) loss from sale of furniture
and equipment 7,959 (325)
Change in assets and liabilities
(Increase) decrease in
receivables (4,324,567) 371,283
(Increase) decrease in
refundable income taxes 515,000 (66,418)
(Increase) decrease in
trading securities 910,746 (1,246,665)
(Increase) decrease in prepaid
and deferred expenses (26,336) (112,380)
Increase (decrease) in accounts
payable and accrued expenses (265,890) 1,099,657
Increase (decrease) in securities
sold, not yet purchased (82,568) (15,509)
Increase (decrease) in income taxes
payable 1,823,876 (130,475)
Decrease in bank overdraft (51,888) (74,717)
--------- --------
Total adjustments (7,392,702) (384,070)
--------- --------
Net cash provided by (used in)
operating activities (4,476,083) (1,144,708)
--------- ---------
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>7
<TABLE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - CONTINUED
<CAPTION>
9/30/95 9/30/94
------- -------
<S> <C> <C>
Cash flows from investing activities
Purchases of short-term investment
securities (3,689,272) (1,416,431)
Proceeds from sale of short-term
investment securities 8,355,586 2,140,703
Additions to furniture and equipment (31,037) (73,520)
Proceeds from sale of furniture
and equipment 5,000 325
--------- ---------
Net cash provided by (used in)
investing activities 4,640,277 651,077
--------- ---------
Cash flows from financing activities
Additions to notes payable -- --
Payments on contracts payable and
obligations under capital leases -- --
Payments on subordinated notes payable -- --
Payments to retire common stock (50,341) (107,844)
--------- ---------
Net cash provided by (used in)
financing activities (50,341) (107,844)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 113,853 (601,475)
Cash and cash equivalents
at beginning of year 145,417 941,048
--------- ---------
Cash and cash equivalents at Sept. 30 $ 259,270 $ 339,573
========= =========
Cash paid during the three months
- ---------------------------------
Interest $ 1,536 $ 1,500
======== ========
Income taxes $ 45,000 $ 2,690
======== ========
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE>8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions for interim financial
statements in Article 10 of Regulation S-X and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the interim financial statements include all adjustments (consisting only
of normal recurring accruals) necessary to state fairly the information
shown therein. The nature of the Company's business is such that the
results of any interim period are not necessarily indicative of results for
a full fiscal year.
2. Securities Owned
Any losses from the disposition of securities are reflected in
trading revenues on the income statement for the period.
3. Commitments and Contingencies
PIC and Chester L.F. Paulson, Paulson Capital's president, are
defendants in Kevin J. O'Rourke, et. al v. With Design In Mind
International, Inc., filed in U.S. District Court for the Central District
of California in February 1993, an asserted class action alleging
violations of Sections 11 and 12(2) of the Securities Act of 1933, relating
to alleged misstatements in the prospectus used in connection with a May
1991 public offering in which PIC acted as the managing underwriter. Mr.
Paulson has not been served with the complaint. PIC sold $4.96 million of
securities in the offering. PIC believes it has meritorious defenses to the
lawsuit. The lawsuit has been settled between the parties but no final
settlement has yet been presented to the court for approval.
PIC has been named as a defendant in Denardo, et al. v. Paulson
Investment Company, Inc., et al., filed in U.S. District Court for the
District of Connecticut in June 1995. Plaintiffs allege that an individual
claiming to be an agent of PIC took approximately $105,000 from them. The
claims allege violations of federal and state securities laws, state unfair
trade practice statutes, gross negligence, breach of fiduciary duties,
common law fraud and conversion. Plaintiffs are seeking compensatory
damages, punitive damages and attorney's fees. PIC has not had an
opportunity to fully investigate this claim and is unable to assess its
merit.
PIC has been named as respondent in Carimi v. Paulson Investment
Company, Inc., an NASD arbitration filed in December 1994. Claimant alleges
that PIC is liable for prematurely
<PAGE>9
exercising various cashless options without authorization. Claimant seeks
$45,000 in compensatory damages and $100,000 in punitive damages. A hearing
has been set on this matter for November 14, 1995. PIC intends to defend
this matter vigorously.
PIC has been named as respondent in Mokhtari v. Paulson Investment
Company, Inc., et al., an NASD arbitration, filed in February 1995.
Claimants allege breach of fiduciary duty, negligence, fraud and securities
fraud. Claimants seek $27,000 in compensatory damages and $73,000 in
punitive damages. PIC believes it has meritorious defenses and intends to
defend this matter vigorously.
PIC has been named as respondent in Rosner v. Investors Associates,
Inc., et al. and MRS Investments v. Investors Associates, Inc., et al.,
NASD arbitrations filed in April and May 1995, respectively. Claimants
assert claims for violation of Sections 12(2) and 15 of the Securities Act
of 1933 and Connecticut securities law in connection with investments by
claimants in a company for which PIC had entered into a non-binding letter
of intent to conduct a public offering. Claimants seek a total of $200,000
in compensatory damages, interest and attorney's fees. PIC believes it has
meritorious defenses and intends to defend these matters vigorously.
PIC has been named as respondent in Elliot v. Paulson Investment
Company, Inc., et al., an NASD arbitration filed in July 1995. Claimant
asserts claims for violation of the Texas Deceptive Trade
Practices-Consumer Protection Act, securities fraud, violation of NASD
rules, sale of an unregistered security and negligence. Claimant seeks
$30,000 in compensatory damages, treble damages pursuant to state law, and
punitive damages in an unspecified amount. PIC has not had an opportunity
to fully investigate this claim and is unable to assess its merit.
PIC has been named as respondent in Eaton v. Paulson Investment
Company, Inc., an NASD arbitration filed in July 1995. Claimant asserts
claims for equitable rescission of the trades made in her account, breach
of fiduciary duty, negligence, fraud, negligent misrepresentation and
securities fraud. Claimant seeks approximately $42,000 in compensatory
damages. PIC has not had an opportunity to fully investigate this claim and
is unable to assess its merit.
PIC has been named as respondent in Volkert v. Investors Associates,
Inc., et al., an NASD arbitration filed in February 1995. The legal and
factual basis of the claim against PIC is unclear but is apparently based
on a claim that the securities claimant purchased were not suitable to meet
his needs and objectives. Claimant seeks $16,500 in compensatory damages.
An arbitration hearing is set for March 12, 1996 in Los Angeles,
<PAGE>10
California. PIC has not had an opportunity to fully investigate this claim
and is unable to assess its merit.
PIC has been named as respondent in Shapiro v. Paulson Investment
Company, Inc., an NASD arbitration filed in September 1995. Claimant
alleges securities fraud, including claims of unsuitability, churning and
unauthorized trading, and seeks $47,000 in compensatory damages. PIC
believes it has meritorious defenses and intends to defend this matter
vigorously.
Assessment from State of California The California Employment
Development Department (the "EDD") has made employment tax assessments
against PIC for the tax period April 1, 1991 through March 31, 1994. The
amount of the assessments totals approximately $575,000. The EDD made the
assessments because it believes that PIC's registered representatives in
California are employees. PIC believes that the California registered
representatives are independent contractors. PIC is not obligated to make
contributions for unemployment insurance or to withhold state personal
income tax for independent contractors. PIC has filed petitions for
reassessment requesting that the assessments be found erroneous because the
registered representatives were properly treated as independent
contractors. PIC also requested that any assessments be recomputed and
credits be applied against any assessment amounts for personal income tax
paid by the registered representatives individually. PIC believes that the
EDD's position is erroneous and intends to defend this matter vigorously. A
hearing before the California Unemployment Insurance Appeals Board has not
yet been scheduled. PIC is unable to predict the financial impact of this
matter.
An adverse outcome in certain of the matters described above could
have a material adverse effect on PIC or the Company. PIC has been named in
certain other legal proceedings and has received notice that certain
customers may commence legal proceedings against PIC. Management of the
Company believes, based upon information received to date and, where
management believes it appropriate, discussions with counsel, that
resolution of this additional pending litigation will have no material
adverse effect on the consolidated financial condition, results of
operations, or business of the Company.
<PAGE>11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1995 vs. Three Months Ended
September 30, 1994
Results of Operations
---------------------
The revenues and operating results of the Company's operating
subsidiary, Paulson Investment Company, Inc. ("PIC"), are influenced by
fluctuations in the equity underwriting markets as well as general economic
and market conditions, particularly conditions in the over-the-counter
market, where PIC's investment account, trading inventory positions and
underwriter warrants are heavily concentrated. Significant fluctuations can
occur in PIC's revenues and operating results from one period to another.
PIC's operations depend upon many factors, such as the number of companies
that are seeking public financing, the quality and financial condition of
those companies, market conditions in general, the performance of previous
PIC underwritings and interest in certain industries by investors. As a
result, revenues and income derived from these activities may vary
significantly from period to period. In the table below, "Trading Income"
is the net gain or loss from trading positions before commissions paid to
the representatives in the trading department. "Investment Income" includes
amounts received, if any, from the exercise of PIC's underwriter warrants.
<TABLE>
<CAPTION>
Summary of Changes in Major Categories
of Revenues and Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
1995 vs. 1994 1995 vs. 1994
------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales Commissions $ 1,250,115 75.4% $ 1,495,791 24.4%
Corporate Finance ( 46,337) ( 8.4%) 571,539 43.9%
Investment Income 5,633,675 N/A 5,692,406 N/A
Trading Income 182,399 166.3% 27,529 7.3%
Other 4,068 59.1% 7,389 29.4%
Total 7,023,920 304.5% 7,794,654 96.6%
Expenses:
Commissions/Salaries 1,368,382 75.9% 1,642,265 26.8%
Underwriting Expenses (59,932) (51.4%) 211,739 76.6%
Rent, Telephone/Quotes 17,497 7.3% (134,502) (15.9%)
Other 775,146 182.2% 497,895 31.4%
Total 2,101,093 81.3% 2,217,397 25.1%
Pretax Income 4,922,827 N/A 5,577,257 N/A
</TABLE>
<PAGE>12
Total revenues for the third quarter of 1995 rose 304.5 percent from
the third quarter of 1994, from $2,306,868 to $9,330,788. As shown in the
table above, sales commissions rose $1,250,115, or 75.4 percent, from
$1,658,334 in the third quarter of 1994 to $2,908,449 in the comparable
1995 period. This increase resulted primarily from the more favorable price
movements and trading levels in OTC issues in the 1995 quarter, compared to
a flat market with lower trading levels in 1994. Corporate finance revenues
fell 8.4 percent, or $46,337, in the third quarter of 1995 compared to the
third quarter of 1994. Two transactions were completed in the 1994 quarter,
raising a total of $6.9 million for the issuers; three transactions were
completed in the 1995 quarter, raising an aggregate of $17.5 million for
corporate finance clients, but the two largest transactions (accounting for
$14.6 million) were jointly managed, resulting in significantly reduced
fees to PIC. Corporate finance revenue is directly related to the amount of
money raised by PIC in completed transactions. Investment income increased
$5,633,675, from a loss of $20,849 in the third quarter of 1994 to a gain
of $5,612,826 in the 1995 quarter. No underwriter warrants were exercised
in the 1994 quarter while six warrants were exercised in the 1995 quarter.
Trading income rose $182,399, or 166.3 percent, from $109,679 in the 1994
quarter to $292,078 in the 1995 period. This improvement was also due to
greater trading levels and generally higher prices in OTC issues in the
1995 quarter compared to a flat market in 1994.
Total expenses rose $2,101,093 in the third quarter of 1995 from the
comparable 1994 period, an increase of 81.3 percent from $2,584,008 to
$4,685,101. Commissions and salaries rose $1,368,382, or 75.9 percent, from
$1,802,508 in the 1994 period to $3,170,890 in 1995. This increase was
primarily due to increased commission revenues resulting in a higher level
of commissions paid. Higher commissions are generally paid to employee
registered representatives at higher production levels as an incentive.
Underwriting expenses decreased by $59,932, or 51.4 percent, due primarily
to decreased legal fees for the jointly managed corporate finance
transactions completed in the 1995 quarter compared to the two solely
managed transactions completed in the 1994 quarter. Rent, telephone and
quote expenses increased from $239,569 in the 1994 period to $257,066 in
1995, an increase of 7.3 percent. Other expenses increased 182.2 percent,
from $425,333 in the third quarter of 1994 to $1,200,479 in the third
quarter of 1995. This increase was primarily due to a $370,000 increase in
settlements, a $207,908 increase in bad debt expense and a $139,750 accrual
for the employee profit sharing plan.
The Company had a pretax profit of $4,645,687 in the third quarter of
1995 compared to a pretax loss of $277,140 in the
<PAGE>13
comparable 1994 period. The primary reason for this increase wasthe
significant increase in investment income resulting from the exercise of
underwriter warrants. Independent of investment income, the Company would
have had a loss before income taxes of $967,139 in the third quarter of
1995 compared to a loss before income taxes of $256,291 in the comparable
1994 period. Investment income in the quarter was significantly higher than
in any previous quarter in the Company's history. This was due to gains in
the value of the underwriter warrants sold in response to significant
increases in OTC prices, particularly the technology sector. This source of
income cannot be expected to regularly recur. Significant fluctuations can
occur in PIC's revenues and operating results from one period to another.
The Company also accrued a credit of $20,000 for an income tax refund
for the third quarter of 1994, compared to an accrual for income taxes in
the third quarter of 1995 of $1,832,000.
Liquidity and Capital Resources
The majority of PIC's assets are cash and assets readily convertible
to cash. PIC's securities inventory is stated at market value. The
liquidity of the market for many of PIC's securities holdings, however,
varies with trends in the stock market. Since many of the securities held
by PIC are thinly traded, and PIC is in many cases a primary market maker
in the issues held, any significant sales of PIC's positions could
adversely affect the liquidity of the issues held. In general, falling
prices in OTC securities (which make up most of PIC's trading positions)
lead to decreased liquidity in the market for these issues, while rising
prices in OTC issues tend to increase the liquidity of the market for these
securities. The overall increase in prices for the OTC securities traded by
PIC in 1995 was combined with a general increase in the liquidity of the
markets for these securities. Markets in 1994 for OTC securities generally
declined. PIC's investment account and trading inventory accounts are
stated at fair market value, which is at or below quoted market price.
PIC owed $100,000 at September 30, 1995 pursuant to a subordinated
loan from an investor. PIC also borrows money from its clearing firm in the
ordinary course of its business, pursuant to an understanding under which
the clearing firm agrees to finance PIC's trading accounts. As of September
30, 1995, no net loans were outstanding pursuant to this arrangement. PIC
and the Company are generally able to meet their compensation and other
obligations out of current liquid assets.
Another source of capital to PIC and the Company has been the
exercise of underwriter warrants issued to PIC in connection with its
corporate finance activities and the sale of the underlying securities.
These warrants are not reflected on the balance sheet
<PAGE>14
of PIC or Paulson Capital. While the warrants and the securities issuable
upon exercise of the warrants are not immediately saleable, PIC receives
the right to require the issuer to register the underlying securities for
resale to the public. Profits, if any, from the warrants are realized based
upon the difference between the market price and the exercise price on the
date of exercise. Further profits or losses are subsequently realized when
the underlying securities are sold. Profits and losses realized from the
warrants are recorded as "Investment Income." There is no public market for
the underwriter warrants. The securities receivable upon exercise of the
underwriter warrants cannot be resold unless the issuer has registered
these securities with the SEC and the states in which the securities will
be sold or exemptions are available. Any delay or other problem in the
registration of these securities would have an adverse impact upon PIC's
ability to obtain funds from the exercise of the underwriter warrants and
the resale of the underlying securities. At September 30, 1995, PIC owned
36 underwriter warrants (from 33 issuers), of which 30 were currently
exercisable and six had an exercise price below the current market price of
the securities receivable upon exercise. The value of the firm's
underwriter warrants depends on the prices of the underlying securities.
These prices are influenced by general movements in the prices of OTC
securities as well as the success of the issuers of the underwriter
warrants. In 1995, PIC exercised underwriter warrants for seven issuers,
and sold its entire position in Ryka Inc., Action Performance Companies,
Inc., Cree Research, Inc., Research Frontiers Incorporated, Irvine Sensors
Corporation and Identix Incorporated.
In the nine months ended September 30, 1995, $4,476,083 of net cash
was used in operating activities by the Company. The major adjustments to
reconcile this result to the Company's net profit included an increase in
receivables of $4,324,567, a realized gain on investment securities of
$5,406,780 and unrealized appreciation of $529,739 in investment
securities, offset by an increase in income taxes payable of $1,823,876, a
decrease in trading securities of $910,746 and a decrease in refundable
income taxes of $515,000. The primary reason for the increase in
receivables was that certain proceeds from the sales of securities
underlying underwriter warrants remained in PIC's account at its clearing
firm. In the quarter, $4,640,277 of net cash was provided to the Company by
investing activities, primarily resulting from $8,355,586 of proceeds from
the sale of short-term investment securities offset partially by the
purchase of $3,689,272 of short-term investment securities. $50,341 of net
cash was used in financing activities in the quarter for payments to retire
common stock. The net increase in cash and cash equivalents for the quarter
totaled $113,853. See "Financial Statements -- Consolidated Statements of
Cash Flows."
<PAGE>15
As a securities broker-dealer, the Company's wholly owned subsidiary,
PIC, is required by SEC regulations to meet certain liquidity and capital
standards. At September 30, 1995, the Company had no material commitments
for capital expenditures.
In general, the primary ongoing sources of PIC's, and therefore the
Company's, liquidity, including PIC's trading positions, borrowings on
those positions and profits realized upon the exercise of underwriter
warrants, all depend in large part on the trend in the general markets for
OTC securities. Rising OTC price levels will tend to increase the value and
liquidity of PIC's trading positions, the amount that can be borrowed from
its clearing firm based upon those positions, and the value of PIC's
underwriter warrants. The Company believes its liquidity is sufficient to
meet its needs for the foreseeable future.
Inflation
Because PIC's assets are primarily liquid, they are not significantly
affected by inflation. The rate of inflation affects PIC's expenses, such
as employee compensation, office leasing and communications costs. These
costs may not readily be recoverable in the price of services offered by
the Company. To the extent inflation results in rising interest rates and
has other adverse effects in the securities markets and the value of
securities held in inventory or PIC's investment account, it may adversely
affect the Company's financial position and results of operations.
<PAGE>16
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAULSON CAPITAL CORP.
Date: 11/9/95 By: CHESTER L.F. PAULSON
------------------ -------------------------------
Chester L.F. Paulson
President
Date: 11/9/95 By: CAROL RICE
------------------ -------------------------------
Carol Rice
Principal Accounting Officer
<PAGE>18
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
------- ----------- ----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET OF PAULSON CAPITAL CORP.
AND SUBSIDIARY AS OF SEPTEMBER 30, 1995 AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND
CASH FLOWS FOR THE NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 259
<RECEIVABLES> 6,150
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 1,938
<PP&E> 118
<TOTAL-ASSETS> 8,943
<SHORT-TERM> 100
<PAYABLES> 3,861
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 115
<LONG-TERM> 0
<COMMON> 0
0
725
<OTHER-SE> 4,142
<TOTAL-LIABILITY-AND-EQUITY> 8,943
<TRADING-REVENUE> 406
<INTEREST-DIVIDENDS> 18
<COMMISSIONS> 7,614
<INVESTMENT-BANKING-REVENUES> 1,873
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 5
<COMPENSATION> 7,763
<INCOME-PRETAX> 4,817
<INCOME-PRE-EXTRAORDINARY> 4,817
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,917
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
