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, 1996
Commission file number: 0-18188
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 25, 1996:
Common stock, no par value - 4,184,809 shares
1
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FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
(unaudited)
9/30/96 12/31/95
---------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 151,632 $ 174,029
Receivables from brokers or dealers and
clearing organizations 2,558,001 4,041,470
Notes and other receivables 189,031 342,822
Refundable income taxes 532,054 157,138
Trading securities and investments 6,054,691 3,260,397
Investment Securities 4,574,232 918,990
Prepaid and deferred expenses 130,673 338,038
Secured demand notes 100,000 100,000
Deferred income taxes 82,000 82,000
---------- ---------
Total current assets 14,372,314 9,414,884
---------- ---------
FURNITURE AND EQUIPMENT, net 124,728 115,881
---------- ---------
DEFERRED INCOME TAXES 10,900 10,900
---------- ---------
$14,507,942 $9,541,665
========== =========
The accompanying notes are an integral part of this statement
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(unaudited)
9/30/96 12/31/95
---------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Bank Overdraft $ -- $ --
Accounts payable 294,227 334,422
Brokers or dealers and clearing organ-
izations 2,893,451 2,809,546
Compensation, employee benefits
and payroll taxes 1,510,078 1,066,182
Securities sold, not yet purchased, at
market 414,223 345,550
Income taxes payable -- --
Deferred income taxes -- --
Subordinated notes payable 100,000 100,000
---------- ---------
Total current liabilities 5,211,979 4,655,700
---------- ---------
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, 4,250,809 and 4,324,539,
respectively 514,747 735,889
Retained earnings 8,781,216 4,150,076
---------- ---------
9,295,963 4,885,965
---------- ---------
$14,507,942 $9,541,665
========== =========
The accompanying notes are an integral part of this statement
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three month For the nine month
period ended Sept. 30 period ended Sept. 30
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Commissions $2,551,998 $2,908,449 $ 9,207,515 $ 7,613,579
Corporate Finance 1,127,282 506,479 2,875,490 1,873,490
Investment Income 998,427 5,612,826 6,283,726 5,939,082
Trading Income 389,402 292,078 1,217,697 405,828
Interest and Dividends 2,174 7,676 5,646 18,123
Other 2,647 3,280 11,311 14,405
--------- --------- ---------- ----------
5,071,930 9,330,788 19,601,385 15,864,507
--------- --------- ---------- ----------
EXPENSES
Commissions
and Salaries 2,485,487 3,170,890 9,209,532 7,763,062
Underwriting Expense 222,637 56,666 546,863 488,131
Rent, telephone
and quotation 188,789 257,066 600,880 710,676
services
Interest expense 1,547 1,536 5,504 4,909
Professional fees 148,154 144,596 369,654 351,513
Bad debt expense 45,000 237,508 136,998 356,957
Travel and
entertainment 31,271 33,489 102,743 77,704
Settlements 60,990 437,500 130,615 586,750
Other 266,221 345,850 779,956 708,186
--------- --------- ---------- ----------
3,450,096 4,685,101 11,882,745 11,047,888
Earnings (loss)
before income
taxes and extra-
ordinary gain 1,621,834 4,645,687 7,718,640 4,816,619
Provision (credit)
for income taxes
Current 648,800 1,832,000 3,087,500 1,900,000
Deferred -- -- -- --
--------- --------- ---------- ----------
Net earnings $ 973,034 $2,813,687 $ 4,631,140 $ 2,916,619
========= ========= ========== ==========
Earnings (loss)
per share $ .24 $ .65 $ 1.09 $ .67
========= ========= ========== ==========
The accompanying notes are an integral part of this statement
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three year period ended December 31, 1995
and the nine months ended September 30, 1996 (unaudited)
Common Stock Retained
----------------------------- Earnings
Shares Amount (Deficit)
--------- -------- ----------
<S> <C> <C> <C>
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
Issuance of common stock in
lieu of Directors' cash
compensation 10,338 10,500 -
Redemption of common stock (49,300) (50,341)
Net earnings for year - - 2,925,033
--------- -------- ----------
Balance at December 31, 1995 4,324,539 $ 735,889 $ 4,150,076
Option Exercise 38,570 40,892 -
Redemption of common stock (112,300) (262,034)
Net earnings for year to date - - 4,631,140
--------- -------- ----------
Balance at September 30,
1996 4,250,809 $ 514,747 $ 8,781,216
========= ======== ==========
The accompanying notes are an integral part of this statement
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
for the nine month period ended Sept. 30, 1996 and Sept. 30, 1995
9/30/96 9/30/95
---------- ----------
<S> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings (loss) $4,631,140 $2,916,619
--------- ---------
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities
Unrealized (appreciation) loss in
investment securities 148,513 (529,739)
Realized gain on investment
securities (6,424,895) (5,406,780)
Depreciation and amortization 38,455 37,485
(Gain) loss from sale of furniture
and equipment (40) 7,959
Change in assets and liabilities
(Increase) decrease in
receivables 1,637,260 (4,324,567)
(Increase) decrease in
refundable income taxes (374,916) 515,000
(Increase) decrease in
trading securities (2,794,294) 910,746
(Increase) decrease in prepaid
and deferred expenses 207,365 (26,336)
Increase (decrease) in accounts
payable and accrued expenses 487,606 (265,890)
Increase (decrease) in securities
sold, not yet purchased 68,673 (82,568)
Increase (decrease) in income taxes
payable -- 1,823,876
Decrease in bank overdraft -- (51,888)
--------- ---------
Total adjustments (7,006,273) (7,392,702)
--------- ---------
Net cash provided by (used in)
operating activities (2,375,133) (4,476,083)
--------- ---------
The accompanying notes are an integral part of this statement
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
9/30/96 9/30/95
----------- ----------
<S> <C> <C>
Cash flows from investing activities
Purchases of short-term investment
securities (14,000,282) (3,689,272)
Proceeds from sale of short-term
investment securities 16,621,422 8,355,586
Additions to furniture and equipment (47,302) (31,037)
Proceeds from sale of furniture
and equipment 40 5,000
---------- ---------
Net cash provided by (used in)
investing activities 2,573,878 4,640,277
---------- ---------
Cash flows from financing activities
Additions to common stock 40,892 --
Payments on subordinated notes payable -- --
Payments to retire common stock (262,034) (50,341)
---------- ---------
Net cash provided by (used in)
financing activities (221,142) (50,341)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (22,397) 113,853
Cash and cash equivalents
at beginning of year 174,029 145,417
--------- ---------
Cash and cash equivalents at Sept. 30 $ 151,632 $ 259,270
========= =========
Cash paid during the three months
Interest $ 1,547 $ 1,536
========= =========
Income taxes $2,478,598 $ 45,000
========= =========
The accompanying notes are an integral part of this statement
</TABLE>
7
<PAGE>
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 has been named as respondent in Eaton v. Paulson Investment
Company, Inc., an NASD arbitration filed in July 1995. Claimant, a former
PIC customer, alleges securities fraud, including unsuitability, breach of
fiduciary duty, negligence, negligent supervision and hiring, and
intentional misrepresentations relating to claimant's account with PIC.
Claimant seeks $100,000 in compensatory damages, attorney fees, and an
unspecified amount of punitive damages. An arbitration hearing was held in
September 1996, but the arbitrators have not yet issued their decision.
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. An
arbitration date has not been set. PIC believes it has meritorious defenses
and intends to defend this matter vigorously.
In November 1995, PIC was informed that a judgment had been entered in
Euro American Group, Inc. v. P.F.D.S. Partners Development Ltd., dba
Paulson Investment Company, Inc. in the Supreme Court of New York in the
amount of $70,024.98 plus post judgment interest of 9 percent. The judgment
was taken by default and the plaintiff now asserts that PIC is liable for
the judgment amount. The case involved a lease entered into by a former PIC
8
<PAGE>
independent contractor for certain equipment and services. PIC does not
believe it is a party to or otherwise liable for the judgment, or that it
was properly served in the matter.
PIC has been named as a defendant in Smith, Benton & Hughes, Inc. v.
Paulson Investment Company, Inc., an NASD arbitration served on PIC in
February 1996. Claimant, an NASD broker-dealer, alleges that PIC was
negligent in supervising one of its employees who maintained a securities
account at the claimant. Claimant alleges that the former Paulson employee
engaged in various acts of fraud, misrepresentation, violation of federal
securities laws and breach of contract, and seeks in excess of $104,000 in
compensatory damages, attorney fees and interest against PIC. An
arbitration hearing is expected to be set in early 1997. PIC has not had an
opportunity to fully investigate this claim, but believes it has
meritorious defenses and intends to defend this matter vigorously.
PIC was named as a respondent in Jack Kimberlin v. Paulson Investment
Company, Inc., et al., an NASD arbitration filed in April 1996. Claimant, a
former PIC customer, alleges breach of contract, breach of fiduciary duty,
negligence, fraud, securities and mail fraud, racketeering and violations
of the Texas Deceptive Trade Practices Act. Claimant seeks $350,000 in
compensatory damages, plus interest, attorney fees, punitive damages and
treble damages. PIC has filed an answer and discovery has just begun. PIC
is investigating this matter and is unable to comment on the merit, if any,
of claimant's allegations.
The Company and PIC are defendants in Holly Millar v. Pearce
International Systems, Inc., et al., filed in San Francisco Superior Court,
State of California, in March 1996. An asserted class action, plaintiff
alleges violations of the California Securities Law, deceit, negligent
misrepresentation and unfair business practices relating to alleged
misstatements in the prospectus used in connection with a February 1994
public offering in which PIC acted as the managing underwriter. The
offering consisted of 675,000 units at a price of $7.25 per unit. Plaintiff
seeks recision of the offering as well as actual damages, interest,
attorney fees and punitive damages. Discovery has just begun. At this early
stage, the Company and PIC have not had an opportunity to investigate this
matter fully, but believe they have meritorious defenses and intend to
defend this matter vigorously. Pursuant to a tolling agreement reached with
the plaintiff, the Company (but not PIC) expects to be dismissed without
prejudice from the lawsuit.
Assessment from State of California In July and September 1994, the
California Employment Development Department (the "EDD") issued employment
tax notices of deficiency against PIC for the period April 1, 1991 through
March 31, 1994. The claimed deficiencies total approximately $498,948 plus
interest and
9
<PAGE>
penalties. The EDD asserts that PIC's registered representatives in
California were employees of PIC and not independent contractors. PIC's
position is that its California registered representatives were independent
contractors, and that PIC was not obligated to make contributions for
unemployment insurance or to withhold state personal income taxes. PIC has
filed petitions for reconsideration and of protest, requesting that the
deficiencies be found erroneous on that basis. PIC has also requested that
any deficiencies be recomputed, and that credits be applied against any
deficiency amounts for the personal income tax paid by the registered
representatives individually. A hearing before the California Unemployment
Insurance Appeals Board has yet to be scheduled. An unfavorable result
could require, in addition to payment by PIC of the deficiencies plus
interest and penalties, additional contributions (plus earnings) to the
Company's qualified retirement plan for the excluded individuals, in order
to avoid disqualification of the plan. PIC believes, however, that the
EDD's position is erroneous, particularly in light of PIC's compliance with
state rules issued in March 1996 that would permit PIC's treatment of its
California registered representatives as independent contractors. The
Company is unable to provide an estimate of the amount or range of
potential loss should the outcome be unfavorable.
Employment Claim by Jack Alexander. A claim was filed in state court
in California in May 1996 against PIC by Jack Alexander, who performed
services for PIC in California between 1991 and 1995. Plaintiff alleges age
discrimination, wrongful termination, breach of employment contract and
breach of a covenant of good faith and fair dealing. The suit seeks
compensatory and punitive damages, interest and attorney fees, but no
specific amounts are plead in the complaint. Plaintiff filed a complaint
with the California Department of Fair Employment and Housing in October
1995 on the same issues and previously indicated that, in any litigation,
he would request damages of $1,218,000 plus attorney fees and punitive
damages. In July 1996, PIC caused the case to be moved to the Federal
District Court for the Southern District of California. PIC denies Mr.
Alexander's claims, believes they are unfounded, and intends to vigorously
defend the action.
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. The Company believes,
based upon information received to date and, where the Company 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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 vs. Three Months Ended
September 30, 1995
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,
1996 vs. 1995 1996 vs. 1995
------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales Commissions $( 356,451) (12.3%) $ 1,593,936 20.9%
Corporate Finance 620,803 122.6% 1,002,000 53.5%
Investment Income (4,614,399) (82.2%) 344,644 5.8%
Trading Income 97,324 33.3% 811,869 200.0%
Other ( 6,135) (56.0%) ( 15,571) (47.9%)
Total (4,258,858) (45.6%) 3,736,878 23.6%
Expenses:
Commissions/Salaries ( 685,403) (21.6%) 1,446,470 18.6%
Underwriting Expenses 165,971 292.9% 58,732 12.0%
Rent, Telephone/Quotes ( 68,277) (26.6%) (109,796) (15.4%)
Other ( 647,296) (53.9%) (560,549) (26.9%)
Total (1,235,005) (26.4%) 834,857 7.6%
Pretax Income (3,023,853) (65.1%) 2,902,021 60.2%
</TABLE>
11
<PAGE>
Total revenues for the third quarter of 1996 fell 45.6 percent from
the third quarter of 1995, to $5,071,930 from $9,330,788. As shown in the
table above, sales commissions fell $356,451, or 12.3 percent, to
$2,551,998 in the third quarter of 1996 from $2,908,449 in the comparable
1995 period. This decrease resulted primarily from the less favorable price
movements and trading levels in OTC issues in the 1996 quarter, compared to
a rising market with higher trading levels in 1995. The Nasdaq Composite
Index rose 11.8 percent in the 1995 quarter but only 2.5 percent in the
1996 quarter. Corporate finance revenues rose 122.6 percent, or $620,803,
in the third quarter of 1996 compared to the third quarter of 1995. Two
transactions were completed in the 1996 quarter, raising a total of $25
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 decreased $4,614,399,
to $998,427 in the third quarter of 1996 from $5,612,826 in the 1995
quarter. One underwriter warrant was exercised in the 1996 quarter while
six warrants were exercised in the 1995 quarter. Trading income rose
$97,324, or 33.3 percent, to $389,402 in the 1996 quarter from $292,078 in
the 1995 period. This improvement was primarily due to greater trading
levels in the securities of issuers for which PIC completed corporate
finance transactions in the 1996 quarter.
Total expenses fell $1,235,005 in the third quarter of 1996 from the
comparable 1995 period, a decrease of 26.4 percent to $3,450,096 from
$4,685,101. Commissions and salaries fell $685,403, or 21.6 percent, to
$2,485,487 in the 1996 period from $3,170,890 in 1995. This decrease was
primarily due to decreased commission revenues resulting in a lower level
of commissions paid. (Higher commissions are generally paid to employee
registered representatives at higher production levels as an incentive.)
Underwriting expenses increased by $166,971, or 292.9 percent, due
primarily to increased legal fees for the two large managed corporate
finance transactions completed in the 1996 quarter compared to the three
smaller transactions completed in the 1995 quarter, including two
transactions in which expenses were shared with a co-manager. Rent,
telephone and quote expenses decreased to $188,789 in the 1996 period from
$257,066 in 1995, a decrease of 26.6 percent. Other expenses decreased 53.9
percent, to $553,183 in the third quarter of 1996 from $1,200,479 in the
third quarter of 1995. This decrease was primarily due to a $376,510
decrease in settlements, a $192,508 decrease in bad debt expense and a
$89,750 lower accrual for the employee profit sharing plan.
12
<PAGE>
The Company had a pretax profit of $4,645,687 in the third quarter of
1995 compared to a pretax profit of $1,621,834 in the comparable 1996
period. The primary reason for this decrease was the significant decrease
in investment income resulting from the exercise of fewer 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 profit before income taxes of $623,407 in the third quarter of 1996.
Investment income in the 1995 quarter and the first three quarters of 1996
were significantly higher than in previous Company history. This was due to
gains in the value of the securities underlying underwriter warrants
exercised in response to significant increases in OTC prices. 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 accrued $648,800 for income taxes in the third quarter of
1996, 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 1996 and 1995 was combined with a general increase in the liquidity
of the markets for these securities. 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, 1996 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, 1996, $335,450 was owed by PIC 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
13
<PAGE>
its corporate finance activities and the sale of the underlying securities.
These warrants are not reflected on the balance sheet 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, 1996, PIC owned
31 underwriter warrants (from 29 issuers), of which 27 were currently
exercisable and five 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. Year to date in 1996, PIC exercised underwriter warrants from two
issuers.
In the nine months ended September 30, 1996, $2,375,133 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 a decrease in
receivables of $1,637,260, an increase in accounts payable and accrued
expenses of $487,606, a decrease in prepaid and deferred expenses of
$207,365 and an unrealized loss in investment securities of $148,513,
offset by a realized gain on investment securities of $6,424,895, an
increase in trading securities of $2,794,294 and an increase in refundable
income taxes of $374,916. The primary reason for the realized gain on
investment securities was the sale of securities underlying an underwriter
warrant during the quarter, with much of the proceeds invested in
investment securities. In the quarter, $2,573,878 of net cash was provided
to the Company by investing activities, primarily resulting from
$16,621,422 of proceeds from the sale of short-term investment securities
offset partially by the purchase of $14,000,282 of short-term investment
securities. $221,142 of net cash was used in financing activities in the
quarter for payments to retire common stock offset partially by additions
to common stock resulting from the exercise of employee stock options. The
net decrease in cash and cash equivalents for the quarter
14
<PAGE>
totaled $22,397. See "Financial Statements -- Consolidated
Statements of Cash Flows."
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, 1996, 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.
15
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 of Notes to Condensed Consolidated Financial Statements
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
16
<PAGE>
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: October 31, 1996 By: CHESTER L.F. PAULSON
------------------ ---------------------------
Chester L.F. Paulson
President
Date: November 1, 1996 By: CAROL RICE
------------------ ----------------------------
Carol Rice
Principal Accounting Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
--- ----------- --------
27 Financial Data Schedule
18
<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, 1996 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH FLOWS FOR
THE NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1996 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-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 151
<RECEIVABLES> 2,747
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 10,629
<PP&E> 125
<TOTAL-ASSETS> 14,508
<SHORT-TERM> 100
<PAYABLES> 4,698
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 414
<LONG-TERM> 0
0
0
<COMMON> 515
<OTHER-SE> 8,781
<TOTAL-LIABILITY-AND-EQUITY> 14,508
<TRADING-REVENUE> 1,218
<INTEREST-DIVIDENDS> 6
<COMMISSIONS> 9,208
<INVESTMENT-BANKING-REVENUES> 2,875
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 6
<COMPENSATION> 9,210
<INCOME-PRETAX> 7,719
<INCOME-PRE-EXTRAORDINARY> 7,719
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,631
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
