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 June 30, 1996
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 July 31, 1996:
Common stock, no par value - 4,320,024 shares
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAULSON CAPITAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
ASSETS
(unaudited)
6/30/96 12/31/95
------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 173,185 $ 174,029
Receivables from brokers or dealers and
clearing organizations 3,163,352 4,041,470
Notes and other receivables 441,816 342,822
Refundable income taxes -- 157,138
Trading securities and investments 8,047,663 3,260,397
Investment Securities 1,713,303 918,990
Prepaid and deferred expenses 136,996 338,038
Secured demand notes 100,000 100,000
Deferred income taxes 82,000 82,000
----------- ----------
Total current assets 13,858,315 9,414,884
----------- ----------
FURNITURE AND EQUIPMENT, net 130,958 115,881
----------- ----------
DEFERRED INCOME TAXES 10,900 10,900
----------- ----------
$14,000,173 $9,541,665
=========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
2
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited)
6/30/96 12/31/95
------- --------
<S> <C> <C>
CURRENT LIABILITIES
Bank Overdraft $ -- $ --
Accounts payable 298,309 334,422
Brokers or dealers and clearing organ-
izations 1,487,218 2,809,546
Compensation, employee benefits
and payroll taxes 1,657,950 1,066,182
Securities sold, not yet purchased, at
market 593,919 345,550
Income taxes payable 1,319,560 --
Deferred income taxes -- --
Subordinated notes payable 100,000 100,000
----------- -----------
Total current liabilities 5,456,956 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, 4,320,024 and 4,324,539,
respectively 735,035 735,889
Retained earnings 7,808,182 4,150,076
----------- -----------
8,543,217 4,885,965
----------- -----------
$14,000,173 $ 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 six month
period ended June 30 period ended June 30
1996 1995 1996 1995
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Commissions $3,537,386 $2,630,375 $6,655,517 $4,705,130
Corporate Finance 485,229 815,339 1,748,208 1,367,011
Investment Income 4,561,110 324,318 5,285,299 326,256
Trading Income 485,388 (41,639) 828,295 113,750
Interest and Dividends 1,382 5,845 3,472 10,447
Other 4,949 4,585 8,664 11,125
---------- ---------- ---------- ----------
9,075,444 3,738,823 14,529,455 6,533,719
---------- ---------- ---------- ----------
EXPENSES
Commissions
and Salaries 3,580,438 2,569,573 6,724,045 4,592,172
Underwriting Expense 19,666 290,021 324,226 431,465
Rent, telephone
and quotation 234,343 230,185 412,091 453,610
services
Interest expense 1,859 1,603 3,957 3,373
Professional fees 126,763 103,886 221,500 206,917
Bad debt expense 47,109 85,841 91,998 119,449
Travel and
entertainment 43,324 18,235 71,472 44,215
Settlements 50,000 125,000 69,625 149,250
Other 247,089 182,882 513,735 362,336
---------- ---------- ---------- ----------
4,350,591 3,607,226 8,432,649 6,362,787
Earnings (loss)
before income
taxes and extra-
ordinary gain 4,724,853 131,597 6,096,806 170,932
Provision (credit)
for income taxes
Current 1,889,900 52,000 2,438,700 68,000
Deferred -- -- -- --
---------- ---------- ---------- ----------
Net earnings $2,834,953 $ 79,597 $3,658,106 $ 102,932
========== ========= ========== =========
Earnings (loss)
per share $ .657 $ .018 $ .847 $ .024
========== ========= ========== =========
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 six months ended June 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 24,285 27,946 --
Redemption of common stock (28,800) (28,800)
----------- ----------- -----------
Net earnings for year to date -- -- 3,658,106
----------- ----------- -----------
Balance at June 30, 1996 4,320,024 $ 735,035 $ 7,808,182
=========== =========== ===========
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 six month period ended June 30, 1996 and June 30, 1995
6/30/96 6/30/95
------- -------
<S> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings (loss) $ 3,658,106 $ 102,932
----------- -----------
Adjustments to reconcile net
earnings (loss) to net cash provided
by operating activities
Unrealized (appreciation) loss in
investment securities 111,355 (4,000)
Realized gain on investment
securities (5,396,654) (319,693)
Depreciation and amortization 26,040 24,994
Gain from sale of furniture
and equipment -- (338)
Change in assets and liabilities
(Increase) decrease in receivables 779,124 (1,402,168)
(Increase) decrease in
refundable income taxes 157,138 515,000
(Increase) decrease in
trading securities (4,787,266) 299,921
(Increase) decrease in prepaid
and deferred expenses 201,042 78,752
Increase (decrease) in accounts
payable and accrued expenses (766,673) (45,586)
Increase (decrease) in securities
sold, not yet purchased 248,369 730,971
Increase (decrease) in income
taxes payable 1,319,560 35,162
Decrease in bank overdraft -- (36,915)
Total adjustments (8,107,965) (123,900)
----------- ----------
Net cash provided by (used in)
operating activities (4,449,859) (20,968)
----------- ----------
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
6/30/96 6/30/95
------- -------
<S> <C> <C>
Cash flows from investing activities
Purchases of short-term investment
securities (9,434,245) (154,200)
Proceeds from sale of short-term
investment securities 13,925,231 476,458
Additions to furniture and equipment (41,117) (25,818)
Proceeds from sale of furniture
and equipment -- 700
------------ ------------
Net cash provided by (used in)
investing activities 4,449,869 297,140
------------ ------------
Cash flows from financing activities
Additions to common stock 27,946 --
Payments to retire common stock (28,800) --
------------ ------------
Net cash provided by (used in)
financing activities (854) --
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (844) 276,172
Cash and cash equivalents
at beginning of year 174,029 145,417
------------ ------------
Cash and cash equivalents at June 30 $ 173,185 $ 421,589
============ ============
Cash paid during the three months
- ---------------------------------
Interest $ 3,957 $ 3,373
============ ============
Income taxes $ 937,102 $ 27,200
============ ============
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 date has been set
for September 24, 1996. PIC believes it has meritorious defenses and
intends to defend this matter vigorously.
PIC has been named as respondent in Volkert v. Investors Associates,
Inc., et al., an NASD arbitration filed in February 1995. Claimants, former
PIC customers, allege fraud, negligent hiring and supervision, unfair
business practices, and intentional and negligent infliction of emotional
distress. Claimant seeks $21,700 in compensatory damages, treble damages,
attorney fees and an unspecified amount of punitive damages. An arbitration
date has been set for September 11, 1996. PIC believes that it has
meritorious defenses and intends to defend this matter vigorously.
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.
8
<PAGE>
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
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 set for August 21, 1996, but the hearing date is
expected to be set over. PIC has not had an opportunity to fully
investigate this claim, but believes it has meritorious defenses and
intends to defend this matter vigorously.
Jack Kimberlin Arbitration. 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 not yet 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. PIC has
filed a motion to dismiss the complaint and 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. Additionally, the Company does
not believe the California state courts have jurisdiction.
9
<PAGE>
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 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 proposed rules 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, and PIC recently
filed a motion to change venue to the Federal District Court for the
District of Oregon. 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. Management of the
Company believes, based upon
10
<PAGE>
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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 vs. Six Months Ended June 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
2nd Quarter 1st Half
1996 vs. 1995 1996 vs. 1995
------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales Commissions $ 907,011 34.5% $ 1,950,387 41.4%
Corporate Finance (330,110) (40.5%) 381,197 27.9%
Investment Income 4,236,792 N/A 4,959,043 N/A%
Trading Income 527,027 N/A 714,545 628.2%
Other (4,099) (39.3%) (9,436) (43.7%)
Total 5,336,621 142.7% 7,995,736 122.4%
Expenses:
Commissions/Salaries 1,010,865 39.3% 2,131,873 46.4%
Underwriting Expenses (270,355) (93.2%) (107,239) (24.8%)
Rent,Telephone/Quotes 4,158 1.8% ( 41,519) ( 9.2%)
Other ( 1,303) ( .3%) 86,747 9.8%
Total 743,365 20.6% 2,069,862 32.5%
Pretax Income 4,593,356 N/A 5,925,874 N/A
</TABLE>
12
<PAGE>
Total revenues for the second quarter of 1996 rose 142.7 percent from
the second quarter of 1995, from $3,738,823 to $9,075,444. As shown in the
table above, sales commissions rose $907,011, or 34.5 percent, from
$2,630,375 in the second quarter of 1995 to $3,537,386 in the comparable
1996 period. This increase resulted primarily from the more favorable price
movements and trading levels in smaller capitalization issues in the 1996
quarter, compared to more moderate levels in 1995. The Nasdaq Industrial
Average rose less in the second quarter of 1996 compared to the comparable
1995 period, but PIC's focus is on very small capitalization issues which
experienced a more favorable market in the 1996 quarter. Specifically, very
active trading levels in the securities of two issuers for which PIC
recently completed corporate finance transactions increased sales
commissions. Corporate finance revenues fell 40.5 percent, or $330,110, in
the second quarter of 1996 compared to the second quarter of 1995. No
transactions were completed in the 1996 quarter in which PIC acted as
managing underwriter, two transactions were completed in the 1995 quarter,
raising an aggregate of $12.2 million for the issuers. Corporate finance
revenue is directly related to the amount of money raised in completed
transactions. Investment income increased $4,236,792, from $324,318 in the
second quarter of 1995 to $4,561,110 in the second quarter of 1996,
primarily due to the exercise in the 1996 quarter of an underwriter warrant
received from a previous corporate finance transactions and substantial
profits from an investment position in one issuer. One warrant exercise
took place in 1995 for a relatively small amount. Trading income rose
$527,027, from a loss of $41,639 in the second quarter of 1995 to $485,388
in the comparable 1996 period. This increase was also due to the better
market conditions in the 1996 quarter compared to the volume levels in the
1995 quarter for small capitalization OTC stocks.
Total expenses rose $743,365 in the second quarter of 1996 from the
comparable 1995 period, an increase of 20.6 percent, from $3,607,226 to
$4,350,591. Commissions and salaries rose $1,010,865, or 39.3 percent, from
$2,569,573 in the 1995 period to $3,580,438 in 1996. This increase was
primarily due to increased commission revenues resulting in a higher level
of commissions paid. Higher percentage commission levels are generally paid
to employee registered representatives at higher production levels.
Underwriting expenses fell by $270,355, or 93.2 percent, due primarily to
decreased legal and other fees accrued because no corporate finance
transactions completed in the 1996 quarter for which PIC acted as managing
underwriter, compared to the two corporate finance transactions completed
in the 1995 quarter. Rent, telephone and quote expenses increased from
$230,185 in the 1995 period to $234,343 in 1996, an increase of 1.8
percent. Other expenses decreased 0.3 percent, from $517,447 in the second
quarter of 1995 to $516,144 in the second quarter of 1996.
13
<PAGE>
The Company had a pretax profit of $4,724,853 in the second quarter of
1996 compared to a pretax profit of $131,597 in the comparable 1995 period.
The primary reasons for this increase were the profits from the exercise of
an underwriter warrant, substantial profits from an investment position in
one issuer, and general increases in commission business and trading income
offset partially by decreases in corporate finance revenues. Significant
fluctuations can occur in PIC's revenues and operating results from one
period to another.
The Company also accrued $1,889,900 in income taxes for the second
quarter of 1996, compared to an accrual for income taxes in the second
quarter of 1995 of $52,000. Independent of investment income, the Company
would have had a profit before income taxes of $163,743 in the second
quarter of 1996 compared to a loss before income taxes of $192,721 in the
comparable 1995 period.
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 both 1995 and 1996 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 June 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 June 30,
1996, 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 of PIC or Paulson Capital.
While the warrants and the securities issuable upon exercise of the
warrants are not immediately
14
<PAGE>
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
June 30, 1996, PIC owned 32 underwriter warrants (from 31 issuers), of
which 28 were currently exercisable and four 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 the three months ended June 30, 1996, $4,449,859 of net cash was
used by operating activities of the Company. The major adjustments to
reconcile this result to the Company's net profit included a realized gain
on investment securities of $5,396,654, an increase in trading securities
of $4,787,266 and a decrease in accounts payable and accrued expenses of
$766,673, partially offset by an increase in income taxes payable of
$1,319,560, and a decrease in receivables of $779,124. The primary reason
for the realized gain on investment securities was a substantial profit on
one investment position and the sale of securities underlying an
underwriter warrant during the quarter, with much of the proceeds invested
in short term government securities which led to the bulk of the increase
in trading securities. In the quarter, $4,449,869 of net cash was provided
to the Company by investing activities, primarily resulting from
$13,925,231 of proceeds from the sale of short-term investment securities,
offset partially by the purchase of $9,434,245 of short-term investment
securities. $854 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 totaled $844. 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 June 30, 1996, the Company had no material commitments for
capital expenditures.
15
<PAGE>
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
16
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 of Notes to Condensed Consolidated Financial Statements in
Item 1 of Part I.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting on June 13, 1996. The three
existing Company directors (Chester L.F. Paulson, Jacqueline M. Paulson and
Kenneth T. LaMear) were elected for additional one year terms. In addition,
the Company's shareholders approved a proposal to authorize an amendment to
the articles of incorporation of the Company to effect a 1-for-4 reverse
split of the Common Stock of the Company upon the occurrence of certain
events, with 3,824,048 shares voting for the proposal, 23,355 shares voting
against the proposal, with 4,100 votes abstaining. Under the proposal, the
Company's directors are authorized to effect the reverse split if the
closing bid of the Company's common stock falls below $1.00 and the
directors determine that the reverse split is in the best interests of the
Company's shareholders. The purpose of the proposal was to enable the
Company to maintain a listing for the Company's common stock on the Nasdaq
System.
Item 5. Other Information.
None
Item 6.
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K
None
17
<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: JULY 29, 1996 By: CHESTER L.F. PAULSON
-----------------------------------------
Chester L.F. Paulson
President
Date: JULY 31, 1996 By: CAROL RICE
-----------------------------------------
Carol Rice
Principal Accounting Officer
18
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIAL PAGE
- ------- ----------- ---------------
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 JUNE 30, 1996 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH FLOWS FOR
THE SIX MONTHS IN THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 173
<RECEIVABLES> 3,605
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 9,761
<PP&E> 137
<TOTAL-ASSETS> 14,000
<SHORT-TERM> 100
<PAYABLES> 4,763
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 594
<LONG-TERM> 0
0
0
<COMMON> 735
<OTHER-SE> 7,808
<TOTAL-LIABILITY-AND-EQUITY> 14,000
<TRADING-REVENUE> 828
<INTEREST-DIVIDENDS> 3
<COMMISSIONS> 6,656
<INVESTMENT-BANKING-REVENUES> 1,748
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 4
<COMPENSATION> 6,724
<INCOME-PRETAX> 6,097
<INCOME-PRE-EXTRAORDINARY> 6,097
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,658
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
