SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file number: 0-18188
December 31, 1995
FORM 10-KSB
PAULSON CAPITAL CORP.
Name of small business issuer as specified in its charter
Oregon 93-0589534
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
811 S.W. Front Avenue
Portland, OR 97204
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(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code: (503) 243-6000
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
Title of class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
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 / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part II of this Form
10-KSB or any amendment to this Form 10-KSB. / X /
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State issuer's revenues for its most recent fiscal year:
$18,030,565
As of March 19, 1996, 4,324,539 shares of the registrant's common
stock, no par value, were outstanding and the aggregate market value of the
shares of common stock of the Registrant held by non-affiliates (based upon
the average of the closing bid and asked prices of Registrant's shares in
the over-the-counter market as of such date) was $2,522,424.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the
1995 annual meeting of shareholders to be filed with the Securities and
Exchange Commission are incorporated by reference into Part III.
Transitional Small Business Disclosure Format:
Yes / / No / X /
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Paulson Capital Corp. ("Paulson Capital" or the "Company") is a
holding company whose only operating subsidiary is Paulson Investment
Company, Inc. ("PIC"), a full service brokerage firm engaged in the
purchase and sale of securities from and to the public and for its own
account and in investment banking activities. The Company operates in one
industry segment, the financial services industry. At December 31, 1995 PIC
employed 25 brokers and had independent contractor arrangements with 81
brokers registered with the National Association of Securities Dealers,
Inc. ("NASD"). PIC also employed a support staff of 43 persons in its
headquarters in Portland, Oregon and in certain of its branch offices. At
December 31, 1995 PIC had 34 branch offices throughout the United States.
The Company was incorporated in Oregon in 1970 under the name Paulson
Trading Company. In 1973, the Company changed its name to Paulson
Investment Company, Inc. and commenced retail brokerage operations. In
1981, the Company changed its name to Paulson Capital Corp. and transferred
its securities brokerage activities and substantially all of its assets to
the newly formed wholly owned subsidiary, PIC. The Company's headquarters
are located at 811 S.W. Front Avenue, Portland, Oregon 97204. Its telephone
number is (503) 243-6000.
Principal Products, Services and Markets
Virtually all of Paulson Capital's business is carried on through PIC.
PIC is involved in the purchase and sale of most investment securities but
is not involved in commodities or futures. Three broad categories of
securities activities contribute to revenues of PIC: general securities (or
retail), trading and market making (or wholesale) and corporate
finance/investment banking. PIC also receives revenues from interest and
dividends on securities owned, from the exercise of underwriter warrants
received in connection with its corporate finance activities, and from
other sources.
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The following table indicates the approximate percentage of revenues
that were accounted for by each of these categories and from underwriter
warrants in the last five fiscal years:
1995 1994 1993 1992 1991
General Securities 54 84 65 64 70
Trading 4 (1) 8 10 5
Corporate Finance 10 14 25 22 22
Underwriter Warrants 32 2 2 4 0
Other 0 1 0 0 3
In this table, "Trading" includes only the net profit or loss from
PIC's trading activities. See "Trading and Market Making."
General Securities
As a securities broker, PIC acts as agent for its customers in the
purchase and sale of common and preferred stocks, options and debt
securities traded on securities exchanges or in the over-the-counter
("OTC") market. A major portion of its revenues is derived from commissions
from customers on these transactions. In the OTC market, transactions with
customers in securities not listed on an exchange may be effected as
principal, rather than agent, primarily where PIC is a market maker in that
security. Customer transactions in securities are effected either on a cash
or margin basis.
PIC enters into dealer agreements with mutual fund management
companies and publicly registered limited partnerships. Commis sions on the
sale of these securities are derived from the standard dealers discounts,
which range from approximately 1 percent to 8.5 percent of the purchase
price of the securities, depending on the terms of the dealer agreement and
the amount of the purchase. PIC does not generally sell interests in
limited partnerships which are not publicly registered.
Pursuant to an agreement between PIC and Correspondent Services
Corporation ("CSC"), a subsidiary of PaineWebber Group, Inc., CSC carries
all of PIC's customer securities accounts and performs the following
services: (1) preparation and mailing of monthly statements to PIC
customers; (2) settlement of contracts and transactions in securities
between PIC and other broker-dealers and between PIC and its customers; (3)
custody and safe-keeping of securities and cash, the handling of margin
accounts, dividends, exchanges, rights offerings and tender offers; and (4)
the execution of customer orders placed on an exchange. PIC determines the
amount of commission to be charged to its customers on agency transactions
and the price of securities purchased or sold in principal transactions.
CSC receives compensation based on the size of the transaction, subject to
certain minimum and maximum
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amounts. The agreement between PIC and CSC may be canceled by either party
upon 60 days written notice, which period may be reduced in certain events.
In the event of a liability arising from a bad debt from a customer, PIC is
required to indemnify CSC against any loss. This potential liability is
uninsured.
In addition to providing clearing services for PIC, CSC loans money to
PIC in the ordinary course of PIC's business, pursuant to an arrangement
under which CSC agrees to finance PIC's trading accounts. At December 31,
1995, no net loans were outstanding pursuant to this arrangement. See "Item
6 - Management's Discussion and Analysis or Plan of Operation."
Trading and Market Making
In addition to executing trades as an agent, PIC regularly acts as a
principal in executing trades in equity securities, corporate debt
securities and municipal bonds. The amount of trading by PIC in the high
yield bond market has not been material. At December 31, 1996, PIC made a
market in approximately 48 securities of 33 issuers. Of these, 16 were
corporations for which PIC has acted as managing or co-managing underwriter
of public financings. In addition, at December 31, 1995, PIC held
securities of 11 companies in its investment account. In 1995, the value of
securities held in the trading accounts and investment account ranged
between $779,769 and $6,253,214. The level of positions carried in PIC's
trading and investment accounts fluctuates significantly. The size of the
securities positions at any date may not be representative of PIC's
exposure on any other date, because the securities positions vary
substantially depending upon economic and market conditions, the allocation
of capital among types of inventories, underwriting commitments, customer
demands and trading volume. The aggregate value of inventories that PIC may
carry is limited by certain requirements under the SEC's net capital rules.
See "Net Capital Requirements."
PIC's market making activities are conducted both with other dealers
in the "wholesale market" and with PIC's customers. Transactions with
customers are effected as principal at a net price equal to the current
interdealer price plus or minus the approximate equivalent of a brokerage
commission. Securities are purchased primarily to provide an inventory for
customers who wish to buy, and short sales are likewise made primarily to
serve customers. PIC's transactions as principal expose PIC to risk because
securities positions are subject to fluctuations in market value and
liquidity. Profits or losses on trading and investment positions depend
upon the skills of the employees in PIC's trading department and employees
responsible for taking investment positions. The trading department is
headquartered in PIC's Portland, Oregon office.
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Corporate Finance
PIC raises capital through public offerings of securities for
corporations that are engaged in a variety of businesses. PIC participates
in underwritings of corporate securities as managing underwriter and as a
syndicate member. Management of an underwriting account is generally more
profitable than participation as a member of an underwriting syndicate.
Revenues generated by syndicate participations have not been material.
PIC generally underwrites public offerings of securities in the range
of $1.5 million to $20 million on a "firm commitment" basis, which means
that it agrees to purchase a specific amount of securities from the issuer
at a discount after the registration statement for the offering is declared
effective by the Securities and Exchange Commission (the "SEC") and resells
the securities to the public at a specified price. The underwriting
involves risk of loss if PIC is unable to resell at a profit the securities
it is committed to purchase. This risk is usually reduced by accepting
other stock brokerage firms as a part of an underwriting syndicate in which
each member commits to purchase a specified amount of the offering. PIC and
other underwriters may also sell a portion of their commitment through a
"selling group" of other stock brokerage firms that participate in selling
the offering but are not subject to an underwriter's commitment. As an
underwriter, PIC is also subject to potential liability under federal and
state securities laws and other laws if the registration statement or
prospectus contains a material misstatement or omission. PIC's potential
liability as an underwriter is uninsured.
The commitment of capital by PIC between the time a firm
commitment underwriting agreement becomes effective and the time
PIC resells the securities constitutes a charge against its net
capital. Accordingly, PIC's participation in or initiation of
underwritings may be limited by the financial requirements of the
SEC and NASD. See "Net Capital Requirements."
Between June 1, 1978 and December 31, 1995 PIC acted as the managing
underwriter or co-managing underwriter for 114 public offerings, raising
approximately $516 million for corporate finance clients. Of these, 71 were
initial public offerings. PIC typically receives 3 percent of the aggregate
amount of money raised in an offering to cover nonaccountable expenses and
between 8 and 10 percent as compensation to underwriters, selling group
members and registered representatives, although these percentages may be
lower for larger transactions. PIC also typically receives warrants to
purchase securities, equal to 10 percent of the securities sold in the
offering, for a period of five years at a price equal to 120 percent of the
public offering price, although a portion of these warrants are typically
transferred as compensation to persons associated with PIC and, in certain
cases,
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to other major underwriters in the public offering. See "Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital
Resources."
PIC also offers its investment banking services to municipalities and
other tax-exempt issuers for debt offerings. In 1995 PIC did not act as the
managing underwriter for any municipal debt issuers.
Branch Offices
Prior to 1988, PIC typically owned and operated its branch offices and
was the party responsible for all branch expenses. PIC has opened and
closed several branch offices in various locations. Because of generally
unsatisfactory profitability of these owned and operated branch offices,
PIC began to add branch offices run by independent contractors that assume
liability for all the operating expenses of the branch. PIC typically
receives between 15 and 20 percent of the gross commission earned by the
branch, with the balance retained by the branch to pay its expenses and
staff. Persons in these branches are registered with PIC, and PIC assumes
the same compliance and regulatory obligations as would be the case if PIC
were fully responsible for the branch's expenses. As of December 31, 1995,
PIC had 34 branch offices in Arizona, California, Colorado, Connecticut,
Georgia, Hawaii, Idaho, Nevada, New York, Oregon, Utah and Washington. All
of these branches except one in Salem, Oregon are operating as independent
contractor offices. PIC continues to be responsible for all expenses of the
non-independent contractor offices.
Research
PIC employs three persons that devote a majority of their time to
gathering and analyzing information which is intended to provide PIC with
an adequate basis for performing its investment banking activities and to
provide customers with a regular flow of information on the companies for
which PIC has in the past provided investment banking services.
Regulation
PIC is registered with the SEC as a broker-dealer under the Securities
Exchange Act of 1934. It is also registered as a broker-dealer under the
laws of 36 states and Washington, D.C. PIC is a member of the NASD.
The securities business is subject to extensive regulation under
federal and state laws. The principal purpose of regulation and discipline
of broker-dealers is the protection of customers and the securities markets
rather than protection of creditors and stockholders of broker-dealers. The
SEC is the federal agency charged with administration of the federal
securities laws. Much
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of the regulation of broker-dealers, however, has been delegated to
self-regulatory organizations, principally the NASD. These self-regulatory
organizations adopt rules (subject to approval by the SEC) which govern the
industry and conduct periodic examinations of member broker-dealers.
Securities firms are also subject to regulation and examination by state
securities commissions in the states in which they are registered.
The regulations to which broker-dealers are subject cover all aspects
of the securities business, including sales methods, trading practices
among broker-dealers, capital structure of securities firms, record keeping
and the conduct of directors, officers and employees. Additional
legislation, changes in rules promulgated by the SEC and by self-regulatory
bodies or changes in the interpretation or enforcement of existing laws and
rules often affect directly the method of operation and profitability of
broker-dealers. The SEC, NASD and state regulatory authorities may conduct
administrative proceedings which can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees.
Net Capital Requirements
PIC is required to maintain minimum "net capital" under the SEC's net
capital rule of not less than 6.67 percent of its aggregate indebtedness.
As of December 31, 1995, PIC had net capital of $3,503,826, which exceeded
its minimum requirement of $100,000 by $3,403,826. The ratio of aggregate
indebtedness of $1,369,604 to net capital of $3,503,826 on December 31,
1995 was approximately .39 to 1. In a public offering in which PIC acts as
an underwriter, PIC must have sufficient net capital to cover the amount of
securities underwritten, applying applicable formulae mandated by the SEC,
during the period between effectiveness and the closing of the transaction
(usually about one week). This results in a significant temporary increase
in PIC's required net capital. In many cases, the amount of securities
underwritten by PIC has been limited by its net capital. Any significant
reduction in PIC's net capital, even if PIC were still in compliance with
the SEC's net capital rule for its retail and trading activities, could
have a material adverse impact on PIC's ability to continue its investment
banking.
Competition
All aspects of the PIC's business are highly competitive. In its
general brokerage activities, PIC competes directly with numerous other
broker-dealers, many of which are large well known firms with substantially
greater financial and personnel resources than PIC. Many of PIC's
competitors employ extensive advertising and actively solicit potential
clients in order to increase business. In addition, brokerage firms compete
by furnishing investment research publications to existing clients, the
quality
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and breadth of which are considered important in the development of new
business and the retention of existing clients. PIC also competes with a
number of smaller regional brokerage firms.
Some commercial banks and thrift institutions offer securities
brokerage services. Many commercial banks offer a variety of investment
banking services. Competition among financial services firms also exists
for investment representatives and other personnel.
The securities industry has become considerably more concentrated and
more competitive since the Company was founded, as numerous securities
firms have either ceased operations or have been acquired by or merged into
other firms. This trend has been particularly pronounced among firms
similar in size and business mix to PIC. In addition, companies not engaged
primarily in the securities business, but with substantial financial
resources, have acquired leading securities firms. These developments have
increased competition from firms with greater capital resources than those
of the Company. Various legislative and regulatory developments have tended
to increase competition within the industry or reduced profits for the
industry. In particular, various recent developments have tended to
increase competition from commercial banks.
The securities industry has experienced substantial commission
discounting by broker-dealers competing for brokerage business. In
addition, an increasing number of specialized firms now offer "discount"
services to individual customers. These firms generally effect transactions
for their customers on an "execution only" basis without offering other
services such as portfolio valuation, investment recommendations and
research. The continuation of such discounting and an increase in the
number of new and existing firms offering discounts could adversely affect
the Company. In addition, rapid growth in the mutual fund industry is
presenting potential customers of PIC with an increasing number of
alternatives to traditional stock brokerage accounts.
In its investment banking activities, PIC competes with other
brokerage firms, venture capital firms, banks and all other sources of
capital for small, growing companies. Since PIC generally manages offerings
smaller than $20 million, it does not typically compete with the investment
banking departments of large, well known national brokerage firms.
Nevertheless, PIC occasionally manages larger offerings. In addition, large
national and regional investment banking firms occasionally manage
offerings of a size that is competitive with PIC, typically for fees and
compensation less than that charged by PIC. When the market for initial
public offerings is active, many small regional firms that do not typically
engage in investment banking activities also begin to compete with PIC.
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Employees
At December 31, 1995, PIC had 68 employees, of whom 43 were executives
and support staff and 25 were involved in brokerage activities and
compensated primarily on a commission basis. PIC also had independent
contractor arrangements with 81 independent contractors, all of whom are
compensated solely on a commission basis. Paulson Capital had no employees
separate from PIC.
ITEM 2. DESCRIPTION OF PROPERTY
PIC leases approximately 17,100 square feet of space for its office in
Portland, Oregon under a lease expiring May 31, 1998 at a monthly rent of
$18,564, adjusted upward each year by the same percentage as the increase,
if any, in the Consumer Price Index. PIC's Salem office rents space for
approximately $38,000 per annum under a lease expiring April 5, 1996. PIC
uses all the space leased by it in Portland and subleases a portion of its
space in Salem. The Company believes the existing leased space is suitable
and adequate for its business for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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 approved.
PIC has been named as respondent in Mokhtari v. Paulson Investment
Company, Inc., et al., an NASD arbitration, filed in February 1995.
Claimants, former PIC customers, allege breach of fiduciary duty,
negligence, fraud and securities fraud. Claimants seek $27,000 in
compensatory damages and $73,000 in punitive damages. An arbitration date
has been set for April 9, 1996. 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
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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 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 $41,800 in compensatory damages, attorney fees, and an
unspecified amount of punitive damages. An arbitration date has been set
for April 16, 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. 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 been set for May 21, 1996. PIC believes it has
meritorious defenses and intends to defend this matter vigorously.
PIC was named as a defendant in Sanchez v. Paulson Investment Company,
Inc., et al., filed in Multnomah County (Oregon) court. Claimant, a former
PIC customer, alleges breach of contract and fraud. Claimant seeks $30,000
in compensatory damages and $90,000 in punitive damages. PIC believes it
has meritorious defenses and intends to defend this matter vigorously. The
case has been dismissed, but the plaintiff has indicated he intends to
refile the case.
PIC was named as a defendant in Attard, et al. v. Paulson Investment
Company, Inc., et al. and Wright, et al. v. Paulson Investment Company,
Inc., et al., both filed in December 1995 in U.S. District Court for the
Southern District of California. The cases are asserted class actions
alleging violations of Section
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12(2) of the Securities Act of 1933, Section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. The claims related to alleged
misstatements in connection with an October 1993 public offering of
approximately $27 million of preferred stock in which PIC acted as the
managing underwriter. The plaintiffs and PIC stipulated to a dismissal of
PIC from this matter without prejudice.
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. PIC has not
had an opportunity to fully investigate this claim, but believes it has
meritorious defenses and intends to defend this matter vigorously.
Frank Fritzie Arbitration. In February 1996, Frank Fritzie, a former
customer of PIC, requested an NASD arbitration alleging unauthorized
trading in his PIC account. PIC has not had an opportunity to fully
investigate this claim or to determine what losses, if any, Mr. Fritzie's
accounts at PIC incurred. PIC believes it has meritorious defenses and
intends to defend this matter vigorously if it is filed.
Jack Kemberlin Arbitration. PIC has been informed that Jack Kemberlin,
a former PIC customer in Texas, has filed an NASD arbitration claim. PIC
has not received the claim. PIC is informed that claimant alleges breach of
fiduciary duty, fraud, violation of federal securities laws, unsuitability,
unauthorized trading and negligent supervision. Claimant claims losses in
his account in excess of $150,000. PIC is currently investigating this
matter and is unable to comment on the merit, if any, of Mr. Kemberlin's
alleged claim.
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
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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 has been asserted against
PIC by Jack Alexander, who performed services for PIC in California between
1991 and 1995. The claimant has made allegations of age discrimination,
breach of employment contract and wrongful termination against PIC, and
demanded payment of $750,000. The claimant has indicated that, if he
commences litigation against PIC, the requested damages would be $1,218,000
and would include claims for attorney fees and punitive damages. In October
1995, claimant filed a complaint with the California Department of Fair
Employment and Housing, but has not instituted formal legal proceedings,
either through an administrative agency or in court. PIC has denied these
claims, believes they are unfounded, and will vigorously defend any action
that may be brought. The Company is unable to provide an estimate of the
amount or range of potential loss should the outcome be unfavorable.
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
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on the consolidated financial condition, results of operations, or
business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock trades in the over-the-counter market. The
Company's stock has not been actively traded. The Company's stock is quoted
on the Nasdaq Small-Cap Market under the symbol "PLCC." The following are
high and low sales prices (high and low sales closing bid quotation
information prior to June 30, 1992) for the common stock for the periods
shown, as obtained from the Nasdaq Stock Market.
<TABLE>
<CAPTION>
1995 Bid 1994 Bid 1993 Bid
-------------- -------------- --------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C> <C>
1st Quarter $ .500 $ .406 $1.375 $1.000 $1.375 $1.125
2nd Quarter .938 .438 1.188 .688 1.500 1.000
3rd Quarter 1.000 .688 .781 .562 1.375 1.000
4th Quarter 1.750 .875 .688 .406 1.688 1.062
</TABLE>
The high and low closing price for the first quarter of 1996 through March
13 were $1.375 and $1.000, respectively.
As of March 14, 1996, there were 4,324,539 shares of the Company's
common stock outstanding and held of record by 207 holders. The number of
record holders includes as single holders various institutions (such as
brokerage firms) that hold shares in "street name" for multiple
shareholders. Based on the number of requests for the Company's proxy
materials for its 1995 annual meeting, the Company believes that there are
approximately 372 beneficial holders of its common stock. The Company
repurchased and retired 49,300 shares of common stock during 1995.
Additional shares of common stock may be repurchased from time to time in
the future.
The Company has never paid a dividend on its common stock. Regulatory
net capital requirements may limit the ability of PIC to pay dividends to
the Company, which would affect the Company's ability to pay dividends to
its shareholders. The Company anticipates that, for the foreseeable future,
earnings will be retained for use in its business and does not anticipate
the payment of dividends.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SELECTED FINANCIAL DATA
(in thousands except per share amounts)
Income Statement Information
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Revenues $18,031 $ 9,345 $18,884 $15,041 $12,791
Commissions and 9,688 7,782 12,572 10,208 8,763
Salaries
Other Expenses 3,637 3,319 4,843 3,678 3,023
Total Expenses 13,325 11,101 17,415 13,886 11,786
Pretax Income 4,706 (1,755) 1,469 1,155 1,005
(loss)
Net Income (loss) 2,925 (1,080) 836 694 647
Earnings (loss) $.67 ($.25) $.18 $.15 $.14
per share
Average number of 4,357 4,372 4,535 4,569 4,549
common shares
outstanding
</TABLE>
Balance Sheet Information
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total Assets $9,542 $4,653 $6,052 $4,507 $4,354
Working Capital 4,759 1,851 3,051 2,343 1,605
Short-Term Debt 100 100 100 103 281
Long-Term Debt 0 0 0 0 3
Shareholders' $4,886 $2,001 $3,173 $2,467 $1,766
Equity
</TABLE>
15
<PAGE>
Results of Operations
PIC's revenues and operating results 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
results of 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 year to year. In the tables 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.
Summary of Changes in Major Categories
of Revenues and Expense
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales Commissions $1,853,704 23.7% ($4,419,668) (36.1%)
Corporate Finance 563,152 42.7% ( 3,387,147) (72.0%)
Investment Income 5,502,391 N/A ( 218,605) (46.8%)
Trading Income 767,377 N/A (1,479,483) N/A
Other ( 1,381) ( 4.2%) ( 33,752) (50.5%)
Expenses:
Commissions
and Salaries $1,905,695 24.5% ($4,790,495) (38.1%)
Underwriting
Expenses 170,197 52.1% ( 581,440) (64.0%)
Rent, Telephone
and Quotes ( 119,935) (11.4%) 111,070 11.8%
Other 267,824 13.8% ( 1,053,733) (35.2%)
Pretax Income $6,461,462 N/A ($3,224,057) N/A
</TABLE>
16
<PAGE>
1995 COMPARED TO 1994
Total revenues for 1995 rose 92.9 percent from 1994, from $9,345,322
to $18,030,565. As shown in the table above, sales commissions rose
$1,853,704, or 23.7 percent, from $7,811,290 in 1994 to $9,664,994 in 1995.
This increase resulted primarily from the more favorable price movements
and trading levels in OTC issues in 1995, compared to a flat market with
lower trading levels in 1994. For example, the Nasdaq Industrial Index rose
29.75 percent in 1995 versus a decline of 5.75 percent in 1994. Corporate
finance revenues rose 42.7 percent or $563,152 in 1995 compared to 1994.
Four transactions were completed in 1994, raising a total of $20.15 million
for the issuers; seven transactions were completed in 1995, raising an
aggregate of $39.70 million for corporate finance clients. Investment
income increased $5,502,391, from $248,876 in 1994 to $5,751,267 in 1995.
Two underwriter warrants were exercised in 1994 while seven warrants were
exercised in 1995, and the warrants exercised in 1995 were significantly
more profitable due to higher prices of the underlying securities. Trading
income rose $767,377, from a loss of $66,738 in 1994 to $700,639 in 1995.
This improvement was also due to greater trading levels and generally
higher prices in OTC issues in 1995 compared to a flat market in 1994.
Total expenses rose $2,223,781 in 1995 from 1994, an increase of 20.0
percent from $11,100,774 to $13,324,555. Commissions and salaries rose
$1,905,695, or 24.5 percent, from $7,781,643 in 1994 to $9,687,338 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 increased by $170,197, or 52.1 percent,
due primarily to increased legal fees for the greater number of corporate
finance transactions completed in 1995 compared to 1994. Rent, telephone
and quote expenses decreased from $1,053,832 in 1994 to $933,897 in 1995, a
decrease of 11.4 percent. This was primarily due to the closing of certain
PIC branch offices. Other expenses increased 13.8 percent, from $1,938,631
in 1994 to $2,206,455 in 1995. This increase was primarily due to a
$367,262 increase in settlements, a $211,814 increase in bad debt expense
and a $150,000 accrual for the employee profit sharing plan, offset
somewhat by a $87,518 decline in branch office expenses and a $78,265
decline in professional fees.
The Company had a pretax profit of $4,706,010 in 1995 compared to a
pretax loss of $1,755,452 in 1994. The primary reason for this increase was
the 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 $1,045,257 in 1995 compared to
a loss before income taxes of $2,004,328 in 1994. Investment income during
the year was significantly higher than in any previous year in the
Company's
17
<PAGE>
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 incurred a benefit of $674,990 for income taxes for
1994, compared to an expense for income taxes in 1995 of $1,780,977.
1994 COMPARED TO 1993
Total revenues for 1994 fell $9,538,655, or 50.5 percent, compared to
1993, from $18,883,977 to $9,345,322. As shown in the table above, sales
commissions fell $4,419,668, from $12,230,958 in 1993 to $7,811,290 in
1994, a decrease of 36.1 percent. This decrease resulted primarily from
generally declining prices and trading levels in OTC issues in 1994. The
NASDAQ Industrial Index fell 5.75 percent in 1994 compared to a 12.03
percent increase in 1993. Corporate finance revenues fell 72.0 percent, or
$3,387,147, in 1994 compared to 1993. Ten transactions were completed in
1993, compared to four transactions in 1994, and the average size of
transaction completed in 1993 was 86 percent larger than the average size
of transactions completed in 1994, resulting in lower absolute levels of
compensation. Investment income decreased $218,605, from $467,481 in 1993
to $248,876 in 1994. This was primarily due to smaller profits in 1994 from
the sale of securities received upon the exercise of underwriter warrants.
Trading income fell $1,479,483, from $1,412,745 in 1993 to a loss of
$66,738 in 1994. The 1994 trading results were significantly lower than the
years prior to 1994, also due to deteriorating market conditions. Other
income fell 50.5 percent, or $33,752, due in large part to a reduction of
interest and dividends received.
Total expenses fell $6,314,598 in 1994 from 1993, a decrease of 36.3
percent from $17,415,372 to $11,100,774. Commissions and salaries fell
$4,790,495 or 38.1 percent, from $12,572,138 in 1993 to $7,781,643 in 1994.
This decrease was primarily due to decreased commission revenues and lower
commission rates paid to employee registered representatives at decreased
production levels. Underwriting expenses decreased by $581,440, or 64.0
percent, due to the decreased number and size of transactions completed in
1994. Rent, telephone and quote expenses increased from $942,762 in 1993 to
$1,053,832 in 1994, an increase of 11.8 percent, due primarily to increased
expenses associated with the operation for the full year of branch offices
in Utah for which PIC is responsible for overhead expenses, along with
normal annual increases. Other expenses decreased 35.2 percent, from
$2,992,364 in 1993 to $1,938,631 in 1994. This decrease was primarily due
to decreased costs of settlement of litigation matters ($993,648 in 1993
vs. $247,184 in 1994) and professional fees related to this litigation and
other matters ($616,744 in 1993 vs. $510,615 in 1994).
18
<PAGE>
Litigation and related professional fees are a normal part of PIC's
business, and the improvement in 1994 payments should not be expected to
recur.
The Company had a pretax loss of $1,755,452 in 1994 compared to a
pretax profit of $1,468,605 in 1993. The primary reasons for this decrease
were: (1) the general decrease in sales commissions received from
customers; (2) a substantial decrease in corporate finance revenues; and
(3) a substantial decrease in trading income. Significant fluctuations can
occur in PIC's revenues and operating results from one period to another.
Pretax and net income results for 1994 were the worst in the Company's
history and the first loss since 1990.
The Company also incurred a benefit from income taxes of $674,990 for
1994, compared to income tax expense of $632,129 in 1993. Independent of
investment income, the Company would have had a loss before income taxes of
$2,004,328 in 1994 compared to a profit before income taxes of $1,001,124
in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Conducting business as a dealer in securities requires that a
substantial inventory of securities be maintained and that a large amount
of liquid assets be readily available. PIC is also required to maintain net
capital as described in "Patents, Trademarks, Licenses, Franchises and
Concessions" above. PCC's working capital at December 31, 1995 was
$4,759,184. Of PIC's total assets (net of intercompany accounts) at
December 31, 1995 of $9,936,029, approximately 42 percent consisted of
securities in PIC's investment account and trading inventory of securities,
at market value, and approximately 42 percent consisted of cash,
certificates of deposit and receivables from its correspondent broker and
other dealers.
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 and prices 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 tends to increase the liquidity of the market for
these securities. The overall decline in prices for the OTC securities
traded by PIC in 1994 was combined with a general reduction in the
liquidity of the markets for these securities. This situation was the
reverse of 1995 and 1993, when increases in prices of OTC securities
increased the liquidity of the markets for these securities. PIC's
investment account and trading inventory
19
<PAGE>
accounts are stated at fair market value, which is at or below quoted
market price.
PIC owed $100,000 at December 31, 1995 pursuant to a subordinated loan
from an investor. PIC also borrows money from CSC in the ordinary course of
its business, pursuant to an arrangement under which CSC agrees to finance
PIC's trading accounts in an amount determined by the size of those
accounts and the type of securities held, with interest charged at
prevailing margin rates. As of December 31, 1995, no net amounts were owed
by PIC to CSC 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 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 December 31, 1995, PIC owned 34
underwriter warrants (from 33 issuers), of which 28 were currently
exercisable and 5 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, $4,680,158 of net cash was used in operating activities. The
major adjustments to reconcile this result to the Company's net income
included a realized gain on investment securities of $5,933,375, an
increase of $2,559,286 in receivables and an increase of $1,696,723 in
trading securities, partially offset by an increase of $1,907,249 in
accounts payable and accrued liabilities, a decrease of $357,862 in
refundable income taxes, a $147,730 increase in securities sold but not yet
purchased and $182,108 unrealized depreciation on investment securities. In
20
<PAGE>
1995, $4,810,999 of net cash was provided by investing activities,
primarily sales of investment securities exceeding purchases of
investment securities. Net cash used in financing activities in
1995 totalled $102,229, resulting primarily from payments to
repurchase common stock and repayment of a bank overdraft. 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. In the unlikely event that PIC was unable to meet these
regulatory standards, it would be unable to pay dividends to the Company.
Since PIC is the Company's only operating business, such a failure could
have a material adverse affect on the Company.
At December 31, 1995, the Company had no material commitments for
capital expenditures.
In general, the primary 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 CSC 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.
21
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Shareholders
Paulson Capital Corp.
We have audited the accompanying consolidated balance sheets of Paulson
Capital Corp. (an Oregon Corporation) and Subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Paulson
Capital Corp. and Subsidiary as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The accompanying
supplementary schedule of warrants owned as of December 31, 1995 is
presented for purposes of additional analysis and is not a required part of
the basic consolidated financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, is fairly stated, in
all material respects, in relation to the basic consolidated financial
statements taken as a whole.
We have also audited Schedule II for each of the three years in the period
ended December 31, 1995. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Portland, Oregon
January 31, 1996
F-1
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 174,029 $ 145,417
Receivable from broker-dealers and
clearing organizations 4,041,470 1,342,230
Notes and other receivables 342,822 482,776
Trading securities 3,260,397 1,563,674
Investment securities 918,990 15,063
Refundable income taxes 157,138 515,000
Prepaid and deferred expenses 338,038 169,268
Secured demand note 100,000 100,000
Deferred income taxes 82,000 170,000
---------- ----------
Total current assets 9,414,884 4,503,428
---------- ----------
FURNITURE AND EQUIPMENT, net 115,881 137,254
---------- ----------
DEFERRED INCOME TAXES 10,900 12,700
---------- ----------
$9,541,665 $4,653,382
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft payable $ - $ 51,888
Accounts payable and accrued liabilities 334,422 268,146
Payable to broker-dealers and
clearing organizations 2,809,546 1,750,193
Compensation, employee benefits and payroll taxes 1,066,182 284,562
Securities sold, not yet purchased 345,550 197,820
Subordinated note payable 100,000 100,000
---------- ----------
Total current liabilities 4,655,700 2,652,609
---------- ----------
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 outstanding, 4,324,539 and
4,363,501, respectively 735,889 775,730
Retained earnings 4,150,076 1,225,043
---------- ----------
4,885,965 2,000,773
---------- ----------
$9,541,665 $4,653,382
========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
F-2
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues
Commissions $ 9,664,994 $ 7,811,290 $ 12,230,958
Corporate finance 1,881,919 1,318,767 4,705,914
Investment income 5,751,267 248,876 467,481
Trading income (loss) 700,639 (66,738) 1,412,745
Interest and dividends 21,237 17,825 36,233
Other 10,509 15,302 30,646
--------------- --------------- ---------------
18,030,565 9,345,322 18,883,977
--------------- --------------- ---------------
Expenses
Commissions and salaries 9,687,338 7,781,643 12,572,138
Underwriting expenses 496,865 326,668 908,108
Rent, telephone and quotation services 933,897 1,053,832 942,762
Interest expense 6,442 2,345 27,268
Professional fees 432,350 510,615 616,744
Bad debt expense 366,920 155,106 183,605
Travel and entertainment 149,500 194,901 176,931
Settlements 614,446 247,184 993,648
Branch office expenses 6,322 93,840 186,529
Other 630,475 734,640 807,639
--------------- --------------- ---------------
13,324,555 11,100,774 17,415,372
--------------- --------------- ---------------
Earnings (loss) before
income taxes 4,706,010 (1,755,452) 1,468,605
Income tax (expense) benefit (1,780,977) 674,990 (632,129)
--------------- --------------- ---------------
NET EARNINGS (LOSS) $ 2,925,033 $ (1,080,462) $ 836,476
=============== =============== ===============
Earnings (loss) per common and
dilutive common equivalent share $ .67 $ (.25) $ .18
=============== =============== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three year period ended December 31, 1995
<TABLE>
<CAPTION>
Common Stock
---------------------------------- Retained
Shares Amount Earnings
--------------- --------------- ---------------
<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 the year -- -- 2,925,033
--------------- --------------- ---------------
Balance at December 31, 1995 4,324,539 $ 735,889 $ 4,150,076
=============== =============== ===============
The accompanying notes are an integral part of this statement.
</TABLE>
F-4
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities
Net earnings (loss) $ 2,925,033 $ (1,080,462) $ 836,476
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities
Unrealized (appreciation) depreciation
on investment securities 182,108 (1,700) (318,751)
Realized gain on investment securities (5,933,375) (247,176) (148,741)
Deferred income taxes 89,800 (195,650) 171,450
Common stock issued for compensation
of Directors 10,500 16,500 10,000
Depreciation and amortization 49,830 51,368 47,114
(Gain) loss from sale of furniture
and equipment 7,884 -- (10,257)
Change in assets and liabilities
Receivables (2,559,286) 842,254 (1,492,569)
Trading securities (1,696,723) (84,958) 279,965
Refundable income taxes 357,862 (515,000) 117,415
Prepaid and deferred expenses (168,770) 12,380 (86,964)
Accounts payable and accrued
liabilities 1,907,249 135,081 353,289
Securities sold, not yet purchased 147,730 (187,923) 262,970
Income taxes payable -- (130,475) 130,475
--------------- --------------- ---------------
Net cash provided by (used in)
operating activities (4,680,158) (1,385,761) 151,872
--------------- --------------- ---------------
Cash flows from investing activities
Purchases of investment securities (5,166,256) (1,416,431) (444,000)
Proceeds from sale of investment
securities 10,013,596 2,212,578 389,808
Additions to furniture and equipment (41,416) (75,345) (50,764)
Proceeds from sale of furniture and
equipment 5,075 -- 12,195
--------------- --------------- ---------------
Net cash provided by (used in)
investing activities 4,810,999 720,802 (92,761)
--------------- --------------- ---------------
</TABLE>
F-5
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities
Payments on contracts payable and
obligations under capital leases $ -- $ -- $ (2,899)
Payments to retire common stock (50,341) (107,843) (140,400)
Increase (decrease) in bank overdraft payable (51,888) (22,829) 74,717
--------------- --------------- ---------------
Net cash used in financing
activities (102,229) (130,672) (68,582)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 28,612 (795,631) (9,471)
Cash and cash equivalents at beginning of year 145,417 941,048 950,519
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 174,029 $ 145,417 $ 941,048
=============== =============== ===============
Cash paid during the year for
Interest $ 6,000 $ 2,345 $ 27,268
=============== =============== ===============
Income taxes $ 1,846,600 $ 38,000 $ 447,756
=============== =============== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
F-6
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's wholly-owned subsidiary, Paulson Investment Company, Inc.
(Subsidiary) is a registered broker-dealer in securities under the
Securities and Exchange Act of 1934, as amended. The Subsidiary renders
broker-dealer services in securities on both an agency and principal
basis to its customers who are fully introduced to Correspondent
Services Corporation (CSC), a subsidiary of Paine Webber Group, Inc. The
Subsidiary also acts as lead or participating underwriter for
over-the-counter securities offerings. The Subsidiary is exempt from the
reserve requirements under SEC Rule 15c3-3(k)(2)(ii), since it does not
handle or carry customer securities and cash.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Paulson Capital Corp. and its wholly-owned subsidiary, Paulson
Investment Company, Inc. All significant intercompany balances and
transactions have been eliminated in the consolidation.
2. Revenue Recognition
Securities transactions and related revenue are recorded on the trade
date basis. Managers' fees, underwriters' fees, and other underwriting
revenues are recognized at the time the underwriting is completed. Tax
shelter revenue is recognized at the time individual tax shelter units
are sold.
3. Securities Valuation
The Company's subsidiary, a registered broker-dealer, values its long
and short security positions held in trading and investment accounts at
market value. Securities which are not readily marketable are carried at
their estimated value as determined by the Board of Directors.
4. Furniture and Equipment
Depreciation of furniture and equipment is computed generally by the
straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the lesser of their estimated useful
life or the lives of their respective leases. For tax purposes,
depreciation is computed using accelerated methods.
5. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash due from banks and brokerage accounts, certificates
of deposit and highly liquid debt instruments purchased with a maturity
of three months or less.
6. Use of Estimates
In preparing the Company's financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-7
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - Continued
7. Earnings Per Share
Earnings per share are computed based on the weighted average number of
common and dilutive common equivalent shares outstanding during the
year. For the years ended December 31, 1995, 1994 and 1993 the weighted
average number of shares was 4,357,095, 4,371,544 and 4,535,070,
respectively. Stock options, which are considered common stock
equivalents, were not included in the calculation for the year ended
December 31, 1994 because they were antidilutive.
8. Income taxes
The Company provides for income taxes based on income reported for
financial reporting purposes. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities as measured by the enacted tax rates
which are expected to be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities.
9. Reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements in order to conform to the 1995 presentation.
NOTE B - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS
AND CLEARING ORGANIZATIONS
The Company's subsidiary introduces all customer transactions in
securities traded on U.S. securities markets to CSC on a fully-disclosed
basis. The agreement between the Company's subsidiary and its clearing
broker provides that the Company's subsidiary is obligated to assume any
exposure related to nonperformance by customers or counterparties. The
Company's subsidiary monitors clearance and settlement of all customer
transactions on a daily basis.
The exposure to credit risk associated with the nonperformance of
customers and counterparties in fulfilling their contractual obligations
pursuant to these securities transactions can be directly impacted by
volatile trading markets which may impair the customer's or
counterparty's ability to satisfy their obligations to the Company's
subsidiary. In the event of nonperformance, the Company's subsidiary may
be required to purchase or sell financial instruments at unfavorable
market prices resulting in a loss. Management does not anticipate
nonperformance by customers and counterparties in the above situations.
In addition to the clearing services provided, CSC also loans money to
the Company's subsidiary to finance trading accounts.
At December 31, 1995 and 1994, the above clearing services and trading
account financing resulted in the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Receivable from CSC $4,041,470 $1,342,230
Payable to CSC (2,809,546) (1,750,193)
---------- ---------
Net receivable (payable) $1,231,924 $ (407,963)
========== ==========
</TABLE>
F-8
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - NOTES AND OTHER RECEIVABLES
Notes and other receivables consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Employees $ 152,100 $ 383,156
Independent brokers 117,993 77,621
Other 72,729 21,999
---------- ----------
$ 342,822 $ 482,776
========== ==========
</TABLE>
Employee receivables relate principally to advances and expenses in
excess of commission earnings and inventory losses charged to the
registered representatives of the Company's Subsidiary. For the years
ended December 31, 1995, 1994 and 1993, employee receivables of
$369,964, $156,479 and $120,122, respectfully, were determined by
management to be uncollectible and written off.
NOTE D - TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold, not yet purchased, represent the
market value of securities held long and short by the Company's
subsidiary.
The categories of trading securities and their related market values
follow:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
Long Short Long Short
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Common stock $1,129,036 $ 51,477 $ 710,357 $ 59,722
Preferred stock 49,424 186,650 727,965 78,860
State and municipal bonds 46,957 25,912 93,799 20,048
Corporate bonds 35,581 81,511 29,791 39,190
US Government Agency 1,999,399 -- 1,762 --
--------- ------- --------- -------
$3,260,397 $345,550 $1,563,674 $197,820
========= ======= ========= =======
</TABLE>
As a securities broker-dealer, the Company's subsidiary is engaged in
various securities trading and brokerage activities as principal. In the
normal course of business, the Company's subsidiary has sold securities
that it does not currently own and will therefore be obligated to
purchase such securities at a future date. This obligation is recorded
in the financial statements at the market value of the related
securities. A trading loss will occur on the securities if the market
price increases and a trading gain will occur if the market price
decreases.
Investment securities held by the Company's subsidiary are stated at
market value. A summary of the investment security portfolio follows:
<TABLE>
<CAPTION>
Market Unrealized Carrying
Cost Value Gain (Loss) Value
---------- -------- --------- --------
<S> <C> <C> <C> <C>
1995
Common stock $1,118,850 $918,990 $(199,860) $918,990
========= ======= ======== =======
1994
Common stock $ 315,051 $ 15,063 $(299,988) $ 15,063
========= ======= ======== =======
</TABLE>
F-9
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - TRADING AND INVESTMENT SECURITIES - Continued
Realized gains included in the determination of net earnings were
$5,933,375, $247,176 and $148,741 for the years ended December 31, 1995,
1994 and 1993, respectively.
NOTE E - FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Office equipment $535,528 $512,080
Leasehold improvements 120,354 120,354
Vehicles 25,245 36,097
------- -------
681,127 668,531
Less accumulated depreciation
and amortization 565,246 531,277
------- -------
$115,881 $137,254
</TABLE>
NOTE F - SUBORDINATED NOTE PAYABLE
Certain shareholders of the Company have loaned securities to its
subsidiary under a secured demand note collateral agreement. This
agreement is in accordance with the National Association of Security
Dealers and the Securities and Exchange Commission requirements and the
related borrowings are subordinated to the claims of general creditors
and are renewable annually on their maturity dates.
Maturity Date Interest Rate 1995 1994
-------------------- ------------- -------- --------
Secured demand note
May 31, 1996 6% $100,000 $100,000
======= =======
This borrowing is included in the Subsidiary's computation of net
capital. Additionally, it is not cancelable by either party and, to the
extent it is required to maintain compliance with minimum net capital
requirements, may not be repaid.
NOTE G - INCOME TAXES
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Current tax (expense) benefit
Federal $ (1,478,713) $ 479,340 $ (376,496)
State (212,464) -- (84,183)
--------------- --------------- ---------------
(1,691,177) 479,340 (460,679)
--------------- --------------- ---------------
Deferred tax (expense) benefit
Federal (38,700) 120,957 (141,180)
State (51,100) 74,693 (30,270)
--------------- --------------- ---------------
(89,800) 195,650 (171,450)
--------------- --------------- ---------------
$ (1,780,977) $ 674,990 $ (632,129)
=============== =============== ===============
</TABLE>
F-10
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - INCOME TAXES - Continued
Income tax (expense) benefit for each year varies from the amount
computed by applying the statutory federal income tax rate to earnings
before taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Income tax (expense) benefit at
statutory federal tax rate $ (1,600,000) $ 597,000 $ (499,000)
State taxes net of federal benefit (205,000) 76,000 (64,000)
Adjustments to prior year tax -- -- (37,438)
Other 24,023 1,990 (31,691)
--------------- --------------- ---------------
$ (1,780,977) $ 674,990 $ (632,129)
=============== =============== ===============
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Deferred tax assets (liabilities)
Basis difference in short-term securities
held for investment $ 76,500 $ 112,700
Depreciation of property and equipment 10,900 12,700
State and local operating loss carryforwards
net of federal benefit 6,000 53,000
Other (500) 4,300
--------------- ---------------
Less valuation allowance -- --
--------------- ---------------
$ 92,900 $ 182,700
=============== ===============
</TABLE>
The state operating loss carryforwards expire from 1999 through 2009.
NOTE H - COMMON STOCK
Directors are compensated for their attendance at a maximum of six
scheduled meetings per year. Compensation is $500 of the Company's stock
for each meeting. The value of the stock is determined at the close of
business the day prior to a scheduled meeting.
The Company's subsidiary has a key employee stock purchase plan. Under
the plan, the Subsidiary will match funds (up to $25,000), committed by
key employees, for the purchase of shares of the Company's common stock.
The committed and matching funds will be used by the Subsidiary to
purchase stock of the Company in the open market or by negotiated
transactions. One half of the shares will be resold to the participating
employee and one half of the shares will be transferred to the employee
for no cash consideration. The named participants, the number of shares
purchased in the open market and the amount of matching funds will be at
the discretion of the Board of Directors of the Subsidiary. No
participants were named and no purchases of common stock under this plan
were made during 1995, 1994 or 1993.
F-11
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - COMMON STOCK - Continued
The Company has two incentive stock option plans known as the 1983 Stock
Option Plan and the Nonemployee Stock Option Plan. The Company has
reserved 1,000,000 shares of Common Stock for issuance under the 1983
Plan and 100,000 under the Nonemployee Plan. These shares have been
registered with the Securities and Exchange Commission. Of the 191,445
shares under option at December 31, 1995, 51,450 expire on March 15,
1996, 40,000 expire on August 27, 1997 and 99,995 expire on June 29,
1998. The following table summarizes activity under the Plans for the
three years ended December 31, 1995:
<TABLE>
<CAPTION>
Shares
Under Exercise Payable on
Option Price Exercise
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at December 31, 1992 140,000 $1.125-1.50 $ 172,500
Granted -- -- --
Exercised -- -- --
Cancelled -- -- --
--------------- --------------- ---------------
Balance at December 31, 1993 140,000 1.125-1.50 172,500
Granted 62,700 1.1875 74,456
Exercised -- -- --
Cancelled (10,000) 1.50 (15,000)
--------------- --------------- ---------------
Balance at December 31, 1994 192,700 1.125-1.50 231,956
Granted 99,995 .906 90,620
Exercised -- -- --
Cancelled (101,250) 1.125-1.25 (118,359)
--------------- --------------- ---------------
Balance at December 31, 1995 191,445 $ .906-1.50 $ 204,217
=============== =============== ===============
</TABLE>
NOTE I - LEASES
Future minimum payments, by year and in the aggregate, required under
non-cancelable operating leases with initial or remaining terms of one
year or more consist of the following at December 31, 1995:
Year ended
December 31,
------------
1996 $234,305
1997 222,768
1998 92,820
-------
$549,893
=======
The leases provide for payment of taxes and other expenses by the
Company. Rental expense for the years ended December 31, 1995, 1994 and
1993 amounted to $298,421, $367,329 and $324,774, respectively.
F-12
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - WARRANTS OWNED
As provided for in certain underwriting agreements, the Company has
acquired warrants to purchase shares of common stock of the underlying
corporations. These warrants are not readily marketable without
registration or reliance upon an exemption therefrom, and no attempt has
been made to assign a value to them.
NOTE K - EMPLOYEE BENEFIT PLANS
Retirement benefits for employees of the Company, who have completed
certain service requirements, are provided by a defined contribution
profit-sharing plan. Plan contributions are determined by the Board of
Directors. Contributions to the plan for the years ended December 31,
1995, 1994 and 1993 were $150,000, $0 and $125,000, respectively.
NOTE L - CONTINGENCIES
The Company's subsidiary has been named by individuals in certain legal
actions, some of which claim state and federal securities law violations
and claim principal and punitive damages. As preliminary hearings and
discovery in these cases is not complete, it is not possible to assess
the degree of liability, the probability of an unfavorable outcome or
the impact on the Company's financial statements, if any. The Company's
management denies the charges in these legal actions and is vigorously
defending against them.
The California Employment Development Department has issued employment
tax notices of deficiency against the Company in the amount of
approximately $500,000 plus interest and penalties. The Company has
filed petitions for reconsideration and protest, requesting that the
deficiencies be found erroneous, as the Company's management believes it
has complied with the employment rules. Due to the above uncertainty it
is not possible to assess the degree of liability, the probability of a
favorable outcome or the impact on the Company's financial statements,
if any.
NOTE M - NET CAPITAL REQUIREMENT
The Company's subsidiary is subject to the net capital rule (Rule
15c3-1) of the Securities and Exchange Commission. This rule prohibits
the Company from engaging in any securities transaction at a time when
its "aggregate indebtedness" exceeds fifteen times its "net capital" as
those terms are defined by the rule. At December 31, 1995, the Company's
net capital and required net capital were $3,503,826 and $100,000,
respectively, and its ratio of aggregate indebtedness to net capital was
.39 to 1. The Company's subsidiary's absolute minimum net capital is
$100,000.
F-13
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - RECENT ACCOUNTING STANDARD
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." Upon future adoption of this statement, the
Company anticipates electing to continue to apply the accounting
provision for APB Opinion 25 with disclosure of the required proforma
amounts. Accordingly, the only impact expected by management on the
Company's future financial statements will be additional disclosures
required by the new standard.
F-14
<PAGE>
SUPPLEMENTARY INFORMATION
F-15
<PAGE>
Paulson Capital Corp. and Subsidiary
SUPPLEMENTARY SCHEDULE OF WARRANTS OWNED
December 31, 1995
<TABLE>
<CAPTION>
Entitled Exercise
to Price Expiration
Description Purchase Each Date
- ----------------------------------------------------------- -------- ---------- --------
<S> <C> <C> <C>
California Culinary Academy, Inc. ERC 06-30-94 71,000 $ 7.80 06-30-98
Cell Robotics International, Inc. (units) ERC 09-19-96 9.3725 25,000.00 08-30-00
Cellegy Pharmaceuticals, Inc. (units) ERC 08-11-96 18,745 20.625 08-11-00
Coin Bill Validator, Inc. ERC 02-06-96 51,750 13.20 02-06-00
CompuMed, Inc. (units) ERC 08-03-93 584,000 0.30 08-03-97
Cusac Industries Ltd. (units) ERC 01-11-96 11,901 12.00 01-11-00
Davstar Industries, Ltd. (units) ERC 03-20-93 78,650 10.05 03-20-97
Document Technologies, Inc. (units) ERC 02-14-93 51,000 7.20 02-14-97
Electronic Technology Group, Inc. (units)
ERC 10-17-92 204,000 1.44 10-17-96
Farragut Mortgage Co., Inc. ERC 02-25-93 95,333 7.80 02-25-97
Frontier Natural Gas Corp. (units) ERC 11-19-94 26,005 28.92 11-12-98
International Nursing Services, Inc. (units)
ERC 09-12-95 15,301 28.20 09-12-99
Kushner-Locke Company 10% Convertible (units)
ERC 03-20-92 272 1,200.00 03-20-96
Kyzen Corporation (units) ERC 08-03-96 15,498 14.95 08-03-00
Medical Technology Systems, Inc. (units) ERC 07-10-92 82,080 6.00 07-10-96
Medphone Corporation (units) ERC 09-12-92 80,300 4.95 09-12-96
Microfield Graphics, Inc. ERC 06-22-96 79,750 7.20 06-22-00
North Coast Energy (units) ERC 12-18-93 34,935 12.00 12-18-97
Northern Bank of Commerce ERC 08-04-94 2,000 6.60 08-04-99
Patrick Petroleum Company Series B Convertible
Preferred ERC 09-14-93 63,800 12.00 09-14-97
Pearce Systems International, Inc. (units) ERC 02-10-95 47,722 8.70 02-11-99
Penultimate, Inc. (units) ERC 12-22-94 38,298 8.10 12-22-98
Prepaid Legal Services, Inc. (units) ERC 06-08-95 16,314 28.80 06-08-99
R-B Rubber Products, Inc. ERC 05-10-96 55,100 5.10 05-10-00
Sparta Surgical Corp. (units) ERC 07-12-95 11,221 12.00 07-12-99
Tide West Oil Company (units) ERC 06-21-92 9,520 51.00 06-21-96
TJ Systems Corp. Ser. A Convertible Preferred
ERC 08-04-94 21,535 12.00 08-04-98
TSS, Ltd. (units) ERC 05-05-94 95,310 1.20 05-05-98
TSS, Ltd. (units) ERC 01-09-93 21,900 22.50 01-09-97
The Unimark Group, Inc. (units) ERC 08-11-94 1,500 15.00 08-11-99
Vector Aeromotive Corp. (units) ERC 08-12-92 182,500 1.20 08-12-96
Willard Pease Oil & Gas Company Ser. A Cum.
Convertible Preferred ERC 08-13-94 64,197 12.00 08-13-98
With Design in Mind, Inc. (units) ERC 05-10-92 102,000 6.00 05-10-96
WRT Energy Corp. 9% Convertible Preferred
ERC 10-20-94 48,147 30.00 10-20-98
</TABLE>
F-16
<PAGE>
Paulson Capital Corp. and Subsidiary Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Balance Additions-Charges Balance
Beginning to Cost and Deductions at End
Description of Year Expenses Write-offs of Year
- ------------------------ ------- ----------------- ---------- -------
Allowance for doubtful
accounts:
<S> <C> <C> <C> <C>
Year ended Dec. 31, 1995 $ -- $369,964 $369,964 $ --
Year ended Dec. 31, 1994 -- 156,479 156,479 --
Year ended Dec. 31, 1993 -- 120,122 120,122 --
</TABLE>
F-17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
(a) Financial Statements
Report of Independent Certified Public F-1
Accountants
Consolidated Balance Sheets as of F-2
December 31, 1995 and 1994
Consolidated Statements of Operations F-3
for the years ended December 31,
1995, 1994 and 1993
Consolidated Statement of F-4
Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows F-5
for the years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial F-7
Statements
22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There has been no Form 8-K filed within 24 months prior to the date of
the most recent consolidated financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
23
<PAGE>
PART III
All information required by Items 9, 10, 11 and 12 of Part III of this
Report will be included in the Company's definitive proxy statement for its
1996 annual meeting of shareholders filed or to be filed not later than 120
days after the end of the fiscal year covered by this Report and is
incorporated herein by reference, other than the information with respect
to executive officers of the Company included below.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors of the Company are elected for a term of one year and until
their successors are elected and qualify. Executive officers are appointed
by the board of directors and do not have fixed terms of office. The board
of directors and executive officers as of December 31, 1995 are set forth
below. The year each person became a director follows his or her name.
Principal Occupa-
Position(s) tion(s) During
Name Age With Company Past Five Years
- ----------------------------------------------------------------
Chester L.F. 59 President and Director of Corporate
Paulson (1970) Director Finance of PIC
(President of PIC
until 7/92)
Jacqueline M. 56 Secretary- Secretary-Treasurer
Paulson (1976) Treasurer and of PIC (Chief
Director Executive Officer of
PIC from 7/92 to 8/93)
Kenneth T. 61 Director Chief Executive Officer
LaMear (1985) of PIC (Senior Vice
President of PIC prior
to 8/93)
Chester L.F. Paulson and Jacqueline M. Paulson are husband
and wife.
24
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) The following financial statements are included
in Part II, Item 7:
Report of Independent Certified Public
Accountants
Consolidated Balance Sheets as of
December 31, 1995 and 1994
Consolidated Statements of Operations
for the years ended December 31,
1995, 1994 and 1993
Consolidated Statement of
Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial
Statements
(2) The following financial schedules for the years 1995, 1994 and 1993
are submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Exhibits
Number Description
3.1 Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the
Company's Registration Statement on Form
10 filed with the Commission on
December 18, 1989 (the "Form
10"))
3.2 Bylaws (incorporated by reference to Exhibit
3.2 to the Form 10)
25
<PAGE>
10.1 Office lease dated June 28, 1988
(incorporated by reference to Exhibit
10.2 to the Form 10)
10.3 Contract with Correspondent Services
Corporation, dated July 24, 1992
(Incorporated by reference to Exhibit
10.3 to the Form 10-Q for the quarter
ended September 30, 1992 filed with the
Commission on November 13, 1992)
10.4 Office Lease renewal for the period from
6/1/93 to 5/31/98, dated as of March 12,
1992 (Incorporated by reference to
Exhibit 10.4 to the Form 10-K for the
year ended December 31, 1992 filed with
the Commission on March 31, 1993)
21.1 Subsidiaries
The Company's only subsidiary is Paulson
Investment Company, Inc., an Oregon
corporation.
27 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the last quarter of
the period covered by this report.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 of the Securities
Exchange Act of 1934, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
PAULSON CAPITAL CORP.
Date: MARCH 19, 1996 By: CHESTER L.F. PAULSON
-------------- -------------------------------------
Chester L.F. Paulson
President
27
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
(1) Principal Executive
and Financial Officer
CHESTER L.F. PAULSON Chairman of the Board MARCH 19, 1996
- ----------------------------- and President
Chester L.F. Paulson
(2) Principal Accounting
Officer
CAROL RICE Principal Accounting MARCH 25, 1996
- ----------------------------- Officer
Carol Rice
(3) Directors
JACQUELINE M. PAULSON Secretary, Treasurer MARCH 19, 1996
- ----------------------------- and Director
Jacqueline M. Paulson
KENNETH T. LaMEAR Director MARCH 19, 1996
- -----------------------------
Kenneth T. LaMear
28
<PAGE>
EXHIBIT INDEX
-------------
Sequential
Exhibit Number Description Page No.
- -------------- ----------- ----------
3.1 Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the
Company's Registration Statement on Form
10 filed with the Commission on
December 18, 1989 (the "Form
10"))
3.2 Bylaws (incorporated by reference to Exhibit
3.2 to the Form 10)
10.1 Office lease dated June 28, 1988
(incorporated by reference to Exhibit
10.2 to the Form 10)
10.3 Contract with Correspondent Services
Corporation, dated July 24, 1992
(Incorporated by reference to Exhibit
10.3 to the Form 10-Q for the quarter
ended September 30, 1992 filed with the
Commission on November 13, 1992)
10.4 Office Lease renewal for the period from
6/1/93 to 5/31/98, dated as of March 12,
1992 (Incorporated by reference to
Exhibit 10.4 to the Form 10-K for the
year ended December 31, 1992 filed with
the Commission on March 31, 1993)
21.1 Subsidiaries
The Company's only subsidiary is Paulson
Investment Company, Inc., an Oregon
corporation.
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 DECEMBER 31, 1995 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH FLOWS FOR
THE TWELVE MONTHS IN THE PERIOD ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 174
<RECEIVABLES> 4,384
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 4,179
<PP&E> 116
<TOTAL-ASSETS> 9,542
<SHORT-TERM> 100
<PAYABLES> 3,144
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 346
<LONG-TERM> 0
0
0
<COMMON> 736
<OTHER-SE> 4,150
<TOTAL-LIABILITY-AND-EQUITY> 9,542
<TRADING-REVENUE> 701
<INTEREST-DIVIDENDS> 21
<COMMISSIONS> 9,665
<INVESTMENT-BANKING-REVENUES> 1,881
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 6
<COMPENSATION> 9,687
<INCOME-PRETAX> 4,706
<INCOME-PRE-EXTRAORDINARY> 4,706
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,925
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
