SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------
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, 1996
FORM 10-KSB
PAULSON CAPITAL CORP.
---------------------
Name of small business issuer as specified in its charter
Oregon 93-0589534
------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
811 S.W. Front Avenue
Portland, OR 97204
--------------------- -----
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code: (503) 243-6000
Securities registered pursuant to Section 12(b) of the Act:
None
----
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. ___
1
<PAGE>
State issuer's revenues for its most recent fiscal year:
$25,618,286
As of March 18, 1997, 3,977,115 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 $6,252,936.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 1997 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
--- ---
2
<PAGE>
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, 1996 PIC employed 19 brokers and had
independent contractor arrangements with 80 brokers registered with the National
Association of Securities Dealers, Inc. ("NASD"). PIC also employed a support
staff of 45 persons in its headquarters in Portland, Oregon and in certain of
its branch offices. At December 31, 1996 PIC had 31 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.
3
<PAGE>
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:
1996 1995 1994 1993 1992
General Securities 47 54 84 65 64
Trading 6 4 (1) 8 10
Corporate Finance 18 10 14 25 22
Underwriter Warrants 29 32 2 2 4
Other 0 0 1 0 0
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. Commissions 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
4
<PAGE>
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, 1996, 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
38 securities of 23 issuers. Of these, 17 were corporations for which PIC has
acted as managing or co-managing underwriter of public financings. In addition,
at December 31, 1996, PIC held securities of 7 companies in its investment
account. In 1996, the value of securities held in the trading accounts and
investment account ranged between $5,094,357 and $12,530,752. 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.
5
<PAGE>
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, 1996 PIC acted as the managing
underwriter or co-managing underwriter for 121 public offerings, raising
approximately $634 million for corporate finance clients. Of these, 76 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,
6
<PAGE>
to other major underwriters in the public offering. See "Item 6 - Management's
Discussion and Analysis or Plan of Operation - Liquidity and Capital Resources."
Branch Offices
PIC branch offices are generally 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, 1996, PIC had 31 branch offices in
Arizona, California, 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 Salem office.
Research
PIC employs two 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
38 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
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,
7
<PAGE>
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, 1996, PIC had net capital of $8,011,615, which exceeded its minimum
requirement of $152,775 by $7,858,840. The ratio of aggregate indebtedness of
$2,291,629 to net capital of $8,011,615 on December 31, 1996 was approximately
.29 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 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.
8
<PAGE>
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.
Employees
At December 31, 1996, PIC had 64 employees, of whom 45 were executives and
support staff and 19 were involved in brokerage activities and compensated
primarily on a commission basis. PIC also had independent contractor
arrangements with 80 independent contractors, all of whom are compensated solely
on a commission basis. Paulson Capital had no employees separate from PIC.
9
<PAGE>
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 on a month to
month basis. The Company believes the existing leased space is suitable and
adequate for its business for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company and PIC are defendants in Holly Millar v. Pearce Systems
International, Inc., et al., filed in San Francisco Superior Court, State of
California, in March 1996. An asserted class action, plaintiff alleges
violations of the California securities law, deceit, negligent misrepresentation
and unfair business practices relating to alleged misstatements in the
prospectus used in connection with a February 1994 public offering in which PIC
acted as the managing underwriter. The offering consisted of 675,000 units at a
price of $7.25 per unit. Plaintiff seeks rescission of the offering as well as
actual damages, interest, attorney fees and punitive damages. PIC has filed a
second motion to dismiss various parts of the complaint. The hearing on this
motion is set for March 26, 1997. In addition, there has been no certification
of a class at this time. Discovery in this matter is still in the early stages.
Therefore, the Company and PIC have not had an opportunity to investigate this
matter fully but believe they have meritorious defenses and intend to defend
this matter vigorously. Pursuant to a tolling agreement with the plaintiff, the
Company (but not PIC) expects to be dismissed without prejudice from the
lawsuit.
PIC has been named as a respondent in Smith Benton & Hughes, Inc. v.
Paulson Investment Co., Inc., an NASD arbitration proceeding served on PIC in
February 1996. Claimant, an NASD broker-dealer, alleges that PIC was negligent
in supervising one of PIC's brokers who maintained a securities account with
claimant. Claimant alleges that the former PIC broker engaged in various acts of
fraud, misrepresentation, violation of federal securities laws and breach of
contract, and seeks in excess of $104,000 in compensatory damages, attorney
fees, and interest against PIC. An arbitration hearing is expected to be set for
mid-1997. PIC believes it has meritorious defenses and intends to defend this
matter vigorously.
Richard Toscano Claim In November 1996, Richard Toscano, a former PIC
customer, asserted claims against PIC and Jeff Hudson, a former PIC broker,
alleging various securities law violations,
10
<PAGE>
including unsuitability and misrepresentation, in connection with his account
with PIC. He has also alleged that PIC failed to supervise Mr. Hudson. Mr.
Toscano has demanded an amount in excess of $130,000 plus interest in order to
settle this matter. At this time, no arbitration claim has been filed. PIC has
not had an opportunity to fully investigate this claim, but intends to defend
this matter vigorously if an arbitration claim is filed.
Philip Cutler Claim In March 1996, Philip Cutler, a former PIC customer,
asserted various claims against Todd Bollman, a former PIC broker, and PIC
alleging unsuitability and churning in his account with PIC. Mr. Cutler has
indicated that his losses approach $90,000, not including commissions. PIC has
indicated to Mr. Cutler that it believes he is an experienced, sophisticated
investor who spoke regularly with Mr. Bollman and was well informed with respect
to the risks involved in the trading that he selected in his account. Although
Mr. Cutler indicated that he would seek arbitration, no arbitration has been
filed at this time. PIC has not had an opportunity to fully investigate this
matter, but believes it has meritorious defenses and intends to defend this
matter vigorously if an arbitration claim is filed.
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.
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 is set for
July. An unfavorable result could require, in addition to payment by PIC of the
deficiencies plus interest and penalties, additional
11
<PAGE>
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 subsequent state rules that 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, but the case has since
been stayed pending arbitration. PIC denies Mr. Alexander's claims, believes
they are unfounded, and intends to vigorously defend the action.
An adverse outcome in certain of the matters described above could have a
material adverse effect on PIC or the Company. PIC has been named in certain
other legal proceedings and has received notice that certain customers may
commence legal proceedings against PIC. The Company believes, based upon
information received to date and, where the Company believes it appropriate,
discussions with legal counsel, that resolution of this additional pending or
threatened litigation will have no material adverse effect 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
12
<PAGE>
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 for the common stock for the periods shown, as obtained from
the Nasdaq Stock Market.
<TABLE>
<CAPTION>
1996 1995 1994
High Low High Low High Low
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $1.188 $ .875 $ .500 $ .406 $1.375 $1.000
2nd Quarter 3.500 .906 .938 .438 1.188 .688
3rd Quarter 3.188 1.750 1.000 .688 .781 .562
4th Quarter 3.125 2.562 1.750 .875 .688 .406
</TABLE>
The high and low closing price for the first quarter of 1997 through March 18
were $3.125 and $2.5625, respectively.
As of March 18, 1997, there were 3,977,115 shares of the Company's common
stock outstanding and held of record by 168 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 1996 annual
meeting, the Company believes there are approximately 490 beneficial holders of
its common stock. The Company repurchased 285,300 shares of common stock during
1996. 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.
13
<PAGE>
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,
--------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Revenues $25,618 $18,031 $ 9,345 $18,884 $15,041
Commissions and 12,092 9,688 7,782 12,572 10,208
Salaries
Other Expenses 4,073 3,637 3,319 4,843 3,678
Total Expenses 16,165 13,325 11,101 17,415 13,886
Pretax Income 9,453 4,706 (1,755) 1,469 1,155
(loss)
Net Income (loss) 5,727 2,925 (1,080) 836 694
Earnings (loss) $1.33 $.67 ($.25) $.18 $.15
per share
Average number of 4,323 4,357 4,372 4,535 4,569
common shares
outstanding
</TABLE>
Balance Sheet Information
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total Assets $16,291 $9,542 $4,653 $6,052 $4,507
Working Capital 9,737 4,759 1,851 3,051 2,343
Short-Term Debt 100 100 100 100 103
Long-Term Debt 0 0 0 0 0
Shareholders' $9,899 $4,886 $2,001 $3,173 $2,467
Equity
</TABLE>
14
<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
1996 vs. 1995 1995 vs. 1994
------------- -------------
Revenues:
Sales Commissions $2,519,052 26.1% $1,853,704 23.7%
Corporate Finance 2,674,864 142.1% 563,152 42.7%
Investment Income 1,595,558 27.7% 5,502,391 N/A
Trading Income 796,232 113.6% 767,377 N/A
Other 2,015 6.3% ( 1,381) ( 4.2%)
Expenses:
Commissions
and Salaries $2,404,918 24.8% $1,905,695 24.5%
Underwriting
Expenses 448,985 90.4% 170,197 52.1%
Rent, Telephone
and Quotes ( 134,539) (14.4%) ( 119,935) (11.4%)
Other 121,245 5.5% 267,824 13.8%
Pretax Income $4,747,112 100.9% $6,461,462 N/A
15
<PAGE>
1996 Compared to 1995
Total revenues for 1996 rose 42.1 percent from 1995, from $18,030,565 to
$25,618,286. As shown in the table above, sales commissions rose $2,519,052, or
26.1 percent, from $9,664,994 in 1995 to $12,184,046 in 1996. This increase
resulted primarily from the more favorable price movements and trading levels in
smaller capitalization OTC issues in 1996, compared to more moderate levels in
1995. The Nasdaq Industrial Average rose less in 1996 (15.03 percent) compared
to 1995 (29.97 percent), but PIC's focus is on very small capitalization issues
which experienced a more favorable market in 1996. 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 rose 142.1 percent or $2,674,864 in 1996 compared to 1995. Seven
transactions were completed in 1996, raising a total of $118 million for the
issuers; seven transactions were completed in 1995, raising an aggregate of
$39.70 million for corporate finance clients. Investment income increased
$1,595,558, to $7,346,825 in 1996 from $5,751,267 in 1995. Two underwriter
warrants were exercised in 1996 while seven warrants were exercised in 1995, but
the profits from investments sold in the investment account in 1996 were
significantly greater than in 1995. Trading income rose $796,232, to $1,496,871
in 1996 from $700,639 in 1995. This improvement was also due to greater trading
levels and generally higher prices in OTC issues in 1996 compared to 1995.
Total expenses rose $2,840,609 in 1996 from 1995, an increase of 21.3
percent from $13,324,555 to $16,165,164. Commissions and salaries rose
$2,404,918, or 24.8 percent, from $9,687,338 in 1995 to $12,092,256 in 1996.
This increase was primarily due to increased commission revenues resulting in a
higher level of commissions paid. Higher commission rates are generally paid to
employee registered representatives at higher production levels as an incentive.
Underwriting expenses increased by $448,985 or 90.4 percent, due primarily to
increased legal fees for the larger corporate finance transactions completed in
1996 compared to 1995. Rent, telephone and quote expenses decreased from
$933,897 in 1995 to $799,358 in 1996, a decrease of 14.4 percent. This was
primarily due to reduced office rent expenses as the result of subleasing to
independent contractors and lower quotation expenses due to replacing leased
quotation machines with purchased personal computers. Other expenses increased
5.5 percent, from $2,206,455 in 1995 to $2,327,700 in 1996, primarily due to
increased accruals for PIC's profit sharing and 401(k) plan.
The Company had a pretax profit of $9,453,122 in 1996 compared to a pretax
profit of $4,706,610 in 1995. The primary reasons for this increase were the
significant increases in corporate finance revenues, investment income and
trading income. Independent of investment income, the Company would have had a
loss before income taxes of $1,045,257 in 1995 compared to pretax income of
$2,106,297
16
<PAGE>
in 1996. Investment income during both years was significantly higher than in
any previous year in the Company's history. This was due to gains in the value
of the underwriter warrants sold and greater profits on positions held 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 an expense of $3,725,920 for income taxes
in 1996, compared to $1,780,977 in 1995.
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
17
<PAGE>
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 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.
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 "Item 1 - Description of Business -- Net Capital Requirements" above. PCC's
working capital at December 31, 1996 was $9,737,222. Of PIC's total assets (net
of intercompany accounts) at December 31, 1996 of $15,544,772, approximately 64
percent consisted of securities in PIC's investment account and trading
inventory of securities, at market value, and approximately 33 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
1996, 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
18
<PAGE>
accounts are stated at fair market value, which is at or below quoted market
price.
PIC owed $100,000 at December 31, 1996 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, 1996, 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, 1996, PIC owned 34 underwriter
warrants (from 32 issuers), of which 27 were currently exercisable and 6 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 1996, $2,654,937 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 $7,383,129, an increase of $1,892,386
in trading securities, an increase of $833,711 in receivables and an increase in
refundable income taxes of $255,123, partially offset by an increase of
$1,801,823 in accounts payable and accrued liabilities, $36,304 unrealized
depreciation on investment securities and a $177,917 decrease in prepaid and
deferred expenses. In 1996,
19
<PAGE>
$3,388,473 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 1996 totalled $722,120, resulting primarily from
payments to repurchase common stock. 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, 1996, 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.
20
<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, 1996 and 1995
Consolidated Statements of Operations F-3
for the years ended December 31,
1996, 1995 and 1994
Consolidated Statement of F-4
Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows F-5
for the years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial F-7
Statements
Supplementary Schedule of Warrants Owned F-16
21
<PAGE>
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
PAULSON CAPITAL CORP. AND SUBSIDIARY
DECEMBER 31, 1996, 1995 AND 1994
<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, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
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, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996, 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, 1996 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, 1996. 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, 1997
F-1
<PAGE>
Paulson Capital Corp. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1996 1995
-------------- -------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 185,445 $ 174,029
Receivable from broker-dealers and clearing organizations 5,035,144 4,041,470
Notes and other receivables 182,859 342,822
Trading securities 5,152,783 3,260,397
Investment securities 4,789,270 918,990
Refundable income taxes 412,261 157,138
Prepaid and deferred expenses 160,121 338,038
Secured demand note 100,000 100,000
Deferred income taxes 112,000 82,000
-------------- -------------
Total current assets 16,129,883 9,414,884
-------------- -------------
FURNITURE AND EQUIPMENT, net 150,925 115,881
-------------- -------------
DEFERRED INCOME TAXES 10,400 10,900
-------------- -------------
$16,291,208 $ 9,541,665
============== =============
LIABITILITES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 380,707 $ 334,422
Payable to broker-dealers and clearing organizations 3,690,844 2,809,546
Compensation, employee benefits and payroll taxes 1,940,422 1,066,182
Securities sold, not yet purchased 280,688 345,550
Subordinated note payable 100,000 100,000
-------------- -------------
Total current liabilities 6,392,661 4,655,700
-------------- -------------
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, 4,081,241 and
4,324,539, respectively 733,701 735,889
Retained earnings 9,164,846 4,150,076
-------------- -------------
9,898,547 4,885,965
-------------- -------------
$16,291,208 $9,541,665
============== =============
The accompanying notes are an integral part of these statements.
</TABLE>
F-2
<PAGE>
Paulson Capital Corp. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995 1994
---------------- -------------- ---------------
<S> <C> <C> <C>
Revenues
Commissions $12,184,046 $ 9,664,994 $ 7,811,290
Corporation finance 4,556,783 1,881,919 1,318,767
Investment income 7,346,825 5,751,267 248,876
Trading income (loss) 1,496,871 700,639 (66,738)
Interest and dividends 18,035 21,237 17,825
Other 15,726 10,509 15,302
---------------- -------------- ---------------
25,618,286 18,030,565 9,345,322
---------------- -------------- ---------------
Expenses
Commissions and salaries 12,092,256 9,687,338 7,781,643
Underwriting expenses 945,850 496,865 326,668
Rent, telephone and quotation services 799,358 933,897 1,053,832
Interest expense 7,010 6,442 2,345
Professional fees 492,773 432,350 510,615
Bad debt expense 180,352 366,920 155,106
Travel and entertainment 153,261 149,500 194,901
Settlements 297,465 614,446 247,184
Branch office expenses - 6,322 93,840
Other 1,196,839 630,475 734,640
---------------- -------------- ---------------
16,165,164 13,324,555 11,100,774
---------------- -------------- ---------------
Earnings (loss) before
income taxes 9,453,122 4,706,010 (1,755,452)
Income tax (expense) benefit (3,725,920) (1,780,977) 674,990
---------------- -------------- ---------------
NET EARNINGS (LOSS) $ 5,727,202 $ 2,925,033 $(1,080,462)
================ ============== ===============
Earnings (loss) per common and
dilutive common equivalent share $ 1.33 $ .67 $ (.25)
================ ============== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE>
Paulson Capital Corp. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three year period ended December 31, 1996
Common Stock
------------------------------------- Retained
Shares Amount Earnings
------------ ------------ --------------
<S> <C> <C> <C>
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
Exercise of stock options 38,570 40,892 -
Issuance of common stock in lieu
of directors' cash compensation 3,432 7,500 -
Redemption of common stock (285,300) (50,580) (712,432)
Net earnings for the year - - 5,727,202
------------ ------------ --------------
Balance at December 31, 1996 4,081,241 $ 733,701 $ 9,164,846
============ ============ ==============
The accompanying notes are an integral part of this statement.
</TABLE>
F-4
<PAGE>
Paulson Capital Corp. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
-------------- -------------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings (loss) $5,727,202 $2,925,033 $(1,080,462)
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities
Unrealized (appreciation) depreciation
on investment securities 36,304 182,108 (1,700)
Realized gain on investment securities (7,383,129) (5,933,375) (247,176)
Deferred income taxes (29,500) 89,800 (195,650)
Common stock issued for compensation
of directors 7,500 10,500 16,500
Depreciation and amortization 53,028 49,830 51,368
Loss from sale of furniture and equipment - 7,884 -
Change in assets and liabilities
Receivables (833,711) (2,559,286) 842,254
Trading securities (1,892,386) (1,696,723) (84,958)
Refundable income taxes (255,123) 357,862 (515,000)
Prepaid and deferred expenses 177,917 (168,770) 12,380
Accounts payable and accrued liabilities 1,801,823 1,907,249 135,081
Securities sold, not yet purchased (64,862) 147,730 (187,923)
Income taxes payable - - (130,475)
-------------- -------------- ---------------
Net cash used in operating activities (2,654,937) (4,680,158) (1,385,761)
-------------- -------------- ---------------
Cash flows from investing activities
Purchases of investment securities (19,493,160) (5,166,256) (1,416,431)
Proceeds from sale of investment securities 22,969,705 10,013,596 2,212,578
Additions to furniture and equipment (88,072) (41,416) (75,345)
Proceeds from sale of furniture and equipment - 5,075 -
-------------- -------------- ---------------
Net cash provided by investing activities 3,388,473 4,810,999 720,802
-------------- -------------- ---------------
</TABLE>
F-5
<PAGE>
Paulson Capital Corp. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1996 1995 1994
------------- -------------- ------------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from exercise of stock options $ 40,892 $ - $ -
Payments to retire common stock (763,012) (50,341) (107,843)
Decrease in bank overdraft payable - (51,888) (22,829)
------------- -------------- ------------
Net cash used in financing activities (722,120) (102,229) (130,672)
------------- -------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALANTS 11,416 28,612 (795,631)
Cash and cash equivalents at beginning of year 174,029 145,417 941,048
------------- -------------- ------------
Cash and cash equivalents at end of year $ 185,445 $ 174,029 $ 145,417
============= ============== ============
Cash paid during the year for
Interest $ 6,000 $ 6,000 $ 2,345
============= ============== ============
Income taxes $ 4,026,942 $ 1,846,600 $ 38,000
============= ============== ============
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 a 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. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective fair
values due to the short maturities of these instruments. The fair values of
securities owned and securities sold, not yet purchased are recorded
primarily on quoted prices for those or similar instruments. Changes in the
market value of these securities are reflected currently in the results of
operations for the year.
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.
F-7
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
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, 1996, 1995 and 1994 the weighted average
number of shares was 4,323,065, 4,357,095 and 4,371,544, 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.
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.
F-8
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
ORGANIZATIONS - Continued
<TABLE>
<CAPTION>
At December 31, 1996 and 1995, the above clearing services and trading
account financing resulted in the following:
1996 1995
-------------- --------------
<S> <C> <C>
Receivable from CSC $ 5,035,144 $ 4,041,470
Payable to CSC (3,690,844) (2,809,546)
-------------- --------------
Net receivable $ 1,344,300 $ 1,231,924
============== ==============
NOTE C - NOTES AND OTHER RECEIVABLES
Notes and other receivables consist of the following:
1996 1995
-------------- ---------------
Employees $ 38,570 $ 152,100
Independent brokers 77,671 117,993
Other 66,618 72,729
-------------- ---------------
$ 182,859 $ 342,822
============== ===============
</TABLE>
Employee and independent broker 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, 1996, 1995 and 1994, notes and receivables of
$81,627, $369,964 and $156,479, 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.
F-9
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - TRADING AND INVESTMENT SECURITIES - Continued
The categories of trading securities and their related market values
follow:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
Long Short Long Short
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Common stock $ 448,722 $ 134,355 $ 1,129,036 $ 51,477
Preferred stock 29,029 9,088 49,424 186,650
State and municipal bonds 144,324 80,814 46,957 25,912
Corporate bonds 53,423 56,431 35,581 81,511
US Government Agency 4,477,285 - 1,999,399 -
---------------- --------------- ---------------- ----------------
$ 5,152,783 $ 280,688 $ 3,260,397 $ 345,550
================ =============== ================ ================
</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>
1996
Common stock $ 5,025,434 $ 4,789,270 $ (236,164) $ 4,789,270
================ =============== ================ ================
1995
Common stock $ 1,118,850 $ 918,990 $ (199,860) $ 918,990
================ =============== ================ ================
</TABLE>
Realized gains included in the determination of net earnings were
$7,383,129, $5,933,375 and $247,176 for the years ended December 31, 1996,
1995 and 1994, respectively.
F-10
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Office equipment $ 623,600 $ 535,528
Leasehold improvements 120,354 120,354
Vehicles 25,245 25,245
------------ ------------
769,199 681,127
Less accumulated depreciation
and amortization 618,274 565,246
------------ ------------
$ 150,925 $ 115,881
============ ============
</TABLE>
NOTE F - SUBORDINATED NOTE PAYABLE
The Company's subsidiary has borrowings subordinated to claims of general
creditors pursuant to 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.
<TABLE>
<CAPTION>
Maturity Date Interest Rate 1996 1995
--------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Secured demand note
May 31, 1997 6% $ 100,000 $ 100,000
</TABLE>
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>
1996 1995 1994
--------------- --------------- ------------
<S> <C> <C> <C>
Current tax (expense) benefit
Federal $(3,008,653) $(1,478,713) $ 479,340
State (746,767) (212,464) -
--------------- --------------- ------------
(3,755,420) (1,691,177) 479,340
--------------- --------------- ------------
Deferred tax (expense) benefit
Federal 11,740 (38,700) 120,957
State 17,760 (51,100) 74,693
--------------- --------------- ------------
29,500 (89,800) 195,650
--------------- --------------- ------------
$(3,725,920) $(1,780,977) $ 674,990
=============== =============== ============
</TABLE>
F-11
<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>
1996 1995 1994
---------------- --------------- -------------
<S> <C> <C> <C>
Income tax (expense) benefit at
statutory federal tax rate $(3,214,000) $(1,600,000) $ 597,000
State taxes net of federal benefit (510,000) (205,000) 76,000
Other (1,920) 24,023 1,990
---------------- --------------- -------------
$(3,725,920) $(1,780,977) $ 674,990
================ =============== =============
Deferred tax assets (liabilities) consist of the following:
1996 1995
---------------- -------------
Deferred tax assets (liabilities)
Basis difference in short-term securities
held for investment $ 91,000 $ 76,500
Depreciation of property and equipment 10,400 10,900
State and local operating loss carryforwards
net of federal benefit 21,000 31,000
Other - (25,500)
---------------- -------------
Less valuation allowance - -
---------------- -------------
$ 122,400 $ 92,900
================ =============
The state operating loss carryforwards expire from 1999 through 2009.
</TABLE>
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 1996, 1995 or
1994.
F-12
<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 101,425 shares under option
at December 31, 1996, 30,000 expire on August 27, 1997 and 71,425 expire on
June 29, 1998.
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS
123). It applies APB Opinion No.25, "Accounting for Stock Issued to
Employees," in accounting for its Plans and therefore does not recognize
compensation expense. Had the Company elected to recognize compensation
expense based upon the fair value at the grant date for awards under these
Plans consistent with the methodology prescribed by FAS 123, the effect on
the Company's pro forma net income and earnings per share would have been
immaterial.
The following table summarizes activity under the Plans for the three years
ended December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Exercise
Option Price
--------------- ----------------
<S> <C> <C>
Balance at December 31, 1993 140,000 $ 1.2321
Granted 62,700 1.1875
Exercised - -
Canceled (10,000) 1.5000
--------------- ----------------
Balance at December 31, 1994 192,700 1.2037
Granted 99,995 .9063
Exercised - -
Canceled (101,250) 1.1690
--------------- ----------------
Balance at December 31, 1995 191,445 1.0667
Granted - -
Exercised (38,570) 1.0602
Canceled (51,450) 1.1875
--------------- ----------------
Balance at December 31, 1996 101,425 $ 1.0079
=============== ================
</TABLE>
The following information applies to options outstanding at December 31,
1996:
Range of exercise prices $.90625 -1.50
Weighted-average remaining contractural life 1.25 years
The weighted-average fair value of options granted during the years ended
December 31, 1996, 1995 and 1994 were $0, $.36 and $.40, respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used in 1995 and 1994, respectively: no dividends for either
year; expected volatility of 62% for both years; risk-free interest rates
of 5.9% and 5.05%; and expected lives of 2.5 and 2 years.
F-13
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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:
Year ended
December 31,
------------
1997 $ 222,768
1998 92,820
----------------
$ 315,588
================
The lease provides for payment of taxes and other expenses by the Company.
Rental expense for the years ended December 31, 1996, 1995 and 1994
amounted to $251,587, $298,421 and $367,329, respectively.
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, 1996,
1995 and 1994 were $500,000, $150,000 and $0, 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.
No provision for any liability that may result from the above contingencies
has been made in the financial statements.
F-14
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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, 1996, the Company's net capital and
required net capital were $8,011,615 and $152,775, respectively, and its
ratio of aggregate indebtedness to net capital was .29 to 1. The Company's
subsidiary's absolute minimum net capital is $100,000.
F-15
<PAGE>
Paulson Capital Corp. and Subsidiary
<TABLE>
<CAPTION>
SUPPLEMENTARY SCHEDULE OF WARRANTS OWNED
December 31, 1996
Shares Exercise
Entitled to Price Expiration
Description Purchase Per-Share Date
- ------------------------------------------------------------------------ ------------ -------------- --------------
<S> <C> <C> <C>
California Culinary Academy, Inc ERC 06-30-94 71,000 $ 7.80 1998, 06/30
Cal-Maine Foods, Inc. ERC 12-11-97 177,100 $ 8.40 2001, 12/10
Cell Robotics International, Inc. (units) ERC 9-19-96 9.3725 $ 25,000.00 2000, 09/18
Cellegy Pharmaceuticals, Inc. (units) ERC 8-11-96 18,745 $ 20.63 2000, 08/11
Coin Bill Validator, Inc. ERC 2-06-96 51,750 $ 13.20 2000, 02/06
Complete Management, Inc. ERC 12-27-96 107,720 $ 10.80 2000, 12/27
Complete Management, Inc. ERC 6-11-97 31,377 $ 21.04 2001, 06/11
CompuMed, Inc. (units) ERC 8-03-93 584,000 $ 0.30 1997, 08/03
Cusac Industries, Ltd. (units) ERC 1-11-96 11,901 $ 12.00 2000, 01/11
Davstar Industries, Ltd. (units) ERC 3-20-93 78,650 $ 10.05 1997, 03/20
Document Technologies, Inc. (units) ERC 2-14-93 51,000 $ 7.20 1997, 02/14
Evergreen Resources, Inc. ERC 10-22-97 134,375 $ 6.90 2001, 10/22
Farragut Mortgage Co., Inc. ERC 2-25-93 95,333 $ 7.80 1997, 02/25
Frontier Natural Gas Corp. (units) ERC 11-19-94 26,005 $ 28.92 1998, 11/12
International Nursing Services, Inc. (units) ERC 9-12-95 15,301 $ 28.20 1999, 09/12
Kyzen Corporation (units) ERC 8-3-96 15,498 $ 14.95 2000, 08/03
Microfield Graphics, Inc. ERC 6-22-96 79,750 $ 7.20 2000, 06/22
Microvision Inc. (units) ERC 8-27-97 123,760 $ 9.60 2001, 08/27
Neotherapeutics Inc. (units) ERC 9-25-97 161,000 $ 9.12 2001, 09/25
North Coast Energy (units) ERC 12-18-93 34,935 $ 12.00 1997, 12/18
Northern Bank of Commerce ERC 8-4-94 2,000 $ 6.60 1999, 08/04
Patrick Petroleum Company Series B Conv. Pfd. ERC 9-14-93 63,800 $ 12.00 1997, 09/14
PCT Holdings, Inc. (units) ERC 7-15-97 146,700 $ 3.75 2001, 07/15
Pearce Systems International, Inc. (units) ERC 2-10-95 47,722 $ 8.70 1999, 02/11
Penultimate, Inc. (units) ERC 12-22-94 38,298 $ 8.10 1998, 12/22
Prepaid Legal Services, Inc. (units) ERC 6-8-95 2,800 $ 28.80 1999, 06/08
R-B Rubber Products, Inc. ERC 5-10-96 55,100 $ 5.10 2000, 05/10
Sparta Surgical Corp. (units) ERC 7-12-95 11,221 $ 12.00 1999, 07/12
Supergen, Inc. (units) ERC 3-12-97 268,950 $ 7.20 2001, 03/12
TJ Systems Corp. Ser. A Convertible Prfd. ERC 8-4-94 21,535 $ 12.00 1998, 08/04
TSS LTD (units) ERC 5-5-94 95,310 $ 1.20 1998, 05/05
TSS LTD (units) ERC 1-9-93 21,900 $ 22.50 1997, 01/09
Willard Pease Oil & Gas Co. Ser. A Cum. Cnv. Pfd. ERC 8-13-94 64,197 $ 12.00 1998, 08/13
WRT Energy Corp 9% Convertible Preferred ERC 10-20-94 48,147 $ 30.00 1998, 10/20
</TABLE>
F-16
<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.
22
<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 1997
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, 1996 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. 60 President and Director of Corporate
Paulson (1970) Director Finance of PIC
(President of PIC
until 7/92)
Jacqueline M. 57 Secretary- Secretary-Treasurer
Paulson (1976) Treasurer and of PIC (Chief
Director Executive Officer of
PIC from 7/92 to 8/93)
Kenneth T. 62 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.
23
<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, 1996 and 1995
Consolidated Statements of Operations
for the years ended December 31,
1996, 1995 and 1994
Consolidated Statement of
Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial
Statements
Supplementary Schedule of Warrants Owned
(2) The following financial schedule for the years 1996, 1995 and 1994 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)
24
<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.
25
<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 17, 1997 By: CHESTER L.F. PAULSON
-------------- ------------------------------------
Chester L.F. Paulson
President
26
<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 17, 1997
- ------------------------ and President
Chester L.F. Paulson
(2) Principal Accounting
Officer
CAROL RICE Principal Accounting MARCH 19, 1997
- ------------------------ Officer
Carol Rice
(3) Directors
JACQUELINE M. PAULSON Secretary, Treasurer MARCH 20, 1997
- ------------------------ and Director
Jacqueline M. Paulson
KENNETH T. LaMEAR Director MARCH 19, 1997
- ------------------------
Kenneth T. LaMear
27
<PAGE>
Schedule II
Paulson Capital Corp. and Subsidiary
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
Balance Additions-Charges Balance
Beginning to Cost and Deductions at End
Description of Year Expenses Write-offs of Year
- ------------------------------ ------------- --------------------- ------------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended Dec. 31, 1996 $ - $ 81,627 $ 81,627 $ -
Year ended Dec. 31, 1995 - 369,964 369,964 -
Year ended Dec. 31, 1994 - 156,479 156,479 -
</TABLE>
<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, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS,
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE TWELVE MONTHS IN THE PERIOD ENDED
DECEMBER 31, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 185
<RECEIVABLES> 5,218
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 9,942
<PP&E> 151
<TOTAL-ASSETS> 16,291
<SHORT-TERM> 100
<PAYABLES> 4,072
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 281
<LONG-TERM> 0
0
0
<COMMON> 734
<OTHER-SE> 9,165
<TOTAL-LIABILITY-AND-EQUITY> 16,291
<TRADING-REVENUE> 1,497
<INTEREST-DIVIDENDS> 18
<COMMISSIONS> 12,184
<INVESTMENT-BANKING-REVENUES> 4,557
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 7
<COMPENSATION> 12,092
<INCOME-PRETAX> 9,453
<INCOME-PRE-EXTRAORDINARY> 9,453
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,727
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.33
</TABLE>
