SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended March 31, 1997
Commission file number: 0-18188
PAULSON CAPITAL CORP.
---------------------
Exact name of registrant as specified in its charter
Oregon 93-0589534
------ ----------
(State of incorporation) (I.R.S. Employer Identification)
811 S.W. Front Avenue
Portland, OR 97204
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (503) 243-6000
--------------
Check whether the issuer (1) filed all reports required to be filed by
Sections 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
--- ---
Number of shares outstanding of each of the issuer's classes of common
stock, as of May 9, 1997:
Common stock, no par value - 3,991,400 shares
Transitional Small Business Disclosure Format Yes No X
--- ---
1
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(unaudited)
3/31/97 12/31/96
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 114,186 185,445
Receivable from broker-dealers and
clearing organizations 1,219,092 5,035,144
Notes and other receivables 186,425 182,859
Trading securities 6,631,706 5,152,783
Investment securities 3,629,957 4,789,270
Refundable income taxes -- 412,261
Prepaid and deferred expenses 127,440 160,121
Secured demand note 100,000 100,000
Deferred income taxes 112,000 112,000
----------- -----------
Total current assets 12,120,806 16,129,883
----------- -----------
FURNITURE AND EQUIPMENT, net 154,715 150,925
----------- -----------
DEFERRED INCOME TAXES 10,400 10,400
----------- -----------
$12,285,921 $16,291,208
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - CONTINUED
(unaudited)
3/31/97 12/31/96
<S> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 350,620 $ 380,707
Payable to broker-dealers and clearing
organizations 492,315 3,690,844
Compensation, employee benefits and
payroll taxes 656,879 1,940,422
Securities sold, not yet purchased 184,594 280,688
Income taxes payable 115,239 --
Subordinated note payable 100,000 100,000
------------ ------------
Total current liabilities 1,899,647 6,392,661
------------ ------------
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, 3,991,400 and
4,081,241, respectively 738,279 733,701
Retained earnings 9,647,995 9,164,846
------------ ------------
10,386,274 9,898,547
------------ ------------
$ 12,285,921 $ 16,291,208
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three month periods ended March 31, 1997
and March 31, 1996 (unaudited)
3/31/97 12/31/96
<S> <C> <C>
Revenues
Commissions $ 2,459,554 $ 3,118,131
Corporate finance 299,409 1,262,979
Investment income 1,488,198 724,189
Trading income (loss) 237,250 342,907
Interest and dividends 1,409 2,090
Other 9,024 3,715
----------- -----------
4,494,844 5,454,011
----------- -----------
Expenses
Commissions and salaries 2,367,050 3,143,607
Underwriting expenses 13,833 304,560
Rent, telephone and quotation services 194,642 177,748
Interest expense 1,532 2,098
Professional fees 141,907 94,737
Bad debt expense 29,000 44,889
Travel and entertainment 39,287 28,148
Settlements -- 19,625
Other 389,034 266,646
----------- -----------
3,176,285 4,082,058
----------- -----------
Earnings (loss) before income taxes 1,318,559 1,371,953
Provision for income taxes
Current 527,500 548,800
Deferred -- --
Net Earnings (Loss) $ 791,059 $ 823,153
=========== ===========
Earnings (loss) per share $ .20 $ .19
=========== ===========
The accompanying notes are an integral part of these statements
</TABLE>
4
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three year period ended December 31, 1996
and the three months ended March 31, 1997 (unaudited)
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
Exercise of stock options 28,570 25,892 -
Redemption of common stock (118,411) (21,314) (307,910)
Net earnings for the year to date 791,059
- -
----------- ---------- ------------
Balance at March 31, 1997 3,991,400 $ 738,279 $9,647,995
=========== ========== ============
The accompanying notes are an integral part of these statements
</TABLE>
5
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) for the three month periods ended
March 31, 1997 and March 31, 1996
3/31/97 3/31/96
--------------- ----------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings (loss) $ 791,059 $ 823,153
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities
Unrealized (appreciation) depreciation
on investment securities (279,500) 48,373
Realized gain on investment securities (1,231,159) (772,562)
Depreciation and amortization 14,468 12,792
Gain from sale of furniture and equipment (6,799) --
Change in assets and liabilities
Receivables 3,812,486 (1,701,884)
Trading securities (1,478,923) 548,039
Refundable income taxes 412,261 157,138
Prepaid and deferred expenses 32,681 296,591
Accounts payable and accrued liabilities (4,512,159) (371,197)
Securities sold, not yet purchased (96,094) 1,533,527
Bank overdraft -- 46,087
Income taxes payable 115,239 82,317
-------------- --------------
Net cash provided by (used in) operating activities (2,426,440) 702,374
-------------- --------------
Cash flows from investing activities
Purchases of investment securities (3,736,816) (5,154,547)
Proceeds from sale of investment securities 6,406,788 4,415,727
Additions to furniture and equipment (21,059) (11,719)
Proceeds from sale of furniture and equipment 9,600 -
-------------- --------------
Net cash provided by (used in) investing activities $ 2,658,513 $ (750,539)
-------------- --------------
The accompanying notes are an integral part of these statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - CONTINUED
3/31/97 3/31/96
--------------- ----------------
<S> <C> <C>
Cash flows from financing activities
Proceeds from exercise of stock options 25,892 -
Payments to retire common stock (329,224) (28,800)
Decrease in bank overdraft payable - -
---------- ----------
Net cash provided by (used in) financing activities (303,332) (28,800)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (71,259) (76,965)
Cash and cash equivalents at beginning of year 185,445 174,029
---------- ----------
Cash and cash equivalents at end of year $ 114,186 $ 97,064
========== ==========
Cash paid during the three months for
Interest $ 1,532 $ 2,098
========== ==========
Income taxes -- $ 24,900
========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for interim financial statements in
Article 10 of Regulation S-X and, therefore, do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the interim financial
statements include all adjustments (consisting only of normal recurring
accruals) necessary to state fairly the information shown therein. The nature of
the Company's business is such that the results of any interim period are not
necessarily indicative of results for a full fiscal year.
2. Securities Owned
Any losses from the disposition of securities are reflected in trading
revenues on the income statement for the period.
3. Commitments and Contingencies
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. No class has been
certified, although a motion for class certification is pending. The case is set
for trial April 20, 1998. 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,
8
<PAGE>
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, 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 contributions
9
<PAGE>
(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. The case has been stayed
pending NASD arbitration initiated by PIC. 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Three Months Ended March 31, 1997 vs. Three Months Ended March 31, 1996
Results of Operations
The revenues and operating results of the Company's operating subsidiary,
Paulson Investment Company, Inc. ("PIC"), are influenced by fluctuations in the
equity underwriting markets as well as general economic and market conditions,
particularly conditions in the over-the-counter market, where PIC's investment
account, trading inventory positions and underwriter warrants are heavily
concentrated. Significant fluctuations can occur in PIC's revenues and operating
results from one period to another. PIC's operations depend upon many factors,
such as the number of companies that are seeking public financing, the quality
and financial condition
10
<PAGE>
of those companies, market conditions in general, the performance of previous
PIC underwritings and interest in certain industries by investors. As a result,
revenues and income derived from these activities may vary significantly from
period to period. In the table below, "Trading Income" is the net gain or loss
from trading positions before commissions paid to the representatives in the
trading department. "Investment Income" includes amounts received, if any, from
the exercise of PIC's underwriter warrants.
<TABLE>
<CAPTION>
Summary of Changes in Major Categories
of Revenues and Expenses
Quarter Ended
3/31/97 3/31/96
<S> <C> <C>
Revenues:
Sales Commissions $ (658,577) (21.1%)
Corporate Finance (963,570) (76.3%)
Investment Income 764,009 105.5%
Trading Income (105,657) (30.8%)
Other 4,628 79.7%
---------- -----
Total $ (959,167) (17.6%)
Expenses:
Commissions and Salaries $ (776,557) (24.7%)
Underwriting Expenses (290,727) (95.5%)
Rent, Telephone and Quotes 16,894 9.5%
Other 144,617 31.7%
---------- -----
Total $ (905,773) (22.2%)
Pretax Income $ (53,394) (3.9%)
</TABLE>
Total revenues for the first quarter of 1997 fell 17.6 percent from the
first quarter of 1996, from $5,454,011 to $4,494,844. As shown in the table
above, sales commissions fell $658,577, or 21.1 percent, from $3,118,131 in the
first quarter of 1996 to $2,459,554 in the comparable 1997 period. This decrease
resulted primarily from the less favorable price movements and trading levels in
smaller capitalization issues in the 1997 quarter, compared to more favorable
levels in 1996. The Nasdaq Industrial Average rose 6.23 percent in the first
quarter of 1996 but fell 8.26 percent in the first quarter of 1997. Corporate
finance revenues fell 76.3 percent, or $963,570, in the first quarter of 1997
compared to the first quarter of 1996. Two corporate finance transactions were
completed in the 1996 quarter, raising a total of $44.84 million for the
issuers; no transactions were completed in the 1997 quarter. Corporate finance
11
<PAGE>
revenue is directly related to the amount of money raised in completed
transactions. Investment income increased $764,009, or 105.5 percent, from
$724,189 in the first quarter of 1996 to $1,488,198 in the first quarter of
1997, primarily due to the exercise in the 1997 quarter of an underwriter
warrant received in previous corporate finance transactions and substantial
trading profits in the investment account compared to two smaller underwriter
warrant exercises in the 1996 quarter. Trading income fell $105,657, or 30.8
percent, to $237,250 in the first quarter of 1997 from $342,907 in the
comparable 1996 period. This decrease was also due to the poorer market
conditions in the 1997 quarter compared to the volume levels in the 1996 quarter
for small capitalization OTC stocks.
Total expenses fell $905,773 in the first quarter of 1997 from the
comparable 1996 period, a decrease of 22.2 percent, from $4,082,058 to
$3,176,285. Commissions and salaries fell $776,557, or 24.7 percent, from
$3,143,607 in the 1996 period to $2,367,050 in 1997. This decrease was primarily
due to decreased commission revenues resulting in a lower level of commissions
paid. (Higher percentage commission levels are generally paid to employee
registered representatives at higher production levels.) Underwriting expenses
decreased by $290,727, or 95.5 percent, due primarily to decreased legal and
other fees accrued because of the lack of corporate finance transactions
compared to the two completed corporate finance transactions in the 1996
quarter. Rent, telephone and quote expenses increased from $177,748 in the 1996
period to $194,642 in 1997, an increase of 9.5 percent. Other expenses increased
31.7 percent, from $456,143 in the first quarter of 1996 to $600,760 in the
first quarter of 1997. This increase was primarily due to increased professional
fees associated with litigation and consulting fees.
The Company had a pretax profit of $1,318,559 in the first quarter of 1997
compared to a pretax profit of $1,371,953 in the comparable 1996 period.
Increases in investment income in the 1997 quarter largely offset declines in
PIC's general securities, corporate finance and trading activities. Significant
fluctuations can occur in PIC's revenues and operating results from one period
to another.
The Company also accrued $527,500 in income taxes for the first quarter of
1997, compared to an accrual for income taxes in the first quarter of 1996 of
$548,000. Independent of investment income, the Company would have had a profit
before income taxes of $647,764 in the first quarter of 1996 compared to a loss
before income taxes of $169,639 in the first quarter of 1997.
Liquidity and Capital Resources
The majority of PIC's assets are cash and assets readily convertible to
cash. PIC's securities inventory is stated at market value. The liquidity of the
market for many of PIC's securities holdings, however, varies with trends in the
stock market. Since many of the securities held by PIC are thinly traded, and
PIC is in many cases a primary market maker in the issues held, any
12
<PAGE>
significant sales of PIC's positions could adversely affect the liquidity of the
issues held. In general, falling prices in OTC securities (which make up most of
PIC's trading positions) lead to decreased liquidity in the market for these
issues, while rising prices in OTC issues tend to increase the liquidity of the
market for these securities. The overall increase in prices for the OTC
securities traded by PIC in both 1995 and 1996 was combined with a general
increase in the liquidity of the markets for these securities. The decline in
prices for the OTC securities traded by PIC in 1997 was combined with a general
decrease in the liquidity of the markets for these securities. PIC's investment
account and trading inventory accounts are stated at fair market value, which is
at or below quoted market price.
PIC owed $100,000 at March 31, 1997 pursuant to a subordinated loan from an
investor. PIC also borrows money from its clearing firm in the ordinary course
of its business, pursuant to an understanding under which the clearing firm
agrees to finance PIC's trading accounts. As of March 31, 1997, no net loans
were outstanding pursuant to this arrangement. PIC and the Company are generally
able to meet their compensation and other obligations out of current liquid
assets.
Another source of capital to PIC and the Company has been the exercise of
underwriter warrants issued to PIC in connection with its corporate finance
activities and the sale of the underlying securities. These warrants are not
reflected on the balance sheet of PIC or Paulson Capital. While the warrants and
the securities issuable upon exercise of the warrants are not immediately
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 March 31, 1997, PIC owned 29 underwriter warrants
(from 28 issuers), of which 23 were currently exercisable and four had an
exercise price below the current market price of the securities receivable upon
exercise. The value of the firm's underwriter warrants depends on the prices of
the underlying securities. These prices are influenced by general movements in
the prices of OTC securities as well as the success of the issuers of the
underwriter warrants.
In the three months ended March 31, 1997, $2,426,440 of net cash was used
in operating activities of the Company. The major adjustments to reconcile this
result to the Company's net profit included a decrease in accounts payable and
accrued liabilities of $4,512,159, an increase in trading securities of
$1,478,923, a realized gain on investment securities of $1,231,159 and
unrealized appreciation of $279,500 on investment securities, partially offset
by a decrease in
13
<PAGE>
receivables of $3,812,486, a decrease in refundable income taxes of $412,261 and
an increase in income taxes payable of $115,239. In the quarter, $2,658,513 of
net cash was provided to the Company from investing activities, primarily
resulting from $6,406,788 of proceeds from the sale of short-term investment
securities more than offsetting the purchase of $3,736,816 of short-term
investment securities. $303,332 of net cash was used in financing activities in
the quarter, consisting of payments to retire common stock partially offset by
proceeds from the exercise of stock options. The net decrease in cash and cash
equivalents for the quarter totaled $71,259. See "Financial Statements --
Consolidated Statements of Cash Flows."
As a securities broker-dealer, the Company's wholly owned subsidiary, PIC,
is required by SEC regulations to meet certain liquidity and capital standards.
At March 31, 1997, the Company had no material commitments for capital
expenditures.
In general, the primary ongoing sources of PIC's, and therefore the
Company's, liquidity, including PIC's trading positions, borrowings on those
positions and profits realized upon the exercise of underwriter warrants, all
depend in large part on the trend in the general markets for OTC securities.
Rising OTC price levels will tend to increase the value and liquidity of PIC's
trading positions, the amount that can be borrowed from its clearing firm based
upon those positions, and the value of PIC's underwriter warrants. The Company
believes its liquidity is sufficient to meet its needs for the foreseeable
future.
Inflation
Because PIC's assets are primarily liquid, they are not significantly
affected by inflation. The rate of inflation affects PIC's expenses, such as
employee compensation, office leasing and communications costs. These costs may
not readily be recoverable in the price of services offered by the Company. To
the extent inflation results in rising interest rates and has other adverse
effects in the securities markets and the value of securities held in inventory
or PIC's investment account, it may adversely affect the Company's financial
position and results of operations.
14
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 of Notes to Condensed Consolidated Financial Statements in
Item 1.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAULSON CAPITAL CORP.
Date: MAY 11, 1997 By: CHESTER L.F. PAULSON
-------------- -------------------------------------
Chester L.F. Paulson
President
Date: MAY 12, 1997 By: CAROL RICE
-------------- -------------------------------------
Carol Rice
Principal Accounting Officer
16
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
--- ----------- ----------
27 Financial Data Schedule
17
<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 MARCH
31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS'
EQUITY AND CASH FLOWS FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
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