SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 1998
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 August 3, 1998:
Common stock, no par value - 3,956,169 shares
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
ASSETS 6/30/98 12/31/97
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents 95,218 73,220
Receivable from broker-dealers and
clearing organizations 1,196,973 4,497,086
Notes and other receivables 874,610 657,918
Trading securities 3,494,947 8,901,802
Investment securities 7,333,778 7,068,580
Refundable income taxes 996,847 101,907
Prepaid and deferred expenses 190,588 400,845
Secured demand note -- 100,000
Deferred income taxes 289,100 289,100
----------- -----------
Total current assets 14,472,061 22,090,458
----------- -----------
FURNITURE AND EQUIPMENT, net 290,264 202,605
----------- -----------
INVESTMENT IN REAL ESTATE 169,900 169,900
----------- -----------
DEFERRED INCOME TAXES -- --
----------- -----------
$14,932,225 $22,462,963
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - CONTINUED
(unaudited)
<TABLE>
<CAPTION>
6/30/98 12/31/97
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 199,055 $ 264,294
Payable to broker-dealers and clearing
organizations 1,089,051 6,041,296
Compensation, employee benefits and
payroll taxes 454,519 1,942,906
Securities sold, not yet purchased 187,008 330,729
Income taxes payable -- --
Subordinated note payable -- 100,000
------------ ------------
Total current liabilities 1,929,633 8,679,225
------------ ------------
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, 3,956,169 and
3,970,536, respectively 791,543 794,416
Retained earnings 12,211,049 12,989,322
------------ ------------
13,002,592 13,783,738
------------ ------------
$ 14,932,225 $ 22,462,963
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and six month periods ended
June 30, 1998 and June 30, 1997 (unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
Revenues
Commissions $ 2,777,981 $ 2,748,611 $ 5,495,454 $ 5,208,165
Corporate finance 39,326 548,975 271,691 848,384
Investment income (795,141) 760,055 (462,167) 2,248,253
Trading income (loss) 17,535 381,547 366,089 618,797
Interest and dividends 1,204 1,331 2,002 2,740
Other 5,366 7,432 10,343 16,456
---------- --------- ---------- ----------
2,046,271 4,447,951 5,683,412 8,942,795
---------- --------- ---------- ----------
Expenses
Commissions and salaries 2,299,006 2,616,310 4,721,037 4,983,360
Underwriting expenses 2,503 131,742 160,742 145,575
Rent, telephone and
quotation services 207,255 189,000 422,029 383,642
Interest expense 1,046 1,464 2,561 2,996
Professional fees 117,128 176,325 212,196 318,232
Bad debt expense 30,000 29,513 60,000 58,513
Travel and entertainment 75,924 40,701 139,856 79,988
Settlements -- 7,000 3,693 7,000
Other 308,635 280,026 667,184 669,060
---------- --------- ---------- ----------
3,041,497 3,472,081 6,389,298 6,648,366
---------- --------- ---------- ----------
Earnings (loss) before income taxes (995,226) 975,870 (705,886) 2,294,429
Provision for income taxes
Current (115,736) 392,500 -- 920,000
Deferred -- -- -- --
----------- --------- ---------- ----------
Net Earnings (Loss) $ (879,490) $ 583,370 $ (705,886) $1,374,429
=========== ========= =========== ==========
Earnings (loss) per share $ (0.22) $ 0.15 $ (0.18) $ 0.35
=========== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three year period ended December 31, 1997
and the six months ended June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------ Retained
Shares Amount Earnings
----------------- ---------------- --------------------
<S> <C> <C> <C>
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 87,140 89,283 -
Issuance of common stock in lieu
of directors' cash compensation 2,266 8,000 -
Redemption of common stock (200,111) (36,568) (529,919)
Net earnings for the year - - 4,354,395
----------------- ----------------- -------------------
Balance at December 31, 1997 3,970,536 $ 794,416 $ 12,989,322
Exercise of stock options - - -
Redemption of common stock ( 14,367) ( 2,873) ( 72,387)
Net earnings for the year to date - - (705,886)
----------------- ----------------- -------------------
Balance at June 30, 1998 3,956,169 $ 791,543 $ 12,211,049
================= ================= ===================
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the six month periods ended June 30, 1998 and June 30, 1997
<TABLE>
<CAPTION>
6/30/98 6/30/97
--------------- ----------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings (loss) $ (705,886) $ 1,374,429
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities
Unrealized (appreciation) depreciation
on investment securities 1,695,237 (165,909)
Realized gain on investment securities (1,233,070) (2,115,407)
Depreciation and amortization 37,320 28,937
Gain from sale of furniture and equipment (300) (6,799)
Change in assets and liabilities
Receivables 3,083,421 2,042,418
Trading securities 5,406,855 (792,223)
Refundable income taxes (894,940) (389,031)
Prepaid and deferred expenses 210,257 (203,931)
Accounts payable and accrued liabilities (6,505,871) (3,516,476)
Securities sold, not yet purchased 56,279 594,270
Bank overdraft -- --
Income taxes payable -- --
--------------- ----------------
Net cash provided by (used in) operating activities 1,149,302 (3,149,722)
--------------- ----------------
Cash flows from investing activities
Purchases of investment securities (13,861,429) (7,161,322)
Proceeds from sale of investment securities 12,934,064 10,744,660
Additions to furniture and equipment (124,979) (31,396)
Proceeds from sale of furniture and equipment 300 9,600
--------------- ----------------
Net cash provided by (used in) investing activities $(1,052,044) $ 3,561,542
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - CONTINUED
<TABLE>
<CAPTION>
6/30/98 6/30/97
--------------- ---------------
<S> <C> <C>
Cash flows from financing activities
Proceeds from exercise of stock options - 40,892
Payments to retire common stock (75,260) (561,236)
Decrease in bank overdraft payable - -
--------------- ---------------
Net cash provided by (used in) financing activities (75,260) (520,344)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 21,998 (108,524)
Cash and cash equivalents at beginning of year 73,220 185,445
--------------- ---------------
Cash and cash equivalents at June 30 $ 95,218 $ 76,921
=============== ===============
Cash paid during the three months for
Interest $ 1,046 $ 1,464
=============== ===============
Income taxes $ 819,940 $ 1,313,130
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements
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 and Bertram Ostrau v.
Pearce Systems International, Inc., et al., filed in San Francisco Superior
Court, State of California, in March 1996. An asserted class action, plaintiffs
allege 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, $5
million public offering in which PIC acted as the managing underwriter.
Plaintiffs seek 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 expected shortly. The case is set for trial
April 6, 1999. Factual discovery in this matter has begun and should be
completed by October 1998. Therefore, the Company and PIC are still
investigating this matter 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.
Richard Toscano Claim Richard Toscano, a former PIC customer, has filed an
arbitration claim 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 seeks damages in excess of
$90,000 plus interest, attorney fees and punitive damages. An arbitration
hearing for this matter is set for October 7, 1998. PIC has not had an
opportunity to fully investigate this claim, but believes it has meritorious
defenses and intends to defend this matter vigorously.
8
<PAGE>
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.
Craig and Cherie Cline Claim In December 1997, Craig and Cherie Cline,
former PIC customers, asserted claims against PIC and Clint Holland, a PIC
broker, alleging misrepresentation, unsuitability and breach of fiduciary duty
in connection with the handling of their account by PIC and Mr. Holland. The
Clines have demanded $250,000 to settle this matter. 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.
Masood Asif Claim In March 1998, Masood Asif, a former PIC customer,
asserted various claims against PIC and Sid Lodhi, a PIC broker, alleging
various securities law violations, including unsuitability and
misrepresentation, in connection with his account with PIC. He has also alleged
breach of fiduciary duty and failure to advise of potential tax liabilities. Mr.
Asif seeks $200,000 in damages. Although Mr. Asif has indicated that he will
seek arbitration of this matter, no arbitration has yet been filed. Although PIC
has not completed its investigation of this matter, it believes it has
meritorious defenses and intends to defend this matter vigorously if an
arbitration claim is filed.
Shahid and Lita Choudhry Claim In February 1998, the Choudhrys, former PIC
customers, asserted various claims against PIC and Sid Lodhi, a PIC broker,
claiming that Mr. Lodhi did not execute certain sales according to directions
allegedly received from Mr. Choudhry. The Choudhrys seek damages of $343,000.
PIC believes it has meritorious defenses and intends to defend this matter
vigorously if an arbitration claim is filed.
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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997
Results of Operations
The revenues and operating results of the Company's operating subsidiary,
Paulson Investment Company, Inc. ("PIC"), are influenced by fluctuations in the
equity underwriting markets as well as general economic and market conditions,
particularly conditions in the over-the-counter market, where PIC's investment
account, trading inventory positions and underwriter warrants are heavily
concentrated. Significant fluctuations can occur in PIC's revenues and operating
results from one period to another. PIC's operations depend upon many factors,
such as the number of companies that are seeking public financing, the quality
and financial condition of those companies, market conditions in general, the
performance of previous PIC underwritings and interest in certain industries by
investors. As a result, revenues and income derived from these activities may
vary significantly from period to period. In the table below, "Trading Income"
is the net gain or loss from trading positions before commissions paid to the
representatives in the trading department. "Investment Income" includes amounts
received, if any, from the exercise of PIC's underwriter warrants.
Summary of Changes in Major Categories
of Revenues and Expenses
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
1998 vs. 1997 1998 vs. 1997
<S> <C> <C> <C> <C>
Revenues:
Sales Commissions $ 29,370 1.1% $ 287,289 5.5%
Corporate Finance (509,649) (92.8%) (576,693) (68.0%)
Investment Income (1,555,196) (204.6%) (2,710,420) (120.6%)
Trading Income (364,012) (95.4%) (252,708) (40.8%)
Other (2,193) (25.0%) (6,851) (35.7%)
------------ -------- ------------- --------
Total $(2,401,680) (54.0%) $ (3,259,383) (36.4%)
Expenses:
Commissions and Salaries $ (317,304) (12.1%) $ (262,323) (5.3%)
Underwriting Expenses (129,239) (98.1%) 15,167 10.4%
Rent, Telephone and Quotes 18,255 9.7% 38,387 10.0%
Other (2,296) (0.4%) (50,299) (4.4%)
------------ ------- ------------- -------
Total $ (430,584) (12.4%) $ (259,068) (3.9%)
Pretax Income $(1,971,096) N/A $ (3,000,315) N/A
</TABLE>
10
<PAGE>
Total revenues for the second quarter of 1998 fell 54.0 percent from the
second quarter of 1997, from $4,447,951 to $2,046,271. As shown in the table
above, sales commissions rose $29,370, or 1.1 percent, from $2,748,611 in the
second quarter of 1997 to $2,777,981 in the comparable 1998 period. This small
increase resulted primarily from the active trading levels in smaller
capitalization issues in the 1998 quarter compared to 1997, particularly in
companies for which PIC had recently completed public offerings. Corporate
finance revenues fell 92.8 percent, or $506,649, in the second quarter of 1998
compared to the second quarter of 1997. One corporate finance transaction was
completed in the 1997 quarter in which PIC acted as the managing underwriter,
raising a total of $20.70 million for the issuer; only one private placement
raising $690,000 was completed in the 1998 quarter. Investment income fell
$1,555,196 to a loss of $795,141 in the second quarter of 1998 from a gain of
$760,055 in the second quarter of 1997. No underwriter warrants were exercised
in either period. The decline was due to substantial realized gains on positions
in the investment account in the 1997 quarter and substantial losses in the
investment account in 1998. Trading income fell $364,012, or 95.4 percent, from
$381,547 in the second quarter of 1997 to $17,535 in the comparable 1998 period,
due primarily to losses on inventory positions in the 1998 quarter.
Total expenses fell $430,584 in the second quarter of 1998 from the
comparable 1997 period, a decrease of 12.4 percent, to $3,041,497 from
$3,472,081. Commissions and salaries fell $317,304, or 12.1 percent, to
$2,299,006 in the 1998 period from $2,616,310 in 1997. This decrease was
primarily due to an increased percentage of commission revenues coming from
employee salespersons in PIC's offices in Portland and Salem offices relative to
independent salespersons in other branch offices, resulting in a lower level of
commissions paid. Employee salespersons receive a lower percentage of commission
revenues. Underwriting expenses decreased by $129,239, due to the lack of any
completed public corporate finance transactions in the 1998 quarter. Rent,
telephone and quote expenses increased to $207,255 in the 1998 period from
$189,000 in 1997, an increase of 9.7 percent, primarily due to decreased
overhead reimbursements from independent contractor representatives. Other
expenses decreased 0.4 percent to $532,733 in the second quarter of 1998 from
$535,029 in the second quarter of 1997.
The Company had a pretax loss of $995,226 in the second quarter of 1998
compared to a pretax profit of $975,870 in the second quarter of 1997. The
biggest factor in this decline was the decrease in investment income in the 1998
quarter, which added to declines in PIC's 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 a refund of $115,736 in income taxes for the
second quarter of 1998, compared to an accrual for income taxes in the second
quarter of 1997 of $392,500. Independent of investment income, the Company would
have had a loss before income taxes of $200,085 in the second quarter of 1998
compared to a profit before income taxes of $215,815 in the second quarter of
1997.
11
<PAGE>
Liquidity and Capital Resources
The majority of PIC's assets are cash and assets readily convertible to
cash. PIC's securities inventory is stated at market value. The liquidity of the
market for many of PIC's securities holdings, however, varies with trends in the
stock market. Since many of the securities held by PIC are thinly traded, and
PIC is in many cases a primary market maker in the issues held, any significant
sales of PIC's positions could adversely affect the liquidity of the issues
held. In general, falling prices in OTC securities (which make up most of PIC's
trading positions) lead to decreased liquidity in the market for these issues,
while rising prices in OTC issues tend to increase the liquidity of the market
for these securities. The overall increase in prices for the OTC securities
traded by PIC in 1995, 1996, 1997 and early 1998 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 the second quarter of 1998 and in
1994 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 borrows money from its clearing firm in the ordinary course of its
business, pursuant to an understanding under which the clearing firm agrees to
finance PIC's trading accounts. As of June 30, 1998, no net loans were
outstanding pursuant to this arrangement. PIC had no subordinated loans at June
30, 1998. 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 June 30, 1998, PIC owned 33 underwriter warrants
(from 31 issuers), of which 27 were currently exercisable. Seven of the
exercisable warrants 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.
12
<PAGE>
In the six months ended June 30, 1998, $1,149,302 of net cash was provided
by 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 $6,505,871 and a realized gain on investment securities
of $1,233,070 being more than offset by a decrease in trading securities of
$5,406,855, a decrease in receivables of $3,083,421, unrealized depreciation of
$1,695,237 on investment securities and a decrease in prepaid and deferred
expenses of $210,257. In the first six months of 1998, $1,052,044 of net cash
was used by the Company in investing activities, primarily resulting from
$12,934,064 of proceeds from the sale of short-term investment securities being
more than offset by the purchase of $13,861,429 of short-term investment
securities and the purchase of $124,979 in furniture and equipment. In the first
six months of 1998, $75,260 of net cash was used in financing activities to
retire common stock. The net increase in cash and cash equivalents for the six
month period totaled $21,998. See "Financial Statements -- Consolidated
Statements of Cash Flows."
As a securities broker-dealer, the Company's wholly owned subsidiary, PIC,
is required by SEC regulations to meet certain liquidity and capital standards.
At June 30, 1998, 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.
13
<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.
The Company held its annual meeting on June 16, 1998. The three existing
Company directors (Chester L.F. Paulson, Jacqueline M. Paulson and Kenneth T.
LaMear) were elected for additional one year terms and three new directors
(Shannon P. Pratt, Paul Shoen and John Westergaard) were also elected to one
year terms. In addition, the Company's shareholders approved a proposal to
authorize an amendment to the articles of incorporation of the Company to effect
a 1-for-4 reverse split of the Common Stock of the Company upon the occurrence
of certain events, with 3,790,243 shares voting for the proposal, 133,805 shares
voting against the proposal, with 15,500 votes abstaining. Under the proposal,
the Company's directors are authorized to effect the reverse split if the
closing bid of the Company's common stock falls below $1.00 and the directors
determine that the reverse split is in the best interests of the Company's
shareholders. The purpose of the proposal was to enable the Company to maintain
a listing for the Company's common stock on the Nasdaq System.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
No. Description
------- -----------
27 Financial Data Schedule
No Reports on Form 8-K were filed during the quarter ended June 30, 1998.
14
<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: 8/5/98 By: CHESTER L.F. PAULSON
--------------------- --------------------------------------
Chester L.F. Paulson
President
Date: 8/6/98 By: CAROL RICE
--------------------- --------------------------------------
Carol Rice
Principal Accounting Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF PAULSON CAPITAL CORP. AND SUBSIDIARY AS OF JUNE
30, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS'
EQUITY AND CASH FLOWS FOR THE SIX MONTHS IN THE PERIOD ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 95
<RECEIVABLES> 2,072
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 10,829
<PP&E> 460
<TOTAL-ASSETS> 14,932
<SHORT-TERM> 0
<PAYABLES> 1,743
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 187
<LONG-TERM> 0
0
0
<COMMON> 792
<OTHER-SE> 12,211
<TOTAL-LIABILITY-AND-EQUITY> 14,932
<TRADING-REVENUE> 366
<INTEREST-DIVIDENDS> 2
<COMMISSIONS> 5,495
<INVESTMENT-BANKING-REVENUES> 272
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 3
<COMPENSATION> 4,721
<INCOME-PRETAX> (706)
<INCOME-PRE-EXTRAORDINARY> (706)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (706)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
