<PAGE>
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 September 30, 2000
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. Naito Parkway
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 November 3, 2000:
Common stock, no par value - 3,402,366 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>
9/30/00 12/31/99
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 105,540 $48,210
Receivable from broker-dealers and
clearing organizations 14,705,720 7,336,562
Notes and other receivables 689,747 671,514
Trading securities 1,881,722 2,238,798
Investment securities 18,934,274 14,200,767
Underwriter warrants -- 10,490,000
Prepaid and deferred expenses 269,452 669,599
---------- ----------
TOTAL CURRENT ASSETS 36,586,455 35,655,450
---------- ----------
NOTE RECEIVABLE 1,100,000 1,100,000
---------- ----------
FURNITURE AND EQUIPMENT, net 527,298 525,716
------- -------
INVESTMENT IN REAL ESTATE 169,900 169,900
------- -------
$38,383,653 $37,451,066
=========== ===========
</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>
9/30/00 12/31/99
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 257,568 $ 814,935
Payable to broker-dealers and clearing
organizations 1,620,350 1,883,602
Compensation, employee benefits and
payroll taxes 2,445,087 3,312,829
Securities sold, not yet purchased 122,247 65,794
Income taxes payable 2,239,336 1,116,800
Deferred income taxes 450,000 4,842,500
------- ---------
TOTAL CURRENT LIABILITIES 7,134,588 12,036,460
--------- ----------
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, 3,436,366 and
3,541,235, respectively 1,057,334 732,343
Retained earnings 30,191,731 24,682,263
---------- ----------
31,249,065 25,414,606
---------- ----------
$ 38,383,653 $ 37,451,066
============ ============
</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 NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND RESTATED SEPTEMBER 30, 1999
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
9/30/00 9/30/99 9/30/00 9/30/99
RESTATED RESTATED
<S> <C> <C> <C> <C>
REVENUES
Commissions $ 2,703,002 $ 3,143,260 $ 12,745,083 $10,679,692
Corporate finance 931,650 589,626 2,491,939 1,577,939
Investment income (1,087,201) 1,923,431 11,323,379 9,420,571
Trading income (loss) 452,519 (30,502) 1,868,543 540,594
Interest and dividends 23,771 1,205 63,858 13,627
Other 823 3,896 4,127 7,632
----- ------- ------- -----
3,024,564 5,630,916 28,496,929 22,240,055
----------- ------------ ------------ ----------
EXPENSES
Commissions and salaries 2,946,141 2,784,389 14,096,971 9,808,470
Underwriting expenses 147,246 152,070 530,434 464,337
Rent, telephone and
quotation services 232,013 233,380 731,541 669,137
Interest expense 6 221 36 1,465
Professional fees 45,614 78,873 227,958 318,161
Bad debt expense 30,000 30,000 90,155 90,800
Travel and entertainment 67,688 58,464 172,138 170,782
Settlements 10,618 18,500 64,205 35,750
Other 367,006 385,265 2,193,218 1,078,733
----------- ------------ ------------ ----------
3,846,332 3,741,162 18,106,656 12,637,635
----------- ------------ ------------ ----------
Earnings (loss) before income taxes (821,768) 1,889,754 10,390,273 9,602,420
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2000 AND RESTATED SEPTEMBER 30, 1999
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Provision for income taxes
Current 415,000 (284,500) 8,542,500 637,000
Deferred (750,000) 998,000 (4,392,500) 3,073,000
----------- ------------ ------------ ----------
NET EARNINGS (LOSS) $ (486,768) $ 1,176,254 $6,240,273 $ 5,892,420
=========== ============= ============ ===========
Earnings (loss) per share, basic $ (0.14) $ 0.32 $ 1.78 $ 1.60
=========== ============= ============ ===========
Earnings (loss) per share, diluted $ (0.14) $ 0.32 $ 1.78 $ 1.60
=========== ============= ============ ===========
Weighted average number of shares 3,450,873 3,682,752 3,503,343 3,674,703
outstanding, basic
Weighted average number of shares 3,450,873 N/A 3,505,505 N/A
outstanding, diluted
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------------------------------ Retained
Shares Amount Earnings
-------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1996, as previously reported 4,081,241 $ 733,701 $ 9,164,846
Restatement - - 671,000
-------------- ---------------- ----------------
Balance at December 31, 1996, as restated 4,081,241 733,701 9,835,846
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, as restated - - 6,950,395
-------------- ---------------- ----------------
Balance at December 31, 1997, as restated 3,970,536 794,416 16,256,322
Issuance of common stock in lieu
of directors' cash compensation 4,283 16,500 -
Redemption of common stock (177,967) (35,593) (451,323)
Net loss for the year, as restated - - (1,768,640)
-------------- ---------------- ----------------
Balance at December 31, 1998, as restated 3,796,852 775,323 14,036,359
Issuance of common stock in lieu
of directors' cash compensation 1,783 8,500 -
Redemption of common stock (257,400) (51,480) (1,065,332)
Net earnings for the year - - 11,711,236
-------------- ---------------- ----------------
Balance at December 31, 1999 3,541,235 732,343 24,682,263
Redemption of common stock (111,869) (23,821) (730,805)
Exercise of stock options 7,000 31,062
Stock options granted 317,750
Net earnings for year to date - - 6,240,273
-------------- ---------------- ----------------
Balance at September 30, 2000 3,436,366 $ 1,057,334 $ 30,191,731
============== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30,
2000 AND RESTATED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
9/30/00 9/30/99
-------------------- ----------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents (restated)
Cash flows from operating activities
Net earnings (loss) $ 6,240,273 $ 5,892,420
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities
Unrealized (appreciation) depreciation
on investment securities 2,202,065 (6,800,398)
Realized gain on investment securities (13,525,444) (2,620,173)
Depreciation and amortization 133,464 97,911
Deferred income taxes (4,392,500) 3,073,000
Stock option grant 317,750 --
Change in assets and liabilities
Receivables (7,387,392) (1,872,566)
Trading securities (1,001,036) (2,873,579)
Refundable income taxes -- (536,013)
Prepaid and deferred expenses 400,147 144,771
Accounts payable and accrued liabilities (1,688,361) 2,666,357
Securities sold, not yet purchased 56,453 35,315
Income taxes payable 1,122,536 --
-------------------- ----------------
Net cash provided by (used in) operating activities (17,522,045) (2,792,955)
-------------------- ----------------
Cash flows from investing activities
Purchases of investment securities (99,454,264) (31,894,946)
Proceeds from sale of investment securities 117,892,249 35,372,435
Additions to furniture and equipment (135,046) (240,686)
Proceeds from sale of furniture and equipment -- --
-------------------- ----------------
Net cash provided by (used in) investing activities 18,302,939 3,236,803
-------------------- ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
<TABLE>
<CAPTION>
9/30/00 9/30/99
--------------- --------------------
(restated)
<S> <C> <C>
Cash flows from financing activities
Proceeds from exercise of stock options 31,062 -
Payments to retire common stock (754,626) (470,949)
Decrease in bank overdraft payable - -
--------------- --------------------
Net cash provided by (used in) financing activities (723,564) (470,949)
--------------- --------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 57,330 (27,101)
Cash and cash equivalents at beginning of period 48,210 100,345
--------------- --------------------
Cash and cash equivalents at end of period $ 105,540 $ 73,244
=============== ====================
CASH PAID DURING THE THREE MONTHS FOR
Interest $ 6 $ 221
=============== ====================
Income taxes $ 4,044,914 $ 1,188,078
=============== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
8
<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
In October 1998, Russell W. Cummings, a former PIC customer, filed a
lawsuit in California state court asserting claims against PIC and a former PIC
registered representative alleging violations of the California Consumers Legal
Remedies Act, fraud, negligent misrepresentation, breach of contract, tortious
breach of the implied covenant of good faith and fair dealing, breach of
fiduciary duty and negligence. Prior to filing the complaint, plaintiff demanded
payment of $250,000. The complaint sought damages in excess of $100,000 in
connection with options and short sales transactions beginning in 1996.
Plaintiff had agreed to arbitrate the matter before the NASD but never did so.
In July 2000, the California state court dismissed the case. The claimant has
now filed a request with the state court to reinstate the case, claiming that
his attorney died and that he was never informed that the case was to be
dismissed. PIC has not had an opportunity to fully investigate this claim, but
believes it has meritorious defenses and intends to defend this matter
vigorously if it is reinstated.
In January 2000, Paul Monka, on behalf of Urantia Corporation and as
trustee for the Urantia Corporation defined benefit pension plan, filed an
arbitration against PIC and a former PIC registered representative alleging
violations of NASD rules, misrepresentation, fraud, breach of contract, and
breach of fiduciary duty. Claimant seeks compensatory damages in excess of
$460,000 and punitive damages. PIC has filed an answer denying any liability.
Discovery is beginning. The arbitration of this matter is set for February 7,
2001, in Los
9
<PAGE>
Angeles, California. PIC has not had an opportunity to fully investigate this
claim, but believes it has meritorious defenses and intends to defend this
matter vigorously.
In August 2000, PIC received a complaint from Charles Bradshaw, a
former PIC customer, alleging that a former PIC registered representative
managed his account improperly and seeking a payment of $93,614 as a result of
such mismanagement. PIC has not had an opportunity to fully investigate this
matter but intends to defend this matter vigorously.
In August 2000, Patricia Staples, a former PIC customer, filed an NASD
arbitration claim against PIC and one of its registered representatives alleging
that PIC and its registered representative made certain misrepresentations and
committed violations of law. Claimant is seeking $100,000 in compensatory and
punitive damages. Claimant's Statement of Claim is vague and does not specify
the alleged misrepresentations or violations of law. PIC has filed a motion to
require a more definite and certain statement of claim by claimant. PIC also has
filed an answer denying any liability. PIC has not had an opportunity to fully
investigate this matter but intends to defend this matter vigorously.
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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999
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 financial results 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.
SUMMARY OF CHANGES IN MAJOR CATEGORIES
OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
QUARTER ENDED SEPT. 30 NINE MONTHS ENDED SEPT. 30
2000 VS. (RESTATED) 1999 2000 VS. (RESTATED) 1999
<S> <C> <C> <C> <C>
REVENUES:
Sales Commissions $ (440,258) (14.0)% $2,065,391 19.3%
Corporate Finance 342,024 58.0% 914,000 57.9%
Investment Income (3,010,632) NA 1,902,808 20.2%
Trading Income 483,021 NA 1,327,949 245.6%
Other 19,493 382.1% 46,726 219.8%
-------- --------- -------- -------
Total $(2,606,352) (46.3)% $6,256,874 28.1%
EXPENSES:
Commissions and Salaries $ 161,752 5.8% $4,288,501 43.7%
Underwriting Expenses (4,824) (3.2)% 66,097 14.2%
Rent, Telephone and Quotes (1,367) (0.6)% 62,404 9.3%
Other (50,391) (8.8)% 1,052,019 62.0%
--------- -------- ----------- ------
Total $ 105,170 2.8% $5,469,021 43.3%
Pretax Income $(2,711,522) NA $ 787,853 8.2%
</TABLE>
11
<PAGE>
During the fourth quarter of 1999, the Company changed its method of
accounting for underwriter warrants. Previously the Company recognized no value
for these warrants in the financial statements. Upon reconsideration, it was
determined that it is appropriate under generally accepted accounting principles
to carry these securities at their estimated fair value. Accordingly, the
financial statements for previous periods have been restated to reflect this
change. Any unrealized change in the value of the Company's underwriter warrants
will be reflected in the "underwriter warrants" line item on the Company's
balance sheet and in the "investment income" line item on the Company's
statement of operations.
Total revenues for the third quarter of 2000 fell 46.3 percent from the
third quarter of 1999, to $3,024,564 from $5,630,916. As shown in the table
above, sales commissions fell $440,258, or 14.0 percent, to $2,703,002 in the
third quarter of 2000 from $3,143,260 in the comparable 1999 period. This
decrease resulted primarily from the less favorable price movements and trading
levels in smaller capitalization issues in the 2000 quarter, compared to more
favorable levels in 1999. (The Nasdaq Industrial Index fell 1.3 percent in the
third quarter of 1999 compared to a fall of 2.8 percent in the 2000 quarter.)
Corporate finance revenues rose 58.0 percent, or $342,024, in the third quarter
of 2000 compared to the third quarter of 1999. One corporate finance transaction
totaling $13.2 million was completed in the 1999 quarter and two transactions
totaling $25.2 million were completed in the 2000 quarter. Corporate finance
revenue is directly related to the amount of money raised in completed
transactions. Investment income fell $3,010,632, from a restated gain of
$1,923,431 in the third quarter of 1999 to a loss of $1,087,201 in 2000.
Investment income included no gains or losses from the sale of previously
exercised underwriter warrants, no gains or losses in value from underwriter
warrants that had not yet been exercised, and $1,087,201 of net loss in
investment securities unrelated to underwriter warrants. There were no
underwriter warrants exercised in either the 1999 or 2000 quarters. Trading
income rose $483,021, to income of $452,519 in the 2000 quarter from a loss of
$30,502 in the third quarter of 1999. This gain was primarily due to price
increases in the quarter in issues for which PIC had acted as the managing
underwriter in corporate finance transactions.
Total expenses rose $105,170 in the third quarter of 2000 from the
comparable 1999 period, an increase of 2.8 percent, to $3,846,332 from
$3,741,162. Commissions and salaries rose $161,752, or 5.8 percent, to
$2,946,141 in the 2000 quarter from $2,784,389 in 1999. This increase was
primarily because a higher percentage of gross commissions was earned by
registered representatives that are independent contractors. Registered
representatives that are independent contractors are paid a higher percentage of
gross commissions than employee representatives. Underwriting expenses fell by
$4,824, or 3.2 percent. Rent, telephone and quote expenses fell $1,367 in the
2000 period, to $232,013 in the 2000 quarter from $233,380 in 1999, a decrease
of 0.6 percent. Other expenses decreased 8.8 percent, or $50,391, to $520,932 in
the third quarter of
12
<PAGE>
2000 from $571,323 in the third quarter of 1999. The largest factor in this
decrease was a $33,259 decrease in professional fees.
The Company had restated pretax income of $1,889,754 in the third
quarter of 1999 compared to a pretax loss of $821,768 in the third quarter of
2000. The biggest factors in this decline was the substantial decline in
investment income in the 2000 quarter and a decline in sales commissions more
than offsetting increases in corporate finance and trading income increases.
Significant fluctuations can occur in PIC's revenues and operating results from
one period to another.
The Company also recorded a tax benefit for income taxes of $335,000 in
the third quarter of 2000, compared to a restated accrual for income taxes in
the third quarter of 1999 of $713,500. Independent of investment income, the
Company would have had a profit before income taxes in the 2000 quarter and a
loss before income taxes in the 1999 quarter.
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 early 2000 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 and third quarters of 2000 and early 1999
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 September 30, 2000, 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
underwriter warrants issued to PIC in connection with its corporate finance
activities and the sale of the underlying securities.
13
<PAGE>
These warrants are reflected on the balance sheet of PIC or the Company at their
estimated fair value, with estimated discounts for lack of marketability. 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 recognized based upon the difference between the market price and
the exercise price less discounts, if any, for trading volume, the remaining
warrant exercise period and other factors. Further profits or losses may
subsequently be realized when the underlying securities are sold. Profits and
losses recognized 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 September 30, 2000, PIC owned 24 underwriter
warrants (from 21 issuers), of which 19 were currently exercisable and two 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 nine months ended September 30, 2000, $17,522,045 of net cash
was used in operating activities of the Company. The major adjustments to
reconcile this result to the Company's net profit of $6,240,273 include a
realized gain on investment securities of $13,525,444, an increase in
receivables of $7,387,392, a decrease in deferred income taxes of $4,392,500, a
decrease in accounts payable and accrued liabilities of $1,688,361 and an
increase in trading securities of $1,001,036 more than offsetting unrealized
depreciation on investment securities of $2,202,065 and an increase in income
taxes payable of $1,122,536. In the nine months, $18,302,939 of net cash was
provided to the Company by investing activities, the result of $117,892,249 in
proceeds from the sale of investment securities more than offsetting the
purchase of $99,454,264 of investment securities and $135,046 of additions to
furniture and equipment. Net cash of $723,564 was used in financing activities
in the nine months, with payments to retire common stock of $754,626 more than
offsetting $31,062 proceeds from the exercise of stock options. 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 September 30, 2000, 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 recognized from underwriter warrants, all depend in large
part on the trend in the general markets for OTC
14
<PAGE>
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.
15
<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
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
No Reports on Form 8-K were filed during the quarter ended September 30, 2000.
16
<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: November 13 , 2000 By: /s/ CHESTER L.F. PAULSON
------------------ --------------------------------
Chester L.F. Paulson
President
Date: November 13 , 2000 By: /s/ CAROL RICE
------------------ ---------------------------------
Carol Rice
Principal Accounting Officer
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
------- ----------- ----------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
18
