<PAGE>
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, 1999
FORM 10-KSB
PAULSON CAPITAL CORP.
---------------------
Name of small business issuer as specified in its charter
OREGON 93-0589534
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
811 S.W. Naito Parkway, Suite 200
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.
-----------------
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State issuer's revenues for its most recent fiscal year:
$39,186,582
As of March 17, 2000, 3,549,535 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 $15,162,624.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 2000
annual meeting of shareholders to be filed with the Securities and Exchange
Commission are incorporated by reference into Part III.
Transitional Small Business Disclosure Format:
Yes No X
--- ---
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Paulson Capital Corp. ("Paulson Capital" or the "Company"), established
in 1970, 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, 1999 PIC employed 19
brokers and had independent contractor arrangements with 86 brokers registered
with the National Association of Securities Dealers, Inc. ("NASD"). PIC also
employed a support staff of 47 persons in its headquarters in Portland, Oregon
and in certain of its branch offices. At December 31, 1999 PIC had 39 branch
offices throughout the United States.
The Company's headquarters are located at 811 S.W. Naito Parkway, Suite
200, 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 gains and losses in investment
accounts, from the exercise of underwriter warrants received in connection with
its corporate finance activities, and from other sources.
The following table indicates the approximate percentage of revenues
that were accounted for by each of these categories and from investment income
(including underwriter warrants) in the last three fiscal years:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
GENERAL SECURITIES 38% 96% 46%
TRADING 1 5 4
CORPORATE FINANCE 5 15 14
INVESTMENT INCOME 55 (17) 35
OTHER 1 1 1
</TABLE>
In this table, "Trading" includes only the net profit or loss from PIC's trading
activities. See "Trading and Market Making."
3
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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 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, 1999, 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, 1999, PIC made a market in approximately
34 securities of 25 issuers. Of these, 18 were corporations for which PIC has
acted as managing or co-managing underwriter of public financings. In addition,
at December 31, 1999, PIC held securities of 38 companies in its investment
account. In 1999, the value of securities held in the trading accounts and
investment account ranged between
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$7,870,602 and $16,439,565. 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.
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 $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."
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Between June 1, 1978 and December 31, 1999 PIC acted as the managing
underwriter or co-managing underwriter for 135 securities offerings, raising
approximately $807 million for corporate finance clients. Of these, 84 were
initial public offerings. PIC typically receives 2 to 3 percent of the aggregate
amount of money raised in an offering to cover nonaccountable expenses and
between 7 and 9 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, 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, 1999, PIC had 39 branch offices in
California, Connecticut, District of Columbia, Georgia, Hawaii, Idaho, Nevada,
New Jersey, 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 three persons that devote a majority of their time to
gathering and analyzing information which is intended to provide PIC with an
adequate basis for performing its investment banking activities and to provide
customers with a regular flow of information on the companies for which PIC has
in the past provided investment banking services.
REGULATION
PIC is registered with the SEC as a broker-dealer under the Securities
Exchange Act of 1934. It is also registered as a broker-dealer under the laws of
45 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
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examinations of member broker-dealers. Securities firms are also subject to
regulation and examination by state securities commissions in the states in
which they are registered.
The regulations to which broker-dealers are subject cover all aspects
of the securities business, including sales methods, trading practices among
broker-dealers, capital structure of securities firms, record keeping and the
conduct of directors, officers and employees. Additional legislation, changes in
rules promulgated by the SEC and by self-regulatory bodies or changes in the
interpretation or enforcement of existing laws and rules often affect directly
the method of operation and profitability of broker-dealers. The SEC, NASD and
state regulatory authorities may conduct administrative proceedings which can
result in censure, fine, suspension or expulsion of a broker-dealer, its
officers or employees.
NET CAPITAL REQUIREMENTS
PIC is required to maintain minimum "net capital" under the SEC's net
capital rule of not less than 6.67 percent of its aggregate indebtedness. As of
December 31, 1999, PIC had net capital of $17,506,585, which exceeded its
minimum requirement of $273,057 by $17,233,528. The ratio of aggregate
indebtedness of $4,095,864 to net capital of $17,506,585 on December 31, 1999
was approximately 0.23 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 activities.
COMPETITION
All aspects of 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.
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
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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. A growing number
of discount brokerage firms offer their services over the Internet, further
decreasing offered commission rates and increasing ease of use for customers.
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, 1999, PIC had 66 employees, of whom 47 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 86 independent contractors, all of whom are compensated solely
on a commission basis. Paulson Capital had no employees separate from PIC.
ITEM 2. DESCRIPTION OF PROPERTY
PIC leases approximately 17,100 square feet of space for its office in
Portland, Oregon under a lease expiring May 31, 2002 at a monthly rent of
$22,848. PIC's Salem office leases space under a lease expiring on October 31,
2002 at a monthly rent of $2,921.69, with rent subject to increases based upon
inflation. The Company believes the existing leased space is suitable and
adequate for its business for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
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. No
date for a trial has been set. Pursuant to a tolling agreement with the
plaintiff, the Company (but not PIC) expects to be dismissed without
prejudice from the lawsuit. PIC and plaintiffs have reached a settlement of
this matter. The settlement is subject to final court approval. The total
payment by PIC under the settlement would depend upon the number of
purchasers in the public offering who file valid claims. PIC believes the
maximum total payment by PIC under the settlement would be approximately
$900,000, but the actual payment could be less, depending upon the number of
valid claims filed.
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 seeks damages in excess
of $100,000 in connection with options and short sales transactions beginning
in 1996. Plaintiff has agreed to arbitrate the matter before the NASD. PIC
has not had an opportunity to fully investigate this claim, but believes it
has meritorious defenses and intends to defend this matter vigorously.
Discovery has not yet commenced.
In October 1998, Masood Asif and Bobbie Sierra, former PIC
customers, filed an arbitration against PIC, an officer and director of PIC,
and a former PIC registered representative alleging breach of fiduciary duty,
negligent misrepresentation, suppression of facts and churning. Plaintiff
seeks damages of $100,000 and punitive damages of $100,000. 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 January 1999, Shahid and Lita Choudhry and Iqbal Waraich, former
customers of PIC, filed an NASD arbitration claim against PIC and a former
PIC registered representative alleging that the registered representative
managed their account improperly, failed to follow claimant's instructions on
particular transactions and failed to provide ongoing investment advice.
Claimants allege negligence, fraud, unsuitability, breach of fiduciary duty,
violations of the federal securities laws, failure to supervise and violation
of NASD rules, seeking damages of $115,000, plus punitive damages and
interest. PIC has not had an opportunity to fully investigate this claim, but
believes it has meritorious defenses and intends to defend this matter
vigorously.
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In April 1999, Philip Cutler, a former PIC customer, filed an NASD
arbitration claim asserting claims against PIC for alleged
misrepresentations, excessive commissions and a failure to supervise.
Claimant alleges damages in excess of $100,000. PIC has not had an
opportunity to investigate this matter fully, but believes it has meritorious
defenses and intends to defend this matter vigorously. This matter is set for
arbitration on May 30, 2000.
In January of 2000, Paulson received notice that Paul Monka, 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 not had an opportunity to fully
investigate this claim, but believes it has meritorious defenses and intends
to defend this matter vigorously.
In December of 1999, Francis Hoffman, a former PIC customer, sent a
written complaint to PIC alleging that PIC and one of its registered
representatives churned her account, placed her in unsuitable investments,
and violated its duty of care and loyalty, the Oregon Securities Law, the
NASD Rules and the Oregon Administrative Rules. The customer claims she has
lost in excess of $220,000. PIC has not had an opportunity to fully
investigate this claim, but believes it has meritorious defenses and 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades in the over-the-counter market.
The Company's stock has not been actively traded. The Company's stock is
quoted on the Nasdaq SmallCap 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>
1999 PRICES 1998 PRICES 1997 PRICES
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1ST QUARTER $7.000 $2.625 $6.750 $4.625 $3.188 $2.500
2ND QUARTER 5.125 3.500 5.625 4.125 5.250 2.562
3RD QUARTER 5.250 3.688 4.125 2.312 6.875 3.500
4TH QUARTER 5.500 3.688 3.875 2.000 6.562 4.625
</TABLE>
The high and low closing price for the first quarter of 2000 through March 10
were $9.250 and $5.062, respectively.
As of March 10, 2000, there were 3,549,535 shares of the Company's
common stock outstanding and held of record by 134 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
1999 annual meeting, the Company believes there are approximately 520
beneficial holders of its common stock. The Company repurchased 257,400
shares of common stock during 1999. 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.
In 1999 the Company issued an aggregate of 1,783 unregistered Shares
of the Company's stock as compensation to persons attending meetings of its
board of directors. Such persons include directors, executive officers of the
Company, and a director of PIC who is neither an officer of the Company or
PIC. These issuances are exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SELECTED FINANCIAL DATA
(in thousands except per share amounts)
INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Revenues $39,187 $11,749 $27,684
Commissions and Salaries 15,693 10,371 12,552
Other Expenses 4,183 4,108 4,003
Total Expenses 19,876 14,479 16,555
Pretax Income (loss) 19,311 (2,730) 11,129
Net Income (loss) 11,711 (1,769) 6,950
Diluted Earnings (loss) $3.16 ($.45) $1.74
per share
Average number of common shares 3,704 3,918 4,005
outstanding
BALANCE SHEET INFORMATION
DECEMBER 31,
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Total Assets $37,451 $17,605 $27,473
Working Capital 23,619 14,282 16,678
Short-Term Debt 0 0 100
Long-Term Debt 0 0 0
Shareholders' Equity $25,415 $14,812 $17,051
</TABLE>
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. 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. See Note N on page F-16 in "Notes to
Consolidated Financial Statements."
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
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<PAGE>
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 and
unrealized appreciation or depreciation in the value of PIC's unexercised
underwriter warrants.
SUMMARY OF CHANGES IN MAJOR CATEGORIES
OF REVENUES AND EXPENSE
<TABLE>
<CAPTION>
1999 VS. 1998 1998 VS. 1997
<S> <C> <C> <C> <C>
Revenues:
Sales Commissions $3,751,155 33.1% ($1,404,382) (11.0%)
Corporate Finance 398,928 23.2% (2,208,823) (56.3%)
Investment Income 23,589,542 N/A (11,741,273) (119.9%)
Trading Income (272,663) (46.2%) (605,763) (50.7%)
Other (29,912) (44.1%) 25,712 61.0%
--------- -------- -------- -----
Total $27,437,050 233.5% (15,934,529) (57.6%)
Expenses:
Commissions and Salaries $5,321,954 51.3% ($2,180,827) (17.4%)
Underwriting Expenses 352,144 35.3% 235,911 31.0%
Rent, Telephone & Quotes 48,271 5.7% 6,965 0.8%
Other (326,472) (14.4%) (137,933) (5.7%)
Total $5,395,897 37.3% ($2,075,884) (12.5%)
Pretax Income $22,041,153 N/A ($13,858,645) (124.5%)
</TABLE>
1999 COMPARED TO 1998
Total revenues for 1999 rose 233.5 percent from 1998, from
$11,749,532 to $39,186,582. As shown in the table above, sales commissions
rose $3,751,155, or 33.1 percent, from $11,324,412 in 1998 to $15,075,567 in
1999. This increase resulted primarily from the more favorable price
movements and trading levels in smaller capitalization OTC issues in 1999
compared to 1998. The Nasdaq Industrial Average rose less in 1999 (11.37
percent) than in 1998 (17.97 percent), but PIC's focus is on very small
capitalization issues, especially those tied to PIC's corporate finance
clients, which experienced a more favorable market in 1999. Corporate finance
revenues rose 23.2 percent, or $398,928, in 1999 compared to 1998. Four
transactions were completed in 1998, raising a total of $37 million for the
issuers; 4 transactions were also completed in 1999, raising an aggregate of
$43 million for corporate finance clients. Investment income
13
<PAGE>
increased $23,589,542, from a loss of $1,949,262 in 1998 to income of
$21,640,280 in 1999, due to unrealized appreciation of underwriter warrants
held by the Company, based upon the Company's estimate of their fair value,
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. No underwriter warrants were exercised in
1998 while four warrants were exercised in 1999 resulting in profits of
$11,356,582, and the profits from investments sold in the investment account
in 1999 were greater than in 1998. Trading income fell $272,663, or 46.2
percent, from $589,822 in 1998 to $317,159 in 1999. This decline was
primarily due to losses on one large holding late in 1999 offsetting the more
favorable markets in smaller capitalization OTC issues in 1999 compared to
1998.
Total expenses rose $5,395,897 in 1999 from 1998, an increase of
37.3 percent from $14,479,189 to $19,875,086. Commissions and salaries rose
$5,321,954, or 51.3 percent, from $10,370,979 in 1998 to $15,692,933 in 1999.
This increase was primarily due to increased commission revenues resulting in
a higher level of commissions paid and higher accruals for PIC's profit
sharing plan. Higher commission rates are generally paid to employee
registered representatives at higher production levels as an incentive.
Underwriting expenses increased by $352,144, or 35.3 percent. While the same
number of transactions were completed in 1999 as in 1998, the 1999
transactions incurred somewhat higher legal and other expenses. In addition,
expenses were incurred on transactions that were not completed. Rent,
telephone and quote expenses increased from $842,437 in 1998 to $890,708 in
1999, an increase of 5.7 percent. Other expenses decreased 14.4 percent, from
$2,267,545 in 1998 to $1,941,073 in 1999, with decreased settlements and
advertising/promotion expenses more than offsetting increases in conference,
travel and entertainment, depreciation and other expenses.
The Company had a pretax loss of $2,729,657 in 1998 compared to a
pretax profit of $19,311,496 in 1999. The primary reason for this increase
was the significant increase in investment income. Independent of investment
income, the Company would have had a pretax loss of $2,328,784 in 1999
compared to a pretax loss of $780,395 in 1998. Investment income in 1999 was
significantly higher than in any other year in the Company's history, due to
unrealized appreciation of underwriter warrants held by the Company, based
upon the Company's estimate of their fair value, 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 a benefit of $961,017 from
income taxes in 1998, compared to an expense of $7,600,260 in 1999.
On September 30, 1999, the Company's board of directors approved the
Company's 1999 Stock Option Plan. The plan reserves 500,000 shares of the
Company's common stock for issuance upon exercise of the options. Also
effective September 30, 1999, the board of directors approved the grant of
128,000 options to directors and employees of the Company. The approved grant
price of the options was $4.44 per share, the September 30, 1999 market
value. However, the plan is subject to shareholder approval at the Company's
June 2000 shareholder meeting. Because approval is not virtually certain, the
options have not been included in the diluted earnings per share calculation
for the year ended December 31, 1999. If the market value of the stock, on
the date of approval, is greater than the grant price, the Company will incur
compensation expense equal to the price per share differential times the
number of shares granted.
14
<PAGE>
1998 COMPARED TO 1997
Total revenues for 1998 fell 57.6 percent from 1997, to $11,749,532
from $27,684,061. As shown in the table above, sales commissions fell
$1,404,382, or 11.0 percent, to $11,324,412 in 1998 from $12,728,794 in 1997.
This decrease resulted primarily from the less favorable price movements and
trading levels in smaller capitalization OTC issues in 1998 compared to 1997.
The Nasdaq Industrial Average rose more in 1997 (11.17 percent) than in 1998
(6.55 percent), and PIC's focus is on very small capitalization issues,
especially those tied to PIC's corporate finance clients, which experienced a
less favorable market in 1998. Corporate finance revenues fell 56.3 percent,
or $2,208,823, in 1998 compared to 1997. Four transactions were completed in
1998, raising a total of $37 million for the issuers; 6 transactions were
completed in 1997, raising an aggregate of $93 million for corporate finance
clients. Investment income decreased $11,741,273, to a loss of $1,949,262 in
1998 from income of $9,792,011 in 1997, primarily as a result of unrealized
depreciation of the value of underwriter warrants held by the Company, based
upon the Company's estimate of their fair value. No underwriter warrants were
exercised in 1998 while one warrant was exercised in 1997, and the profits
from investments sold in the investment account in 1997 were significantly
greater than in 1998. Trading income fell $605,763, or 50.7 percent, to
$589,822 in 1998 from $1,195,585 in 1997. This decline was due to lower
trading levels in 1998 and the generally more favorable markets in smaller
capitalization OTC issues in 1997 compared to 1998.
Total expenses fell $2,075,884 in 1998 from 1997, a decrease of 12.5
percent to $14,479,189 from $16,555,073. Commissions and salaries fell
$2,180,827, or 17.4 percent, to $10,370,979 in 1998 from $12,551,806 in 1997.
This decrease was primarily due to decreased commission revenues resulting in
a lower 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 $235,911, or 31.0 percent.
While fewer transactions were completed in 1998, PIC was the sole manager for
all transactions and bore all the expenses. In addition, expenses were
incurred on transactions that were not completed. Rent, telephone and quote
expenses increased to $842,437 in 1998 from $835,472 in 1997, an increase of
0.8 percent. Other expenses decreased 5.7 percent, to $2,267,545 in 1998 from
$2,405,478 in 1997, with increased settlements and travel and entertainment
expenses more than offset by declines in professional fees and other expenses.
The Company had a pretax loss of $2,729,657 in 1998 compared to a
pretax profit of $11,128,988 in 1997. The primary reasons for this decrease
were the significant decreases in investment income, corporate finance
revenues and trading income. Independent of investment income, the Company
would have had pretax income of $1,336,977 in 1997 compared to a pretax loss
of $780,395 in 1998. Investment income in 1995 through 1997 was significantly
higher than in any previous year in the Company's history, primarily as a
result of increases in unrealized appreciation of underwriter warrants held
by the Company, based upon the Company's estimate of their fair value, 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
15
<PAGE>
PIC's revenues and operating results from one period to another. The Company
also incurred a benefit of $961,017 from income taxes in 1998, compared to an
expense of $4,178,593 in 1997.
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. The Company's working capital at December 31, 1999 was
$23,618,990. Of PIC's total assets (net of intercompany accounts) at December
31, 1999 of $35,639,226, approximately 76 percent consisted of securities in
PIC's investment account, trading inventory and underwriter warrant
securities, at fair value, and approximately 21 percent consisted of cash,
certificates of deposit and receivables from its correspondent broker.
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 very small capitalization OTC securities
traded by PIC in 1994 and 1998 were combined with a general reduction in the
liquidity of the markets for these securities. This situation was the reverse
of 1999, 1997, 1996 and 1995, when increases in prices of OTC securities
increased 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. They include shares of restricted stock
recorded by PIC, with an original cost of $1,014,210, currently valued at
$1,014,210, which the Company believes, based upon available evidence,
approximates market value.
PIC 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, 1999, no net loans 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
16
<PAGE>
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, 1999, PIC owned 28 underwriter
warrants (from 26 issuers), of which 23 were currently exercisable and 8 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. As of December 31, 1999, the Company
estimated that the value of PIC's underwriter warrants that had an exercise
price below the current market price of the securities receivable upon
exercise was $10,490,000. This estimate includes estimates by the Company of
discounts for lack of marketability, risk of failure of the issuer to
register the securities for resale and other possible difficulties that may
prevent the Company from realizing the value of the underwriter warrants. The
prices of the securities underlying the underwriter warrants are very
volatile, and substantial fluctuations in the Company's estimate of their
value can be expected in the future.
In 1999, $6,879,286 of net cash was used in operating activities. The
major adjustments to reconcile this result to the Company's net income included
unrealized appreciation on investment securities and underwriter warrants of
$13,556,395, a realized gain of $8,083,884 on investment securities, an increase
in receivables of $6,082,055 and an increase in trading securities of $119,061,
partially offset by an increase in accounts payable and accrued liabilities of
$3,279,288, a change in deferred income taxes of $1,826,873, income taxes
payable of $1,284,859 and depreciation and amortization of $136,274. In 1999,
$7,943,963 of net cash was provided by investing activities, primarily sales of
investment securities exceeding purchases investment securities and the issuance
of a note receivable of $1,100,000. Net cash used in financing activities in
1999 totaled $1,116,812, resulting 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, 1999, 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.
17
<PAGE>
YEAR 2000 EFFORTS
In 1998 and 1999, the Company took various steps to address the issue
of computer programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000 (the "Y2K" issue). The Company has no
proprietary operating system or applications software, nor do any of its
operations use mainframe or mini-computer systems. Therefore, the Company's
focus with respect to the Y2K issue was: (1) its PC hardware and software
purchased from third parties; and (2) external suppliers and service providers.
While there is no assurance that associated problems may not arise in the
future, to date the Company has not experienced any material problems relating
to the Y2K issue.
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.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS PAGE
<S> <C>
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1999, 1998 F-4
and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, F-5
1998 and 1997
Notes to Consolidated Financial Statements F-7
Supplementary Schedule of Warrants Owned F-17
Schedule II - Valuation and Qualifying Account F-18
</TABLE>
<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, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note N of Notes to Consolidated Financial Statements, the 1998
and 1997 financial statements have been restated.
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, 1999 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, 1999. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
Portland, Oregon
January 26, 2000, except for Notes E and N,
as to which the date is April 5, 2000
F-1
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------------- ----------------
(restated)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 48,210 $ 100,345
Receivable from broker-dealers and clearing organizations 7,336,562 1,430,586
Notes and other receivables 671,514 439,967
Trading securities 2,238,798 2,119,737
Investment securities 14,200,767 9,697,387
Underwriter warrants 10,490,000 2,488,000
Refundable income taxes - 168,059
Prepaid and deferred expenses 669,599 578,556
Deferred income taxes - 53,373
---------------- ----------------
Total current assets 35,655,450 17,076,010
---------------- ----------------
NOTE RECEIVABLE 1,100,000 -
---------------- ----------------
FURNITURE AND EQUIPMENT, net 525,716 359,329
---------------- ----------------
INVESTMENT IN REAL ESTATE 169,900 169,900
---------------- ----------------
$ 37,451,066 $ 17,605,239
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 814,935 $ 738,155
Payable to broker-dealers and clearing organizations 1,883,602 753,413
Compensation, employee benefits and payroll taxes 3,312,829 1,240,510
Securities sold, not yet purchased 65,794 61,479
Income taxes payable 1,116,800 -
Deferred income taxes 4,842,500 -
---------------- ----------------
Total current liabilities 12,036,460 2,793,557
---------------- ----------------
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, 3,541,235 and
3,796,852, respectively 732,343 775,323
Retained earnings 24,682,263 14,036,359
---------------- ----------------
25,414,606 14,811,682
---------------- ----------------
$ 37,451,066 $ 17,605,239
================ ================
The accompanying notes are an integral part of this statement.
</TABLE>
F-2
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(restated) (restated)
<S> <C> <C> <C>
Revenues
Commissions $ 15,075,567 $ 11,324,412 $ 12,728,794
Corporate finance 2,115,619 1,716,691 3,925,514
Investment income (loss) 21,640,280 (1,949,262) 9,792,011
Trading income 317,159 589,822 1,195,585
Interest and dividends 16,641 48,668 7,010
Other 21,316 19,201 35,147
---------------- ---------------- ----------------
39,186,582 11,749,532 27,684,061
---------------- ---------------- ----------------
Expenses
Commissions and salaries 15,692,933 10,370,979 12,551,806
Underwriting expenses 1,350,372 998,228 762,317
Rent, telephone and quotation services 890,708 842,437 835,472
Interest expense 1,248 60,889 5,996
Professional fees 394,368 389,478 639,386
Bad debt expense 80,379 84,670 55,011
Travel and entertainment 333,927 283,234 158,649
Settlements 59,000 518,362 67,299
Other 1,072,151 930,912 1,479,137
---------------- ---------------- ----------------
19,875,086 14,479,189 16,555,073
---------------- ---------------- ----------------
Earnings (loss) before income taxes 19,311,496 (2,729,657) 11,128,988
Income tax expense (benefit) 7,600,260 (961,017) 4,178,593
---------------- ---------------- ----------------
NET EARNINGS (LOSS) $ 11,711,236 $ (1,768,640) $ 6,950,395
================ ================ ================
Basic earnings (loss) per share $ 3.16 $ (.45) $ 1.75
================ ================ ================
Diluted earnings (loss) per share $ 3.16 $ (.45) $ 1.74
================ ================ ================
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Paulson Capital Corp. and Subisidiary
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three year period ended December 31, 1999
<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 (Note N) - - 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
============== ============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
(restated) (restated)
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net earnings (loss) $ 11,711,236 $ (1,768,640) $ 6,950,395
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities
Unrealized (appreciation) depreciation
on investment securities and underwriter warrants (13,556,395) 1,816,738 (3,803,194)
Realized (gain) loss on investment securities (8,083,884) 404,441 (5,988,817)
Deferred income taxes 4,895,873 (1,796,273) 1,448,300
Common stock issued for compensation
of directors 8,500 16,500 8,000
Depreciation and amortization 136,274 89,448 59,994
(Gain)/loss from sale of furniture and equipment - 6,180 (6,800)
Write-down of notes receivable, net of recoveries (267,193) 267,193 -
Changes in assets and liabilities
Receivables (6,082,055) 3,051,643 562,999
Trading securities (119,061) 6,782,065 (3,749,019)
Income taxes receivable/payable 1,284,859 (66,152) 310,354
Prepaid and deferred expenses (91,043) (177,711) (240,724)
Accounts payable and accrued liabilities 3,279,288 (5,516,418) 2,236,523
Securities sold, not yet purchased 4,315 (269,250) 50,041
---------------- ---------------- ----------------
Net cash provided by (used in)
operating activities (6,879,286) 2,839,764 (2,161,948)
---------------- ---------------- ----------------
Cash flows from investing activities
Purchases of investment securities (41,501,353) (27,439,553) (28,103,962)
Proceeds from sale of investment securities 50,636,252 25,400,567 31,405,663
Proceeds from repayment of notes receivable 211,725 500,000 -
Issuance of note receivable (1,100,000) (534,385) (500,000)
Additions to furniture and equipment (302,661) (254,652) (114,474)
Purchase of real estate - - (169,900)
Proceeds from sale of furniture and equipment - 2,300 9,600
---------------- ---------------- ----------------
Net cash provided by (used in)
investing activities 7,943,963 (2,325,723) 2,526,927
---------------- ---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Paulson Capital Corp. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
(restated) (restated)
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from exercise of stock options $ - $ - $ 89,283
Payments to retire common stock (1,116,812) (486,916) (566,487)
--------------- --------------- ---------------
Net cash used in financing activities (1,116,812) (486,916) (477,204)
--------------- --------------- ---------------
Net Increase (Decrease) in Cash and
Cash Equivalents (52,135) 27,125 (112,225)
Cash and cash equivalents at beginning of year 100,345 73,220 185,445
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 48,210 $ 100,345 $ 73,220
=============== =============== ===============
CASH PAID DURING THE YEAR FOR
Interest $ 1,248 $ 61,389 $ 6,000
=============== =============== ===============
Income taxes $ 1,441,715 $ 901,408 $ 2,405,275
=============== =============== ===============
NONCASH INVESTING AND FINANCING ACTIVITY
Repayment of secured demand note collateral agreement $ - $ 100,000 $ -
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Paulson Capital Corp. (the Company) is a holding company whose 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 conducts business
throughout the United States. 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. Manager's fees, underwriter's 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, notes and other receivables and payables approximate their
respective fair values due to the short maturities of these instruments. The
fair values of trading and investing securities owned and securities sold,
not yet purchased are recorded primarily at quoted prices for those or
similar instruments. Underwriter warrants are recorded at estimated fair
value as determined by management. Changes in the market value of these
securities are reflected currently in the results of operations.
4. FURNITURE AND EQUIPMENT
Depreciation of furniture and equipment is computed generally by the
straight-line method over their estimated useful lives (5 years). Leasehold
improvements are amortized over the lesser of their estimated useful life or
the lives of their respective leases (2.5 years).
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
The Company adopted Financial Accounting Standard No. 128, "Earnings Per
Share" in 1997. Earnings (loss) per share are computed based on the weighted
average number of common and dilutive common equivalent shares outstanding
during the year (Note H).
8. INCOME TAXES
The Company provides for income taxes under the liability method. 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. Income tax expense is the tax payable for the period and
the change during the period in net deferred tax assets and liabilities.
NOTE B - RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
ORGANIZATIONS
The Subsidiary introduces all customer transactions in securities traded on
U.S. securities markets to CSC on a fully-disclosed basis. The agreement
between the Subsidiary and its clearing broker provides that the Subsidiary
is obligated to assume any exposure related to nonperformance by customers or
counterparties. The 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 Subsidiary. In the event of nonperformance, the
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
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
At December 31, the above clearing services and trading account financing
resulted in the following:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Receivable from CSC $ 7,336,562 $ 1,430,586
Payable to CSC (1,883,602) (753,413)
--------------- ----------------
Net receivable $ 5,452,960 $ 677,173
=============== ================
</TABLE>
NOTE C - NOTES AND OTHER RECEIVABLES
Notes and other receivables consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Underwriting $ - $ 267,191
Employees 558,131 49,493
Independent brokers 59,045 69,909
Other 54,338 53,374
--------------- ---------------
$ 671,514 $ 439,967
=============== ===============
</TABLE>
In connection with an underwriting, the Subsidiary accepted a note receivable
on December 18, 1997 in the amount of $500,000. On February 6, 1998 the note
was paid. Three additional notes totaling $534,385 were accepted during 1998.
These notes were uncollateralized and the Subsidiary recorded an allowance of
$267,193 against them. During 1999, collection was received on one of the
notes and the remainder of the other two were written off.
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 Subsidiary. For the years ended
December 31, 1999, 1998, and 1997, notes and receivables of $80,379, $85,448,
and $17,206, respectfully, were determined by management to be uncollectible
and written off.
At December 31, 1999 the Company had a $1,100,000 unsecured note receivable
from a company that was subordinated to the interest of another creditor.
This note has an interest rate of 6% and is due October 21, 2001.
F-9
<PAGE>
Paulson Capital Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold not yet purchased represent the market
value of securities held long and short by the Company's subsidiary.
The categories of trading securities and their related market values follow:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
Long Short Long Short
-------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Common stock $ 1,895,409 $ 65,794 $ 1,686,731 $ 50,672
Preferred stock - - 39,008 5,511
State and municipal bonds 262,082 - 243,055 5,296
Corporate bonds 81,307 - 150,943 -
-------------- ------------ --------------- -------------
$ 2,238,798 $ 65,794 $ 2,119,737 $ 61,479
============== ============ =============== =============
</TABLE>
As a securities broker-dealer, the Subsidiary is engaged in various
securities trading and brokerage activities as principal. In the normal
course of business, the 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 Subsidiary which are readily marketable are
stated at market value. Included in investment securities are certain
securities which are not readily marketable. Securities not readily
marketable include investment securities (a) for which there is no market on
a securities exchange or no independent publicly quoted market, (b) that
cannot be publicly offered or sold unless registration has been effected
under the Securities Act of 1933, or (c) that cannot be offered or sold
because of other arrangements, restrictions, or conditions applicable to the
securities or to the Company. At December 31, 1999 these securities consist
of corporate stocks and warrants at estimated fair value of $914,210 and a
convertible debenture valued at $100,000. At December 31, 1998 these
securities consisted of corporate stocks at estimated fair value of $325,475.
A summary of the investment security portfolio follows:
<TABLE>
<CAPTION>
Market Unrealized Carrying
Cost Value Gain (Loss) Value
--------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1999
Corporate equities $ 11,752,070 $ 14,178,877 $ 2,426,807 $ 14,178,877
Corporate bonds 102,420 21,890 (80,530) 21,890
--------------- --------------- ----------------- ----------------
$ 11,854,490 $ 14,200,767 $ 2,346,277 $ 14,200,767
=============== =============== ================= ================
1998
Corporate equities $ 11,993,688 $ 9,697,387 $ (2,296,301) $ 9,697,387
=============== =============== ================= ================
</TABLE>
Realized gain (loss) included in the determination of net earnings was
$8,083,884, $(404,441), and $5,988,817 for the years ended December 31,
1999, 1998 and 1997, respectively.
F-10
<PAGE>
NOTE E - UNDERWRITER WARRANTS
As provided in certain underwriting agreements, Paulson Investment Company,
Inc. obtains warrants to purchase equity instruments from client companies.
During the restriction periods on these warrants, the Company recognizes no
value. When the restrictions expire and the underlying securities become
exercisable, the Company marks the warrants to estimated fair value.
In estimating fair value of the warrants, management considers the trading
volume and quoted prices of the underlying securities, the number of such
securities held by the public, the remaining warrant exercise period and
other factors that they believe might effect the value of the warrants.
NOTE F - FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Office equipment $ 1,173,097 $ 905,710
Leasehold improvements 35,274 120,354
Vehicles 65,619 65,619
--------------- ---------------
1,273,990 1,091,683
Less accumulated depreciation
and amortization 748,274 732,354
--------------- ---------------
$ 525,716 $ 359,329
=============== ===============
</TABLE>
NOTE G - INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Current tax expense
Federal $ 1,921,593 $ 724,613 $ 2,364,177
State 782,794 110,643 366,116
--------------- --------------- ---------------
2,704,387 835,256 2,730,293
--------------- --------------- ---------------
Deferred tax expense (benefit)
Federal 4,338,537 (1,579,461) 1,289,457
State 557,336 (216,812) 158,843
--------------- --------------- ---------------
4,895,873 (1,796,273) 1,448,300
--------------- --------------- ---------------
$ 7,600,260 $ (961,017) $ 4,178,593
=============== =============== ===============
</TABLE>
F-11
<PAGE>
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 (loss) before
taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Income tax expense (benefit) at
statutory federal tax rate $ 6,566,000 $ (928,000) $ 3,784,000
State taxes net of federal benefit 841,000 (119,000) 485,000
Permanent and other differences 193,260 85,983 (90,407)
-------------- --------------- ---------------
$ 7,600,260 $ (961,017) $ 4,178,593
============== =============== ===============
</TABLE>
The deferred income tax asset (liability) consists of the following at
December 31,:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Unrealized appreciation on securities $ (4,923,000) $ (55,000)
Accrued expenses 48,000 -
State net operating loss carryforwards 67,100 -
Allowance on notes receivable - 105,000
Fixed asset depreciation (34,600) 3,373
---------------- ---------------
$ (4,842,500) $ 53,337
================ ===============
</TABLE>
No valuation allowance is considered necessary. The state net operating loss
carryforwards expire through 2014.
NOTE H - COMMON STOCK
Directors are compensated for their attendance at a maximum of six scheduled
meetings per year. Compensation is approximately $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 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 1999, 1998 or 1997.
The Company's Nonemployee Stock Option Plan had 100,000 registered shares of
common stock reserved for issuance.
F-12
<PAGE>
NOTE H - COMMON STOCK - Continued
The Company has adopted the disclosure only 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 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: no dividends; expected volatility of 62%;
risk-free interest rate of 5.9% and expected life of 2.5 years.
There was no activity under the Nonemployee Stock Option Plan during 1999 or
1998. The following table summarizes activity under the Plan for the year
ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Exercise
Option Price
------------ ------------
<S> <C> <C>
Balance at December 31, 1996 101,425 $ 1.01
Granted - -
Exercised (87,140) 1.02
Canceled (14,285) .91
------------
Balance at December 31, 1997 -
============
</TABLE>
On September 30, 1999, the Board of Directors approved the 1999 Stock Option
Plan. The plan reserves 500,000 shares of the Company's common stock for
issuance upon exercise of the options. Also effective September 30, 1999, the
Board of Directors approved the grant of 128,000 options to directors and
employees of the Company. The approved grant price of the options was $4.44
per share, the September 30, 1999 market value. However, the plan is subject
to shareholder approval at the June 2000 shareholder meeting. Because
approval is not virtually certain, the options have not been included in the
diluted earnings per share calculation for the year ended December 31, 1999.
If the market value of the stock, on the date of approval, is greater than
the grant price, the Company will incur compensation expense equal to the
price per share differential times the number of shares granted.
F-13
<PAGE>
NOTE I - EARNINGS PER SHARE
The following table is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for each of the three years in
the period ended December 31, 1999:
<TABLE>
<CAPTION>
Weighted Average Per
Income Shares Share
1997 (Restated) (Numerator) (Denominator) Amount
--------------- --------------- ----------------- -----------
<S> <C> <C> <C>
Basic earnings per share
Income available to
common stockholders $ 6,950,395 3,973,034 $1.75
Effect of dilutive securities
Stock options - 32,344
--------------- -----------------
Diluted earnings per share
Income available to
common stockholders $ 6,950,395 4,005,378 $1.74
=============== ================= ===========
1998 (Restated)
---------------
Basic earnings (loss) per share
Income (loss) available to
common stockholders $ (1,768,640) 3,917,788 $(.45)
=============== ================= ===========
1999
----
Basic earnings per share
Income available to
common stockholders $ 11,711,236 3,704,360 $3.16
=============== ================= ===========
</TABLE>
During the years ended December 31, 1999 and 1998 there were no potentially
dilutive securities outstanding. During the year ended December 31, 1997 all
outstanding stock options were included in the computation of diluted
earnings per share since the options' exercise price was less than the
average market price of the common shares.
F-14
<PAGE>
NOTE J - 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:
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
<S> <C>
2000 $ 274,176
2001 274,176
2002 114,240
------------
$ 662,592
============
</TABLE>
The leases provide for payment of taxes and other expenses by the Company.
Rental expense for the years ended December 31, 1999, 1998 and 1997
approximated $265,000, $270,000, and $240,000, respectively.
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, 1999, 1998 and
1997 were $600,000, $0 and $500,000, respectively.
NOTE L - CONTINGENCIES
The Company and its Subsidiary have 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. Management denies the
charges in these legal actions and is vigorously defending against them. No
provision for any liability that may result from the above contingencies has
been made in the financial statements.
The Company and its Subsidiary are defendants in a class action alleging
violations of California securities law and other laws relating to a public
offering in which the Subsidiary acted as the managing underwriter. The
Subsidiary and the plaintiffs reached a settlement in principle during 1998,
which is subject to court approval. The total payment by the Subsidiary under
the settlement depends upon the number of purchasers in the public offering
who file valid claims. Management believes the range of payment possible
under the settlement is between approximately $350,000 and $900,000. An
accrual of $500,000 has been recorded based upon management's estimate of the
most likely amount.
NOTE M - NET CAPITAL REQUIREMENT
The Subsidiary is subject to the net capital rule (Rule 15c3-1) of the
Securities and Exchange Commission. This rule prohibits the Subsidiary 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, 1999, the Subsidiary's net capital and
required net capital were $17,506,585 and $273,057, respectively, and its
ratio of aggregate indebtedness to net capital was .234 to 1. The
Subsidiary's absolute minimum net capital is $100,000.
F-15
<PAGE>
NOTE N - RESTATEMENT
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. 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.
The effect of the change on the 1999 financial statements was to increase
investment income by $8,002,000, net income by $4,933,000 and basic and
diluted earnings per share by $1.33. For the year ended December 31, 1998,
the effect of the adjustment was to decrease investment income by $2,811,000,
increase net loss by $1,733,000 and increase the basic and diluted loss per
share by $.44. For the year ended December 31, 1997, the effect of the
adjustment was to increase investment income by $4,211,000, increase net
income by $2,596,000 and increase the basic and diluted earnings per share by
$.65. The effect of the adjustment for periods prior to 1997 was to increase
shareholders' equity by $671,000.
The effect of the adjustment on each of the quarters for the years 1999,
1998 and 1997 is as follows (unaudited):
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
1999
Net income (loss), as previously reported $ 112,963 $ 1,269,203 $ (426,746) $ 5,822,816
Effect of adjustment 936,000 2,398,000 1,603,000 (4,000)
--------------- --------------- ---------------- -----------------
Net income, as restated $ 1,048,963 $ 3,667,203 $ 1,176,254 $ 5,818,816
=============== =============== ================ =================
Earnings (loss) per share, as previously reported $ $0.03 $ 0.34 $ (0.12) $ 1.61
Effect of adjustment 0.25 0.63 0.44 -
--------------- --------------- ---------------- -----------------
Earnings per share, as restated $ 0.28 $ 0.97 $ 0.32 $ 1.61
=============== =============== ================ =================
1998
Net income (loss), as previously reported $ 173,604 $ (879,490) $ (2,101,563) $ 2,771,809
Effect of adjustment (152,000) (1,086,000) (740,000) 245,000
--------------- --------------- ---------------- -----------------
Net income (loss), as restated $ 21,604 $ (1,965,490) $ (2,841,563) $ 3,016,809
=============== =============== ================ =================
Earnings (loss) per share, as previously reported $ 0.04 $ (0.22) $ (0.55) $ 0.70
Effect of adjustment (0.03) (0.28) (0.17) 0.09
--------------- --------------- ---------------- -----------------
Earnings (loss) per share, as restated $ 0.01 $ (0.50) $ (0.72) $ 0.79
=============== =============== ================ =================
1997
Net income, as previously reported $ 791,059 $ 583,370 $ 1,807,880 $ 1,172,086
Effect of adjustment 250,000 1,311,000 2,032,000 (997,000)
--------------- --------------- ---------------- -----------------
Net income, as restated $ 1,041,059 $ 1,894,370 $ 3,839,880 $ 175,086
=============== =============== ================ =================
Earnings per share, as previously reported $ 0.20 $ 0.15 $ 0.45 $ 0.30
Effect of adjustment 0.06 0.33 0.52 (0.26)
--------------- --------------- ---------------- -----------------
Basic earnings per share, as restated $ 0.26 $ 0.48 $ 0.97 $ 0.04
=============== =============== ================ =================
Diluted earnings per share, as previously reported $ 0.20 $ 0.15 $ 0.45 $ 0.29
Effect of adjustment 0.06 0.32 0.52 (0.25)
--------------- --------------- ---------------- -----------------
Diluted earnings per share, as restated $ 0.26 $ 0.47 $ 0.97 $ 0.04
=============== =============== ================ =================
</TABLE>
F-16
<PAGE>
Paulson Capital Corp. and Subsidiary
SUPPLEMENTARY SCHEDULE OF WARRANTS OWNED
December 31, 1999
<TABLE>
<CAPTION>
Shares Exercise
Entitled to Price Expiration
Description Purchase Per-Share Date
- -------------------------------------------------------------------------- ------------- -------------- ---------------
<S> <C> <C> <C>
AdStar.com (units) ERC 12-17-00 60,500 $ 7.20 2004, 12/16
Advantage Marketing Systems (units) ERC 11-12-98 65,520 $ 5.40 2002, 11/12
Audiohighway (units) ERC 12-17-99 163,900 $ 7.80 2003, 12/17
AVI Biopharma, Inc. (units) ERC 6-3-98 112,700 $ 10.80 2002, 06/03
Beta Oil & Gas, Inc. ERC 7-30-00 9,300 $ 7.50 2004, 07/30
C3, Inc. ERC 11-14-98 214,592 $ 18.00 2002, 11/14
Cal-Maine Foods, Inc. ERC 12-11-97 177,100 $ 8.40 2001, 12/10
Careside, Inc. (units) ERC 06-15-00 92,650 $ 9.00 2004, 06/15
Caring Products International, Inc. (units) ERC 12-9-98 83,075 $ 6.00 2002, 12/09
Cell Robotics International, Inc. (units) ERC 9-19-96 9.3725 $ 25,000.00 2000, 09/18
Cell Robotics International, Inc. (units) ERC 2-2-99 29,800 $ 9.90 2003, 02/01
Cellegy Pharmaceuticals, Inc. (units) ERC 8-11-96 18,745 $ 20.63 2000, 08/11
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
Cusac Industries, Ltd. (units) ERC 1-11-96 11,901 $ 12.00 2000, 01/11
Dag Media, Inc. ERC 05-12-00 90,562 $ 7.80 2004, 05/12
E.Com International, Inc. ERC 12-5-97 75,587 $ 3.50 2002, 12/31
Global Payment Technology ERC 2-6-96 103,500 $ 6.60 2000, 02/06
Hometown Auto Retailers NC ERC 7-28-99 120,690 $ 10.80 2003, 07/28
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
Neotherapeutics Inc. (units) ERC 9-25-97 161,000 $ 9.12 2001, 09/25
Pacific Aerospace & Electronics (Units) ERC 7-15-97 146,700 $ 3.75 2001, 07/15
Premium Cigars International, Ltd. ERC 8-21-98 2,000 $ 8.40 2002, 08/21
R-B Rubber Products, Inc. ERC 5-10-96 55,100 $ 5.10 2000, 05/10
Supergen, Inc. (units) ERC 3-12-97 218,950 $ 7.20 2001, 03/12
3D shopping.com (units) ERC 07-20-00 73,466 $ 14.40 2004, 07/20
WSG Systems, Inc. ERC 4-8-99 11.0260 $ 6,000.00 2003, 03/31
</TABLE>
F-17
<PAGE>
Paulson Capital Corp. and Subsidiary Schedule II
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
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, 1999 $ 267,193 $55,466 $ 322,659* $ -
Year ended Dec. 31, 1998 - 352,641 $ 85,448 $ 267,193
Year ended Dec. 31, 1997 - 17,206 17,206 -
* Net of recoveries of previously reserved amounts of $105,863.
</TABLE>
F-18
<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.
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 2000
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.
<PAGE>
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, 1999 are set forth below.
The year each person became a director follows his or her name.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING PAST FIVE
NAME AGE POSITION(S) WITH COMPANY YEARS
<S> <C> <C> <C>
Chester L.F. Paulson (1970) 63 President and Director Director of Corporate Finance of PIC
Jacqueline M. Paulson (1976) 60 Secretary-Treasurer and Secretary-Treasurer of PIC
Director
Glen Davis 43 Director President of PIC since February 1998 (Senior
(1999) Vice President of PIC until February 1998
Kenneth T. LaMear (1985) 65 Director Senior Vice President of PIC since February
1998, Chief Executive Officer of PIC until
February 1998
Shannon P. Pratt 66 Director Managing Director, Founder - Willamette
(1998) Management Associates, a business valuation
firm
Paul Shoen 43 Director Chairman of the Board of Directors and Chief
(1998) Executive Officer of Panetechnicon Aviation,
an operator and lessor of aircraft; private
investor; Director -- AMERCO, the parent
company of U-Haul Trucking Rental and
Telepartner A/S, a long distance telephone
provider
John Westergaard 68 Director Publisher/Editor of Westergaard Online
(1998) Systems, Inc., an Internet publisher of
financial "webzines"
Chester L.F. Paulson and Jacqueline M. Paulson are husband and wife.
</TABLE>
<PAGE>
(a) 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)
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 6/1/97 to 5/31/02,
dated as of May 6, 1997 (Incorporated by reference to Exhibit
10.4 to the Form 10-QSB for the quarter ended June 30, 1997
filed with the Commission on August 13, 1997)
10.5 1999 Stock Option Plan
21.1 Subsidiaries - The Company's only subsidiary is Paulson
Investment Company, Inc., an Oregon corporation.
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed during the last quarter of
the period covered by this report.
<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: April 13, 2000 By: /s/ CHESTER L.F. PAULSON
----------------------- ------------------------
Chester L.F. Paulson
President
23
<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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
(1) PRINCIPAL EXECUTIVE AND FINANCIAL
OFFICER
/s/ CHESTER L.F. PAULSON April 13, 2000
- ------------------------------------- Chairman of the Board and President ---------------
Chester L.F. Paulson
(2) PRINCIPAL ACCOUNTING OFFICER
/s/ CAROL RICE April 12, 2000
- ------------------------------------- Principal Accounting Officer ---------------
Carol Rice
(3) DIRECTORS
/s/ JACQUELINE M. PAULSON April 13, 2000
- ------------------------------------- Secretary, Treasurer and Director ---------------
Jacqueline M. Paulson
/s/ GLEN DAVIS April 13, 2000
- ------------------------------------- Director ---------------
Glen Davis
- ------------------------------------- Director ---------------
Kenneth T. LaMear
/s/ SHANNON PRATT April 13, 2000
- ------------------------------------- Director ---------------
Shannon Pratt
/s/ PAUL SHOEN April 13, 2000
- ------------------------------------- Director ---------------
Paul Shoen
/s/ JOHN WESTERGAARD April 13, 2000
- ------------------------------------- Director ---------------
John Westergaard
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<S> <C> <C>
3.1 Articles of Incorporation (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form 10 filed
with the Commission on December 18, 1989 (the "Form 10"))
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Form 10)
10.1 Office lease dated June 28, 1988 (incorporated by reference to
Exhibit 10.2 to the Form 10)
10.3 Contract with Correspondent Services Corporation, dated July 24,
1992 (Incorporated by reference to Exhibit 10.3 to the Form 10-Q
for the quarter ended September 30, 1992 filed with the
Commission on November 13, 1992)
10.4 Office Lease renewal for the period from 6/1/97 to 5/31/02,
dated as of May 6, 1997 (Incorporated by reference to Exhibit
10.4 to the Form 10-QSB for the quarter ended June 30, 1997
filed with the Commission on August 13, 1997)
10.5 1999 Stock Option Plan
21.1 Subsidiaries - The Company's only subsidiary is Paulson
Investment Company, Inc., an Oregon corporation.
27.1 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.5
PAULSON CAPITAL CORPORATION
1999 STOCK OPTION PLAN
1. PURPOSE. The purpose of this 1999 Stock Option Plan (the "Plan")
is to enable Paulson Capital Corporation (the "Company") to attract and retain
the services of selected employees, officers, and directors of the Company and
of any subsidiary thereof, and to provide added incentive to such persons by
increasing their ownership interests in the Company.
2. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided
below and in paragraph 7, the shares to be offered under the Plan shall consist
of Common Stock of the Company, and the total number of shares of Common Stock
that may be issued under the Plan shall not exceed 500,000 shares. The shares
issued under the Plan may be authorized and unissued shares or reacquired
shares. If an option granted under the Plan expires, terminates or is canceled,
the unissued shares subject to such option shall again be available under the
Plan.
3. EFFECTIVE DATE AND DURATION OF PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by
the Board of Directors; provided, however, that prior to shareholder approval of
the Plan, any awards shall be subject to and conditioned on approval of the Plan
by a majority of the votes cast at a shareholders' meeting at which a quorum is
present. Options may be granted under the Plan at any time after the effective
date and before termination of the Plan.
(b) DURATION. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options then outstanding under the Plan.
4. ADMINISTRATION. The Plan shall be administered by a committee of
the Board of Directors of the Company (the "Committee"), which shall determine
and designate from time to time the persons to whom awards shall be made and the
amount and other terms and conditions of the awards. Subject to the provisions
of the Plan, the Committee may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Committee necessary or desirable for
the administration of the Plan. The interpretation and construction of the
provisions of the Plan and related agreements by the Committee shall be final
and conclusive. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any related agreement in the
manner and to the extent it shall deem expedient to carry the Plan into effect,
and it shall be the sole and final judge of such expediency. No director shall
vote on any action by the Committee or the Board of Directors of the Company
with respect to any matter relating to an award held by such director.
5. TYPES OF AWARDS; ELIGIBILITY. The Committee may, from time to
time, grant (i) Incentive Stock Options, as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), as provided in Sections
6(a) and 6(b); and (ii) options other than Incentive Stock Options ("Non-
Statutory Stock Options"), as provided in Sections 6(a) and 6(c). Options may be
awarded pursuant to this Plan only to employees, officers, and directors of the
Company or any subsidiary thereof; provided, however, that only employees of
the Company shall be eligible to receive Incentive Stock Options under the Plan.
The Committee shall select the individuals to whom awards shall be made and
shall specify the action taken with respect to each individual to whom an award
is made. At the discretion
1
<PAGE>
of the Committee, a director may be given an election to surrender an award
in exchange for the grant of a new award. Notwithstanding anything to the
contrary herein, and in addition to any other applicable limitation, no
single employee may be granted more than 75,000 options under this plan.
6. OPTION GRANTS.
(a) TERMS OF GRANT. The Committee may grant options under the Plan.
With respect to each option grant, the Committee shall determine the number of
shares subject to the option, the option price, the period of the option, the
time or times at which the option may be exercised, and whether the option is an
Incentive Stock Option or a Non-Statutory Stock Option. At the time of the
grant of an option or at any time thereafter, the Committee may provide that an
optionee who exercised an option with Common Stock of the Company shall
automatically receive a new option to purchase additional shares equal to the
number of shares surrendered and may specify the terms and conditions of such
new options.
(b) INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be subject
to the following additional terms and conditions:
(i) LIMITATION ON AMOUNT OF GRANTS. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market
value, on the date of grant, of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by that
employee during any calendar year under the Plan and under all incentive
stock option plans (within the meaning of Section 422 of the Code) of the
Company or any parent or subsidiary of the Company exceeds $100,000.
(ii) LIMITATIONS ON GRANTS TO 10 PERCENT SHAREHOLDERS. An Incentive
Stock Option may be granted under the Plan to an employee possessing more
than ten percent of the total combined voting power of all classes of
stock of the Company or of any parent or subsidiary of the Company only
if the option price is at least 110 percent of the fair market value of
the Common Stock subject to the option on the date it is granted and the
option by its terms is not exercisable after the expiration of five years
from the date it is granted.
(iii) DURATION OF OPTIONS. Subject to Sections 6(b)(ii) and 6(d),
Incentive Stock Options granted under the Plan shall continue in effect
for the period fixed by the Committee, except that no Incentive Stock
Option shall be exercisable after the expiration of ten years from the
date it is granted.
(iv) OPTION PRICE. The option price per share shall be determined by
the Committee at the time of grant. Except as provided in Section
6(b)(ii), the option price shall not be less than 100 percent of the fair
market value of the Common Stock covered by the Incentive Stock Option at
the date the option is granted. The Committee shall make a good faith
determination of the fair market value. If the Common Stock of the
Company is not publicly traded on the date the option is granted, the
Committee may consider any valuation methods it deems appropriate and
may, but is not required to, obtain one or more independent appraisals of
the Company. If the Common Stock of the Company is publicly traded on
the date the option is granted, the fair market value shall be deemed to
be the closing price of the Common Stock as reported in The Wall Street
Journal on the day preceding the date the option is granted, or, if there
has been no sale on that date, on the last preceding date on which a sale
occurred or such other value of the Common Stock as shall be specified by
the Committee.
(v) LIMITATION ON TIME OF GRANT. No Incentive Stock Option shall be
granted on or after the tenth anniversary of the date of the last action
by the Committee approving an increase in the
2
<PAGE>
number of shares available for issuance under the Plan, which action was
subsequently approved within 12 months by the shareholders.
(vi) CONVERSION OF INCENTIVE STOCK OPTIONS. The Committee may at any
time without the consent of the optionee convert an Incentive Stock
Option to a Non-Statutory Stock Option.
(c) NON-STATUTORY STOCK OPTIONS. Non-Statutory Stock Options shall be
subject to the following terms and conditions in addition to those set forth in
Section 6(a) above:
(i) OPTION PRICE. The option price for Non-Statutory Stock Options
shall be determined by the Committee at the time of grant and may be any
amount determined by the Committee.
(ii) DURATION OF OPTIONS. Non-Statutory Stock Options granted under
the Plan shall continue in effect for the period fixed by the Committee.
(d) EXERCISE OF OPTIONS. Except as provided in paragraph 6(f) or as
determined by the Committee, no option granted under the Plan may be exercised
unless at the time of such exercise the optionee is employed by or in the
service of the Company or a subsidiary thereof and shall have been so employed
or provided such service continuously since the date such option was granted.
Absence on leave or on account of illness or disability under rules established
by the Committee shall not, however, be deemed an interruption of continuous
service for this purpose. Unless otherwise determined by the Committee, vesting
of options shall not continue during an absence on leave (including an extended
illness) or on account of disability. Except as provided in paragraphs 6(f) and
7, options granted under the Plan may be exercised from time to time over the
period stated in each option in such amounts and at such times as shall be
prescribed by the Committee, provided that options shall not be exercised for
fractional shares. Unless otherwise determined by the Committee, if the
optionee does not exercise an option in any one year with respect to the full
number of shares to which the optionee is entitled in that year, the optionee's
rights shall be cumulative and the optionee may purchase those shares in any
subsequent year during the term of the option.
(e) NONTRANSFERABILITY. Except as provided below, each stock option
granted under the Plan by its terms shall be nonassignable and nontransferable
by the optionee, either voluntarily or by operation of law, and each option by
its terms shall be exercisable during the optionee's lifetime only by the
optionee. A stock option may be transferred by will or by the laws of descent
and distribution of the state or country of the optionee's domicile at the time
of death. The Committee may, in its discretion, authorize all or a portion of
an option to be on terms which permit transfer by the optionee to (A) the
spouse, children or grandchildren of the optionee, including stepchildren and
adopted children ("Immediate Family Members"), (B) a trust or trusts for the
exclusive benefit of Immediate Family Members, or (C) a partnership or limited
liability company in which Immediate Family Members are the only partners or
members, provided that (X) there may be no consideration for any transfer, (Y)
the stock option agreement pursuant to which the options are granted or an
amendment thereto must expressly provide for transferability in a manner
consistent with this paragraph, and (Z) subsequent transfers of transferred
options shall be prohibited except by will or by the laws of descent and
distribution. Following any transfer, options shall continue to be subject to
the same terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of paragraphs 6(g) and 7 the term "optionee" shall be
deemed to refer to the transferee. The continued service requirement of
paragraph 6(d) and the events of termination of service of paragraph 6(f) shall
continue to be applied with respect to the original optionee, and following the
termination of employment or service of the original optionee the options shall
be exercisable by the transferee only to the extent, and for the periods
specified, and all other references to employment or service, termination of
employment or service, life or death of the optionee shall continue to be
applied with respect to the original optionee.
3
<PAGE>
(f) TERMINATION OF SERVICE.
(i) GENERAL RULE. Unless otherwise determined by the Committee, in
the event the employment or service of the optionee with the Company or a
subsidiary thereof terminates for any reason other than because of
physical disability or death as provided in subparagraphs 6(f)(ii) and
(iii) the option may be exercised at any time prior to the expiration
date of the option or the expiration of 30 days after the date of such
termination, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
such termination.
(ii) TERMINATION BECAUSE OF TOTAL DISABILITY. Unless otherwise
determined by the Committee, in the event of the termination of
employment or service because of total disability, the option may be
exercised at any time prior to the expiration date of the option or the
expiration of 12 months after the date of such termination, whichever is
the shorter period, but only if and to the extent the optionee was
entitled to exercise the option at the date of such termination. The
term "total disability" means a mental or physical impairment which is
expected to result in death or which has lasted or is expected to last
for a continuous period of 12 months or more and which causes the
optionee to be unable, in the opinion of the Company and two independent
physicians, to perform his or her duties as an employee, director or
officer of the Company and to be engaged in any substantial gainful
activity. Total disability shall be deemed to have occurred on the first
day after the Company and the two independent physicians have furnished
their opinion of total disability to the Company.
(iii) TERMINATION BECAUSE OF DEATH. Unless otherwise determined by the
Committee, in the event of the death of an optionee while employed by or
providing service to the Company or a subsidiary, the option may be
exercised at any time prior to the expiration date of the option or the
expiration of 12 months after the date of such death, whichever is the
shorter period, but only if and to the extent the optionee was entitled
to exercise the option at the date of such termination and only by the
person or persons to whom such optionee's rights under the option shall
pass by the optionee's will or by the laws of descent and distribution of
the state or country of domicile at the time of death.
(iv) AMENDMENT OF EXERCISE PERIOD APPLICABLE TO TERMINATION. The
Committee, at the time of grant or at any time thereafter, may extend the
30-day and 12-month exercise periods specified above any length of time
not later than the original expiration date of the option, and may
increase the portion of an option that is exercisable, subject to such
terms and conditions as the Committee may determine.
(v) FAILURE TO EXERCISE OPTION. To the extent that the option of any
deceased optionee or of any optionee whose employment or service
terminates is not exercised within the applicable period, all further
rights to purchase shares pursuant to such option shall cease and
terminate.
(g) PURCHASE OF SHARES.
(i) Unless the Committee determines otherwise, shares may be acquired
pursuant to an option granted under the Plan only upon receipt by the
Company of notice in writing from the optionee of the optionee's
intention to exercise, specifying the number of shares as to which the
optionee desires to exercise the option, the date on which the optionee
desires to complete the transaction, and, if required in order to comply
with the Securities Act of 1933, as amended, containing a representation
that it is the optionee's present intention to acquire the shares for
investment and not with a view to distribution.
4
<PAGE>
(ii) Unless the Committee determines otherwise, on or before the date
specified for completion of the purchase of shares pursuant to an option,
the optionee must have paid the Company the full purchase price of such
shares in cash (including, with the consent of the Committee, cash that
may be the proceeds of a loan from the Company) or, with the consent of
the Committee, in whole or in part, in Common Stock of the Company valued
at fair market value, restricted stock, performance units or other
contingent awards denominated in either stock or cash, deferred
compensation credits, promissory notes and other forms of consideration.
The Committee shall make a good faith determination of the fair market
value of Common Stock provided in payment of the purchase price. If the
Common Stock of the Company is not publicly traded on the date the option
is exercised, the Committee may consider any valuation methods it deems
appropriate and may, but is not required to, obtain one or more
independent appraisals of the Company. No shares shall be issued until
full payment therefor has been made. With the consent of the Committee,
an optionee may request the Company to apply automatically the shares to
be received upon the exercise of a portion of a stock option (even though
stock certificates have not yet been issued) to satisfy the purchase
price for additional portions of the option.
(iii) Each optionee who has exercised an option shall immediately upon
notification of the amount due, if any, pay to the Company in cash
amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If additional withholding is or becomes
required beyond any amount deposited before delivery of the certificates,
the optionee shall pay such amount to the Company on demand. If the
optionee fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the optionee,
including salary, subject to applicable law. With the consent of the
Committee an optionee may satisfy this obligation, in whole or in part,
by having the Company withhold from the shares to be issued upon the
exercise that number of shares that would satisfy the withholding amount
due or by delivering to the Company Common Stock to satisfy the
withholding amount.
(iv) Upon the exercise of an option, the number of shares reserved for
issuance under the Plan shall be reduced by the number of shares issued
upon exercise of the option.
7. CHANGES IN CAPITAL STRUCTURE. If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company or of
another corporation by reason of any reorganization, merger, consolidation, plan
of exchange, recapitalization, reclassification, stock split-up, combination of
shares or dividend payable in shares, appropriate adjustment shall be made by
the Committee in the number and kind of shares available for awards under the
Plan. In addition, the Committee shall make appropriate adjustment in the
number and kind of shares as to which outstanding options then unexercised,
shall be exercisable, so that the optionee's proportionate interest before and
after the occurrence of the event is maintained. Notwithstanding the foregoing,
the Committee shall have no obligation to effect any adjustment that would or
might result in the issuance of fractional shares, and any fractional shares
resulting from any adjustment may be disregarded or provided for in any manner
determined by the Committee. Any such adjustments made by the Committee shall
be conclusive. In the event of dissolution of the Company or a merger,
consolidation or plan of exchange affecting the Company, in lieu of providing
for options or in lieu of having the options continue unchanged, the Committee
may, in its sole discretion, provide a 30-day period prior to such event during
which optionees shall have the right to exercise options in whole or in part
without any limitation on exercisability and upon the expiration of which 30-day
period all unexercised options shall immediately terminate.
5
<PAGE>
8. AMENDMENT OF PLAN. The Board of Directors may at any time, and
from time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraph 6(d), however, no change in an
award already granted shall be made without the written consent of the holder of
such award.
9. APPROVALS. The obligations of the Company under the Plan are
subject to the approval of state and federal authorities or agencies with
jurisdiction in the matter. The Company will use its best efforts to take steps
required by state or federal law or applicable regulations, including rules and
regulations of the Securities and Exchange Commission and any stock exchange on
which the Company's shares may then be listed, in connection with the grants
under the Plan. The foregoing notwithstanding, the Company shall not be
obligated to issue or deliver Common Stock under the Plan if such issuance or
delivery would violate applicable state or federal securities laws.
10. EMPLOYMENT AND SERVICE RIGHTS. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
11. RIGHTS AS A SHAREHOLDER. The recipient of any award under the
Plan shall have no rights as a shareholder with respect to any Common Stock
until the date of issue to the recipient of a stock certificate for such shares.
Except as otherwise expressly provided in the Plan, no adjustment shall be made
for dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF PLCC AND SUBSIDIARY AS OF DEC. 31, 1999 AND THE
RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH
FLOWS FOR THE TWELVE MONTHS IN THE PERIOD ENDED DEC. 31, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 48
<RECEIVABLES> 8,008
<SECURITIES-RESALE> 2,239
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 26,930
<PP&E> 696
<TOTAL-ASSETS> 37,451
<SHORT-TERM> 0
<PAYABLES> 6,011
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 66
<LONG-TERM> 0
0
0
<COMMON> 732
<OTHER-SE> 24,682
<TOTAL-LIABILITY-AND-EQUITY> 37,451
<TRADING-REVENUE> 317
<INTEREST-DIVIDENDS> 17
<COMMISSIONS> 15,076
<INVESTMENT-BANKING-REVENUES> 2,116
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 1
<COMPENSATION> 15,693
<INCOME-PRETAX> 19,311
<INCOME-PRE-EXTRAORDINARY> 19,311
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,711
<EPS-BASIC> 3.16
<EPS-DILUTED> 3.16
</TABLE>
