SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
––––––––––
FORM 10-QSB
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter ended March 31, 2001
Commission file number: 0-18188
| PAULSON CAPITAL CORP. |
| Exact name of registrant as specified in its charter |
| Oregon | 93–0589534 |
| (State of incorporation) | (I.R.S. Employer Identification) |
| 811 S.W. Naito Parkway Portland, OR | 97204 |
| (Address of principal | (Zip Code) |
| executive offices) | |
| Registrant's telephone number, including area code: | (503) 243–6000 |
Check whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx Noo
Number of shares outstanding of each of the issuer's classes of common stock, as of May 10, 2001:
Common stock, no par value - 3,263,866 shares
Transitional Small Business Disclosure Format Yeso Nox
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited)
| ASSETS | 3/31/01 | 12/31/00 |
| CURRENT ASSETS | ||
| Cash and cash equivalents | $127,940 | $104,309 |
| Receivable from clearing organization | 4,175,585 | 8,878,083 |
| Notes and other receivables | 813,884 | 1,247,520 |
| Trading securities, at market value | 1,103,954 | 1,305,989 |
| Investment securities, at market value | 13,828,651 | 13,063,135 |
| Underwriter warrants, at estimated fair value | -- | -- |
| Prepaid and deferred expenses | 273,292 | 865,986 |
| Deferred income taxes | 5,298,000 | 5,298,000 |
| Total current assets | 25,621,306 | 30,763,022 |
| NOTE RECEIVABLE | 105,374 | 103,551 |
| FURNITURE AND EQUIPMENT, net | 467,611 | 509,676 |
| INVESTMENT IN REAL ESTATE | 169,900 | 169,900 |
| $26,364,191 | $31,546,149 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
| CURRENT LIABILITIES | ||
| Accounts payable and accrued liabilities | $185,827 | $194,399 |
| Payable to clearing organization | 713,122 | 828,859 |
| Compensation, employee benefits and payroll taxes | 370,658 | 1,037,465 |
| Securities sold, not yet purchased, at market value | 93,749 | 31,496 |
| Income taxes payable | 719,251 | 3,896,000 |
| Total current liabilities | 2,082,607 | 5,988,219 |
| Deferred income taxes | 39,100 | 39,100 |
| 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, 3,276,866 and 3,367,366, respectively | 1,059,196 | 1,080,011 |
| Retained earnings | 23,183,288 | 24,438,819 |
| Total shareholders’ equity | 24,242,484 | 25,518,830 |
| $26,364,191 | $31,546,149 |
The accompanying notes are an integral part of these statements.
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three month periods ended March 31, 2001
and March 31, 2000 (unaudited)
| 3/31/01 | 3/31/00 | |
| Revenues | ||
| Commissions | $1,931,901 | $6,348,435 |
| Corporate finance | 371,382 | 15,744 |
| Investment income | (854,566) | 17,763,423 |
| Trading income | 215,977 | 831,657 |
| Interest and dividends | 10,864 | 20,024 |
| Other | 673 | 2,694 |
| 1,676,231 | 24,981,977 | |
| Expenses | ||
| Commissions and salaries | 2,016,889 | 8,019,576 |
| Underwriting expenses | 217,397 | 4,922 |
| Rent, telephone and quotation services | 255,104 | 288,665 |
| Interest expense | 3 | -- |
| Professional fees | 71,599 | 99,920 |
| Bad debt expense | 30,000 | 30,155 |
| Travel and entertainment | 62,201 | 52,579 |
| Settlements | 1,050 | 20,000 |
| Other | 338,816 | 1,282,076 |
| 2,993,059 | 9,797,893 | |
| Earnings (loss) before income taxes | (1,316,828) | 15,184,084 |
| Provision for income taxes | ||
| Current | (526,730) | 4,128,000 |
| Deferred | -- | 1,945,000 |
| Net Earnings (Loss) | $(790,098) | $9,111,084 |
| Earnings (loss) per share | $(0.24) | $2.57 |
The accompanying notes are an integral part of these statements
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three year period ended December 31, 2000
and the three months ended March 31, 2001 (unaudited)
| Common Stock | Retained | ||
| Shares | Amount | Earnings | |
| Balance at December 31, 1997 | 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 | - | - | (1,768,640) |
| Balance at December 31, 1998 | 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 |
| Stock option grants | - | 317,750 | - |
| Stock options exercised | 16,000 | 71,000 | - |
| Redemption of common stock | (189,869) | (41,082) | (1,235,230) |
| Net earnings for the year | - | - | 991,786 |
| Balance at December 31, 2000 | 3,367,366 | $1,080,011 | $24,438,819 |
| Redemption of common stock | (90,500) | (20,815) | (465,433) |
| Net loss for year to date | - | - | (790,098) |
| Balance at March 31, 2001 | 3,276,866 | $1,059,196 | $23,183,288 |
The accompanying notes are an integral part of these statements
PAULSON CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the three month periods ended March 31, 2001 and March 31, 2000
| 3/31/01 | 3/31/00 | |
| Increase (Decrease) in Cash and Cash Equivalents | ||
| Cash flows from operating activities | ||
| Net earnings (loss) | $(790,098) | $9,111,084 |
| Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities | ||
| Unrealized (appreciation) depreciation on investment securities | 1,707,537 | (5,118,960) |
| Realized gain on investment securities | (852,971) | (12,644,464) |
| Depreciation and amortization | 50,602 | 42,222 |
| Deferred income taxes | -- | 1,945,000 |
| Change in assets and liabilities | ||
| Receivables | 5,134,311 | (17,370,838) |
| Trading securities | 202,035 | (868,172) |
| Prepaid and deferred expenses | 592,694 | 83,159 |
| Accounts payable and accrued liabilities | (791,115) | 8,691,604 |
| Securities sold, not yet purchased | 62,253 | (470) |
| Income taxes payable | (3,176,749) | 3,349,600 |
| Net cash provided by (used in) operating activities | 2,138,499 | (12,780,235) |
| Cash flows from investing activities | ||
| Purchases of investment securities | (10,890,701) | (46,977,794) |
| Proceeds from sale of investment securities | 9,270,619 | 60,022,869 |
| Additions to furniture and equipment | (8,538) | (51,471) |
| Proceeds from sale of furniture and equipment | -- | -- |
| Net cash provided by (used in) investing activities | $(1,628,620) | $12,993,604 |
| Cash flows from financing activities | ||
| Proceeds from exercise of stock options | -- | -- |
| Payments to retire common stock | (486,248) | -- |
| Decrease in bank overdraft payable | -- | -- |
| Net cash provided by (used in) financing activities | (486,248) | -- |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 23,631 | 213,369 |
| Cash and cash equivalents at beginning of period | 104,309 | 48,210 |
| Cash and cash equivalents at March 31 | $127,940 | $261,579 |
| Cash paid during the three months for | ||
| Interest | $3 | $-- |
| Income taxes | $2,650,019 | $778,400 |
The accompanying notes are an integral part of these statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for interim financial statements in Article 10 of Regulation S–X and, therefore, do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to state fairly the information shown therein. The nature of the Company's business is such that the results of any interim period are not necessarily indicative of results for a full fiscal year.
2. Securities Owned
Any losses from the disposition of securities are reflected in trading revenues on the income statement for the period.
3. Commitments and Contingencies
In October 1998, Russell W. Cummings, a former PIC customer, filed a lawsuit in California state court asserting claims against PIC and a former PIC registered representative alleging violations of the California Consumers Legal Remedies Act, fraud, negligent misrepresentation, breach of contract, tortious breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty and negligence. Plaintiff had agreed to arbitrate the matter before the NASD but never did so. Consequently, in July 2000, the California state court dismissed the case. In November 2000, the California state court reinstated the case and, in January 2001, Cummings filed an arbitration claim against PIC and its former registered representative. The complaint seeks $250,000 in actual damages and $1,500,000 in 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 August 2000, Patricia Staples, a former PIC customer, filed an NASD arbitration claim against PIC and one of its registered representatives alleging that PIC and its registered representative made certain misrepresentations and committed violations of law. Claimant is seeking $100,000 in compensatory and punitive damages. Claimant's statement of claim is vague and does not specify the alleged misrepresentations or violations of law. PIC has filed a motion to require a more definite and certain statement of claim by claimant. PIC also has filed an answer denying any liability. PIC has not had an opportunity to fully investigate this matter but intends to defend this matter vigorously.
In January 2001, V.J.E. Enterprises, Inc. and Vincent and Diana Nartker, former PIC customers, filed a complaint with PIC regarding the handling of their account by PIC and one of its registered representatives. They have asserted that their account was mismanaged and that PIC failed to supervise its registered representative. They have requested that PIC pay them $275,100. PIC has not had an opportunity to fully investigate this claim, but believes it has meritorious defenses and intends to defend this matter vigorously if an arbitration is filed.
In April 2001, Michael Swan, a PIC customer, complained that a PIC broker failed to place a stop loss order on a stock that Swan held in one of his PIC accounts. The price of the stock subsequently declined significantly and Swan now claims that PIC and its broker failed to place the stop loss, resulting in a loss of $125,000. Swan has demanded that PIC pay this amount to him. PIC has not had an opportunity to fully investigate this claim.
An adverse outcome in certain of the matters described above could have a material adverse effect on PIC or the Company. PIC has been named in certain other legal proceedings and has received notice that certain customers may commence legal proceedings against PIC. The Company believes, based upon information received to date and, where the Company believes it appropriate, discussions with legal counsel, that resolution of this additional pending or threatened litigation will have no material adverse effect on the consolidated financial condition, results of operations, or business of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Three Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000
Results of Operations
The revenues and operating results of the Company's operating subsidiary, Paulson Investment Company, Inc. ("PIC"), are influenced by fluctuations in the equity underwriting markets as well as general economic and market conditions, particularly conditions in the over-the-counter market, where PIC's investment account, trading inventory positions and underwriter warrants are heavily concentrated. Significant fluctuations can occur in PIC's revenues and operating results from one period to another. PIC's financial results depend upon many factors, such as the number of companies that are seeking public financing, the quality and financial condition of those companies, market conditions in general, the performance of previous PIC underwritings and interest in certain industries by investors. As a result, revenues and income derived from these activities may vary significantly from period to period. In the table below, "Trading Income" is the net gain or loss from trading positions before commissions paid to the representatives in the trading department.
Summary of Changes in Major Categories
of Revenues and Expenses
| Quarters Ended | ||
| 3/31/01 vs. 3/31/00 | ||
| Revenues: | ||
| Sales Commissions | $(4,416,534) | -69.6 % |
| Corporate Finance | 355,638 | 2,258.9 % |
| Investment Income | (18,617,989) | -104.8 % |
| Trading Income | (615,680) | -74.0 % |
| Other | (11,181) | -49.2 % |
| Total | $(23,305,746) | -93.3 % |
| Expenses: | ||
| Commissions and Salaries | $(6,002,687) | -74.8 % |
| Underwriting Expenses | 212,475 | 4,316.8 % |
| Rent, Telephone and Quotes | (33,561) | -11.6 % |
| Other | (981,061) | -66.1 % |
| Total | $(6,804,834) | -69.4 % |
| Pretax Income | $(16,500,912) | -108.7 % |
Total revenues for the first quarter of 2001 fell 93.3 percent from the first quarter of 2000, from $24,981,977 to $1,676,231. As shown in the table above, sales commissions fell $4,416,534, or 69.6 percent, from $6,348,435 in the first quarter of 2000 to $1,931,901 in the comparable 2001 period. This decrease resulted primarily from the less favorable price movements and trading levels in the stock market, especially the market for the very small capitalization issues (the primary focus of PIC's investment banking and trading businesses) in the 2001 quarter compared to 2000. The Nasdaq Industrial Average rose 8.09 percent in the first quarter of 2000 but fell 17.05 percent in the first quarter of 2001. Corporate finance revenues rose $355,638 in the first quarter of 2001 compared to the first quarter of 2000, to $371,382 from $15,744. One transaction for $10 million was completed in the first quarter of 2001; no transactions were completed in the 2000 quarter. Corporate finance revenue is directly related to the amount of money raised in completed transactions. Investment income fell from $17,763,423 in the first quarter of 2000 to a loss of $854,566 in the first quarter of 2001. There were no underwriter warrant exercises in the 2001 quarter, while four were exercised in 2000. Investment income was all due to net losses in investment securities unrelated to underwriter warrants. Trading income fell $615,680, or 74.0 percent, to $215,977 in the first quarter of 2001 from $831,657 in the comparable 2000 period. This decrease was also due to decreased prices and trading in the market for very small capitalization companies described above. Other Income declined $11,181, from $22,718 in the first quarter of 2000 to $11,537 in the 2001 quarter, due primarily to a decline in interest and dividend income.
Total expenses fell $6,804,834 in the first quarter of 2001 from the comparable 2000 period, a decrease of 69.4 percent, from $9,797,893 to $2,993,059. Commissions and salaries fell $6,002,687, or 74.8 percent, from $8,019,576 in the 2000 period to $2,016,889 in 2001. This decrease was primarily due to lower bonus and compensation arrangements related to lesser investment and trading profits and decreased commission revenues resulting in a lower level of commissions paid. (Higher percentage commission levels are generally paid to employee registered representatives at higher production levels.) Underwriting expenses rose $212,475, from $4,922 in the 2000 quarter to $217,397 in the first quarter of 2001. No transactions were completed in the 2000 period, while one transaction was completed in 2001. Rent, telephone and quote expenses decreased from $288,665 in the 2000 period to $255,104 in 2001, a decrease of 11.6 percent, primarily due to expenses related to improvements in quotation and phone systems in the 2000 quarter. The aggregate of all other expenses fell 66.1 percent, from $1,484,730 in the first quarter of 2000 to $503,669 in the first quarter of 2001, primarily due to decreased accrual for PIC's profit sharing.
The Company had a pretax profit of $15,184,084 in the first quarter of 2000 compared to a pretax loss of $1,316,828 in the comparable 2001 period, primarily due to the decrease in investment income and, to a lesser extent, decreased sales commissions and trading income. Significant fluctuations can occur in PIC's revenues and operating results from one period to another.
The Company also accrued $6,073,000 in income taxes for the first quarter of 2000, compared to an estimated tax benefit for income taxes in the first quarter of 2001 of $526,730. Independent of investment income, the Company would have had a loss before income taxes in both quarters.
Liquidity and Capital Resources
The majority of PIC's assets are cash and assets readily convertible to cash. PIC's securities inventory is stated at market value. The liquidity of the market for many of PIC's securities holdings, however, varies with trends in the stock market. Since many of the securities held by PIC are thinly traded, and PIC is in many cases a primary market maker in the issues held, any significant sales of PIC's positions could adversely affect the liquidity of the issues held. In general, falling prices in OTC securities (which make up most of PIC's trading positions) lead to decreased liquidity in the market for these issues, while rising prices in OTC issues tend to increase the liquidity of the market for these securities. The overall increase in prices for the OTC securities traded by PIC in early 2000 and 1999 was combined with a general increase in the liquidity of the markets for these securities. The decline in prices for the OTC securities traded by PIC to date in 2001 and late 2000 was combined with a general decrease in the liquidity of the markets for these securities. PIC's investment account and trading inventory accounts are stated at fair market value, which is at or below quoted market price.
PIC borrows money from its clearing firm in the ordinary course of its business, pursuant to an understanding under which the clearing firm agrees to finance PIC's trading accounts. As of March 31, 2001, no net loans were outstanding pursuant to this arrangement. PIC and the Company are generally able to meet their compensation and other obligations out of current liquid assets.
Another source of capital to PIC and the Company has been the underwriter warrants issued to PIC in connection with its corporate finance activities and the sale of the underlying securities. These warrants are reflected on the balance sheet of PIC and the Company at their estimated fair value, with estimated discounts for lack of marketability. While the warrants and the securities issuable upon exercise of the warrants are not immediately saleable, PIC receives the right to require the issuer to register the underlying securities for resale to the public. Profits, if any, from the warrants are recognized based upon the difference between the market price and the exercise price less discounts, if any, for trading volume, the remaining warrant exercise period and other factors. Further profits or losses are subsequently realized when the underlying securities are sold. Profits and losses recognized from the warrants are recorded as "Investment Income." There is no public market for the underwriter warrants. The securities receivable upon exercise of the underwriter warrants cannot be resold unless the issuer has registered these securities with the SEC and the states in which the securities will be sold or exemptions are available. Any delay or other problem in the registration of these securities would have an adverse impact upon PIC's ability to obtain funds from the exercise of the underwriter warrants and the resale of the underlying securities. At March 31, 2001, PIC owned 24 underwriter warrants (from 23 issuers), of which 20 were currently exercisable; none 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. (A warrant with an exercise price above the market price for the underlying security is valued at zero. If the exercise price is below the market price, the value is the amount of the aggregate spread, discounted for lack of liquidity.) 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 March 31, 2001, the Company placed no value on PIC's underwriter warrants that had an exercise price below the current market price of the securities issuable upon exercise. 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.
As a securities broker–dealer, the Company's wholly owned subsidiary, PIC, is required by SEC regulations to meet certain liquidity and capital standards. At March 31, 2001, the Company had no material commitments for capital expenditures.
In general, the primary ongoing sources of PIC's, and therefore the Company's, liquidity, including PIC's trading positions, borrowings on those positions and profits recognized from underwriter warrants, all depend in large part on the trend in the general markets for OTC securities. Rising OTC price levels will tend to increase the value and liquidity of PIC's trading positions, the amount that can be borrowed from its clearing firm based upon those positions, and the value of PIC's underwriter warrants. The Company believes its liquidity is sufficient to meet its needs for the foreseeable future.
Inflation
Because PIC's assets are primarily liquid, they are not significantly affected by inflation. The rate of inflation affects PIC's expenses, such as employee compensation, office leasing and communications costs. These costs may not readily be recoverable in the price of services offered by the Company. To the extent inflation results in rising interest rates and has other adverse effects in the securities markets and the value of securities held in inventory or PIC's investment account, it may adversely affect the Company's financial position and results of operations.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 of Notes to Condensed Consolidated Financial Statements in Item 1.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits - None
No Reports on Form 8-K were filed during the quarter ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PAULSON CAPITAL CORP. | ||
| Date: May 7, 2001 | By: | /s/ CHESTER L.F. PAULSON |
| Chester L.F. Paulson | ||
| President | ||
| Date: May 7, 2001 | By: | /s/ CAROL RICE |
| Carol Rice | ||
| Principal Accounting Officer | ||
EXHIBIT INDEX
None
