**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON D.C. 20549**

 

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**FORM 10-QSB**

 
| **ý****QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30,2003**

 
| **o****TRANSITION REPORT  UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------|

 

**For the transition period from              to              **

 

**Commission file number: 0-18188**

 
| **PAULSON CAPITAL CORP.**                                          |
|--------------------------------------------------------------------|
| (Exact name of small business issuer as  specified in its charter) |
|                                                               |
| **Oregon**                                                         |
| (state or other jurisdiction of  incorporation or organization)    |
|                                                               |
| **93-0589534**                                                     |
| (IRS employer identification number)                               |
|                                                               |
| **811 S.W. Naito Parkway  Portland, OR 97204**                     |
| (Address of principal executive offices)                           |
|                                                               |
| **(503) 243-6000**                                                 |
| (Issuer’s telephone number)                                   |

 

Number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date:

 

Common stock, no par value—3,110,811 sharesas of August 11, 2003

 

Transitional Small Business Disclosure Format(check  one): Yes  o    No ý

 

 

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**PARTI — FINANCIAL INFORMATION**

 

ITEM 1. FINANCIAL STATEMENTS

 

PAULSON CAPITAL CORP. ANDSUBSIDIARYCONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                |   | **6/30/03**     |       | **12/31/02** |       |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|--------------|------------|
|                                                                                                                                |   | **(unaudited)** |       |         |       |
| **ASSETS**                                                                                                                          |   |            | ** ** |         | ** ** |
|                                                                                                                                |   |            | ** ** |         | ** ** |
| Cash and cash equivalents                                                                                                           |   | $               | 42,416     |         | $          | 97,630 |   |
| Receivable from clearing organization                                                                                               |   | 9,302,685       |       | 3,926,749    |       |
| Notes and other receivables                                                                                                         |   | 781,507         |       | 681,655      |       |
| Income taxes receivable                                                                                                             |   | 99,517          |       | 1,894,000    |       |
| Trading securities, at market value                                                                                                 |   | 2,437,254       |       | 2,725,081    |       |
| Investment securities, at market value                                                                                              |   | 14,220,803      |       | 15,656,235   |       |
| Underwriter warrants, at estimated fair  value                                                                                      |   | 4,443,000       |       | 2,714,000    |       |
| Prepaid and deferred expenses                                                                                                       |   | 1,082,202       |       | 1,158,738    |       |
| Furniture  and equipment, net                                                                                                       |   | 223,047         |       | 257,559      |       |
|                                                                                                                                |   |            |       |         |       |
| Total  assets                                                                                                                       |   | $               | 32,632,431 |         | $          | 29,111,647 |   |
|                                                                                                                                |   |            |       |         |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                      |   |            |       |         |       |
|                                                                                                                                |   |            |       |         |       |
| **LIABILITIES**                                                                                                                     |   |            |       |         |       |
| Accounts payable and accrued liabilities                                                                                            |   | $               | 636,895    |         | $          | 524,886 |   |
| Payable to clearing organization                                                                                                    |   | 1,565,765       |       | 2,087,907    |       |
| Compensation, employee benefits and payroll  taxes                                                                                  |   | 1,734,809       |       | 595,052      |       |
| Securities sold, not yet purchased, at  market value                                                                                |   | 1,968,406       |       | 60,843       |       |
| Deferred income taxes                                                                                                               |   | 350,000         |       | —       |       |
|                                                                                                                                |   |            |       |         |       |
| Total liabilities                                                                                                                   |   | 6,255,875       |       | 3,268,688    |       |
|                                                                                                                                |   |            |       |         |       |
| **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, 3,117,811 at 6/30/03 and 3,125,811  at 12/31/02 |   | 1,084,740       |       | 1,086,740    |       |
| Retained earnings                                                                                                                   |   | 25,291,816      |       | 24,756,219   |       |
|                                                                                                                                |   |            |       |         |       |
| Total  shareholders’ equity                                                                                                    |   | 26,376,556      |       | 25,842,959   |       |
|                                                                                                                                |   |            |       |         |       |
| Total  liabilities and shareholders’ equity                                                                                    |   | $               | 32,632,431 |         | $          | 29,111,647 |   |

 

The accompanying notes are an integral part of these statements.

 

2

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PAULSONCAPITAL CORP. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)

 
|                                                    |   | **Three  months ended** |      | **Six months  ended** |   |
|---------------------------------------------------------|--------|-------------------------|-----------|-----------------------|--------|
|                                                    |   | **6/30/03**             |      | **6/30/02**           |   | **6/30/03** |   | **6/30/02** |   |
|                                                    |   |                    |      |                  |   |   |   |   |   |
| **Revenues**                                            |   |                    |      |                  |   |   |   |   |   |
| Commissions                                             |   | $                       | 4,288,954 |                  | $      | 1,698,313 |   | $ | 6,726,739 |   | $ | 3,325,454 |   |
| Corporate finance                                       |   | 2,337,428               |      | 8,332                 |   | 2,362,791 |   | 85,655 |   |
| Investment income (loss)                                |   | 4,776,792               |      | (9,400,728            | )      | 548,718 |   | (8,434,392 | ) |
| Trading income (loss)                                   |   | 850,054                 |      | (120,335              | )      | 434,463 |   | (428,354 | ) |
| Interest and dividends                                  |   | 10,747                  |      | 18,809                |   | 30,553 |   | 39,673 |   |
| Other                                                   |   | 840                     |      | 617                   |   | 1,645 |   | 734 |   |
|                                                    |   |                    |      |                  |   |   |   |   |   |
|                                                    |   | 12,264,815              |      | (7,794,992            | )      | 10,109,409 |   | (5,411,230 | ) |
| **Expenses**                                            |   |                    |      |                  |   |   |   |   |   |
| Commissions and salaries                                |   | 4,782,936               |      | 1,738,766             |   | 7,233,452 |   | 3,807,190 |   |
| Underwriting expenses                                   |   | 111,298                 |      | —                |   | 111,298 |   | — |   |
| Rent, telephone and quotation services                  |   | 286,795                 |      | 210,973               |   | 552,307 |   | 464,695 |   |
| Interest expense                                        |   | —                  |      | —                |   | — |   | 7,130 |   |
| Professional fees                                       |   | 173,446                 |      | 163,715               |   | 319,485 |   | 307,014 |   |
| Bad debt expense                                        |   | 130,000                 |      | 30,000                |   | 160,000 |   | 60,000 |   |
| Travel and entertainment                                |   | 78,953                  |      | 93,636                |   | 118,434 |   | 163,114 |   |
| Settlements                                             |   | 11,850                  |      | —                |   | 11,850 |   | 85,000 |   |
| Other                                                   |   | 372,503                 |      | 381,760               |   | 679,491 |   | 704,264 |   |
|                                                    |   |                    |      |                  |   |   |   |   |   |
|                                                    |   | 5,947,781               |      | 2,618,850             |   | 9,186,317 |   | 5,598,407 |   |
|                                                    |   |                    |      |                  |   |   |   |   |   |
| Earnings (loss) before income taxes                     |   | 6,317,034               |      | (10,413,842           | )      | 918,592 |   | (11,009,637 | ) |
|                                                    |   |                    |      |                  |   |   |   |   |   |
| Income tax expense (benefit)                            |   |                    |      |                  |   |   |   |   |   |
| Current                                                 |   | —                  |      | (685,000              | )      | — |   | (920,000 | ) |
| Deferred                                                |   | 350,000                 |      | (3,480,000            | )      | 350,000 |   | (3,480,000 | ) |
|                                                    |   |                    |      |                  |   |   |   |   |   |
| **Net Earnings (Loss)**                                 |   | $                       | 5,967,034 |                  | $      | (6,248,842 | ) | $ | 568,592 |   | $ | (6,609,637 | ) |
|                                                    |   |                    |      |                  |   |   |   |   |   |
| Earnings (loss) per share, basic and  diluted           |   | $                       | 1.91      |                  | $      | (1.99 | ) | $ | 0.18 |   | $ | (2.10 | ) |
|                                                    |   |                    |      |                  |   |   |   |   |   |
| Weighted average number of shares  outstanding, basic   |   | 3,117,811               |      | 3,142,700             |   | 3,119,844 |   | 3,151,313 |   |
|                                                    |   |                    |      |                  |   |   |   |   |   |
| Weighted average number of shares  outstanding, diluted |   | 3,118,488               |      | 3,142,700             |   | 3,120,517 |   | 3,151,313 |   |

 

The accompanying notes are anintegral part of these statements

 

3

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PAULSON CAPITAL CORP. ANDSUBSIDIARYCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITYFor the two year period ended December 31, 2001 and 2002and the six month period ended June 30, 2003

 
|                                           |   | **Common  Stock** |   | **Retained  Earnings** |      |
|------------------------------------------------|--------|-------------------|--------|------------------------|-----------|
|                                           |   | **Shares**        |   | **Amount**             |      |   |
| Balance at December 31, 2000              |   | 3,367,366         |   | $                      | 1,080,011 |   | $ | 26,104,819 |   |
|                                           |   |              |   |                   |      |   |   |
| Stock options exercised                        |   | 7,000             |   | 31,063                 |      | — |   |
|                                           |   |              |   |                   |      |   |   |
| Redemption of common stock                     |   | (211,304          | )      | (48,646                | )         | (1,073,350 | ) |
|                                           |   |              |   |                   |      |   |   |
| Net earnings for the year                      |   | —            |   | —                 |      | 7,037,062 |   |
|                                           |   |              |   |                   |      |   |   |
| Balance at December 31, 2001              |   | 3,163,062         |   | $                      | 1,062,428 |   | $ | 32,068,531 |   |
|                                           |   |              |   |                   |      |   |   |
| Stock options exercised                        |   | 8,000             |   | 35,500                 |      | — |   |
|                                           |   |              |   |                   |      |   |   |
| Redemption of common stock                     |   | (45,251           | )      | (11,188                | )         | (301,158 | ) |
|                                           |   |              |   |                   |      |   |   |
| Net loss for year to date                      |   | —            |   | —                 |      | (7,011,154 | ) |
|                                           |   |              |   |                   |      |   |   |
| Balance at December 31, 2002              |   | 3,125,811         |   | $                      | 1,086,740 |   | $ | 24,756,219 |   |
|                                           |   |              |   |                   |      |   |   |
| Stock options exercised (unaudited)            |   | —            |   | —                 |      | — |   |
|                                           |   |              |   |                   |      |   |   |
| Redemption of common stock (unaudited)         |   | (8,000            | )      | (2,000                 | )         | (32,995 | ) |
|                                           |   |              |   |                   |      |   |   |
| Net earnings for the year to date  (unaudited) |   | —            |   | —                 |      | 568,592 |   |
|                                           |   |              |   |                   |      |   |   |
| Balance at June 30, 2003 (unaudited)      |   | 3,117,811         |   | $                      | 1,084,740 |   | $ | 25,291,816 |   |

 

The accompanying notes are an integral partof these statements

 

4

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PAULSON CAPITAL CORP. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)

 
|                                                                                        |   | **Six months  ended** |    |
|---------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                        |   | **6/30/03**           |    | **6/30/02** |   |
| Increase (Decrease) in Cash and Cash  Equivalents                                           |   |                  |    |   |   |
|                                                                                        |   |                  |    |   |   |
| Cash flows from operating activities                                                        |   |                  |    |   |   |
| Net earnings (loss)                                                                         |   | $                     | 568,592 |   | $ | (6,609,637 | ) |
| Adjustments to reconcile net earnings  (loss) to net cash provided by operating activities: |   |                  |    |   |   |
| Receipt of underwriter warrants                                                             |   | (1,413,378            | )       | (68,391 | ) |
| Unrealized (appreciation) depreciation and  expiration of underwriter warrants              |   | (315,622              | )       | 3,437,391 |   |
| Depreciation and amortization                                                               |   | 76,654                |    | 96,103 |   |
| Deferred income taxes                                                                       |   | 350,000               |    | — |   |
| Change in assets and liabilities                                                            |   |                  |    |   |   |
| Receivables                                                                                 |   | (5,475,788            | )       | 3,242,360 |   |
| Trading and investment securities                                                           |   | 1,723,259             |    | 3,592,129 |   |
| Prepaid and deferred expenses                                                               |   | 76,536                |    | 227,870 |   |
| Accounts payable and accrued liabilities                                                    |   | 729,624               |    | (1,115,372 | ) |
| Securities sold, not yet purchased                                                          |   | 1,907,563             |    | 358,062 |   |
| Income taxes payable/receivable                                                             |   | 1,794,483             |    | (2,906,269 | ) |
|                                                                                        |   |                  |    |   |   |
| Net cash provided by operating activities                                                   |   | 21,923                |    | 254,246 |   |
|                                                                                        |   |                  |    |   |   |
| Cash flows from investing activities  Additions to furniture and equipment                  |   | (42,142               | )       | (72,472 | ) |
|                                                                                        |   |                  |    |   |   |
| Net cash used in investing activities                                                       |   | (42,142               | )       | (72,472 | ) |
|                                                                                        |   |                  |    |   |   |
| Cash flows from financing activities                                                        |   |                  |    |   |   |
| Proceeds from exercise of stock options                                                     |   | —                |    | 35,500 |   |
| Payments to retire common stock                                                             |   | (34,995               | )       | (253,477 | ) |
|                                                                                        |   |                  |    |   |   |
| Net cash used in financing activities                                                       |   | (34,995               | )       | (217,977 | ) |
|                                                                                        |   |                  |    |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                       |   | (55,214               | )       | (36,203 | ) |
|                                                                                        |   |                  |    |   |   |
| Cash and cash equivalents at beginning of  period                                           |   | 97,630                |    | 42,938 |   |
|                                                                                        |   |                  |    |   |   |
| Cash and cash equivalents at end of period                                                  |   | $                     | 42,416  |   | $ | 6,735 |   |
|                                                                                        |   |                  |    |   |   |
| Cash paid during the period                                                                 |   |                  |    |   |   |
|                                                                                        |   |                  |    |   |   |
| Interest                                                                                    |   | $                     | —  |   | $ | 7,130 |   |
| Income taxes                                                                                |   | $                     | 5,225   |   | $ | 35,095 |   |

 

The accompanying notes are an integral partof these statements

 

5

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**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**(unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with the instructions for interim financial statementsin Item 310(b) of Regulation S-B and, therefore, do not include all informationand footnotes required by generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, the interim financial statements include all adjustments (consistingonly of normal recurring adjustments) necessary to state fairly the informationshown therein.  The nature of theCompany’s business is such that the results of any interim period are notnecessarily indicative of results for a full fiscal year.

 

2. Securities Owned

 

Gains and losses from the disposition of securities are reflected astrading revenues in the income statement for the period.

 

3. Commitments and Contingencies

 

On November 7, 2001, the Company and its wholly owned subsidiary,Paulson Investment Company, Inc., or PIC, were named as defendants in a lawsuitfiled by Spirit Partners, L.P. and Tech-Trade Capital LLC.  The lawsuit was filed in the Supreme Courtof the State of New York for the County of New York.  The lawsuit alleges that PIC committed fraud and was unjustlyenriched in connection with the redemption of warrants issued in the initialpublic offering of audiohighway.com, for which PIC served as underwriter.  According to plaintiffs, the warrantagreement and prospectus contain different provisions governing the redemptionof the warrants.  This allegedlyoccurred because the redemption provisions were changed during the registrationprocess, and the warrant agreement was not amended to reflect the change inprovisions.  audiohighway.com’sredemption was proper under the terms of the prospectus, which contains theupdated redemption provisions and allowed the issuer to redeem when the closingbid price of the common stock was at least $13.50 for 10 calendar days.  Plaintiffs allege that the redemption wasimproper under the terms of the warrant agreement, which they allege containsthe original redemption provisions and allows the issuer to redeem when theclosing bid price of the common stock exceeded $13.50 for 20 consecutivetrading days.  Plaintiffs also allegethat counsel for audiohighway.com and PIC fraudulently concealed the allegeddiscrepancy between the prospectus and warrant agreement by amending thewarrant agreement to be consistent with the prospectus.  Plaintiffs claim unspecified monetarydamages and seek $3 million in punitive damages. The lawsuit has been stayed,pending mandatory arbitration before the NASD. The arbitration is in a very early stage and the Company and PIC arecurrently conducting discovery. However, the Company and PIC believe that they have meritorious defensesto these claims and intend to defend the case vigorously.

 

In January 2002, PIC was served in an arbitration brought by oneof its former customers, Patricia Weber, against PIC and its registeredrepresentative Melvin Vukcevich.  Thearbitration claim alleges unsuitable securities recommendations,misrepresentation, breach of fiduciary duty and negligence.  The claimant is seeking damages of $255,000,interest, an additional return on her portfolio, punitive damages and attorneyfees.  PIC has filed its answer.  PIC believes it has meritorious defenses andintends to defend these matters vigorously.

 

In March 2002, PIC and one of its registered representatives,Marvin Cox, were named as defendants in lawsuits filed by Louis Barinaga andStuart Mackenzie, former PIC customers. The claims of Barinaga and Mackenzie relate to purchases of convertiblenotes of E.com, which were purchased directly from E.com.  Barinaga and Mackenzie allege that PIC andMr. Cox participated in and materially aided the sale of the notes and,therefore, are liable under state securities law.  Barinaga and Mackenzie allege damages of $717,000 and $165,000,respectively, plus interest and attorney fees. PIC asserted that the claims aresubject to arbitration. Plaintiffs have abated their lawsuit and refiled theirclaims before the NASD.  PIC iscurrently conducting discovery and believes it has meritorious defenses andintends to defend this matter vigorously. The arbitration hearing in this matter is scheduled to beginNovember 3, 2003 in Portland, Oregon.

 

In October 2002, PIC was named as a defendant in a lawsuit filedby Special Situations Fund III, LP and Special Situations Cayman Fund, LP.  The lawsuit was filed in U.S. FederalDistrict Court for the State of New Jersey. It asserts various federal securities law claims and common law fraudand negligence against numerous defendants, including PIC, arising out of twosecondary offerings of Suprema Specialties, Inc.  PIC participated in one of the two offerings, the August 25,2000 secondary offering of Suprema Specialities, Inc., as a member of theunderwriting syndicate, underwriting 75,000 shares in total.  The plaintiffs seek damages for the purchaseof 399,151 shares of Suprema Specialities, Inc. stock between August 25,2000 and November 14, 2001.

 

6

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On January 15, 2003, PIC filed a motion to dismiss all claimsbrought by plaintiffs.  PIC’s motion todismiss was argued April 14, 2003. On June 25, 2003, all claims against PIC were dismissed.  Plaintiffs were given 60 days to formallymove to amend their complaint by the submission of a proposed amendedcomplaint.  PIC believes it hasmeritorious defenses and intends to defend this matter vigorously.

 

In December 2002, PIC and its former registered representative,Wayde Newman, were named as respondents in arbitration claims filed by EugeneV. Doty.  Mr. Doty asserts claims forfraud, breach of fiduciary duty, and violations of Colorado consumer andsecurities acts and violations of NASD rules. Mr. Doty seeks $2,300,000, interest, attorney fees and punitive andtreble damages.  The arbitration in thiscase is scheduled for December 2, 2003. PIC is investigating this claim, but believes it has meritorious defensesand intends to defend this matter vigorously.

 

In January 2003, Joanne Thies, a former PIC customer, filed anarbitration claim with the NASD, naming PIC and Peter Jones, a current PICregistered representative, as respondents. Ms. Thies asserts claims for negligence, failure to supervise, fraud andsecurities law violations relating to her account.  The claimant seeks damages of $457,000, attorney fees, costs andexpenses.  PIC has not had anopportunity to fully investigate this claim, but believes it has meritoriousdefenses and intends to defend this matter vigorously.

 

In February 2003, Brock and Julie Belt, former PIC customers,filed an arbitration claim with the NASD, naming PIC as a respondent.  The statement of claim alleges unsuitablesecurities recommendations and seeks $700,000 in damages, plus attorney feesand interest.  PIC has not had anopportunity to fully investigate this claim, but believes it has meritoriousdefenses and intends to defend this matter vigorously.

 

In May 2003, Tony and Toby Velarde, former PIC customers, filed anarbitration claim with the NASD, naming PIC as a respondent.  The statement of claim alleges negligence,churning, breach of fiduciary duty, failure to supervise and securities lawviolations and seeks $710,000 in damages, plus interest and attorney fees.  PIC has not had an opportunity to fullyinvestigate this claim, but believes it has meritorious defenses and intends todefend this matter vigorously.

 

In addition to the matters described above, PIC has information thatcertain former customers may file claims against it; however, no such claimshave been asserted at this time.  PIChas no information regarding what amounts, if any, may be sought from PIC butbelieves the amounts may be material. PIC has not had an opportunity to fully investigate these claims, butbelieves it has meritorious defenses and intends to defend these mattersvigorously if any claims are filed.

 

An adverse outcome in certain of the matters described above could havea material adverse effect on PIC or the Company. PIC also has been named incertain other legal proceedings and has received notice that certain customersmay commence legal proceedings against PIC. The Company believes, based uponinformation received to date and, where the Company believes it appropriate,discussions with legal counsel, that resolution of this additional pending orthreatened litigation will have no material adverse effect on the consolidatedfinancial condition, results of operations, or business of the Company.

 

4. Stock Options

 

The Company has a stock-based employee compensation plan. The Companyaccounts for its stock option plan under SFAS No. 123 “Accounting forStock-Based Compensation.” As allowed under this statement, the Companycontinues to account for stock options for employees under APB No. 25,“Accounting for Stock Issued to Employees,” and has adopted the disclosure onlyrequirements of SFAS No. 123.

 

There were no stock option grants in the three month period ended June30, 2003. In the period ended June 30, 2002, no stock-based employeecompensation cost is reflected in net income, since all options granted underthe plan had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensationfor the six months ended June 30, 2002. The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model with the followingweighted-average assumption: no dividends; expected volatility of 68%;risk-free interest rate of 4.8%; and expected life of 5 years. There would beno effect on net income and earnings per share for the six months endedJune 30, 2003 because there was no vesting of options during the six monthperiod.

 
| Net loss, as reported                                                                                                                         |   | $        | (6,609,637 | ) |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|---|
| Deduct: Total stock-based  employee compensation expense determined under fair value based method for  all awards, net of related tax effects |   | (130,000 | )          |
| Pro forma net loss                                                                                                                            |   | $        | (6,739,637 | ) |
| Loss per share:                                                                                                                               |   |     |       |
| Basic and diluted - as reported                                                                                                               |   | $        | (2.10      | ) |
| Basic and diluted - pro forma                                                                                                                 |   | $        | (2.14      | ) |

 

7

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ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OR PLAN OF OPERATION

 

**General**

 

FORWARD-LOOKING STATEMENTS

 

This report, including, without limitation, “Item 2: Management’sDiscussion and Analysis or Plan of Operation,” contains or incorporates bothhistorical and “forward-looking” statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Wordssuch as “anticipates”, “believes”, “expects”, “intends”, “future” and similarexpressions identify forward-looking statements.  Any such forward-looking statements in this report reflect ourcurrent views with respect to future events and financial performance and aresubject to a variety of factors that could cause our actual results to differmaterially from historical results or from anticipated results expressed orimplied by such forward-looking statements. Because of such factors, we cannot assure you that the resultsanticipated in this report will be realized. As noted elsewhere in this report, various aspects of our business aresubject to extreme volatility often as a result of factors beyond our abilityto anticipate or control.  In particular,factors, such as the condition of securities markets, which are in turn basedon popular perceptions of the health of the economy generally, can be expectedto affect the volume of our business as well as the value of the securitiesmaintained in our trading and investment accounts.  Other factors that may affect our future financial condition orresults of operations include the following:

 

•                  The performanceof companies whose securities we have underwritten or otherwise sold to ourcustomers may affect our reputation with other potential syndicate and sellinggroup members and institutional and other retail accounts and may also affectthe amount of money in our customers’ portfolios available for the kinds ofinvestments that we offer.

 

•                  The value of ourinvestment portfolio, including the value of securities without a readilyascertainable market value, that we have estimated for the purpose of reportingon our financial condition and results of operations, may be significantly andadversely affected by changes in the value of the companies themselves or ofcomparable companies whose stock values we use in estimating the value of ourportfolio securities.

 

•                  We are subjectto a very high degree of regulation and are responsible for compliance withapplicable regulations by all of our personnel.  A significant regulatory infraction by us or any of ourregistered representatives could result in significant penalties, including theloss of our license to conduct securities business in one or more jurisdictions.

 

•                  Alternativesavailable to our customers to transact securities trades could affect ourability to continue to execute our brokerage customers’ transactions.

 

•                  The loss of ourChairman, Chester Paulson, could have a material adverse impact on our business.

 

**Overview**

 

Substantially all of our business consists of the securities brokerageand investment banking activities of our wholly owned subsidiary, PaulsonInvestment Company, Inc., or PIC. PIC has operations in four principalcategories, all of them in the financial services industry. These categoriesare:

 

•                                          securitiesbrokerage activities for which PIC earns commission revenues;

 

•                                          corporatefinance revenues consisting principally of underwriting discounts, underwriterwarrants received, and other compensation from investment banking activities;

 

•                                          securitiestrading from which PIC records profit or loss, depending on trading results;and

 

•                                          investmentincome resulting from profits from, and increases or decreases in the value of,PIC’s investment portfolio.

 

Because we operate in the financial services industry, our revenues andearnings are substantially affected by conditions in financial marketsgenerally. In our securities brokerage and corporate finance businesses, theamount of our revenues depends

 

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substantially on levels ofmarket activity requiring the services we provide. For example, our investmentbanking activity, which consists primarily of acting as managing orparticipating underwriter of initial and follow-on public offerings for smallercompanies, depends on the market for new equity offerings, which hashistorically experienced substantial cyclical fluctuation. Although we attemptto match operating costs with activity levels, many of our expenses are eitherfixed or difficult to change on short notice. Accordingly, fluctuations inbrokerage and corporate finance revenues tend to result in sharperfluctuations, on a percentage basis, in net income or loss.

 

Our investment income or loss and, to a lesser extent, our tradingincome or loss are affected by changes in market valuation of securitiesgenerally and, in particular, by changes in valuation of the equity securitiesof microcap companies in which our investments and trading activities tend tobe concentrated. Equity markets in general, and microcap equity markets inparticular, have always experienced significant volatility and this volatilityhas in recent years been extreme. The results of this volatility on the valueof our investment portfolio and securities held in connection with our tradingand investment activities include large quarterly fluctuations in income orloss from these operations and substantial increases or decreases in our networth as our securities holdings are marked to market.

 

A substantial portion of our investment banking business consists ofacting as managing underwriter of initial and follow-on public offerings formicrocap companies. As a part of our underwriter compensation for thisactivity, we typically receive warrants exercisable to purchase securitiesidentical to those that we offer and sell to the public. The underwriterwarrants are not exercisable for the first year after the offering in whichthey are earned and are thereafter generally exercisable for four years, afterwhich they expire. The exercise price is typically 120% of the price at whichwe initially sold the securities to the public. Accordingly, unless there is atleast a 20% increase in the price of these securities at some time more thanone and less than five years after the offering, the warrants will remain“under water” and will ultimately expire unexercised.

 

**Critical Accounting Policies**

 

The following discussion and analysis of our financial condition andresults of operations is based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Inpreparing our consolidated financial statements, we must make estimates andjudgments that affect the reported amounts of assets and liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities atthe date of our financial statements. Actual results are likely to differ from these estimates under differentassumptions and conditions.

 

The critical accounting policies described below include those thatreflect significant judgments and uncertainties, which potentially couldproduce materially different results under different assumptions andconditions.  We believe our criticalaccounting policies are limited to those described below.

 

*Use of Estimates*. Weare required to estimate the value of all derivative securities that we hold atthe date of any financial statements and to include that value, and changes insuch value, in those financial statements. Accordingly, the aggregate estimated value of our underwriter warrantsas of the date of any balance sheet is recorded as an asset on that balancesheet. When a new warrant is earned as a result of our investment bankingactivity, its estimated value is included in corporate finance revenue for theperiod in which it is earned. In subsequent periods, any change in estimatedvalue is recorded as investment income for the period. If, and when, anunderwriter warrant is exercised, the book value is adjusted to reflect thevalue of the securities purchased, net of the exercise price, and theadjustment amount is recorded as investment income or loss for the relevantperiod. If the warrant expires unexercised, the book value is adjusted to zeroand the decrease is recorded as a loss in the relevant period.

 

We estimate the value of our underwriter warrants using theBlack-Scholes Option Pricing Model.  TheBlack-Scholes model requires us to use historical price data combined withvarious other assumptions and judgments as inputs for the model.  The most influential factor in this model isprice volatility, which we calculate for each company’s warrants, based on eachcompany’s own historical stock price movements as well as an index ofcomparable companies.  When we initiallyreceive a new underwriter warrant, from an initial public offering, itscalculated volatility factor is entirely based on the volatility of an index ofcomparable companies, since there is no price history for a new publicly tradedcompany. As each underwriter warrant approaches its expiration date, itsvolatility factor is derived primarily from the historical prices of itsunderlying common stock. We cannot assure you that we will ultimately be ableto exercise any of our warrants in a way that will realize the value that weattribute to them in our financial statements based on this model.  As of June 30, 2003, our underwriterwarrants, based on the Black-Scholes Option Pricing Model, were valued atapproximately $4.4 million, up from a $1.8 million estimated value atMarch 31, 2003.

 

In addition to our underwriter warrants, we hold other securities, someof which have very limited liquidity and some of which do not have a readilyascertainable market value.  Accordingto Generally Accepted Accounting Principles, we are required to carry thesesecurities at estimated fair value.

 

As a result of the factors described above, our revenues and earningsare subject to substantial fluctuation from period to period based oncircumstances that often are beyond our control. An increase in financialmarket activity generally, and/or an increase in equity valuations generally,will normally result in increases in revenue, earnings and net worth as our activitylevels and the value

 

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of our investment portfolioincrease. Conversely, a general market retrenchment will typically lead todecreased revenue, earnings and net worth as a result of both decreased activityand the need to adjust high investment portfolio values to lower levels.Accordingly, results for any historical period are not necessarily indicativeof similar results for any future period.

 

**Resultsof Operations**

 

PIC’s revenues and operating results are influenced by fluctuations inthe equity underwriting markets as well as general economic and marketconditions, particularly conditions in the over-the-counter market, where PIC’sinvestment account, trading inventory positions and underwriter warrants areheavily concentrated.  Significantfluctuations can occur in PIC’s revenues and operating results from one periodto another.  PIC’s financial resultsdepend upon many factors, such as the number of companies that are seekingpublic financing, the quality and financial condition of those companies,market conditions in general, the performance of previous PIC underwritings andinterest in certain industries by investors. As a result, revenues and income derived from these activities may varysignificantly from period to period.  Inthe table below,  “corporate finance”revenues are a function of total proceeds from offerings done during theperiod, compensation per offering, and the fair value of underwriter warrantsreceived.  “investment income” includesrealized gains from exercise of underwriter warrants, gains and losses from thesales of investment securities, and unrealized gains and losses fromunderwriter warrants and other investment securities.  “trading income” is the net gain or loss from trading positionsbefore commissions paid to the representatives in the trading department.

 

**Summaryof Changes in Major Categoriesof Revenues and Expenses**increase/(decrease)

 
|                                   |   | **Three  Months Ended June 30  2003 vs. 2002** |       | **Six Months  Ended June 30  2003 vs. 2002** |   |
|----------------------------------------|--------|-----------------------------------------------------|------------|---------------------------------------------------|--------|
| **Revenues:**                          |   |                                                |       |                                              |   |   |   |   |   |
| Commissions                            |   | $                                                   | 2,590,641  |                                              | 152.5  | % | $ | 3,401,285 |   | 102.3 | % |
| Corporate finance                      |   | 2,329,096                                           |       | 27,953.6                                          | %      | 2,277,136 |   | 2,658.5 | % |
| Investment income                      |   | 14,177,520                                          |       | N/A                                               |   | 8,983,110 |   | N/A |   |
| Trading income                         |   | 970,389                                             |       | N/A                                               |   | 862,817 |   | N/A |   |
| Other                                  |   | (7,839                                              | )          | (40.4                                             | )%     | (8,209 | ) | (20.3 | )% |
|                                   |   |                                                |       |                                              |   |   |   |   |   |
| Total                                  |   | $                                                   | 20,059,807 |                                              | N/A    |   | $ | 15,516,139 |   | N/A |   |
|                                   |   |                                                |       |                                              |   |   |   |   |   |
| **Expenses:**                          |   |                                                |       |                                              |   |   |   |   |   |
| Commissions and salaries               |   | $                                                   | 3,044,170  |                                              | 175.1  | % | $ | 3,426,262 |   | 90.0 | % |
| Underwriting expenses                  |   | 111,298                                             |       | N/A                                               |   | 111,298 |   | N/A |   |
| Rent, telephone and quotation services |   | 75,822                                              |       | 35.9                                              | %      | 87,612 |   | 18.9 | % |
| Other                                  |   | 97,641                                              |       | 14.6                                              | %      | (37,262 | ) | (2.8 | )% |
|                                   |   |                                                |       |                                              |   |   |   |   |   |
| Total                                  |   | $                                                   | 3,328,931  |                                              | 127.1  | % | $ | 3,587,910 |   | 64.1 | % |
|                                   |   |                                                |       |                                              |   |   |   |   |   |
| Earnings before income taxes           |   | $                                                   | 16,730,876 |                                              | N/A    |   | $ | 11,928,229 |   | N/A |   |

 

**Three Months Ended June 30, 2003 vs.Three Months Ended June 30, 2002**

 

Revenues for the second quarter of 2003 increased $20,059,807 torevenues of  $12,264,815, from negativerevenues of $7,794,992 for the second quarter of 2002.  As shown in the table above, commissionsincreased $2,590,641, or 152.5 percent, from $1,698,313 in the second quarterof 2002 to $4,288,954 in the comparable 2003 period. This increase resultedfrom an increase in the number of retail brokers and a higher volume oftransactions in the 2003 quarter compared to the same period in 2002. Corporatefinance revenues rose $2,329,096 in the second quarter of 2003, to $2,337,428,from $8,332 for the  second quarter of2002.  One corporate finance transactionwas completed in the second quarter of 2003 and no corporate financetransactions were completed in the second quarter of 2002.  Investment income increased from a loss of$9,400,728 in the second quarter of 2002 to a profit of $4,776,792 in the secondquarter of 2003.  Investment income inthe 2003 period consisted of unrealized gains in the value of investmentsecurities unrelated to underwriter warrants and an increase in the estimatedfair value of underwriter warrants. No underwriter warrants were exercised ineither the 2002 or 2003 quarters. Trading income increased by $970,389, to aprofit of $850,054 in the second quarter of 2003, from a trading loss of$120,335 in the comparable 2002 period. The improvement in trading income was primarily due to higher prices ofsecurities held and profits realized on securities sold.  Other income, including interest anddividends, decreased $7,839, to $11,587 in the second quarter of 2003 from$19,426 in the 2002 quarter.

 

Improving market conditions and reduced uncertainties regarding the warin Iraq resulted in increased equity securities prices

 

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across many sectors.  The Nasdaq composite showed an increase of21.9 percent in the second quarter of 2003 compared to a decrease of 20.7percent for the second quarter of 2002.

 

Total expenses increased $3,328,931 in the second quarter of 2003 fromthe comparable 2002 period, an increase of 127.1 percent, from $2,618,850 to$5,947,781.  Commissions and salaries increased$3,044,170 or 175.1 percent, from $1,738,766 in the 2002 period to $4,782,936in 2003. This increase was primarily due to higher commissions paid onincreased commission revenues.  Therewere underwriting expenses of $111,298 during the second quarter of 2003 andone corporate finance transaction was completed.  In the second quarter of 2002 there were no corporate financetransactions completed and no underwriting expenses.  Rent, telephone and quote expenses increased to $286,795 in thesecond quarter of 2003 compared to $210,973 in the same quarter of 2002, anincrease of 35.9 percent, primarily due to increased business activity andincreased rental space in our Manhattan office.  The aggregate of all other expenses increased 14.6 percent, from$669,111 in the second quarter of 2002 to $766,752 in the second quarter of2003, primarily due to an increased reserve for bad debt.

 

The Company had a pretax profit of $6,317,034 in the second quarter of2003 compared to a pretax loss of $10,413,842 in the comparable 2002period.  The pre-tax profit was due toincreases in all revenue categories. Exclusive of investment income (loss), the Company would have had apretax profit of $1,540,242 for the second quarter of 2003 compared to a pretaxloss of $1,013,114 in second quarter of 2002. Significant fluctuations canoccur in PIC’s revenues and operating results from one period to another,particularly when market conditions improve or decline substantially.

 

The Company had an estimated tax expense of $350,000 for the secondquarter of 2003, compared to estimated tax benefits in the second quarter of2002 of $4,165,000.

 

**SixMonths Ended June 30, 2003 vs. Six Months Ended June 30, 2002**

 

Totalrevenues for the first six months of 2003 increased $15,516,139, to  $10,104,909, from negative revenues of$5,411,230 for the first six months of 2002. As shown in the table above, sales commissions increased $3,401,285, or102.3 percent, to $6,726,739 for the first six months of 2003 from $3,325,454for the first six months of 2002.  Thisincrease resulted from higher transaction volume and increased price levels,particularly in the very small capitalization sector, which is the primaryfocus of the Company’s business, during the first six months of 2003 comparedto the same period in 2002.  As notedabove, improving market and business conditions during the first half of 2003contributed to our improved results. The Nasdaq composite increased 17.2 percent from January 1, 2003through June 30, 2003, compared to a decrease of 26.1 percent during thefirst half of 2002.  Corporate financerevenues increased $2,277,136, or 2,658.5%, for the first six months of 2003,to $2,362,791 for the first two quarters of 2003 from $85,655 for the first twoquarters of 2002. One corporate finance transaction with gross proceeds of$16.4 million was completed during the first half of 2003 and no corporatefinance transactions were completed during the same period in 2002.  Corporate finance revenues are directlyrelated to the amount of money raised in completed transactions.  Investment income increased by $8,983,110,to a profit of $548,718 for the first six months of 2003 compared to a loss of$8,434,392 for the first six months of 2002. During the first half of 2003, themarket value of investment securities and the fair value of underwriterwarrants increased significantly compared to the same period in 2002 when bothinvestment securities and the fair value of underwriter warrants showeddecreases.  No underwriter warrants wereexercised in either period.  Tradingincome increased $862,817 to a profit of $434,463 for the first half of 2003compared to a loss of $428,354 during the first half of 2002.  This increase was the result of highertrading volume and higher price levels for many securities during the 2003period.  Other income, includinginterest and dividends, for the first half of 2003 decreased to $32,198compared to $40,407 for the first half of 2002, primarily due to decreases individend and interest income.

 

Total expensesfor the first half of 2003 increased $3,108,245, or 55.5 percent, to $8,706,652from $5,598,407 for the first half of 2002. Commission and salary expenses increased 77.4 percent, or $2,946,597,from $3,807,190 for the first half of 2002 to $6,753,787 for the first half of2003.  This increase was primarily dueto larger commissions paid on higher commission revenues during the 2003period.  Underwriting expenses totaled $111,298for the first half of 2003 since one corporate finance transaction was closedcompared to no underwriting expenses in the first half of 2002 during which nocorporate finance transactions were completed. Rent, telephone and quote expenses were up $87,612, or 18.9 percent, forthe first six months of 2003 to $552,307 from $464,695 for the first half of2002.  This increase was due to theopening of a new office in Manhattan. The aggregate of all other expenses decreased $37,262, or 2.8 percent,for the first half of 2003, to $1,289,260 from $1,326,522 for the first half of2002.  The decrease for the first halfof 2003 is due primarily to a decrease in lawsuit settlements and travelexpenses partially offset by an increase in bad debt expense.

 

The Companyhad pretax earnings of $918,592 for the first six months of 2003 compared to apretax loss of $11,009,637 for the first half of 2002, primarily due tosignificant increases in corporate finance revenues, estimated value ofunderwriter warrants, and investment and trading income during the first halfof 2003.  Independent of investmentincome (loss), the Company would have had pretax earnings of $369,874 for thefirst half of 2003 compared to a pre-tax loss of $2,575,245 for the first halfof 2002.  Significant fluctuations canoccur in PIC’s revenues and operating results from one period to another.

 

The Companyalso accrued $350,000 in income taxes for the first six months of 2003,compared to an estimated tax benefit of $4,400,000 for the first half of 2002.

 

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**Liquidity and Capital Resources**

 

The majority of PIC’s assets are cash and assets readily convertible tocash.  PIC’s securities inventory isstated at market value.  The liquidityof the market for many of PIC’s securities holdings, however, varies withtrends in the stock market.  Since manyof the securities held by PIC are thinly traded, and PIC is in many cases aprimary market maker in the issues held, any significant sales of PIC’spositions 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 inthe market for these issues, while rising prices in OTC issues tend to increasethe liquidity of the market for these securities.

 

PIC borrows money from its clearing firm in the ordinary course of itsbusiness, pursuant to an understanding under which the clearing firm agrees tofinance PIC’s trading accounts.  As ofJune 30, 2003, no net loans were outstanding pursuant to thisarrangement.  PIC and the Company aregenerally able to meet their compensation and other obligations out of currentliquid assets.

 

Another source of capital to PIC and the Company has been theunderwriter warrants issued to PIC in connection with its corporate financeactivities and the sale of the underlying securities. The underwriter warrantsare not exercisable for the first year after the offerings in which they areearned and are thereafter generally exercisable for four years, after whichthey expire.  The exercise price istypically 120% of the price at which we initially sold the securities to thepublic.  Accordingly, unless there is atleast a 20% increase in the price of these securities at some time more thanone and less than five years after the offering, the warrants will remain“under water” and will ultimately expire unexercised.  There is no public market for the underwriter warrants. Thesecurities receivable upon exercise of the underwriter warrants cannot beresold unless the issuer has registered these securities with the SEC and thestates in which the securities will be sold or exemptions are available.  Any delay or other problem in theregistration of these securities would have an adverse impact upon PIC’s abilityto obtain funds from the exercise of the underwriter warrants and the resale ofthe underlying securities.  AtJune 30, 2003, PIC owned 22 underwriter warrants (from 17 issuers), allbut one of which were currently exercisable; two had an exercise price belowthe current market price of the securities receivable upon exercise.  If we had exercised those two warrants andsold the securities on June 30, 2003, we would have received approximately$462,237.  There is little or no directrelationship between the intrinsic value of PIC’s underwriter warrants at theend of any given period and the fair value calculated using the Black-Scholespricing model, as described more fully in Critical Accounting Policies above.The prices of these securities are influenced by general movements in theprices of OTC securities as well as the success of the issuers of theunderwriter warrants.  The prices of thesecurities underlying the underwriter warrants are very volatile, andsubstantial fluctuations in the Company’s estimate of their value can beexpected in the future.

 

In the six months ended June 30, 2003, $21,923 of net cash wasprovided by operating activities of the Company.  The major adjustments to reconcile this result to the Company’snet earnings of $568,592 include the receipt of and an increase in theestimated value of underwriter warrants and an increase in receivables offsetby a decrease in trading and investment securities, a decrease in income taxesreceivable and an increase in securities sold, not yet purchased.  In the most recent period, $42,142 of netcash was used by the Company’s investing activities, consisting of purchases offurniture and equipment.  The Companyused cash of $34,995 in financing activities during the second quarter of 2003for payments to retire common stock.

 

As a securities broker-dealer, PIC is required by SEC regulations tomeet certain liquidity and capital standards. We believe we are in compliance with these standards.

 

At June 30, 2003, the Company had no material commitments forcapital expenditures.

 

In general, the primary ongoing sources of PIC’s, and therefore theCompany’s, liquidity, including PIC’s trading positions, borrowings on thosepositions and profits recognized from underwriter warrants, all depend in largepart on the trend in the general markets for OTC securities.  Rising OTC price levels will tend toincrease the value and liquidity of PIC’s trading positions, the amount thatcan be borrowed from its clearing firm based upon those positions, and the valueof PIC’s underwriter warrants.  The Companybelieves its liquidity is sufficient to meet its needs for the foreseeablefuture.

 

**Inflation**

 

Because PIC’s assets are primarily liquid, they are not significantlyaffected by inflation.  The rate ofinflation affects PIC’s expenses, such as employee compensation, office leasingand communications costs.  These costsmay not readily be recoverable in the price of services offered by theCompany.  To the extent inflationresults in rising interest rates and has other adverse effects in the securitiesmarkets and the value of securities held in inventory or PIC’s investmentaccount, it may adversely affect the Company’s financial position and resultsof operations.

 

ITEM 3.  CONTROLS AND PROCEDURES

 

(a)                                  Underthe supervision and with the participation of our management, our President andChief Financial Officer conducted an evaluation of our disclosure controls andprocedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)promulgated under the Securities Exchange Act of 1934, as amended, within 90days of the filing date of this report. Based on their evaluation, our

 

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President and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective.

 

(b)                                 Therehave been no significant changes (including corrective actions with regard tosignificant deficiencies or material weaknesses) in our internal controls or inother factors that could significantly affect these controls subsequent to thedate of the evaluation referenced in paragraph (a) above.

 

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**PARTIIOTHER INFORMATION**

 

Item 1. Legal Proceedings.

 

See Note 3 to Condensed Consolidated Financial Statements in Part 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.

 

(a) The Company held its annual meeting on June 10, 2003.

 

(b) The six Company directors (Chester L.F.Paulson, Jacqueline M. Paulson, Glen Davis, Steve Kleemann, Shannon P. Pratt,and Paul Shoen) were each elected for an additional one year term.

 

(c) The results of the voting for election of each director were asfollows:

 
| **Nominee**           | **For**   | **Abstain** |
|-----------------------|-----------|-------------|
|                  |      |        |
| Chester L. F. Paulson | 3,027,708 | 10,222      |
| Jacqueline M. Paulson | 3,027,708 | 10,222      |
| Glen Davis            | 3,027,708 | 10,222      |
| Steve Kleemann        | 3,027,708 | 10,222      |
| Shannon Pratt         | 3,027,708 | 10,222      |
| Paul Schoen           | 3,027,708 | 10,222      |

 

Item 5. Other Information.

None

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 
| 31.1   |   | Certification of Principal Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                    |
| 31.2   |   | Certification of Principal Financial Officer Pursuant to Section 302  of Section 302 of the Sarbanes-Oxley Act of 2002  |
|   |   |                                                                                                                    |
| 32.2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

(b) No Reports on Form 8-K were filed during the quarter endedJune 30, 2003.

 

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**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 theundersigned thereunto duly authorized.

 

 
|                       | PAULSON CAPITAL CORP. |
|----------------------------|-----------------------|
|                       |                  |   |
|                       |                  |   |
| Date: August 13, 2003 | By:                   | /s/ CHESTER L.F. PAULSON |   |
|                       |                  | Chester L.F. Paulson |
|                       |                  | President  Principal Executive Officer |
|                       |                  |   |
| Date: August 13, 2003 | By:                   | /s/ CAROL RICE |   |
|                       |                  | Carol Rice |
|                       |                  | Chief Financial Officer  Principal Financial Officer |

 

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**EXHIBIT INDEX**

 
| 31.1   |   | Certification of Principal Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                    |
| 31.2   |   | Certification of Principal Financial Officer Pursuant to Section 302  of Section 302 of the Sarbanes-Oxley Act of 2002  |
|   |   |                                                                                                                    |
| 32.2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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