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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2003, or
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ___________TO __________.
Commission File Number 000-27437
PARAGON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-322773
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5000 Sawgrass Village Circle
Ponte Vedra, Florida 32082
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 285-0000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes_____ No_______
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 116,146,478 shares as of May
16, 2003.
Paragon Financial Corporation
Form 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS .............................................. 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................. 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ......................................................... 19
ITEM 4. CONTROLS AND PROCEDURES ........................................... 20
PART II - OTHER INFORMATION ............................................... 21
ITEM 1. LEGAL PROCEEDINGS ................................................. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 21
SIGNATURES ................................................................ 23
CERTIFICATIONS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited condensed consolidated financial statements of
Paragon Financial Corporation (the "Company") and its wholly-owned subsidiaries
include all adjustments (consisting only of normal recurring accruals) which
management considers necessary for a fair presentation of the Company's
financial position as of March 31, 2003 and its operating results and cash flows
for the three month periods ended March 31, 2003 and 2002.
These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
3
Paragon Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
March 31, 2003 December 31, 2002
(Unaudited) *
-------------- -----------------
Assets
Cash and cash equivalents $ 235 $ 91
Fees receivable 271 -
Mortgage loans receivable held for sale, net 14,047 -
Prepaid expenses 84 31
Office property and equipment, net of accumulated depreciation 1,139 1
Notes and mortgages receivable, other 339
Available for sale securities 764 -
Goodwill and other intangible assets 8,143 -
Other assets 54 83
-------- --------
Total Assets $ 25,076 $ 206
======== ========
Liabilities and Stockholders' Equity
Warehouse lines of credit $ 13,733 $ -
Notes payable 1,771 -
Convertible debentures payable 38 34
Accounts payable 689 177
Accrued expenses - related party 59 204
Accrued expenses - other 337 -
Derivative liability 305 -
Related party debt subsequently converted to preferred stock - 659
-------- --------
Total liabilities 16,932 1,074
-------- --------
Stockholders' Equity:
Preferred stock: Issuable in series, $0.0001 par
value; 5,000,000 shares authorized:
Series E, $1,000 stated value; 2,459 and no
shares issued and outstanding, respectively - -
Common stock: $0.0001 par value; 400,000,000
shares authorized; 116,146,478 and
62,592,744 shares issued and outstanding,
respectively 12 6
Additional paid-in capital 11,623 1,693
Accumulated deficit (3,490) (2,567)
Accumulated other comprehensive income (1) -
-------- --------
Total stockholders' equity (deficiency) 8,144 (868)
-------- --------
Total liabilities and stockholders' equity $ 25,076 $ 206
======== ========
* Condensed from audited financial statements.
See notes to unaudited condensed consolidated financial statements.
4
Paragon Financial Corporation and Subsidiaries
Condensed Consolidated Statement of Operations (Unaudited)
For the three-month periods ended March 31, 2003
and 2002 (in thousands, except per share amounts)
- --------------------------------------------------------------------------------
2003 2002
-------- ---------
Revenues
Gain on sale of loans $ 699 $ -
Loan origination fees 876 -
Interest earned 271 -
-------- --------
Total revenues 1,846 -
Expense
Salaries and related expenses 1,585 329
Loan production costs 247 -
General and administrative expenses 670 60
Interest expense 259 -
Realized loss in derivative 25 -
Unrealized gain on derivative (17) -
-------- --------
Total expenses 2,769 389
-------- --------
Net loss $ (923) $ (389)
======== ========
Basic and diluted loss per share $ (0.01) $ (0.01)
======== ========
Weighted average shares outstanding -
basic and diluted 97,673 35,310
======== ========
See notes to unaudited condensed consolidated financial statements.
5
Paragon Financial Corporation and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the three-months ended March 31, 2003 and 2002
(in thousands)
- --------------------------------------------------------------------------------
2003 2002
-------- ---------
Cash flows from operating activities
Net loss $ (923) $ (389)
Adjustments to reconcile net loss to net cash provided by
used in operating activities:
Depreciation and amortization 47 -
Provision for loan losses 36 -
Loans originated (35,281) -
Loans sold 45,828 -
Decrease in warehouse lines of credit (9,584) -
Net changes in other assets (89) -
Net changes in other liabilities (171) 174
-------- --------
Net cash used in operating activities (137) (215)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (149) (1)
Cash acquired in purchases of businesses 343 -
Purchase of marketable securities (83) -
Other investing proceeds 13 -
-------- --------
Net cash provided by (used in) investing activities 124 (1)
Cash Flows from financing activities:
Proceeds from the issuance of common stock - 364
Proceeds from the issuance of debentures 231 -
Proceeds from the issuance of warrants 13 -
Repayments of debt (87) -
-------- --------
Net cash provided by financing activities 157 364
-------- --------
Net Increase or (Decrease) in Cash 144 148
Cash and cash equivalents beginning of period 91 -
-------- --------
Cash and cash equivalents end of period $ 235 $ 148
======== ========
See notes to condensed consolidated financial statements.
6
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. Principles of Consolidation, Basis of Presentation and Significant
Accounting Policies
The accompanying condensed consolidated financial statements of Paragon
Financial Corporation and subsidiaries (referred to herein sometimes as "we",
"our" or the "Company") are prepared in accordance with the Securities and
Exchange Commission's rules regarding interim financial statements, and
therefore do not contain all disclosures required by accounting principles
generally accepted in the United States of America for annual financial
statements. Reference is made to the consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2002. Certain
previously reported amounts have been reclassified to conform to the current
period's presentation. Such reclassifications had no effect on net loss or
shareholders' equity.
The condensed consolidated balance sheet as of March 31, 2003 and the
condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2003 and 2002 are unaudited and include all
adjustments (consisting only of normal recurring accruals) which management
considers necessary for a fair presentation of our financial position as of
March 31, 2003 and our operating results and cash flows for the three month
periods ended March 31, 2003 and 2002. The results of operations for the three
months ended March 31, 2003 and 2002 are not necessarily indicative of the
results to be expected for the full year.
Due to our recent acquisitions, we are no longer considered a development stage
enterprise.
Significant Accounting Policies
- -------------------------------
Principles of Consolidation. The accompanying consolidated financial statements
include the financial statements of our wholly owned subsidiaries, PNGF Home
Lending Corp. (formerly known as Mortgage Express, Inc. and referred to as
"PGNF" in this Form 10-Q) and Paragon Homefunding, Inc. (referred to as "Paragon
Florida" in this Form 10-Q). All material intercompany balances and transactions
are eliminated in consolidation. The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America.
Use Of Estimates. In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Financial Statement Presentation. We prepare our financial statements using an
unclassified balance sheet presentation as is customary in the mortgage banking
industry. We operate under two business segments: wholesale and retail.
Cash and Cash Equivalents. For purposes of the statements of cash flows, we
consider all highly-liquid debt instruments with maturities when purchased of
three months or less to be cash equivalents. Cash equivalents consist of cash on
hand and due from banks.
Mortgage Loans Receivable Held for Sale. Mortgage loans receivable held for sale
are stated at the lower of amortized cost or fair value as determined by
outstanding commitments from investors or current investor-yield requirements,
calculated on an aggregate basis. Interest on loans receivable held for sale is
credited to income as earned. Interest is accrued only if deemed collectible.
7
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Gain on Sales of Loans. Gains or losses resulting from sales of mortgage loans
are recognized at the date of settlement and are based on the difference between
the selling price for sales and the carrying value of the related loans sold.
Nonrefundable fees and direct costs associated with the origination of mortgage
loans are deferred and recognized when the loans are sold. Loan sales are
accounted for as sales when control of the loans is surrendered, to the extent
that consideration other than beneficial interests in the loans transferred is
received in the exchange.
Derivatives. As a result of its merger with PGNF, we have a derivative
instrument. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, obligates us to record all derivatives at fair value and permits us
to designate derivative instruments as being used to hedge changes in fair value
or changes in cash flows. Changes in the fair value of derivatives that offset
changes in cash flows of hedged items are recorded initially in other
comprehensive income. Amounts recorded in other comprehensive income are
subsequently reclassified into earnings during the same period in which the
hedged item affects earnings. If a derivative qualifies as a fair value hedge,
then changes in fair value of the hedging derivative are recorded in earnings
and are offset by changes in fair value attributable to the hedged risk of the
hedged item. Any portion of the change in the fair value of derivatives
designated as hedge that is deemed ineffective is recorded in earnings along
with changes in the fair value of derivatives with no hedge designation.
Allowance for Loan Losses. The allowance for loan losses relates primarily to
the potential repurchase of loans or indemnification of losses based on alleged
violations of representations and warranties which are customary to the mortgage
banking industry. We purchase fraud insurance on the loans originated by our
wholesale segment. The allowance represents our estimate of the total uninsured
losses expected to occur and is considered to be adequate. Provisions for losses
are charged to gain on sale of loans and credited to mortgage loans receivable
held for sale.
Office Property and Equipment. Property and equipment are carried at cost less
accumulated depreciation. Upon disposal of property and equipment, the
appropriate accounts are reduced by the related cost and accumulated
depreciation. The resulting gains and losses are reflected in consolidated
earnings. Depreciation is computed using the straight-line method over the
estimated lives of the related assets.
Advertising. We account for our advertising costs as nondirect response
advertising. Accordingly, advertising costs are expensed as incurred.
Segment Reporting. Through our retail and wholesale origination segments, we
provide a broad range of mortgage products. Management measures the revenue
streams of each of its origination segments separately. We have provided revenue
and expense data by each of these business segments.
Stock-Based Compensation. We have elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations, in accounting for employee stock options rather than
the alternative fair value accounting allowed by FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). APB 25 provides that
compensation expense relative to our employee stock options is recorded on the
date of grant only if the current market price of the underlying stock exceeds
8
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
the exercise price. Under SFAS 123, the fair value of stock options at the date
of grant is recognized in earnings over the vesting period of the options. In
December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("SFAS 148"), which amends SFAS 123 to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method on
reported results.
As of March 31, 2003, there were stock options outstanding for the purchase of
28,433,000 shares of our common stock. There were no stock options granted
during the quarters ended March 31, 2003 and 2002. The following table shows the
pro forma net loss as if the fair value method of SFAS No. 123 had been used to
account for stock-based compensation expense (dollars in thousands, except per
share amounts):
Three Months Ended
March 31, 2003
==================
Net loss, as reported $ (923)
Stock-based employee compensation expense determined
under fair value based method for all awards,
net of related tax effects (324)
-------
Pro forma net loss $(1,247)
=======
Net loss per share:
Basic and diluted, as reported $ (0.01)
=======
Pro forma basic and diluted $ (0.01)
=======
2. Acquisitions and Goodwill
On January 31, 2003, we completed our merger with PGNF, and as a result of the
merger, PGNF became a wholly owned subsidiary of ours. PGNF has been in the
business of originating residential mortgage loans since 1998. Subject to the
terms of the merger agreement, at closing, all of the outstanding shares of
PGNF's common stock converted into 52,329,735 shares of our common stock valued
at $6.4 million (or approximately $0.122 per share), or approximately 45.5% of
the then outstanding common stock after the consummation of the merger.
Additionally, we issued a promissory note in the amount of $1.8 million to an
entity wholly owned by the sole shareholder of PGNF. The promissory note accrued
interest at 4.92% and was payable on July 31, 2004. Our payment obligations
under the promissory note were secured by a security interest in the PGNF shares
of common stock that we own. On March 26, 2003, the holder of this note agreed
to convert the note into 1,800 shares of our Series E preferred stock with a
face value of $1,000 per share, and a 4% stated dividend payable in cash or
shares of common stock, at the Company's option. This series of preferred stock
does not provide for redemption and is non-voting.
On February 2, 2003 we completed our merger with Paragon Florida. Subject to the
terms of the merger agreement, at closing, all of the outstanding shares of
Paragon Florida's common stock converted into 1,224,000 of shares of our common
9
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
stock valued at $836,000 (approximately $0.6833 per share). Additionally, we
issued promissory notes to the shareholders of Paragon Florida in the aggregate
principal amount of $25,000. The promissory notes accrue interest at 4.92% and
are payable on February 2, 2004. Paragon Florida has been in the business of
originating residential mortgage loans since 1998.
Both of these mergers were accounted for as acquisitions pursuant to SFAS No.
141, Accounting for Business Combinations ("SFAS 141"). Accordingly, our results
of operations include the operating results of these companies from the
effective date of these mergers, February 1, 2003. As a result of these mergers,
we have initially recorded goodwill and other intangible assets of $8.1 million
which represents the excess of the purchase price over the initial estimated
fair values of the tangible, financial and intangible assets acquired and
liabilities assumed at date of acquisition. We are currently evaluating the
initial estimates of the fair values of the assets acquired and liabilities
assumed and the application of SFAS 141. The final fair values allocated to the
assets acquired, including specifically indentified intangibles other than
goodwill, liabilities assumed and goodwill may differ materially from our
initial estimates. SFAS No. 142, Accounting for Goodwill and Intangible Assets,
eliminated the requirement to amortize goodwill through a periodic charge to
earnings. We will evaluate goodwill on an annual basis for impairment based upon
the estimated fair value as of the balance sheet date.
Our unaudited consolidated results of operations on a pro forma basis as if we
had consummated the mergers with PGNF and Paragon Florida on January 1, 2002 are
as follows:
3 Months 3 Months
March 31, 2003 March 31, 2002
--------------- --------------
(in thousands,exceptshare and per share data)
Revenues $ 4,115 $ 2,927
Net income (loss) $ 115 $ (331)
Diluted Earnings (Loss) per Share $ 0.00 $ 0.00
Weighted Average Shares-Diluted 116,147 88,864
3. Going Concern
We have sustained operating losses since inception. At March 31, 2003, our
shareholders' equity was $8.3 million primarily due to the issuance of equity
securities as a result of our acquisitions of PGNF and Paragon Florida. We
incurred a net loss of $923,000 and used $137,000 of cash in operations during
the three months ended March 31, 2003. These factors raise substantial doubt
about our ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Management believes that, with the mergers with PGNF and
Paragon Florida, it has taken the steps necessary to reverse the negative trend.
Our continued existence depends on a number of factors, including but not
limited to, our ability to secure adequate sources of capital and locate and
fund acquisitions of suitable companies. However, there can be no assurance we
will be able to continue as a going concern.
10
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
4. Comprehensive Income (Loss)
The components of comprehensive income (loss) for the three months ended
March 31, 2003 are listed below:
Net loss as reported $(923)
Other Comprehensive Income (Loss)
Unrealized loss of securities $ (1)
-----
Total Comprehensive Loss $(924)
=====
5. Mortgage Loans Receivable Held For Sale
Capitalized as part of mortgage loans receivable held for sale are employee
costs and loan production costs. These capitalized costs are offset against net
gains on mortgage loan sales and fees when the loans are sold or amortized as
yield adjustment in the case of loans held for investment. A summary of mortgage
loans receivable held for sale, at the lower of cost or market at March 31, 2003
follows (dollars in thousands):
March 31, 2003
--------------
Mortgage loans receivable held for sale $13,873
Allowance for loan losses (36)
Net deferred origination costs 210
-------
$14,047
=======
6. Debentures and Warrants
On March 6, 2003, we completed a private offering of 379 units consisting of (i)
a $1,000 convertible promissory note due December 31, 2003 with interest payable
quarterly at a stated interest rate of 15% per annum and (ii) a warrant to
purchase shares of common stock, exercisable at $0.25 per share, for each $5.00
in principal of the promissory note issued in the unit. The holder has the right
to convert the outstanding principal amount of the convertible promissory note
(or any portion thereof), together with accrued interest thereon, into shares of
our common stock at a conversion price of $0.25 per share, subject to standard
anti-dilution adjustments as specified in the note.
Over the course of the offering, our common stock was trading above the
conversion price. This difference has resulted in the recognition of a
beneficial conversion feature and, accordingly, a portion of the proceeds from
each convertible note has been credited to additional paid-in capital. In the
three months ended March 31, 2003, we issued $244,000 of units and allocated
$227,000 and $13,000 to the beneficial conversion feature and warrants,
respectively, with $4,000 remaining as principal.
As a result of the offering, we raised $354,000 in cash and paid $25,000 in
legal services to our company counsel. We allocated $20,000, $322,000 $38,000 of
the proceeds to the warrants, beneficial conversion feature and debenture
values, respectively. Based upon these allocations, the overall effective
interest rate on this offering is approximately 1055%.
7. Warehouse Lines of Credit
Our subsidiary, PGNF, has mortgage warehouse facilities with commercial banks
aggregating $47.5 million. These credit facilities are used to fund mortgage
loans and are collateralized by the mortgage loans funded. These warehouse
11
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
facilities do not require compensating balances. Warehouse lines of credit
consist of the following at March 31, 2003 (dollars in thousands):
March 31, 2003
--------------
$15 million mortgage warehouse credit facility at a commercial bank; interest at
Prime plus 1.5%. This line expires on July 31, 2003. 10,197
$25 million mortgage warehouse credit facility at a commercial bank; interest at
Libor plus 2.25%. This line expires on April 15, 2003. 3,536
--------------
$ 13,733
==============
All of the Company's warehouse lines contain provisions whereby the lender can
terminate their agreement without cause with certain notice requirements. The
Company's management believes the warehouse relationships will remain in place
until maturity; however, there is no assurance that one or more of the lenders
will not terminate their agreements prior to maturity, or that additional lines
will be negotiated when existing lines terminate. Either occurrence would
adversely affect the Company's ability to originate loans.
8. Segment Data
We provide a broad range of mortgage products through our wholesale and
retail segments. Our management measures the revenue streams of each of our
lending segments separately. The table below provides revenue and expense data
by business segment.
For the quarter ended March 31, 2003
(amounts in thousands)
Wholesale Retail Corporate Total
========= ======== ========= =====
Mortgage loans closed $ 35,281 $ 50,582 $ - $ 85,863
======== ======== ========= ========
Revenues:
Gain on sale $ 699 $ - $ - $ 699
Loan origination fees - 876 - 876
Interest income 262 9 - 271
-------- -------- --------- --------
Total Revenues $ 961 $ 885 $ - $ 1,846
Salaries and benefits 726 681 178 1,585
Other operating expenses 80 167 - 247
Other overhead not allocated 326 168 176 670
Interest expense 162 13 109 284
-------- -------- --------- --------
Total expenses 1,294 1,029 463 2,786
-------- -------- --------- --------
Net loss $ (333) $ (144) $ (463) $ (940)
======== ======== ========= ========
9. Preferred Stock
On March 26, 2003, our board of directors authorized the issuance of Series
E preferred stock. Our Series E preferred stock has a stated value of $1,000 per
share and provides for a mandatory dividend equal to 4% of the stated value per
annum. The Series E preferred stock is non-voting, is not redeemable and has no
conversion rights.
On March 26, 2003, the holder of the $1.8 million note issued as part of
the consideration for the PGNF acquisition converted this note, including
$14,000 in accrued interest, into 1,800 shares of Series E preferred stock. On
March 26, 2003, our executive officers converted $659,000 due them for deferred
salaries, benefits and other items into 659 shares of Series E preferred stock.
At March 31, 2003, the cumulative dividend due on this Series E preferred stock
was $1,347.
12
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
10. Commitments and Contingencies
MINIMUM OPERATING LEASE COMMITMENTS
The Company is party to real estate leases for its corporate headquarters and
operations locations in Westmont, IL and Olrando, FL.
EMPLOYMENT AGREEMENTS
At March 31, 2003, the Company is party to several employment contracts with
certain members of management. These contracts are for varying periods and
include standard provisions for restrictions on competition after termination.
These agreements provide for salaries, bonuses and other benefits and also
specify and delineate the granting of various stock options.
LITIGATION
In March, April and May 2001, the Company, and its former directors David M.
Beirne, Michael Mortiz, William J. Razzouk and Christos M. Cotsakos and its
former Chief Financial Officer, Steve Valenzuela, were named as defendants in
class action complaints alleging violations of the federal securities laws in
the United States District Court for the Southern District of New York. The
suits have been consolidated into a single action and a consolidated amended
complaint was filed on April 19, 2002.
The purported class action alleges violation of Sections 11 and 15 of the
Securities Acts of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. The essence of the complaint
is that the defendants issued and sold the Company's common stock pursuant to a
registration statement for its October 7, 1999 initial public offering ("IPO")
without disclosing to investors that certain underwriters in the offering had
solicited and received excessive and undisclosed commissions from certain
investors. The complaint also alleges that the registration statement failed to
disclose that the underwriters allocated Company shares in the IPO to customers
in exchange for the customers' promises to purchase additional shares in the
aftermarket at pre-determined prices above the IPO price, thereby maintaining,
distorting and/or inflating the market price for the shares in the aftermarket.
The action seeks damages in an unspecified amount. The action is being
coordinated with approximately three hundred other nearly identical actions
filed against other companies. On July 15, 2002, the Company moved to dismiss
all claims against it and the individual defendants. On February 19, 2003, the
Court denied the motion to dismiss the complaint against the Company. The Court
dismissed the Section 10(b) claim against the individual defendants, but denied
the motion to dismiss the Section 11 claim and the Section 15 and 20(a) control
person claims. The Company and the individual defendants intend to vigorously
defend the action. At this time, the Company does not believe this matter will
have a material impact on its financial position, operations or liquidity.
On June 19, 2001, vTraction, Inc. filed a complaint for breach of contract in
the Chancery Court of Tennessee for the Thirtieth Judicial District at Memphis
alleging that the Company entered into an oral agreement with vTraction to sell
certain equipment and later reneged, and claiming damages in an amount
including, but not limited to, the difference between the price agreed to in the
alleged oral contract and the market price of the equipment. The Company has
filed an answer asserting the affirmative defenses of failure of consideration
and statute of frauds and denying the existence of an oral contract. At this
13
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
time, the Company does not believe this matter will have a material impact on
its financial position, operations or liquidity.
11. New Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" (EITF 94-3). The principal
difference between SFAS No. 146 and EITF 94-3 relates to SFAS No. 146's
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost as generally defined in
EITF 94-3 was recognized at the date of an entity's commitment to an exit plan.
We adopted the new standard effective January 1, 2003. The adoption of SFAS No.
146 did not have a material impact on our results of operations, financial
position or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others". The interpretation elaborates on the disclosures to
be made by a guarantor in its financial statements under certain guarantees that
is has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. We adopted the disclosure requirements of
the Interpretation as of December 31, 2002, the date upon which they became
effective. These provisions of the Interpretation require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of the Interpretation were effective
January 1, 2003. The implementation of the recognition requirements of the
Interpretation did not have a material impact on our results of operations,
financial position or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities". This interpretation provides guidance with respect
to the identification of variable interest entities and when assets,
liabilities, noncontrolling interests, and the results of operations of a
variable interest entity need to be included in a company's consolidated
financial statements. The Interpretation requires consolidation by business
enterprises of variable interest entities in cases where the equity investment
at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, which is provided
through other interests that will absorb some or all of the expected losses of
the entity, or in cases where the equity investors lack one or more of the
essential characteristics of a controlling financial interest, which include the
ability to make decisions about the entity's activities through voting rights,
the obligation to absorb the expected losses of the entity if they occur, or the
right to receive the expected residual returns of the entity if they occur. The
Interpretation applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. We are currently assessing the impact that
the Interpretation will have on our consolidated financial position and
consolidated results of operations and do not believe this Interpretation will
have a material impact on our results of operations, financial position or cash
flows.
12. Subsequent Event
On May 12, 2003, we amended our $25 million revolving warehouse facility with a
commercial bank. Under this amendment, the revolving warehouse facility was
reduced from $25 million to $10 million, provided only for an advance of only
95% of the principal balance of the mortgage loans, requiring the Company to use
working capital to fund the remaining portion of the principal balance of the
mortgage loans and had an interest rate of Libor plus 2.25%.
On April 23, 2003, our $7.5 Million revolving warehouse facility with a
commercial bank expired and was not renewed.
13. Supplemental Cash Flow Information
Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
(in thousands)
Non-cash investing and financing activities
Consideration for purchases of businesses $ 9,103 $ -
======= =======
14. Income Taxes
We utilize an asset and liability approach in our accounting for income taxes.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement and tax basis carrying amounts of assets and liabilities.
Our results of operations do not recognize a tax benefit on the net operating
losses incurred in the three month periods ended March 31, 2003 and 2002.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The discussion below should be read in conjunction with the Paragon Financial
Corporation and Subsidiaries (the "Company", "we", "our" or "us") Unaudited
Consolidated Financial Statements and Notes appearing elsewhere in this report.
Special Note Regarding Forward-Looking Information
- --------------------------------------------------
Certain information contained in this Report may include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and is subject to the safe harbor created by that act. We caution
readers that certain important factors may affect our actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this Report or which are otherwise made
by or on behalf of us. For this purpose, any statements contained in this Report
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," "believe," "explore," "consider," "anticipate,"
"intend," "could," "estimate," "plan," or "continue" or the negative variations
of those words or comparable terminology are intended to identify
forward-looking statements. Factors that may affect our results include, but are
not limited to the risks and uncertainties associated with:
- our ability to raise capital necessary to sustain our operations and
to implement our business plan,
- our ability to obtain regulatory permits and approvals to continue
operating in the financial services area,
- our ability to identify and complete acquisitions and successfully
integrate the businesses we acquire, if any,
- changes in the real estate market, interest rates or the general
economy of the markets in which we operate,
- our ability to employ and retain qualified management and employees,
- changes in government regulations that are applicable to our
businesses,
- general volatility of the capital markets and the maintenance of a
market for our shares,
- changes in the demand for our services,
- the degree and nature of our competition,
- our ability to generate sufficient cash to pay our creditors, and
- disruption in the economic and financial conditions primarily from the
impact of past terrorist attacks in the United States, threats of
future attacks, police and military activities overseas and other
disruptive worldwide political events.
We are also subject to other risks detailed from time to time in our
Securities and Exchange Commission filings. Any one or more of these
uncertainties, risks and other influences could materially affect our results of
operations and whether forward-looking statements made by us ultimately prove to
be accurate. Our actual results, performance and achievements could differ
materially from those expressed or implied in these forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether from new information, future events or otherwise.
The following is a discussion of the results of operations and analysis of
financial condition for the three months ended March 31, 2003 compared to March
31, 2002. The results of operations for PGNF and Paragon Florida are included
since February 1, 2003, the effective date of our mergers with them.
General
We are headquartered in Ponte Vedra Beach, Florida and were incorporated in
Delaware in August 1999. We are a nationwide mortgage banking company that,
through our subsidiaries, originates and sells residential mortgage loans
secured primarily by first mortgages on single-family residences. Our borrowers
generally have considerable equity in the property securing the loan, but have
impaired or limited credit profiles or higher debt-to-income ratios than
traditional mortgage lenders allow. Our borrowers also include individuals who,
due to self-employment or other circumstances, have difficulty verifying their
income through conventional methods, and who prefer the prompt and personalized
service we provide.
We originate loans through our wholesale and retail divisions. Wholesale loans
are originated through independent mortgage brokers by the Wholesale Division of
our subsidiary, PGNF. We do not purchase bulk pools of loans from third parties.
15
After originating we then sell those loans.
Our retail division originates loans direct to the consumer at our locations in
Illinois and Florida. By creating a direct relationship with the borrower,
retail lending provides a more sustainable loan origination franchise and
greater control over the lending process. The loan origination fees contribute
to profitability and cash flow and offset the higher costs of retail lending.
Market Conditions
The financial services industry, including the markets in which we operate, is
highly competitive. Competition is based on the type of loan, interest rates,
and service. Traditional competitors in the financial services industry include
commercial banks, credit unions, thrift institutions, credit card issuers,
consumer and commercial finance companies, and leasing companies. While we face
significant competition in connection with our mortgage loan products, we
believe that we compete effectively in our markets by providing competitive
rates and efficient, complete services.
Seasonality
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in mortgage interest rates. Sales and resales of homes typically peak
during the spring and summer seasons and decline to lower levels from
mid-November through February. In addition, mortgage delinquency rates typically
rise temporarily in the winter months.
Critical Accounting Policies
We have established various accounting policies which govern the application of
accounting principles generally accepted in the United States of America in the
preparation of our financial statements. Our significant accounting policies are
described in Footnote 1 to the Condensed Consolidated Financial Statements,
beginning on page 7. Certain accounting policies require us to make significant
estimates and assumptions that may have a material impact on certain assets and
liabilities, as well as our operating results, and we consider these to be
critical accounting policies. The estimates and assumptions we use are based on
historical experience and other factors which we believe to be reasonable under
the circumstances. Actual results could differ materially from these estimates
and assumptions, which could have a material impact on the carrying value of
assets and liabilities and our results of operations.
We believe the following are critical accounting policies that require the most
significant estimates and assumptions that are subject to significant change in
the preparation of our consolidated financial statements:
- Allowance for loan losses.
- Gain on sale of loans.
- Income taxes.
16
Results of Operations
Three Months Ended March 31, 2003 Compared To Three Months Ended March 31,
2002.
Originations and Purchases. We originated $85.9 million in loans for the
three months ended March 31, 2003. Wholesale loan originations were $35.2
million, or 41.1% of total originations for the three months ended March 31,
2003. Retail loan originations were $50.6 million, or 58.9%, of total
originations for the three months ended March 31, 2003.
Gain on sale of loans. The gain on the sale of loans originated was
$699,000 in the three months ended March 31, 2003, and represents only the sales
of loans completed in February and March of 2003.
Loan origination fees. Revenues from loan origination fees were $876,000 in
the three months ended March 31, 2003.
Interest earned. Interest earned was $271,000 in the three months ended
March 31, 2003 and was entirely the result of the Company's merger with PGNF
completed on January 31, 2003.
Salaries and related expenses. Salaries and related expenses increased by
$1,256,000, or 381.8%, to $1,585,000 in the three months ended March 31, 2003
compared to $329,000 in the three months ended March 31, 2002. This increase was
primarily due to the mergers of PGNF and Paragon Florida completed on January
31, 2003 and February 2, 2003, respectively and effective from February 1, 2003.
In addition, the three months ended March 31, 2003 contains the salary expense
associated with the hiring of our chief executive officer and chief financial
officer, both of whom were not employed by the Company in the previous
comparable period.
Loan production costs. Loan production costs were $247,000 in the three
months ended March 31, 2003. Loan productin costs exclude those costs which,
pursuant to SFAS 91, were capitalized and included in the basis of mortgage
loans receivable held for sale.
General and administrative expenses. General and administrative costs were
$670,000 in the three months ended March 31, 2003 compared to $60,000 in the
three months ended March 31, 2002. This increase was due primarily to the
mergers of PGNF and Paragon Florida completed on January 31, 2003 and February
2, 2003, respectively and effective from February 1, 2003.
Interest expense. Interest expense was $284,000 in the three months ended
March 31, 2003. Interest expense was incurred primarily from borrowings under
our revolving warehouse facilities and interest on our convertible debentures.
Interest expense related to borrowings under our warehouse facility was
approximately $141,000 for the three months ended March 31, 2003. Interest
expense on our convertible debentures was approximately $109,000 for the three
months ended March 31, 2003.
Net loss. Net loss increased by $538,000 to $927,000 in the three months
ended March 31, 2003 compared to $389,000 for the three months ended March 31,
2003 due to the factors discussed above.
17
Liquidity and Capital Resources
Our primary sources of liquidity are:
- fundings under revolving warehouse facilities,
- sale of mortgage loans and related servicing rights, and
- fees earned from originating retail mortgage loans. We historically
have relied on the issuance of convertible debt and equity securities
to finance our operating cash requirements.
Our operations require continued access to short-term and long-term sources
of cash. Our primary operating cash requirements include:
- funding of mortgage loan originations prior to their sale,
- fees and expenses incurred in connection with the sale of loans,
- ongoing administrative, operating, and tax expenses, and
- interest and principal payments under our revolving warehouse
facilities and other existing indebtedness.
We had cash and cash equivalents of approximately $235,000 and available
for sale securities of $764,000 at March 31, 2003.
Warehouse Facilities. We rely on our revolving warehouse facilities to
originate mortgage loans and hold them prior to sale. At March 31, 2003, we had
committed revolving warehouse facilities in the amount of $47.5 million. Of the
$47.5 million of committed revolving warehouse facilities available to us at
March 31, 2003, $25.0 million and $7.5 million expired on April 15, 2003 and
April 30, 2003, respectively. We subsequently entered into a new $10 million
revolving warehouse facility with one of the expiring lenders. Generally, the
Company's revolving warehouse facilities have 364-day terms and are renewed on
an annual basis. No assurances can be made that we will be successful in our
efforts to renew our warehouse facilities.
Certain of the Company's warehouse and repurchase facility lenders advance
less than 100% of the principal balance of the mortgage loans, requiring the
Company to use working capital to fund the remaining portion of the principal
balance of the mortgage loans.
All of the Company's revolving warehouse facilities contain provisions
requiring the Company to meet certain periodic financial covenants, which
establish, among other things, liquidity, stockholders' equity, leverage, and
net income levels. If the Company is unable to meet these financial covenants
going forward, or is unable to obtain subsequent amendments or waivers, if
required, or for any other reason is unable to maintain existing warehouse or
repurchase lines or renew them when they expire, it would have to cease loan
production operations which would jeopardize the Company's ability to continue
to operate as a going concern.
The Sale of Mortgage Loans. The Company's ability to sell loans originated
by it in the secondary market through whole loan sales is necessary to generate
cash proceeds to pay down its warehouse facilities and fund new mortgage loan
originations. The ability of the Company to sell loans in the secondary market
18
on acceptable terms is essential for the continuation of the Company's loan
origination operations.
Due to our recent mergers with PGNF and Paragon Florida, we anticipate that
the cash generated from these operations, cash on hand, available for sale
securities and available borrowings under our warehouse facilities will enable
us to meet our existing liquidity requirements during the next 12 months. We
may, however, require additional financing to pursue our growth strategies or
pursue acquisitions of other mortgage origination businesses. If such financing
is required, there are no assurances that it will be available, or if available,
that it can be obtained on terms favorable to us or on a basis that is not
dilutive to our stockholders.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Impact Of Inflation
Inflation affects us most significantly in the area of loan originations and can
have a substantial effect on interest rates. Interest rates normally increase
during periods of high inflation and decrease during periods of low inflation.
Profitability may be directly affected by the level and fluctuation in interest
rates that affect our ability to earn a spread between interest received on its
loans and the costs of its borrowings. Our profitability is likely to be
adversely affected during any period of unexpected or rapid changes in interest
rates. A substantial and sustained increase in interest rates could adversely
affect our ability to originate loans and affect the mix of first and
second-lien mortgage loan products. Generally, first-lien mortgage production
increases relative to second-lien mortgage production in response to low
interest rates and second-lien mortgage production increases relative to
first-lien mortgage production during periods of high interest rates.
Fluctuating interest rates may also affect the net interest income earned by us
resulting from the difference between the yield to us on loans held pending
sales and the interest paid by us for funds borrowed under our warehouse lines
of credit.
Market Risk
Our market risk is the risk of economic loss resulting from adverse changes in
market prices of mortgage loans and interest rates. We rely heavily on
borrowings under our warehouse credit facilities to conduct our wholesale
origination business. Borrowings under these credit facilities are done at
variable rates that will increase as interest rates rise. Additionally, when
interest rates rise, loans held for sale and any applications in process with
locked-in rates decrease in value. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in
future periods.
When interest rates decline, fallout may occur as a result of customers
withdrawing their applications. In those instances, we may be required to reduce
our interest rates to meet the market demands. Our wholesale segment operates
primarily in the subprime credit market. This market is less sensitive than the
prime credit markets are to the daily fluctuations in mortgage rates.
We do not maintain a trading account nor are we subject to currency exchange
risk or commodity price risk. Responsibility for monitoring interest rate risk
rests with senior management. Senior management regularly reviews our interest
rate risk position and adopts balance sheet strategies that are intended to
optimize operating earnings while maintaining market risk within acceptable
guidelines.
While we monitor interest rates and may, from time to time, employ a strategy
designed to hedge some of the risks associated with changes in interest rates,
no assurance can be given that our results of operations and financial condition
will not be adversely affected during periods of fluctuations in interest rates.
There were no open hedging positions at March 31, 2003.
19
Item 4. Controls and Procedures
An evaluation was performed within the last ninety days under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures and its internal controls and procedures for financial reporting.
Based on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
as of March 31, 2003. Also as a result of that evaluation, the CEO and CFO made
improvements to the Company's internal controls during the quarter ended March
31, 2003. The Company's goal is to monitor disclosure controls and internal
controls and to make modifications as necessary so that these controls are
dynamic systems that change as conditions warrant.
20
PART II
Item 1. Legal Proceedings
We have previously disclosed our material litigation and regulatory issues in
our 2002 Annual Report on Form 10-K. Below we have provided updates on those
matters for which there were material developments during the first quarter of
2003.
With respect to the securities litigation class action pending in the United
States District Court for the Southern District of New York, in which we are
named as one of the issuer-defendants, the court denied the motion to dismiss
the complaint against the company on February 19, 2003. The court dismissed the
Securities Exchange Act Section 10(b) claim against the individual defendants,
but denied the motion to dismiss the Securities Act Section 11 claim and
Sections 15 and 20(a) control person claims. The issuer-defendants, including
the company, have engaged in settlement discussions with the plaintiffs. A
Memorandum of Understanding reflecting the settlement discussions is being
drafted. The Company and the individual defendants intend to vigorously defend
the action. At this time, the Company does not believe this matter will have a
material impact on its financial position, operations or liquidity, however, due
to inherent uncertainties in litigation, such an outcome cannot be assured.
Item 2. Changes in Securities and Use of Proceeds
The information in response to this item is set forth in footnotes 6 and 9 on
pages 11 and 12 of this Form 10-Q and is incorporated hereinby reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are hereby filed as part of this Quarterly
Report on Form 10-Q.
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Merger dated as of October 14, 2002 among
PlanetRx.com, Inc. (n/k/a Paragon Financial Corporation), Paragon
Homefunding, Inc. a Delaware Corporation and Mortgage Express, Inc.
(n/k/a PGNF Home Lending Corp., et al (the "Mortgage Express Plan of
Merger") *
2.2 Amendment No. 1 to the Mortgage Express Plan of Merger **
2.3 Agreement and Plan of Merger dated December 9, 2002 among
PlanetRx.com, Inc. (n/k/a Paragon Financial Corporation), Paragon
Acquisition Corp. II, Paragon Homefunding, Inc., a Florida
corporation, et al. (the "Paragon Homefunding Plan of Merger") **
2.4 Amendment No. 1 to the Paragon Homefunding Florida Plan of Merger **
3.1 Restated Certificate of Incorporation filed with the Secretary of
State of the State of Delaware on October 6, 1999 +
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation filed with the Secretary of State of the State of
Delaware on October 13, 2000 +
21
3.3 Certificate of Amendment to Restated Certificate of Incorporation
filed with the Secretary of State of the State of Delaware on
November 30, 2002 +
3.4 Certificate of Amendment of the Restated Certificate of
Incorporation filed with the Secretary of State of the State of
Delaware on December 26, 2002 +
3.5 Certificate of Designations of Series E Preferred Stock +
3.6 Amended and Restated By-laws ***
4.1 Form of Promissory Note ***
4.2 Certificate of Designations of Series E Preferred Stock ****
10.1 Employment Agreement, dated as of January 31, 2003 by and between
Paragon Homefunding Corporation and Philip Lagori ***
10.2 Lease dated January 1, 2003 between Ponte Vedra Management Group,
Ltd. and Paragon Financial Corporation ***
99.1 Certificate of Chief Executive Officer Pursuant to 18 U.S.C. Section
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +
- -----------------------
* Filed as an Exhibit 2 to Paragon's Quarterly Report for the period ended
September 30, 2002
** Filed as an exhibit to Paragon's Current Report on Form 8-K for an event
dated January 31, 2003
*** Filed herewith as an exhibit to Paragon's Annual Report on Form 10-K
**** Filed herewith as Exhibit 3.5
+ Filed herewith
(b) Reports on Form 8-K
Current Report on Form 8-K for an Event Dated January 31, 2003
filed on February 14, 2003 relating to the acquisitions of PGNF and
Paragon Homefunding, Inc.
Current Report on Form 8-K for an Event Dated February 12, 2003
filed on February 20, 2003 relating to change in accountants.
22
PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PARAGON FINANCIAL CORPORATION
/s/ Steven A. Burleson
-----------------------------------------------
Steven A. Burleson
President, Chief Executive Officer and Director
Dated: May 27, 2003
/s/ Scott L. Vining
-----------------------------------------------
Scott L. Vining
Chief Financial Officer
Dated: May 27, 2003
23
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven A. Burleson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paragon Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
ther employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 27, 2003
By: /s/ Steven A. Burleson
================================================
Steven A. Burleson, Chief Executive Officer
(Principal Operating Officer)
24
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott L. Vining, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Paragon Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(d) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(e) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
ther employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 27, 2003
By: /s/ Scott L. Vining
================================================
Scott L. Vining, Chief Financial Officer
(Principal Accounting Officer)
25