PARAGON FINANCIAL CORP - 10-K Annual Report

Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2002

OR

|_| TRANSITION REPORT PURSUANT TO 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
(Exact name of registrant as specified in its charter)

DELAWARE 94-322773
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification Number)
5000 SAWGRASS VILLAGE CIRCLE
PONTE VEDRA BEACH, FLORIDA 32082
(Address of principal executive offices) (Zip Code)

(904) 285-0000
Registrant's telephone number, including area code

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK ($.0001 par value)

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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. No Yes |X| No [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes [ ] No |X|

The aggregate market value of our common stock held by non-affiliates
was approximately $2.9 million as of June 28, 2002, the last business day of our
most recently completed second fiscal quarter (based upon the closing price for
the common stock as reported on such date by the Nasdaq Over-The-Counter
Bulletin Board). In making this calculation the issuer has assumed, without
admitting for any other purpose, that all executive officers and directors of
the registrant are affiliates.

As of April 14, 2003, there were 116,146,478 shares of the registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None.

TABLE OF CONTENTS

Page
======
PART I

ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 15
ITEM 11. EXECUTIVE COMPENSATION 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
PART IV
ITEM 14. CONTROLS AND PROCEDURES 15
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 16

FINANCIAL STATEMENTS F-1
SIGNATURES 17
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 18
EXHIBIT INDEX 16

2

PART I

FORWARD LOOKING STATEMENTS

We believe that it is important to communicate our expectations to our
investors. Accordingly, this report contains discussions of events or results
that have not yet occurred or been realized. You can identify this type of
discussion, which is often termed "forward-looking statements", by such words
and phrases as "will","explore", "consider","continue","expects", "anticipates",
"intends", "plans", "believes", "estimates" and "could be". You should read
forward-looking statements carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial position, or state other expectations of future performance. There may
be events in the future that we are not able accurately to predict or to
control. Any cautionary language in this report provides examples of risks,
uncertainties and events that may cause our actual results to differ from the
expectations we express in our forward-looking statements. You should be aware
that the occurrence of certain of the events described in this report could
adversely affect our business, results of operations and financial position.

These forward looking statements are based on information available to
us on the date hereof, and we assume no obligation to update any such forward
looking statement. It is important to note that our actual results and timing of
certain events could differ materially from those in such forward looking
statements due to a number of factors, including but not limited to, general
economic conditions, overall interest rates, the shape of the yield curve,
reductions in the value of retained interest in securitizations,our ability to
successfully grow our recently acquired mortgage origination subsidiaries and
our ability to obtain the financing necessary to fund our origination business.
Other risk factors that could cause actual results to differ materially are set
forth in this item under the heading "Management Discussion and Analysis of
Financial Condition and Results of Operations - - Overview" on page 11.

3

ITEM 1. BUSINESS

COMPANY HISTORY
- ---------------

Paragon Financial Corporation was incorporated in Delaware on August
27, 1999 under the name PlanetRx.com, Inc. and operated as an online healthcare
destination for commerce, content and community. We closed our online health
store in March 2001. Shortly after that, we began the process of liquidating our
online health store and seeking a merger partner as an alternative to complete
liquidation. We completed this process on May 31, 2002, when we merged with
Paragon Homefunding, Inc., ("Paragon Homefunding Delaware") a privately held,
development stage company based in Ponte Vedra Beach, Florida, that had no
operating history at the time the merger was consummated and intended to enter
the financial services market through acquisitions.

On January 31, 2003, we completed our merger with Mortgage Express,
Inc. (now known as PGNF Homelending Corp.) In this merger our subsidiary,
Paragon Homefunding Delaware, was merged into Mortgage Express. As a result of
the merger, Mortgage Express became a wholly owned subsidiary of ours. Mortgage
Express 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 Mortgage Express's common stock converted into 52,329,735
of shares of the 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. The shares issued for the merger are
privately issued unregistered shares. This means that these shares cannot be
publicly traded until they are either registered with the Securities and
Exchange Commission or there is an exemption from registration. The shares of
common stock issued in the Mortgage Express transaction carry piggyback
registration rights. This means that we must invite the holder of those Paragon
shares of common stock to include those shares to be registered for resale in a
registration statement which Paragon files in the future. However, if that
registration statement includes securities being offered for the sale by an
underwriter, the underwriter may, in its discretion, limit the number of shares
of common stock which may be included in that registration for resale, down to
zero if it chooses. In that case, those shares of common stock which were not
permitted to be registered for resale by an underwriter will be eligible to be
included in our next registration statement on the same terms.

Additionally, Paragon issued a promissory note in the amount of $1.8
million, subject to adjustment, to an entity wholly owned by Philip Lagori, the
sole shareholder of Mortgage Express. The promissory note accrues interest at
4.92% and is payable on July 31, 2004. Paragon's payment obligations under the
promissory note were secured by a security interest in the Mortgage Express
shares of common stock owned by Paragon. On March 26, 2003, the holder of this
note agreed to convert the note into shares of the company's 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 a merger with Paragon Homefunding,
Inc., a Florida corporation ("Paragon Florida") which was not affiliated with us
or our former Delaware corporation subsidiary. 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 Paragon common stock valued
at $836,000 (approximately $0.6833 per share), or approximately one percent of
Paragon's outstanding common stock after the consummation of the merger and
giving effect to the consummation of the Mortgage Express merger described

4

above. Additionally, Paragon 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.

Our shares of common stock which Paragon Florida's shareholders
received in the merger are privately issued unregistered shares, and they cannot
be publicly traded until they are either registered with the Securities and
Exchange Commission or there is an exemption from registration. The shares
issued Paragon Florida's shareholders carry the same carry piggyback
registration rights discussed above for the Mortgage Express acquisition.

Prior to the consummation of the mergers discussed above, Paragon had
no operations. The consideration in both of these mergers was mutually agreed to
by the parties and was based upon the number of Paragon's unregistered common
shares equal in value to the values of each of Mortgage Express's and Paragon
Florida's businesses at the time each of the merger agreements were signed.

BUSINESS
- --------

Upon completion of the mergers with Mortgage Express and Paragon
Florida, we began operating in the residential mortgage origination and banking
industry. We originate, wholesale and sell residential mortgage loans and
function as both a mortgage banker and broker. We conduct business in 26 states,
with an emphasis in Illinois and Indiana, and have a wholesale relationship with
over 500 brokers. All of the retail activity is conducted in Illinois, Indiana
and Florida. Our primary sources of revenue will be from

o loan origination fees;

o gains from the sales of loans; and

o interest earned on mortgage loans during the period they are held by us,
net of interest paid on funds borrowed to finance such mortgage loans.

OUR MORTGAGE PRODUCTS

We offer a broad range of mortgage products that aim to meet the mortgage needs
of all borrowers. Our product line includes Fannie Mae-eligible loans, jumbo
loans, adjustable rate mortgages, FHA-insured and VA-guaranteed loans, alternate
"A" loans and sub-prime loans.

Conforming and Government-Insured Fixed Rate Loans. These mortgage loans conform
to the underwriting standards established by Federal National Mortgage
Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage Corporation
(FHLMC or "Freddie Mac"). This product is limited to high-quality borrowers with
good credit records and involves adequate down payments or mortgage insurance.
These loans may qualify for insurance from the Federal Housing Authority (FHA)
or guarantees from the Veterans Administration (VA). FHA and VA mortgages must
be underwritten within specific governmental guidelines, which include borrower
income verification, asset verification, borrower creditworthiness, property
value and property condition.

Jumbo Loans. Jumbo loans are considered non-conforming mortgage loans because
they have a principal loan amount in excess of the loan limits set by Fannie Mae
and Freddie Mac (currently, $300,700 for single-family, one-unit mortgage loans
in the continental United States).

Adjustable Rate Mortgages (ARM). The ARM's defining feature is a variable
interest rate that fluctuates over the life of the loan. Interest rate
fluctuations are based on an index that is related to Treasury bill rates,
regional or national average cost of funds of savings and loan associations, or
another widely published rate, such as LIBOR. The period between the rate
changes is called an adjustment period and may change every six months or one
year.

5

Alternate "A" Loans. From a credit risk standpoint, alternate "A" loan borrowers
present a risk profile comparable to that of conforming loan borrowers, but
entail special underwriting considerations, such as a higher loan to value ratio
or limited income verification.

Sub-Prime Mortgage Loans. The non-prime mortgage loan focuses on customers whose
borrowing needs are not served by traditional financial institutions. Borrowers
of sub-prime mortgage loans may have impaired or limited credit profiles, high
levels of debt service to income, or other factors that disqualify them for
conforming loans. Offering this category of mortgage loans allows us to provide
loan products to borrowers with a variety of differing credit profiles.

MARKET

According to the Mortgage Bankers Association of America, $2.5 trillion
of residential loans were originated in 2002 representing a record year for
mortgage loan industry. Due to extremely low interest rates, much of the growth
can be attributed to the significant increase in refinancing. Loans for sales of
new or existing homes increased.

The mortgage market is divided into two components: the primary market
and secondary mortgage markets. In the primary market, the consumer obtains a
home loan and the process usually includes application, credit and property
evaluation, underwriting and loan closing. Mortgage bankers originate and then
resell mortgages into the secondary market, earning fees in connection
therewith. In the secondary mortgage market, the acquisition and sale of newly
closed and seasoned loans between mortgage bankers and institutional investors
such as the Government National Mortgage Association (GNMA or "GinnieMae"), the
Federal National Mortgage Association (FNMA or "FannieMae") and the Federal Home
Loan Mortgage Corporation (FHLMC or "FreddieMac") takes place. With these
long-term investors as major purchasers of mortgage loans, vast liquidity is
added to the market. Typically, when an originator funds a loan, it is doing so
on borrowed funds from a line of credit known as a "warehouse line." When
sufficient loans are accumulated, the portfolio is then sold into the secondary
market. Originators rarely hold loans longer than a few weeks, in addition to
providing liquidity, the secondary market is a convenient way for mortgage
bankers to manage and transfer the interest rate risk associated with the
closing of the loan.

COMPETITION

Mortgage banking is highly competitive. A large number of banks,
non-bank mortgage lenders, and mortgage brokers offer mortgage loans. Many of
these competing mortgage originators share a business strategy and capability
similar to ours and many of them are larger than we are, with substantially more
capital and greater marketing and technical resources than we have.

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.

REGULATION

Our mortgage banking business is subject to the rules and regulations
of, and examination by, the Department of Housing and Urban Development ("HUD"),
the Federal Housing Administration (the "FHA"), the Department of Veteran
Affairs (the "VA"), Fannie Mae, Freddie Mac, the Government National Mortgage
Association ("GNMA") and state regulatory authorities with respect to
originating, processing, selling and servicing

6

mortgage loans. Those rules and regulations, among other things impose licensing
obligations on us, establish standards for origination and servicing mortgage
loans, prohibit discrimination, provide for inspections and appraisals of
property, require credit reports on prospective borrowers and, in some cases,
restrict certain loan features, and fix maximum interest rates and fees.
Moreover, FHA lenders are required to submit to the FHA Commissioner, on an
annual basis, audited financial statements, and GNMA requires the maintenance of
specified net worth levels (which vary depending on the amount of GNMA
securities issued by the Company). Our affairs are also subject to examination
by the FHA Commissioner to assure compliance with FHA regulations, policies and
procedures. In addition to other federal laws, mortgage origination activities
are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home
Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Home
Ownership Equity Protection Act, and the regulations under these acts. These
laws prohibit discrimination, require the disclosure of certain basic
information to mortgagors concerning credit and settlement costs, limit payment
for settlement services to the reasonable value of the services rendered and
require the maintenance and disclosure of information regarding the disposition
of mortgage applications based on race, gender, geographical distribution and
income level.

EMPLOYEES

At December 31, 2002, we had four people employed at our corporate
offices engaged primarily in the furtherance of our business plan. Upon the
completion of the Mortgage Express and Paragon Florida mergers, we had
approximately 186 employees and relationships with over 875 independent brokers.

ITEM 2. PROPERTIES

Our executive offices are located at 5000 Sawgrass Village Circle, Ponte
Vedra Beach, Florida. We occupy approximately 4,348 square feet of space at this
location under a lease, which commenced January 1, 2003, and expires December
31, 2006. The annual rent on our executive offices is $95,200.

Our Mortgage Express subsidiary occupies approximately 8,100 square
feet in Westmont, Illinois under a lease expiring August 31, 2010. The annual
rent on our offices in Westmont, Illinois is $360,000.

ITEM 3. LEGAL PROCEEDINGS

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 coordinated with approximately

7

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 time, the Company does not believe this matter will have a
material impact on its financial position, operations or liquidity.

In addition to the above named legal proceedings, from time to time, we
has been a party to routine pending or threatened legal proceedings and
arbitrations. We insure some, but not all, of our exposure with respect to such
proceedings. Based upon information presently available, and in light of legal
and other defenses available to us, we do not consider the liability from any
other threatened or pending litigation to be material to us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annual meeting of stockholders on December 20, 2002 to:

o elect directors,

o to approve an amendment to our Restated Certificate of Incorporation
to change our name from "PlanetRx.com, Inc." to "Paragon Financial
Corporation",

o to approve an amendment to our Restated Certificate of Incorporation
to increase the number of authorized shares of common stock from
200,000,000 to 400,000,000,

o to ratify the adoption of the PlanetRx 2002 Equity Participation Plan,
and to approve an amendment to our Restated Certificate of
Incorporation to permit stockholder action by written consent.

Each of management's nominees for directors, as listed in the proxy
statement, was elected with the number of votes set forth below.

FOR WITHHELD
Steven A. Burleson 47,516,032 3,095
Paul K. Danner 47,516,038 3,089
Harold Lazarus, Ph.D. 47,516,519 2,608

The other matters voted upon at the annual meeting were approved with
the number of votes set forth below:

FOR AGAINST ABSTAIN
Proposal to change the Company's
Name 47,517,962 665 500
Proposal to increase the number of
authorized shares 47,430,552 6,601 81,974

Ratify the 2002 Equity Participation Plan 47,502,713 14,149 2,265

Proposal to permit stockholder action by
written consent 47,512,554 4,645 1,928

8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Paragon's common stock trades in the over-the-counter market and is
quoted on the OTC Bulletin Board. Before we changed our name from "PlanetRx.com,
Inc." to "Paragon Financial Corporation", our trading symbol was PLRX. Our
trading symbol changed to PGNF with our name change. As of December 31, 2002 and
April 14, 2003, we had 62,592,744 and 116,146,478 shares of common stock issued
and outstanding, respectively.

The following table sets forth, for the periods indicated, the high and
low bid prices per share of our common stock as quoted on the OTC Bulletin
Board.

HIGH LOW
---- ---

2003
1st Quarter................. $0.80 $0.40
2003

2002
4th Quarter ........................... $1.35 $0.08
3rd Quarter ........................... $0.17 $0.07
2nd Quarter................................ $0.26 $0.05
1st Quarter................................ $0.07 $0.05

2001
4th Quarter ........................... $0.11 $0.04
3rd Quarter ........................... $0.28 $0.09
2nd Quarter................................ $0.31 $0.27
1st Quarter................................ $0.56 $0.27

HOLDERS

As of April 14, 2003, we had approximately 450 stockholders of record.
Only record holders of shares held in "nominee" or street names are included in
this number.

DIVIDENDS

We have never declared or paid cash dividends on our common stock. We
intend to retain future earnings, if any, for use in the operations of our
business including working capital, repayment of indebtedness, capital
expenditures and general corporate purposes. We do not anticipate paying any
cash dividends on our common stock in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

On May 31, 2002, we issued an aggregate of 55,560,616 shares of common
stock to the former holders of Paragon Homefunding Delaware in our merger
transaction with Paragon Homefunding Delaware. These shares were issued in
conversion of the Paragon Homefunding Delaware shares at the rate of 27.386626
of our shares of common stock for each Paragon Homefunding Delaware share. In
connection with this merger, the Company assumed liabilities totaling $72,000 in
excess of the fair value of the assets acquired.

On January 31, 2003, we issued an aggregate of 52,329,725 shares of
common stock to the former shareholder of Mortgage Express in our merger
transaction with Mortgage Express. These shares were issued in conversion of the
Mortgage Express shares of common stock at the rate of 523,297.25 of our shares
for each Mortgage Express share. These shares were valued at $0.122, the value
at the date the merger was agreed to in October 2002.

9

On February 2, 2003, we issued an aggregate of 1,224,000 shares of
common stock to the former shareholders of Paragon Florida. These shares were
issued in conversion of the Paragon Florida shares at the rate of 12.24 of our
shares for each Paragon Florida share. These shares were valued at $0.683 the
value on February 2, 2003 the date at which all the terms were agreed.

From December 20, 2002 to March 6, 2003, we issued units consisting of
convertible promissory notes in the aggregate principal amount of $379,000 of
which $135,000 were issued as of December 31, 2002 together with common stock
purchase warrants to purchase an aggregate of 75,800 shares of common stock. The
convertible promissory notes bear interest at the rate of 15% per annum.
Interest is payable quarterly on March 31, June 30, September 30, and December
31, 2003, and the principal is payable on December 31, 2003. The convertible
promissory notes are convertible at each holder's option at any time prior to
repayment at the rate of $0.25 per share. The warrants are exercisable to
purchase shares of common stock at $0.25 for a period of three years. Proceeds
from this offering is being used for working capital, and general corporate
purposes.

Each of the above issuances were exempt from registration under Section
4(2) of the Securities Act of 1933. We did not use any underwriter or placement
agent in these transactions, and did not pay any compensation to anyone in
connection with these issuances.

ITEM 6. SELECTED FINANCIAL DATA

The following selected Statement of Operations and Balance Sheet data
as of and for the periods ended December 31, 2002 and 2001 has been derived from
our consolidated financial statements audited by BP Professional Group, LLP,
independent auditors, whose report with respect to each of the years since
inception appears on page F-2. Such selected financial data should be read in
conjunction with those consolidated financial statements and the accompanying
notes thereto and with "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" also included herein.

2002 2001
---- ----
Total revenue $ -- $ --
Net loss $(2,342) $ (225)
Basic and diluted earnings per share $ (0.04) $ (0.01)
Total assets $ 206 $ --
Working capital $ (293) $ --
Stockholders' equity $ (868) $ (197)

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

OVERVIEW

Certain information contained in the matters set forth in this Annual Report are
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. Paragon cautions 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 item
and elsewhere in this Annual Report, or which are otherwise made by or on behalf
of us. For this purpose, any statements contained in this Annual 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 the following:

o Our ability to raise capital necessary to sustain our operations and
implement our business plan,

o Our ability to implement our business plan,

o Our ability to obtain regulatory permits and approvals to operate in the
financial services area,

o Our ability to identify and complete acquisitions and successfully
integrate the businesses we acquire, if any,

o Changes in the real estate market, interest rates or the general economy
of the markets in which we operate,

o Our ability to employ and retain qualified management and employees,

o Changes in government regulations that are applicable to our regulated
brokerage and lending businesses,

o General volatility of the capital markets and the establishment of a
market for our shares,

o Changes in the demand for our services,

o The degree and nature of our competition,

o Our ability to generate sufficient cash to pay our creditors, and

o 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.

RESULTS OF OPERATIONS

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE PERIOD FROM INCEPTION
(AUGUST 1, 2001) TO DECEMBER 31, 2001

REVENUE

Revenues for the year ended December 31, 2002 and for the period from inception
(August 3, 2001) to December 31, 2001 were $0.

OPERATING EXPENSES

Deferred salaries, related benefits and stock based compensation. Deferred
salaries, related benefits and stock based compensation increased $1,560,000,
or 750%, to $1,768,000 for the year ended December 31, 2002 compared to $208,000
for the period from inception (August 3, 2001) to December 31, 2001. This
increase is due to the increase in the number of executives during fiscal 2002
as well as the additional seven months in year ended December 31, 2002 compared
to the period ended December 31, 2001. The deferred

11

salaries, related benefits and stock based compensation are primarily related to
salaries accrued for the executive officers pursuant to employment agreements.
On March 26, 2003 these executives converted an aggregate of $659,000 of
deferred salaries and related benefits into 659 shares of our Series E preferred
stock. Our Series E preferred stock provides for a stated value of $1,000 per
share, an annual dividend of 4% of the stated value, is non-voting and does not
provide for redemption.

General and other administrative expenses. General and other administrative
expenses increased $552,000, or 3,247%, to $569,000 for the year ended December
31, 2002 compared to $17,000 for the period from inception (August 3, 2001) to
December 31, 2001. This increase is primarily due to the additional seven months
in year ended December 31, 2002 compared to the period ended December 31, 2001
as well as the increase in travel to support our acquisition program.

Interest expense, net. Interest expense, net was $5,000 and relates to a premium
finance plan on certain of our insurance contracts. There was no interest
expense for the period from inception (August 3, 2001) to December 31, 2001.

Net loss. Net loss for the year ended December 31, 2002 was $2,342,000 compared
to $225,000 for the period from inception (August 3, 2001) to December 31, 2001.
The increase of $2,117,000 was due to the factors discussed above.

QUARTERLY RESULTS

Set forth below is certain unaudited quarterly financial data for each of our
last eight quarters. The information has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
such quarterly information in accordance with generally accepted accounting
principles. The operating results for any quarter are not necessarily indicative
of the results to be expected for any future period.

YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

Net revenue $ - $ - $ - $ -
Total operating expenses $ 389 $ 432 $ 658 $ 863
Net loss $(389) $(432) $(658) $ (863)
Basic and diluted loss per
Share $(0.01) $(0.01) $(0.01) $(0.01)

YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

Net revenue $ - $ - $ - $ -
Total operating expenses $ - $ - $ 77 $ 148
Net loss $ - $ - $(77) $ (148)
Basic and diluted loss per
Share $ - $ - $(0.00) $(0.01)

12

LIQUIDITY AND CAPITAL RESOURCES

As reflected in our financial statements, since inception through December 31,
2002, we did not generate any revenues since we were in the development stage.
In May 2002, we consummated our merger with Paragon Homefunding and began
implementing our plan of acquiring or combining with financial services
companies. We achieved our initial goals in this plan by merging with Mortgage
Express and Paragon Florida, both of which are operating businesses that
originate residential mortgage loans. We expect that we will generate revenues
and cash flow from these operations during 2003. Additionally, we plan to
continue to seek additional financial services companies to acquire or merge
with. If we are successful in this, we expect that we will generate additional
revenue and cash flow from their operations as well. There can be no assurance
that we will be successful in either securing additional capital or acquiring
additional businesses with sufficient cash flow to allow us to continue our
existence and execute our business plan.

We invest excess cash predominantly in instruments that are highly liquid, of
high-quality investment grade, and predominantly have maturities of less than
one year with the intent to make such funds readily available for operating
purposes. At December 31, 2002, we had cash of $91,000, and we had a working
capital deficit of $293,000.

Net cash used in operating activities was $320,000 since we were formed in
August 2001 and primarily represent the payment of legal and accounting fees. To
date, we have raised approximately $386,000 in cash from the issuance of common
stock to individual investors and an additional $110,000 in cash from the sale
of units consisting of convertible promissory notes and warrants. The
convertible promissory notes bear interest at the rate of 15% per annum, and
interest is payable quarterly on March 31, June 30, September 30, and December
31, 2003. The convertible promissory notes are convertible at each holder's
option at any time prior to repayment at the rate of $0.25 per share.

RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Recission on FASB 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections" (SFAS
145). Under SFAS 145, gains and losses related to the extinguishment of debt
should no longer be segregated on the income statement from continuing
operations. The provisions of SFAS 145 are effective for fiscal years beginning
after May 15, 2002 with early adoption encouraged. The adoption of this standard
is not expected to have a material effect on the Company.

In June 2002, the FASB issued Statement of Financial Accounting Standard 146,
"Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146).
SFAS 146 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)." FAS 146 is effective for exit or disposal activities initiated
on or after December 31, 2002. The effects of adopting this standard will not
have a material effect on the Company.

13

In December 2002, the FASB issued Statement of Financial Accounting Standard
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
148). SFAS 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement of Financial Accounting Standard 123, "Accounting for Stock-Based
Compensation" (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 used on reported results. The
disclosures required by SFAS 148 are included in this document.

ITEM 7A. QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of our operating and financial activities, we are exposed to changes
in interest rates which may adversely affect our results of operations and
financial position. In seeking to minimize the risks and/or costs associated
with such activities, we manage exposure to changes in interest rates through
our regular operating and financing activities. We do not utilize financial
instruments for trading or other speculative purposes, nor do we utilize
leveraged financial instruments or other derivatives for such purposes.

MARKET RATE RISK

The following discussion about our market rate risk involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in
interest rates, foreign currency exchange rates, and equity security price risk.
We do not use derivative financial instruments to hedge these risks.

Interest Rate Risk. Our exposure to market rate risk for changes in interest
rates relate primarily to borrowings under our credit instruments and our
short-term monetary investments. To the extent that, from time to time, we hold
short-term money market instruments, there is a market rate risk for changes in
interest rates on such instruments. To that extent, there is inherent rollover
risk in the short-term money market instruments as they mature and are renewed
at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and business
financing requirements. However, there is no risk of loss of principal in the
short-term money market instruments, only a risk related to a potential
reduction in future interest income. Derivative instruments are not presently
used to adjust our interest rate risk profile. We do not use derivative
financial instruments to hedge this interest rate risk. However, in the future,
we may consider the use of financial instruments to hedge interest rate risk.

See Note 2 to financial statements.

14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item are incorporated under Item 15 in
Part IV of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

On February 20, 2003, we reported on Form 8-K a change in our certifying
accountant.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding executive officers required by this Item
is incorporated by reference to the sections entitled "Director Information"
and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's
proxy statement relating to the company's 2003 annual meeting of stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding compensation of executive officers and directors
is incorporated by reference to the sections entitled "Board Compensation
Committee Report on Executive Compensation," "Executive Compensation and Other
Information," "Stock Options," "Options Exercises and Holdings," "Stock
Performance Graph," "Retirement Plans," "Employment Agreements with Officers of
the Company" and "Directors' Compensation" of the company's proxy statement
relating to the company's 2003 annual meeting of stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners
and management is incorporated by reference to the section entitled "Security
Ownership of Certain Beneficial Owners and Management" of the company's proxy
statement relating to the company's 2003 annual meeting of stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
incorporated by reference to the sections entitled "Employment Agreements with
Officers of the Company" and "Certain Relationships and Related Transactions" of
the company's proxy statement relating to the company's 2003 annual meeting of
stockholders.

ITEM 14. CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures (as defined in Securities Exchange
Act of 1934 Rules 13a-14(c) and 15d-14(c)) are sufficiently effective to ensure
that the information required to be disclosed by us in the reports we file under
the Securities Exchange Act of 1934 is gathered, analyzed and disclosed with
adequate timeliness, accuracy and completeness, based on an evaluation of such
controls and procedures conducted within 90 days prior to the date hereof.

Subsequent to our evaluation, there were no significant changes in
internal controls or other factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

15

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)Documents filed as part of this report:

1. The following financial statements of the Company are included in Part II,
Item 8 of this Annual Report on Form 10-K:

Independent Auditors' Report;
Balance Sheets as of December 31, 2002, and 2001;

Statements of Operations for the year ended December 31, 2002 and the period
inception (August 3, 2001) to December 31, 2001;

Statements of Stockholders' Equity for the period inception (August 3, 2001) to
December 31, 2002;

Statements of Cash Flows for the year ended December 31, 2002 and the period
inception (August 3, 2001) to December 31, 2001;

Notes to Financial Statements.

(b) Reports on form 8-K:

No reports on Form 8-K were filed during the quarter ended
December 31, 2002.

On February 14, 2003, the company filed a Current Report on Form 8-K
announcing the closing of our Agreements and Plans of Merger with Mortgage
Express, Inc. and Paragon Homefunding, Inc., respectively.

On February 20, 2003, the company filed a Current Report on Form 8-K
announcing a change in our certyifying accountant.

(c)Exhibits:

EXHIBIT
NUMBER DESCRIPTION

============= =============================================================================================
2.1 Agreement and Plan of Merger dated as of April 22, 2002, among PlanetRx.com, Inc. (n/k/a
Paragon Financial Corporation). PHI Acquisition Corp. and Paragon Homefunding Delaware *

2.2 Agreement and Plan of Merger dated as of October 14, 2002 among PlanetRx.com, Inc. (n/k/a
Paragon Financial Corporation)., Paragon Homefunding Delaware and Mortgage Express, Inc.
(n/k/a PGNF Home Lending Corp.), Phillip Lagori, John LaGrassa and Philip LaGiglia (the
"Mortgage Express Plan of Merger") **

2.3 Amendment No. 1 to the Mortgage Express Plan of Merger ***

2.4 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 Florida
and Edward Parnell (the "Paragon Homefunding Florida Plan of Merger") ***

2.5 Amendment No. 1 to the Paragon Homefunding Florida Plan of Merger xxx

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, 1999+

3.3 Certificate of Amendment to Restated Certificate of Incorporation filed with the Secretary
of State of the State of Delaware on November 30, 2000+

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+

3.6 Amended and Restated By-laws+

4.1 Form of Promissory Note+

10.1 Amended and Restated Employment Agreement, dated as of September 1, 2002 by and between
PlanetRx.com, Inc. (now known as Paragon Financial Corporation) and Paul Danner+

10.2 Employment Agreement, dated as of September 4, 2002 by and between PlanetRx.com, Inc. (now
known as Paragon Financial Corporation) and Steven A. Burleson+

10.3 Employment Agreement, dated as of January 31, 2003 by and between Paragon Financial
Corporation and Philip Lagori+

10.4 Letter Agreement, dated as of November 1, 2002 (but effective December 30, 2002) by and
between PlanetRx.com, Inc. (now known as Paragon Financial Corporation) and Scott Vining+

10.5 Lease dated January 1, 2003 between Ponte Vedra Management Group, Ltd. and Paragon Financial
Corporation+

10.6 Lease dated September 1, 2000 between 820 West Lake, LLC and Mortgage Express, Inc. (n/k/a
PGNF Home Lending Corp.)+

23.1 Consent of BP Professionals LLP

99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted
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 1350 as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

- -----------------
* Filed as Exhibit 2 to Paragon's Quarterly Report for the period ended
March 31, 2002

** Filed as 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 for an event
dated January 31, 2003

+ Filed herewith

16

INDEX TO FINANCIAL STATEMENTS

PAGE
----
PARAGON FINANCIAL CORPORATION
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF STOCKHOLDERS' DEFICIENCY F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-7

F-1

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS
PARAGON FINANCIAL CORPORATION

We have audited the accompanying balance sheets of Paragon Financial Corporation
(a development stage company) as of December 31, 2002 and 2001, and the related
statements of operations, cash flows and stockholders' deficiency for the year
ended December 31, 2002, for the period from August 3, 2001 (date of inception)
through December 31, 2001, and cumulatively for the period from August 3, 2001
(date of inception) through December 31,2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paragon Financial Corporation
as of December 31, 2002 and 2001, and the related statements of operations, cash
flows and stockholders' deficiency for the year ended December 31, 2002, for the
period from August 3, 2001 (date of inception) through December 31, 2001, and
cumulatively for the period from August 3, 2001 (date of inception) through
December 31,2002, in conformity with accounting principles generally accepted in
the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has suffered losses from operations and has
net working capital and stockholders' equity deficiencies that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/s/ BP PROFESSIONAL GROUP LLP
Farmingdale, New York
March 6, 2003, except as to Note 8
for which the date is April 11, 2003

F-2

PARAGON FINANCIAL CORPORATION

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

December 31, December 31,
2002 2001

Assets
Current assets:
Cash $ 91 $ -
Prepaid expenses 31
----------------- -----------------
Total current assets $ 122 $ -

Property and equipment, net of accumulated
depreciation of $1 in 2002 1 -
Deferred merger costs 58 -
Deposits 25 -
----------------- -----------------
Total assets $ 206 $ -
================= =================

Liabilities and Stockholders' Deficiency
Current liabilities:
Convertible debentures payable $ 34 $ -
Accounts payable 177 38
Accrued expenses, related party 204 4
----------------- -----------------
Total current liabilities 415 42
Related party debt, subsequently converted to
preferred stock 659 155
----------------- -----------------

Total liabilities 1,074 197
----------------- -----------------

Commitments and contingencies (Notes 4, 5, and 7)

Stockholders' deficiency:
Preferred stock: Issuable in series, $0.0001 par value;
5,000,000 shares authorized; none issued - -
Common stock: $0.0001 par value; 400,000,000 shares
authorized; 62,592,744 and 33,822,480 shares issued
and outstanding, respectively 6 3
Additional paid-in capital 1,693 26
Subscriptions receivable - (1)
Deficit accumulated during the development stage (2,567) (225)
----------------- -----------------
Total stockholders' deficiency (868) (197)
----------------- -----------------
Total liabilities and stockholders' deficiency $ 206 $ -
================= =================

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-3

PARAGON FINANCIAL CORPORATION

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

From Cumulative
Inception From Inception
(August 3, 2001) (August 3, 2001)
Year Ended through through
December 31, 2002 December 31, 2001 December 31, 2002

Revenue $ - $ - $ -

Operating expenses:
Deferred salaries, related benefits and stock-based
compensation 1,768 208 1,976
General and other administrative expenses 569 17 586
Interest expense 5 - 5
------------------ ----------------- -----------------
Total operating expenses 2,342 225 2,567

Net loss $ (2,342) $ (225) $(2,567)
================== ================= =================
Basic and diluted loss per share $ (0.04) $ (0.01)
================== =================

Weighted average shares outstanding - basic and diluted 54,407 31,954
================== =================

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-4

PARAGON FINANCIAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(DOLLAR AMOUNTS IN THOUSANDS)

Additional Total
Paid-in Deferred Subscriptions Treasury Accumulated Stockholders'
Common Stock Capital Compensation Receivable Stock Deficit Deficit
------------ ------- ------------ ---------- ----- ------- -------
Shares Amount
------- ------

Balances August 3, 2001 - $ - $ - $ - $ - $ - $ -
August 3 Initial
capitalization of the
company (with shares at -
$0.001 par value) 1,120,000 1 (1) -
October 31 Issuance of
shares for services 115,000 28 28
Adjustment to reflect
changes in shares and
par value for 32,587,480 2 (2)
subsequent merger
Net loss for the period (225) (225)
- -------------------------------------------------------------------------------------------------------------------------------

Balances December 31, 2001 33,822,480 3 26 (1) - (225) (197)
March 1 Contribution from
founding shareholders
of 5,477,325 shares as 200 1 (200) 1
treasury stock
March 1 Issuance of
16,431,975 restricted
and unrestricted shares
for services 10,954,650 1 399 (400) 200 200
May 31 Issuance of shares
for cash 10,783,486 1 384 385
May 31 Issuance of shares
to effect reverse
acquisition 6,173,403 1 (73) (72)
June 30 Amortization of
restricted shares 62 62
July 10 Issuance of shares
for services 458,725 - 46 46
July 16 Rescission of
16,431,975 shares and
re-issuance and
re-allocation as
unrestricted shares 148 338 486
August 1 Contribution of
services by shareholder 5 5
November 8 Issuance of
shares for services 400,000 - 36 36
December 30 Issuance of
options to consultants 421 421
December 31 Issuance of
warrants included in
convertible
debentures 6 6
December 31 Beneficial
conversion feature on
convertible debentures 95 95
Net loss for year (2,342) (2,342)
- -------------------------------------------------------------------------------------------------------------------------------

Balances December 31, 2002 62,592,744 $ 6 $ 1,693 $ - $ - $ - $(2,567) $ (868)
========== === ======= ==== === ===== ======= ======

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-5

PARAGON FINANCIAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

Cumulative
From From
Inception Inception
(August 3, (August 3,
Year 2001) 2001)
Ended through through
December 31, December 31, December 31,
2002 2001 2002
---------------- --------------- ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $(2,342) $(225) $(2,567)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation 1 - 1
Deferred compensation to related parties,
subsequently converted to preferred shares 504 155 659
Stock-based compensation 1,256 28 1,284
Changes in assets and liabilities:
Prepaid expenses (31) - (31)
Accounts payable 67 38 105
Accrued expenses - related party 225 4 229
---------------- --------------- ---------------
Cash used by operating activities (320) - (320)
---------------- --------------- ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2) - (2)
Deferred merger costs (58) - (58)
Deposits (25) - (25)
---------------- --------------- ---------------
Cash used by investing activities (85) - (85)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 386 - 386
Proceeds from the issuance of warrants 6 6
Proceeds from issuance of debentures 104 - 104
---------------- --------------- ---------------
Cash provided by financing activities 496 - 496
---------------- --------------- ---------------
Net increase in cash 91 - 91

Cash, beginning of period - - -
---------------- --------------- ---------------
Cash, end of period $ 91 $ - $ 91
============== =============== ===============
Supplemental Cash Flow Data:

Cash interest paid $ 5 $ - $ 5
============== =============== ===============
Non-cash investing and financing activities:

Issuance of debentures for legal fees (25) - (25)
============== ===============
Liabilities assumed in reverse acquisition 72 - 72
============== ===============

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-6

PARAGON FINANCIAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

Organization and Basis of Presentation

THE COMPANY

Paragon Financial Corporation was incorporated in Delaware on August 27, 1999
under the name PlanetRx.com, Inc. and operated as an online healthcare
destination for commerce, content and community. The Company closed its online
health store in March 2001. Shortly thereafter, the Company began the process of
liquidating its online health store and seeking a merger partner as an
alternative to complete liquidation.

Paragon Homefunding, Inc., a privately held, development stage company based in
Ponte Vedra Beach, Florida, was incorporated in Delaware on August 3, 2001, for
the purpose of entering the financial services market through acquisitions. On
May 31, 2002, the Company merged with Paragon Homefunding.

Pursuant to the merger, PlanetRx.com merged with and into Paragon, and issued
55,560,616 shares of common stock to the Paragon stockholders constituting 90%
of the total shares of the Company's common stock outstanding immediately after
the merger. As a result of the merger, Paragon also assumed approximately $72 of
PlanetRx.com's accrued liabilities, principally for legal services.

For financial reporting purposes, the merger has been accounted for as a
recapitalization of Paragon Homefunding with Paragon Homefunding viewed as the
accounting acquiror in what is commonly called a reverse acquisition.
Accordingly, the financial statements presented before the merger are those of
Paragon Homefunding.

These financial statements have been prepared in accordance with Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises," to recognize the fact that through December 31, 2002, the
Company had devoted substantially all of its efforts to establishing a new
business and planned principal operations had not commenced. Through such date,
the Company had recorded no revenue and generated losses since inception
aggregating $2,567. As of December 31, 2002, the Company had a net capital
deficiency of $868. These factors raise substantial doubt about the Company's
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. The continued existence of the Company depends on a number of
factors, including but not limited to, its ability to secure adequate sources of
capital and locate and fund acquisitions of suitable companies. Management
believes that the Company's mergers with Mortgage Express, Inc. and a similarly
named Florida corporation, Paragon Homefunding, Inc., ("Paragon Homefunding
Florida") on January 31, 2003 and February

F-7

2, 2003, respectively, will provide the Company with sufficient capital to
continue operations, but there can be no assurance that such acquired operations
will be successful. Upon consummation of the mergers on January 31, 2003 and
February 2, 2003, the Company is no longer considered to be a development stage
enterprise (See Note 7).

SIGNIFICANT ACCOUNTING POLICIES

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.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives using the straight-line
method. Repair and maintenance costs are expensed as incurred.

POST MERGER CONTINGENT ASSETS

As part of its merger with PlanetRX.com, the Company received certain intangible
assets, principally domain names, whose realization is uncertain, and for which
no value is recorded in the accompanying financial statements. Accordingly, such
assets will be recognized only upon their sale for objectively valid
consideration.

DEFERRED MERGER COSTS

Costs incurred related to a pending merger are capitalized until the transaction
is either consummated, in which case the costs are included in the consideration
paid, or abandoned, in which case the costs are charged to expense.

DEVELOPMENT STAGE EXPENSES

Expenses incurred during the development stage are expensed as incurred.

STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation pursuant to Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This pronouncement allows companies to either
expense the estimated fair value of all stock options, or, with respect to
options granted to employees and directors, to

F-8

continue to follow the intrinsic value method previously set forth in Accounting
Principles Board Opinion No. 25, but disclose pro forma effects on net income
(loss) had the fair value of those options been expensed. The Company has
elected to continue to apply the previous standard in accounting for stock
options granted to employees and directors. Disclosure of stock-based
compensation as required by SFAS 123 is presented in Note 5. For stock options
granted to non-employees, other than to directors serving in such capacity, the
Company follows the fair value method prescribed by SFAS 123.

INCOME TAXES

The Company utilizes an asset and liability approach in its 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.

COMPREHENSIVE INCOME (LOSS)

The Company has no items of comprehensive income (loss) other than net loss.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission on FASB 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections" (SFAS
145). Under SFAS 145, gains and losses related to the extinguishment of debt
should no longer be segregated on the income statement from continuing
operations. The provisions of SFAS 145 are effective for fiscal years beginning
after May 15, 2002 with early adoption encouraged. The adoption of this standard
is not expected to have a material effect on the Company.

In June 2002, the FASB issued Statement of Financial Accounting Standard 146,
"Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146).
SFAS 146 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)." SFAS 146 is effective for exit or disposal activities initiated
on or after December 31, 2002. The effects of adopting this standard on the
Company's financial statements are not expected to be material.

In December 2002, the FASB issued Statement of Financial Accounting Standard
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
148). SFAS 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of
Statement of Financial Accounting Standard 123, "Accounting for Stock-Based
Compensation" (SFAS 123), to require

F-9

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 used on reported results. The disclosures required by SFAS 148 are
included in this report. (See Note 5).

NOTE 2. CONVERTIBLE DEBENTURES PAYABLE

On December 20, 2002, the Company commenced a private offering of 379 units
consisting of (i) a 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 the Company's common stock at a conversion price of
$0.25 per share, subject to standard anti-dilution adjustments as specified in
the note.

At the time of the Offering, the Company's 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. At
December 31, 2002, the Company had issued $135 of units, including $25 for
previously rendered legal services, and allocated $95 and $6 to the beneficial
conversion feature and warrants, respectively, with $34 remaining as principal.
As a result of these two allocated principal amounts, the overall effective
interest rate on these notes approximates 357%.

On December 31, 2003, the Company will be required to pay $135, together with
accrued quarterly interest thereon. The fair value of such liability at
December 31, 2002 is $145.

NOTE 3. RELATED PARTY TRANSACTIONS

The Company has entered into employment agreements with its executive officers.
All executive officers had elected to defer receipt of the salaries, related
benefits and other items due them pursuant to such contracts until the Company
acquired sufficient operating capital through the acquisition of operating
companies, raising of debt or equity capital or both. At December 31, 2002 and
December 31, 2001, the Company had accrued $666 and $155 pursuant to these
contracts, respectively. Subsequent to December 31, 2002, the Company's
executive officers converted $659 of such accrued compensation due to them to
newly issued preferred shares. (See Note 7).

The Company's legal counsel is also a minority stockholder. During the year
ended December 31, 2002 and the period from inception, August 3, 2001, through
December 31, 2001, the Company incurred $264 and $17, respectively, of fees to
this related party. Payment of these fees was made in part by the issuance of a
$25 face amount of convertible debentures payable. Amounts due this party as of
December 31, 2002 and 2001 are reported as accrued expenses, related party on
the accompanying balance sheet.

F-10

In addition at December 31, 2002, deferred merger costs consisted of amounts
incurred to this party.

Another minority stockholder provided services to the Company at no cost in
August of 2002. These services have been valued at $5 and are included in
operating expenses with an offsetting credit to paid-in capital.

NOTE 4. COMMITMENTS AND CONTINGENCIES

MINIMUM OPERATING LEASE COMMITMENTS

The Company is party to a real estate lease for its corporate headquarters,
entered into in December 2002. The lease provides for escalation based upon
price indexes and operating cost increases. The approximate future minimum
annual lease payments under the lease total $268 as follows: 2003: $71; 2004:
$97; 2005: $100.

EMPLOYMENT AGREEMENTS

At December 31, 2002, 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

F-11

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
time, the Company does not believe this matter will have a material impact on
its financial position, operations or liquidity.

NOTE 5. STOCKHOLDERS' DEFICIENCY

PREFERRED STOCK

The Company's certificate of incorporation authorizes a series of 5,000,000
shares of preferred stock with a par value of $0.0001 and with such rights,
privileges and preferences, as the board of directors may determine. Through
December 31, 2002, the Company had not issued any shares of preferred stock.
(See Note 7).

STOCK PURCHASE WARRANTS

As part of its convertible notes offering, the Company issued detachable
warrants to purchase up to 75,800 shares of common stock at a rate of $0.25 per
share. The warrants are exercisable at a rate of $0.25 per share for a period of
three years.

COMMON STOCK

On August 3, 2001, the Company received subscriptions to purchase 1,120,000
shares of common stock for $0.001 per share from its founders. Such
subscriptions were paid in 2002.

On October 31, 2001, the Company issued 115,000 shares of common stock valued at
$0.25 per share to individuals for consulting services provided to the Company.
As a result, the Company recorded approximately $28 of non-cash compensation
expense in the quarterly period ended December 31, 2001.

F-12

In March 2002, the Company, partially through its founding shareholders, issued
a total of 16,431,975 shares of restricted and unrestricted common stock to its
newly recruited chief executive officer in connection with his employment
agreement and recorded $200 of non-cash stock compensation applicable to the
5,477,325 of shares that were unrestricted. Immediately prior to their issuance
to the new chief executive officer, they had been contributed, at no
consideration, to the Company by the Company's two founding shareholders. Of the
10,954,650 restricted shares issued, all of which were newly issued shares,
8,215,875 were to vest over time with the value of the stock award to be
amortized to expense over the related vesting period. The remaining 2,738,775
restricted shares were to vest upon the Company's completing its initial
acquisition, with a compensation charge to be recorded based on the market value
of the stock at the time of such initial acquisition. On July 16, 2002, this
individual resigned as chief executive officer of the Company. In connection
with his resignation, he rescinded the stock grant as well as all options that
he had been granted. In accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations, the
Company recorded approximately $62 of income in order to reverse the effects of
amounts previously recorded as expense for the amortization of unvested
restricted stock that was forfeited. Also, pursuant to the terms of the
rescission agreement, the unrestricted shares that were issued to the individual
that had been contributed to the Company by the founding shareholders were
reissued to them and pursuant to the merger agreement with PlanetRx.com the
restricted shares were reallocated to all shareholders that had existed just
prior to the merger with PlanetRx.com. The reallocation to all other
shareholders was a "de facto" proportional stock split, not requiring any
accounting recognition. The re-issuance of the shares to the founding
shareholders resulted in a $548 charge to non-cash stock-based compensation,
since among other factors, they assumed the responsibilities of the former
executive.

In May of 2002, the Company completed an offering of 10,783,486 shares of common
stock for approximately $394 to private investors at $0.0365 per share.
Approximately $9 of offering costs were charged against these proceeds.

Also in May of 2002, as described in Note 1, the Company merged with
PlanetRx.com. As a result, the shareholders of PlanetRx.com became shareholders
of the Company. At the time of the merger, these shareholders owned 6,173,403
shares. In accordance with standard accounting practices for reverse
acquisitions, the shares owned and retained by the PlanetRX.com shareholders are
treated as if they were newly issued by the Company to effect the merger.

In July 2002 the Company issued 458,725 shares of common stock valued at $0.10
per share, to certain consultants as consideration for their services and
recorded $46 of non-cash compensation expense.

In November 2002, the Company issued 400,000 shares of common stock, valued at
$0.09 per share, to a consultant as consideration for his services and recorded
$36 of non-cash compensation expense.

F-13

STOCK OPTIONS

In December 2002, the Company's shareholders approved the 2002 Equity
Participation Plan (the "2002 Plan"). The maximum number of shares of common
stock that may be issued pursuant to options or as restricted stock granted
under the 2002 Plan is one hundred million shares. The 2002 Plan authorizes the
granting of stock options, restricted stock and stock bonuses to employees,
officers, directors and consultants, independent contractors and advisors of the
Company and its subsidiaries.

Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended December 31, 2002 and the period
from inception (August 3, 2001) to December 31, 2001:

Expected life of option in years 4
Dividend yield 0%
Volatility 115%
Risk free interest rate 3.94%

The Company did not grant options during 2001. The weighted average fair value
of options granted to employees during 2002 was as follows:

2002
-------------
Fair value of each option granted $nil
Total number of options granted 38,433,000
Total fair value of all options granted $83

Outstanding options, consisting of ten-year incentive options typically vest and
become exercisable over a three-year period from the date of grant. The
outstanding options expire ten years from the date of grant or upon retirement
from the Company, and their exercise is contingent upon continued employment
during the applicable ten-year period.

A summary of the stock option grants outstanding as of December 31, 2002 and
changes during the year then ended is presented below:

WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
-------------- -----------
Outstanding at January 1, 2002 - -
Granted 38,433,000 $0.19
Assumed in merger 18,750 $2.12
Exercised - -
Forfeited - -
-------------- -----------

Outstanding at December 31, 2002 38,451,750 $0.19
============== ===========

Options exercisable at December 31, 2002 10,518,750 $0.17
============== ===========

F-14

The following table summarizes information about stock options outstanding at
December 31, 2002:

12/31/2002 REMAINING
OPTIONS OPTIONS LIFE IN
EXERCISE PRICE RANGE OUTSTANDING EXERCISABLE YEARS
----------------- ------------ -------------
$0.09 - 0.10 16,408,000 6,000,000 9.8
$0.26 22,025,000 4,500,000 10.0
$2.12* 18,750 18,750 7.8
----------------- ------------
Total 38,451,750 10,518,750
================= ============

* Granted by predecessor issuer
- -------------------------------------------------------------------------------

NOTE 6. INCOME TAXES

Through December 31, 2002, the Company is considered to be in the development
stage and has incurred losses since inception. Due to the uncertainty of future
taxable income, no future tax benefits have been recognized. At December 31,
2002, the Company has net operating tax loss carryforwards totaling $606,
expiring $38 in 2021 and $568 in 2022. The components of the Company's net
deferred tax assets as of December 31, 2002 and 2001 are as follows:

2002 2001
---------- ----------
(IN THOUSANDS)
Deferred tax assets:
Deferred salaries and benefits $682 $ 58
Operating loss carryforwards 219 14
---------- ----------
901 72
Deferred tax asset valuation allowance (901) (72)
---------- ----------

Net deferred tax assets $ - $ -
==== ====

The tax asset valuation allowance increased by $829 in 2002 and by $72 in 2001.

The following reconciles the income tax expense computed at the federal
statutory income tax rate to the provision for income taxes recorded in the
income statement for the periods ended December 31, 2002 and 2001:

2002 2001

Provision for income taxes at statutory federal rate 35.0% 35.0%

F-15

State and local income taxes, net of federal benefit 3.5% 3.5%
Items providing no benefit (38.5)% (38.5)%
------- -------
Effective tax rate 0% 0%
======= =======

NOTE 7. SUBSEQUENT EVENTS

On January 31, 2003, the Company completed its merger with Mortgage Express,
Inc. (now known as PGNF Homefunding Corp.) pursuant to an agreement dated
October 14, 2002, and Paragon Homefunding was merged into Mortgage Express, with
Mortgage Express becoming a wholly owned subsidiary of the Company. Mortgage
Express has been in the business of originating residential mortgage loans since
1998.

At closing, all of the outstanding common shares of Mortgage Express converted
into 52,329,735 shares of the Company's common stock valued at $0.122 per share
and aggregating $6,367, constituting approximately 45.5% of the common stock
outstanding after the consummation of the merger. The shares of common stock
issued in the Mortgage Express merger are unregistered but carry piggyback
registration rights. However, if the holder requests such piggyback rights be
exercised in a registration statement that includes securities being offered for
the sale by an underwriter, the underwriter may, in its discretion, limit or
exclude the number of shares of common stock to be registered for resale. In
that case, those shares of common stock that were not permitted to be registered
for resale by an underwriter will be eligible to be included in a subsequent
registration statement.

Additionally, Paragon issued a promissory note in the amount of $1,800, subject
to adjustment, to an entity wholly owned by the sole owner of Mortgage Express.
The promissory note accrues interest at 4.92% and is payable on July 31, 2004.
Paragon's payment obligations under the promissory note are secured by a
security interest in the Mortgage Express shares of common stock owned by
Paragon. On March 26, 2003, this note was converted into a Series E Preferred
Stock with an equivalent face value and a 4% stated dividend. This series of
preferred stock is non-redeemable and non-voting.

On February 2, 2003 the Company consummated a merger with Paragon Homefunding,
Inc., a Florida corporation ("Paragon Florida") which was not previously
affiliated with the Company. At closing, all of the outstanding common shares of
Paragon Florida converted into 1,224,000 of shares of the Company's common stock
valued at $0.683 per share, aggregating $836, constituting approximately one
percent of Paragon's common stock outstanding after the merger and after giving
effect to the consummation of the Mortgage Express merger. Additionally, Paragon
issued promissory notes to the shareholders of Paragon Florida in the aggregate
principal amount of $25. The promissory notes with interest accruing at 4.92%
are payable on February 2, 2004. Paragon Florida has been in the business of
originating residential mortgage loans since 1998.

Prior to the consummation of the mergers discussed above, Paragon had no
operations. The consideration in both of these mergers was mutually agreed to by
the parties and was based upon the number of Paragon's unregistered common
shares equal in value to the values of each of Mortgage Express's and Paragon
Florida's businesses at the time each of the merger agreements were signed.

F-16

The shares issued to Paragon Florida's shareholders are unregistered shares and
cannot be sold until they are either registered with the Securities and Exchange
Commission or there is an exemption from registration. These shares have the
same carry piggyback registration rights as those issued in the Mortgage Express
merger.

On March 26, 2003, the Company's executive officers converted amounts due them
for deferred salaries, benefits and other items into $659 of Series E preferred
stock, with each share having a face value of $1,000 and a stated dividend rate
of 4% payable in either cash or stock, at the Company's option. This series of
preferred stock does not provide for redemption and is non-voting.

NOTE 8. UNAUDITED QUARTERLY INFORMATION AND FOURTH QUARTER ADJUSTMENTS

In connection with the audit of its financial statements as of and for the year
ended December 31, 2002, the Company discovered certain errors in previously
reported quarterly periods during the prior two fiscal years. These errors, some
of which overstated expenses and some of which understated expenses, arose from
the erroneous expensing of offering costs, the non-recognition of a financed
insurance policy as well as non-recording or under-recording of certain costs
and expenses which were paid for by the issuance of Company stock and/or common
stock purchase options, and in one case, certain consulting services that were
donated by a stockholder. The costs and expenses understated (overstated), and
the quarterly periods to which they relate, are summarized as follows:

YEAR ENDED DECEMBER 31, 2002
---------------------------------
SECOND THIRD
QUARTER QUARTER
--------- ---------
Insurance expense $ - $ (17)
Non-cash compensation for
shares reissued to founding
shareholders - 548
Consulting and professional fees (8) 5
Interest expense 1
---- -----
Net expense (over)/understatement $ (8) $ 537
==== =====

YEAR ENDED DECEMBER 31, 2001
----------------------------
FOURTH
QUARTER
-------
Consulting and professional fees $ 29
----
Net expense understatement $ 29
====

The above adjustments have been made to the previously reported quarterly
information. As restated for such adjustments, unaudited quarterly information
for each of the quarters

F-17

in the last two fiscal years is as follows:

YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

Revenue $ - $ - $ - $ -
Total operating expenses $ 389 $ 432 $ 658 $ 863
Net loss $ (389) $ (432) $ (658) $ (863)
Basic and diluted loss per
share $(0.01) $(0.01) $(0.01) $(0.01)

YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

Revenue $ - $ - $ - $ -
Total operating expenses $ - $ - $ 77 $ 148
Net loss $ - $ - $ (77) $ (148)
Basic and diluted loss per
share $ - $ - $(0.00) $(0.01)

F-18

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form 10-K and has duly caused this Form 10-K
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Ponte Vedra Beach, State of Florida, on the 15th day of April, 2003.

PARAGON FINANCIAL CORPORATION
By: /s/ STEVEN A. BURLESON
==================================================
Steven A. Burleson
Chief Executive Officer

Date: April 15, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
================================================= ========================================== =====================

By: /s/ PAUL K. DANNER Chairman of the Board of Directors, April 15, 2003
=========================================== Director and Secretary
Paul K. Danner
By: /s/ STEVEN A. BURLESON Chief Executive Officer and Director April 15, 2003
=========================================== (Principal Operating Officer)
Steven A. Burleson
By: /s/ SCOTT L. VINING Chief Financial Officer (Principal April 15, 2003
=========================================== Financial and Accounting Officer)
Scott Vining
By: Director
===========================================
Harold Lazarus
By: /s/ PHILIP LAGORI Vice Chairman of the Board of Directors April 15, 2003
=========================================== and Director
Philip Lagori

CERTIFICATIONS
--------------

I, Steven A. Burleson, certify that:

1. I have reviewed this annual report on Form 10-K 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
annual 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
other 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: April 15, 2003 By: /s/ STEVEN A. BURLESON
================================================
Steven A. Burleson, Chief Executive Officer
(Principal Operating Officer)

I, Scott L. Vining, certify that:

1. I have reviewed this annual report on Form 10-K 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
annual 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
other 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: April 15, 2003 By: /s/ SCOTT L. VINING
==============================================
Scott L. Vining, Chief Financial Officer
(Principal Financial and Accounting Officer)