Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED March 31, 2005

OR

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number 000-27437

PARAGON FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

2207 Sawgrass Village Drive, Ponte Vedra Beach, FL 32082

(Address of principal executive offices and zip code)

(904) 285-0000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The total number of shares of the registrant’s common stock outstanding as of May 20, 2005: 86,706,250

Table of Contents

INDEX

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2005 AND DECEMBER 31, 2004

(Dollars in thousands, except share data)

3

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Dollars in thousands, except share data)

4

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(Dollars in thousands)

5

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION – Paragon Financial Corporation (the “Company”) was incorporated in Delaware on August 27, 1999. The unaudited condensed consolidated financial statements include the accounts of Paragon Financial Corporation and its wholly owned subsidiaries, Paragon Homefunding, Inc. and First Charleston Mortgage, L.L.C. (collectively referred to as the “Company”, “we”, or “us”). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. All intercompany balances and transactions are eliminated in consolidation. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

USE OF ESTIMATES - In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that materially affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan repurchases and premium recapture, goodwill, and loss on disposal of our discontinued segment. Actual results could differ from those estimates.

The determination of the adequacy of the allowance for loan repurchases and premium recapture losses is based on estimates that may be affected by significant changes in the economic environment and market conditions. The Company has obtained insurance to mitigate some of this risk.

FINANCIAL STATEMENT PRESENTATION - The condensed consolidated financial statements and notes are representations of the Company’s management. The Company’s management is responsible for the integrity and objectivity of these financial statements.

ACQUISITIONS - On January 19, 2005, the Company completed its acquisition of First Charleston Mortgage, L.L.C. (“FCM”). As consideration for the acquisition of 100% interest in FCM, the Company issued 4,285,714 shares of its $0.0001 par value common stock valued at $185 (or $0.043 per share). FCM has been in the business of originating residential mortgage loans since 2002. The acquisition is effective February 1, 2005 and was accounted for as an acquisition pursuant to SFAS No. 141, Accounting for Business Combinations (“SFAS 141”). Accordingly, the Company’s results of operations include the operating results of FCM from the effective date of the acquisition.

6

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES - (continued)

The Company’s unaudited condensed consolidated results of operations on a pro forma basis for the three months ended March 31, 2005 and 2004 as if it had consummated the acquisition of FCM and disposed of PGNF Home Lending Corp. (see Note 2) on January 1, 2004 are as follows (in thousands except per share data):

CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less on their acquisition date to be cash equivalents. Cash and cash equivalents include cash on hand and funds held in checking, money market, and savings accounts.

FEES RECEIVABLE - Fees receivable consist of fees due on loans closed prior to the balance sheet date. Fees receivable are typically collected within 30 days.

MORTGAGE LOANS RECEIVABLE HELD-FOR-SALE - Mortgage loans receivable held-for-sale consist of loans made to individuals that are primarily collateralized by residential one to four unit family dwellings. Mortgage loans are recorded at the principal amount outstanding net of deferred origination costs and fees and any premium or discounts. These loans are carried at the lower of amortized cost or fair value as determined by outstanding commitments from investors or current investor-yield requirements, calculated on an aggregate basis. Interest on loans receivable held-for-sale is credited to income as earned. Interest is accrued only if deemed collectible.

ALLOWANCE FOR LOAN REPURCHASES AND PREMIUM RECAPTURE - The allowance for loan repurchases and premium recapture relates to expenses incurred due to the potential repurchase of loans or indemnification of losses based on alleged violations of representations and warranties which are customary to the mortgage banking industry. Provisions for losses are charged to gain on sale of loans and credited to the allowance. The allowance represents the Company’s estimate of the total losses expected to occur and is considered to be adequate by management based upon the Company’s evaluation of the potential exposure related to the loan sale agreements over the life of the associated loans sold. The Company has purchased insurance to cover third party broker fraud, which mitigates some of the risks.

7

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES - (continued)

OFFICE PROPERTY AND EQUIPMENT, NET - Office property and equipment, net, are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the asset as follows:

AVAILABLE-FOR-SALE SECURITIES AND COMPREHENSIVE LOSS - Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income. Realized gains (losses) on securities available-for-sale are included in other income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.

The Company does not purchase, sell, or utilize off-balance sheet derivative financial instruments or derivative commodity instruments.

GOODWILL - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill and other intangible assets are stated on the basis of cost. See also “Impairment” which follows.

IMPAIRMENT - Long-lived assets, including certain identifiable intangibles and goodwill, are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable including, but not limited to, a deterioration of profits for a business segment that has long-lived assets, and when other changes occur which might impair recovery of long-lived assets.

GAIN ON SALES OF LOANS - Gains or losses resulting from sales of mortgage loans are recognized at the date of settlement and are based on the difference between the selling price of the mortgage loans sold and the carrying value of the related loans sold. Nonrefundable fees and direct costs associated with the origination of mortgage loans are deferred and recognized when the loans are sold. Loan sales are accounted for as sales when control of the loans is surrendered, to the extent that consideration other than beneficial interests in the loans transferred is received in the exchange.

ORIGINATION FEES - Origination fees are comprised of points and other fees charged on mortgage loans originated by the retail segment of the Company. Points and fees are primarily a function of the volume of mortgage loans originated by our retail segment. Origination fees on loans originated by the Company that are subsequently sold are deferred and recognized as part of the gain on sale of loans.

8

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES - (continued)

INCOME TAXES - The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under the asset and liability method specified thereunder, deferred taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities. Deferred tax liabilities are offset by deferred tax assets relating to net operating loss carryforwards and deductible temporary differences.

ADVERTISING - The Company’s advertising costs are expensed as incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments of the Company consist of cash and cash equivalents, receivables for fees, accounts payable, notes payable, and convertible debentures payable. The carrying amount of financial instruments approximates fair value.

CONCENTRATIONS OF RISKS - The Company is required by Statement of Financial Accounting Standards No. 105 to disclose concentrations of credit risk regardless of the degree of such risk. The Company’s operations are concentrated in single-family first mortgage residential real estate market. The Company operates in a heavily regulated environment. The operations of the Company are subject to changes in laws, administrative directives and rules and regulations of federal, state, and local governments and regulatory agencies. Such changes may occur with little notice of time for compliance. Further, the Company performs credit evaluations of its customers’ financial condition, performs its operations under contracts and requires deposits when deemed necessary. Historically, the Company has not incurred any significant credit losses.

STOCK-BASED COMPENSATION – The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, in accounting for employee stock options rather than the alternative fair value accounting allowed by FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). APB 25 provides that compensation expense relative to the Company’s employee stock options is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Under SFAS 123, the fair value of stock options at the date of grant is recognized in earnings over the vesting period of the options. In December 2002, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”), which amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. The Company will continue to report stock based compensation under APB 25 but has adopted the interim reporting requirements of SFAS 148.

9

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 1. PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES - (continued)

As of March 31, 2005, there were stock options outstanding for the purchase of 35,211,750 shares of the Company’s common stock. There were 800,000 stock options granted during the three months ended March 31, 2005.

The following table shows the pro forma net loss as if the fair value method of SFAS No. 123 had been used to account for stock-based compensation expense for the three months ended March 31, 2005 and 2004 (dollars in thousands, except per share amounts):

RECENT ACCOUNTING DEVELOPMENTS - - In December 2004, the Financial Accounting Standards Board issued a revision of SFAS No. 123, Accounting for Stock-Based Compensation, which also supersedes APB 25, Accounting for Stock Issued to Employees. The revised standard eliminates the alternative to use Opinion 25’s intrinsic value method of accounting and eliminates the disclosure only provisions of SFAS No. 123. The compliance date for the revised standard was extended by the Securities and Exchange Commission (the “SEC”) in April 2005. The revision, as extended by the SEC, applies to all awards granted after December 31, 2005 and requires the recognition of the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards and applies to all stock options and awards granted after December 31, 2005 and requires the recognition of compensation expense in the financial statements for all share-based payment transactions subsequent to that date. The revision also requires the prospective recognition of compensation expense in the financial statements for all unvested options as of January 1, 2006. Adoption of this standard on January 1, 2006 will have a slightly negative impact on our earnings based on the pro forma data in the table above.

NOTE 2. DISCONTINUED OPERATIONS

On June 30, 2004, we sold our PGNF Home Lending Corp. (“PGNF”) subsidiary effective May 31, 2004. Pursuant to the agreement, the Company exchanged the common stock of PGNF, as well as the assumption of all of PGNF’s liabilities, contingent and otherwise, for 52,329,735 shares of our common stock valued at $3,140 (based upon the closing price of $0.06 on May 31, 2004) and 1,800 shares of our Series E preferred stock plus accrued dividend valued at $1,813.

10

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 2. DISCONTINUED OPERATIONS - (continued)

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the assets and liabilities of the PGNF have been classified as discontinued operations, with its operating results in the current and prior periods reported in discontinued operations for the three-month period ended March 31, 2004. A summary of the operating results of the discontinued operations for the three months ended March 31, 2004 is as follows.

NOTE 3. GOING CONCERN

As shown in the accompanying unaudited condensed consolidated financial statements, the Company incurred a net loss of $244 in the three months ended March 31, 2005, and cumulative losses of $8,869. At March 31, 2005, we had a working capital deficit of $1,789 and a deficit in stockholders’ equity of $1,251. 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 Company’s continued existence depends on a number of factors, including but not limited to, the ability to originate loans, to secure adequate sources of capital and to locate and fund acquisitions of suitable companies. However, there can be no assurance that the Company will be able to continue as a going concern.

11

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 4. OFFICE PROPERTY AND EQUIPMENT

Office property and equipment from continuing operations as of March 31, 2005 and December 31, 2004 are summarized as follows:

Depreciation expense for the three months ended March 31, 2005 and 2004 was $6 and $11, respectively.

NOTE 5. GOODWILL

Goodwill represents the excess of the merger consideration over the fair value of the net assets of PHF and FCM on the date they were acquired. A summary of goodwill follows:

NOTE 6. OTHER ASSETS

Other assets from continuing operations at March 31, 2005 and December 31, 2004 were:

12

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 7. SEGMENT DATA

The Company previously operated in two separate business segments: wholesale and retail. With the disposal of PGNF (Note 2), the Company operates in one business segment: retail mortgage brokering.

NOTE 8. DEBT

The Company’s debt from continuing operations as of March 31, 2005 and December 31, 2004 was as follows:

NOTE 9. COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Risks - The Company enters into commitments to extend credit in the normal course of business. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Commitments to fund loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. One-to-four family residential properties, if funded, would collateralize the commitments. The Company evaluates each customer’s creditworthiness and obtains appraisals to support the value of the underlying collateral. Also, external market forces affect the probability of commitments being exercised; therefore, total commitments outstanding do not necessarily represent future cash requirements. The Company quotes interest rates to borrowers,

13

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 9. COMMITMENTS AND CONTINGENCIES - (continued)

which are generally subject to change by the Company. Although the Company typically honors such interest rate quotes, the quotes do not constitute interest rate locks, minimizing the potential interest rate risk exposure. The Company had no binding commitments to fund loans at March 31, 2005.

Supervisory Regulation - The Company’s mortgage brokering business is subject to the rules and regulations of the Department of Housing and Urban Development (“HUD”) and various state and federal agencies with respect to originating, processing, and selling mortgage loans as a nonsupervised correspondent lender. Those rules and regulations require, among other things, that the Company’s subsidiary, PHF, maintain a minimum net worth of $63. As of March 31, 2005, PHF was in compliance with these requirements. The Company currently does not service loans for other investors or federal agencies.

Minimum Operating Lease Commitments - The Company is party to real estate leases for its corporate headquarters and its Orlando location as well as leases for certain office equipment.

The Company pays taxes, insurance, other operating expenses, and general maintenance for all lease arrangements.

Litigation – On September 24, 2004, the Company defaulted on its promissory note dated June 4, 2003 to Bank of America, N.A. (“BoA”) being unable to repay this note in full when demanded to do so by BoA. BoA has commenced legal action against the Company and other guarantors of the indebtedness for repayment. On December 13, 2004, the Company entered into a standstill agreement whereby, for a principal reduction payment of $25 and the payment of an extension fee and the bank’s legal fees, the maturity date of the note was extended to December 1, 2005, the interest rate was increased to the bank’s prime rate plus 4%, and requires principal reduction payments of $5 per month through November 1, 2005.

In mid-2001, the Company, and certain of its former directors and officers 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. In mid-2002, the complaints against the Company were consolidated into a single action.

The essence of the complaint is that in connection with the Company’s initial public offering in October 1999 (“IPO”), the defendants issued and sold the Company’s common stock pursuant to a registration statement which did not disclose to investors that certain underwriters in the offering had solicited and received excessive and undisclosed commissions from certain investors acquiring the Company’s common stock in connection with the IPO. The complaint also alleges that the registration statement failed to disclose that the underwriters allocated Company shares in the IPO to customers of the underwriters in exchange for the customers’ promises to purchase additional shares in the aftermarket at pre-determined prices above the IPO price. The action seeks damages in an unspecified amount.

14

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 9. COMMITMENTS AND CONTINGENCIES - (continued)

The action is being coordinated with approximately 300 other nearly identical actions filed against other companies that had initial public offerings of securities between 1997 and 2000 same time period.

The Company has approved a Memorandum of Understanding (“MOU”) and related agreements which set forth the terms of a settlement between the Company, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement contemplated by the MOU provides for a release of the Company and the individual defendants for the conduct alleged in the action to be wrongful. The Company would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters.

It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court. The Company cannot opine as to whether or when a settlement will occur or be finalized. Whether or not the settlement is ultimately approved, the Company believes the resolution of this matter will not have a material adverse effect on the Company.

The Company is also party to various legal proceedings arising out of the ordinary course of the Company’s business. Management believes that any liability with respect to these legal actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position and results of operations.

NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION

15

Table of Contents

PARAGON FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

NOTE 11. STOCKHOLDERS’ DEFICIT

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.

On March 26, 2003, the Company’s board of directors authorized the issuance of 3,000 shares of preferred stock, par value $0.0001 per share, and designated the shares as Series E Preferred Shares (the “Series E Preferred”). The stated value of each share of the Series E Preferred is $1,000 per share; has a mandatory dividend of 4% of the stated value, per annum and shall be payable on January 1st of each year and is payable in either shares of the Company’s common stock or cash; has no voting rights; and is not convertible. On March 26, 2003, certain of the Company’s executive officers converted certain accrued salary and benefits into 659 shares of Series E Preferred.

At March 31, 2005 and December 31, 2004, the Company had 659 shares of Series E Preferred Stock issued and outstanding. The cumulative dividend payable under this Series E Preferred Stock was $53 and $47 at March 31, 2005 and December 31, 2004, respectively.

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.

As part of its private placement transaction (discussed more fully below), the Company issued warrants to purchase up to 17,207,791 shares of its common stock for $0.04 per share. These warrants expire on December 31, 2007.

COMMON STOCK - On February 28, 2005, the Company completed a private placement financing transaction pursuant to which it sold 17,207,791 units (at $0.0308 per unit) to several accredited investors for an aggregate purchase price of $530,000. Each unit consisted of one share of common stock, par value $0.0001 per share (the “Common Stock”), and one warrant to purchase one share of Common Stock at $0.04 per share expiring on December 31, 2007.

16

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be reviewed in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this document contain forward-looking information that involves risks and uncertainties. Please refer to the section entitled “Forward-Looking Statements” on page 3 of this Form 10-Q. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed below.

Forward-Looking Statements

Certain information contained in this report may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that act. We caution readers that certain important factors may affect our actual results and could cause such results to differ materially from any forward-looking statements which may be deemed to have been made in this Report or which are otherwise made by or on behalf of us. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “explore,” “consider,” “anticipate,” “intend,” “could,” “estimate,” “annualized,” “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:

17

Table of Contents

We are also subject to other risks detailed from time to time in our Securities and Exchange Commission filings. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance, and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events, or otherwise.

Overview

We are headquartered in Ponte Vedra Beach, Florida and were incorporated in Delaware in August 1999. We are a retail mortgage broker in the one-to-four family residential mortgage market. We conduct business the states of Florida and South Carolina.

Our business relies on our ability to originate mortgage loans at a reasonable cost. The mortgage industry is generally subject to seasonal trends, and loan origination volumes in our industry have historically fluctuated from year to year and are affected by such external factors as home values, the level of consumer debt and the overall condition of the economy. In addition, the premiums we receive from the secondary market for our loans have also fluctuated, also influenced by the overall condition of the economy and, more importantly, the interest rate environment. As a consequence, the business of originating and selling loans is cyclical.

Loan Originations

As of March 31, 2005, we originated loans through our locations in Florida and South Carolina.

18

Table of Contents

Critical Accounting Policies

We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Certain accounting policies require us to make significant estimates and assumptions that may have a material impact on certain assets and liabilities, as well as our operating results, and we consider these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors which we believe to be reasonable under the circumstances. Actual results, particularly goodwill and loss of our discontinued segment, could differ materially from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities and our results of operations.

We believe the following are critical accounting policies that require the most significant estimates and assumptions that are subject to significant change in the preparation of our consolidated financial statements:

Loan Origination Fees

Origination fees are comprised of points and other fees charged on mortgage loans originated by our loan officers and brokered through other banks and financial institutions. Points and fees are primarily a function of the volume of mortgage loans originated by our loan officers.

Loan Production Costs

We also measure and monitor the cost to originate our loans. Such costs include the points and fees we may pay to our loan officers, net of fees we receive from borrowers, plus our operating expenses associated with the loan origination business.

Income Taxes

We file a consolidated federal income and combined state franchise tax returns. We utilize the asset and liability method of accounting for income taxes, under which deferred income taxes are recognized for the future tax consequences attributable to the differences between the financial statement values of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates we expect to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred taxes of a change in tax rates in income in the period that includes the enactment date.

In determining the possible realization of deferred tax assets, we consider future taxable income from the following sources: (a) the reversal of taxable temporary differences, (b) future operations exclusive of reversing temporary differences, and (c) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire.

Discontinued Operations

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), a component classified as held for sale is reported in discontinued operations when the following conditions are met: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and (b) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement for current and prior periods reports the results of operations of the component, including any gain or loss recognized in accordance with SFAS 144 paragraph 37, in discontinued operations. The results of discontinued operations, less

19

Table of Contents

applicable income taxes (benefit), is reported as a separate component of income before extraordinary items and the cumulative effect of accounting changes (if applicable). The assets and liabilities of a disposal group classified as held for sale is presented separately in the asset and liability sections, respectively, of the statement of financial position.

Results of Operations

Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004

Continuing Operations

Loan Originations. Loan originations decreased $4,735, or 20.7%, to $18,091 for the three months ended March 31, 2005 compared to $22,825 for the three months ended March 31, 2004. This decrease was due to a general decline in the volume of refinance market and the loss of three loan officers in our Orlando, Florida location.

Revenues

Loan origination fees. Loan origination fees decreased $284, or 48.8%, to $298 for the three months ended March 31, 2005 compared to $582 for the three months ended March 31, 2004. This decrease was due primarily to the decrease in the number of mortgage loans originated during the period as well as a reduction in the average fee per loan originated. Expressed as a percentage of loan origination volume, origination fees were 1.6% for the three months ended March 31, 2005 compared to 2.5% for the three months ended March 31, 2004.

Operating Expenses

Salaries, commissions and benefits. Salaries, commissions and benefits decreased $507, or 63.5%, to $291 for the three months ended March 31, 2005 compared to $798 for the three months ended March 31, 2004. This decrease was due primarily to the reduction in our corporate officers’ salaries in the three months ended March 31, 2005 compared to the three months ended March 31, 2004 as well as a reduction in commissions paid to our loan officers due to the fewer number of mortgage loans originated in the three months ended March 31, 2005 compared to the three months ended March 31, 2004.

Loan production costs. Loan production costs increased $4, or 44.4%, to $13 for the three months ended March 31, 2005 compared to $9 for the three months ended March 31, 2004. This increase was due primarily to the higher loan production costs in our recently acquired subsidiary, FCM, that has a lower pull through rate than our PHF subsidiary.

General and administrative expenses. General and administrative expenses decreased $46, or 19.5%, to $190 for the three months ended March 31, 2005 compared to $236 for the three months ended March 31, 2004. This decrease was primarily due to reductions of expenses at our corporate headquarters partially offset by the operating expenses incurred at our recently acquired subsidiary, FCM.

20

Table of Contents

Operating loss. The operating loss decreased by $265, or 57.5%, to $196 for the three months ended March 31, 2005 compared to $461 for the three months ended March 31, 2004. This decrease was due primarily to factors discussed above.

Interest expense. Interest expense increased $30, or 166.7%, to $48 for the three months ended March 31, 2005 compared to $18 for the three months ended March 31, 2004. This increase was due primarily to interest on the subordinated notes issued to PGNF. These subordinated notes were not outstanding during the three months ended March 31, 2004.

Net loss from continuing operations. The net loss from continuing operations decreased $235, or 49.1%, to $244 for the three months ended March 31, 2005 compared to $479 for the three months ended March 31, 2004. This decrease was primarily due to the factors discussed above.

Loss from discontinued operations. The loss from discontinued operations was $2,873 for the three months ended March 31, 2004 and relates to the results of our former subsidiary PGNF. We disposed of PGNF on June 1, 2004.

Net loss. The net loss from decreased $3,108, or 92.7%, to $244 for the three months ended March 31, 2005 compared to $3,352 for the three months ended March 31, 2004. This decrease was primarily due to the factors discussed above.

Liquidity and Capital Resources

Our primary source of liquidity is from fees earned by originating mortgage loans. Our mortgage origination operations require continued access to cash to fund ongoing administrative, operating, and tax expenses as well as providing cash to fund our corporate operations. Our corporate operations require access to cash to fund ongoing administrative expenses, our acquisition program, tax expenses as well as interest and principal payments under our existing indebtedness.

At March 31, 2005, we had cash and cash equivalents of approximately $193 and fees receivable of $78 with which to satisfy our on-going mortgage and corporate operation’s current liabilities of $2,078. We continue seeking way to improve our liquidity to a level sufficient to accomplish our goals for 2005. We continue implementing our liquidity improvement plan that includes: reducing our corporate operating expenses, raising additional equity capital, seeking to acquire profitable mortgage brokering operations producing positive cash flow, renegotiating the terms of our existing indebtedness with major creditors to defer material principal payments into the future.

As part of this plan, we continued the reduction in the amount of cash required to fund our corporate operations which began in June 2004 following the divestiture of PGNF. We expect the reduction in corporate operating expenses will help us obtain profitability with fewer acquisitions and will reduce the dilution that would otherwise be required having to raise a substantial amount of equity capital.

21

Table of Contents

On February 28, 2005, we completed a private placement financing transaction (the “Offering”) pursuant to which we sold 17,207,791 units (at $0.0308 per unit) to several accredited investors for an aggregate purchase price of $530. Each unit consisted of one share of common stock, par value $0.0001 per share (the “Common Stock”), and one warrant to purchase one share of Common Stock at $0.04 per share expiring on December 31, 2007. This Offering increased our cash and cash equivalents by $342 subsequent to our year-end.

On January 19, 2005, we acquired FCM, a South Carolina mortgage brokering company. On March 15, 2005, we announced that we had assumed operations of a branch of another mortgage origination company based in Jacksonville, Florida. We expect these operations to provide cash to fund our corporate operations during the quarter ended June 30, 2005.

We are actively discussing the restructuring of our debt with our creditors. Below is a summary of our actions to date attempting to restructure our debt.

Short-term debt. On June 4, 2003, we entered into a revolving line of credit with a commercial bank in the amount of $250,000. This revolving line of credit had an interest rate of prime, is secured by a general lien on our assets, and is guaranteed by our current and former subsidiaries. The commercial bank demanded repayment of this credit facility on September 13, 2004. We were not able to meet this demand, and, as discussed elsewhere, we entered into a standstill agreement with this bank whereby the maturity date of the note was extended to December 1, 2005, the interest rate was increased to the bank’s prime rate plus 4%, and requires principal reduction payments of $5 per month through November 1, 2005.

Convertible debentures. On March 6, 2003, we completed a private offering of 379 units consisting of (i) a $1 convertible promissory note due December 31, 2003 with interest payable quarterly at a stated interest rate of 15% per annum and (ii) a warrant to purchase shares of common stock, exercisable at $0.25 per share, for each $5.00 in principal of the promissory note issued in the unit. The holder has the right to convert the outstanding principal amount of the convertible promissory note (or any portion thereof), together with accrued interest thereon, into shares of our common stock at a conversion price of $0.25 per share, subject to standard anti-dilution adjustments as specified in the note. In 2005, we repaid principal of $30 to certain holders of our 15% convertible notes. The remaining holders have agreed to amend the maturity date of the convertible notes to December 31, 2006 and reduce the interest rate thereon to 10% in consideration for a reduction in the strike price of the warrants to $0.05 per share. The convertible notes require quarterly interest payments on March 31, June 30, September 30, and December 31 of each year.

Notes payable and liabilities to formerly related party. On April 7, 2005, the holder of notes with a face value of $1,531 and accrued interest of $46 agreed to accept monthly interest payments of approximately $7 in lieu of what is contractually due. There was no set timeframe within which the holder agreed to accept interest only payments. We anticipate working towards a formal standstill agreement with the holder, but we cannot be certain such an agreement will be reached.

22

Table of Contents

Accrued expenses – related parties. On February 28, 2005, certain of our former executives and current shareholders agreed in principal to convert amount currently due them into additional shares of our Series E Preferred Stock. The stated value of each share of the Series E Preferred is $1,000 per share; has a mandatory dividend of 4% of the stated value, per annum and shall be payable on January 1st of each year and is payable in either shares of the Company’s common stock or cash; has no voting rights; and is not convertible.

In addition to the above, we continue to explore additional ways to enhance our liquidity and reduce our insolvency risk.

FUTURE ACCOUNTING PRONOUNCEMENTS

There are currently no pronouncements issued that are scheduled for implementation during 2005 that are expected to have any significant impact on the accounting policies of the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Impact of Inflation

Inflation affects us most significantly in the area of loan originations and can have a substantial effect on interest rates. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Profitability may be directly affected by the level and fluctuation in interest rates that affect our ability to earn a spread between interest received on its loans and the costs of its borrowings. Our profitability is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect our ability to originate loans and affect the mix of first and second-lien mortgage loan products. Generally, first-lien mortgage production increases relative to second-lien mortgage production in response to low interest rates and second-lien mortgage production increases relative to first-lien mortgage production during periods of high interest rates. Fluctuating interest rates may also affect the net interest income earned by us resulting from the difference between the yield to us on loans held pending sales and the interest paid by us for funds borrowed.

Market Risk

Our market risk is the risk of economic loss resulting from adverse changes in market prices of mortgage loans and interest rates. When interest rates rise, applications in process with locked-in rates decrease in value. This risk of loss can be reflected in diminished current market values and/or reduced potential income in future periods.

When interest rates decline, customers may withdraw their mortgage loan applications. In those instances, we may be required to reduce our interest rates to meet the market demands. When interest rates rise, fallout may occur due to customers that are not locked into a rate withdrawing their applications, and, as a result, we may suffer a reduction in the volume of loan originations. We may be required to reduce our fees to entice these customers in order to close their loans.

23

Table of Contents

We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with senior management. Senior management regularly reviews our interest rate risk position and adopts balance sheet strategies that are intended to optimize operating earnings while maintaining market risk within acceptable guidelines.

While we monitor interest rates and may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that our results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. There were no open hedging positions at March 31, 2005.

Item 4. Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, as of the end of the period covered by this Quarterly Report our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in this Quarterly Report has been made known to them in a timely fashion.

There were no changes in our internal controls over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, these internal controls.

24

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Refer to Part I, Footnote 9 – Commitments and Contingencies for a discussion of our ongoing litigation. In addition to the specific items discussed therein, from time to time, we become involved in a variety of mortgage lending related claims and other matters incidental to its business in addition to the matters described above. In our opinion, the resolution of any of these matters is not expected to have a material adverse effect on our consolidated financial position and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On January 19, 2005, the Company completed its acquisition of First Charleston Mortgage, L.L.C. (“FCM”). As consideration for the acquisition, the Company issued 4,285,714 shares of its $0.0001 par value common stock valued at $185 (or $0.043 per share). FCM has been in the business of originating residential mortgage loans since 2002.

On February 28, 2005, the Company completed a private placement financing transaction pursuant to which it sold 17,207,791 units (at $0.0308 per unit) to several accredited investors for an aggregate purchase price of $530,000. Each unit consisted of one share of common stock, par value $0.0001 per share (the “Common Stock”), and one warrant to purchase one share of Common Stock at $0.04 per share expiring on December 31, 2007.

Item 3. Defaults Upon Senior Securities.

As we disclosed in Part I, Footnote 9 – Commitments and Contingencies, we are in default of under certain of our promissory notes with our creditors. As explained therein, we are attempting to negotiate extensions and other forebearance with these creditors.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.

25

Table of Contents

Table of Contents

On January 26, 2005, we filed a Current Report on Form 8-K for an event dated January 19, 2005 related to our acquisition of our First Charleston Mortgage, L.L.C. subsidiary.

On March 4, 2005, we filed a Current Report on Form 8-K for an event dated February 28, 2005 related to the completion of a private placement of equity securities.

On March 21, 2005, we filed a Current Report on Form 8-K announcing the addition of Stephen Croskrey to our Board of Directors.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.