Company Heading Toward Insolvency

Paragon Financial can’t pay executives

July 19, 2004

By PATRICK CROWLEY

In a federal filing, Paragon blamed the purge on continued losses and the “inability to raise the required capital to fund our mortgage banking operations” and said its board of directors “deemed it necessary to reduce our overall expenses especially at our corporate headquarters” in Ponte Verde Beach, Fla.

Pargaon’s board of directors have taken over running the company on a day-to-day basis, it said in a 10-Q filing with the Securities and Exchange Commission.

“While our executives and the board of directors are currently working to establish a compensation agreement that is mutually agreeable to both parties, there is no guarantee that an agreement will be reached,” Paragon said in the filing.

Paragon announced it early March that it had hired investment banker JPS Capital Corp. to try and raise $7 million to $10 million in cash.

“Paragon intends to use the anticipated proceeds to fuel its growth strategy by increasing its warehouse facilities, adding loan officers and expanding its wholesale broker network,” the company said in a written statement.

Apparently, Paragon has not been successful in raising the additional capital.

In the same federal filing used to detail the salary cuts, Paragon announced that about 84% of its shareholders have approved the sale of its largest subsidiary, PGNF Home Lending Corp.

The unit was sold to its former owner, Philip Lagori, in what was mainly a stock transaction. Paragon said it wants to use the stock it acquired from Lagori — 52.3 million shares valued at just $2.36 million — “to aggressively seek to acquire another retail mortgage brokering business.”

But Paragon’s stock has been trading a less than a dime a share.

After the sale of PGNF Home Lending Corp., Paragon will have just one subsidiary left – Paragon Home Funding Inc.

And the company also revealed more bad news; the sale of PGNF is likely to reduce revenues and operating expenses and result in a noncash loss of about $1.1 million.

Paragon hinted at problems when it released first quarter earnings earlier this year.

In the earnings statement Paragon said its relies on “revolving warehouse facilities to originate mortgage loans and hold them prior to sale.”

As of March 31, Paragon had $30 million in these revolving warehouse facilities. But some of company’s lenders don’t advance 100% of the mortgage loans it made to Paragon.

That requires Paragon “to use working capital to fund the remaining portion of the principal balance of the mortgage loans.

“As of March 31, 2004, we were in violation of certain financial covenants under our warehouse credit facilities,” Paragon revealed in the earnings statement. “We are currently seeking waivers of these financial covenants with our lenders.

“If we are unable to meet these financial covenants…or for any reason unable to maintain existing warehouse lines or renew them when they expire, we would cease our wholesale operations which would jeopardize our ability to continue to operate as a going concern.”

Paragon lost $3.5 million in the quarter, compared to a loss of $923,000 in the same period of 2003, the company said in the earnings statement.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com