Paragon Real Estate Equity & Investment 10KSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
Commission File Number: 0-25074
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
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Maryland
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39-6594066 |
(State or other jurisdiction of incorporation)
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(I.R.S. Employer Identification Number) |
1240 Huron Road, Cleveland, OH
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44115 |
(Address of principal executive offices)
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(Zip code) |
Issuers telephone number: 216-430-2700 Fax number: 216-430-2702
Securities registered under Section 12(b) of the Act: None
Securities registered under to Section 12(g) of the Act: Common Shares, $0.01 par value
Check whether the issuer is not required to file reports pursuant to section 13 or 15(d) of
the exchange act. o
Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing requirements for the past 90
days. Yes þ No o
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB þ.
Indicate by check mark whether the Registrant is a shell company (as defined in rule 126-2 of the
Exchange Act. Yes o No þ
Registrants revenues for its most recent fiscal year: $646,442.
At March 16, 2006, the Registrant had 33,191,649 common shares of beneficial interest (including
2,859,765 shares held in treasury), $0.01 par value, and 278,155 Class A Cumulative Convertible
Preferred Shares. The aggregate market value of the voting common and preferred shares held by
non-affiliates of the Registrant was approximately $855,818 based on the closing price of $0.06 per
common share on the over-the-counter bulletin board on March 16, 2006. The aggregate market value
of the voting preferred shares was valued as if each of the remaining 116,745 preferred shares held
by non-affiliates were converted into 3.448 common shares on March 16, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check one): Yes o No þ
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2005 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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EXHIBITS |
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Exhibit 31.1 |
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Section 302 CEO Certificate |
Exhibit 31.2 |
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Section 302 CFO Certificate |
Exhibit 32.1 |
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Section 906 CEO & CFO Certificate |
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PART I
Item 1. Description of Business
Company Overview
Paragon Real Estate Equity and Investment Trust (the Company, Paragon, we, our, or us) is
a real estate company with its primary focus during 2005 on acquiring, repositioning, owning,
managing and operating multifamily apartment communities. Generally, however, the selling prices
of this asset category have been quite high recently and have impacted the availability and cost of
financing. During 2006, Paragon has also been searching for and reviewing other value-added real
estate deals, including land development, retail, office, industrial, hotel, and joint venture
investments.
As of December 31, 2005, we owned a 1.0% interest in Paragon Real Estate, LP, the operating
partnership that owns Richton Trail Apartments (Richton Trail), an apartment community containing
72 units. Hampton Court Associates owns the remaining 99.0% interest in Paragon Real Estate, LP.
Because we are the sole general partner of Paragon Real Estate, LP, we consolidate Richton Trail in
our financial statements and show separately amounts for minority interest for Hampton Court
Associates, which is the only limited partner. Hampton Court Associates ownership interest in
Paragon Real Estate, LP is 813,938 restricted limited partnership units, each redeemable after July
1, 2007 for cash, or at our option, 22.881 of our common shares.
The Company was formed on March 15, 1994 as a Maryland real estate investment trust (REIT). We
operated as a traditional real estate investment trust by buying, selling, owning and operating
commercial and residential properties through December 31, 1999. In 2000, the Company purchased a
software technology company, resulting in the Company not meeting the Internal Revenue Code
qualifications to be a REIT for federal tax purposes. In 2002, the Company discontinued the
operations of the technology segment and can elect REIT status effective for 2005, though we intend
to take advantage of our tax loss carryforwards before electing to be a REIT again.
From 2003 through 2005, we pursued a value-added business plan primarily focused on acquiring well
located, under-performing multi-family residential properties, including affordable housing
communities, and repositioning them through renovation, leasing, improved management and branding.
Throughout 2005, Paragon reviewed several portfolios of apartment properties, and in August 2005,
identified a portfolio of ten apartment communities comprised of 1,478 units located in Texas and
Ohio, and signed a contract in September 2005 to acquire the portfolio for $62.6 million.
In order to fund the acquisition, Paragon hired an investment banking firm, which advised the
Company to do a public equity offering for $100 million for this acquisition and to provide funds
for future acquisitions and operations. The Company filed a registration statement with the
Securities and Exchange Commission (SEC) in October 2005, which the SEC decided not to review
allowing the Company to proceed with the public offering. Subsequently, Paragons investment
advisor informed the Company that market conditions made it impractical to continue with the
proposed offering, and the Company withdrew the registration statement from the SEC in January
2006. Without completing the public offering, the Company was not able to meet the listing
requirements of the American Stock Exchange (Amex) because its book equity was less than the $6
million minimum requirement, it had sustained several consecutive years of losses from operations
and net losses, and its common shares had been selling at a low share price for more than a year.
In February 2006, Amex delisted Paragons common shares, which then commenced being quoted on the
over-the-counter bulletin board (OTC Bulletin Board) and on the pink sheets with the new stock
symbol PRGL. The Company is continuing its search for financing to complete the acquisition of
the ten apartment communities under contract, which has been extended until March 31, 2006 with a
closing by April 30, 2006. Failure to obtain external sources of capital will materially and
adversely affect the Companys ability to close the acquisition as well as adversely affect its
ability to continue to operate as a public company.
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Because the cash flow from our property does not fully fund our operations, we have reduced our
day-to-day overhead and material future obligations. We have reduced overhead expenses by not
replacing employees who have left, reducing office space and rent, reducing the use of outside
consultants, negotiating discounts on prices wherever possible, and delaying or foregoing other
expenses. The mortgage debt service payment is funded from the cash flow of the property secured
by the mortgage, and the current salary requirements of the employment contracts is only $5,000 per
month for each executive officer. We historically have financed our long-term capital needs,
including acquisitions, as follows:
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Borrowings from new loans; |
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Additional equity issuances of our common and preferred shares; and |
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Proceeds from the sales of our real estate and technology segment. |
There can be no assurance any of the alternatives will be adopted, or if adopted, will be
successful.
Real Estate
Paragon Real Estate, LP, an operating partnership of which we are sole general partner and own a
1.0% interest, owns Richton Trail, a residential apartment community containing 72 units located
near Chicago, Illinois.
Our operating partnership, Paragon Real Estate, LP, acquired the residential community in 2003
along with the associated mortgage from Hampton Court Associates, a partnership controlled by James
C. Mastandrea, its general partner and our Chairman, Chief Executive Officer and President. In
consideration for transferring Richton Trail, Hampton Court Associates received 813,938 restricted
limited partnership units of Paragon Real Estate, LP. Each unit is redeemable after July 1, 2007
for cash, or at our option, 22.881 of our common shares.
Real Estate Tenants
Our tenants have leases that are generally for terms of one year or less.
Competition
The real estate market is highly competitive. Competing properties may be newer or have more
desirable locations than the Companys current property holding. If the market does not absorb
newly constructed units, market vacancies will increase and market rents may decline. As a result,
we may have difficulty leasing units within our properties and may be forced to lower rents on
leases to compete effectively.
We compete for the acquisition of properties with many entities, including, among others, publicly
traded REITs, life insurance companies, pension funds, partnerships and individual investors.
Many competitors may have substantially greater financial resources than us. In addition, certain
competitors may be willing to accept lower returns on their investments. If competitors prevent us
from buying properties that may be targeted for acquisition, our capital appreciation and valuation
may be impacted.
Employees
The Company has three full-time employees as of March 16, 2006.
Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. Certain information included in this Annual Report on Form 10-KSB and other materials
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filed by the Company with the Securities and Exchange Commission (as well as information included
in oral statements or other written statements made or to be made by the Company) contain
statements that are forward-looking, such as statements relating to business development and real
estate development activities, acquisitions, dispositions, future capital expenditures, financing
sources and availability, and the effects of regulation (including environmental regulation) and
competition. Although we believe that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, we can give no assurance that our expectations will
be achieved. As forward-looking statements, these statements involve risks, uncertainties and
other factors that could cause actual results to differ materially from the expected results and,
accordingly, such results may differ from those expressed in any forward-looking statements made
by, or on behalf of, the Company. These risks, uncertainties and other factors include
uncertainties affecting real estate businesses generally (such as entry into new leases, renewal of
leases and dependence on tenants ability to pay rent), risks relating to our ability to maintain
and increase property occupancy and rental rates, risks relating to construction or development
activities, acquisitions, dispositions, possible environmental liabilities, risks relating to
leverage and debt service (including availability of financing on terms acceptable to us and
sensitivity of our operations and financing arrangements to fluctuations in interest rates),
dependence on the primary markets in which our properties are located, the existence of complex
regulations relating to our tax status and the potential adverse impact of market interest rates on
the market price for our securities. We assume no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events.
Our cash resources are limited.
As of December 31, 2005, our unrestricted cash resources were approximately $529,000. We are
dependent on our existing cash resources to meet our liquidity needs because cash from operations
is not sufficient to meet our operating requirements. Our unrestricted cash is not sufficient to
allow us to continue operations beyond mid-2006 and we have been reviewing alternatives, including
value-added real estate deals for land development, retail, office, industrial, hotel and joint
venture investments, as well as reverse merging with another company, selling the corporate entity,
and seeking additional investors.
We have a history of losses.
We have reported net losses for each year since our inception. We have an accumulated deficit of
approximately $25.9 million as of December 31, 2005. There can be no assurance that we will
become profitable in the future.
We have not been able to raise funds through a public equity offering.
In October 2005, we filed a registration statement with the SEC to offer $100 million of our common
shares in a public equity offering. The SEC determined not to review the registration statement,
thus allowing the Company to proceed to sell the common shares. Subsequently, Paragons investment
advisor informed the Company that market conditions made it impractical to continue with the
proposed offering, and the Company withdrew the registration statement from the SEC in January
2006. Failure to obtain external sources of capital will materially and adversely affect the
Companys ability to close the acquisition as well as adversely affect its ability to continue to
operate as a public company.
We have not been able to meet the American Stock Exchanges continued listing qualifications.
Paragon was advised by Amex that Amex delisted Paragons common shares. On February 14, 2006,
Paragons common shares commenced being quoted on the OTC Bulletin Board and on the pink sheets
with the new symbol PRGL.
In addition, our common shares are thinly traded and trading volumes fluctuate significantly.
The average trading volume for the year ended December 31, 2005 was approximately 37,000
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common shares per day. As a result, investors may have difficulty selling our common shares at
generally prevailing prices.
We have approximately $2.7 million in debt secured by Richton Trail.
Our declaration of trust and bylaws have no limitation on the amount of debt that we may incur in
the purchase, sale, development or expansion of any property. Richton Trail secures approximately
$2.7 million of outstanding mortgage debt. In the future, we may incur additional indebtedness to
finance other acquisitions and development projects. Our debt service requirements may reduce
funds available for operations and future business opportunities, and may increase our
vulnerability to adverse general economic and industry conditions and competition.
We may not be able to consummate the acquisition we have under contract for ten apartment
communities.
We have a signed contract to acquire a portfolio of ten apartment communities, comprised of 1,478
units located in Texas and Ohio, for $62.6 million by March 31, 2006 with a closing by April 30,
2006. This acquisition is subject to several closing conditions, including satisfactory completion
of due diligence, obtaining financing and other customary closing conditions. If any of these
conditions are not met, we may not be able to consummate the acquisition or we may purchase some
but not all of the apartment communities. The failure to consummate the acquisition, in whole or
in part, could adversely affect our financial condition, results of operations and cash flows and
the market price of our common shares.
We need additional capital to execute our business plan and may not be able to obtain it.
We need additional equity and debt financing to execute our value-added business plan. Additional
financing may have unacceptable terms or may not be available at all for reasons relating to:
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Our limited operating history; |
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Our inability to meet our business plan; and |
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Lenders or investors view of real estate operating companies with a focus on one segment of real estate or small-capitalized companies. |
If adequate financing is not available, we will not be able to acquire additional properties or
develop new properties. Failure to obtain this financing will materially and adversely affect our
strategy. Any additional capital offerings could dilute our existing shareholders, and we expect that as we
grow, our existing shareholders will be diluted significantly.
We will be subject to risks with debt financing.
Our business plan relies on debt financing. There are numerous risks associated with debt
financing including:
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We must generate cash to service our debt; |
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An increase in interest expense would adversely affect our cash flow, our ability
to make future distributions to our shareholders and the value of our shares; |
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We may not be able to finance necessary capital expenditures for renovations
and other improvements on favorable terms or at all; and |
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Our apartment community is mortgaged to secure payment of indebtedness, and if we are unable to meet mortgage payments, the property could be foreclosed with a consequent loss of income and asset value to us. |
Our focus on multi-family residential property may not be beneficial.
Richton Trail is a multi-family residential property, a segment of real estate on which we focused
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2003 through 2005. During this time, we have been actively seeking and reviewing multi-family
residential companies, portfolios and properties, including affordable housing communities, for
potential acquisition. We have a signed contract to acquire a portfolio of ten apartment
communities, comprised of 1,478 units in Texas and Ohio, for $62.6 million by March 31, 2006 with a
closing by April 30, 2006. There can be no assurances that we will be able to close this
transaction. Even if our management is successful in closing a transaction, investors may not value
the transaction in the same manner as we did, and investors may not value a portfolio of the same
type of properties as highly as they would value portfolios consisting of diverse properties.
We may not be able to manage our growth effectively.
Our business plan envisions significant growth. This growth will require increased investment in
management and professionals, personnel, financial and management systems and controls and
facilities, which could cause operating results to vary significantly from quarter to quarter and
could negatively impact our financial results. Any difficulty or significant delay in the
implementation or operation of existing or new systems or integration of new personnel could
adversely affect our ability to manage growth and our cash flow.
Advantageous transactions may be prevented.
Certain provisions contained in our declaration of trust and bylaws and under federal and Maryland
laws may have the effect of discouraging a third party from making any acquisition proposal for us.
For example, such provisions may
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deter attractive tender offers for our shares, or |
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deter purchases of large blocks of our shares, thereby limiting the opportunity for our shareholders to receive a premium for their shares over then-prevailing market prices. |
James C. Mastandrea controls a significant percentage of our shares.
Mr. Mastandrea, our Chairman of the Board, Chief Executive Officer and President, is a member and
the manager of Paragon Real Estate Development, LLC and John J. Dee, our Chief Financial Officer
and a trustee, is also a member of that entity. Mr. Mastandrea and Mr. Dee have 12,233,738
restricted common shares and 161,410 restricted preferred shares each convertible into 22.881
common shares. Mr. Mastandrea and Mr. Dee assigned their common and preferred shares to Paragon
Real Estate Development, LLC. Mr. Mastandrea also purchased 28,432 common shares on the open market
in 2004. In addition, Hampton Court Associates owns 813,938 units in Paragon Real Estate, LP, which
may be converted into cash, or at our option, 18,623,715 common shares at any time after July 1,
2007. Mr. Mastandrea is the general partner of Hampton Court Associates and owns directly or
indirectly 325,575 of these units, which may be converted into 7,449,481 common shares or cash, at
our discretion. If Mr. Mastandrea caused Hampton Court Associates to redeem all of the limited
partnership units in Paragon Real Estate, LP, and we elected to convert such units into common
shares, and if the preferred shares held by Paragon Real Estate Development, LLC were converted
into common shares, then including the other common shares held by Paragon Real Estate Development,
LLC, and if all exercisable options were exercised, Mr. Mastandrea would own or have the right to
vote approximately 67.3% of our common shares. Consequently, he would have the ability to approve
some matters requiring the vote of shareholders which may result in corporate action with which you
do not agree.
Mr. Mastandrea has the right to appoint a majority of our board of trustees.
Under a restricted share agreement, Mr. Mastandrea will have the right to appoint five trustees to
our board as long as Paragon Real Estate Development, LLC owns either:
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a majority of the preferred shares; or |
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40% or more of the sum of the restricted shares issued to Mr. Mastandrea |
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and Mr. Dee and the common shares issued to them upon conversion of their
restricted preferred shares into restricted common shares. |
Even if these conditions are not met, Mr. Mastandreas appointment right will continue until March
4, 2013; provided that if Mr. Mastandrea remains as our Chairman or Chief Executive Officer on that
date, the right to appoint five trustees will continue until the time Mr. Mastandrea is no longer
our Chairman or Chief Executive Officer. Although Mr. Mastandrea has not exercised this right in
the election of trustees, he may exercise it any time in the future.
Mr. Mastandrea and Mr. Dee have conflicts of interest.
James C. Mastandrea is our Chairman of the Board, Chief Executive Officer and President. We are
the general partner of Paragon Real Estate, LP, our operating partnership, and Mr. Mastandrea, as
our Chief Executive Officer, therefore, oversees the day to day operations of the operating
partnership. Mr. Mastandrea owns directly or indirectly limited partnership units totaling 40% of
the operating partnership. Because of his different positions, Mr. Mastandrea faces conflicts of
interest in making determinations regarding the Paragon operating partnership. Mr. Mastandreas
interests may differ from the interests of our shareholders and the other limited partners,
including different and more adverse tax consequences than holders of our common or preferred
shares upon the sale of Richton Trail, the refinancing of Richton Trails debt, or in connection
with any proposed tender offer or merger involving us. Therefore, we and Mr. Mastandrea, as
partners in the Paragon operating partnership, may have different objectives regarding the
appropriate terms of any such transaction.
John J. Dee is our Senior Vice President, Chief Financial Officer and a trustee. Mr. Mastandrea
and Mr. Dee may have a conflict of interest with respect to their obligations as officers and
trustees to the extent we attempt or the Paragon operating partnership attempts to enforce the
terms of the Paragon operating partnership agreement or any other agreement to which we and either
or both Mr. Mastandrea and Mr. Dee are parties. The failure to enforce the material terms of any such
agreement, particularly indemnification provisions and the remedy provisions for breaches of
representations and warranties or failures to perform covenants, could result in a substantial
monetary loss to or otherwise could have a material adverse effect on us and our shareholders.
Mr. Mastandrea has additional conflicts of interest because he owns the management company that
manages Richton Trail and his spouse, who is President and CEO of the management company,
supervises the on-site property management employees.
Mid Illinois Realty Corp., an Illinois corporation, is owned by Mr. Mastandrea and is the
management company that manages Richton Trail. Mr. Mastandreas spouse is President and CEO of Mid
Illinois Realty and supervises the on-site property employees who manage the daily operations of
Richton Trail. The existing management fee is 4.5% of gross revenues collected, excluding expense
reimbursements and forfeited security deposits. While the contract to manage Richton Trail,
including the management fee, is at a competitive market rate for similar services with an
unrelated company, it was not negotiated at arms-length. We cannot provide any assurance that a
contract with an independent third party could not be negotiated upon terms more favorable to us.
In addition, Mr. Mastandrea owns another company, MDC Realty Corporation, an Illinois corporation, which is
reimbursed, at cost, for the payroll costs of the employees at Richton Trail that are processed by
MDC Realty through an unaffiliated payroll services provider. MDC Realty does not charge Richton
for these services. As our Chairman of the Board, Chief Executive Officer and President, and
because we are the general partner of the Paragon operating partnership that contracts with Mid
Illinois Realty and MDC Realty, Mr. Mastandrea faces conflicts of interest in making determinations
regarding the management of Richton Trail and the enforcement of the terms of the Richton Trail
management agreement. As the Company acquires more properties, it intends to use local third party
management companies until we are able to provide management services ourselves. There can be no
assurances that we will be able to provide management services for our properties, or after
management services are handled internally that we will operate our properties more efficiently or
effectively than third party management companies.
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We may face competition from other business interests of Mr. Mastandrea.
Mr. Mastandrea owns a combined mixed-use shopping plaza and office facility in suburban Chicago,
Illinois. We do not believe that this property will compete with our apartment community; however,
it is possible that this mixed-use facility may compete with us in the future in the event we
invest in a similar property in close proximity to it.
We are dependent on a small number of key senior professionals and the loss of any of these
professionals could adversely affect our results and may, in turn, negatively affect the market
price of our common shares.
The loss of professionals, particularly a senior professional with a broad range of contacts in an
industry, could materially and adversely affect our operating results. Among the key professionals
on whom we depend, and whose loss could have a material adverse effect on our business, are Mr. Mastandrea and Mr. Dee. We believe that personal relationships with potential investors,
lenders and sellers of real estate properties and projects are an important component of our
business plan. These relationships depend in part upon the individual employees who represent us.
We will face competition for experienced real estate professionals. We cannot assure you that
losses of key personnel due to competition or otherwise will not occur.
The board of trustees has the ability to effect changes to our major policies, including our
investment policy, without the vote of shareholders.
Our major policies, including policies with respect to acquisitions, mergers, financing, growth,
debt capitalization, recapitalization of the equity structure and distributions will be determined
by our board of trustees. The board of trustees may amend or revise these and other policies from
time to time without the vote of the shareholders. Accordingly, the shareholders will have no
direct control over changes in our policies which may not fully serve the interests of all of our
shareholders.
We cannot sell Richton Trail for ten years without Mr. Mastandreas consent.
We are precluded by the Paragon partnership agreement from selling the Richton Trail apartment
buildings for ten years without the consent of Mr. Mastandrea. Mr. Mastandreas right to consent
may present him with a conflict of interest.
Shareholders could experience possible future dilution through the issuance of additional shares or
partnership interests.
As a result of growth relating to acquisitions financed with the issuance of additional preferred
or common shares or interests in the Paragon operating partnership or any similar entity of ours,
you could experience significant future dilution. We cannot estimate how much dilution will occur,
but anticipate that it would be significant.
Possible issuances of future series of preferred shares.
Pursuant to our declaration of trust, our board of trustees has the authority to fix the rights,
preferences, privileges and restrictions, including voting rights, of unissued shares and to issue
those shares without any further vote or action by the shareholders. The rights of the holders of
our common shares will be subject to, and may be adversely affected by, the rights of the holders
of any series of preferred shares that may be issued in the future.
We currently do not plan to distribute dividends to the holders of our shares.
Unless we again become a real estate investment trust, we intend to retain earnings in order to
fund the operation and expand our business. Accordingly, we do not intend to pay cash dividends on
our common or preferred shares. Payment of future cash dividends, if any, and the amounts thereof
will be dependent upon our earnings, financial requirements and other factors deemed relevant by
our board of trustees.
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Our real estate assets are located in only one market.
Our existing property is located in Illinois. Assuming no other property acquisitions under our
business plan, our financial performance is dependent upon economic conditions in this state and
the specific local market where the property is located. Like other real estate markets, this
market has experienced economic downturns in the past. Such slowdowns can lead companies to lay
off employees, which might cause individuals to move or miss rent payments. Declines in the
economy of the Illinois real estate market could adversely affect our operations or cash flow and
ability to meet ongoing obligations, pay distributions to our shareholders, if in the future we
elect to pay cash dividends on our common shares, and adversely impact the value of our shares.
Real Estate Risks
We face competition from numerous real estate entities with greater resources than ours.
We compete for the acquisition of properties with many entities, including, among others,
publicly-traded REITs, life insurance companies, pension funds, partnerships and individual
investors. Many competitors have substantially greater financial and personnel resources than we
do. Competition may reduce the number of suitable acquisition opportunities offered to us and
increase the bargaining power of property owners seeking to sell. In addition, certain competitors
may be willing to accept lower returns on their investments. If competitors prevent us from buying
properties that may be targeted for acquisition, our business plan may be adversely impacted, as
will our capital appreciation and value.
Because real estate is illiquid, we may not be able to sell properties when appropriate.
Real estate investments generally cannot be sold quickly. As we grow in accordance with our
business plan, this illiquidity will limit our ability to alter our portfolio, whether necessary to
sell our properties, to raise capital, or in response to changes in economic or other conditions.
In addition, the sale price of any disposition may not recoup or exceed the amount of our
investment.
Our operating costs may rise, which could reduce our cash flow.
As we expand, our operating costs may increase as a percentage of our revenue as a result of rising
costs and the heightened awareness of possible terrorist attacks. As a direct result of the September 11, 2001 terrorist attacks, costs have increased for building security, property/casualty
and liability insurance, and property maintenance. We may not be able to pass along the increased
costs associated with such increased building security to our tenants, which could reduce our cash
flow.
The possibility of future terrorist attacks has caused increases in the cost of premiums for
insurance coverage. Furthermore, in light of recently-adopted securities laws and regulations and
the additional responsibility given to audit committees as a result, we may experience increased
costs in our directors and officers liability insurance premiums and fees for auditors and other
independent third parties hired by the audit committee to fulfill its expanded responsibilities.
Because of rising costs in general, we might experience increases in our property maintenance
costs, such as for cleaning, electricity, real estate taxes and heating, ventilation and air
conditioning. If operating expenses increase, the availability of other comparable apartment communities in our
specific geographic market may limit our ability to increase rents, which could reduce our cash
flows and limit our ability to make distributions to shareholders, if in the future we elect to pay
cash dividends on our common shares.
New development and acquisitions may not produce results in accordance with our expectations and
may require development and renovation costs exceeding our estimates.
Our real estate investment strategy during 2005 was to grow by acquiring well located,
under-performing multi-family residential properties and repositioning them through renovation,
leasing,
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improved management and branding. During 2006, we have also been searching for and reviewing other
value-added real estate deals, including land development, retail, office, industrial, hotel and
joint venture investments. Once made, our investments may not produce results in accordance with
our expectations. Our actual renovation, improvement development costs to bring an acquired
property up to market standards or to bring units of an existing property up to standards for a
tenant may exceed our estimates. Risks associated with these activities include:
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the unavailability of financing; |
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construction costs exceeding original estimates; |
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construction and lease-up delays resulting in increased debt service
and construction costs; |
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complications in obtaining necessary zoning, occupancy and other
governmental permits; and |
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a lack of acceptance of our value added strategy by investors or tenants. |
In addition, acquisitions and development projects require a significant amount of managements
time which could divert managements attention away from the daily operation of our business.
Financially distressed tenants may limit our ability to realize the value of our investments.
Following a tenants lease default, we may experience delays in enforcing our rights as a landlord
and may incur substantial costs in protecting our investment and recovering lease and other
payments owed to us. In addition, a tenant may seek bankruptcy law protection, which could relieve
the tenant from its obligation to make lease payments.
We may be unable to renew leases or relet units as leases expire.
If tenants fail to renew their leases upon expiration, we may be unable to relet the subject unit.
Even if the tenants do renew their leases or we can relet the units, the terms of renewal or
reletting (including the cost of any upgrades) may be less favorable than current lease terms.
Some potential losses are not fully covered by insurance or may not be covered by insurance at all.
We carry comprehensive liability, fire, extended coverage and rental loss insurance on our
property. We believe the policy specification and insured limits of these policies are adequate
and appropriate. However, there are types of losses, such as losses from casualties associated
with civil unrest, acts of God, including natural disasters, and acts of war that generally are not
insured.
As a consequence of the possibility of terrorist attacks in the future, we may be unable to renew
or duplicate our current insurance coverage in adequate amounts. In addition, insurance companies
may no longer offer coverage against certain types of losses, such as losses due to terrorist acts
and toxic mold, or if offered, these types of insurance may be prohibitively expensive. Should an
uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the
capital we have invested in a property, as well as the anticipated future revenue from the
property. Inflation, changes in building codes and ordinances, environmental considerations, and
other factors also might make it unfeasible to use insurance proceeds to replace a property after
it has been damaged or destroyed. Under these circumstances, the insurance proceeds received by us
might not be adequate to restore our economic position with respect to that property. In such an
event, we may nevertheless remain obligated for any mortgage debt or other financial obligations
related to the property. We cannot provide assurance that material losses in excess of insurance
proceeds will not occur in the future. If any of our properties experience a catastrophic loss, the loss could seriously disrupt our
operations, delay revenue and result in large expenses to repair or rebuild the property, if we are
able to make the repairs or rebuild the property at all. These events could adversely affect our
cash flow and ability to make distributions to shareholders.
10
The ownership of real estate is subject to numerous risks generally.
The underlying value of our real estate investments and our income and our ability to make future
distributions to our shareholders are dependent upon our ability to operate rental properties in a
manner sufficient to maintain or increase cash available for future distribution, if any. Income
from the properties may be adversely affected by:
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changes in national economic conditions; |
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changes in local market conditions due to changes in general or local economic
conditions and neighborhood characteristics; |
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changes in interest rates and in the availability, cost and terms of mortgage
funds; |
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impact of present or future environmental legislation and compliance with
environmental laws; |
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ongoing need for capital improvements, particularly in older properties; |
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more attractive lease incentives offered by competitors in similar markets; |
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increased market demand for newer properties; |
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changes in real estate tax rates and other operating expenses; |
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adverse changes in governmental rules and fiscal policies; |
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adverse changes in zoning laws; and |
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other factors which are beyond our control. |
Liability for environmental matters could adversely affect our financial position.
Under various federal, state, and local environmental laws, a current or previous owner or operator
of real property may be liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in the property. These laws often impose liability whether or not the
owner or operator caused or knew of the presence of the hazardous or toxic substances and whether
or not the storage of such substances was in violation of a tenants lease. The owner or operator
is not always in a position to know what a tenant stores in its apartment. In addition, the
presence of hazardous or toxic substances, or the failure to remediate such property, may adversely
affect our ability to lease any or all of a property and our ability to borrow using the
contaminated property as collateral. In connection with the ownership of any property, we are
potentially liable for any cleanup costs and these costs may be substantial.
Our assessments of our existing properties have not revealed any environmental liability that we
believe would have a material adverse effect on our business, assets or results of operations, nor
are we aware of any such environmental liability. We also intend to condition future acquisitions
on successful environmental assessments. Nevertheless, it is possible that our past and future
assessments will not reveal all environmental liabilities or that there are existing or future
material environmental liabilities of which we will be unaware.
Compliance with applicable laws, rules and regulations, including the Americans with Disabilities
Act, can be costly.
All places of public accommodation are required to meet certain federal requirements, including but
not limited to those associated with the Americans with Disabilities Act. A number of additional
federal, state and local laws exist that also may require modifications to our present and future
properties or restrict certain further renovations thereof, with respect to access thereto by
disabled persons.
Although we believe that our existing property is substantially in compliance with present
requirements, future legislation may impose additional burdens or restrictions on owners with
respect to access by disabled persons. Although the costs of compliance with any additional
legislation are not currently ascertainable, the costs could be substantial. Limitations or
restrictions on the
11
completion of certain renovations may also limit application of our investment strategy in certain
instances or reduce overall returns on our investments.
Item 2. Description of Property
As of December 31, 2005, we owned an interest in one residential apartment community, Richton
Trail, consisting of 12 three-story apartment buildings containing a total 72 units, which we
acquired on July 1, 2003. The apartment buildings were built in 1978, 1979 and 1982, were
refurbished in the late 1980s and again in the 1990s. They are situated in a suburb of Chicago
on 3.21 acres, or 139,884 square feet, of land. Each building has its own parking lot and contains
six apartment units, with a combined total of 60 two-bedroom apartments and 12 one-bedroom
apartments.
Richton Trail contains 56,040 square feet of net rentable area and 74,196 square feet of above
grade gross building area. The property has generated rental revenue of approximately $605,000 in
2005, and for the year ended December 31, 2005, 96.6% of the property, or approximately 70 units,
were rented. Tenants lease obligations are generally on a year-to-year basis. Richton Trail must
maintain approximately 90% of the apartments rented in order to achieve the necessary cash flow to
operate the property with its current expenses and liabilities. We currently have no plans for any
significant improvements at Richton Trail because the property has been maintained in the past and
it is at or near full occupancy.
Paragon Real Estate, LP, an operating partnership of which we are sole general partner and own a
1.0% interest, owns Richton Trail. Hampton Court Associates owns the remaining 99.0% interest of
Paragon Real Estate, LP. Because we are the sole general partner of Paragon Real Estate, LP, we
consolidate Richton Trail in our financial statements and show separately amounts for minority
interest for Hampton Court Associates, which is the only limited partner. Hampton Court Associates
ownership interest in Paragon Real Estate, LP is 813,938 limited partnership units, each redeemable
after July 1, 2007 for cash, or at our option, 22.881 of our common shares.
Investments in Real Estate Depreciation and Insurance Coverages
For financial reporting, depreciation expense on our apartment community is computed using the
straight line method based on a useful life of 40 years and the original acquisition cost allocated
to buildings of approximately $3.2 million. For tax reporting, depreciation expense is computed
under the modified accelerated cost recovery system using the double-declining depreciation method
based on a useful life of 27.5 years and the original tax basis of the buildings of approximately
$836,000. The tax basis is the previous owners undepreciated basis of the property, which was a
tax deferred exchange for operating partnership units of Paragon Real Estate, LP.
The stated real estate tax rate of Cook County Illinois is 11.504%, which is applied to the
equalized assessed value of the property. This value is the product of the assessors
determination of the property value, an assessment factor of 16%, and a state equalization factor
of 2.5757. The annual real estate taxes paid in 2005 were $88,498, based on the assessors
property value of approximately $1.9 million.
We believe we have adequate insurance coverage for our real estate property.
Mortgage Loan
Richton Trail has a mortgage loan with an independent lender. The mortgage loan had an original
balance of $2.8 million with a fixed interest rate of 5.87% for a term of 10 years. The monthly
principal and interest payments are approximately $18,000, based on a 25-year amortization
schedule. The balance due at maturity in 2013 will be approximately $2.1 million. The mortgage
loan payable was approximately $2,711,000 as of December 31, 2005.
12
Item 3. Legal Proceedings
In the normal course of business, we may be involved in legal actions arising from the ownership
and administration of our properties. In our opinion, the liabilities, if any, that may ultimately
result from such legal actions are not expected to have a materially adverse effect on our
consolidated financial position, operations or liquidity. We are not currently involved in any
legal actions.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2005.
PART II
Item 5. Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
Our common shares began trading on the Amex on October 28, 1999 under the symbol RPP.
On June 30, 2003 we changed our name to Paragon Real Estate Equity and Investment Trust. As a
result of our name change our common shares traded under the new symbol PRG on the Amex. Amex
delisted Paragons common shares for failure to meet listing requirements and on February 14, 2006,
Paragons common shares commenced being quoted on the OTC.BB and on the pink sheets with the new
symbol PRGL.
Our Class A Preferred Shares began trading on the Amex on October 28, 1999 under the symbol
RPP.A. In May 2003, we offered preferred shareholders a one-time incentive to exchange preferred
shares for common shares, which expired June 30, 2003. After the exchange offer was completed, the
remaining preferred shares held by investors not affiliated with Paragon had an aggregate market
value below $1 million and therefore no longer met the minimum requirement for listing on Amex, as
set forth in the Amexs Company Guide. Amex suspended trading of the preferred shares and the SEC
removed the preferred shares from listing and registration in accordance with Section 12 of the
Securities and Exchange Act of 1934. Preferred shareholders retain the right to convert each of
their shares for 3.448 common shares. The preferred shares are now quoted over-the-counter with
the symbol PRGYP.
The table below shows the range of the high and low sale prices for our common shares as reported
on the Amex. The quotations shown represent interdealer prices without adjustment for retail
markups, markdowns or commissions, and may not reflect actual transactions.
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High |
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Low |
2005 |
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4th Quarter |
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$ |
0.18 |
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$ |
0.10 |
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3rd Quarter |
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$ |
0.14 |
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$ |
0.08 |
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2nd Quarter |
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$ |
0.19 |
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$ |
0.10 |
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1st Quarter |
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$ |
0.26 |
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$ |
0.11 |
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2004 |
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4th Quarter |
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$ |
0.20 |
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$ |
0.06 |
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3rd Quarter |
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$ |
0.24 |
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$ |
0.11 |
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2nd Quarter |
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$ |
0.22 |
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$ |
0.12 |
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1st Quarter |
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$ |
0.37 |
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$ |
0.18 |
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On March 16, 2006, the last reported sales price of our common shares on the OTC was $0.06.
The number of holders of record of our common shares was 258 as of March 16, 2006 and we estimate
we have approximately 1,200 beneficial holders of common interests as of that same date.
13
Dividend Policy
We have not declared or paid dividends on our common shares since the fourth quarter of 1999, and
we do not anticipate paying dividends on our common shares in the foreseeable future. Declaration
or payment of dividends, if any, in the future, will be at the discretion of the board of trustees
and will depend on our then current financial condition, results of operations, capital
requirements and other factors deemed relevant by the board of trustees.
On June 30, 2003, the holders of our preferred shares consented to waive the dividend that would
otherwise have been payable in May 2003 and to eliminate any future dividends that would have been
payable under the terms of our preferred shares. The waiver was sought in connection with a
one-time incentive exchange offer under which we offered to exchange each of our preferred shares
for 22.881 common shares. The exchange offer was completed on June 30, 2003.
Preferred Share Conversions
No preferred shares were converted during the fourth quarter of 2005.
Issuer Purchases of Equity Securities
The Company did not purchase any equity securities within the fourth quarter of 2005 that were not
registered under the Securities Act.
Item 6. Managements Discussion and Analysis or Plan of Operation
Overview
Paragon Real Estate Equity and Investment Trust (the Company, Paragon, we, our, or us) is
a real estate company with its primary focus during 2005 on acquiring, repositioning, owning,
managing and operating multifamily apartment communities. Generally, the selling prices of this
asset category have been quite high and have impacted the availability and cost of financing.
During 2006, Paragon has also been searching for and reviewing other value-added real estate deals,
including land development, retail, office, industrial, hotel, and joint venture investments.
As of December 31, 2005, we owned a 1.0% interest in Paragon Real Estate, LP, the operating
partnership that owns Richton Trail Apartments (Richton Trail), an apartment community containing
72 units. Hampton Court Associates owns the remaining 99.0% interest in Paragon Real Estate, LP.
Because we are the sole general partner of Paragon Real Estate, LP, we consolidate Richton Trail in
our financial statements and show separately amounts for minority interest for Hampton Court
Associates, which is the only limited partner. Hampton Court Associates ownership interest in
Paragon Real Estate, LP is 813,938 restricted limited partnership units, each redeemable after July
1, 2007 for cash, or at our option, 22.881 of our common shares.
From 2003 through 2005, Paragon pursued a value-added business plan that was primarily focused on
acquiring well located, underperforming multifamily residential properties and repositioning them
through renovation, leasing, improved management, and branding. During 2006, Paragon has also been
searching for and reviewing other value-added real estate deals, including land development,
retail, office, industrial, hotel, and joint venture investments. Paragon intends to raise equity
through individual investors or groups of investors. We may also use joint venture structures for
property and portfolio acquisitions, and tax-deferred operating partnership units for acquisitions
of companies.
On September 26, 2005, we entered into an agreement to acquire for approximately $62.6 million, ten
apartment communities in Texas and Ohio, consisting of 1,478 units, which is subject to the
completion of due diligence, our obtaining financing and other customary closing conditions. We are
exploring a variety of capital raising alternatives in order to fund the acquisition, which was
extended until March 31, 2006 with a closing by April 30, 2006.
14
Brief History
Paragon was formed on March 15, 1994 as a Maryland real estate investment trust (REIT).
We operated as a traditional REIT by buying, selling, owning and operating commercial and
residential properties through December 31, 1999.
In February 2000, the Company purchased a software technology company, resulting in the Company not
meeting the Internal Revenue Code qualifications to be a REIT for federal tax purposes. In 2002,
the Company discontinued the operations of the technology segment and we can elect REIT status
effective for 2005, though we intend to take advantage of our tax loss carryforwards before
electing to be a REIT again.
Recent Developments in 2005 and Executive Overview
From 2003 through 2005, we pursued a value-added business plan primarily focused on acquiring
well located, under-performing multi-family residential properties, including affordable housing
communities, and repositioning them through renovation, leasing, improved management and branding.
Throughout 2005, Paragon reviewed several portfolios of apartment properties, and in August 2005,
identified a portfolio of ten apartment communities comprised of 1,478 units located in Texas and
Ohio, and signed a contract in September 2005 to acquire the portfolio for $62.6 million.
In order to fund the acquisition, Paragon hired an investment banking firm, which advised the
Company to do a public equity offering for $100 million for this acquisition and to provide funds
for future acquisitions and operations. The Company filed a registration statement with the SEC in
October 2005, which the SEC decided not to review allowing the Company to proceed with the public
offering. Subsequently, Paragons investment advisor informed the Company that market conditions
made it impractical to continue with the proposed offering. The Company continued to solicit
additional firms until it withdrew the registration statement from the SEC in January 2006.
Without completing the public offering, the Company was not able to meet the listing requirements
of Amex because its book equity was less than the $6 million minimum requirement, it had sustained
several consecutive years of losses from operations and net losses, and its common shares had been
selling at a low share price for more than a year. In February 2006, Amex delisted Paragons
common shares, which then commenced being quoted on the over-the-counter bulletin board (OTC
Bulletin Board) and on the pink sheets with the new stock symbol PRGL. The Company is
continuing its search for financing to complete the acquisition of the ten apartment communities
under contract, which has been extended until March 31, 2006 with a closing by April 30, 2006.
Failure to obtain external sources of capital will materially and adversely affect the Companys
ability to close the acquisition as well as adversely affect its ability to continue to operate as
a public company.
During 2006, Paragon has been also searching for and reviewing other value-added real estate deals,
including land development, retail, office, industrial, hotel, and joint venture investments. In
addition because our unrestricted cash is not sufficient to allow us to continue operations beyond
mid-2006, we have been reviewing other alternatives, including a reverse merger with another
company, selling the corporate entity, and seeking additional investors. There can be no assurance
that we will be able to enter into a definitive agreement or that we will be able to close a
transaction once a definitive agreement is signed. Even if our management is successful in closing
a transaction, investors may not value the transaction in the same manner as we did, and investors
may not value the transaction as they would value other transactions or alternatives.
Forward-Looking Information
The following is a discussion of our results of operations for the years ended December 31, 2005
and 2004 and financial condition, including:
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Explanation of changes in the results of operations in the Consolidated Statements
of Operations for the year ended December 31, 2005 compared to the year ended
December 31, 2004. |
15
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Our critical accounting policies and estimates that require our subjective judgment and
are important to the presentation of our financial condition and results of operations. |
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Our primary sources and uses of cash for the year ended December 31, 2005, and how
we intend to generate cash for long-term capital needs. |
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Our current income tax status. |
This section contains forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on our current expectations, estimates and projections about
future events and financial trends affecting the financial condition and operations of our
business. Forward-looking statements can be identified by the use of words such as may, will,
should, expect, estimate or comparable terminology. Forward-looking statements are
inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and
some of which we might not even anticipate. Although we believe that the expectations, estimates
and projections reflected in these forward-looking statements are based on reasonable assumptions
when they are made, we can give no assurance that these expectations, estimates and projections can
be achieved. Future events and actual results may differ materially from those discussed in the
forward-looking statements. The Company assumes no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events. Factors that could
cause actual results to differ materially from managements current expectations include, but are
not limited to, changes in general economic conditions, changes in local real estate conditions
(including rental rates and competing properties), changes in the economic conditions affecting
industries which employ tenants residing in our property, our failure to lease unoccupied units or
to re-lease occupied units upon expiration of leases in accordance with our projections, changes in
prevailing interest rates, the cost or general availability of equity and debt financing,
unanticipated costs associated with the acquisition and integration of our acquisitions, our
ability to obtain adequate insurance for terrorist acts, demand for tenant services beyond those
traditionally provided by landlords, and potential liability under environmental or other laws.
Please see the section Risk Factors on previous pages for other factors which could affect our
Company.
Comparison of the years ended December 31, 2005 and 2004
Revenues
Rental revenue of approximately $605,000 for the year ended December 31, 2005 and approximately
$609,000 for the year ended December 31, 2004 is a decrease of approximately $4,000. Each year
represents twelve months of revenue for Richton Trail.
Interest and other income decreased by approximately $10,000 to approximately $41,000 for the year
ended December 31, 2005, from approximately $51,000 for the year ended December 31, 2004.
The decrease is comprised of a decrease in interest income of approximately $5,000 due to a
decrease in cash and cash equivalents, and a decrease in other income of approximately $5,000.
Expenses from Continuing Operations
Total expenses increased from approximately $1,558,000 for the year ended December 31, 2004 to
approximately $2,077,000 for the year ended December 31, 2005, a net increase of $519,000. This
increase is the result of increased general and administrative expenses of approximately $519,000,
which was comprised of increased costs for due diligence on new deals of approximately $324,000 and
approximately $195,000 to prepare a registration statement for a public equity offering. The
increase of approximately $324,000 for due diligence includes legal, consulting and travel costs.
The cost to prepare the registration statement of approximately $195,000 includes legal, auditor
research and review, and travel costs.
General and administrative costs represent approximately 71% of total costs. General and
administrative costs are a large percent of total costs because we have only one property and
continue
16
to actively seek and review potential acquisitions to build our portfolio and to obtain
acquisition capital.
The remainder of the expense categories reflects Richton Trail operations and variances between the
years ended December 31, 2005 and 2004 net to approximately zero. Property taxes increased
approximately $7,000, insurance increased approximately $2,000, and depreciation increased
approximately $3,000. These increases were offset by decreased operating and maintenance expense
of approximately $10,000 and decreased mortgage interest expense of approximately $3,000.
Loss from operations before minority interests
As a result of the above, loss from operations before minority interests increased from
approximately $898,000 for the year ended December 31, 2004 to approximately $1,430,000 for the
year ended December 31, 2005.
(Income) loss allocated to minority interests
Income allocated to minority interests of approximately $4,000 for the year ended December 31, 2005
is an increase over the loss of approximately $82,000 allocated for the year ended December 31,
2004. Fewer overhead expenses were allocable to minority interests in 2005 compared to 2004.
Loss from operations
As a result of the above, loss from operations increased from approximately $816,000 for the year
ended December 31, 2004 to approximately $1,434,000 for the year ended December 31, 2005.
Gain on sale of marketable securities
The gain on sale of marketable securities of approximately $60,500 for the year ended December 31,
2005 was a result of our sale of 10,000 common shares of Stellent, Inc. at a price of $9.80 per
share.
Net loss attributable to Common Shareholders
Based on the above, the net loss attributable to common shareholders increased from approximately
$816,000 for the year ended December 31, 2004 to approximately $1,374,000 for the year ended
December 31, 2005.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting
principles, which require us to make certain estimates and assumptions. A summary of our
significant accounting policies is provided in Note 3 to our Consolidated Financial Statements.
The following section is a summary of certain aspects of those accounting policies that both
require our most subjective judgment and are most important to the presentation of our financial
condition and results of operations. It is possible that the use of different estimates or
assumptions in making these judgments could result in materially different amounts being reported
in our Consolidated Financial Statements.
Impairment of Long-Lived Assets
We recognize an impairment loss on a real estate asset if the assets carrying amount exceeds its
fair value and is non-recoverable. First, to determine if impairment may exist, we review our
properties and identify those, if any, which have had either an event of change or event of
circumstances warranting further assessment of recoverability. Next, we estimate the fair value of
those properties on an individual basis through either independent appraisals or by capitalizing
the expected net operating income. These amounts are then compared to the propertys depreciated
cost to determine whether an impairment exists. We compute the expected net operating income using
certain estimates
17
and assumptions for revenues and expenses. As a result, these estimates and
assumptions impact the amount of impairment loss that we recognize.
Real Estate Investments
When we acquire real estate properties, we allocate the components of these acquisitions using
relative fair values computed using our estimates and assumptions. These estimates and assumptions
affect the amount of costs allocated between land and different categories of building
improvements. The allocations impact depreciation expense and gain or loss recorded on sale of
real estate. When we acquired Richton Trail, we allocated 80% of the acquisition price to building
and 20% to land, based on our judgment of the relative values of the two components and as
supported by standard industry practice. The acquisition price was from a market appraisal.
Valuation Allowance of Deferred Tax Asset
We account for income taxes using the liability method under which deferred tax assets and
liabilities are determined based on differences between the financial reporting and tax bases of
assets and liabilities using enacted tax rates in effect for the period in which the differences
are expected to affect taxable income. At December 31, 2005, we have net operating losses totaling
approximately $12.4 million and capital losses of approximately $0.6 million. While these losses
created a deferred tax asset of approximately $5.3 million, a valuation allowance of $5.3 million
was applied against this asset because of the uncertainty of whether we will be able to use these
loss carryforwards, which will expire in varying amounts through the year 2025.
Liquidity and Capital Resources
Cash provided by operations, equity transactions, and borrowings from affiliates and lending
institutions have generally provided the primary sources of liquidity to the Company.
Historically, the Company has used these sources to fund operating expenses, satisfy its debt
service obligations and fund distributions to shareholders. In 2003, as part of the one-time
incentive exchange offer for holders of preferred shares to convert to common shares, our
shareholders approved eliminating the preferred dividend, which allows us to use that cash for
current operations and future growth of the Company. Our unrestricted cash is not sufficient to
allow us to continue operations beyond mid-2006 and we have been reviewing alternatives, including
value-added real estate deals for land development, retail, office, industrial, hotel and joint
venture investments, as well as reverse merging with another company, selling the corporate entity,
and seeking additional investors.
Cash Flows
As of December 31, 2005, our unrestricted cash resources were approximately $529,000. We are
dependent on our existing cash resources to meet our liquidity needs because cash from operations
is not sufficient to meet our operating requirements.
During the year ended December 31, 2005, the Companys cash balance decreased by approximately
$1,270,000 from approximately $1,799,000 at December 31, 2004 to approximately $529,000 at December
31, 2005. Cash was used primarily for (i) continuing operations of approximately $1,268,000, (ii)
improvements to real estate properties of approximately $48,000, and (iii) payments on mortgage
loans of approximately $52,000. These were offset by cash proceeds of approximately $98,000 from
the sale of marketable securities.
Cash used for continuing operations is negatively impacted by general and administrative costs that
represent approximately 71% of total costs. General and administrative costs are a large percent of
total costs because we spent significant amounts actively seeking and reviewing potential
acquisitions to build our portfolio.
18
Future Obligations
Because the cash flow from our properties does not fully fund our operations, we have reduced our
day-to-day overhead expenses and material future obligations. We have reduced overhead expenses by
not replacing employees who have left, reducing office space and rent, reducing use of outside
consultants, negotiating discounts on prices wherever possible, and delaying or foregoing other
expenses. At December 31, 2005, future obligations include the mortgage on the apartment community
and the employment contracts for our executive officers.
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The mortgage is being paid by the cash flow from Richton Trail. The property has been well maintained and managed, and has had historical occupancy in the range of 95% to 100% even prior to our ownership. So long as Richton Trail maintains approximately 90% occupancy, it will generate the cash flow needed to pay its current expenses and the mortgage debt service. We intend to keep the property as close to 100% occupancy as possible and do not foresee any market conditions that would show a decline in occupancy or rents during the coming year. Also, no major improvements are planned at the property for next year. |
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Each of the two employment contracts has a salary requirement of only $60,000 per year. The Company has the benefit of two highly qualified executives in the
real estate industry, each with previous experience with a publicly traded company,
for salaries that are well below market levels. Each executive has a significant number
of common shares and expects to share in the growth of the Company along with our
shareholders. |
Long Term Liquidity and Operating Strategies
We historically have financed our long term capital needs, including acquisitions, as follows:
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Borrowings from new loans; |
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Additional equity issuances of our common and preferred shares; and |
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Proceeds from the sales of our real estate and technology segment. |
From 2003 through 2005, we pursued a value-added business plan primarily focused on acquiring
well located, under-performing multi-family residential properties, including affordable housing
communities, and repositioning them through renovation, leasing, improved management and branding.
Throughout 2005, Paragon reviewed several portfolios of apartment properties, and in August 2005,
identified a portfolio of ten apartment communities comprised of 1,478 units located in Texas and
Ohio, and signed a contract in September 2005 to acquire the portfolio for $62.6 million.
In order to fund the acquisition, Paragon hired an investment banking firm, which advised the
Company to do a public equity offering for $100 million for this acquisition and to provide funds
for future acquisitions and operations. The Company filed a registration statement with the SEC in
October 2005, which the SEC decided not to review allowing the Company to proceed with the public
offering. Subsequently, Paragons investment advisor informed the Company that market conditions
made it impractical to continue with the proposed offering. The Company continued to solicit
additional firms until it withdrew the registration statement from the SEC in January 2006.
Without completing the public offering, the Company was not able to meet the listing requirements
of Amex because its book equity was less than the $6 million minimum requirement, it had sustained
several consecutive years of losses from operations and net losses, and its common shares had been
selling at a low share price for more than a year. In February 2006, Amex delisted Paragons
common shares, which then commenced being quoted on the OTC Bulletin Board and on the pink sheets
with the new stock symbol PRGL. The Company is continuing its search for financing to complete
the acquisition of the ten apartment communities under contract, which has been extended until
March 31, 2006 with a closing by April 30, 2006. Failure to obtain external sources of capital
will materially and adversely affect the Companys ability to close the acquisition as well as
adversely affect its ability to
19
continue to operate as a public company.
During 2006, Paragon has also been searching for and reviewing other value-added real estate deals,
including land development, retail, office, industrial, hotel, and joint venture investments. In
addition because our unrestricted cash is not sufficient to allow us to continue operations beyond
mid-2006, we have been reviewing other alternatives, including a reverse merger with another
company, selling the corporate entity, and seeking additional investors. There can be no assurance
that we will be able to enter into a definitive agreement or that we will be able to close a
transaction once a definitive agreement is signed. Even if our management is successful in closing
a transaction, investors may not value the transaction in the same manner as we did, and investors
may not value the transaction as they would value other transactions or alternatives.
Current Tax Status
At December 31, 2005, we have net operating losses of approximately $12.4 million. While these
losses created a deferred tax asset, a valuation allowance was applied against the asset because of
the uncertainty of whether we will be able to use these loss carryforwards, which will expire in
varying amounts through the year 2025.
We, and certain of our subsidiaries, are also subject to certain state and local income, excise and
franchise taxes. The provision for state and local taxes has been reflected in general and
administrative expense in the consolidated statements of operations and has not been separately
stated due to its insignificance.
Interest Rates and Inflation
Interest rates rose slightly during 2005 from the record low rates of the previous few years. The
record low interest rates led to higher selling prices for established real estate properties, the
type that we were reviewing to acquire. In addition, institutional investors have had an excess of
funds to invest and have chosen to allocate more funds to the real estate sector in hopes of
increasing their returns. Due to this abundance of funds trying to invest in real estate during
2005, we have found higher selling prices for multi-family residential apartment communities as
well, which made it difficult for us to bid competitively. During 2006, Paragon has been
searching for and reviewing other value-added real estate deals, including land development,
retail, office, industrial, hotel, and joint venture investments, as well as reviewing other
alternatives, including a reverse merger with another company, selling the corporate entity, and
seeking additional investors.
We were not significantly affected by inflation during the periods presented in this report due
primarily to the relative low nationwide inflation rates.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are likely to have a current or future
material effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
|
|
|
Item 7. |
|
Financial Statements |
The required audited consolidated financial statements of the Company are included herein
commencing on page F-1.
|
|
|
Item 8. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
20
|
|
|
Item 8a. |
|
Controls and Procedures |
As of December 31, 2005, the date of this report, James M. Mastandrea, our Chief Executive Officer
and President, and John J. Dee, our Chief Financial Officer and Senior Vice President, evaluated
the effectiveness of the design and operation of the Companys disclosure controls and procedures
pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon this evaluation,
Messrs. Mastandrea and Dee concluded that, as of December 31, 2005, our disclosure controls and
procedures are effective to ensure that material information relating to the Company and our
consolidated subsidiaries is recorded, processed, summarized and reported in a timely manner.
Further, there were no significant changes in the internal controls or, to our knowledge, in other
factors that could significantly affect such controls subsequent to December 31, 2005.
|
|
|
Item 8b. |
|
Other Information |
None.
21
PART III
|
|
|
Item 9. |
|
Trustees and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act |
The names, ages and positions of our trustees and executive officers are as follows:
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Expiration |
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Name |
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Age |
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Position |
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of Term |
|
|
James C. Mastandrea
|
|
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62 |
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|
President, Chief Executive Officer and Chairman of Board of Trustees
|
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2006 |
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John J. Dee
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54 |
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|
Senior Vice President, Chief Financial Officer and Trustee
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2007 |
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Daryl J. Carter
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50 |
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Trustee
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2008 |
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Daniel G. DeVos
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48 |
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Trustee
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2006 |
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Paul T. Lambert
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53 |
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Trustee
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|
2007 |
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Michael T. Oliver
|
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|
62 |
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Trustee
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2008 |
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|
Board of Trustees and Executive Officers
The business experience, principal occupations and employment, as well as the periods of service,
of each of our trustees and executive officers during at least the last five years are set forth
below.
James C. Mastandrea has served as President and Chairman of the Board of Trustees since March 4,
2003 and as Chief Executive Officer since April 7, 2003. In May 1998, Mr. Mastandrea returned as
Chairman and Chief Executive Officer to MDC Realty Corporation, Chicago, Illinois, which he founded
in 1978 and had used for the development of over $500 million of real estate projects until 1993.
From July 1993 to December 1993, Mr. Mastandrea was President of First Union Real Estate
Investments, a NYSE listed real estate investment trust headquartered in Cleveland, Ohio. From
January 1994 until his departure in May 1998, he was Chairman of the Board of Trustees and Chief
Executive Officer of First Union. During his tenure at First Union, Mr. Mastandrea and his
management team substantially grew the assets of the company from $495 million at the beginning of
1994 to $934 million at the end of 1997, along with commensurate growth in net operating income and
funds from operations. In 1999, Mr. Mastandrea formed Eagles Wings Aviation Corporation, where he
served as Chief Executive Officer, to purchase a troubled aviation services business. At the time
of the purchase, the business was in default on its debt obligations. Following the September 11,
2001 terrorist attacks, the business was further adversely affected. In March 2002, Eagles Wings
filed for protection under Chapter 11 of the federal bankruptcy laws. Mr. Mastandrea has been the
general partner of Hampton Court Associates, L.P. since its formation in 1983. Mr. Mastandrea is a
director of Cleveland State University Foundation Board and Chairman of the nominating committee,
and a director and a member of the real estate committee of University Circle Inc., Cleveland,
Ohio. He is a member of National Association of Real Estate Investment Trusts (NAREIT), Pension Real
Estate Association (PREA), and National Multifamily Housing Association (NMHA).
John J. Dee has served as a trustee and Senior Vice President since March 4, 2003, and as Chief
Financial Officer since April 7, 2003. Prior to Mr. Dees joining Paragon, from 2002 to 2003, he
was Senior Vice President and Chief Financial Officer of MDC Realty Corporation, Cleveland, Ohio,
an
22
affiliate of MDC Realty Corporation, Chicago, Illinois. From 2000 to 2002, Mr. Dee was Director
of Finance and Administration for Frantz Ward, LLP, Cleveland, Ohio, a Cleveland-based law firm
with approximately 100 employees. From 1978 to 2000, Mr. Dee held various management positions
with First Union Real Estate Investments (NYSE), most recently as Senior Vice President and Chief
Accounting Officer from 1996 to 2000. Mr. Dee is licensed as a CPA (non-practicing) in the State
of Ohio.
Daryl J. Carter has served as a trustee since June 30, 2003. Mr. Carter is Chief Executive Officer
of CharterMac Mortgage Capital, where he oversees a $10 billion servicing portfolio and is
responsible for the overall strategic direction of the company including its national origination
platform, investment strategy, credit policy, and new business development. Mr. Carter is also
Vice-Chairman and serves on the Investment Committee of Capri Capital Advisors, Irvine, California,
an affiliated company of CharterMac Mortgage Capital. Capri Capital is a diversified real estate
financial services firm that Mr. Carter co-founded in 1992 and developed to include investments in
commercial mortgages, mezzanine capital, and equity investments in Fannie Mae, Freddie Mac and
HUD/FHA programs, along with equity and mezzanine capital investments on behalf of various public,
private and labor funds. Mr. Carter is a member of the Pension Real Estate Association (PREA), a
Trustee and Vice Chairman of the Urban Land Institute (ULI), a Board Member and Chair of the
Finance Committee of the National Multifamily Housing Association (NMHA), and a member of the
Commercial Board of Governors of the Mortgage Bankers Association. Mr. Carter also served as a
Director of Catellus Development Corporation (NYSE; merged with ProLogis in 2005),
San Francisco, California, a publicly held real estate investment trust.
Daniel G. DeVos has served as a trustee since March 4, 2003. Mr. DeVos is Chairman of the Board
and Chief Executive Officer of DP Fox Ventures, LLC, a diversified management enterprise with
investments in real estate, transportation, and sports teams. In addition, Mr. DeVos is the
majority owner of the Grand Rapids Rampage (AFL), Grand Rapids Griffins (AHL) and has ownership interests
in the Orlando Magic (NBA). Mr. DeVos is a director of Alticor, Inc., the parent of Amway
Corporation, located in Ada, Michigan, and the Orlando Magic (NBA). From 1994 to 1998, Mr. DeVos
served as a trustee of First Union Real Estate Investments (NYSE).
Paul T. Lambert has served as a trustee since November 1998. Mr. Lambert serves as the Chief
Executive Officer of Lambert Capital Corporation. He served on the Board of Directors and was the
Chief Operating Officer of First Industrial Realty Trust, Inc. (NYSE) from its initial public
offering in October 1994 to the end of 1995. Mr. Lambert was one of the largest contributors to
the formation of First Industrial and one of its founding shareholders. Prior to forming First
Industrial, Mr. Lambert was managing partner for The Shidler Group, a national private real estate
investment company. Prior to joining Shidler, Mr. Lambert was a commercial real estate developer
with Dillingham Corporation and, prior to that, was a consultant with The Boston Consulting Group.
Michael T. Oliver has served as a trustee since March 4, 2003. Since December 2005, Mr. Oliver has
been Director of New Business Development and a member of the investment committee at Concierge
Asset Management. In October 2005, Mr. Oliver retired from the Alaska State Pension Board where he
was the State Investment Officer of Real Estate and Private Equity Investments since August 2000.
Mr. Oliver was a partner of MPAC Capital Markets from September 1998 to July 2000 providing
consultation to several Asian governments concerning laws governing real estate investment trusts.
From February 1996 to September 1998, Mr. Oliver was Chairman of RERC Capital Markets, LLC advising
investment banking firms and publicly traded real estate companies. From March 1987 to February
1996, he was Chairman of Heitman/PRA Securities Advisors, Inc. and President of its
Real Estate Fund. Prior to March 1987 and since 1967, Mr. Oliver held positions at real estate
companies raising capital and making direct investments in real estate, and at investment banking
firms analyzing real estate companies and raising capital.
The board of trustees has determined that each of Messrs. Carter, DeVos, Lambert and Oliver do not
have a material relationship with Paragon that would interfere with the exercise of independent
23
judgment and are independent as defined by the applicable rules of the SEC. Mr. Oliver is the
chairman of Paragons audit committee and serves as the committees financial expert. Mr. Carter
is the chairman of the management, organization and compensation committee. All four independent
trustees are on the audit committee and the management, organization and compensation committee.
Code of Ethics
On January 14, 2004, our Board of Trustees adopted a code of conduct and ethics that applies to all
officers, trustees and employees of Paragon, including our principal executive officer, principal
financial officer and principal accounting officer. Upon written request to the Company, we will
provide a copy of our Code of Conduct and Ethics without charge.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys officers, trustees and
persons who own more than 10% of our common shares to file reports of ownership and changes in
ownership with the SEC. Officers, Trustees and greater than 10% shareholders are required by
regulation to furnish us with copies of all Section 16(a) forms they file. Based solely on review
of the copies of Form 4s filed by trustees reporting grants of restricted shares and options
furnished to us, or written representations that no Annual Statements of Beneficial Ownership of
Securities on Form 5 were required to be filed, we believe that for the fiscal year ended December
31, 2005, all Section 16(a) filing requirements applicable to our officers, trustees and greater
than 10% shareholders were complied with in 2005.
|
|
|
Item 10. |
|
Executive Compensation |
The following table sets forth the compensation paid to our CEO for the years ended December 31,
2005, 2004, and 2003.
|
|
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|
|
|
|
Name and Principal |
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
Securities Underlying |
Position |
|
Year |
|
Salary (1) |
|
Awards |
|
Options |
|
James C. Mastandrea |
|
|
2005 |
|
|
$ |
60,000 |
|
|
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
2004 |
|
|
$ |
60,000 |
|
|
$ |
66,000 |
(2) |
|
|
150,000 |
(3) |
President and Chairman |
|
|
2003 |
|
|
$ |
49,615 |
(4) |
|
$ |
1,044,117 |
(5) |
|
|
|
|
|
|
|
(1) |
|
No bonuses or other compensation were paid for the years ended December 31, 2005, 2004,
and 2003. |
|
(2) |
|
Represents 300,000 restricted common shares issued on January 2, 2004. The value per
share on the issue date was $0.22 per share. Half of the restricted shares vest in five
years or earlier upon Paragons share price being equal to or exceeding $1.00 per share for
20 consecutive trading days. The remaining half of the restricted shares vest when funds
from operations doubles compared to the four consecutive quarters preceding the grant date,
or when Paragons share price is 50% higher compared to the average closing price for the
five trading days preceding the grant date. |
|
(3) |
|
Options were granted January 2, 2004 at an exercise price of $0.27 per common share,
representing 110% of the average of the closing price for the common shares for 10 days
preceding the grant date. The options vest one-third on each January 2nd of 2005, 2006,
and 2007, and are exercisable until January 2, 2009. |
|
(4) |
|
Amount represents base annual salary of $60,000 for the period from March 4, 2003
through December 31, 2003. |
|
(5) |
|
Represents 348,039 preferred shares issued on June 30, 2003 at a closing price of
$3.00 per preferred share. |
24
Options/SAR Value at Fiscal Year End
There were no options for common shares granted in 2005 to James C. Mastandrea, our Chief Executive
Officer and President.
The following table summarizes the value of options held by Mr. Mastandrea at December 31, 2005,
none of which were in-the-money.
Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values
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|
|
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|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
Value of |
|
|
|
|
|
|
|
|
|
|
Underlying |
|
Unexercised |
|
|
|
|
|
|
|
|
|
|
Unexercised |
|
In-the-Money |
|
|
|
|
|
|
|
|
|
|
Options/ |
|
Options/ |
|
|
Shares |
|
|
|
|
|
SARs |
|
SARs |
|
|
Acquired |
|
|
|
|
|
at FY End |
|
at FY-End |
|
|
on |
|
Value |
|
(#) |
|
($) |
|
|
Exercise |
|
Realized |
|
Exercisable/ |
|
Exercisable/ |
Name |
|
(#) |
|
($) |
|
Unexercisable |
|
Unexercisable |
James C. Mastandrea
Chief Executive
Officer, President and
Chairman |
|
|
|
|
|
|
|
|
|
|
50,000/100,000 |
|
|
|
/ |
|
Employment Agreements
The employment agreement with James C. Mastandrea provides for an annual salary of $60,000
effective as of March 4, 2003. The initial term of Mr. Mastandreas employment is for two years
and may be extended for terms of one year through his 70th birthday. Mr. Mastandreas
base annual salary may be adjusted from time to time, except that the adjustment may not be lower
than the preceding years base salary. The employment agreement provides that Mr. Mastandrea will
be entitled to base salary and bonus at the rate in effect before any termination for a period of
three years in the event that his employment is terminated without cause by us or for good reason
by Mr. Mastandrea.
Effective June 30, 2003, we issued 696,078 preferred shares valued at approximately $2.4 million to
Messrs. Mastandrea and Dee pursuant to separate restricted share agreements. On June 30, 2003,
534,668 preferred shares were converted at a factor of 22.881 into 12,233,739 common shares. Under
the restricted share agreement for each of Mr. Mastandrea and Mr. Dee, the restricted shares vest
upon the later of the following dates:
|
|
|
the date our gross assets exceed $50.0 million, or |
|
|
|
|
50% of the restricted shares on March 4, 2004; 25% of the shares on
March 4, 2005, and the remaining 25% of the shares on March 4, 2006. |
Compensation of Trustees
Effective October 28, 2003, each trustee who is not an officer of the Company receives a retainer
of $5,000 per annum, $500 per meeting for each meeting attended in person, $200 per meeting for
each meeting attended via teleconference, 25,000 options as to common shares which are to vest one
year after issuance and to expire 90 days after the term of the trustee ends and 50,000 restricted
common shares that will vest one year after their issuance. Effective June 3, 2005, 100,000
options at an exercise price of $0.14 per common share and 200,000 restricted common shares were
issued.
25
Effective June 15, 2004, 100,000 options at an exercise price of $0.18 per common share
and 200,000 restricted common shares were issued.
During the year ended December 31, 2005, trustees were paid approximately $30,000 for retainers and
meetings for 2005 and during the year ended December 31, 2004, trustees were paid approximately
$27,000 for retainers and meetings for 2004.
|
|
|
Item 11. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
The following table includes certain information with respect to the beneficial ownership of our
shares by: (i) each person known by us to own more than 5% in interest of the outstanding shares:
(ii) each of the trustees and each nominee for trustee; (iii) each of our executive officers; and
(iv) all of the trustees and executive officers as a group. Except as otherwise noted, the person
or entity named has sole voting and investment power over the shares indicated.
The table shows ownership as of March 16, 2006.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Shares |
|
|
Common Shares (2) |
|
Preferred Shares (3) |
|
and Units (4) |
Name and Address (1) |
|
Number |
|
Percent (5) |
|
Number |
|
Percent (5) |
|
Number |
|
Percent (5) |
|
James C. Mastandrea |
|
|
13,162,170 |
|
(6) |
|
43.3 |
% |
|
|
161,410 |
|
(14) |
|
58.0 |
% |
|
|
35,479,107 |
|
(16) |
|
66.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paragon Real Estate Development,
LLC |
|
|
12,233,738 |
|
(7) |
|
40.3 |
% |
|
|
161,410 |
|
(14) |
|
58.0 |
% |
|
|
15,926,960 |
|
(17) |
|
46.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loeb Partners Corp.
61 Broadway
New York, NY 10006 (8) |
|
|
3,135,349 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
3,135,349 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul T. Lambert (9) |
|
|
2,558,619 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
2,558,619 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. Dee |
|
|
400,000 |
|
(10) |
|
1.3 |
% |
|
|
|
|
(15) |
|
|
|
|
|
400,000 |
|
(18) |
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daryl J. Carter (11) |
|
|
200,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel G. DeVos (11) |
|
|
200,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael T. Oliver (11) |
|
|
200,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All trustees and
current executive
officers as a group (12) |
|
|
16,720,789 |
|
(13) |
|
54.3 |
% |
|
|
161,410 |
|
|
|
58.0 |
% |
|
|
39,037,726 |
|
(19) |
|
73.5 |
% |
|
|
|
|
* |
|
Indicates less than one percent |
|
(1) |
|
Unless otherwise indicated, the address of all beneficial owners is our corporate headquarters at
1240 Huron Road, Cleveland, Ohio 44115. |
|
(2) |
|
Percentages based on 30,331,884 common shares outstanding, not including 2,859,765 shares held in
treasury. For each individual trustee and executive officer, also includes common shares he has
the right
to acquire through share options that are or will become exercisable as of May 15, 2006. |
|
(3) |
|
Percentages based on 278,155 preferred shares outstanding as of March 16, 2006, which convert to
4,095,758 common shares as follows: 161,410 preferred shares are each convertible into 22.881
common shares and 116,745 preferred shares are each convertible into 3.448 common shares. |
|
(4) |
|
Percentages based on 30,331,884 common shares outstanding, not including 2,859,765 shares held in
treasury. For each individual trustee and executive officer, also includes common shares he has
the right
to acquire through share options that are or will become exercisable as of May 15, 2006. Mr.
Mastandreas percentage includes (i) 30,331,884 common shares, not including 2,859,765 shares held
in treasury;
(ii) 100,000 options; (iii) 278,155 preferred shares, which convert to 4,095,758 common shares; and
(iv) 813,938 restricted limited partnership units which may be converted into 18,623,715 common
shares
or cash, at our discretion, any time after July 1, 2007. |
|
(5) |
|
The ownership percents total more than 100% due to more than one person or entity being considered
the beneficial owner of the same shares, in accordance with SEC regulations for this table. |
26
|
|
|
(6) |
|
Includes: (i) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea has the right to vote; (ii) 12,233,738 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 300,000 restricted common
shares; (iv) 100,000 options; and (v) 28,432 common shares. |
|
(7) |
|
Mr. Mastandrea is the managing member of Paragon Real Estate Development, LLC and these shares are
also included in Mr. Mastandreas common shares. |
|
(8) |
|
Based solely on information in the Schedule 13D filed on February 11, 2005 with the SEC by Loeb
Partners Corporation listing the following entities and quantities of shares owned: Loeb Arbitrage
Fund 1,970,002 shares; Loeb Partners Corporation 148,480 shares; Loeb Offshore Fund Ltd. 184,967
shares; Robert Grubin 581,000 shares; and other affiliates of Loeb Partners Corporation 250,900
shares. The Schedule 13D reported an ownership percentage of 9.37% based on the number of common
shares reported as outstanding in our filing for the third quarter and nine months ended September
30, 2005, which included shares held in treasury. The ownership percentage reported in the table
above is based on 30,331,884 common shares outstanding, which does not include shares held in
treasury. |
|
(9) |
|
Includes: (i) 100,000 options; (ii) 150,000 restricted common shares; (iii) 444,755 common shares
held by Lambert Equities II, LLC, of which Mr. Lambert is the controlling majority member and sole
manager; and (iv) 1,863,864 common shares. |
|
(10) |
|
Includes: (i) 300,000 restricted common shares; and (iii) 100,000 options. Does not include
12,233,738 common shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a
member. |
|
(11) |
|
Includes 150,000 restricted common shares and 50,000 options. |
|
(12) |
|
Includes six named persons. |
|
(13) |
|
Includes: (i) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea has the right to vote; (ii) 12,233,738 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 1,200,000 restricted common
shares; (iv) 450,000 options; and (v) 2,337,051 common shares. |
|
(14) |
|
Represents shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the
managing member. Each preferred share is convertible into 22.881 common shares. |
|
(15) |
|
Does not include 161,410 preferred shares held by Paragon Real Estate Development, LLC, of which
Mr. Dee is a member. |
|
(16) |
|
Includes: (i) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea has the right to vote; (ii) 12,233,738 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 300,000 restricted common
shares; (iv) 100,000 options; (v) 18,623,715 common shares issuable upon the conversion of 813,938
limited partnership units of Paragon Real Estate, L.P., our operating partnership, held by Hampton
Court Associates, L.P., of which
Mr. Mastandrea is the general partner; (vi) 3,693,222 common shares issuable upon conversion of
161,410 preferred shares held by Paragon Real Estate Development, LLC; and (vii) 28,432 common
shares. |
|
(17) |
|
Includes (i) 12,233,738 common shares and (ii) 3,693,222 common shares issuable upon conversion of
161,410 preferred shares. These shares are also included in Mr. Mastandreas total shares. |
|
(18) |
|
Includes: (i) 300,000 restricted common shares; and (ii) 100,000 options. Does not include
12,233,738 common shares or 161,410 preferred shares held by Paragon Real Estate Development, LLC,
of which
Mr. Dee is a member. |
|
(19) |
|
Includes: (i) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea has the right to vote; (ii) 12,233,738 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 1,200,000 restricted common
shares; (iv) 450,000 options; (v) 18,623,715 common shares issuable upon the conversion of 813,938
limited partnership units of Paragon Real Estate, LP, our operating partnership, held by Hampton
Court Associates, LP, of which
Mr. Mastandrea is the general partner; (vi) 3,693,222 common shares issuable upon conversion of
161,410 preferred shares held by Paragon Real Estate Development, LLC; and (vii) 2,337,051 common
shares. |
27
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
Number of |
|
|
Weighted- |
|
|
remaining available |
|
|
|
securities to be |
|
|
average exercise |
|
|
for future issuance |
|
|
|
issued upon |
|
|
price of |
|
|
under equity |
|
|
|
exercise of |
|
|
outstanding |
|
|
compensation plans |
|
|
|
outstanding |
|
|
options, |
|
|
(excluding securities |
|
Equity Compensation Plans |
|
options, warrants |
|
|
warrants and |
|
|
reflected in column |
|
Approved/ Not Approved by Security |
|
and rights |
|
|
rights |
|
|
(a)) |
|
Holders |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
Former Share Option Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options for common shares |
|
|
54,387 |
|
|
$ |
5.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Share Option Plan |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common shares |
|
|
1,300,000 |
|
|
$ |
|
|
|
|
|
|
Options for common shares |
|
|
650,000 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,950,000 |
|
|
$ |
0.08 |
|
|
|
1,550,000 |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
500,000 |
|
|
$ |
|
|
|
|
|
|
Warrants for common shares |
|
|
922,500 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,500 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total all plans Common shares |
|
|
3,426,887 |
|
|
$ |
0.23 |
|
|
|
1,550,000 |
|
Preferred shares |
|
|
|
|
|
$ |
|
|
|
|
|
|
In addition to the above plans, we entered into an agreement dated March 4, 2003 and approved
by the shareholders on June 30, 2003 with Mr. Mastandrea, Mr. Dee and Paragon Real Estate
Development, LLC of which Mr. Mastandrea is the managing member, and Mr. Dee is a member. Pursuant
to this agreement, we may issue up to $26.0 million in our common shares to Paragon Real Estate
Development, LLC in exchange for it and its members procuring future acquisition, development and
re-development real estate transactions for Paragons benefit. This agreement is intended to serve
as incentive for Mr. Mastandrea and Mr. Dee to increase our assets and net operating income in the
future. The exact number of common shares that would be issued to Paragon Real Estate Development,
LLC will be calculated in accordance with a formula based on the type of project that they present
to us. The formula for a particular real estate transaction would be calculated by dividing (i)
estimated net operating income to be generated from the real estate transaction for the first year
following its consummation by (ii) the capitalization rate used in the real estate transaction,
less the applicable basis point factor. The applicable basis point factor is defined as: 75
basis points for the acquisition of an existing operating property, 87.5 basis points for the
acquisition of a re-development property, and 100 basis points for the acquisition of a development
property. We would issue our common shares to Paragon Real Estate Development, LLC only upon the
closing of the real estate transaction. For each transaction, Mr. Mastandrea would be allocated
half of the common shares and Mr. Dee would be allocated the other half. All of the common shares
would be held by Paragon Real Estate Development, LLC for the benefit of its owners.
|
|
|
Item 12. |
|
Certain Relationships and Related Transactions |
Management Fees
James C. Mastandrea, our Chairman, Chief Executive Officer and President, is the general partner of
Hampton Court Associates and owns two companies which provide services to Richton Trail.
28
Mid Illinois Realty Corp. manages Richton Trail and MDC Realty Corp. is reimbursed, at cost, for
Richton Trails payroll related costs. The related management fees were approximately $28,000 per
year in 2005 and 2004. Reimbursement, at cost, for the payroll related costs paid and accrued for 2005 and 2004
were approximately $62,300 and $59,300, respectively. The Company
intends to use local third party management companies until we are
able to provide management services ourselves.
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
2.1
|
|
Asset Contribution Agreement among
Hampton Court Associates, L.P.,
Paragon Real Estate, L.P., and the
Company (filed as Exhibit 2.1 with
the Companys Current Report on
Form 8-K filed on March 5, 2003
and incorporated herein by
reference) |
|
|
|
2.2
|
|
Additional Contribution Agreement
between the Company and Paragon
Real Estate Development, LLC
(filed as Exhibit 2.7 with the
Companys Current Report on Form
8-K filed on March 5, 2003 and
incorporated herein by reference) |
|
|
|
2.3
|
|
Modification Agreement between the
Company and Paragon Real Estate
Development, LLC (filed as Exhibit
2.8 with the Companys Current
Report on Form 8-K filed on March
5, 2003 and incorporated herein by
reference) |
|
|
|
2.4
|
|
Amendment No. 1 to the Agreement
of Limited Partnership of
Wellington Properties Investments,
L.P. among the Company and the
Limited Partners named therein
(filed as Exhibit 2.9 with the
Companys Current Report on Form
8-K filed on March 5, 2003 and
incorporated herein by reference) |
|
|
|
2.5
|
|
Closing Agreement dated June 27,
2003 among the Company, Hampton
Court Associates, L.P., Hoyt
Properties, Inc. and WLPT Funding
LLC (filed as Exhibit 2.5 with the
Companys Current Report on Form
8-K filed on July 15, 2003 and
incorporated herein by reference) |
|
|
|
3.1
|
|
Articles of Amendment and
Restatement of the Declaration of
Trust of the Company (filed as
Exhibit 3.1 with the Companys
Registration Statement on Form
SB-2/A filed on October 14, 1999
and incorporated herein by
reference) |
|
|
|
3.2
|
|
Articles of Amendment of
Declaration of Trust of the
Company (filed as Exhibit 2.3 with
the Companys Current Report on
Form 8-K filed on July 15, 2003
and incorporated herein by
reference) |
|
|
|
3.3
|
|
Articles Supplementary to the
Declaration of Trust of the
Company (filed as Exhibit 3.1 with
the Companys Current Report on
Form 8-K filed on July 23, 2004
and incorporated herein by
reference) |
|
|
|
3.4
|
|
Amended and Restated Bylaws of the
Company (filed as Exhibit 3.2 with
the Companys Registration
Statement on Form SB-2/A filed on
October 14, 1999 and incorporated
herein by reference) |
|
|
|
3.5
|
|
Amendment No. 1 to the Amended and
Restated Bylaws of the Company
(filed as Exhibit 3.4 with the
Companys Quarterly Report on Form
10-QSB for the quarter ended June
30, 2003 and incorporated herein
by reference) |
29
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
|
|
|
3.6 |
|
|
Amendment No. 2 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with
the Companys Current Report on Form 8-K filed on October 19, 2005 and incorporated herein by
reference) |
|
|
|
|
|
|
4.1 |
|
|
Voting and Stock Restriction Agreement among the Company, Steven B. Hoyt, Duane H. Lund, Paul
T. Lambert, John J. Dee, James C. Mastandrea, and Paragon Real Estate Development, LLC (filed
as Exhibit 2.2 with the Companys Current Report on Form 8-K filed on March 5, 2003 and
incorporated herein by reference) |
|
|
|
|
|
|
10.1 |
|
|
Employment Agreement of James C. Mastandrea (filed as Exhibit 2.3 with the Companys Current
Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1) |
|
|
|
|
|
|
10.2 |
|
|
Employment Agreement of John J. Dee (filed as Exhibit 2.4 with the Companys Current Report on
Form 8-K filed on March 5, 2003 and incorporated herein by reference) (1) |
|
|
|
|
|
|
10.3 |
|
|
Restricted Share Agreement of James C. Mastandrea (filed as Exhibit 2.5 with the Companys
Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1) |
|
|
|
|
|
|
10.4 |
|
|
Restricted Share Agreement of John J. Dee (filed as Exhibit 2.6 with the Companys Current
Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1) |
|
|
|
|
|
|
10.5 |
|
|
Employment Agreement of Jack R. Kuhn dated July 19, 2004 (filed as Exhibit 10.1 with the
Companys Registration Statement on Form S-8 filed on July 23, 2004 and incorporated herein by
reference) (1) |
|
|
|
|
|
|
10.6 |
|
|
Agreement of Limited Partnership of Paragon Real Estate, L.P. (filed as Exhibit 2.2 with the
Companys Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by
reference) |
|
|
|
|
|
|
10.7 |
|
|
2004 Share Option Plan of the Company (filed as Exhibit 4.1 with the Companys Registration
Statement on Form S-8 filed on July 23, 2004 and incorporated herein by reference) |
|
|
|
|
|
|
10.8 |
|
|
Purchase Agreement dated September 26, 2005, by and among Veard Baytown Limited Partnership,
Veard Stafford Limited Partnership, Veard Lake Jackson Limited Partnership, Veard Wharton
Limited Partnership, Veard Irving Limited Partnership, Veard Arlington Limited Partnership,
Veard Amarillo Limited Partnership, Veard Victoria Limited Partnership, Veard Kettering Limited
Partnership, Veard Canton Limited Partnership and Paragon Real Estate Equity and Investment
Trust (filed as Exhibit 2.1 with the Companys Current Report on Form 8-K filed on September
26, 2005 and incorporated herein by reference) |
|
|
|
|
|
|
10.9 |
|
|
Letter Agreement dated December 2, 2005, amending Purchase Agreement dated
September 26, 2005 by and among Veard Baytown Limited Partnership, Veard Stafford Limited
Partnership, Veard Lake Jackson Limited Partnership, Veard Wharton Limited Partnership, Veard
Irving Limited Partnership, Veard Arlington Limited Partnership, Veard Amarillo Limited
Partnership, Veard Victoria Limited Partnership, Veard Kettering Limited Partnership, Veard
Canton Limited Partnership and Paragon Real Estate Equity and Investment Trust (filed as
Exhibit 2.1 with the Companys Current Report on Form 8-K filed on December 8, 2005 and
incorporated herein by reference) |
30
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
|
|
|
14 |
|
|
Code of Conduct and Ethics (filed as Exhibit 14 with the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2003 and incorporated herein by reference) |
|
|
|
|
|
|
31.1 |
|
|
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 Chief Executive Officer
(2) |
|
|
|
|
|
|
31.2 |
|
|
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002 Chief Financial Officer
(2) |
|
|
|
|
|
|
32.1 |
|
|
CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002 (2) |
|
|
|
(1) |
|
Indicates a management contract or compensatory plan or arrangement |
|
(2) |
|
Filed or furnished herewith |
Item 14. Principal Accountant Fees and Services
The aggregate fees billed by the principal independent registered public accountants (Boulay,
Heutmaker, Zibell & Co., P.L.L.P.) to the Company for the fiscal years ended December 31, 2005
and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Approved |
|
|
|
|
|
|
|
|
|
|
by Audit |
Category |
|
Year |
|
Fees |
|
Committee |
Audit Fees (1) |
|
|
2005 |
|
|
$ |
122,675 |
|
|
|
100 |
% |
|
|
|
2004 |
|
|
$ |
67,150 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit-Related Fees |
|
|
2005 |
|
|
$ |
|
|
|
|
|
|
|
|
|
2004 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Fees |
|
|
2005 |
|
|
$ |
|
|
|
|
|
|
|
|
|
2004 |
|
|
$ |
6,900 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Fees |
|
|
2005 |
|
|
$ |
|
|
|
|
|
|
|
|
|
2004 |
|
|
$ |
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees include audits and reviews of required SEC filings and proposed acquisitions of properties. |
Policy for Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
Before the independent auditors are engaged by the Company to render audit or non-audit services,
the Audit Committee approves the engagement.
31
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
Paragon real estate equity and investment trust |
|
|
By:
|
|
/s/ James C. Mastandrea |
|
|
|
|
|
Date: March 16, 2006
|
|
|
|
James C. Mastandrea |
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
Paragon real estate equity and investment trust |
|
|
By:
|
|
/s/ John J. Dee |
|
|
|
|
|
Date: March 16, 2006
|
|
|
|
John J. Dee |
|
|
|
|
Chief Financial Officer |
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints John J. Dee, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this Report on
Form 10-KSB and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof.
In accordance with Section 13 or 15(d) of the Securities Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
Trustee, Chief Executive Officer and
President
|
|
March 16, 2006 |
James C. Mastandrea |
|
|
|
|
|
|
|
|
|
|
|
Trustee, Senior Vice President and
Chief Financial Officer
|
|
March 16, 2006 |
John J. Dee |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
March 16, 2006 |
Daryl J. Carter |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
March 16, 2006 |
Daniel G. DeVos |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
March 16, 2006 |
Paul T. Lambert |
|
|
|
|
|
|
|
|
|
|
|
Trustee
|
|
March 16, 2006 |
Michael T. Oliver |
|
|
|
|
32
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
Paragon Real Estate Equity and Investment Trust and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Paragon Real Estate Equity and
Investment Trust and Subsidiaries as of December 31, 2005, and the related consolidated statements
of operations, shareholders equity, and cash flows for the years ending December 31, 2005 and
2004. These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Paragon Real Estate Equity and Investment Trust and
Subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for
the years ending December 31, 2005 and 2004 in conformity with U.S. generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming the Company will
continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the
net losses, negative cash flow from operations and accumulated deficit of Paragon Real Estate
Equity and Investment Trust raise substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are also described in Note 2. The
consolidated statements do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Minneapolis, Minnesota
February 27, 2006
F-2
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Balance Sheet
December 31, 2005
|
|
|
|
|
Assets |
|
|
|
|
Investments in real estate: |
|
|
|
|
Land |
|
$ |
797,682 |
|
Buildings and improvements |
|
|
3,217,739 |
|
Furniture, fixtures and equipment |
|
|
49,403 |
|
|
|
|
|
4,064,824 |
|
Accumulated depreciation and amortization |
|
|
(207,424 |
) |
|
Net investments in real estate |
|
|
3,857,400 |
|
Cash and cash equivalents |
|
|
529,114 |
|
Marketable securities, net |
|
|
1,925 |
|
Restricted cash |
|
|
117,866 |
|
Accounts receivable, net |
|
|
9,775 |
|
Other assets, net |
|
|
182,986 |
|
|
Total Assets |
|
$ |
4,699,066 |
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
Liabilities: |
|
|
|
|
Mortgage loan |
|
$ |
2,710,938 |
|
Accounts payable and accrued expenses |
|
|
268,188 |
|
Security deposits |
|
|
62,505 |
|
|
Total liabilities |
|
|
3,041,631 |
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary |
|
|
2,171,352 |
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
Preferred Shares $0.01 par value, 10,000,000
authorized: 278,155 Class A cumulative convertible
shares issued and outstanding, $10.00 per share
liquidation preference |
|
|
2,782 |
|
Common Shares $0.01 par value, 100,000,000
authorized; 33,191,649 shares issued and outstanding |
|
|
331,916 |
|
Additional paid-in capital |
|
|
28,374,727 |
|
Accumulated other comprehensive income, net
unrealized gain on marketable securities |
|
|
749 |
|
Accumulated deficit |
|
|
(25,935,287 |
) |
Treasury shares, at cost, 2,859,765 shares |
|
|
(800,735 |
) |
Unearned compensation and trustees fees |
|
|
(2,488,069 |
) |
|
Total shareholders equity (deficit) |
|
|
(513,917 |
) |
|
Total Liabilities and Shareholders Equity |
|
$ |
4,699,066 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
2005 |
|
2004 |
Revenues |
|
|
|
|
|
|
|
|
Rental revenue |
|
$ |
605,291 |
|
|
$ |
609,389 |
|
Interest and other |
|
|
41,151 |
|
|
|
50,639 |
|
|
Total revenues |
|
|
646,442 |
|
|
|
660,028 |
|
|
Expenses |
|
|
|
|
|
|
|
|
Property, operating and maintenance |
|
|
207,917 |
|
|
|
217,441 |
|
Property taxes and insurance |
|
|
110,687 |
|
|
|
101,285 |
|
Depreciation and amortization |
|
|
91,041 |
|
|
|
87,105 |
|
Interest |
|
|
163,017 |
|
|
|
166,487 |
|
General and administrative |
|
|
1,476,710 |
|
|
|
958,311 |
|
Management fees |
|
|
27,520 |
|
|
|
27,611 |
|
|
Total expenses |
|
|
2,076,892 |
|
|
|
1,558,240 |
|
|
Loss from operations before loss allocated to
minority interest |
|
|
(1,430,450 |
) |
|
|
(898,212 |
) |
(Income) loss allocated to minority interest |
|
|
(3,843 |
) |
|
|
81,988 |
|
|
Loss from operations |
|
|
(1,434,293 |
) |
|
|
(816,224 |
) |
Gain on sale of marketable securities |
|
|
60,500 |
|
|
|
|
|
|
Net loss attributable to Common Shareholders |
|
|
(1,373,793 |
) |
|
|
(816,224 |
) |
|
Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of Common Shares outstanding |
|
|
33,598,240 |
|
|
|
32,993,966 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,373,793 |
) |
|
$ |
(816,224 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities |
|
|
176 |
|
|
|
(10,427 |
) |
|
Comprehensive loss |
|
$ |
(1,373,617 |
) |
|
$ |
(826,651 |
) |
|
The accompanying notes are an integral part of the consolidated financial statements.
F-4
Paragon Real Estate Equity and Investment Trust
Consolidated Statements of Shareholders Equity
For the years ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income, net |
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
Class A |
|
|
|
|
|
Additional |
|
unrealized gain (loss) |
|
|
|
|
|
Cost of Shares |
|
compensation |
|
|
|
|
Preferred |
|
Common |
|
Paid-in |
|
on marketable |
|
Accumulated |
|
held in |
|
and trustees |
|
|
|
|
Shares |
|
Shares |
|
Capital |
|
securities |
|
Deficit |
|
Treasury |
|
fees |
|
Total |
|
Balance at December 31, 2003 |
|
$ |
2,794 |
|
|
$ |
316,374 |
|
|
$ |
28,055,559 |
|
|
$ |
61,700 |
|
|
$ |
(23,745,270 |
) |
|
$ |
(800,735 |
) |
|
$ |
(2,467,471 |
) |
|
$ |
1,422,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common share grants issued |
|
|
¾ |
|
|
|
17,000 |
|
|
|
295,000 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
(312,000 |
) |
|
|
¾ |
|
Restricted common share grants cancelled |
|
|
¾ |
|
|
|
(3,500 |
) |
|
|
(66,333 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
69,833 |
|
|
|
¾ |
|
Restricted common share grants issued for rent |
|
|
|
|
|
|
2,500 |
|
|
|
49,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,500 |
|
Conversion of preferred shares to common
shares |
|
|
(9 |
) |
|
|
32 |
|
|
|
(23 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
Unrealized loss on marketable securities |
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
(10,427 |
) |
|
|
|
|
|
|
¾ |
|
|
|
¾ |
|
|
|
(10,427 |
) |
Amortization of unearned compensation and
trustee fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,204 |
|
|
|
118,204 |
|
Net loss |
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
¾ |
|
|
|
(816,224 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
(816,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
$ |
2,785 |
|
|
$ |
332,406 |
|
|
$ |
28,333,203 |
|
|
$ |
51,273 |
|
|
$ |
(24,561,494 |
) |
|
$ |
(800,735 |
) |
|
$ |
(2,591,434 |
) |
|
$ |
766,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common share grants issued |
|
|
¾ |
|
|
|
5,500 |
|
|
|
92,500 |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
(98,000 |
) |
|
|
¾ |
|
Restricted common share grants cancelled |
|
|
¾ |
|
|
|
(8,500 |
) |
|
|
(99,969 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
108,469 |
|
|
|
¾ |
|
Restricted common share grants issued for rent |
|
|
|
|
|
|
2,500 |
|
|
|
49,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,500 |
|
Conversion of preferred shares to common
shares |
|
|
(3 |
) |
|
|
10 |
|
|
|
(7 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
|
|
¾ |
|
Unrealized gain on marketable securities |
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
176 |
|
|
|
|
|
|
|
¾ |
|
|
|
¾ |
|
|
|
176 |
|
Unrealized gain on marketable securities
converted to realized gain on sale of
marketable securities |
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
(50,700 |
) |
|
|
|
|
|
|
¾ |
|
|
|
¾ |
|
|
|
(50,700 |
) |
Amortization of unearned compensation and
trustee fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,896 |
|
|
|
92,896 |
|
Net loss |
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
¾ |
|
|
|
(1,373,793 |
) |
|
|
¾ |
|
|
|
¾ |
|
|
|
(1,373,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
2,782 |
|
|
$ |
331,916 |
|
|
$ |
28,374,727 |
|
|
$ |
749 |
|
|
$ |
(25,935,287 |
) |
|
$ |
(800,735 |
) |
|
$ |
(2,488,069 |
) |
|
$ |
(513,917 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
2005 |
|
2004 |
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,373,793 |
) |
|
$ |
(816,224 |
) |
Adjustments to reconcile net loss to net cash used in
continuing operations: |
|
|
|
|
|
|
|
|
Compensation costs paid through amortization of
restricted Common Shares issued |
|
|
92,896 |
|
|
|
118,204 |
|
Rent expense paid by issuing restricted common shares |
|
|
51,500 |
|
|
|
51,500 |
|
Depreciation and amortization |
|
|
91,041 |
|
|
|
87,105 |
|
Income (loss) allocated to minority interests |
|
|
3,843 |
|
|
|
(81,988 |
) |
Gain on sale of marketable securities |
|
|
(60,500 |
) |
|
|
|
|
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,498 |
) |
|
|
1,534 |
|
Restricted cash |
|
|
(11,681 |
) |
|
|
(9,104 |
) |
Other assets, net |
|
|
(72,150 |
) |
|
|
247,241 |
|
Accounts payable and accrued expenses |
|
|
4,052 |
|
|
|
60,385 |
|
Rents received in advance and security deposits |
|
|
8,317 |
|
|
|
(2,283 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations |
|
|
(1,267,973 |
) |
|
|
(343,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Acquisition and additions to real estate properties |
|
|
(47,941 |
) |
|
|
(25,642 |
) |
Cash proceeds from sale of marketable securities |
|
|
98,000 |
|
|
|
|
|
Purchase of marketable securities |
|
|
|
|
|
|
(1,176 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities |
|
|
50,059 |
|
|
|
(26,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on mortgage loan |
|
|
(52,334 |
) |
|
|
(48,864 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
(52,334 |
) |
|
|
(48,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(1,270,248 |
) |
|
|
(419,312 |
) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
1,799,362 |
|
|
|
2,218,674 |
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
529,114 |
|
|
$ |
1,799,362 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005
Note 1 Organization
Paragon Real Estate Equity and Investment Trust (the Company, Paragon, we, our, or us) is
a real estate company with its primary focus during 2005 on acquiring, repositioning, owning,
managing and operating multifamily apartment communities. Generally, however, the selling prices
of this asset category have been quite high recently and have impacted the availability and cost of
financing.
As of December 31, 2005, we owned a 1.0% interest in Paragon Real Estate, LP, the operating
partnership that owns Richton Trail Apartments (Richton Trail), an apartment community containing
72 units. Hampton Court Associates owns the remaining 99.0% interest in Paragon Real Estate, LP.
Because we are the sole general partner of Paragon Real Estate, LP, we consolidate Richton Trail in
our financial statements and show separately amounts for minority interest for Hampton Court
Associates, which is the only limited partner. Hampton Court Associates ownership interest in
Paragon Real Estate, LP is 813,938 restricted limited partnership units, each redeemable after July
1, 2007 for cash, or at our option, 22.881 of our common shares.
Note 2 Basis of Presentation and Going Concern
Consolidated Financial Statement Presentation
Minority interest at December 31, 2005 represents approximately a 99.0% aggregate partnership
interest in Paragon Real Estate, LP held by Hampton Court Associates for its partners. The Company
is the sole general partner of Paragon Real Estate, LP and owns the remaining 1.0% interest. After
July 1, 2007, the limited partners may redeem, in whole or in part, their Paragon Real Estate, LP
units for cash. When these units are offered for redemption in cash, we may, at our option, elect
to convert the limited partnership units into our common shares. The conversion ratio would be
22.881 common shares for each limited partnership unit, or 18,623,715 common shares. The cash
redemption price would be the cash value of the common shares into which the limited partnership
units could have been converted.
We report our investments using the consolidated method of accounting as we own the outstanding
voting interests and can control operations for Paragon Real Estate, LP. In the consolidation
method, the accounts
of these entities are combined with our accounts. All significant intercompany transactions are
eliminated in consolidation.
Going Concern
The financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates the continued operations as a public company, operating Richton Trail and paying
liabilities in the normal course of business. However, the Company has continued to incur net
losses and at December 31, 2005, had unrestricted cash of approximately $529,000, which is not
sufficient to operate beyond mid-2006. The Company had an overall decrease in cash of
approximately $1.3 million in 2005 due to significant amounts spent to actively seek and review
potential acquisitions to build our portfolio and to obtain acquisition capital. Our ability to
continue as a going concern will be dependent upon our ability to secure additional debt or equity
financing and acquire real estate assets in which we can create value for our shareholders and
generate cash flow to support the overhead of our public company.
In 2005, Paragon identified a portfolio of ten apartment communities comprised of 1,478 units
located in Texas and Ohio and signed a contract in September 2005 to acquire the portfolio for
$62.6 million. In order to fund the acquisition, Paragon hired an investment banking firm, which
advised the Company to do a public equity offering for $100 million for this acquisition and to
provide funds for future acquisitions and operations. The
F-7
Company filed a registration statement with the SEC in October 2005, which the SEC
decided not to review allowing the Company to proceed with the public offering. Subsequently,
Paragons investment advisor informed the Company that market conditions made it impractical to
continue with the proposed offering.
The Company continued to solicit additional firms until it withdrew the registration statement from
the SEC
in January 2006. Without completing the public offering, the Company was not able to meet the
listing requirements of Amex because its book equity was less than the $6 million minimum
requirement, it had sustained several consecutive years of losses from operations and net losses,
and its common shares had been selling at a low share price for more than a year. In February
2006, Amex delisted Paragons common shares, which then commenced being quoted on the
over-the-counter bulletin board (OTC Bulletin Board) and on the pink sheets with the new stock
symbol PRGL. The Company is continuing its search for financing to complete the acquisition of
the ten apartment communities under contract, which has been extended until
March 31, 2006 with a closing by April 30, 2006. Failure to obtain external sources of capital
will materially and adversely affect the Companys ability to close the acquisition as well as
adversely affecting its operations, liquidity and financial results.
During 2006, Paragon has also been searching for and reviewing other value-added real estate deals,
including land development, retail, office, industrial, hotel, and joint venture investments. In
addition because our unrestricted cash is not sufficient to allow us to continue operations beyond
mid-2006, we have been reviewing other alternatives, including a reverse merger with another
company, selling the corporate entity, and seeking additional investors. There can be no assurance
that we will be able to enter into a definitive agreement or that we will be able to close a
transaction once a definitive agreement is signed. Even if our management is successful in closing
a transaction, investors may not value the transaction in the same manner as we did, and investors
may not value the transaction as they would value other transactions or alternatives.
Note 3 Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
In order to conform with generally accepted accounting principles, management, in preparation of
our consolidated financial statements, is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
as of December 31, 2005, and the reported amounts of revenues and expenses for the years ended
December 31, 2005 and 2004. Actual results could differ from those estimates. Significant
estimates include the valuation of investments in real estate, marketable securities, deferred
taxes and a related valuation allowance, and these significant estimates, as well as other
estimates and assumptions, may change in the near term.
Investments in Real Estate
Our investments in real estate assets are reported at the lower of cost or estimated net realizable
value.
We periodically review our properties for impairment and provide for a provision if impairments are
determined. First, to determine if impairment may exist, we review our properties and identify
those, if any, which have had either an event of change or event of circumstances warranting
further assessment of recoverability. Then, we estimate the fair value of those properties on an
individual basis based on an independent appraisal, capitalizing the expected net operating income,
or applying various other valuation factors. Such amounts are then compared to the propertys
depreciated cost to determine whether an impairment exists.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), impairment of investments in real estate
exists when the carrying amount of the investments exceeds its fair value and is non-recoverable.
Fair value of these assets is the amount an asset could be bought or sold in a current transaction
between willing parties.
F-8
Depreciation expense is computed using the straight-line method based on the following useful
lives:
|
|
|
|
|
|
|
Years |
Building and improvements |
|
|
40 |
|
Furniture, fixtures and equipment |
|
|
3-7 |
|
Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and
significant renovations and improvements that improve or extend the useful life of the asset are
capitalized and depreciated over their estimated useful life.
Cash and cash equivalents
Cash and cash equivalents include all cash and liquid investments that mature three months or less
from when they are purchased. Cash equivalents are reported at cost, which approximates fair
value. We maintain our cash in bank accounts in amounts that may exceed federally insured limits
at times. We also maintained cash
of approximately $6,000 at December 31, 2005 in a money market account that was not federally
insured.
Cash of approximately $54,000 is classified as restricted at December 31, 2005 because it is held
in an escrow account of the mortgage lender for the payment of property taxes and insurance, and
cash of approximately $64,000 is classified as restricted at December 31, 2005 because it is held
as security deposits for the tenants at Richton Trail.
Accounts Receivable
Our accounts receivable of approximately $10,000 are reported net of an allowance for bad debts of
approximately $1,000 at December 31, 2005 for Richton Trail.
Other Assets
As of December 31, 2005, other assets of approximately $183,000 include prepaid expenses of
approximately $65,000, deferred financing costs incurred to obtain and secure mortgage debt
financing of approximately $43,000 (net of accumulated amortization) and deferred costs of
approximately $75,000 related to a real estate acquisition contract of approximately $62.6 million.
The deferred financing costs are carried at cost, less accumulated amortization. They are being
amortized over the life of the mortgage loan payable on a straight-line basis. Accumulated
amortization related to deferred financing costs as of December 31, 2005 was approximately $12,000.
The deferred costs of approximately $75,000 consist of refundable escrow deposits for the
acquisition of real property of which $30,000 was paid during February 2006 for costs related to
financial audits of the properties.
Revenue Recognition
Revenues from rental property are recognized when due from tenants. Leases are generally for terms
of one year
or less.
Stock Based Compensation
At December 31, 2005, we had one stock-based employee and trustee compensation plan, which is
described more fully in Note 6. During the year ended December 31, 2005, we issued 100,000 common
share options and 80,000 common share options expired. We also issued 550,000 restricted share
grants under this plan. In connection with the resignation of employees we cancelled 500,000
common share options under this plan during the twelve months ended December 31, 2005. During the
year ended December 31, 2004, we issued options as to 575,000 common shares under this plan and
further issued 1,700,000 restricted common share grants under this plan.
In 2004 we cancelled 350,000 restricted share grants. The Company accounted for the grants of
options and
F-9
restricted shares using the intrinsic value method of Accounting Principles Board
Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations. No stock-based employee compensation
cost is reflected in net loss for options granted, as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant. Stock-based
employee compensation cost of approximately $93,000 is reflected in net loss for the year ended
December 31, 2005. The Company has adopted the disclosure only provisions of both SFAS No. 123,
Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. Pursuant to the requirements of SFAS No. 148, the
following are the pro forma net loss amounts for 2005 and 2004, as if the compensation cost for the
options granted to the trustees had been determined based on the fair value at the grant date:
|
|
|
|
|
|
|
|
|
|
|
For the twelve month periods ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Net loss attributable to Common Shareholders |
|
$ |
(1,373,793 |
) |
|
$ |
(816,224 |
) |
Add: Stock-based employee compensation
expense included in reported net loss, net
of related tax effects |
|
|
92,896 |
|
|
|
118,204 |
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects |
|
|
141,564 |
|
|
|
158,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to Common
Shareholders |
|
$ |
(1,422,461 |
) |
|
$ |
(856,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Common
Shareholders per |
|
|
|
|
|
|
|
|
Common Share: |
|
|
|
|
|
|
|
|
Basic and Diluted as reported |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
Basic and Diluted pro forma |
|
$ |
(0.04 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
The assumptions made in estimating the fair value of the options on the grant date based upon the
Black-Scholes option-pricing model are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
Risk-free interest rate |
|
4.05% and 4.02% |
|
3.40% and 5.06% |
Volatility |
|
168.9% and 175.5% |
|
176.5% and 171.1% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Life expectancy |
|
10 years |
|
10 years |
Income Taxes
Because we have not elected to be taxed as a Real Estate Investment Trust (REIT) for federal
income tax purposes, we account for income taxes using the liability method under which deferred
tax assets and liabilities are determined based on differences between the financial reporting and
tax bases of assets and liabilities using enacted tax rates in effect for the period in which the
differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized. Although we were
eligible to re-elect REIT status for 2005, we intend to take advantage of our tax loss
carryforwards before electing to be a REIT again.
At December 31, 2005, we have net operating losses totaling approximately $12.4 million and capital
losses of approximately $0.6 million. While these losses created a deferred tax asset, a valuation
allowance was applied against the asset because of the uncertainty of whether we will be able to
use these loss carryforwards, which will expire in varying amounts through the year 2025. Pursuant
to Internal Revenue Code regulations, Paragon will be limited to using approximately $10.4 million
of the $12.4 million net operating losses. These same regulations also limit the amount of loss
used in any one year.
F-10
We are also subject to certain state and local income, excise and franchise taxes. The provision
for state and local taxes has been reflected in general and administrative expense in the
consolidated statements of operations and has not been separately stated due to its insignificance.
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, marketable securities and a mortgage
loan. The fair values of the financial instruments were not materially different from their
carrying or contract values at
December 31, 2005.
Segment Disclosure
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. This Statement requires that a public
company report financial and descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to segments. Management
views the Company as a single segment, which acquires, owns and operates rental real estate.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-based Payment. This Statement requires
all entities to recognize compensation expense in an amount equal to the fair value of share-based
payments granted to employees. The Statement is effective for the first reporting period, interim
or annual, beginning after December 15, 2005.
The Company is currently evaluating the effects of this Statement, and does not expect it to have a
material impact on the financial condition or operating results of the Company.
Note 4 Marketable Securities
Our investments in marketable securities are available-for-sale, as of December 31, 2005, and
represent 100 common shares of Century Realty Trust.
As of December 31, 2005, our marketable securities had a fair market value of approximately $2,000
(based upon the NASDAQ closing quote of $19.25 per share for Century Realty Trust on December 31,
2005). We recorded
an unrealized loss on marketable securities during 2005 of approximately $200, resulting in a
balance of approximately $700 in shareholders equity for unrealized gain on marketable securities.
The NASDAQ closing quote on March 16, 2006 was $19.80 per common share of Century Realty Trust.
During the year ended December 31, 2005, we sold 10,000 shares of Stellent, Inc. at a price of
$9.80 per share and recognized a gain on the sale of these shares totaling approximately $60,000
after broker commission.
Note 5 Mortgage Loan
On October 31, 2003, we refinanced Richton Trail with an independent lender. The mortgage
loan payable of $2.8 million has a fixed interest rate of 5.87% for a term of 10 years. The monthly
principal and interest payments are approximately $18,000 based on a 25-year amortization schedule.
The balance due at maturity in 2013 will be approximately $2.2 million. The mortgage loan payable
was approximately $2,711,000 as of December 31, 2005.
F-11
The mortgage loan matures as follows:
|
|
|
|
|
Year ending December 31, |
|
|
|
|
2006 |
|
|
55,535 |
|
2007 |
|
|
58,932 |
|
2008 |
|
|
62,092 |
|
2009 |
|
|
66,334 |
|
2010 |
|
|
70,392 |
|
Thereafter |
|
|
2,397,653 |
|
|
|
|
|
|
|
$ |
2,710,938 |
|
|
|
|
|
Note 6 Shareholders Equity
Preferred Shares
During 1999, we issued 785,037 Class A Cumulative Convertible Preferred Shares (preferred shares)
to the public. The preferred shares bear a liquidation value of $10.00 per share. The preferred
shares are convertible into 3.448 common shares subject to certain formulas. We have the right to
redeem the preferred shares.
In May 2003, we offered preferred shareholders a one-time incentive to exchange preferred shares
into common shares at the rate of one preferred share for 22.881 common shares, which expired June
30, 2003. Through that exchange offer, preferred shareholders exchanged 1,174,120 of the preferred
shares, or nearly 81%, for 26,865,042 common shares. After the exchange offer was completed, the
remaining preferred shares held by investors not affiliated with Paragon had an aggregate market
value below $1 million and therefore no longer met the minimum requirement for listing on the
American Stock Exchange. The Exchange suspended trading of the preferred shares and the Securities
and Exchange Commission removed the preferred shares from listing and registration. Preferred
shareholders retain the right to convert each of their shares for 3.448 common shares. The
preferred shares are on the over-the-counter market with the symbol PRGYP.
Effective June 30, 2003, we issued 696,078 preferred shares valued at approximately $2.4 million to
Messrs. Mastandrea and Dee pursuant to separate restricted share agreements. Under each restricted
share agreement, the restricted shares vest upon the later of the following dates:
|
|
|
the date our gross assets exceed $50.0 million, or |
|
|
|
|
50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005 and the remaining 25% of the shares on March 4, 2006. |
In conjunction with the one-time incentive exchange offer for preferred shareholders, Messrs.
Mastandrea and Dee exchanged 534,668 restricted preferred shares into 12,233,738 restricted common
shares. The restrictions described above are applicable to their common shares. The remaining
161,410 restricted preferred shares held by Messrs Mastandrea and Dee can each be converted into
22.881 restricted common shares.
During the first quarter of 2004, 935 preferred shares were converted to 3,224 common shares at a
conversion rate of 3.448 common shares for each preferred share.
On July 7, 2005, 300 preferred shares were converted to 1,034 common shares, at a conversion rate
of 3.448 common shares for each preferred share.
Common Shares
During 2005, our common shares were listed on the American Stock Exchange with the symbol PRG.
On February 15, 2006, our common shares commenced trading on over-the-counter with the new symbol
PRGL following the American Stock Exchanges delisting our shares because our book equity was
less than the $6 million minimum requirement, we had sustained several consecutive years of losses from
operations and net
F-12
losses, and the common shares had been selling at a low share price for more
than a year, as provided in
Section 1003 of the American Stock Exchanges Company Guide.
Shares Held in Treasury
On October 1, 2003 we completed the sale of our 92.9% general partnership interest in our four
commercial properties. A portion of the proceeds from the sale was paid in 2,859,765 of our common
shares at an average closing price for the 30 calendar days prior to June 27, 2003 of $0.28 or
approximately $801,000. These shares are recorded at cost in the accompanying consolidated balance
sheet under treasury shares.
Restricted Common Shares
On June 30, 2003, our shareholders approved the issuance of additional common shares to Paragon
Real Estate Development, LLC for James C. Mastandrea, our Chief Executive Officer and President,
and John J. Dee, our Chief Financial Officer and Senior Vice President, to encourage them to
substantially grow the asset base, net operating income, funds from operations, net value, and
share value of Paragon. We will issue restricted common shares if they locate and close on our
behalf future acquisition, development or re-development transactions. Any of these transactions
would be subject to approval by our board of trustees. The maximum number of common shares they
may receive under the additional contribution agreement is limited to a total value of $26 million
based on the average closing price of the common shares for 30 calendar days preceding the closing
of any acquisition. The common shares will be restricted until we achieve the five-year proforma
income target for the acquisition, as approved by the board of trustees, and an increase of 5% in
Paragons net operating income and funds from operations. The restricted shares would vest
immediately upon any shift in ownership, as defined in the agreement.
On October 28, 2003, our board of trustees approved the issuance of 50,000 restricted commons
shares to each of our four trustees who are not officers of the Company, and following each annual
meeting, trustees serving on our board who are not officers of the Company will receive grants of
50,000 restricted shares. These restricted shares are granted from the 2004 Plan, which is
described below. The grants of restricted shares are made at the current market price of the
common shares when granted.
On December 16, 2003, our board of trustees approved the issuance of 500,000 restricted common
shares to Paragons landlord for 4,000 square feet of fully furnished office space, including all
utilities, phone, high speed internet, equipment usage, copying, presentation packaging and
preliminary design planning for our proposed projects for two years. Half of the shares were to be
issued in March 2004 and half were to be issued in March 2005. The shares have restrictions as to
voting and transfer. A proxy will be signed when the shares are issued granting Mr. Mastandrea the
right to vote the shares during the ownership of the landlord or if transferred in a block sale.
The shares are restricted from being transferred or sold for four years from the date of issuance,
and thereafter have volume limits on the number of shares that may be sold daily in the open market
or transferred in a block sale. The market value of the office space and services for two years
was estimated at $103,000.
On January 2, 2004, our board of trustees approved the issuance of 300,000 restricted common shares
each to James C. Mastandrea, our Chief Executive Officer and President, John J. Dee, our Chief
Financial Officer and Senior Vice President and to an employee that terminated employment in 2004.
Half of the restricted shares vest in five years or earlier if Paragons share price rises to $1.00
per share. The remaining half vests when funds from operations has doubled or when Paragons share
price is 50% higher compared to the average trading price for the five days preceding the grant
date. The market value of the restricted common shares on the date of the grant was $198,000. The
300,000 restricted shares previously issued to an employee who terminated in 2004 were cancelled.
These restricted shares were issued from the 2004 Plan described below.
Effective December 1, 2004, our board of trustees approved the issuance of 100,000 restricted
common shares to a new employee of the Company. Half of the shares will vest in four years and the
second half will vest in five years. The market value of the 100,000 restricted common shares
issued on the date of the grant was $13,000.
These restricted shares were issued from the 2004 Plan described below.
F-13
Effective March 7, 2005, our board of trustees approved the issuance of 350,000 restricted common
shares to a new employee of the Company. Half of the shares were to vest in four years and the
second half were to vest in five years, but all of the shares were cancelled on December 31, 2005
upon the employees resignation. The market value of the 350,000 restricted common shares issued
on the date of grant was $70,000. These restricted shares were issued from the 2004 Plan described
below.
Effective June 3, 2005, we issued a total of 200,000 restricted common shares to our four
independent trustees, who are not executive officers of Paragon, as part of their compensation for
serving on Paragons board and committees. The restrictions will be removed from the shares after
twelve months from the date of issue.
The market value of the restricted common shares on the date of grant was $28,000.
Options
On May 27, 1998, in accordance with our former stock option plan, we granted options as to 54,387
common shares to then existing employees and trustees. The options remain unexercised and are
exercisable on any date through May 26, 2008 at a price of $5.37 per share.
On November 16, 1998, we adopted the 1998 Share Option Plan. In 2004 the board of trustees
unanimously recommended and the shareholders approved amendments to our 1998 Share Option Plan to
increase the number of shares available for grant from 3,166,666 to 3,500,000 and to conform it
with current tax regulations (2004 Plan). The 2004 Plan provides for the grant of incentive
stock options, as defined under Section 422(b) of the tax code, options that are not qualified
under the tax code (referred to in this proxy statement as non-statutory options), share
appreciation rights (SARs) and restricted share grants and performance share awards and dividend
equivalents. The 2004 Plan is administered by our management, organization and compensation
committee of the board. The committee has the authority, subject to approval by our board, to
determine the terms of each award, to interpret the provisions of the 2004 plan and to make all
other determinations for the administration of the 2004 Plan.
The 2004 Plan provides for the granting of share options to officers, trustees and employees at a
price determined by a formula in the 2004 Plan agreement. The options are to be exercisable over a
period of time determined by the 2004 Plan committee, but no longer than ten years after the grant
date. Compensation resulting from the share options is initially measured at the grant date based
on fair market value of the shares.
On October 28, 2003, our board of trustees approved the issuance of 25,000 options to each of our
four trustees who are not officers of the Company, and following each annual meeting, trustees
serving on our board who are not officers of the Company will receive grants of 25,000 options.
The exercise price of the options is the current market price of the common shares when the options
are issued. The options can be exercised six months after issuance and expire 90 days after the
trustees term ends.
Effective January 2, 2004, we issued 150,000 options each to James C. Mastandrea, our Chief
Executive Officer and President, John J. Dee, our Chief Financial Officer and Senior Vice
President, and an employee that terminated employment in 2004. The options have an exercise price
of $0.27 per share and vest one-third on each of January 2, 2005, 2006, and 2007. The options
expire on the earlier of January 2, 2009 or 90 days after leaving the employ of the Company.
F-14
The following table summarizes the Companys option activity for the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
Options |
|
Average |
|
|
|
|
to Purchase |
|
Exercise Price |
|
Range of Exercise |
|
|
Common Shares |
|
per Share |
|
Price per Share |
Outstanding at January 1, 2004 |
|
|
284,387 |
|
|
$ |
2.00 |
|
|
$ |
0.22 - $5.375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
575,000 |
|
|
$ |
0.25 |
|
|
$ |
0.18 - $0.27 |
|
Expired/terminated |
|
|
(25,000 |
) |
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
834,387 |
|
|
$ |
.85 |
|
|
$ |
0.18 - $5.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
100,000 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
Expired/terminated |
|
|
(230,000 |
) |
|
$ |
1.18 |
|
|
$ |
0.27 - $2.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
704,387 |
|
|
$ |
.64 |
|
|
$ |
0.14 - $5.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2004 |
|
|
284,387 |
|
|
$ |
2.00 |
|
|
$ |
0.22 - $5.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2005 |
|
|
404,387 |
|
|
$ |
0.94 |
|
|
$ |
0.18 - $5.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize exercisable options outstanding as of December 31, 2005 and
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable Options as of December 31, 2005 |
|
|
Number of |
|
Weighted |
|
|
|
|
Options |
|
Average |
|
|
|
|
Outstanding |
|
Remaining |
|
Weighted |
Range of |
|
and |
|
Contractual |
|
Average |
Exercise Prices |
|
Exercisable |
|
Life (in years) |
|
Exercise Price |
$5.37 |
|
|
54,387 |
|
|
|
2.4 |
|
|
$ |
5.37 |
|
$0.45 |
|
|
50,000 |
|
|
|
1.2 |
|
|
$ |
0.45 |
|
$0.22 |
|
|
100,000 |
|
|
|
1.2 |
|
|
$ |
0.22 |
|
$0.27 |
|
|
100,000 |
|
|
|
3.0 |
|
|
$ |
0.27 |
|
$0.18 |
|
|
100,000 |
|
|
|
1.2 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.18 to $5.37 |
|
|
404,387 |
|
|
|
1.8 |
|
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable Options as of December 31, 2004 |
|
|
Number of |
|
Weighted |
|
|
|
|
Options |
|
Average |
|
|
|
|
Outstanding |
|
Remainng |
|
Weighted |
Range of |
|
and |
|
Contractual |
|
Average |
Exercise Prices |
|
Exercisable |
|
Life (in years) |
|
Exercise Price |
$5.37 |
|
|
54,387 |
|
|
|
3.4 |
|
|
$ |
5.37 |
|
$2.90 |
|
|
80,000 |
|
|
|
1.0 |
|
|
$ |
2.90 |
|
$0.45 |
|
|
50,000 |
|
|
|
1.2 |
|
|
$ |
0.45 |
|
$0.22 |
|
|
100,000 |
|
|
|
1.2 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.22 to $5.37 |
|
|
284,387 |
|
|
|
1.6 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
Warrants
On March 5, 1998, we issued a warrant to Credit Suisse First Boston Mortgage LLC in connection with
the refinancing of debt. The warrant provides for the right to purchase 47,500 common shares at a
price of $5.37 per common share and is exercisable at any time through March 5, 2008. The warrant
remains unexercised as
of December 31, 2005.
Effective September 23, 2005, we issued to our legal counsel 875,000 warrants for our common shares
at an exercise price of $0.10 per warrant representing the average closing price of our common
shares for the preceding ten days. Each warrant is exercisable for one common share, can be
exercised after a two year holding period, and expires five years from the date issued.
Note 7 Loss Per Share
The
Company has adopted the SFAS No. 128, Earnings Per Share (EPS) for all periods presented
herein.
Net loss per weighted average common share outstanding basic
and diluted are computed based on
the weighted average number of common shares outstanding for the
period. The weighted average
number of common shares outstanding for the years ended
December 31, 2005 and 2004 was 33,598,240
and 32,993,966, respectively. Common share equivalents of
approximately 24.3 million and 23.6
million as of December 31, 2005 and
December 31, 2004, respectively, include outstanding convertible
preferred shares, warrants, stock
options and limited partnership units, and are not included in net
loss per weighted average common
share outstandingdiluted as they would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Numerator |
|
|
|
|
|
|
|
|
Net loss attributable to Common Shareholders |
|
$ |
(1,373,793 |
) |
|
$ |
(816,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Weighted average Common Shares outstanding
at December 31, 2005 and December 31, 2004
Basic and Diluted |
|
|
33,598,240 |
|
|
|
32,993,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS |
|
|
|
|
|
|
|
|
Net loss attributable to Common
Shareholders Basic and Diluted |
|
$ |
(0.04 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
Note 8 Dividends/Distributions
On June 30, 2003, the holders of our preferred shares consented to waive the dividend that would
otherwise have been payable in May 2003 and to eliminate any future dividends that would have been
payable under the terms of our preferred shares. The waiver was sought in connection with the
one-time incentive exchange offer under which we offered to exchange each of our preferred shares
for 22.881 common shares.
No cash distributions were declared during 2005 and 2004 with respect to the common shares.
Note 9 Income taxes
There was no income tax provision for the years ended December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Current |
|
$ |
|
|
|
$ |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-16
The tax provision differs from the expense that would result from applying Federal statutory rates
as follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Tax / (Benefit) at Federal statutory rate |
|
$ |
(468,000 |
) |
|
$ |
(277,000 |
) |
State income tax / (benefit), net of Federal tax effect |
|
|
(88,000 |
) |
|
|
(53,000 |
) |
Adjustment to net operating and capital loss carryforwards |
|
|
|
|
|
|
348,000 |
|
Change in valuation allowance |
|
|
421,000 |
|
|
|
(18,000 |
) |
Other |
|
|
135,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2005 |
|
|
2004 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
5,003,000 |
|
|
$ |
4,447,000 |
|
Capital loss carryforward |
|
|
262,000 |
|
|
|
262,000 |
|
Provision for loss on marketable securities |
|
|
|
|
|
|
106,000 |
|
Accrual and other temporary variances |
|
|
|
|
|
|
29,000 |
|
Valuation allowance |
|
|
(5,265,000 |
) |
|
|
(4,844,000 |
) |
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon generation of sufficient future taxable income
and the effects of other loss utilization provisions. Management has determined that sufficient
uncertainty exists regarding the realizability of a significant portion of the net deferred tax
assets and has provided a valuation allowance of $5,265,000 and $4,844,000, against the net
deferred tax assets of the Company as of December 31, 2005 and 2004, respectively. A valuation
allowance is considered to be a significant estimate that may change in the near term.
At December 31, 2005, the Company had net operating loss carryforwards of approximately $12.4
million and capital loss carryforwards of approximately $0.6 million available to be carried to
future periods. Net operating loss carryforwards of $3,737,000 are available for Paragon to use
without any limitation or restriction imposed by tax regulations. Changes in the ownership of
Paragons shares that occurred in 2001 and 2003 will limit the amount of additional net operating
losses to be used to approximately $351,000 per year for another 19 years, or a total of
approximately $6,670,000. Net loss carryforwards of approximately $1,898,000 cannot be used due to
the limitations imposed by Section 382 of the Internal Revenue Code related to the 2001 and 2003
changes of share ownership. The loss carryforwards expire as follows:
|
|
|
|
|
|
|
|
|
Year Expiring |
|
Net Operating Loss |
|
|
Capital Loss |
|
2008 |
|
$ |
|
|
|
$ |
649,000 |
|
2012 |
|
|
458,000 |
|
|
|
|
|
2018 |
|
|
739,000 |
|
|
|
|
|
2019 |
|
|
115,000 |
|
|
|
|
|
2020 |
|
|
2,025,000 |
|
|
|
|
|
2021 |
|
|
177,000 |
|
|
|
|
|
2022 |
|
|
592,000 |
|
|
|
|
|
2023 |
|
|
6,085,000 |
|
|
|
|
|
2024 |
|
|
819,000 |
|
|
|
|
|
2025 |
|
|
1,374,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss carryforwards |
|
$ |
12,384,000 |
|
|
$ |
649,000 |
|
|
|
|
|
|
|
|
F-17
Note
10 Commitments and Contingencies
Liquidity
As of December 31, 2005, our unrestricted cash resources were approximately $529,000.
During the year ended December 31, 2005, we sold 10,000 shares of Stellent, Inc. at a price of
$9.80 per share and recognized a gain on the sale of these shares totaling approximately $60,000.
Net proceeds from this sale were approximately $97,000.
From 2003 through 2005, we pursued a value-added business plan primarily focused on acquiring well
located, under-performing multi-family residential properties, including affordable housing
communities, and repositioning them through renovation, leasing, improved management and branding.
Throughout 2005, Paragon reviewed several portfolios of apartment properties, and in August 2005,
identified a portfolio of ten apartment communities comprised of 1,478 units located in Texas and
Ohio, and signed a contract in September 2005 to acquire the portfolio for $62.6 million. In order
to fund the acquisition, Paragon hired an investment banking firm, which advised the Company to do
a public equity offering for $100 million for this acquisition and to provide funds for future
acquisitions and operations. The Company filed a registration statement with the SEC in October
2005, which the SEC decided not to review allowing the Company to proceed with the public offering.
Subsequently, Paragons investment advisor informed the Company that market conditions made it
impractical to continue with the proposed offering. The Company continued to solicit additional
firms until it withdrew the registration statement from the SEC in January 2006. Without
completing the public offering, the Company was not able to meet the listing requirements of Amex
because its book equity was less than the
$6 million minimum requirement, it had sustained several consecutive years of losses from
operations and net losses, and its common shares had been selling at a low share price for more
than a year. In February 2006, Amex delisted Paragons common shares, which then commenced being
quoted on the over-the-counter bulletin board (OTC Bulletin Board) and on the pink sheets with
the new stock symbol PRGL. The Company is continuing its search for financing to complete the
acquisition of the ten apartment communities under contract, which has been extended until March
31, 2006 with a closing by April 30, 2006. Failure to obtain external sources of capital will
materially and adversely affect the Companys ability to close the acquisition as well as adversely
affect its ability to continue to operate as a public company.
On June 30, 2003, the holders of our preferred shares consented to waive the dividend that
would otherwise have been payable in May 2003 and to eliminate any future dividends that would have
been payable under the terms of our preferred shares. The waiver was sought in connection with a
one-time incentive exchange offer under which we exchanged each of our preferred shares for 22.881
common shares.
We are dependent on our existing cash to meet our liquidity needs because cash from operations is
not sufficient to meet our operating requirements. Because the cash flow from our properties does
not fully fund our operations, we have reduced our day-to-day overhead expenses and material future
obligations. We have reduced overhead expenses by not replacing employees who have left, reducing
office space and rent, reducing use of outside consultants, negotiating discounts on prices
wherever possible, and delaying or foregoing other expenses. The mortgage debt service payment is
being funded from the cash flow of the property secured by the mortgage, and the current salary
requirements of the employment contracts is only $5,000 per month for each executive officer.
We historically have financed our long-term capital needs, including acquisitions, as follows:
|
|
|
Borrowings from new loans; |
|
|
|
|
Additional equity issuances of our common and preferred shares; and |
|
|
|
|
Proceeds from the sales of our real estate and technology segment. |
Paragon has been searching for and reviewing other value-added real estate deals, including
land development, retail, office, industrial, hotel, and joint venture investments. Paragon
intends to raise equity through individual
F-18
investors or groups of investors. We may also use joint
venture structures for property and portfolio acquisitions, and tax-deferred operating partnership
units for acquisitions of companies. There can be no assurance that any of the alternatives will
be adopted, or if adopted, will be successful.
Employment Agreements
The employment agreements with James C. Mastandrea and John J. Dee provide for an annual
salary of $60,000 each effective as of March 4, 2003 and in connection therewith, Mr. Mastandrea
was appointed as Chief Executive Officer and Mr. Dee was appointed as Chief Financial Officer on
April 7, 2003. The initial terms of Messrs. Mastandrea and Dees employment are for two years and
may be extended for terms of one year through their 70th birthdays. Messrs. Mastandrea
and Dees base annual salaries may be adjusted from time to time, except that the adjustment may
not be lower than the preceding years base salary. The employment agreements provide that Messrs.
Mastandrea and Dee will be entitled to base salary and bonus at the rate in effect before any
termination for a period of three years in the event that their employment is terminated without
cause by us or for good reason by either Messrs. Mastandrea or Dee.
In 2004, an executive joined our management team as Sr. Vice President Chief Property Management
and Development Officer responsible for overseeing, managing and directing all property management
and development activities. The employment agreement with the executive provided for an annual
salary of $60,000. The initial term of the employment was for one year and may have been extended
for terms of one year through his 70th birthday. The base annual salary was adjustable
from time to time, except that the adjustment could not be lower than the preceding years base
salary. The executive resigned in 2005 and the employment agreement was cancelled.
Note
11 Related Party Transactions
Richton Trail Acquisition and Management Fees
Effective July 1, 2003, we closed the acquisition of our residential apartment community,
Richton Trail, following approval by our shareholders of the transaction on June 30, 2003. Our
operating partnership, Paragon Real Estate, LP, acquired the residential community along with the
associated mortgage from Hampton Court Associates, LP, a partnership controlled by James C.
Mastandrea, its general partner and our Chairman, Chief Executive Officer and President. In
consideration for transferring Richton Trail, Hampton Court Associates received 813,938 restricted
limited partnership units of Paragon Real Estate, LP. Each unit is redeemable after four years for
cash, or at our option, 22.881 of our common shares.
Mr. Mastandrea also owns two companies that provide services to Richton Trail. Mid Illinois
Realty Corp. manages Richton Trail and MDC Realty Corp. is reimbursed, at cost, for Richton Trails
payroll related costs. The related management fees included in years ended December 31, 2005 and
December 31, 2004 were approximately $28,000 and $28,000, respectively. Reimbursement, at cost,
for the payroll related costs paid and accrued for the years ended December 31, 2005 and December
31, 2004 were approximately $62,300 and $59,300, respectively. As the Company acquires more
properties, it intends to use local third party management companies until we are able to provide
management services ourselves.
Note
12 Supplemental Information to Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
Interest paid |
|
$ |
163,017 |
|
|
$ |
166,487 |
|
|
|
|
|
|
|
|
F-19