Paragon Real Estate Equity and Investment Trust 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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) |
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1240 Huron Road, Suite 301, Cleveland, OH
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44115 |
(Address of principal executive offices)
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(Zip code) |
Issuers telephone number: 216-430-2700
Check whether the issuer (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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of October 17, 2005, the issuer had 33,541,649 common shares outstanding, including 2,859,765
common shares held in treasury.
Transitional Small Business Disclosure Format (Check one): Yes o No þ
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
FORM 10-QSB
INDEX
- 1 -
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Balance Sheet
September 30, 2005
(unaudited)
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|
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Assets |
|
|
|
|
Investments in real estate: |
|
|
|
|
Land |
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$ |
797,682 |
|
Buildings and improvements |
|
|
3,205,186 |
|
Furniture, fixtures and equipment |
|
|
41,290 |
|
|
|
|
|
4,044,158 |
|
Accumulated depreciation and amortization |
|
|
(185,435 |
) |
|
Net investments in real estate |
|
|
3,858,723 |
|
Cash and cash equivalents |
|
|
917,179 |
|
Marketable securities |
|
|
87,591 |
|
Restricted cash |
|
|
130,501 |
|
Accounts receivable, net |
|
|
5,516 |
|
Other assets, net |
|
|
186,190 |
|
|
Total Assets |
|
$ |
5,185,700 |
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
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|
|
|
Liabilities: |
|
|
|
|
Mortgage loan payable |
|
$ |
2,723,978 |
|
Accounts payable and accrued expenses |
|
|
170,474 |
|
Security deposits |
|
|
59,925 |
|
|
Total liabilities |
|
|
2,954,377 |
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary |
|
|
2,185,316 |
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
Shareholders equity: |
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|
|
|
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; 33,541,649 shares
issued and outstanding |
|
|
335,416 |
|
Additional paid-in capital |
|
|
28,428,102 |
|
Accumulated other comprehensive income, net
unrealized gain on marketable securities |
|
|
48,915 |
|
Accumulated deficit |
|
|
(25,403,060 |
) |
Treasury stock, at cost, 2,859,765 shares |
|
|
(800,735 |
) |
Unearned compensation and trustees fees |
|
|
(2,565,413 |
) |
|
Total shareholders equity |
|
|
46,007 |
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
5,185,700 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- 2 -
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Operations
(unaudited)
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|
For the nine months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
Rental revenue |
|
$ |
453,917 |
|
|
$ |
455,741 |
|
Interest and other |
|
|
31,087 |
|
|
|
38,511 |
|
|
Total revenues |
|
|
485,004 |
|
|
|
494,252 |
|
|
Expenses |
|
|
|
|
|
|
|
|
Property, operating and maintenance |
|
|
147,698 |
|
|
|
158,694 |
|
Property taxes and insurance |
|
|
75,727 |
|
|
|
70,738 |
|
Depreciation and amortization |
|
|
67,689 |
|
|
|
65,006 |
|
Interest |
|
|
122,219 |
|
|
|
124,912 |
|
General and administrative |
|
|
874,963 |
|
|
|
717,386 |
|
Management fees |
|
|
20,468 |
|
|
|
20,094 |
|
|
Total expenses |
|
|
1,308,764 |
|
|
|
1,156,830 |
|
|
Loss from operations before (income) loss
allocated to minority interest |
|
|
(823,760 |
) |
|
|
(662,578 |
) |
(Income) loss allocated to minority interest |
|
|
(17,807 |
) |
|
|
75,158 |
|
|
Net loss attributable to Common Shareholders |
|
$ |
(841,567 |
) |
|
$ |
(587,420 |
) |
|
Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
Weighted average number of Common Shares
outstanding: Basic and Diluted |
|
|
33,617,311 |
|
|
|
32,899,490 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(841,567 |
) |
|
$ |
(587,420 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities |
|
|
(2,358 |
) |
|
|
(22,048 |
) |
|
Comprehensive loss |
|
$ |
(843,925 |
) |
|
$ |
(609,468 |
) |
|
The accompanying notes are an integral part of the consolidated financial statements.
- 3 -
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Operations
(unaudited)
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|
|
|
|
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|
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|
For the three months ended September 30, |
|
|
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2005 |
|
|
2004 |
|
Revenues |
|
|
|
|
|
|
|
|
Rental revenue |
|
$ |
153,128 |
|
|
$ |
160,130 |
|
Interest and other |
|
|
10,686 |
|
|
|
11,054 |
|
|
Total revenues |
|
|
163,814 |
|
|
|
171,184 |
|
|
Expenses |
|
|
|
|
|
|
|
|
Property, operating and maintenance |
|
|
41,850 |
|
|
|
58,511 |
|
Property taxes and insurance |
|
|
26,312 |
|
|
|
24,033 |
|
Depreciation and amortization |
|
|
22,956 |
|
|
|
21,997 |
|
Interest |
|
|
40,994 |
|
|
|
41,760 |
|
General and administrative |
|
|
177,468 |
|
|
|
253,024 |
|
Management fees |
|
|
6,970 |
|
|
|
6,537 |
|
|
Total expenses |
|
|
316,550 |
|
|
|
405,862 |
|
|
Loss from operations before income allocated to
minority interest |
|
|
(152,736 |
) |
|
|
(234,678 |
) |
Income allocated to minority interest |
|
|
(15,050 |
) |
|
|
(5,859 |
) |
|
Net loss attributable to Common Shareholders |
|
$ |
(167,786 |
) |
|
|
(240,537 |
) |
|
Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
Weighted average number of Common Shares
outstanding: Basic and Diluted |
|
|
33,541,570 |
|
|
|
33,342,790 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(167,786 |
) |
|
$ |
(240,537 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities |
|
|
10,887 |
|
|
|
(8,316 |
) |
|
Comprehensive loss |
|
$ |
(156,899 |
) |
|
$ |
(248,853 |
) |
|
The accompanying notes are an integral part of the consolidated financial statements.
- 4 -
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(841,567 |
) |
|
$ |
(587,420 |
) |
Adjustments to reconcile net loss to net cash used
in continuing operations: |
|
|
|
|
|
|
|
|
Compensation costs and trustees fees incurred
through the issuance of shares |
|
|
72,427 |
|
|
|
91,371 |
|
Rent expense incurred through the issuance of
restricted shares |
|
|
51,500 |
|
|
|
51,500 |
|
Depreciation and amortization |
|
|
67,689 |
|
|
|
65,006 |
|
Income (loss) allocated to minority interest |
|
|
17,807 |
|
|
|
(75,158 |
) |
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
2,761 |
|
|
|
(581 |
) |
Restricted cash |
|
|
(24,315 |
) |
|
|
(25,970 |
) |
Other assets, net |
|
|
(73,991 |
) |
|
|
280,700 |
|
Accounts payable and accrued expenses |
|
|
(93,136 |
) |
|
|
(15,491 |
) |
Rents received in advance and security deposits |
|
|
5,211 |
|
|
|
2,316 |
|
|
Net cash used in continuing operations |
|
|
(815,614 |
) |
|
|
(213,727 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to real estate properties |
|
|
(27,275 |
) |
|
|
(20,258 |
) |
Purchase of marketable securities |
|
|
|
|
|
|
(1,175 |
) |
|
Net cash used in investing activities |
|
|
(27,275 |
) |
|
|
(21,433 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments on mortgage loan |
|
|
(39,294 |
) |
|
|
(36,601 |
) |
|
Net cash used in financing activities |
|
|
(39,294 |
) |
|
|
(36,601 |
) |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(882,183 |
) |
|
|
(271,761 |
) |
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
1,799,362 |
|
|
|
2,218,674 |
|
|
End of period |
|
$ |
917,179 |
|
|
$ |
1,946,913 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental information to Consolidated Statements of Cash Flows |
|
|
|
|
|
Interest paid |
|
$ |
122,219 |
|
|
$ |
124,912 |
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- 5 -
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1
Organization
Paragon Real Estate Equity and Investment Trust (the Company, Paragon, we, our, or us) is
a real estate company focused primarily on acquiring, repositioning, owning, managing and operating
multifamily apartment communities. As of September 30, 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.
Paragon is also the sole member of Paragon Housing LLC, which was the general partner of River West
Apartments Limited Partnership (River West). In July 2005, Paragon Housing LLC withdrew as the
general partner of River West. River West is a single asset entity owning an apartment complex of
30 units. We do not consolidate Paragon Housing LLC with Paragons financial statements because we
do not have financial or voting control over the entity, and we do not have sufficient equity at
risk for Paragon Housing LLC to finance River West activities without additional subordinated
financial support. Our exposure is limited to Paragon Housing LLCs $100 capital contribution in
River West, and we and Paragon Housing LLC are not obligated on any of the liabilities of River
West.
Note 2
Basis of Presentation
We have prepared the consolidated financial statements without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and regulations.
However, we believe that the included disclosures are adequate to make the information presented
not misleading. In our opinion, all adjustments (consisting solely of normal recurring items)
necessary for a fair presentation of our financial position as of September 30, 2005, the results
of our operations for the nine month and three month periods ended September 30, 2005 and 2004, and
of our cash flows for the nine month periods ended September 30, 2005 and 2004 have been included.
The results of operations for interim periods are not necessarily indicative of the results for a
full year. For further information, refer to our consolidated financial statements and footnotes
included in the Annual Report on Form 10-KSB for the year ended December 31, 2004.
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 September 30, 2005, and the reported amounts of revenues and expenses for the nine month and
three month periods ended September 30, 2005 and 2004. Actual results could differ from those
estimates. Significant estimates include the valuation of investments in real estate, marketable
securities, deferred acquisition costs and deferred taxes, and these significant estimates, as well
as other estimates and assumptions, may change in the near term.
- 6 -
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 Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, 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.
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 $18,000 at September 30, 2005 in a money market
account that was not federally insured. Cash of approximately $131,000 is classified as restricted
at September 30, 2005 because approximately $70,000 is held in an escrow account of the mortgage
lender for the payment of property taxes and insurance and approximately $61,000 is in a separate
bank account for security deposits of our residential tenants.
Accounts Receivable
Our accounts receivable of approximately $6,000 are reported net of an allowance for bad debts of
approximately $18,000 at September 30, 2005 for Richton Trail.
Other Assets
As of September 30, 2005, other assets include prepaid expenses of approximately $37,000, deferred
financing costs incurred to obtain and secure mortgage debt financing of approximately $55,000 and
deferred costs of approximately $105,000 related to a real estate acquisition contract of
approximately $64.7 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 September 30, 2005 was approximately
$10,000.
- 7 -
The deferred costs of approximately $105,000 consist of refundable escrow deposits of $75,000 for
the
acquisition of real property and deferred acquisition costs of approximately $30,000.
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 September 30, 2005, we had one stock-based employee compensation plan. During the nine months
ended September 30, 2005, we issued 100,000 common share options and issued 550,000 restricted
share grants under this plan. In connection with the resignation of an employee we cancelled
150,000 common share options under this plan during the nine months ended September 30, 2005.
During the nine months ended September 30, 2004, we issued 550,000 common share options and further
issued 1,600,000 restricted share grants. In connection with the resignation of an employee in
2004, we cancelled 50,000 restricted share grants under this plan. During the nine months ended
September 30, 2005, we also issued 875,000 warrants. The warrants are not part of our stock-based
employee compensation plan.
We account for the plan under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. In accordance with APB
Opinion No. 25, no stock-based employee compensation cost would be reflected in net loss, as all
options granted under the plan have an exercise price equal to the market value of the underlying
common shares on the date of grant. Stock based compensation cost of approximately $72,000 is
reflected in net loss for the nine months ended September 30, 2005, and approximately $91,000 for
the nine months ended September 30, 2004. The following table illustrates the effect on net loss
and loss per share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, as amended, to stock-based
compensation.
|
|
|
|
|
|
|
|
|
|
|
For the nine month periods ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
Net loss attributable to Common Shareholders |
|
$ |
(841,567 |
) |
|
$ |
(587,420 |
) |
Add: Stock-based compensation expense
included in reported net loss, net of
related tax effects |
|
|
72,427 |
|
|
|
91,371 |
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects |
|
|
(101,845 |
) |
|
|
(119,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to Common
Shareholders |
|
$ |
(870,985 |
) |
|
$ |
(615,545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Common
Shareholders per Common Share: |
|
|
|
|
|
|
|
|
Basic and
Diluted as reported |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
Basic and
Diluted pro forma |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
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
- 8 -
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 as of January 1, 2005, we intend to take advantage of our tax loss carryforwards before
electing to be a REIT again.
At September 30, 2005, we have net operating losses, and at December 31, 2004, we had net operating
losses totaling approximately $11.0 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 2024. Pursuant to Internal Revenue Code
regulations, Paragon will be limited to using approximately $9.1 million of the $11.0 net operating
losses. These same regulations also limit the amount of loss used in any one year.
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 September 30, 2005.
Segment Disclosure
Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information 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.
Note 4
Marketable Securities
Our investments in marketable securities are available-for-sale, as of September 30, 2005, and
represent 10,000 common shares of Stellent, Inc. (Stellent) and 100 common shares of Century
Realty Trust (Century).
As of September 30, 2005, our marketable securities had a fair market value of approximately
$88,000 (based upon the NASDAQ closing quote of $8.57 per share for Stellent and $18.91 per share
for Century on September 30, 2005). We recorded an unrealized loss on marketable securities during
2005 of approximately $2,000, resulting in a balance of approximately $49,000 in shareholders
equity for unrealized gain on marketable securities.
The NASDAQ closing quote on October 17, 2005 was $8.63 per common share of Stellent and $19.00 per
common share of Century.
We recognize gain or loss on the sale of marketable securities based upon the first-in-first-out
method.
Note 5
Mortgage Loan Payable
The mortgage loan payable secured by our residential real estate property had a balance at
September 30, 2005 of approximately $2.7 million at a fixed interest rate of 5.87% for a term of 10
years with monthly principal and interest payments of approximately $18,000 based on a 25-year
amortization schedule.
- 9 -
Note 6
Equity
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.
Effective January 2, 2004, we issued a total of 900,000 restricted common shares and 450,000 common
share options at a price of $0.27 per share to three of our officers. The market value of the
restricted common shares on the date of grant was $198,000. The options vest ratably over three
years after issuance and expire after five years from the date of issuance. During the fourth
quarter of 2004, 300,000 restricted common shares were cancelled and in the first quarter of 2005,
150,000 common share options were cancelled.
Effective February 16, 2004, 50,000 restricted common shares (issued during 2003) were cancelled.
Effective March 4, 2004 and 2005, a total of 500,000 restricted common shares are issuable to our
landlord in connection with office space and related services for the twelve months ended March 4,
2004 and 2005.
Effective June 15, 2004, we issued a total of 200,000 restricted common shares and 100,000 common
share options at a price of $0.18 per share 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 market value of the restricted common shares on the date of grant was $36,000. The options
vest one year after issuance and expire 90 days after the trustee leaves Paragons board.
Effective July 19, 2004, we committed to issue a total of 1.0 million restricted common shares to a
new officer of the Company. The initial grant of 500,000 restricted shares was cancelled June 30,
2005 upon the executives resignation of employment and no additional grants will be made.
Effective December 1, 2004, we issued 100,000 restricted common shares to a new employee of the
Company. Half of the shares will vest on December 1, 2008 and the second half will vest on December
1, 2009. The market value of the 100,000 restricted common shares issued on the date of grant was
$13,000.
Effective March 7, 2005, we issued 350,000 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 350,000 restricted common shares issued on the date of grant was $70,000.
Effective June 3, 2005, we issued a total of 200,000 restricted common shares and 100,000 common
share options at a price of $0.14 per share 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 market value of the restricted common shares on the date of grant was $28,000. The options
vest one year after issuance and expire 90 days after the trustee leaves Paragons board.
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.
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 Statement of Financial Accounting Standards No. 128, Earnings Per
- 10 -
Share (EPS) for all periods presented herein. Net loss per weighted average Common Share
outstandingbasic and net loss per weighted average Common Share outstandingdiluted 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 nine months ended September 30, 2005
and September 30, 2004 were 33,617,311 and 32,899,490, respectively. Common share equivalents of
approximately 24.4 million and 23.7 million as of September 30, 2005 and September 30, 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.
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|
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|
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|
|
|
For the nine months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
Numerator |
|
|
|
|
|
|
|
|
Net loss attributable to Common Shareholders |
|
|
(841,567 |
) |
|
|
(587,420 |
) |
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Weighted average Common Shares outstanding
at September 30, 2005 and
September 30, 2004, respectively: Basic and Diluted |
|
|
33,617,311 |
|
|
|
32,899,490 |
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS |
|
|
|
|
|
|
|
|
Net loss attributable to Common
Shareholders Basic and Diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
|
Note 8 Commitments and Contingencies
Liquidity
As of September 30, 2005, our unrestricted cash resources were approximately $917,000 and our
marketable securities available for sale were approximately $88,000. Our marketable securities
primarily represented 10,000 common shares of Stellent. The NASDAQ closing quote on
October 17, 2005 was $8.63 per common share of Stellent.
Our management team and board of trustees have formulated a value-added business strategy focused
on acquiring well located, underperforming multifamily residential properties and repositioning
them through renovation, leasing, improved management and branding. Management has been pursuing
this strategy by actively seeking and reviewing multifamily residential companies, portfolios and
properties, including affordable housing projects. While we made offers to some of the sellers, low
interest rates for debt financing have had the effect of increasing sale prices for these types of
properties. We have entered into a definitive purchase agreement to acquire for approximately $64.7
million, ten multifamily residential communities in Texas and Ohio, consisting of 1,478 units.
There can be no assurance that we will be able to close the transaction. Even if our management is
successful in closing the 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 are dependent on our existing cash and Stellent shares to meet our liquidity needs because cash
from operations is not sufficient to meet our operating requirements. Because the cash flow from
our properties is not expected to fully fund our future liquidity requirements, we have reduced our
material future obligations, which include a mortgage on the apartment community and the salaries
of our four employees. The debt service payment is being funded from the cash flow of the property
- 11 -
secured by the mortgage, and the current monthly salary for each employee is only $5,000 or less.
When we need additional resources for due diligence to review potential acquisitions, we use
independent contractors. During the months from January through September 2005, we used from one to
three independent
contractors at a cost of $4,000 to $5,000 per month for each contractor.
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 that any of these alternatives will be adopted, or if adopted, will be
successful.
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.
Note 9 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 (Hampton Court), 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 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. Related management fees of $20,000 were included for the nine months ended
September 30, 2005 and 2004. Reimbursement, at cost, for the payroll related costs paid and accrued
for the nine months ended September 30, 2005 was approximately $47,000 and for the nine month
period ended September 30, 2004 was approximately $49,000. As Paragon acquires more properties, we
intend to use local third party management companies until we are able to provide management
services internally for all our properties.
Medical Insurance Reimbursement
Paragon previously reimbursed MDC Realty Corp. for medical insurance, at cost, for one of its
executive officers. The amount paid or accrued for the nine months ended September 30, 2005 was $0
and for the nine months ended September 30, 2004 was approximately $4,000.
- 12 -
ITEM 2. 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 focused primarily on acquiring, repositioning, owning, managing and operating
multifamily apartment communities. As of September 30, 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 located near Chicago, Illinois. 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.
Paragon is also the sole member of Paragon Housing LLC, which was the general partner of River West
Apartments Limited Partnership (River West). In July 2005, Paragon Housing LLC withdrew as
general partner of River West. River West is a single asset entity owning an apartment complex of
30 units. We do not consolidate Paragon Housing LLC with Paragons financial statements because we
do not have financial or voting control over the entity, and we do not have sufficient equity at
risk for Paragon Housing LLC to finance River West activities without additional subordinated
financial support. Our exposure is limited to Paragon Housing LLCs $100 capital contribution in
River West, and we and Paragon Housing LLC are not obligated on any of the liabilities of River
West.
Paragon has developed a value-added business plan that is primarily focused on acquiring well
located, underperforming multifamily residential properties and repositioning them through
renovation, leasing, improved management, and branding. Paragons investments will be in
properties, portfolios and companies with value-added programs. Paragon intends to raise equity
through public and private offerings. 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 $64.7 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 and expect that the acquisition will close in
late 2005 or early 2006.
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, former management of the Company purchased a software technology company. As a
result of the operations of the technology company commencing in 2000, the Company did not meet the
Internal Revenue Code qualifications to be a REIT for federal tax purposes. In July 2001, former
management sold the software technology company, but continued marketing the software product. In
2002, the Company discontinued the operations of the technology segment. Although Paragon is not
taxed as a REIT for federal tax purposes, we can elect REIT status effective for 2005. We intend to
take advantage of our tax loss carryforwards before electing to be a REIT again.
Forward-Looking Information
The following is a discussion of our results of operations for the nine month and three month periods
- 13 -
ended September 30, 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 nine month period ended September 30, 2005 compared to the nine month
period ended September 30, 2004. |
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|
Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended September 30, 2005 compared to the three month
period ended September 30, 2004. |
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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 nine month period ended September 30, 2005,
and how we intend to generate cash for long-term capital needs. |
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Our current income tax status. |
This report on Form 10-QSB contains forward-looking statements for the purposes of the Securities
Act of 1933 and the Securities Exchange Act of 1934 and may involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance, and achievements of
the Company to be materially different from results, performance or achievements expressed or
implied by such forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable assumptions, there can be no
assurance that these expectations will be realized. 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, 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, failure
to acquire properties in accordance with our value added strategy, 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. For further information, refer to our
consolidated financial statements and footnotes included in the Annual Report on Form 10-KSB for
the year ended December 31, 2004.
The following discussion and analysis should be read in conjunction with the financial statements
and associated notes appearing at the beginning of this report.
Results of Operations
Comparison of the Nine Month Periods Ended September 30, 2005 and 2004
Revenues from Operations
Rental revenue was approximately $454,000 for the nine month period ended September 30, 2005 and
$456,000 for the nine month period ended September 30, 2004. Rental revenue was comprised entirely
of Richton Trail.
Interest and other revenue decreased by approximately $8,000 to approximately $31,000 for the nine
month period ended September 30, 2005 compared to the nine month period ended September 30, 2004.
The decrease is primarily due to the decrease in cash and cash equivalents between the periods.
Cash was used during 2004 and 2005 to fund the operation of the Company while we implement our
value-added acquisition strategy.
Expenses from Operations
Total expenses increased from approximately $1,157,000 for the nine month period ended
- 14 -
September 30, 2004 to approximately $1,309,000 for the nine month period ended September 30, 2005,
a net increase of approximately $152,000. The $152,000 increase includes a decrease of
approximately
$6,000 related to Richton Trail and an increase in general and administrative expense of
approximately $158,000.
Richton Trail expenses decreased approximately $6,000 from approximately $440,000 for the nine
month period ended September 30, 2004 to approximately $434,000 for the nine month period ended
September 30, 2005. Property operating and maintenance expense decreased approximately $11,000 as
the result of decreased legal expense of approximately $7,000 and decreased utilities expense of
approximately $4,000. Interest expense decreased approximately $3,000. These decreases are offset
by increases in property taxes of approximately $2,000, increased insurance cost of approximately
$3,000 and increased depreciation expense of approximately $3,000.
General and administrative expenses increased from approximately $717,000 for the nine month period
ended September 30, 2004 to approximately $875,000 for the nine month period ended September 30,
2005. The increase of approximately $158,000 resulted from due diligence being performed on
potential transactions, including legal fees, general consulting costs, and other miscellaneous
items including travel costs for visiting properties.
Loss from operations before minority interest
As a result of the above, loss from operations before loss allocated to minority interest increased
from approximately $663,000 for the nine month period ended September 30, 2004 to approximately
$824,000 for the nine month period ended September 30, 2005.
Loss allocated to minority interest
Loss allocated to minority interests changed from approximately $75,000 of loss allocated for the
nine month period ended September 30, 2004 to an income allocation of approximately $18,000 for the
nine month period ended September 30, 2005. This is primarily as a result of fewer costs being
allocated for the nine month period ended on September 30, 2005 compared to the same period in
2004.
Net loss attributable to Common Shareholders
Based on the above, the net loss attributable to common shareholders increased from approximately
$587,000 for the nine month period ended September 30, 2004 to approximately $842,000 for the nine
month period ended September 30, 2005.
Comparison of the Three Month Periods Ended September 30, 2005 and 2004
Revenues from Operations
Rental revenue was approximately $153,000 for the three month period ended September 30, 2005 and
$160,000 for the three month period ended September 30, 2004. Rental revenue was comprised
entirely of Richton Trail.
Expenses from Operations
Total expenses decreased from approximately $406,000 for the three month period ended September 30,
2004 to approximately $317,000 for the three month period ended September 30, 2005, a net decrease
of approximately $89,000. Of the $89,000 decrease, approximately $13,000 is related to Richton
Trail and the balance of approximately $76,000 is a decrease in general and administrative expense.
Richton Trail total expense decreased approximately $13,000 for the three month period ended
September 30, 2005 compared to the three month period ended September 30, 2004. The decreases were
in utilities, repairs and maintenance, legal, and bad debt expense, which are included in property,
- 15 -
operating and maintenance expenses.
General and administrative expenses decreased from approximately $253,000 for the three month
period ended September 30, 2004 to approximately $177,000 for the three month period ended
September 30, 2005. The decrease of approximately $76,000 was the result of reduced outside
accounting costs of approximately $31,000 because we are performing more of accounting functions
internally, lower legal costs of approximately $27,000 because of litigation resolved in 2004, and
lower stock exchange fees of approximately $18,000 related to listing our stock-based employee
compensation plan in 2004.
Loss from operations before minority interest
As a result of the above, loss from operations before income allocated to minority interest
decreased from approximately $235,000 for the three month period ended September 30, 2004 to
approximately $153,000 for the three month period ended September 30, 2005.
Income allocated to minority interest
Income allocated to minority interests increased from approximately $6,000 of income allocated for
the three month period ended September 30, 2004 to approximately $15,000 for the three month period
ended September 30, 2005.
Net loss attributable to Common Shareholders
Based on the above, the net loss attributable to common shareholders decreased from approximately
$241,000 for the three month period ended September 30, 2004 to approximately $168,000 for the
three month period ended September 30, 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, among various other factors. 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 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
- 16 -
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.
Deferred Acquisition Costs
We entered into an agreement to acquire for $64.7 million, ten apartment communities in Texas and
Ohio, consisting of 1,478 units, which is subject to the completion of due diligence, Paragons
obtaining financing and other customary closing conditions. We defer costs incurred to acquire the
properties until closing. If this acquisition is not successful, these costs would be expensed in
a future period.
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. As of September 30, 2005, we have net operating losses and
at December 31, 2004, we had net operating losses totaling approximately $11.0 million and capital
losses of approximately $0.6 million. While these losses created a deferred tax asset of
approximately $4.8 million, a valuation allowance of $4.8 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 2024. Pursuant to Internal Revenue Code regulations,
Paragon will be limited to using approximately $9.1 million of the $11.0 net operating losses.
These same regulations also limit the amount of loss used in any one year.
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 Paragon. Historically, we
have used these sources to fund operating expenses, satisfy our 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.
Cash Flows
As of September 30, 2005, our unrestricted cash resources were approximately $917,000 and our
marketable securities available for sale were approximately $88,000, comprised primarily of 10,000
common shares of Stellent, Inc. The NASDAQ closing quote on October 17, 2005 was $8.63 per common
share of Stellent, Inc. We are dependent on our existing cash resources and Stellent, Inc. shares
to meet our liquidity needs because cash from operations is not sufficient to meet our operating
requirements.
During the nine month period ended September 30, 2005, we used cash for (i) our continuing
operations of approximately $816,000 including increased due diligence on potential transactions of
approximately $232,000 and refundable escrow deposits of $75,000 for the acquisition of property;
(ii) additions to real estate properties of approximately $27,000; and (iii) payments on the
mortgage loan payable of approximately $39,000. As a result, our cash balance decreased by
approximately $882,000 from approximately $1,799,000 at December 31, 2004 to approximately $917,000
at September 30, 2005.
- 17 -
Future Obligations
Because the cash flow from our properties is not expected to fully fund our future liquidity
requirements, we reduced our material future obligations, which include the mortgage on Richton
Trail 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%.
So long as Richton Trail maintains approximately 85% 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.
Improvements to be made at the property through December 31, 2005 will be funded with cash
generated from its operations. |
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As of September 30, 2005, we had four employees, and each employees monthly salary is
$5,000 or less. The Company has the benefit of highly qualified employees in the real
estate industry and other areas of expertise, for salaries that are well below market
levels. Several of them have previous experience with publicly traded companies. As the
Company grows and appreciates in value, our employees expect to share in the growth of the
Company and to earn higher levels of compensation. Our employees will also share in the
growth of the Company along with our other shareholders, because each has been incented by
the grant of a significant number of common shares. |
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|
We entered into an agreement to acquire for $64.7 million, ten apartment communities in
Texas and Ohio, consisting of 1,478 units, which is subject to the completion of due
diligence, Paragons obtaining financing and other customary closing conditions. We are
exploring a variety of capital raising alternatives and expect the acquisition to close in
late 2005 or early 2006. |
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; |
|
|
|
|
Additional equity issuances of our common and preferred shares; and |
|
|
|
|
Proceeds from the sales of our real estate and technology segment. |
Paragon has developed a value-added business plan that is primarily focused on acquiring well
located, under-performing multifamily residential properties and repositioning them through
renovation, leasing, improved management, and branding. Paragons investments will be in
properties, portfolios and companies with value-added programs. Paragon intends to raise equity
through public and private offerings. We may also use joint venture structures for property and
portfolio acquisitions, and tax-deferred operating partnership units for acquisitions of companies.
Failure to obtain external sources of capital or to find sellers willing to exchange their
properties for tax-deferred partnership units will materially and adversely affect our strategy and
our operations, liquidity and financial results. Paragons investment advantages, compared to
private companies, include our potential ability to access capital and to offer sellers a
tax-deferred exit alternative to exchange their properties for partnership units with opportunities
for both liquidity and share appreciation. Our cash resources are sufficient to meet our projected
overhead for approximately twelve months while identifying and reviewing potential acquisitions.
American Stock Exchange Listing
In September 2005, the American Stock Exchange notified us we were not in compliance with
- 18 -
continued
listing requirements related to shareholders equity being less than $6 million and losses from
continuing operations and net losses for the past five years. In addition the exchange recommended
a reverse split of our common shares because the price per share has been below $0.24 for the last
12 months. In response to a letter received from the exchange in December 2004, we submitted a plan
to the exchange to regain compliance with the continuing listing standards, which the exchange
determined made a reasonable demonstration for the Company to regain compliance by December 2, 2005
and is subject to periodic review by the exchange to determine if we are making progress consistent
with the plan. In addition, in June 2005 at the annual meeting, the shareholders approved our board
of trustees to effect a reverse split of our common shares at the appropriate time. If we are not
in compliance with the listing standards by December 2, or we do not make progress consistent with
the plan, our common shares will be subject to delisting proceedings. In the interim, our common
shares continue to trade on Amex.
Current Tax Status
At September 30, 2005, we have a net operating loss, and at December 31, 2004, we had net operating
losses totaling approximately $11.0 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 2024. Pursuant to Internal Revenue Code
regulations, Paragon will be limited to using approximately $9.1 million of the $11.0 net operating
losses. These same regulations also limit the amount of loss used in any one year. Although we can
elect REIT status effective for 2005, we intend to take advantage of our tax loss carryforwards
before electing to be a REIT again.
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
For the past several years, interest rates have declined, and many financial experts and economists
have agreed that interest rates reached bottom in 2003. Lower interest rates have led to higher
selling prices for established real estate properties, the type that we intend to buy. Purchasers
of properties have been able to place a larger amount of debt on their acquisitions because the
lower interest rates have lowered the monthly mortgage payments. Interest rates started to
increase during 2004, but asking prices for multifamily residential properties have not decreased.
The interactions between an increase in interest rates and a decrease in selling prices of
properties cannot be measured with any certainty. Paragon continues to pursue its value-added
business plan during 2005. The economics of transactions, including price, current cash flow,
existing debt, cost of new funds for acquiring the properties, and potential for increased value,
will be reviewed closely prior to making any acquisitions.
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.
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ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2005, the date of this report, James C. Mastandrea, our Chairman of the Board,
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 September 30, 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 September 30, 2005.
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PART II. OTHER INFORMATION
ITEM 1. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 after five years from the date issued.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
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|
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Exhibit |
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|
Number |
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Exhibit Description |
|
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) |
|
|
|
31.1
|
|
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
Principal Executive Officer |
|
|
|
31.2
|
|
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
Principal Financial Officer |
|
|
|
32.1
|
|
CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002.
|
- 21 -
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: October 17, 2005
|
|
|
|
James C. Mastandrea |
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
Paragon real estate equity and investment trust |
|
|
By:
|
|
/s/ John J. Dee |
|
|
|
|
|
Date: October 17, 2005
|
|
|
|
John J. Dee |
|
|
|
|
Chief Financial Officer |
- 22 -