PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
Commission File Number:
0-25074
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
|
|
|
Maryland
(State or other jurisdiction of incorporation)
|
|
39-6594066
(I.R.S. Employer Identification Number) |
|
|
|
1240 Huron Road, Cleveland, OH
(Address of principal executive offices)
|
|
44115
(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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes þ No o
As of November 10, 2006, the issuer had 442,565 common shares outstanding, including 38,130 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
|
|
|
|
|
PART I. Financial Information |
|
|
|
|
|
|
|
|
|
Item 1. Financial Statements |
|
|
|
|
|
|
Page - 2 - |
|
|
|
|
|
|
|
Page - 3 - |
|
|
|
|
|
|
|
Page - 4 - |
|
|
|
|
|
|
|
Page - 5 - |
|
|
|
|
|
|
|
Page - 6 - |
|
|
|
|
|
|
|
Page - 16 - |
|
|
|
|
|
|
|
Page - 24 - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page - 24 - |
|
|
|
|
|
|
|
Page - 24 - |
|
|
|
|
|
|
|
Page - 24 - |
|
|
|
|
|
|
|
Page - 24 - |
|
|
|
|
|
|
|
Page - 24 - |
|
|
|
|
|
|
|
Page - 24 - |
|
|
|
|
|
|
|
Page - 25 - |
|
|
|
|
|
EX - 31.1 Section 302 Certification of Chief Executive Officer |
|
|
|
|
EX - 31.2 Section 302 Certification of Chief Financial Officer |
|
|
|
|
EX - 32.1 CEO/CFO Under 906 of Sarbanes-Oxley Act |
|
|
|
|
EX-31.1 |
EX-31.2 |
EX-32.1 |
- 1 -
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Balance Sheet
September 30, 2006
(unaudited)
|
|
|
|
|
Assets |
|
|
|
|
Investments in equipment: |
|
|
|
|
Furniture, fixtures and equipment |
|
$ |
5,370 |
|
Accumulated depreciation and amortization |
|
|
(1,841 |
) |
|
Net investments in equipment |
|
|
3,529 |
|
Cash and cash equivalents |
|
|
226,078 |
|
Other assets, net |
|
|
10,991 |
|
|
Total Assets |
|
$ |
240,598 |
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
Liabilities: |
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
84,645 |
|
|
Total liabilities |
|
|
84,645 |
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
Preferred A Shares $0.01 par value,
10,000,000 authorized: 277,955 Class A
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference |
|
|
2,780 |
|
Preferred C Shares $0.01 par value,
300,000 authorized: 244,444 Class C
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference |
|
|
2,444 |
|
Common Shares $0.01 par value,
100,000,000 authorized; 442,565 shares
issued and outstanding |
|
|
4,426 |
|
Additional paid-in capital |
|
|
30,546,156 |
|
Accumulated deficit |
|
|
(26,276,309 |
) |
Treasury stock, at cost, 38,130 shares |
|
|
(800,735 |
) |
Unearned compensation and trustees fees |
|
|
(2,947,809 |
) |
Subscriptions receivable Preferred C Shares |
|
|
(375,000 |
) |
|
Total shareholders equity |
|
|
155,953 |
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity |
|
$ |
240,598 |
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, |
|
|
2006 |
|
2005 |
Revenues |
|
|
|
|
|
|
|
|
Interest and other |
|
$ |
4,149 |
|
|
$ |
16,617 |
|
|
Total revenues |
|
|
4,149 |
|
|
|
16,617 |
|
|
Expenses |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
806 |
|
|
|
652 |
|
General and administrative |
|
|
345,264 |
|
|
|
874,964 |
|
|
Total expenses |
|
|
346,070 |
|
|
|
875,616 |
|
|
Loss from operations |
|
|
(341,921 |
) |
|
|
(858,999 |
) |
Gain on sale of marketable securities |
|
|
777 |
|
|
|
|
|
|
Loss from continuing operations |
|
|
(341,144 |
) |
|
|
(858,999 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations of
residential properties before
allocation to
minority interest |
|
|
12,448 |
|
|
|
35,239 |
|
Income allocated to minority interest |
|
|
(12,324 |
) |
|
|
(35,059 |
) |
|
Net loss attributable to Common Shareholders |
|
|
(341,020 |
) |
|
|
(858,819 |
) |
|
Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted |
|
$ |
(0.77 |
) |
|
$ |
(1.92 |
) |
|
Weighted average number of Common Shares
outstanding: Basic and Diluted |
|
|
442,560 |
|
|
|
448,231 |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(341,020 |
) |
|
$ |
(858,819 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities |
|
|
|
|
|
|
(2,358 |
) |
|
Comprehensive loss |
|
$ |
(341,020 |
) |
|
$ |
(861,177 |
) |
|
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)
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
2006 |
|
2005 |
Revenues |
|
|
|
|
|
|
|
|
Interest and other |
|
$ |
1,046 |
|
|
$ |
5,177 |
|
|
Total revenues |
|
|
1,046 |
|
|
|
5,177 |
|
|
Expenses |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
269 |
|
|
|
269 |
|
General and administrative |
|
|
84,135 |
|
|
|
177,469 |
|
|
Total expenses |
|
|
84,404 |
|
|
|
177,738 |
|
|
Loss from operations |
|
|
(83,358 |
) |
|
|
(172,561 |
) |
Gain on sale of marketable securities |
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(83,358 |
) |
|
|
(172,561 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations of
residential properties before
allocation to
minority interest |
|
|
|
|
|
|
19,824 |
|
Income allocated to minority interest |
|
|
|
|
|
|
(19,672 |
) |
|
Net loss attributable to Common Shareholders |
|
|
(83,358 |
) |
|
|
(172,409 |
) |
|
Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted |
|
$ |
(0.19 |
) |
|
$ |
(0.39 |
) |
|
Weighted average number of Common Shares
outstanding: Basic and Diluted |
|
|
442,555 |
|
|
|
447,221 |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(83,358 |
) |
|
$ |
(172,409 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities |
|
|
|
|
|
|
10,887 |
|
|
Comprehensive loss |
|
$ |
(83,358 |
) |
|
$ |
(161,522 |
) |
|
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, |
|
|
2006 |
|
2005 |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(341,020 |
) |
|
$ |
(858,819 |
) |
Adjustments to reconcile net loss to net cash used in
continuing operations: |
|
|
|
|
|
|
|
|
Compensation costs and trustees fees incurred
through the issuance of shares |
|
|
8,983 |
|
|
|
72,427 |
|
Compensation costs, trustees fees and legal costs
incurred through the issuance of options |
|
|
53,082 |
|
|
|
|
|
Rent expense incurred through the issuance of
restricted shares |
|
|
|
|
|
|
51,500 |
|
Depreciation and amortization |
|
|
806 |
|
|
|
652 |
|
Income from discontinued operations, net of
allocation to minority interest |
|
|
(124 |
) |
|
|
(180 |
) |
Gain on sale of marketable securities |
|
|
(777 |
) |
|
|
|
|
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
Other assets, net |
|
|
113,313 |
|
|
|
(69,268 |
) |
Accounts payable and accrued expenses |
|
|
(75,162 |
) |
|
|
(113,532 |
) |
|
Net cash used in continuing operations |
|
|
(240,899 |
) |
|
|
(917,220 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Cash proceeds from sale of marketable securities |
|
|
1,953 |
|
|
|
|
|
Purchase of equipment |
|
|
|
|
|
|
(3,070 |
) |
|
Net cash from (used in) investing activities |
|
|
1,953 |
|
|
|
(3,070 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Cash proceeds from issuance of Preferred C shares |
|
|
125,000 |
|
|
|
|
|
|
Net cash from financing activities
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(113,946 |
) |
|
|
(920,290 |
) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
340,024 |
|
|
|
1,629,350 |
|
|
End of period |
|
$ |
226,078 |
|
|
$ |
709,060 |
|
|
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 with its primary focus on searching for and reviewing value-added real
estate deals, including land development, retail, office, industrial, hotel, and joint venture
investments. In the third quarter of 2006, three independent members of the Board of Trustees
signed subscription agreements to purchase 125,000 Class C Convertible Preferred Shares for an
aggregate contribution of $500,000 cash, and James C. Mastandrea, Paragons President, Chief
Executive Officer and Chairman of the Board of Trustees, signed a similar agreement to purchase
Class C Convertible Preferred Shares in exchange for his compensation for services to Paragon for
the following two years ended September 29, 2008. Additional information related to the Class C
Convertible Preferred Shares is described in the equity note to these financial statements.
Effective July 27, 2006, the Board of Trustees approved a reverse share split of 1-for-75 for the
outstanding common shares. Information related to the number of common shares and the earnings per
share have been restated in the accompanying financial statements and related footnotes to reflect
this reverse split.
Effective March 31, 2006, the Company transferred its interest in Paragon Real Estate, LP, the
operating partnership that owned Richton Trail Apartments (Richton Trail), to Hampton Court
Associates, the sole limited partner of Paragon Real Estate, LP. The Company is no longer the
general partner of Paragon Real Estate, LP and will not be liable for the mortgage loan of
approximately $2.7 million secured by Richton Trail. The Company cancelled the right of Hampton
Court Associates to redeem 813,938 partnership units of Paragon Real Estate, LP for cash after July
1, 2007, or at the option of the Company, for each unit to be converted into 22.881 of the
Companys common shares. In connection with the cancellation of the right to redeem the
partnership units of Paragon Real Estate, LP, the Company also recorded an increase of
approximately $825,000 to its additional paid in capital based on the cancellation of indebtedness
to Paragon Real Estate, LP.
In our financial statements, we consolidated the revenues and expenses of Richton Trail for the
quarter ended March 31, 2006, which are shown as discontinued operations for the nine months ended
September 30, 2006 and the three and nine months ended September 30, 2005 because of the transfer
of our 1.0% interest to Hampton Court Associates as of March 31, 2006.
Note 2
Basis of Presentation
Consolidated Financial Statement Presentation
We have prepared the consolidated financial statements without audit pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). 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,
2006, the results of our operations for the nine month and three month periods ended September 30,
2006 and 2005, and of our cash flows for the nine month periods ended September 30, 2006 and 2005
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, 2005.
- 6 -
We report our investments using the consolidated method of accounting because we own the
outstanding voting interests and can control their operations. In the consolidation method, the
accounts of these entities are combined with our accounts. All significant intercompany
transactions are eliminated in consolidation.
The Company was the sole general partner of Paragon Real Estate, LP and owned a 1.0% interest until
March 31, 2006 when that 1.0% interest was transferred to Hampton Court Associates, the sole
limited partner of Paragon Real Estate, LP. Therefore, at September 30, 2006, this investment is
no longer consolidated with the Company.
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 and paying liabilities in the
normal course of business. The Company has received the first quarterly installment of $125,000
from three trustees for payment of Class C Convertible Preferred Shares, which is to be used to
maintain Paragon as a public shell current in its SEC filings. The Company has continued to incur
net losses and at September 30, 2006, had unrestricted cash of approximately $226,000. 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. The decrease in cash during the three quarters ended September 30, 2006 was
approximately $114,000, mainly for expenses to keep the Company operating as a public company,
offset by the first quarterly installment of $125,000 for the purchase of Class C Convertible
Preferred Shares. Our ability to continue as a going concern will be dependent upon our acquiring
assets to generate cash flow.
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 Company filed a registration statement
with the SEC in October 2005, which the SEC did not review, thereby 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 the American Stock Exchange (Amex) because its book equity was less than the $6
million minimum requirement, it had sustained 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. Additionally,
without the funds from the public offering, the Company was unable to complete the acquisition of
the apartment portfolio and the contract was terminated in April 2006.
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, we
have been reviewing other alternatives, including selling the corporate entity and seeking
additional investors. Three independent trustees signed subscription agreements to purchase
125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000 cash to
maintain the Company as a corporate shell current in its SEC filings so that it may be used in the
future for real estate deals or sold to another company. During the third quarter of 2006, the
Company received the first quarterly installment of $125,000 from three trustees for payment of
Class C Convertible Preferred Shares. There can be no assurance that we will be able to close a
transaction or keep the Company currently filed with the SEC. Even if our management is successful
in closing a transaction, investors may not
- 7 -
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. Failure to obtain external sources of capital
and complete a transaction will materially and adversely affect the Companys ability to continue
operations.
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, 2006, and the reported amounts of revenues and expenses for the three and nine
month periods ended September 30, 2006 and 2005. Actual results could differ from those estimates.
Significant estimates include the valuation of deferred taxes and a related allowance, and these
significant estimates, as well as other estimates and assumptions, may change in the near term.
Investments in Equipment
Our investments in equipment assets were reported at the lower of cost or estimated net realizable
value.
Depreciation expense was computed using the straight-line method based on the following useful
lives:
|
|
|
|
|
Years |
Furniture, fixtures and equipment
|
|
3-7 |
Cash
We maintain our cash in bank accounts in amounts that may exceed federally insured limits at times.
Other Assets
As of September 30, 2006, other assets of approximately $11,000 is prepaid insurance.
Revenue Recognition
Revenues from rental property were recognized when due from tenants. Leases were generally for
terms of one year or less.
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123R), which replaced Statement of
Financial Account Standards No. 123 Accounting for Stock-Based Compensation (SFAS 123) and
superseded Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. SFAS 123R requires the measurement and recognition of compensation expense for all
share-based payment awards to employees and directors based on estimated fair values, eliminating
pro forma disclosure as an alternative. The cost is measured based on the grant-date fair value of
the equity or liability instruments issued. SFAS 123R is effective for small business filers as of
the first interim or annual period that begins after December 31, 2005.
Effective January 1, 2006, the Company adopted the provisions of SFAS 123 using the modified
prospective transition method. Under this transition method, compensation expense recognized
during
- 8 -
the three months and nine months ended September 30, 2006 equals approximately $16,000 and
$53,000, respectively, and reflects (a) compensation expense for all share-based awards granted
prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value estimated
in accordance with the original provisions of SFAS 123, and (b) compensation expense for all
share-based awards granted subsequent to December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. The Company did not grant any
share-based awards during the first nine months of 2006. In accordance with the modified
prospective transition method, the Companys Consolidated Financial Statements for prior periods
have not been restated to reflect the impact of SFAS 123R.
The Company records compensation expense for employee stock options based on the estimated fair
value of the options on the date of grant using the Black Scholes model with the assumptions
included in the table below. The Company uses historical data among other factors to estimate the
expected price volatility, the expected option life and the expected forfeiture rate. The risk-free
rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated
life of the option. At September 30, 2006, we had one stock-based employee compensation plan.
During the nine months ended September 30, 2006, we did not issue or cancel any common share options or restricted share grants.
During the six months ended June 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 six months ended
June 30, 2005. The following table includes the ranges of the assumptions that were used to
estimate the fair value of unvested options outstanding at September 30, 2006.
|
|
|
Dividend yield
|
|
0.0% |
Expected volatility
|
|
168.9 175.5% |
Risk free interest rate
|
|
3.40 4.05% |
Expected lives
|
|
5 10 years |
Prior to January 1, 2006, the Company accounted for the grants of options and restricted
shares using the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations. Had compensation cost for share-based
awards been determined consistent with SFAS 123R, the net income and earnings per share would have
been adjusted to the following pro forma amounts for the nine month period ended September 30,
2005:
|
|
|
|
|
|
|
For the nine month period ended |
|
|
September 30, 2005 |
Net loss attributable to Common Shareholders |
|
$ |
(858,819 |
) |
Add: Stock-based employee compensation expense
included in reported net loss, net of related tax
effects |
|
|
72,427 |
|
|
|
|
|
|
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects |
|
|
(101,845 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss attributable to Common Shareholders |
|
$ |
(888,237 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Common Shareholders per
Common Share: |
|
|
|
|
Basic and
Diluted as reported |
|
$ |
(1.92 |
) |
|
|
|
|
|
Basic and
Diluted pro forma |
|
$ |
(1.98 |
) |
|
|
|
|
|
- 9 -
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 in 2005, we intend to take advantage of our tax loss carryforwards
before qualifying to be a REIT again.
At September 30, 2006, we have net operating losses, and at December 31, 2005, we had 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.
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.
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.
Note 4
Marketable Securities
As of September 30, 2006, we did not have any marketable securities. We sold our 100 common shares
of Century Realty Trust in April 2006 for approximately $2,000.
We recognize gain or loss on the sale of marketable securities based upon the first-in-first-out
method.
Note 5
Equity
Effective September 29, 2006, Paragon filed articles supplementary to its declaration of trust, as
amended, restated and supplemented with the State Department of Assessment and Taxation of Maryland
designating 300,000 Class C Convertible Preferred Shares. Dividends for the holders of the Class C
Convertible Preferred Shares are at the discretion of the trustees. The Class C Convertible
Preferred Shares have voting rights equal to the number of common shares into which they are
convertible. Each Class C Convertible Preferred Share is convertible into common shares by
dividing by the sum of $10.00 and any accrued but unpaid dividends on the Class C Convertible
Preferred Shares by the conversion price of $1.00. The Class C convertible Preferred Shares have a
liquidation preference of $10.00 per share, plus any accrued but unpaid dividends, and can be
redeemed by the Board of Trustees at any time, with notice, at the same price per share.
Effective September 29, 2006, three independent trustees of Paragon signed subscription agreements
to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000
cash to maintain Paragon as a corporate shell current in its SEC filings and will receive Class C
Convertible Preferred Shares. The trustees paid the first quarterly installment of $125,000 during
the third quarter of 2006.
- 10 -
In addition, on September 29, 2006, James C. Mastandrea, President, Chief Executive Officer, and
Chairman of the Board of Trustees of Paragon, signed a subscription agreement whereby he will
purchase 44,444 restricted shares of Class C Convertible Preferred Shares. The consideration for
the purchase will be Mr. Mastandreas services as an officer of Paragon for the period beginning
September 29, 2006 and ending September 29, 2008. The Class C Convertible Preferred Shares are
subject to forfeiture and restricted from being sold by Mr. Mastandrea until the latest to occur of
a public offering by Paragon sufficient to liquidate the Class C Convertible Preferred Shares, an
exchange of Paragons existing shares for new shares, or September 29, 2008.
Each of the trustees of Paragon, namely Daryl J. Carter, John J. Dee, Daniel G. DeVos, Paul T.
Lambert, James C. Mastandrea and Michael T. Oliver, signed a restricted share agreement with
Paragon, dated September 29, 2006, to receive a total of 12,500 restricted Class C Convertible
Preferred Shares in lieu of receiving fees in cash for service as a trustee for the two years
ending September 29, 2008. The restrictions on the Class C Convertible Preferred Shares will be
removed upon the latest to occur of a public offering by Paragon sufficient to liquidate the Class
C Convertible Preferred Shares, an exchange of Paragons existing shares for new shares, or
September 29, 2008.
Effective July 27, 2006, the Board of Trustees approved a reverse share split of 1-for-75 for the
outstanding common shares. Shareholders approved a proposal at the June 3, 2005 annual meeting
authorizing the Board, at its discretion, to determine the timing of the reverse share split and
declare the split at one of four ratios. Information related to the number of common shares and
the earnings per share have been restated in the accompanying financial statements and related
footnotes to reflect this reverse split.
During the nine months ended September 30, 2006, 200 preferred shares were converted to 9.2 common
shares (post-reverse split), at a conversion rate of 0.0460 common shares (post-reverse split) for
each preferred share. On July 7, 2005, 300 preferred shares were converted to 13.8 common shares,
at a conversion rate of 0.0460 common shares (post-reverse split) for each preferred share.
No options were issued or cancelled during the nine month period ended September 30, 2006.
Effective March 31, 2006, the Company cancelled the right of Hampton Court Associates to redeem
813,938 partnership units of Paragon Real Estate, LP for cash after July 1, 2007, or at the option
of the Company, for each unit to be converted into 0.305 (post-reverse split) of the Companys
common shares after the Company transferred its 1.0% interest in Paragon Real Estate, LP, the
operating partnership that owns Richton Trail Apartments (Richton Trail), to Hampton Court
Associates, the sole limited partner of Paragon Real Estate, LP. In connection with the
cancellation of the right to redeem the partnership units of Paragon Real Estate, LP, the Company
also recorded an increase of approximately $825,000 to its additional paid in capital based on the
cancellation of indebtedness to Paragon Real Estate, LP.
Note 6
Loss Per Share
Effective July 27, 2006, the Board of Trustees approved a reverse share split of 1-for-75 for the
outstanding common shares. Information related to the number of common shares and the earnings per
share have been restated in the accompanying financial statements and related footnotes to reflect
this reverse split.
The Company has adopted the Statement of Financial Accounting Standards No. 128, Earnings Per
Share for all periods presented herein. Net loss per weighted average common share
outstandingbasic 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 nine
months ended September 30, 2006 and September 30, 2005 were 442,560 and 448,231, respectively.
Common share equivalents of 2,520,733 and 325,685 as of September 30, 2006 and September 30, 2005,
respectively,
- 11 -
include outstanding convertible preferred class A shares, convertible preferred class C shares
(2006 only), warrants, stock options and limited partnership units (2005 only), and are not
included in net loss per weighted average Common Share outstandingdiluted as they would be
anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, |
|
|
2006 |
|
2005 |
Numerator |
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
$(341,144 |
) |
|
|
$(858,999 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations of
residential properties before allocation to
minority interest |
|
|
12,448 |
|
|
|
35,239 |
|
Income allocated to minority interest |
|
|
(12,324 |
) |
|
|
(35,059 |
) |
|
|
|
|
|
|
|
|
|
Net loss attributable to Common Shareholders |
|
|
$(341,020 |
) |
|
|
$(858,819 |
) |
|
Denominator |
|
|
|
|
|
|
|
|
Weighted average Common Shares outstanding
at June 30, 2006 and June 30, 2005,
respectively: Basic and Diluted |
|
|
442,560 |
|
|
|
448,231 |
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
$ (0.77 |
) |
|
|
$ (1.92 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations of
residential properties before allocation
to minority interest |
|
|
0.00 |
|
|
|
0.00 |
|
Income allocated to minority interest |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Common
Shareholders: |
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
$ (0.77 |
) |
|
|
$ (1.92 |
) |
|
Note 7
Commitments and Contingencies
Liquidity
As of September 30, 2006, our unrestricted
cash resources were approximately $226,000.
Three of our independent trustees signed subscription agreements to purchase 125,000 Class C
Convertible Preferred Shares for an aggregate contribution $500,000 cash. During the third quarter
of 2006, they paid the first quarterly installment of $125,000, which will be used to maintain
Paragon as a corporate shell current with its SEC filings.
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 did not review, thereby 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
- 12 -
Amex because its book equity was less than the $6 million minimum requirement, it had sustained
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.
Failure to obtain external sources of capital will materially and adversely affect the Companys
ability to continue its operations.
We are dependent on our existing cash to meet our liquidity needs and 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 was being funded from the cash flow of Richton Trail
and the Company will not be liable for the mortgage payment because it transferred its 1.0%
interest in Paragon Real Estate, LP, the owner of Richton Trail, to the sole limited partner
Hampton Court Associates.
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 has also
been reviewing the sale of the corporate entity and seeking additional investors. The Company
received the first quarterly installment of $125,000 from three trustees for payment of Class C
Convertible Preferred Shares, which is to be used to maintain Paragon as a public shell current
with its SEC filings. The Board of Trustees intends to keep the Company as a corporate shell that
may be used in the future for real estate deals or sold to another company. There can be no
assurance that any of the 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 8
Discontinued Operations
Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the
operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited
partner of Paragon Real Estate, LP.
In our financial statements prior to the transfer of our 1.0% interest as of March 31, 2006, we
consolidated the revenues and expenses of Richton Trail. As of September 30, 2006, the revenues
and expenses of Richton Trail are shown as discontinued operations for the nine months ended
September 30, 2006 and the three months and nine months ended September 30, 2005 because of the
transfer of our 1.0% interest as of March 31, 2006. The following tables summarize the income from
discontinued operations of Richton Trail. The nine month period ended September 30, 2006 includes
only three months of discontinued operations through March 31, 2006, which was the date of the
transfer. The nine month period ended September 30, 2005 contains nine months of discontinued
operations.
- 13 -
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, |
|
|
2006 |
|
2005 |
Revenues |
|
|
$163,926 |
|
|
|
$468,387 |
|
Operating expenses |
|
|
(88,288 |
) |
|
|
(243,892 |
) |
Depreciation and amortization |
|
|
(23,476 |
) |
|
|
(67,037 |
) |
Interest expense |
|
|
(39,714 |
) |
|
|
(122,219 |
) |
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
$ 12,448 |
|
|
|
$ 35,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
2006 |
|
2005 |
Revenues |
|
|
$ |
|
|
|
$158,638 |
|
Operating expenses |
|
|
|
|
|
|
(75,133 |
) |
Depreciation and amortization |
|
|
|
|
|
|
(22,687 |
) |
Interest expense |
|
|
|
|
|
|
(40,994 |
) |
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
$ |
|
|
|
$ 19,824 |
|
|
Note 9
Related Party Transactions
Richton Trail Disposition and Previous Acquisition and Management Fees
Effective September 29, 2006, three independent trustees of Paragon signed subscription agreements
to purchase 125,000 Class C Convertible Preferred Shares for an aggregate contribution of $500,000
cash to maintain Paragon as a corporate shell current in its SEC filings and will receive Class C
Convertible Preferred Shares. In addition, James C. Mastandrea, President, Chief Executive
Officer, and Chairman of the Board of Trustees of Paragon, signed a subscription agreement whereby
he will purchase 44,444 restricted Class C Convertible Preferred Shares by his providing services
as an officer of Paragon for the period beginning September 29, 2006 and ending September 29, 2008.
Each of the trustees of Paragon, namely Daryl J. Carter, John J. Dee, Daniel G. DeVos, Paul T.
Lambert, James C. Mastandrea and Michael T. Oliver, signed a restricted share agreement with
Paragon to receive a total of 12,500 restricted Class C Convertible Preferred Shares in lieu of
receiving fees in cash for service as a trustee for the two years ending September 29, 2008.
Additional information related to the Class C Convertible Preferred Shares is described in the
equity note to these financial statements.
As of March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the
operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited
partner of Paragon Real Estate, LP. The Company is no longer the general partner of Paragon Real
Estate, LP and will not be liable for the mortgage loan secured by Richton Trail. Hampton Court
Associates is a partnership controlled by James C. Mastandrea, its general partner and our
Chairman, Chief Executive Officer and President. Previously, on July 1, 2003, we purchased Richton
Trail from Hampton Court Associates by issuing 813,938 partnership units to Hampton Court
Associates, which were redeemable after four years for cash, or at the option of the Company, for
0.305 (post-reverse split) common shares for each unit. As of March 31, 2006, when the Company
transferred its 1.0% interest in Paragon Real Estate, LP, the Company cancelled the right of
Hampton Court Associates to redeem the partnership units of Paragon Real Estate, LP for cash or for
the Companys common shares. In connection with the cancellation of the right to redeem the
partnership units of Paragon Real Estate, LP, the Company also recorded an increase of
approximately $825,000 to its additional paid in capital based on the cancellation of indebtedness
to Paragon Real Estate, LP.
- 14 -
Mr. Mastandrea also owns two companies that provided services to Richton Trail. Mid Illinois
Realty Corp. managed Richton Trail and MDC Realty Corp. was reimbursed, at cost, for Richton
Trails payroll related costs. The related management fees included in discontinued operations for
the nine month period ended September 30, 2006 were approximately $8,000 and for the nine month
period ended September 30, 2005 were approximately $20,000. Reimbursement, at cost, for the
payroll related costs paid and accrued that were included in discontinued operations for the nine
month period ended September 30, 2006 was approximately $17,000 and for the nine month period ended
September 30, 2005 was approximately $47,000.
- 15 -
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 with its primary focus on and reviewing value-added real estate deals,
including land development, retail, office, industrial, hotel, and joint venture investments.
Paragon has also been reviewing the possibility of selling the corporate entity or seeking
additional investors. During 2005, our primary focus was 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.
Effective September 29, 2006, three independent members of the Board of Trustees signed
subscription agreements to purchase a total of 125,000 Class C Convertible Preferred Shares for an
aggregate contribution of $500,000 cash, and James C. Mastandrea, Paragons President, Chief
Executive Officer and Chairman of the Board of Trustees, signed a similar agreement to purchase
44,444 restricted Class C Convertible Preferred Shares in exchange for his compensation for
services to Paragon for the following two years ended September 29, 2008. In the third quarter of
2006, the trustees paid the first quarterly installment of $125,000 for the Class C Convertible
Preferred Shares. Also, each of the trustees of Paragon, namely Daryl J. Carter, John J. Dee,
Daniel G. DeVos, Paul T. Lambert, James C. Mastandrea and Michael T. Oliver, signed a restricted
share agreement with Paragon to receive a total of 12,500 restricted Class C Convertible Preferred
Shares in lieu of receiving fees in cash for service as a trustee for the two years ending
September 29, 2008. Additional information related to the Class C Convertible Preferred Shares is
described in the equity note to the financial statements.
Effective July 27, 2006, the Board of Trustees approved a reverse share split of 1-for-75 for our
outstanding common shares. Shareholders approved a proposal at the June 3, 2005 annual meeting
authorizing the Board, at its discretion, to determine the timing of the reverse share split and
declare the split at one of four ratios. Information related to the number of common shares and
the earnings per share have been restated in the accompanying financial statements and related
footnotes to reflect this reverse split.
Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the
operating partnership that owns Richton Trail Apartments (Richton Trail), to Hampton Court
Associates, the sole limited partner of Paragon Real Estate, LP. The Company is no longer the
general partner of Paragon Real Estate, LP and will not be liable for the mortgage loan of
approximately $2.7 million secured by Richton Trail. The Company cancelled the right of Hampton
Court Associates to redeem 813,938 partnership units of Paragon Real Estate, LP for cash after July
1, 2007, or at the option of the Company, for each unit to be converted into 0.0305 (post-reverse
split) of the Companys common shares. In connection with the cancellation of the right to redeem
the partnership units of Paragon Real Estate, LP, the Company also recorded an increase of
approximately $825,000 to its additional paid in capital based on the cancellation of indebtedness
to Paragon Real Estate, LP.
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
- 16 -
and operations. The Company filed a registration statement with the SEC in October 2005, which the
SEC did not review, thereby 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 the American Stock Exchange
(Amex) because its book equity was less than the $6 million minimum requirement, it had sustained
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. Additionally, without the funds from the public offering, the
Company was unable to complete the acquisition of the apartment portfolio and the contract was
terminated in April 2006.
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. In
addition, because our unrestricted cash is not sufficient to allow us to continue operations, we
have been reviewing other alternatives, including selling the corporate entity and seeking
additional investors. The Company received the first quarterly installment of $125,000 from three
trustees for payment of Class C Convertible Preferred Shares, which is to be used to maintain
Paragon as a public shell current with its SEC filings. The Board of Trustees intends to keep the
Company currently filed with the SEC as a corporate shell that may be used in the future for real
estate deals or sold to another company. There can be no assurance that we will be able to close a
transaction or keep the Company currently filed with the SEC. Even if our management is successful
in closing a transaction, investors may not value the transaction or the current filing status with
the SEC in the same manner as we did, and investors may not value the transaction as they would
value other transactions or alternatives. Failure to obtain external sources of capital will
materially and adversely affect the Companys ability to continue operations, as well as its
liquidity and financial results.
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 were eligible to elect REIT status in 2005, though we intend to take
advantage of our tax loss carryforwards before qualifying to be a REIT again.
Forward-Looking Information
The following is a discussion of our results of operations for the three month and nine month
periods ended September 30, 2006 and 2005 and financial condition, including:
|
|
|
Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the nine month period ended September 30, 2006 compared to the nine month
period ended September 30, 2005. |
|
|
|
|
Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended September 30, 2006 compared to the three month
period ended September 30, 2005. |
|
|
|
|
Our critical accounting policies and estimates that require our subjective judgement and
are important to the presentation of our financial condition and results of operations. |
|
|
|
|
Our primary sources and uses of cash for the nine month period ended September 30, 2006,
and how we intend to generate cash for long-term capital needs. |
|
|
|
|
Our current income tax status. |
- 17 -
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, our failure to obtain adequate financing to continue our operations, changes in
general economic conditions, changes in real estate conditions, changes in prevailing interest
rates, changes in our current filing status with the SEC, 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, 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, 2005.
The following discussion and analysis should be read in conjunction with the financial statements
and notes thereto appearing elsewhere herein.
Results of Operations
Comparison of the Nine Month Periods Ended September 30, 2006 and 2005
Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the
operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited
partner of Paragon Real Estate, LP. In our financial statements, we consolidated the revenues and
expenses of Richton Trail as of March 31, 2006, which are shown as discontinued operations for the
nine months ended September 30, 2006 and the three months and nine months ended September 30, 2005
because of the transfer of our 1.0% interest to Hampton Court Associates as of March 31, 2006.
Revenues from Operations
Interest and other revenue decreased by approximately $12,000 to approximately $4,000 for the nine
month period ended September 30, 2006 compared to the nine month period ended September 30, 2005.
The decrease is primarily due to the decrease in cash and cash equivalents between the periods.
Cash was used during 2005 and 2006 to fund the operation of the Company while we reviewed
acquisition of apartment properties in 2005 and other value-added real estate deals in 2006,
including land development, retail, office, industrial, hotel, and joint venture investments.
Expenses from Operations
Total expenses, comprised mostly of general and administrative expenses, decreased from
approximately $876,000 for the nine month period ended September 30, 2005 to approximately $346,000
for the nine month period ended September 30, 2006, a net decrease of $530,000. The decrease
resulted from significant due diligence costs incurred in 2005, compared to 2006, on potential
transactions, including decreases in legal fees of approximately $168,000, other general consulting
costs of approximately $105,000, accounting fees of approximately $17,000, and travel costs of
approximately $70,000 for visiting properties. Payroll expenses also decreased $94,000 in 2006
compared to 2005, as well as other overhead expenses, such as rent and expenses of maintaining the
public entity, which decreased approximately $76,000 net. Because the Company has limited
unrestricted cash available, it has not replaced employees who have left and has been reducing
other overhead expenses.
- 18 -
Loss from continuing operations
As a result of the above, loss from continuing operations decreased from approximately $859,000 for
the nine month period ended September 30, 2005 to approximately $341,000 for the nine month period
ended September 30, 2006.
Discontinued operations
Discontinued operations includes the revenues and expenses of Richton Trail, the Companys former
real estate asset. Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon
Real Estate, LP, the operating partnership that owns Richton Trail, to Hampton Court Associates,
the sole limited partner of Paragon Real Estate, LP. The Company is no longer the general partner
of Paragon Real Estate, LP, will not be liable for the mortgage loan of approximately $2.7 million
secured by Richton Trail.
Income from discontinued operations of residential properties before allocation to minority
interest was approximately $12,000 for the nine months ended September 30, 2006 compared to
approximately $35,000 for the nine months ended September 30, 2005. In 2006, the operations of
Richton Trail are included for only three months through March 31, 2006, which was the date of the
transfer of the property to its previous owner, whereas in 2005, the operations of Richton Trail
are included for the full nine months. Throughout 2005, rental rates increased at Richton Trails
as leases expired.
Most of the income from discontinued operations is allocated to the minority interest, which owned
99.0% of the operating partnership, resulting in 1.0% of the discontinued operations remaining as
part of the Company.
Net loss attributable to Common Shareholders
Based on the above, the net loss attributable to Common Shareholders decreased from approximately
$859,000 for the nine month period ended September 30, 2005 to approximately $341,000 for the nine
month period ended September 30, 2006.
Comparison of the Three Month Periods Ended September 30, 2006 and 2005
Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon Real Estate, LP, the
operating partnership that owns Richton Trail, to Hampton Court Associates, the sole limited
partner of Paragon Real Estate, LP. In our financial statements, we consolidated the revenues and
expenses of Richton Trail as of March 31, 2006, which are shown as discontinued operations for the
three months ended September 30, 2005 because of the transfer of our 1.0% interest to Hampton Court
Associates as of March 31, 2006.
Revenues from Operations
Interest and other revenue decreased by approximately $4,000 to approximately $1,000 for the three
month period ended September 30, 2006 compared to the three month period ended September 30, 2005.
The decrease is primarily due to the decrease in cash and cash equivalents between the periods.
Cash was used during 2005 and 2006 to fund the operation of the Company while we reviewed potential
acquisitions of apartment properties in 2005 and other value-added real estate deals in 2006,
including land development, retail, office, industrial, hotel, and joint venture investments.
- 19 -
Expenses from Operations
Total expenses, comprised mostly of general and administrative expenses, decreased from
approximately $178,000 for the three month period ended September 30, 2005 to approximately $84,000
for the three month period ended September 30, 2006, a net decrease of $94,000. The net decrease
resulted from significant due diligence costs on potential transactions incurred in 2005, compared
to 2006. The net decrease included lower costs for consulting of approximately $35,000, travel of
approximately $23,000 for visiting properties, and trustee fees of approximately $14,000. Payroll
expenses also decreased $24,000 in 2006 compared to 2005, as well as other overhead expenses, such
as rent and expenses of maintaining the public entity, which decreased approximately $13,000 net.
These decreases in expenses were offset in part by increases in legal fees of approximately $4,000
and transfer agent fees of approximately $11,000. Because the Company has limited unrestricted
cash available, it has not replaced employees who have left and has been reducing other overhead
expenses while looking for value-added real estate deals.
Loss from continuing operations
As a result of the above, loss from continuing operations decreased from approximately $173,000 for
the three month period ended September 30, 2005 to approximately $83,000 for the three month period
ended September 30, 2006.
Discontinued operations
Discontinued operations includes the revenues and expenses of Richton Trail, the Companys former
real estate asset. Effective March 31, 2006, the Company transferred its 1.0% interest in Paragon
Real Estate, LP, the operating partnership that owns Richton Trail, to Hampton Court Associates,
the sole limited partner of Paragon Real Estate, LP. The Company is no longer the general partner
of Paragon Real Estate, LP, will not be liable for the mortgage loan of approximately $2.7 million
secured by Richton Trail.
Income from discontinued operations of residential properties before allocation to minority
interest was approximately $20,000 for the three months ended September 30, 2005 compared to zero
for the three months ended September 30, 2006 due to the transfer of the property as of March 31,
2006.
Most of the income from discontinued operations is allocated to the minority interest, which owns
99.0% of the operating partnership, resulting in 1.0% of the discontinued operations remaining as
part of the Company.
Net loss attributable to Common Shareholders
Based on the above, the net loss attributable to Common Shareholders decreased from approximately
$172,000 for the three month period ended September 30, 2005 to approximately $83,000 for the three
month period ended September 30, 2006.
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.
- 20 -
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. Effective March 31, 2006, we transferred our 1.0% interest in
Paragon Real Estate, LP, the operating partnership that owns Richton Trail, to Hampton Court
Associates, the sole limited partner of Paragon Real Estate, LP. Prior to the transfer, no
impairment existed in the value of the real estate assets.
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. As of September 30, 2006, we have net operating losses and
at December 31, 2005, we had 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 planned growth of the Company. Our unrestricted cash is not sufficient to
allow us to continue operations 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 a private company, selling the corporate entity, and seeking
additional investors. The Company received the first quarterly installment of $125,000 from three
trustees for payment of Class C Convertible Preferred Shares, which is to be used to maintain
Paragon as a public shell current in its SEC filings. The Board of Trustees intends to keep the
Company as a corporate shell that may be used in the future for real estate deals or sold to
another company. However, there can be no assurances that the Company will be able to maintain its
current filing status or successfully close a future transaction.
Cash Flows
As of September 30, 2006, our unrestricted cash resources were approximately $226,000. 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 nine month period ended September 30, 2006, cash was used for our continuing operations
of approximately $241,000. The cash used for continuing operations was offset by the proceeds from
- 21 -
the issuance of the Class C Convertible Preferred Shares of approximately $125,000 and
approximately $2,000 from the sale of a marketable security. There were no additions to assets of
the Company. As a result, our cash balance decreased by approximately $114,000 from approximately
$340,000 at December 31, 2005 to approximately $226,000 at September 30, 2006.
Future Obligations
We are dependent on our existing cash to meet our liquidity needs and 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 was being paid from the cash flow of Richton Trail and the Company will not be liable
for the mortgage payment because it transferred its 1.0% interest in Paragon Real Estate, LP, the
owner of Richton Trail, to the sole limited partner Hampton Court Associates on March 31, 2006.
Long Term Liquidity and Operating Strategies
Our unrestricted cash of $226,000 is sufficient to meet only the Companys current liabilities.
Our ability to continue as a going concern will be dependent upon our acquiring assets to generate
cash flow for the Company. During 2006, Paragon has been searching for and reviewing value-added
real estate deals, including land development, retail, office, industrial, hotel, and joint venture
investments. Paragon has also been reviewing other alternatives, including selling the corporate
entity and seeking additional investors. During the third quarter of 2006, the Company received
the first quarterly installment of $125,000 from three trustees for payment of Class C Convertible
Preferred Shares.
Current Tax Status
At September 30, 2006, we have a net operating loss, and at December 31, 2005, we had 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.
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 during 2005 and the first nine months of 2006 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 pursuing
investments in real estate during 2005, we 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 a private 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.
- 22 -
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.
- 23 -
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2006, 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, 2006, 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, 2006.
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
None
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
Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
31.1
|
|
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
Chief Executive Officer |
|
|
|
31.2
|
|
Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
Chief Financial Officer |
|
|
|
32.1
|
|
CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002. |
- 24 -
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 |
|
|
|
|
|
|
|
|
|
Date: November 6, 2006
|
|
By:
|
|
/s/ James C. Mastandrea
James C. Mastandrea
|
|
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
Paragon real estate equity and investment trust |
|
|
|
|
|
|
|
|
|
Date: November 6, 2006
|
|
By:
|
|
/s/ John J. Dee
John J. Dee
|
|
|
|
|
|
|
Chief Financial Officer |
|
|
- 25 -