Paragon Real Estate Equity & Invest. Trust 10QSB
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 March 31, 2007
Commission File Number:
0-25074
PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
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Maryland
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39-6594066 |
(State or other jurisdiction of incorporation)
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(I.R.S. Employer Identification Number) |
1240 Huron Road, Cleveland, OH
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44115 |
(Address of principal executive offices)
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(Zip code) |
Issuers telephone number: 216-430-2700
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 May 14, 2007 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
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PART I. Financial Information |
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Item 1. Financial Statements |
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Consolidated Balance Sheet March 31, 2007 (unaudited) |
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Page - 2 - |
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Consolidated Statements of Operations Three months ended March 31, 2007 and March 31, 2006 (unaudited) |
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Page - 3 - |
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Consolidated Statements of Cash Flows Three months ended March 31, 2007 and March 31, 2006 (unaudited) |
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Page - 4 - |
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Notes to Consolidated Financial Statements (unaudited) |
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Page - 5 - |
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Item 2. Managements Discussion and Analysis or Plan of Operation |
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Page - 11 - |
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Item 3. Controls and Procedures |
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Page - 16 - |
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Part II. Other Information |
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Item 1. Legal Proceedings |
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Page - 16 - |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Page - 16 - |
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Item 3. Defaults upon Senior Securities |
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Page - 16 - |
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Item 4. Submission of Matters to a Vote of Security Holders |
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Page - 16 - |
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Item 5. Other Information |
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Page - 16 - |
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Item 6. Exhibits |
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Page - 16 - |
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Signatures |
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Page - 17 - |
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EX - 31.1 Section 302 Certification of Chief Executive Officer |
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EX - 31.2 Section 302 Certification of Chief Financial Officer |
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EX - 32.1 CEO/CFO Certification Under 906 of Sarbanes-Oxley Act |
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- 1 -
Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Balance Sheet
March 31, 2007
(unaudited)
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Assets |
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Investments in equipment: |
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Furniture, fixtures and equipment |
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$ |
5,370 |
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Accumulated depreciation |
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(2,378 |
) |
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Net investments in equipment |
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2,992 |
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Cash |
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315,042 |
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Other assets, net |
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11,803 |
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Total Assets |
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$ |
329,837 |
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Liabilities and Shareholders Equity |
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Liabilities: |
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Accounts payable and accrued expenses |
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$ |
47,485 |
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Total liabilities |
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47,485 |
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Commitments and Contingencies |
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Shareholders equity: |
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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 |
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2,780 |
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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 |
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2,444 |
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Common Shares $0.01 par value, 100,000,000
authorized; 442,565 shares issued and outstanding |
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4,426 |
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Additional paid-in capital |
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30,559,303 |
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Accumulated deficit |
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(26,501,620 |
) |
Treasury stock, at cost, 38,130 shares |
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(800,735 |
) |
Unearned compensation and trustees fees |
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(2,809,246 |
) |
Subscriptions receivable Preferred C Shares |
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(175,000 |
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Total shareholders equity |
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282,352 |
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Total Liabilities and Shareholders Equity |
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$ |
329,837 |
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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 three months ended March 31, |
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2007 |
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2006 |
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Revenues |
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Interest |
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$ |
1,872 |
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$ |
1,773 |
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Total revenues |
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1,872 |
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1,773 |
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Expenses |
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Depreciation |
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269 |
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269 |
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General and administrative |
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121,453 |
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165,691 |
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Total expenses |
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121,722 |
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165,960 |
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Loss from continuing operations |
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(119,850 |
) |
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(164,187 |
) |
Discontinued operations: |
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Income from discontinued operations of
residential properties
before allocation to
minority interest |
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12,448 |
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Income allocated to minority interest |
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(12,324 |
) |
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Net loss attributable to Common Shareholders |
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(119,850 |
) |
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(164,063 |
) |
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Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted |
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$ |
(0.27 |
) |
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$ |
(0.37 |
) |
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Weighted average number of Common Shares
outstanding: Basic and Diluted |
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442,565 |
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442,555 |
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Comprehensive loss: |
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Net loss |
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$ |
(119,850 |
) |
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$ |
(164,063 |
) |
Other comprehensive loss: |
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Unrealized gain on marketable securities |
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6 |
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Comprehensive loss |
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$ |
(119,850 |
) |
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$ |
(164,057 |
) |
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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 Cash Flows
(unaudited)
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For the three months ended March 31, |
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2007 |
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2006 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(119,850 |
) |
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$ |
(164,063 |
) |
Adjustments to reconcile net loss to net cash used in
continuing operations: |
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Compensation costs and trustees fees incurred
through the issuance of shares |
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62,605 |
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16,531 |
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Compensation costs, trustees fees and legal costs
incurred through the issuance of options |
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10,500 |
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19,250 |
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Depreciation |
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269 |
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269 |
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Income from discontinued operations, net of
allocation to minority interest |
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(124 |
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Net change in assets and liabilities: |
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Other assets, net |
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4,045 |
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42,094 |
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Accounts payable and accrued expenses |
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19,767 |
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(73,662 |
) |
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Net cash used in continuing operations |
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(22,664 |
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(159,705 |
) |
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Cash flows from investing activities: |
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Cash proceeds from sale of marketable securities |
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Purchase of equipment |
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Net cash from investing activities |
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Cash flows from financing activities: |
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Cash proceeds from issuance of Preferred C shares |
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125,000 |
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Net cash from financing activities |
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125,000 |
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Net increase (decrease) in cash |
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102,336 |
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(159,705 |
) |
Cash |
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Beginning of period |
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212,706 |
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340,024 |
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End of period |
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$ |
315,042 |
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$ |
180,319 |
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The accompanying notes are an integral part of the consolidated financial statements.
- 4 -
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 our financial statements, we consolidated the revenues and expenses of a residential real estate
property for the quarter ended March 31, 2006, which are shown as discontinued operations for the
three months ended March 31, 2006 because we transferred our 1.0% interest to the entity that owned
the other 99.0% 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 March 31, 2007,
the results of our operations for the three month periods ended March 31, 2007 and 2006, and of our
cash flows for the three month periods ended March 31, 2007 and 2006 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, 2006.
We report our investments using the consolidated method of accounting as we own the majority of the
outstanding voting interests and can control operations of a non-active subsidiary company. In the
consolidation method, the accounts of this entity is combined with our accounts. All significant
intercompany transactions are eliminated in consolidation.
Going Concern
The financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates the continued operations as a public company and paying liabilities in the
normal course of business. The Company received $200,000 in 2006 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. An additional $125,000 has been received during the first quarter of
2007. The Company has continued to incur net losses and at March 31, 2007, had unrestricted cash
of approximately $315,000. The increase in cash during the first quarter ended March 31, 2007 was
approximately $102,000, from installments of $125,000 received from three independent trustees for
the purchase of Class C Convertible Preferred Shares, offset by expenses to keep the Company
operating as a public company. Our ability to continue as a going concern will be dependent upon
acquiring assets to generate cash flow because we have no revenue generating assets.
During 2007 and 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
- 5 -
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. We have received $325,000 of the $500,000 cash for the
Class C Convertible Preferred Shares and expect to receive the remainder during the second quarter
of 2007. 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 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.
Fair Value of Financial Instruments
Our financial statements include cash only. We do not have any cash equivalents at March 31, 2007.
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 March 31, 2007, and the reported amounts of revenues and expenses for the three month periods
ended March 31, 2007 and 2006. 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:
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Years |
Furniture, fixtures and equipment |
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3-7 |
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Cash
We maintain our cash in bank accounts in amounts that may exceed federally insured limits at times.
Other Assets
As of March 31, 2007, other assets of approximately $12,000 is prepaid insurance.
Revenue Recognition
Revenues include interest earned on cash balances.
- 6 -
Stock Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based
Payment, which addresses the accounting for stock-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprises equity instruments or that may be
settled by the issuance of such equity instruments. In January 2005, the SEC issued SAB No. 107,
which provides supplemental implementation guidance for SFAS No. 123R. SFAS No. 123R eliminates the
ability to account for stock-based compensation transactions using the intrinsic value method under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
instead generally requires that such transactions be accounted for using a fair-value-based method.
In accordance with the modified-prospective transition method, the Companys financial statements
for prior periods have not been restated to reflect the impact of SFAS No. 123R. The Company uses
the Black-Scholes option-pricing model to determine the fair-value of stock-based awards.
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 March 31, 2007, we have net operating losses, and at December 31, 2006, we had net operating
losses totaling approximately $12.8 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 2026. Pursuant to Internal Revenue Code
regulations, Paragon will be limited to using approximately $1.8 million of the $12.8 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.
Note 4 Marketable Securities
As of March 31, 2007, 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
- 7 -
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 installments of $200,000 during 2006 and $125,000
during the first quarter of 2007.
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 three months ended March 31, 2007, no preferred shares were converted to common shares.
No options were issued or cancelled during the three month period ended March 31, 2007.
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 for March 31, 2006 in the accompanying financial statements.
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 three
months ended March 31, 2007 and March 31, 2006 were 442,565 and 442,555, respectively. Common
share equivalents of 2,520,733 and 76,302 as of March 31, 2007 and March 31, 2006, respectively,
include outstanding convertible preferred class A shares, convertible preferred class C shares,
warrants, and stock options, and are not included in net loss per weighted average Common Share
outstandingdiluted as they would be anti-dilutive.
- 8 -
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For the three months ended March 31, |
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2007 |
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2006 |
|
Numerator |
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|
|
|
|
|
Loss from continuing operations |
|
$ |
(119,850 |
) |
|
$ |
(164,187 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations of
residential properties before allocation to
minority interest |
|
|
|
|
|
|
12,448 |
|
Income allocated to minority interest |
|
|
|
|
|
|
(12,324 |
) |
|
|
|
|
|
|
|
Net loss attributable to Common Shareholders |
|
$ |
(119,850 |
) |
|
$ |
(164,063 |
) |
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Weighted average Common Shares outstanding
at March 31, 2007 and March 31, 2006,
respectively: Basic and Diluted |
|
|
442,565 |
|
|
|
442,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted EPS |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(0.27 |
) |
|
$ |
(0.37 |
) |
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 |
|
$ |
(0.27 |
) |
|
$ |
(0.37 |
) |
|
|
|
|
|
|
|
Note 7 Commitments and Contingencies
Liquidity
As of March 31, 2007, our unrestricted cash resources were approximately $315,000. 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 2006, they paid installments
of $200,000, and during the first quarter of 2007, they paid $125,000, which will be used to
maintain Paragon as a corporate shell current with its SEC filings.
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.
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 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.
- 9 -
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 March 31, 2006, the revenues and
expenses of Richton Trail are shown as discontinued operations for the three months ended March 31,
2006 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 three month period ended
March 31, 2006 includes the three months of discontinued operations through March 31, 2006, which
was the date of the transfer.
|
|
|
|
|
|
|
For the three months |
|
|
|
ended March 31, 2006 |
|
Revenues |
|
$ |
163,926 |
|
Operating expenses |
|
|
(88,288 |
) |
Depreciation and amortization |
|
|
(23,476 |
) |
Interest expense |
|
|
(39,714 |
) |
|
|
|
|
Income from discontinued operations |
|
$ |
12,448 |
|
|
|
|
|
Note 9 Related Party Transactions
Richton Trail Disposition and Previous Acquisition and Management Fees
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.
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 three month period ended March 31, 2006 were approximately $8,000. Reimbursement, at cost, for
the payroll related costs paid and accrued that were included in discontinued operations for the
three month period ended March 31, 2006 was approximately $17,000.
- 10 -
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.
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. The Company received
installments of $200,000 in 2006 and $125,000 in the first quarter of 2007 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. 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.
During 2007 and 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 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.
- 11 -
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 periods ended March
31, 2007 and 2006 and financial condition, including:
|
|
|
Explanation of changes in the results of operations in the Consolidated Statements of
Operations for the three month period ended March 31, 2007 compared to the three month
period ended March 31, 2006. |
|
|
|
|
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. |
|
|
|
|
Our primary sources and uses of cash for the three month period ended March 31, 2007,
and how we intend to generate cash for long-term capital needs. |
|
|
|
|
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, 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, 2006.
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 Three Month Periods Ended March 31, 2007 and 2006
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 March 31, 2006 because of the transfer of our 1.0% interest to Hampton Court
Associates as of March 31, 2006.
- 12 -
Revenues from Operations
Interest income was approximately $2,000 for the three month period ended March 31, 2007 and
approximately $2,000 for the three month period ended March 31, 2006.
Expenses from Operations
Total expenses, comprised mostly of general and administrative expenses, decreased from
approximately $166,000 for the three month period ended March 31, 2006 to approximately $122,000
for the three month period ended March 31, 2007, a net decrease of $44,000. The decrease resulted
from a decrease in costs for due diligence on potential transactions incurred in 2006 compared to
2007, specifically a decrease of approximately $10,000 for contract personnel and a decrease of
approximately $8,000 in travel expenses. In addition there is a decrease in compensation costs for
employees and trustees of approximately $12,000, a decrease in D&O insurance of approximately
$9,000, decreased rent of approximately $2,000, and decreases in other general expenses of
approximately $3,000.
Because the Company has limited unrestricted cash available, it has been reducing overhead
expenses.
Loss from continuing operations
As a result of the above, loss from continuing operations decreased from approximately $164,000 for
the three month period ended March 31, 2006 to approximately $120,000 for the three month period
ended March 31, 2007.
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 and 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 three months ended March 31, 2006. 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.
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
$164,000 for the three month period ended March 31, 2006 to approximately $120,000 for the three
month period ended March 31, 2007.
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
- 13 -
judgments could result in materially different amounts being reported in our Consolidated
Financial Statements.
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 March 31, 2007, we have net operating losses and at
December 31, 2006, we had net operating losses totaling approximately $12.8 million and capital
losses of approximately $0.6 million. While these losses created a deferred tax asset of
approximately $5.4 million, a valuation allowance of $5.4 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 2026. Pursuant to Internal Revenue Code regulations, we
will be limited to using approximately $1.8 million of the $12.8 million net operating losses, and
these same regulations also limit the amount of loss used in any one year.
Liquidity and Capital Resources
Historically, the Company has used cash provided by operations, equity transactions, and borrowings
from affiliates and lending institutions to fund operating expenses, satisfy its debt service
obligations and fund distributions to shareholders. 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 installments of $200,000 in 2006 and $125,000 during
the first quarter of 2007 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 March 31, 2007, our unrestricted cash resources were approximately $315,000. 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 three month period ended March 31, 2007, approximately $23,000 of cash was used for our
continuing operations. The cash used for continuing operations was offset by the proceeds from the
issuance of the Class C Convertible Preferred Shares of approximately $125,000. There were no
additions to assets of the Company. As a result, our cash balance increased by approximately
$102,000 from approximately $213,000 at December 31, 2006 to approximately $315,000 at
March 31, 2007.
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.
- 14 -
Long Term Liquidity and Operating Strategies
Our unrestricted cash of $315,000 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 2007 and 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 2006 and the first quarter of 2007,
the Company received installments of $325,000 from three trustees for payment of Class C
Convertible Preferred Shares.
Current Tax Status
At March 31, 2007, we have a net operating loss, and at December 31, 2006, we had net operating
losses totaling approximately $12.8 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 2026. Pursuant to Internal Revenue Code
regulations, we will be limited to using approximately $1.8 million of the $12.8 million net
operating losses, and these same regulations also limit the amount of loss used in any one year.
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
Because Paragon is a corporate shell, it is not presently effected by interest rates. During 2007
and 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.
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.
- 15 -
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2007, 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 March 31, 2007, 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 March 31, 2007.
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. |
- 16 -
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: May 14, 2007 |
|
James C. Mastandrea |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
Paragon real estate equity and investment trust
|
|
|
By: |
/s/ John J. Dee
|
|
Date: May 14, 2007 |
|
John J. Dee |
|
|
|
Chief Financial Officer |
|
|
- 17 -