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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, 2005 Commission File Number: 0-25074 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST  Maryland
    
    39-6594066(State or other jurisdiction of incorporation)1240 Huron Road, Suite 301, Cleveland, OH
(Address of principal executive offices)
    
    (I.R.S. Employer Identification Number)44115
(Zip code)
 Issuers 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 As of May 6, 2005, the issuer had 33,490,615 common shares outstanding, including 2,859,765
common shares held in treasury. Transitional Small Business
Disclosure Format (Check one): Yes
o   No þ




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PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
FORM 10-QSB
INDEX  
 PART I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheet  March 31, 2005 (unaudited)
    
    Page - 2 -Consolidated Statements of Operations  Three months ended March 31, 2005 and March 31, 2004 (unaudited)
    
    Page - 3 -Consolidated Statements of Cash Flows  Three months ended March 31, 2005 and March 31, 2004 (unaudited)
    
    Page - 4 -Notes to Consolidated Financial Statements (unaudited)
    
    Page - 5 -Item 2. Managements Discussion and Analysis or Plan of Operation
    
    Page - 12 -Item 3. Controls and Procedures
    
    Page - 18 -Part II. Other InformationItem 1. Legal Proceedings
    
    Page - 19 -Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page - 19 -Item 3. Defaults upon Senior Securities
    
    Page - 19 -Item 4. Submission of Matters to a Vote of Security Holders
    
    Page - 19 -Item 5. Other Information
    
    Page - 19 -Item 6. Exhibits
    
    Page - 19 -Signatures
    
    Page - 20 -EX - 31.1 Section 302 Certification of Chief Executive OfficerEX - 31.2 Section 302 Certification of Chief Financial OfficerEX - 32.1 CEO/CFO Under 906 of Sarbanes-Oxley ActEX-31.1 Certification 302-CEOEX-31.2 Certification 302-CFOEX-32.1 Certification 906-CEO & CFO
  - 1 -




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Paragon Real Estate Equity and Investment Trust and Subsidiaries 
 Consolidated Balance Sheet
 March 31, 2005
 (unaudited)
 AssetsInvestments in real estate:Land
    
    $
    797,682Buildings and improvements
    
    
    3,197,967Furniture, fixtures and equipment
    
    
    24,8134,020,462Accumulated depreciation and amortization
    
    
    (142,715
    )Net investments in real estate
    
    
    3,877,747Cash and cash equivalents
    
    
    1,406,688Marketable securities
    
    
    85,817Restricted cash
    
    
    94,372Accounts receivable, net
    
    
    5,026Other assets, net
    
    
    115,152Total Assets
    
    $
    5,584,802Liabilities and Shareholders EquityLiabilities:Mortgage loan payable
    
    $
    2,749,920Accounts payable and accrued expenses
    
    
    217,199Security deposits
    
    
    60,274Total liabilities
    
    
    3,027,393Minority interest in consolidated subsidiary
    
    
    2,167,677Commitments and ContingenciesShareholders equity:Preferred Shares  $0.01 par value,
10,000,000 authorized: 278,455 Class A
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference
    
    
    2,785Common Shares - $0.01 par value,
100,000,000 authorized; 33,490,615 shares
issued and outstanding
    
    
    334,906Additional paid-in capital
    
    
    28,382,203Accumulated other comprehensive income, net
unrealized gain on marketable securities
    
    
    47,142Accumulated deficit
    
    
    (25,007,323
    )Treasury stock, at cost, 2,859,765 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,569,246
    )Total shareholders equity
    
    
    389,732Total Liabilities and Shareholders Equity
    
    $
    5,584,802
 The accompanying notes are an integral part of the consolidated financial statements. - 2 -




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Paragon Real Estate Equity and Investment Trust and Subsidiaries 
 Consolidated Statements of Operations
 (unaudited)
 For the three months ended March 31,2005
    
    
    2004RevenuesRental revenue
    
    $
    150,775
    
    
    $
    150,602Interest and other
    
    
    10,621
    
    
    
    18,157Total revenues
    
    
    161,396
    
    
    
    168,759ExpensesProperty, operating and maintenance
    
    
    54,355
    
    
    
    56,353Property taxes and insurance
    
    
    24,485
    
    
    
    23,215Depreciation and amortization
    
    
    22,242
    
    
    
    21,431Interest
    
    
    40,486
    
    
    
    41,667General and administrative
    
    
    458,676
    
    
    
    239,593Management fees
    
    
    6,812
    
    
    
    6,866Total expenses
    
    
    607,056
    
    
    
    389,125Loss from operations before loss allocated to
minority interest
    
    
    (445,660
    )
    
    
    (220,366
    )(Income) loss allocated to minority interest
    
    
    (168
    )
    
    
    86,896Net loss attributable to Common Shareholders
    
    $
    (445,828
    )
    
    $
    (133,470
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.01
    )
    
    $
    (0.00
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    33,315,615
    
    
    
    32,580,976Comprehensive loss:Net loss
    
    $
    (445,828
    )
    
    $
    (133,470
    )Other comprehensive loss:Unrealized loss on marketable securities
    
    
    (4,131
    )
    
    
    (24,500
    )Comprehensive loss
    
    $
    (449,959
    )
    
    $
    (157,970
    )
 The accompanying notes are an integral part of the consolidated financial statements. - 3 -




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Paragon Real Estate Equity and Investment Trust and Subsidiaries 
 Consolidated Statements of Cash Flows
 (unaudited)
 For the three months ended March 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (445,828
    )
    
    $
    (133,470
    )Adjustments to reconcile net loss to net cash used in
continuing operations:Compensation costs and trustees fees incurred
through the issuance of shares
    
    
    22,188
    
    
    
    31,533Rent expense incurred through the issuance of
restricted shares
    
    
    51,500
    
    
    
    51,500Depreciation and amortization
    
    
    22,242
    
    
    
    21,431Income (loss) allocated to minority interest
    
    
    168
    
    
    
    (86,896
    )Net change in assets and liabilities:Accounts receivable, net
    
    
    3,251
    
    
    
    3,471Restricted cash
    
    
    11,813
    
    
    
    15,670Other assets, net
    
    
    (226
    )
    
    
    242,165Accounts payable and accrued expenses
    
    
    (46,170
    )
    
    
    (37,627
    )Rents received in advance and security deposits
    
    
    5,318
    
    
    
    790Net cash (used in) from continuing operations
    
    
    (375,744
    )
    
    
    108,567Cash flows from investing activities:Additions to real estate properties
    
    
    (3,579
    )
    
    
    (2,996
    )Net cash used in investing activities
    
    
    (3,579
    )
    
    
    (2,996
    )Cash flows from financing activities:Payments on mortgage loan
    
    
    (13,351
    )
    
    
    (12,171
    )Net cash used in financing activities
    
    
    (13,351
    )
    
    
    (12,171
    )Net increase (decrease) in cash and cash equivalents
    
    
    (392,674
    )
    
    
    93,400Cash and cash equivalentsBeginning of period
    
    
    1,799,362
    
    
    
    2,218,674End of period
    
    $
    1,406,688
    
    
    $
    2,312,074Supplemental information to Consolidated Statements of Cash FlowsInterest paid
    
    $
    40,486
    
    
    $
    41,667
 The accompanying notes are an integral part of the consolidated financial statements. - 4 -




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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, which primarily acquires, owns and operates multi-family residential real
estate properties. As of March 31, 2005, we owned a 1.0% interest in Paragon Real Estate, LP, the
operating partnership that owns Richton Trail Apartments (Richton Trail), an apartment complex
containing 72 units. Hampton Court Associates owns the remaining 99.0% interest in Paragon Real
Estate, LP. Because we are the sole general partner of Paragon Real Estate, LP, we consolidate
Richton Trail in our financial statements and show separately amounts for minority interest for
Hampton Court Associates, which is the only limited partner. Hampton Court Associates ownership
interest in Paragon Real Estate, LP is 813,938 restricted limited partnership units, each
redeemable after
July 1, 2007 for cash, or at our option, 22.881 of our common shares. Paragon is also the sole member of Paragon Housing LLC, which is the general partner of River West
Apartments Limited Partnership (River West). River West is a single asset entity owning an
apartment complex of 30 units. We do not consolidate Paragon Housing LLC with Paragons financial
statements because we do not have financial or voting control over the entity, and we do not have
sufficient equity at risk for Paragon Housing LLC to finance River West activities without
additional subordinated financial support. Our exposure is limited to Paragon Housing LLCs $100
capital contribution in River West, and we and Paragon Housing LLC are not obligated on any of the
liabilities of River West. Note 2  Basis of Presentation We have prepared the consolidated financial statements without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and regulations.
However, we believe that the included disclosures are adequate to make the information presented
not misleading. In our opinion, all adjustments (consisting solely of normal recurring items)
necessary for a fair presentation of our financial position as of March 31, 2005, the results of
our operations for the three month periods ended March 31, 2005 and 2004, and of our cash flows for
the three month periods ended March 31, 2005 and 2004 have been included. The results of
operations for interim periods are not necessarily indicative of the results for a full year. For
further information, refer to our consolidated financial statements and footnotes included in the
Annual Report on Form 10-KSB for the year ended December 31, 2004. Note 3  Summary of Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements In order to conform with generally accepted accounting principles, management, in preparation of
our consolidated financial statements, is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
as of March 31, 2005, and the reported amounts of revenues and expenses for the three month periods
ended March 31, 2005 and 2004. Actual results could differ from those estimates. Significant
estimates include the valuation of investments in real estate, marketable securities and deferred
taxes, and these significant estimates, as well as other estimates and assumptions, which may
change in the near term. - 5 -




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Investments in Real Estate Our investments in real estate assets are reported at the lower of cost or estimated net realizable
value. We periodically review our properties for impairment and provide for a provision if impairments are
determined. First, to determine if impairment may exist, we review our properties and identify
those, if any, which have had either an event of change or event of circumstances warranting
further assessment of recoverability. Then, we estimate the fair value of those properties on an
individual basis based on an independent appraisal, capitalizing the expected net operating income,
or applying various other valuation factors. Such amounts are then compared to the propertys
depreciated cost to determine whether an impairment exists. In accordance with Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), impairment of investments in real estate exists when
the carrying amount of the investments exceeds its fair value and is non-recoverable. Fair value
of these assets is the amount an asset could be bought or sold in a current transaction between
willing parties. Depreciation expense is computed using the straight-line method based on the following useful
lives: YearsBuilding and improvements
    
    
    40Furniture, fixtures and equipment
    
    
    3-7
 Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and
significant renovations and improvements that improve or extend the useful life of the asset are
capitalized and depreciated over their estimated useful life. When a property is sold or retired, the costs and related accumulated depreciation are removed from
the accounts and the resulting gain or loss, together with the related historical operating
results, are included in discontinued operations. Cash and cash equivalents Cash and cash equivalents include all cash and liquid investments that mature three months or less
from when they are purchased. Cash equivalents are reported at cost, which approximates fair
value. We maintain our cash in bank accounts in amounts that may exceed federally insured limits
at times. We also maintained cash of approximately $18,000 at March 31, 2005 in a money market
account that was not federally insured. Cash of approximately $94,000 is classified as restricted
at March 31, 2005 because approximately $33,000 is held in an escrow account of the mortgage lender
for the payment of property taxes and insurance and approximately $61,000 is in a separate bank
account for security deposits of our residential tenants. Accounts Receivable Our accounts receivable of approximately $5,000 are reported net of an allowance for bad debts of
approximately $10,000 at March 31, 2005 for Richton Trail. Other Assets As of March 31, 2005, other assets include prepaid expenses of approximately $68,000 and deferred
financing costs incurred to obtain and secure mortgage debt financing of approximately $55,000.
Other assets are carried at cost, less accumulated amortization. The deferred financing costs are being amortized over the life of the mortgage loan payable on a
straight- - 6 -




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line basis. Accumulated amortization related to deferred financing costs as of March 31,
2005 was approximately $8,000. Revenue Recognition Revenues from rental property are recognized when due from tenants. Leases are generally for terms
of one year or less. Stock Based Compensation At March 31, 2005, we had one stock-based employee compensation plan. During the three months
ended March 31, 2005, we cancelled 150,000 common share options under this plan in connection with
the resignation of an employee in 2004. We did not issue any common share options during the three
months ended March 31, 2005. During the three months ended March 31, 2004, we issued 450,000 common
share options and 900,000 restricted share grants. We account for the plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. In accordance with APB Opinion No. 25, no stock-based employee
compensation cost would be reflected in net loss for options granted, as all options granted under
the plan have an exercise price equal to the market value of the underlying common shares on the
date of grant. Stock based employee compensation cost of approximately $22,000 is reflected in net
loss for the three months ended March 31, 2005, and approximately $32,000 for the three months
ended March 31, 2004. The following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, as amended, to stock-based employee compensation. For the three month periods endedMarch 31,2005
    
    
    2004Net loss attributable to Common Shareholders
    
    $
    (445,828
    )
    
    $
    (133,470
    )Add: Stock-based employee compensation
expense included in reported net
loss, net of related tax effects
    
    
    22,188
    
    
    
    31,533Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects
    
    
    (34,563
    )
    
    
    (39,408
    )Pro forma net loss attributable to Common
Shareholders
    
    $
    (458,203
    )
    
    $
    (141,345
    )Net loss attributable to Common
Shareholders per Common Share:Basic and Diluted  as reported
    
    $
    (0.01
    )
    
    $
    (0.00
    )Basic and Diluted  pro forma
    
    $
    (0.01
    )
    
    $
    (0.00
    )
 Income Taxes Because we are no longer 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 are eligible to
re-elect REIT status as of January 1, 2005, we intend to take advantage of our tax loss
carryforwards before electing to be a REIT again. - 7 -




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At March 31, 2005, we have net operating losses, and at December 31, 2004, we had net operating
losses totaling approximately $11.0 million and capital losses of approximately $0.6 million.
While these losses created a deferred tax asset, a valuation allowance was applied against the
asset because of the uncertainty of whether we will be able to use these loss carryforwards, which
will expire in varying amounts through the year 2024. We are also subject to certain state and local income, excise and franchise taxes. The provision
for state and local taxes has been reflected in general and administrative expense in the
consolidated statements of operations and has not been separately stated due to its insignificance. Fair Value of Financial Instruments Our financial instruments include cash and cash equivalents, marketable securities and a mortgage
loan. The fair values of the financial instruments were not materially different from their
carrying or contract values at March 31, 2005. Segment Disclosure Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information requires that a public company report financial and descriptive
information about its reportable operating segments. Generally, financial information is required
to be reported on the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. Management views the Company as a single segment,
which acquires, owns and operates rental real estate. Note 4  Marketable Securities Our investments in marketable securities are available-for-sale, as of March 31, 2005, and
represent 10,000 common shares of Stellent, Inc. (Stellent) and 100 common shares of Century
Realty Trust (Century). As of March 31, 2005, our marketable securities had a fair market value of approximately $86,000
(based upon the NASDAQ closing quote of $8.41 per share for Stellent and $17.18 per share for
Century on March 31, 2005). We recorded an unrealized loss on marketable securities during 2005 of
approximately $4,000, resulting in a balance of approximately $47,000 in shareholders equity for
unrealized gain on marketable securities. The NASDAQ closing quote on May 6, 2005 was $6.98 per common share of Stellent and $16.27 per
common share of Century. We recognize gain or loss on the sale of marketable securities based upon the first-in-first-out
method. Note 5  Mortgage Loan Payable The mortgage loan payable secured by our residential real estate property has a balance at
March 31, 2005 of approximately $2.7 million at a fixed interest rate of 5.87% for a term of 10
years with monthly principal and interest payments of approximately $18,000 based on a 25-year
amortization schedule. Note 6  Equity During the first quarter of 2004, 935 preferred shares were converted to 3,224 common shares, at a
conversion rate of 3.448 common shares for each preferred share. No other preferred shares were
converted through March 31, 2005. - 8 -




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Effective January 2, 2004, we issued a total of 900,000 restricted common shares 450,000 common
share options at a price of $0.27 per share to three of our officers. The market value of the
restricted common shares on the date of grant was $198,000. The options vest ratably over three
years after issuance and expire after five years from the date of issuance. During the fourth
quarter of 2004, 300,000 restricted common shares were cancelled and in the first quarter of 2005,
150,000 common share options were cancelled. Effective February 16, 2004, 50,000 restricted common shares (issued during 2003) were cancelled. Effective March 4, 2004 and 2005, a total of 500,000 restricted common shares are issuable to our
landlord for office space and related services for the twelve months ended March 4, 2004 and 2005. Effective June 15, 2004, we issued a total of 200,000 restricted common shares and 100,000 common
share options at a price of $0.18 per share to our four independent trustees, who are not executive
officers of Paragon, as part of their compensation for serving on Paragons board and committees.
The market value of the restricted common shares on the date of grant was $36,000. The options
vest one year after issuance and expire 90 days after leaving Paragons board. Effective July 19, 2004, we committed to issue a total of 1.0 million restricted common shares to a
new officer of the Company. The initial grant of 500,000 restricted shares will vest half of the
shares in four years and the second half in five years. Additional grants of 125,000 restricted
common shares will be made annually for the next four years beginning on the anniversary date of
his employment with vesting effective four years after each grant date. Effective December 1, 2004 we issued 100,000 restricted common shares to a new employee of the
Company. Half of the shares will vest in four years and the second half will vest in five years.
The market value of the 100,000 restricted common shares issued on the date of grant was $13,000. Note 7  Loss Per Share The Company has adopted the Statement of Financial Accounting Standards No. 128, Earnings Per
Share (EPS) for all periods presented herein. Net loss per weighted average Common Share
outstandingbasic and net loss per weighted average Common Share outstanding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, 2005 and March 31,
2004 were 33,315,615 and 32,580,976, respectively. Common share equivalents of approximately 23.5
million and 23.6 million as of March 31, 2005 and March 31, 2004, respectively, include outstanding
convertible preferred shares, warrants, stock options and limited partnership units, and are not
included in net loss per weighted average Common Share outstandingdiluted as they would be
anti-dilutive. For the three months ended March 31,2005
    
    
    2004NumeratorNet loss attributable to Common Shareholders
    
    $
    (445,828
    )
    
    $
    (133,470
    )DenominatorWeighted average Common Shares outstanding
at March 31, 2005 and March 31, 2004,
respectively: Basic and Diluted
    
    
    33,315,615
    
    
    
    32,580,976Basic and Diluted EPSNet loss attributable to Common
Shareholders  - Basic and Diluted
    
    $
    (0.01
    )
    
    $
    (0.00
    )
 - 9 -




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Note 8  Commitments and Contingencies Liquidity As of March 31, 2005, our unrestricted cash resources were approximately $1,407,000 and our
marketable securities available for sale were approximately $86,000. Our marketable securities
primarily represented 10,000 common shares of Stellent. The NASDAQ closing quote on
May 6, 2005 was $6.98 per common share of Stellent. Our management team and board of trustees have formulated a value-added business strategy focused
on acquiring well located, underperforming multi-family residential properties and repositioning
them through renovation, leasing, improved management and branding. Management has been pursuing
this strategy by actively seeking and reviewing multi-family residential companies, portfolios and
properties, including affordable housing projects. While we made offers to some of the sellers, low
interest rates for debt financing have had the effect of increasing sale prices for these types of
properties. We are currently engaged in discussions with potential sellers, but have not entered
into any definitive purchase agreements for any of these properties. There can be no assurance that
we will be able to enter into a definitive purchase agreement or that we will be able to close a
transaction if an agreement is signed. Even if our management is successful in closing a
transaction, investors may not value the transaction in the same manner as we did, and investors
may not value a portfolio of the same type of properties as highly as they would value portfolios
consisting of diverse properties. We are dependent on our existing cash and Stellent shares to meet our liquidity needs because cash
from operations is not sufficient to meet our operating requirements. Because the cash flow from
our properties is not expected to fully fund our future liquidity requirements, we have reduced our
material future obligations, which include a mortgage on the apartment complex and the salaries of
our five employees. The debt service payment is being funded from the cash flow of the property
secured by the mortgage, and the current monthly salary for each employee is only $5,000 or less.
When we need additional resources for due dilligence to review potential acquisitions, we use
independent contractors. During the first quarter of 2005, we used three independent contractors at
a cost of $4,000 to $5,000 per month for each contractor. We historically have financed our long-term capital needs, including acquisitions, as follows:  
    Borrowings from new loans;
    Additional equity issuances of our common and preferred shares; and
    Proceeds from the sales of our real estate and technology segment. 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. - 10 -




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Note 9  Related Party Transactions Richton Trail Acquisition and Management Fees Effective July 1, 2003, we closed the acquisition of our residential apartment complex, Richton
Trail, following approval by our shareholders of the transaction on June 30, 2003. Our operating
partnership, Paragon Real Estate, LP, acquired the residential complex along with the associated
mortgage from Hampton Court Associates, LP (Hampton Court), a partnership controlled by James C.
Mastandrea, its general partner and our Chairman, Chief Executive Officer and President. In
consideration for transferring Richton Trail, Hampton Court received 813,938 restricted limited
partnership units of Paragon Real Estate, LP. Each unit is redeemable after four years for cash,
or, at our option, 22.881 of our common shares. Mr. Mastandrea also owns two companies that provide services to Richton Trail. Mid Illinois Realty
Corp. manages Richton Trail and MDC Realty Corp. is reimbursed, at cost, for Richton Trails
payroll related costs. The related management fees included for the three months ended
March 31, 2005 were approximately $7,000 and for the three months ended March 31, 2004 were
approximately $7,000. Reimbursement, at cost, for the payroll related costs paid and accrued for
the three months ended March 31, 2005 was approximately $16,000 and for the three month period
ended March 31, 2004 was approximately $15,000. As Paragon acquires more properties, we intend to
use local third party management companies until we are able to provide management services
internally for our properties. Medical Insurance Reimbursement Paragon was reimbursing MDC Realty Corp. for medical insurance, at cost, for one of its executive
officers. The amount paid or accrued for the three months ended March 31, 2005 was $0 and for the
three months ended March 31, 2004 was approximately $1,400. - 11 -




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ITEM 2. MANAGEMENTS 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 acquiring, owning and operating multi-family
residential real estate. As of March 31, 2005, we owned a 1.0% interest in Paragon Real Estate,
LP, the operating partnership that owns Richton Trail Apartments (Richton Trail), an apartment
complex containing 72 units. Hampton Court Associates owns the remaining 99.0% interest in Paragon
Real Estate, LP. Because we are the sole general partner of Paragon Real Estate, LP, we
consolidate Richton Trail in our financial statements and show separately amounts for minority
interest for Hampton Court Associates, which is the only limited partner. Hampton Court Associates
ownership interest in Paragon Real Estate, LP is 813,938 restricted limited partnership units, each
redeemable after
July 1, 2007 for cash, or at our option, 22.881 of our common shares. Paragon is also the sole member of Paragon Housing LLC, which is the general partner of River West
Apartments Limited Partnership (River West). River West is a single asset entity owning an
apartment complex of 30 units. We do not consolidate Paragon Housing LLC with Paragons financial
statements because we do not have financial or voting control over the entity, and we do not have
sufficient equity at risk for Paragon Housing LLC to finance River West activities without
additional subordinated financial support. Our exposure is limited to Paragon Housing LLCs $100
capital contribution in River West, and we and Paragon Housing LLC are not obligated on any of the
liabilities of River West. Paragon has developed a value-added business plan that is primarily focused on acquiring well
located, under-performing multi-family residential properties, including affordable housing
complexes, and repositioning them through renovation, leasing, improved management, and branding.
This strategy, while unique to public companies, is common among private companies on both a local
and limited regional basis. Paragons investments will be in properties, portfolios and companies
with value-added programs. Paragon intends to raise equity through public and private offerings. We
may also use joint venture structures for property and portfolio acquisitions, and tax-deferred
operating partnership units for acquisitions of companies. Brief History Paragon was formed on March 15, 1994 as a Maryland real estate investment trust (REIT). We
operated as a traditional REIT by buying, selling, owning and operating commercial and residential
properties through December 31, 1999. In February 2000, former management of the Company purchased a software technology company. As a
result of the operations of the technology company commencing in 2000, the Company did not meet the
Internal Revenue Code qualifications to be a REIT for federal tax purposes. In July 2001, former
management sold the software technology company, but continued marketing the software product. In
2002, the Company discontinued the operations of the technology segment. Although Paragon is no
longer a REIT for federal tax purposes, we can elect REIT status effective for 2005. We intend to
take advantage of our tax loss carryforwards before electing to be a REIT again. Forward-Looking Information The following is a discussion
of our results of operations for the three month periods ended
March 31, 2005 and 2004 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, 2005 compared to the three month
period ended March 31, 2004. - 12 -




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
    Our critical accounting policies and estimates that require our subjective judgment and
are important to the presentation of our financial condition and results of operations.
    Our primary sources and uses of cash for the three month period ended March 31, 2005,
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 managements current expectations include, but
are not limited to, changes in general economic conditions, changes in local real estate conditions
(including rental rates and competing properties), changes in the economic conditions affecting
industries which employ tenants residing in our property, failure to lease unoccupied units or to
re-lease occupied units upon expiration of leases in accordance with our projections, changes in
prevailing interest rates, the cost or general availability of equity and debt financing, failure
to acquire properties in accordance with our value added strategy, unanticipated costs associated
with the acquisition and integration of our acquisitions, our ability to obtain adequate insurance
for terrorist acts, demand for tenant services beyond those traditionally provided by landlords,
and potential liability under environmental or other laws. For further information, refer to our
consolidated financial statements and footnotes included in the Annual Report on Form 10-KSB for
the year ended December 31, 2004. The following discussion and analysis should be read in conjunction with the financial statements
and notes thereto appearing elsewhere herein. Results of Operations Comparison of the Three Month Periods Ended March 31, 2005 and 2004 Revenues from Operations Rental revenue was approximately $151,000 for each of the three month periods ended March 31, 2005
and 2004 and was comprised entirely of Richton Trail. Interest and other revenue decreased by approximately $7,000 to approximately $11,000 for the three
month period ended March 31, 2005 compared to the three month period ended March 31, 2004. The
decrease is primarily due to the decrease in cash and cash equivalents between the periods. Cash
was used during 2004 and 2005 to fund the operation of the Company while we implement our
value-added acquisition strategy. Expenses from Operations Total expenses increased from approximately $389,000 for the three month period ended March 31,
2004 to approximately $607,000 for the three month period ended March 31, 2005, a net increase of
$218,000. Richton Trail is included in operations for each of the three month periods ended March 31, 2005
and 2004, and the expenses between these two periods were approximately the same for property,
operating
and maintenance; property taxes and insurance; depreciation and amortization; interest; and
management fees. - 13 -




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General and administrative expenses increased from approximately $240,000 for the three month
period ended March 31, 2004 to approximately $459,000 for the three month period ended
March 31, 2005. The increase of approximately $219,000 resulted from due diligence being performed
on potential transactions, including legal fees of approximately $149,000, other general consulting
costs of $60,000, and other miscellaneous items of approximately $10,000 including travel costs for
visiting the properties. Loss from operations before minority interest As a result of the above, loss from operations before loss allocated to minority interest increased
from approximately $220,000 for the three month period ended March 31, 2004 to approximately
$446,000 for the three month period ended March 31, 2005. Loss allocated to minority interest Loss allocated to minority interests changed from approximately $87,000 of loss allocated for the
three month period ended March 31, 2004 to an allocation of approximately zero for the three month
period ended March 31, 2005. This is primarily as a result of fewer costs being allocated for the
three month period ended on March 31, 2005 compared to the same period in 2004. Net loss attributable to Common Shareholders Based on the above, the net loss attributable to Common Shareholders increased from approximately
$133,000 for the three month period ended March 31, 2004 to approximately $446,000 for the three
month period ended March 31, 2005. Critical Accounting Policies and Estimates Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting
principles, which require us to make certain estimates and assumptions. A summary of our
significant accounting policies is provided in Note 3 to our Consolidated Financial Statements.
The following section is a summary of certain aspects of those accounting policies that both
require our most subjective judgment and are most important to the presentation of our financial
condition and results of operations. It is possible that the use of different estimates or
assumptions in making these judgments could result in materially different amounts being reported
in our Consolidated Financial Statements. Impairment of Long-Lived Assets We recognize an impairment loss on a real estate asset if the assets carrying amount exceeds its
fair value and is non-recoverable. First, to determine if impairment may exist, we review our
properties and identify those, if any, which have had either an event of change or event of
circumstances warranting further assessment of recoverability. Next, we estimate the fair value of
those properties on an individual basis through either independent appraisals or by capitalizing
the expected net operating income, among various other factors. These amounts are then compared to
the propertys depreciated cost to determine whether an impairment exists. We compute the expected
net operating income using certain estimates and assumptions for revenues and expenses. As a
result, these estimates and assumptions impact the amount of impairment loss that we recognize. Real Estate Investments When we acquire real estate properties, we allocate the components of these acquisitions using
relative fair values computed using our estimates and assumptions. These estimates and assumptions
affect the 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 - 14 -




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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 March 31, 2005, we have net operating losses and at
December 31, 2004, we had net operating losses totaling approximately $11.0 million and capital
losses of approximately $0.6 million. While these losses created a deferred tax asset of
approximately $4.8 million, a valuation allowance of $4.8 million was applied against this asset
because of the uncertainty of whether we will be able to use these loss carryforwards, which will
expire in varying amounts through the year 2024. Liquidity and Capital Resources Cash provided by operations, equity transactions, and borrowings from affiliates and lending
institutions have generally provided the primary sources of liquidity to Paragon. Historically, we
have used these sources to fund operating expenses, satisfy our debt service obligations and fund
distributions to shareholders. In 2003, as part of the one-time incentive exchange offer for
holders of preferred shares to convert to common shares, our shareholders approved eliminating the
preferred dividend, which allows us to use that cash for current operations and future growth of
the Company. Cash Flows As of March 31, 2005, our unrestricted cash resources were approximately $1,407,000 and our
marketable securities available for sale were approximately $86,000, comprised primarily of 10,000
common shares of Stellent, Inc. The NASDAQ closing quote on May 6, 2005 was $6.98 per common share
of Stellent, Inc. We are dependent on our existing cash resources and Stellent, Inc. shares to
meet our liquidity needs because cash from operations is not sufficient to meet our operating
requirements. During the three month period ended March 31, 2005, we utilized cash for (i) our continuing
operations of approximately $376,000 including increased due diligence on potential transactions of
approximately $219,000; (ii) additions to real estate properties of approximately $4,000; and (iii)
payments on the mortgage loan payable of approximately $13,000. As a result, our cash balance
decreased by approximately $393,000 from approximately $1,799,000 at December 31, 2004 to
approximately $1,407,000 at March 31, 2005. Future Obligations Because the cash flow from our properties is not expected to fully fund our future liquidity
requirements, we reduced our material future obligations, which include the mortgage on the
apartment complex and the employment contracts for our executive officers.  
    The mortgage is being paid by the cash flow from Richton Trail. The property has been
well maintained and managed, and has had historical occupancy in the range of 95% to 100%.
So long as Richton Trail maintains approximately 85% occupancy, it will generate the cash
flow needed to pay its current expenses and the mortgage debt service. We intend to keep
the property as close to 100% occupancy as possible and do not foresee any market
conditions that would show a decline in occupancy or rents during the coming year. Also,
no major improvements are planned at the property through December 31, 2005.
    As of March 31, 2005, we had five employees, and each employees monthly salary is
$5,000 or less. The Company has the benefit of highly qualified employees in the real
estate industry - 15 -




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and other areas of expertise, for salaries that are well below market
levels. Several of them have previous experience in a publicly traded company. As the
Company grows and appreciates in
value, our employees expect to share in the growth of the Company and to earn higher levels
of compensation. Our employees will also share in the growth of the Company along with our
other shareholders, because each has a significant number of common shares. Long Term Liquidity and Operating Strategies We historically have financed our long-term capital needs, including acquisitions, as follows:  
    Borrowings from new loans;
    Additional equity issuances of our common and preferred shares; and
    Proceeds from the sales of our real estate and technology segment. During the first half of 2003, we put into place a new management team and shareholders elected
five new Trustees. Paragon has developed a value-added business plan that is primarily focused on
acquiring well located, under-performing multi-family residential properties, including affordable
housing complexes, and repositioning them through renovation, leasing, improved management, and
branding. This strategy, while unique to public companies, is common among private companies on
both a local and limited regional basis. Paragons investments will be in properties, portfolios
and companies with value-added programs. Paragon intends to raise equity through public and private
offerings. We will also use joint venture structures for property and portfolio acquisitions, and
tax-deferred operating partnership units for acquisitions of companies. Failure to obtain external
sources of capital or to find sellers willing to exchange their properties for tax-deferred
partnership units will materially and adversely affect our strategy and our operations, liquidity
and financial results.
Paragons investment advantages, compared to private companies, include our potential ability to
access capital and to offer sellers a tax-deferred exit alternative to exchange their properties
for partnership units with opportunities for both liquidity and share appreciation. Our cash
resources are sufficient to meet our projected overhead for approximately eighteen months while
identifying and reviewing potential acquisitions. Current Tax Status At March 31, 2005, we have a net operating loss, and at December 31, 2004, we had net operating
losses totaling approximately $11.0 million and capital losses of approximately $0.6 million.
While these losses created a deferred tax asset, a valuation allowance was applied against the
asset because of the uncertainty of whether we will be able to use these loss carryforwards, which
will expire in varying amounts through the year 2024. Although we can elect REIT status effective
for 2005, we intend to take advantage of our tax loss carryforwards before electing to be a REIT
again. We, and certain of our subsidiaries, are also subject to certain state and local income, excise and
franchise taxes. The provision for state and local taxes has been reflected in general and
administrative expense in the consolidated statements of operations and has not been separately
stated due to its insignificance. Interest Rates and Inflation For the past several years, interest rates have declined, and many financial experts and economists
have agreed that interest rates reached bottom in 2003. Lower interest rates have led to higher
selling prices for established real estate properties, the type that we intend to buy. Purchasers
of properties have been able to place a larger amount of debt on their acquisitions because the
lower interest rates have lowered the monthly mortgage payments. Interest rates started to
increase during 2004, but asking prices for multi-family residential properties have not decreased.
The interactions between an increase in interest rates and a decrease in selling prices of
properties cannot be measured with any certainty. Paragon continues to pursue its value-added
business plan during 2005. The economics of - 16 -




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transactions, including price, current cash flow,
existing debt, cost of new funds for acquiring the properties, and potential for increased value,
will be reviewed very closely prior to making any acquisitions. We were not significantly affected by inflation during the periods presented in this report due
primarily to the relative low nationwide inflation rates. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have, or are likely to have, a current or future
material effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources. - 17 -




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ITEM 3. CONTROLS AND PROCEDURES As of March 31, 2005, the date of this report, James C. Mastandrea, our Chairman of the Board,
Chief Executive Officer and President, and John J. Dee, our Chief Financial Officer and Senior Vice
President, evaluated the effectiveness of the design and operation of the Companys 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, 2005, our
disclosure controls and procedures are effective to ensure that material information relating to
the Company and our consolidated subsidiaries is recorded, processed, summarized and reported in a
timely manner. Further, there were no significant changes in the internal controls or, to our knowledge, in other
factors that could significantly affect such controls subsequent to March 31, 2005. - 18 -




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS In the normal course of business, we may be involved in legal actions arising from the ownership
and administration of our properties. In our opinion, the liabilities, if any, that may ultimately
result from such legal actions are not expected to have a materially adverse effect on our
consolidated financial position, operations or liquidity. We are not currently involved in any
legal actions. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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 ExhibitNumber
    
    Exhibit Description31.1
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
 Chief Executive Officer31.2
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002
 Chief Financial Officer32.1
    
    CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002.
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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 trustBy:
    
    /s/ James C. MastandreaDate: May 6, 2005
    
    
    
    James C. MastandreaChief Executive OfficerParagon real estate equity and investment trustBy:
    
    /s/ John J. DeeDate: May 6, 2005
    
    
    
    John J. DeeChief Financial Officer
 - 20 -