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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-KSB (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (   )
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission File Number: 0-25074 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST  Maryland
(State or other jurisdiction of incorporation)1240 Huron Road, Suite 301, Cleveland, OH
(Address of principal executive offices)
    
    39-6594066
(I.R.S. Employer Identification Number)44115
(Zip code)
 Issuers telephone number: 216-430-2700 Fax number: 216-430-2702   Securities registered under Section 12(b) of the Act: None Securities registered under to Section 12(g) of the Act: Common Shares, $0.01 par value Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to the filing requirements for the past
90 days. Yes  [X]  No  [   ] Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB  [   ] Registrants revenues for its most recent fiscal year: $306,748. At March 18, 2004, the Registrant had 32,740,615 common shares of beneficial
interest (including 2,859,765 shares held in treasury), $0.01 par value and
278,455 Class A Cumulative Convertible Preferred Shares. The aggregate market
value of the voting common and preferred shares held by non-affiliates of the
Registrant was approximately $2,628,111 based on the closing price of $0.23 per
common share on the American Stock Exchange on March 18, 2004. The aggregate
market value of the voting preferred shares was valued as if each of the
remaining 117,045 preferred shares held by non-affiliates were converted into
3.448 common shares on March 18, 2004. DOCUMENTS INCORPORATED BY REFERENCE None Transitional Small Business
Disclosure Format (Check one):
Yes [   ]  No [X]




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PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2003 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS PagePART IItem 1 Description of Business
    
    
    2Item 2 Description of Property
    
    
    12Item 3 Legal Proceedings
    
    
    13Item 4 Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5 Market for Common Equity and Related Shareholder Matters
    
    
    13Item 6 Managements Discussion and Analysis or Plan of Operation
    
    
    14Item 7 Financial Statements
    
    
    21Item 8 Changes In and Disagreements with Accountants on Accounting
 and Financial Disclosure
    
    
    21Item 8a Disclosure Controls and Procedures
    
    
    21PART IIIItem 9 Trustees and Executive Officers
    
    
    22Item 10 Executive Compensation
    
    
    25Item 11 Security Ownership of Certain Beneficial Owners and Management
    
    
    27Item 12 Certain Relationships and Related Transactions
    
    
    30Item 13 Exhibits and Reports on Form 8-K
    
    
    30Item 14 Principal Accountant Fees and Services
    
    
    31SIGNATURES
    
    
    32EX-14 CODE OF CONDUCT AND ETHICSEX-31.1 SECTION 302 CEO CERTIFICATEEX-31.2 SECTION 302 CFO CERTIFICATEEX-32.1 SECTION 906 CEO & CFO CERTIFICATE




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PART I 
 Item 1. Description of Business Company Overview Paragon Real Estate Equity and Investment Trust, formerly Stonehaven Realty
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 December 31, 2003, 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 (Hampton) owns the remaining 99.0% interest in
Paragon Real Estate, LP. We are the sole general partner of Paragon Real
Estate, LP and Hampton Court is the limited partner. The Company was formed on March 15, 1994 as a Maryland real estate investment
trust. We operated as a traditional real estate investment trust 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. 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 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 joint venture structures to be used for property and portfolio
acquisitions, and use 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. On June 30, 2003, the holders of our preferred shares consented to waive the
dividend that would otherwise have been payable in May 2003 and to eliminate
any future dividends that would have been payable under the terms of our
preferred shares. The waiver was sought in connection with a one-time
incentive exchange offer pursuant to which we offered to exchange each of our
outstanding preferred shares for 22.881 common shares. We are dependent on our existing cash and our common shares of Stellent, Inc.
(Stellent) 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 employment contracts for our three executive
officers. The debt service payment is being funded from the cash flow of the
property secured by the mortgage, and the current salary requirements of the
employment contracts is only $5,000 per month for each executive officer. We
historically have financed our long-term capital needs, including acquisitions,
as follows:  
    
    Borrowings from new loans;
    
    Additional equity issuances of our common and preferred shares; and
    
    Proceeds from the sales of our real estate and technology segment. 2




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There can be no assurance any of the alternatives will be adopted, or if
adopted, will be successful. Real Estate Paragon Real Estate, LP, an operating partnership of which we are sole general
partner and own a 1.0% interest, owns one residential apartment complex
containing 72 units. Effective July 1, 2003, we closed the acquisition of our residential apartment
complex, Richton Trail, located near Chicago, Illinois, 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, 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 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. On October 1, 2003, we closed on the sale of our 92.9% general partnership
interest in four commercial properties. Proceeds from the sale of these
properties, net of closing costs and the mortgage balances assumed by the
purchaser, were approximately $1,601,000. The proceeds from the sale were paid
in a combination of approximately $801,000 in cash and 2,859,765 of our common
shares at an average closing price for the 30 calendar days prior to June 27,
2003 of $0.28. Also as a result of the sale, approximately $318,000
representing cash from the commercial real estate properties was released from
mortgage related restrictions and made available for operations. Real Estate Tenants Our tenants have leases that are generally for terms of one year or less. Competition The real estate market is highly competitive. Competing properties may be
newer or have more desirable locations than the Companys current property
holdings. If the market does not absorb newly constructed units, market
vacancies will increase and market rents may decline. As a result, we may have
difficulty leasing units within our properties and may be forced to lower rents
on leases to compete effectively. We compete for the acquisition of properties with many entities, including,
among others, publicly traded REITs, life insurance companies, pension funds,
partnerships and individual investors. Many competitors may have substantially
greater financial resources than us. In addition, certain competitors may be
willing to accept lower returns on their investments. If competitors prevent
us from buying properties that may be targeted for acquisition, our capital
appreciation and valuation may be impacted. Discontinued Operations We sold our 92.9% general partnership interest in four commercial properties on
October 1, 2003. The results of operations for these properties are presented
in the accompanying Consolidated Statement of Operations as Income/Loss from
discontinued operations. The following is a summary of the income from discontinued operations of our
commercial properties for the years ended December 31, 2003 and 2002. 3




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Year ended December 31,2003
    
    2002Revenues
    
    $
    1,007,813
    
    
    $
    1,362,050Operating expenses
    
    
    (444,995
    )
    
    
    (646,894
    )Depreciation and amortization
    
    
    (157,735
    )
    
    
    (228,450
    )Interest expense
    
    
    (251,900
    )
    
    
    (448,395
    )General and administrative
    
    
    (305,087
    )
    
    
    (264,116
    )Non-recurring real estate expenses
    
    
    (305,970
    )
    
    
    (2,023,000
    )Income (loss) from discontinued operations
    
    $
    (457,874
    )
    
    $
    (2,248,805
    )
 Losses from discontinued operations relating to our technology segment for the
years ended December 31, 2003 and December 31, 2002 were approximately $0 and
$82,000, respectively. The discontinued operations relating to our technology
segment for the year ended December 31, 2002 were primarily composed of general
and administrative expense. Employees The Company has three full-time employees as of March 18, 2004. Risk Factors The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. Certain information included in this Annual
Report on Form 10-KSB and other materials filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain statements that are forward-looking, such as statements relating to
business development and real estate development activities, acquisitions,
dispositions, future capital expenditures, financing sources and availability,
and the effects of regulation (including environmental regulation) and
competition. Although we believe that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, we can give no
assurance that our expectations will be achieved. As forward-looking
statements, these statements involve risks, uncertainties and other factors
that could cause actual results to differ materially from the expected results
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks,
uncertainties and other factors include uncertainties affecting real estate
businesses generally (such as entry into new leases, renewal of leases and
dependence on tenants ability to pay rent), risks relating to our ability to
maintain and increase property occupancy and rental rates, risks relating to
construction or development activities, acquisitions, dispositions, possible
environmental liabilities, risks relating to leverage and debt service
(including availability of financing on terms acceptable to us and sensitivity
of our operations and financing arrangements to fluctuations in interest
rates), dependence on the primary markets in which our properties are located,
the existence of complex regulations relating to our tax status and the
potential adverse impact of market interest rates on the market price for our
securities. We assume no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events. Our cash resources are limited. As of December 31, 2003, our unrestricted cash resources were approximately
$2,219,000 and our marketable securities available for sale were approximately
$99,000. Our marketable securities represented 10,000 common shares of
Stellent. The NASDAQ closing quote on March 18, 2004 was $8.64 per common
share of Stellent. We are dependent on our existing cash resources and our 4




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Stellent shares to meet our liquidity needs because cash from operations is not
sufficient to meet our
operating requirements. We have a history of losses. We have reported net losses for each year since our inception. We had an
accumulated deficit of approximately $23.7 million as of December 31, 2003.
There can be no assurance that we will become profitable in the future. We have approximately $2.8 million in debt secured by Richton Trail. Our declaration of trust and bylaws have no limitation on the amount of debt
that we may incur in the purchase, sale, development or expansion of any
property. Richton Trail secures approximately $2.8 million of outstanding
mortgage debt. In the future, we may incur additional indebtedness to finance
other acquisitions and development projects. Our debt service requirements may
reduce funds available for operations and future business opportunities, and
may increase our vulnerability to adverse general economic and industry
conditions and competition. We need additional capital to execute our business plan and may not be able to obtain it. We need additional equity and debt financing to execute our value-added
multi-family apartment plan to grow. Additional financing may have
unacceptable terms or may not be available at all for reasons relating to:  
    
    Our limited operating history;
    
    Our inability to meet our business plan;
    
    Lenders or investors view of real estate operating
companies with a focus on one segment of real estate or
small-capitalized companies; and If adequate financing is not available, we may not be able to acquire
additional properties or develop our new properties. Failure to obtain this
financing will materially and adversely affect our strategy. Any additional
capital offerings could dilute our existing shareholders, and we expect that as
we grow, our existing shareholders will be diluted significantly. We will be subject to risks with debt financing. Our business plan relies on debt financing. There are numerous risks
associated with debt financing including:  
    
    We must generate cash to service our debt;
    
    An increase in interest expense would adversely affect
our cash flow, our ability to make future distributions to our
shareholders and the value of our shares;
    
    We may not be able to finance necessary capital
expenditures for renovations and other improvements on favorable
terms or at all; and
    
    Our apartment complex is mortgaged to secure payment of
indebtedness, and if we are unable to meet mortgage payments, the
property could be foreclosed with a consequent loss of income and
asset value to us. Our focus on multi-family residential property may not be beneficial. In the past several years, our real estate focus was to acquire and develop
office and industrial properties. Richton Trail is a multi-family residential
property, a segment of real estate on which we intend to focus. There can be
no assurance that our management will be able to successfully acquire this type
of property. Even if our management is successful, investors may not value a
portfolio of the 5




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same type of properties as highly as they would value
portfolios consisting of diverse properties. We may not be able to manage our growth effectively. Our business plan envisions significant growth. This growth will require
increased investment in management and professionals, personnel, financial and
management systems and controls and facilities, which could cause operating
results to vary significantly from quarter to quarter and could negatively
impact our financial results. Any difficulty or significant delay in the
implementation or operation of existing or new systems or integration of new
personnel could adversely affect our ability to manage growth and our cash
flow. James C. Mastandrea controls a significant percentage of our shares. Mr. Mastandrea, our Chairman of the Board, Chief Executive Officer and
President, is a member and the manager of Paragon Real Estate Development LLC
(Paragon Development) and John J. Dee, our Chief Financial Officer and a
trustee, is also a member of that entity. Of the 696,078 preferred shares
issued to Mr. Mastandrea and Mr. Dee under their restricted share agreements,
534,668 preferred shares were converted into 12,233,738 common shares and the
balance of 161,410 preferred shares remain outstanding. Mr. Mastandrea and Mr.
Dee assigned their common and preferred shares to Paragon Development. In
addition, Hampton Court Associates owns 813,938 units in Paragon Real Estate,
LP, which may be converted into 18,623,715 common shares or cash, at our
discretion, at any time after July 1, 2007. Mr. Mastandrea is the general
partner of Hampton and owns directly or indirectly 325,575 of these units,
which may be converted into 7,449,481 common shares or cash, at our discretion.
If Mr. Mastandrea caused Hampton to redeem all of the limited partnership
units in Paragon Real Estate, LP, and we elected to convert such units into
common shares, and if the preferred shares held by Paragon Development were
converted into common shares, then including the other common shares held by
Paragon Development, Mr. Mastandrea would own or have the right to vote
approximately 78.3% of our common shares. Consequently, he would have the
ability to approve some matters requiring the vote of shareholders which may
result in corporate action with which you do not agree. Mr. Mastandrea has the right to appoint a majority of our board of trustees. Under restricted share agreements, Mr. Mastandrea will have the right to
appoint five trustees to our board as long as Paragon Development owns either:  
    
    a majority of the preferred shares; or
    
    40% or more of the sum of the restricted shares issued
to Mr. Mastandrea and Mr. Dee and the common shares issued to
them upon conversion of their restricted preferred shares into
restricted common shares after the exchange offer. Even if these conditions are not met, Mr. Mastandreas appointment right will
continue until March 4, 2013; provided that if Mr. Mastandrea remains as our
Chairman or Chief Executive Officer on that date, the right to appoint five
trustees will continue until the time Mr. Mastandrea is no longer our Chairman
or Chief Executive Officer. Although Mr. Mastandrea waived this right in the
election of trustees in 2003, he may exercise it any time in the future. Mr. Mastandrea and Mr. Dee have conflicts of interest. James C. Mastandrea is our Chairman of the Board, Chief Executive Officer and
President. We are the general partner of Paragon Real Estate, LP, our
operating partnership, and Mr. Mastandrea, as our Chief Executive Officer,
therefore, oversees the day to day operations of the operating partnership.
Mr. Mastandrea owns directly or indirectly limited partnership units totaling
40% of the operating partnership. Because of his different positions, Mr.
Mastandrea faces conflicts of interest in making determinations regarding the
Paragon operating partnership. Mr. Mastandreas interests may differ from the
interests of our shareholders and the other limited partners, including
different and more adverse tax consequences than holders of our common or
preferred shares upon the sale of Richton 6




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Trail, the refinancing of Richton
Trails debt, or in connection with any proposed tender offer or merger
involving us. Therefore, we and Mr. Mastandrea, as partners in the Paragon
operating partnership, may have different objectives regarding the appropriate terms of
any such transaction. John J. Dee is our Senior Vice President, Chief Financial Officer and a
trustee. Mr. Mastandrea and Mr. Dee may have a conflict of interest with
respect to their obligations as officers and trustees to the extent we attempt
or the Paragon operating partnership attempts to enforce the terms of the
Paragon operating partnership agreement or any other agreement to which we and
either or both Mr. Mastandrea and Mr. Dee are parties. The failure to enforce
the material terms of any such agreement, particularly indemnification
provisions and the remedy provisions for breaches of representations and
warranties or failures to perform covenants, could result in a substantial
monetary loss to or otherwise could have a material adverse effect on us and
our shareholders. Mr. Mastandrea has additional conflicts of interest because he owns the
management company that manages Richton Trail and his spouse, who is President
and CEO of the management company, supervises the on-site property management
employees. Mid Illinois Realty Corp., an Illinois corporation, is owned by Mr. Mastandrea
and is the management company that manages Richton Trail. Mr. Mastandreas
spouse is President and CEO of Mid Illinois Realty and supervises the on-site
property employees who manage the daily operations of Richton Trail. The
existing management fee is 4.5% of gross revenues collected, excluding expense
reimbursements and forfeited security deposits. While the contract to manage
Richton Trail, including the management fee, is at a competitive market rate
for similar services with an unrelated company, it was not negotiated at
arms-length. We cannot provide any assurance that a contract with an
independent third party could not be negotiated upon terms more favorable to
us. In addition, Mr. Mastandrea owns another company, MDC Realty Corporation,
an Illinois corporation, which is reimbursed, at cost, for the payroll costs of
the employees at Richton Trail that are processed by MDC Realty through an
unaffiliated payroll services provider. MDC Realty does not charge Richton for
these services. As our Chairman of the Board, Chief Executive Officer and
President, and because we are the general partner of the Paragon operating
partnership that contracts with Mid Illinois Realty and MDC Realty, Mr.
Mastandrea faces conflicts of interest in making determinations regarding the
management of Richton Trail and the enforcement of the terms of the Richton
Trail management agreement. As the Company acquires more properties, it
intends to use local third party management companies until we are able to
provide management services ourselves. There can be no assurances that we will
be able to provide management services for our properties, or after management
services are handled internally that we will operate our properties more
efficiently or effectively than third party management companies. We may face competition from other business interests of Mr. Mastandrea. Mr. Mastandrea owns a combined mixed-use shopping plaza and office facility in
suburban Chicago, Illinois. We do not believe that this property will compete
with our apartment complex; however, it is possible that this mixed-use
facility may compete with us in the future in the event we invest in a similar
property in close proximity to it. We are dependent on a small number of key senior professionals and the loss of
any of these professionals could adversely affect our results and may, in turn,
negatively affect the market price of our common shares. The loss of professionals, particularly a senior professional with a broad
range of contacts in an industry, could materially and adversely affect our
operating results. Among the key professionals on whom we depend, and whose
loss could have a material adverse effect on our business, are Mr. Mastandrea,
Mr. Dee and Steven M. Edelman, our Chief Investment Officer and Senior Vice
President. We believe that personal relationships with potential investors,
lenders and sellers of real estate properties and projects are an important
component of our business plan. These relationships depend in part upon the
individual employees who represent us. We will face competition for 7




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experienced real estate professionals. We cannot assure you that losses of key
personnel due to competition or otherwise will not occur. The board of trustees has the ability to effect changes to our major policies,
including our investment policy, without the vote of shareholders. Our major policies, including policies with respect to acquisitions, mergers,
financing, growth, debt capitalization, recapitalization of the equity
structure and distributions will be determined by our board of trustees. The
board of trustees may amend or revise these and other policies from time to
time without the vote of the shareholders. Accordingly, the shareholders will
have no direct control over changes in our policies which may not fully serve
the interests of all of our shareholders. We cannot sell Richton Trail for ten years without Mr. Mastandreas consent. We are precluded by the Paragon partnership agreement from selling the Richton
Trail apartment buildings for ten years without the consent of Mr. Mastandrea.
Mr. Mastandreas right to consent may present him with a conflict of interest. Shareholders could experience possible future dilution through the issuance of
additional shares or partnership interests. As a result of growth relating to acquisitions financed with the issuance of
additional preferred or common shares or interests in the Paragon operating
partnership or any similar entity of ours, you could experience significant
future dilution. We cannot estimate how much dilution will occur, but
anticipate that it would be significant. We currently do not plan to distribute dividends to the holders of our shares. Unless we again become a real estate investment trust, we intend to retain
earnings in order to fund the operation and expand our business. Accordingly,
we do not intend to pay cash dividends on our common or preferred shares.
Payment of future cash dividends, if any, and the amounts thereof will be
dependent upon our earnings, financial requirements and other factors deemed
relevant by our board of trustees. Our real estate assets are located in only one market. All of our existing properties are located in Illinois. Assuming no other
property acquisitions under our business plan, our financial performance is
dependent upon economic conditions in this state and the specific local market
where the property is located. Like other real estate markets, this market has
experienced economic downturns in the past. Such slowdowns can lead companies
to lay off employees, which might cause individuals to move or miss rent
payments. Declines in the economy of the Illinois real estate market could
adversely affect our operations or cash flow and ability to meet ongoing
obligations, pay distributions to our shareholders, if in the future we elect
to pay cash dividends on our common shares, and adversely impact the value of
our shares. Real Estate Risks We face competition from numerous real estate entities with greater resources
than ours. We compete for the acquisition of properties with many entities, including,
among others, publicly-traded REITs, life insurance companies, pension funds,
partnerships and individual investors. Many competitors have substantially
greater financial and personnel resources than we do. Competition may reduce
the number of suitable acquisition opportunities offered to us and increase the
bargaining power of property owners seeking to sell. In addition, certain
competitors may be willing to accept lower returns on their investments. If
competitors prevent us from buying properties that may be targeted for
acquisition, our business plan may be adversely impacted, as will our capital
appreciation and value. 8




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Because real estate is illiquid, we may not be able to sell properties when
appropriate. Real estate investments generally cannot be sold quickly. As we grow in
accordance with our
business plan, this illiquidity will limit our ability to alter our portfolio,
whether necessary to sell our properties, to raise capital, or in response to
changes in economic or other conditions. In addition, the sale price of any
disposition may not recoup or exceed the amount of our investment. Our operating costs may rise, which could reduce our cash flow. As we expand, our operating costs may increase as a percentage of our revenue
as a result of rising costs and the heightened awareness of possible terrorist
attacks. As a direct result of the September 11, 2001 terrorist attacks, costs
have increased for building security, property/casualty and liability
insurance, and property maintenance. We may not be able to pass along the
increased costs associated with such increased building security to our
tenants, which could reduce our cash flow. The possibility of future terrorist attacks has caused increases in, the cost
of premiums for insurance coverage. Furthermore, in light of recently-adopted
securities laws and regulations and the additional responsibility given to
audit committees as a result, we may experience increased costs in our
directors and officers insurance premiums and fees for auditors and other
independent third parties hired by the audit committee to fulfill its expanded
responsibilities. Because of rising costs in general, we might experience increases in our
property maintenance costs, such as for cleaning, electricity, real estate
taxes and heating, ventilation and air conditioning. If operating expenses
increase, the availability of other comparable apartment complexes in our
specific geographic market may limit our ability to increase rents, which could
reduce our cash flows and limit our ability to make distributions to
shareholders, if in the future we elect to pay cash dividends on our common
shares. New development and acquisitions may not produce results in accordance with our
expectations and may require development and renovation costs exceeding our
estimates. Our real estate investment strategy is to grow by acquiring well located,
under-performing multi-family residential properties and repositioning them
through renovation, leasing, improved management and branding. Once made, our
investments may not produce results in accordance with our expectations. Our
actual renovation and improvement costs to bring an acquired property up to
market standards or to bring units of an existing property up to standards for
a tenant may exceed our estimates. Risks associated with these activities
include:  
    
    the unavailability of financing;
    
    construction costs exceeding original estimates;
    
    construction and lease-up delays resulting in increased
debt service and construction costs;
    
    complications in obtaining necessary zoning, occupancy
and other governmental permits; and
    
    a lack of acceptance of our value added strategy by
investors or tenants. In addition, acquisitions and development projects require a significant amount
of managements time which could divert managements attention away from the
daily operation of our business. Financially distressed tenants may limit our ability to realize the value of
our investments. Following a tenants lease default, we may experience delays in enforcing our
rights as a landlord and may incur substantial costs in protecting our
investment and recovering lease and other payments owed to us. In addition, a
tenant may seek bankruptcy law protection, which could relieve the tenant from
its obligation to make lease payments. 9




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We may be unable to renew leases or relet units as leases expire. If tenants fail to renew their leases upon expiration, we may be unable to
relet the subject unit. Even
if the tenants do renew their leases or we can relet the units, the terms of
renewal or reletting (including the cost of any upgrades) may be less favorable
than current lease terms. Some potential losses are not fully covered by insurance or may not be covered
by insurance at all. We carry comprehensive liability, fire, extended coverage and rental loss
insurance on our property. We believe the policy specification and insured
limits of these policies are adequate and appropriate. However, there are
types of losses, such as losses from casualties associated with civil unrest,
acts of God, including natural disasters, and acts of war that generally are
not insured. As a consequence of the possibility of terrorist attacks in the future, we may
be unable to renew or duplicate our current insurance coverage in adequate
amounts. In addition, insurance companies may no longer offer coverage against
certain types of losses, such as losses due to terrorist acts and toxic mold,
or if offered, these types of insurance may be prohibitively expensive. Should
an uninsured loss or a loss in excess of insured limits occur, we could lose
all or a portion of the capital we have invested in a property, as well as the
anticipated future revenue from the property. Inflation, changes in building
codes and ordinances, environmental considerations, and other factors also
might make it unfeasible to use insurance proceeds to replace a property after
it has been damaged or destroyed. Under these circumstances, the insurance
proceeds received by us might not be adequate to restore our economic position
with respect to that property. In such an event, we may nevertheless remain
obligated for any mortgage debt or other financial obligations related to the
property. We cannot provide assurance that material losses in excess of
insurance proceeds will not occur in the future.
If any of our properties experience a catastrophic loss, the loss could
seriously disrupt our operations, delay revenue and result in large expenses to
repair or rebuild the property, if we are able to make the repairs or rebuild
the property at all. These events could adversely affect our cash flow and
ability to make distributions to shareholders. The ownership of real estate is subject to numerous risks generally. The underlying value of our real estate investments and our income and our
ability to make future distributions to our shareholders are dependent upon our
ability to operate rental properties in a manner sufficient to maintain or
increase cash available for future distribution, if any. Income from the
properties may be adversely affected by:  
    
    changes in national economic conditions;
    
    changes in local market conditions due to changes in
general or local economic conditions and neighborhood
characteristics;
    
    changes in interest rates and in the availability, cost
and terms of mortgage funds;
    
    impact of present or future environmental legislation
and compliance with environmental laws;
    
    ongoing need for capital improvements, particularly in older properties;
    
    more attractive lease incentives offered by competitors in similar markets;
    
    increased market demand for newer properties;
    
    changes in real estate tax rates and other operating expenses;
    
    adverse changes in governmental rules and fiscal policies;
    
    adverse changes in zoning laws; and
    
    other factors which are beyond our control. 10




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Liability for environmental matters could adversely affect our financial
position. Under various federal, state, and local environmental laws, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in the
property. These laws often impose liability whether or not the owner or
operator
caused or knew of the presence of the hazardous or toxic substances and whether
or not the storage of such substances was in violation of a tenants lease. The
owner or operator is not always in a position to know what a tenant stores in
its apartment. In addition, the presence of hazardous or toxic substances, or
the failure to remediate such property, may adversely affect our ability to
lease any or all of a property and our ability to borrow using the contaminated
property as collateral. In connection with the ownership of any property, we
are potentially liable for any cleanup costs and these costs may be
substantial. Our assessments of our existing properties have not revealed any environmental
liability that we believe would have a material adverse effect on our business,
assets or results of operations, nor are we aware of any such environmental
liability. We also intend to condition future acquisitions on successful
environmental assessments. Nevertheless, it is possible that our past and
future assessments will not reveal all environmental liabilities or that there
are existing or future material environmental liabilities of which we will be
unaware. Compliance with applicable laws, rules and regulations, including the Americans
with Disabilities Act, can be costly. All places of public accommodation are required to meet certain federal
requirements, including but not limited to those associated with the Americans
with Disabilities Act. A number of additional federal, state and local laws
exist that also may require modifications to our present and future properties
or restrict certain further renovations thereof, with respect to access thereto
by disabled persons. Although we believe that our existing property is substantially in compliance
with present requirements, future legislation may impose additional burdens or
restrictions on owners with respect to access by disabled persons. Although
the costs of compliance with any additional legislation are not currently
ascertainable, the costs could be substantial. Limitations or restrictions on
the completion of certain renovations may also limit application of our
investment strategy in certain instances or reduce overall returns on our
investments. We may not be able to meet AMEXS continued listing qualifications. While our common shares are currently listed on the American Stock Exchange, we
may not be able to meet AMEXs continued listing qualifications in the future.
In addition, our common shares are thinly traded and trading volumes fluctuate
significantly. The average trading volume for year-ended December 31, 2003 was
approximately 21,000 common shares per day. As a result, investors may have
difficulty in selling our common shares at generally prevailing prices. Advantageous transactions may be prevented. Certain provisions contained in our declaration of trust and bylaws and under
federal and Maryland laws may have the effect of discouraging a third party
from making any acquisition proposal for us. For example, such provisions may  
    
    deter attractive tender offers for our shares, or
    
    deter purchases of large blocks of our shares, thereby
limiting the opportunity for our shareholders to receive a
premium for their shares over then-prevailing market prices. 11




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Possible issuances of future series of preferred shares. Pursuant to our declaration of trust, our Board of Trustees has the authority
to fix the rights, preferences, privileges and restrictions, including voting
rights, of unissued shares of our capital and to issue those shares without any
further vote or action by the shareholders. The rights of the holders
of our common shares will be subject to, and may be adversely affected by, the
rights of the holders of any series of preferred shares that may be issued in
the future. 
 Item 2. Description of Property As of December 31, 2003, we owned one residential apartment complex, Richton
Trail, consisting of 12 three-story apartment buildings containing a total 72
units, which we acquired on July 1, 2003. The apartment buildings were built
in 1978, 1979 and 1982, were refurbished in the late 1980s and again in the
1990s. They are situated in a suburb of Chicago on 3.21 acres, or 139,884
square feet, of land. Each building has its own parking lot and contains six
apartment units, with a combined total of 60 two-bedroom apartments and 12
one-bedroom apartments. Richton Trail contains 56,040 square feet of net rentable area and 74,196
square feet of above grade gross building area. Assuming all available
apartments are rented and we acquired the building on January 1, 2003, the
property would have generated total annual rental revenue of approximately
$630,000 in 2003. As of December 31, 2003, 100.0% of the property, or 72
units, was rented. Tenants lease obligations are generally on a year-to-year
basis. Richton Trail must maintain approximately 83% of the apartments rented
in order to achieve the necessary cash flow to operate the property with its
current expenses and liabilities. We currently have no plans for any
significant improvements at Richton Trail because the property has been
maintained in the past and it is at or near full occupancy. Paragon Real Estate, LP, an operating partnership of which we are sole general
partner and own a 1.0% interest, owns Richton Trail. On October 1, 2003, we closed on the sale of our 92.9% general partnership
interest in four commercial properties. Proceeds from the sale of these
properties, net of closing costs and the mortgage balances assumed by the
purchaser, were approximately $1,601,000. The proceeds from the sale were paid
in a combination of approximately $801,000 in cash and 2,859,765 of our common
shares at an average closing price for the 30 calendar days prior to June 27,
2003 of $0.28. Also as a result of the sale, approximately $318,000
representing cash from the commercial real estate properties was released from
mortgage related restrictions and made available for operations. Investments in Real Estate Depreciation and Insurance Coverages Depreciation expense on our apartment buildings is computed using the straight
line method based on a useful life of forty years. We believe we have adequate insurance coverage for our real estate property. Mortgage Loan On October 31, 2003, we completed the refinance of the Richton Trail with
KeyBank Real Estate Capital. The mortgage loan payable of $2.8 million has 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. The balance due at maturity in 2013 will be approximately $2.1
million. The net proceeds from the loan were approximately $1.3 million. The
mortgage loan payable was approximately $2,812,000 as of December 31, 2003. 12




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Item 3. Legal Proceedings In the normal course of business, we may be involved in, but are currently not
aware of, 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. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth
quarter of 2003. 
 PART II 
 Item 5. Market for Common Equity and Related Shareholder Matters Our common shares began trading on the American Stock Exchange (AMEX) on
October 28, 1999 under the symbol RPP. On June 30, 2003 we changed our name
to Paragon Real Estate Equity and Investment Trust. As a result of our name
change our common shares now trade under the new symbol PRG on the AMEX. Our Class A Preferred Shares began trading on the AMEX on October 28, 1999
under the symbol RPP.A. In May 2003, we offered preferred shareholders a
one-time incentive to exchange preferred shares into common shares, which
expired June 30, 2003. Through that exchange offer, preferred shareholders
exchanged 1,174,120 of the preferred shares, or nearly 81%, for 26,865,042
common shares. After the exchange offer was completed, the remaining preferred
shares held by investors not affiliated with Paragon had an aggregate market
value below $1 million and therefore no longer met the minimum requirement for
listing on the American Stock Exchange, as set forth in Section 1202(b) of the
AMEXs Company Guide.This requirement was disclosed in the proxy statement as
well as our intent not to seek another trading market for the preferred shares.
AMEX suspended trading of the preferred shares and the Securities and Exchange
Commission removed the preferred shares from listing and registration in
accordance with Section 12 of the Securities and Exchange Act of 1934.
Preferred shareholders retain the right to convert each of their shares for
3.448 common shares. The preferred shares are now on the Over the Counter
Market with the symbol PRGYP. The table below shows the range of the high and low sale prices for our common
shares as reported on the AMEX. The quotations shown represent interdealer
prices without adjustment for retail markups, markdowns or commissions, and may
not reflect actual transactions. High
    
    Low20034th Quarter
    
    $
    0.34
    
    
    $
    0.183rd Quarter
    
    $
    0.39
    
    
    $
    0.192nd Quarter
    
    $
    0.39
    
    
    $
    0.131st Quarter
    
    $
    0.20
    
    
    $
    0.1120024th Quarter
    
    $
    0.20
    
    
    $
    0.103rd Quarter
    
    $
    0.27
    
    
    $
    0.112nd Quarter
    
    $
    0.45
    
    
    $
    0.181st Quarter
    
    $
    0.49
    
    
    $
    0.26
 On March 18, 2004, the last reported sales price of our common shares on the
AMEX was $0.23. The number of holders of record of our common shares was
approximately 300 as of March 18, 2004 and we estimate we have approximately
900 beneficial holders of common interests as of that same date. 13




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Dividend Policy We have not declared or paid dividends on our common shares since the fourth
quarter of 1999, and we do not anticipate paying dividends on our common shares
in the foreseeable future. Declaration or payment of dividends, if any, in the
future, will be at the discretion of the Board of Trustees and will depend on
our then current financial condition, results of operations, capital
requirements and other
factors deemed relevant by the Board of Trustees. On June 30, 2003, the holders of our preferred shares consented to waive the
dividend that would otherwise have been payable in May 2003 and to eliminate
any future dividends that would have been payable under the terms of our
preferred shares. The waiver was sought in connection with a one-time
incentive exchange offer under which we offered to exchange each of our
preferred shares for 22.881 common shares. The exchange offer was completed on
June 30, 2003. Preferred Share Conversions Subsequent to the exchange offer, during the fourth quarter of 2003, three
shareholders converted 1,400 preferred shares into 4,827 common shares pursuant
to their terms. We believe this issuance of common shares to be exempt from
registration under Section 3(a)(9) of the Securities Act. 
 Item 6. Managements Discussion and Analysis or Plan of Operation Overview Paragon Real Estate Equity and Investment Trust, formerly Stonehaven Realty
Trust (the Company, Paragon, we, our, or us), is a real estate
company that primarily acquires, owns and operates multi-family residential
properties. As of December 31, 2003, 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 (Hampton Court) owns the remaining 99.0% interest in Paragon Real
Estate, LP. We are the sole general partner of Paragon Real Estate, LP and
Hampton Court is the limited partner. Hampton Courts ownership interest in
Paragon Real Estate, LP is 813,938 restricted limited partnership units, each
unit redeemable after July 1, 2007 for cash, or, at our option, 22.881 of our
common shares. Brief History The Company was formed on March 15, 1994 as a Maryland real estate investment
trust. We operated as a traditional real estate investment trust 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. Recent Developments in 2003 and Executive Overview On March 4, 2003, James C. Mastandrea and John J. Dee signed exclusive
employment agreements with the Company, and were joined by Steven M. Edelman in
May 2003. Mr. Mastandrea is our Chairman, Chief Executive Officer and
President, Mr. Dee is our Chief Financial Officer, Senior Vice President and a
trustee, and Mr. Edelman is our Chief Investment Officer and Senior Vice
President. At the June 30, 2003 annual meeting, shareholders approved several proxy
proposals to reposition the 14




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Company, of which the most significant were the following:  (1)
    
    A one-time incentive exchange offer to holders of our preferred shares to
exchange each preferred share for 22.881 common shares, and
elimination of the preferred share dividend to conserve cash for
operations and acquisitions;(2)
    
    The July 1, 2003 acquisition of Richton Trail, a suburban Chicago
apartment complex owned
by a partnership of which Mr. Mastandrea is the general partner, for
813,938 restricted limited partnership units of Paragon Real Estate LP,
convertible after four years into our common shares at the rate of one
partnership unit for 22.881 common shares, or cash, at our option;(3)
    
    The October 1, 2003 sale of our four existing commercial properties
located in Minnesota to former members of management for cash of
approximately $801,000 plus $318,000 released from mortgage related
restrictions and the return of 2,859,765 of our common shares; and(4)
    
    The election of five trustees, resulting in the board of trustees
being comprised of four independent trustees and two trustees who are
also executive officers. On October 31, 2003, Richton Trail was refinanced with a new $2.8 million
mortgage, providing cash of approximately $1.3 million for operations and
acquisitions. Due to the sale of our four commercial properties, the revenues and expenses of
those properties, along with our technology segment, were reclassified as
discontinued operations for 2003 and 2002. Our current management has developed a value-added business plan that is
primarily focused on acquiring well located, under-performing multi-family
residential properties, and then repositioning them through renovation,
leasing, improved management and branding. Besides finding acquisitions, it is
equally important to find sources of capital to fund the acquisitions, or find
sellers interested in exchanging their properties for tax deferred partnership
units. Forward-Looking Information The following is a discussion of our results of operations for the years ended
December 31, 2003 and 2002 and financial condition, including  
    
    Explanation of changes in the results of operations in the
Consolidated Statements of Operations for the year ended December 31,
2003 compared to the year ended December 31, 2002.
    
    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 year ended December
31, 2003, and how we intend to generate cash for long-term capital
needs.
    
    Our current income tax status. This section contains forward-looking statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on our current
expectations, estimates and projections about future events and financial
trends affecting the financial condition and operations of our business.
Forward looking statements can be identified by the use of words such as may,
will, should, expect, estimate or comparable terminology.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which we cannot predict with accuracy and some of which we might not
even anticipate. Although we believe that the expectations, estimates and
projections reflected in these forward-looking statements are based on
reasonable assumptions when they are made, we can give no assurance that these
expectations, estimates and projections can be achieved. Future events and
actual results may differ materially from those discussed in the
forward-looking statements. The Company assumes no obligation to update or
supplement forward-looking statements that become untrue because of subsequent
events. Factors that could cause actual results to differ materially from 15




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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, our failure
to lease unoccupied units or to re-lease occupied units upon expiration of
leases in accordance with the our projections, changes in prevailing interest
rates, the cost or general availability of equity and debt financing,
unanticipated costs associated with the acquisition and
integration of our acquisitions, our ability to obtain adequate insurance for
terrorist acts, demand for tenant services beyond those traditionally provided
by landlords, and potential liability under environmental or other laws.
Please see the section Risk Factors on previous pages for other factors which
could affect our Company. Comparison of the years ended December 31, 2003 and 2002 Revenues from Continuing Operations As a result of the October 1, 2003 sale of our 92.9% general partnership
interest in the operating partnership that held our four commercial real estate
properties, rental revenues and interest income and other income related to
these properties were reclassified to discontinued operations for the years
ended December 31, 2003 and 2002. Richton Trail, which we acquired on July 1,
2003, is included in continuing operations. Rental revenue of approximately $288,000 for the year ended December 31, 2003
was comprised entirely of Richton Trail, acquired on July 1, 2003, compared to
$0 the year ended December 31, 2002 when it was not part of our portfolio. Interest income and other income decreased by approximately $8,000 or 30.0% to
approximately $19,000 for the year ended December 31, 2003 compared to the year
ended December 31, 2002. The decrease is primarily due to the decrease in cash
and cash equivalents, offset in part by the acquisition of the Richton Trail in
July 2003. Expenses from Continuing Operations Total expenses increased from approximately $431,000 for the year ended
December 31, 2002 to approximately $1,223,000 for the year ended December 31,
2003, a net increase of $792,000 described below. As a result of the October 1, 2003 sale of our 92.9% general partnership
interest in the four commercial Minnesota properties, property taxes and
insurance, depreciation and amortization, interest and management fees related
to these properties were reclassified to discontinued operations. Richton
Trail, which we acquired on July 1, 2003, is included in continuing operations,
as follows:  
    
    Property, operating and maintenance  $88,000
    
    Property taxes and insurance   $48,000
    
    Depreciation and amortization  $57,000
    
    Interest  $66,000
    
    Management fees  $13,000 General and administrative expenses increased from approximately $409,000 for
the year ended December 31, 2002 to approximately $951,000 for the year ended
December 31, 2003. The increase was primarily the result of increased
professional fees for hiring new management and obtaining shareholder approval
to reposition the Company, coupled with a $300,000 non-cash severance expense
recorded in connection with the employment contract of Duane H. Lund, our
former Chief Executive Officer. Mr. Lund received 95,541 preferred shares in
lieu of a cash payment. The number of shares issued was based on two times his
annual salary (as provided in his employment contract) with the price of the
preferred shares based on the average closing price for the 30 calendar days
prior 16




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to March 1, 2003. Loss from operations before minority interests As a result of the above, loss from operations before minority interests
increased from approximately $404,000 for the year ended December 31, 2002 to
approximately $917,000 for the year ended
December 31, 2003. Loss allocated to minority interests Loss allocated to minority interests decreased from approximately $168,000 for
the year ended December 31, 2002 to approximately $149,000 for the year ended
December 31, 2003 primarily as a result of the October 2003 sale of our
partnership interest in our commercial properties offset, in part, by the July
2003 acquisition of our partnership interest in Richton Apartments. Loss from operations As a result of the above, loss from operations increased from approximately
$235,000 for the year ended December 31, 2002 to approximately $768,000 for the
year ended December 31, 2003. Gain on sale of marketable securities The gain on sale of marketable securities of approximately $136,000 for the
year ended December 31, 2003 was a result of our sale of 30,000 common shares
of Stellent at an average price of $8.30 per share. The gain on sale of marketable securities of approximately $56,000 for the year
ended December 31, 2002 was a result of our sale of 40,000 common shares of
Stellent at an average price of $31.34 per share early in 2002 before the share
price declined significantly. Our Stellent shares were acquired in connection with the disposition of our
technology segment on July 10, 2001 and were valued at $29.94 per share based
on the NASDAQ closing quote per share on July 9, 2001. In 2002, we recorded a
loss on the Stellent shares, as described immediately below. Provision for loss on marketable securities The provision for loss on marketable securities of approximately $1,048,000 for
the year ended December 31, 2002 was a result of the decline in market value of
the Stellent shares. Given market conditions at that time, management viewed
the decline in value of the Stellent shares as a permanent impairment.
Accordingly, we recorded a provision for loss on marketable securities. Loss from continuing operations Loss from continuing operations decreased from approximately $1,227,000 for the
year ended December 31, 2002 to approximately $632,000 for the year ended
December 31, 2003. Discontinued operations Loss from discontinued operations of our technology segment, net of tax,
was $0 and approximately $82,000 for the years ended December 31, 2003 and
2002, respectively, and was a result of the Companys discontinued operations
of its technology segment. Loss from discontinued operations of our commercial properties, net of
tax, was approximately $458,000 and $2,249,000 for the years ended December 31,
2003 and 2002, respectively. The loss in 2003 included $350,000 representing
tenant improvements, leasing commission and professional fees spent on the
commercial properties prior to their sale without an increase in proceeds. The
loss in 17




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2002 included $2,023,000 to adjust the carrying value of the commercial
properties to estimated fair value based on an independent appraisal. The
discontinued operations were a result of the sale of our 92.9% general
partnership interest in the four commercial properties on October 1, 2003.
Current management did not consider these properties, comprised of small
office/industrial facilities, to be core assets for the new value-added
business plan for multi-family residential properties. Therefore, the
commercial properties were sold to raise cash for short term operations and for
future acquisitions. As a result of the sale of our commercial properties on October 1, 2003,
we received cash of approximately $801,000, and approximately $318,000 of
additional cash was released from mortgage related restrictions and made
available for operations. Preferred Share Dividends Preferred share dividends decreased from approximately $630,000 for the
year ended December 31, 2002 to $0 for the year ended December 31, 2003. The
preferred shareholders were offered a one-time incentive to exchange each
preferred share for 22.881 common shares. In connection with the exchange
offer, preferred and common shareholders approved a proxy proposal in June 2003
to eliminate the dividend requirement of the preferred shares. Net loss attributable to Common Shareholders Based on the above, the net loss attributable to common shareholders decreased
from approximately $4,188,000 for the year ended December 31, 2002 to
approximately $1,090,000 for the year ended December 31, 2003. 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. In 2003, we recognized a provision for loss on the four
commercial properties of $350,000 for tenant improvements, leasing commissions
and professional fees spent on the properties prior to their sale without an
increase in proceeds. In 2002, the provision for loss on the commercial
properties of $2,023,000 was based on a market appraisal of the properties
compared to their depreciated cost. 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 18




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allocations impact depreciation expense and gain or loss recorded on sale of
real estate. When we acquired Richton Trail, we allocated 80% of the
acquisition price to building and 20% to land, based on our judgment of the
relative values of the two components and as supported by standard industry
practice. The acquisition price was from a market appraisal. Valuation Allowance of Deferred Tax Asset We account for income taxes using the liability method under which deferred tax
assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities using enacted tax
rates in effect for the period in which the differences are expected to affect
taxable income. At December 31, 2003, we have net operating losses totaling
approximately $11.0 million and capital losses of approximately $0.8 million.
While these losses created a deferred tax asset of approximately $4.9 million,
a valuation allowance of $4.9 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 2023. Liquidity and Capital Resources Cash provided by operations, equity transactions, borrowings from affiliates
and lending institutions have generally provided the primary sources of
liquidity to the Company. Historically, the Company has used these sources to
fund operating expenses, satisfy its debt service obligations and fund
distributions to shareholders. In 2003, as part of the one-time incentive
exchange offer for holders of preferred shares to convert to common shares, our
shareholders approved eliminating the preferred dividend, which allows us to
use that cash for current operations and future growth of the Company. Cash Flows As of December 31, 2003, our unrestricted cash resources were approximately
$2,219,000 and our marketable securities available for sale were approximately
$99,000, comprised solely of 10,000 common shares of Stellent. The NASDAQ
closing quote on March 18, 2004 was $8.64 per common share of Stellent. We are
dependent on our existing cash resources and Stellent shares to meet our
liquidity needs because cash from operations are not sufficient to meet our
operating requirements. During the year ended December 31, 2003, we generated cash of (i) approximately
$1,119,000 from the disposition of four commercial properties; (ii)
approximately $249,000 from the sale of 30,000 common shares of Stellent, net
of commissions; and (iii) approximately $1,286,000 in proceeds from the
mortgage loan refinancing of our residential apartment complex. Cash was used
primarily for (i) continuing operations of approximately $890,000, which
included a deposit of $250,000 on a development site that was returned to the
Company in February 2004; (ii) discontinued operations of our commercial real
estate properties of approximately $458,000; (iii) acquisition and additions to
real estate properties of approximately $47,000; (iv) payments on mortgage
loans of approximately $18,000; and (v) payments of deferred financing costs of
approximately $55,000. As a result, the Companys cash balance increased by
approximately $1,190,000 from approximately $1,029,000 at December 31, 2002 to
approximately $2,219,000 at December 31, 2003. 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 at
December 31, 2003 compared to December 31, 2002, 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% even prior to our
ownership. So long as Richton Trail maintains approximately 83%
occupancy, it 19




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will generate the cash flow needed to pay its current
expenses and the mortgage debt service. We intend to keep the property
as close to 100% occupancy as possible and do not foresee any market
conditions that would show a decline in occupancy or rents during the
coming year. Also, no major improvements are planned at the property
for next year.
    
    Each of the three employment contracts has a salary requirement of
only $60,000 per year, plus medical benefits which are being paid for
only one of the three executive officers in an effort to conserve cash.
The Company has the benefit of three highly qualified executives in
the real estate industry, each with previous experience with a publicly
traded company, for salaries that are well below market levels. As the
Company grows and appreciates in value, our executive officers expect
to share in the growth of the Company, along with our other
shareholders, because each executive has a significant number of common
shares, and to earn higher levels of compensation. 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 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 joint venture structures to be used for property and portfolio
acquisitions, and use tax-deferred operating partnership units, convertible
into a separate class of common shares, 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 will materially and adversely affect 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 current
overhead for approximately two years in order to make acquisitions. Current Tax Status At December 31, 2003, we have net operating losses of approximately $11.8
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 carry forwards, which will expire in varying
amounts through the year 2023. 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. The partnership that owned our four commercial properties was audited by the
Internal Revenue Service for the tax periods ended December 31, 1999 and 2000.
On December 22, 2003, it received a no adjustments letter from the Internal
Revenue Service, thereby completing the audit without any changes to the tax
returns. 20




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##### Table of Contents



Interest Rates and Inflation For the past several years, interest rates have declined, and many financial
experts and economists have predicted 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 are expected to increase during
2004, which should lead to slightly lower prices for real estate properties and
to higher borrowing rates. The interactions between an increase in interest
rates and a decrease in selling prices of properties cannot be measured with
any certainty. Paragon will continue to pursue its value-added business plan
during 2004. The economics of transactions, including price, current cash
flow, existing debt, cost of new funds for acquiring the properties, and
potential for increased value, will be reviewed 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. 
 Item 7. Financial Statements The required audited consolidated financial statements of the Company are
included herein commencing on page F-1. 
 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 
 Item 8a. Disclosure Controls and Procedures As of December 31, 2003, the date of this report, James M. Mastandrea, our
Chief Executive Officer and President, and John J. Dee, our Chief Financial
Officer and Senior Vice President, evaluated the effectiveness of the design
and operation of the 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 December 31, 2003,
our disclosure controls and procedures are effective to ensure that material
information relating to the Company and our consolidated subsidiaries is
recorded, processed, summarized and reported in a timely manner. Further, there were no significant changes in the internal controls or, to our
knowledge, in other factors that could significantly affect such controls
subsequent to December 31, 2003. 21




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##### Table of Contents



PART III 
 Item 9. Trustees and Executive Officers of the Registrant Board of Trustees and Executive Officers The names, ages and positions of our Trustees and executive officers are as
follows: ExpirationName
    
    Age
    
    Position
    
    of TermJames C. Mastandrea
    
    
    60
    
    
    President, Chief Executive Officer and
Chairman
    
    
    2006John J. Dee
    
    
    53
    
    
    Senior Vice President, Chief
Financial Officer and
Trustee
    
    
    2004Daryl J. Carter
    
    
    48
    
    
    Trustee
    
    
    2006Daniel G. DeVos
    
    
    46
    
    
    Trustee
    
    
    2006Paul T. Lambert
    
    
    51
    
    
    Trustee
    
    
    2004Michael T. Oliver
    
    
    61
    
    
    Trustee
    
    
    2005Steven M. Edelman
    
    
    49
    
    
    Senior Vice President and
Chief Investment Officer
    
    Not applicable
 The business experience, principal occupations and employment, as well as the
periods of service,
of each of our Trustees and executive officers during at least the last five
years are set forth below. James C. Mastandreahas served as President and Chairman of the Board of
Trustees since March 4, 2003 and as Chief Executive Officer since April 7,
2003. In May 1998, Mr. Mastandrea returned as Chairman and Chief Executive
Officer to MDC Realty Corporation, Chicago, Illinois, which he founded in 1978
and had used for the development of over $500 million of real estate projects
until 1993. From July 1993 to December 1993, Mr. Mastandrea was President of
First Union Real Estate Investments, a publicly traded real estate investment
trust headquartered in Cleveland, Ohio. From January 1994 until his departure
in May 1998, he was Chairman of the Board of Trustees and Chief Executive
Officer of First Union Real Estate Investments. During his tenure at First
Union, Mr. Mastandrea and his management team substantially grew the assets of
the Trust from $495 million at the beginning of 1994 to $934 million at the end
of 1997, along with commensurate growth in net operating income and funds from
operations. In 1999, Mr. Mastandrea formed Eagles Wings Aviation Corporation,
where he served as Chief Executive Officer, to purchase a troubled aviation
services business. At the time of the purchase, the business was in default on
its debt obligations. Following the September 11, 2001 terrorist attacks, the
business was further adversely affected. In March 2002, Eagles Wings Aviation
Corporation filed for protection under Chapter 11 of the federal bankruptcy
laws. Mr. Mastandrea has been the general partner of Hampton since its
formation in 1983. Mr. Mastandrea is a Director of Cleveland State University
Foundation Board and Chairman of the Nominating Committee, and a Director and a
member of the Real Estate Committee of University Circle Inc., Cleveland, Ohio. 22




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##### Table of Contents



John J. Deehas served as a trustee and Senior Vice President since March 4,
2003, and as Chief
Financial Officer since April 7, 2003. Prior to Mr. Dees joining Paragon,
from 2002 to 2003, he was Senior Vice President and Chief Financial Officer of
MDC Realty Corporation, Cleveland, Ohio, an affiliate of MDC Realty
Corporation, Chicago, Illinois. From 2000 to 2002, Mr. Dee was Director of
Finance and Administration for Frantz Ward, LLP, Cleveland, Ohio, a
Cleveland-based law firm with approximately 100 employees. From 1978 to 2000,
Mr. Dee held various management positions with First Union Real Estates
Investments, most recently as Senior Vice President and Chief Accounting
Officer from 1996 to 2000. Mr. Dee is licensed as a CPA (non-practicing) in
the State of Ohio. Daryl J. Carterhas served as a trustee since June 30, 2003. Mr. Carter is
Co-Chairman and Chief Investment Officer of Capri Capital, Irvine, California,
a diversified real estate financial services firm that he co-founded in 1992.
Capri Capital has $6.5 billion in assets under management, including
investments in commercial mortgages, mezzanine capital, and equity investments
in Fannie Mae, Freddie Mac and HUD/FHA programs, along with equity and
mezzanine capital investments on behalf of various public, private and labor
funds. Mr. Carter also serves as a Director of Catellus Development
Corporation, Los Angeles, California, a publicly held real estate development
company, and is Chairman of the Audit Committee. Mr. Carter is a member of the
Pension Real Estate Association (PREA), a Trustee of the Urban Land Institute
(ULI), and a Board Member of the National Multifamily Housing Association
(NMHA). Daniel G. DeVoshas served as a trustee since March 4, 2003. Mr. DeVos is
Chairman of the Board and Chief Executive Officer of DP Fox Ventures, LLC, a
diversified management enterprise with investments in real estate,
transportation, entertainment and sports teams. In addition, Mr. DeVos is the
majority owner of the Grand Rapids Rampage (AFL), Grand Rapids Griffins (AHL),
and has ownership interests in the Orlando Magic (NBA), Orlando, Florida. Mr.
DeVos is a Director of: Alticor, Inc., the parent of Amway Corporation, Ada,
Michigan, and Chairman of the Audit Committee; Genmar Industries, a
privately-held boat manufacturer in Minneapolis, Minnesota; and the Orlando
Magic (NBA), Orlando, Florida. From 1994 to 1998, Mr. DeVos served as a Trustee
of the Board of Trustees of First Union Real Estate Investment. Paul T. Lamberthas served as a trustee since November 1998. Mr. Lambert
serves as the Chief Executive Officer of Lambert Capital Corporation. He
served on the Board of Directors and was the Chief Operating Officer of First
Industrial Realty Trust, Inc. from its initial public offering in October 1994
to the end of 1995. Mr. Lambert was one of the largest contributors to the
formation of First Industrial and one of its founding shareholders. Prior to
forming First Industrial, Mr. Lambert was managing partner for The Shidler
Group, a national private real estate investment company. Prior to joining
Shidler, Mr. Lambert was a commercial real estate developer with Dillingham
Corporation and, prior to that, was a consultant with The Boston Consulting
Group. Michael T. Oliverhas served as a trustee since March 4, 2003. Mr. Oliver is
the State Investment Officer of Real Estate and Private Equity Investments of
the Alaska State Pension Board of the Alaska State Pension Fund, Juneau,
Alaska, a position he has held since August 2000. Prior to joining the Alaska
State Pension Board, Mr. Oliver was a consultant from March 1998 to July 2000
to MPAC Capital Markets, Seattle, Washington, and a consultant to the Asian
government concerning laws governing REITs. From April 1996 to March 1998, Mr.
Oliver was Chairman of RERC Capital Markets, LLC, Chicago, Illinois. Steven M. Edelmanwas appointed as our Chief Investment Officer and Senior Vice
President on May 16, 2003. From 1999 until joining Paragon, Mr. Edelman served
as the Chief Financial Officer of Carnegie Management & Development Corporation
located in Westlake, Ohio. Carnegie Management is a $350 million
privately-held developer, owner and manager of retail, office and special use
properties. From 1980 to 1999, Mr. Edelman held various positions with First
Union Real Estate Investments (NYSE: FUR) located in Cleveland, Ohio. Most
recently, from 1997 to 1999, he served as its Executive Vice President and
Chief Financial Officer, and from 1995 to 1996 as its Executive Vice President
and Chief Financial Officer. 23




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##### Table of Contents



The Board of Trustees has determined that each of Messrs. Carter, DeVos,
Lambert and Oliver do not have a material relationship with Paragon that would
interfere with the exercise of independent judgment and are independent as
defined by the applicable rules of the American Stock Exchange. Board of Trustees; Committees Our trustees are Mr. Mastandrea, Mr. Carter, Mr. Dee, Mr. DeVos, Mr. Lambert
and Mr. Oliver. Our trustees held seven meetings in 2003. All members of the
board of trustees participated in at least 75% of all board and applicable
committee meetings in 2003 called while they served as trustees, except Mr.
DeVos, who participated in 50% of all meetings and Mr. Lambert, who
participated in 71% of all meetings due to conflicts of schedules. Messrs.
Carter, DeVos, Lambert and Oliver are independent trustees. Audit Committee Our audit committee consists of Mr. Carter, Mr. DeVos, Mr. Lambert and Mr.
Oliver, who serves as Chairman of this committee and the audit committee
financial expert. The audit committee held four meetings in 2003. The audit
committee makes recommendations concerning the engagement of independent public
accountants, reviews the performance of independent public accountants,
considers the range of audit and non-audit fees and reviews the adequacy of our
internal accounting controls. Management, Organization and Compensation Committee Our management, organization and compensation committee consists of Mr. Carter,
who serves as Chairman of this committee and Messrs. DeVos, Lambert and Oliver.
During 2003, this committee held three meetings. The committee makes
recommendations and exercises all powers of the board of trustees in connection
with certain compensation matters, including incentive compensation and benefit
plans. The committee administers, and has authority to grant awards under our
1998 Share Option Plan. Code of Ethics On January 14, 2004, our Board of Trustees adopted a code of conduct and ethics
that applies to all officers, trustees and employees of Paragon, including our
principal executive officer, principal financial officer and principal
accounting officer. The code is attached to this report as Exhibit 14. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
officers, trustees and persons who own more that 10% of our common shares to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, Trustees and greater than 10% shareholders are
required by regulation to furnish us with copies of all Section 16(a) forms
they file. Separate Form 4s filed by Messrs. Carter, DeVos, Lambert and Oliver, each
supporting an award of restricted shares and share options, were not filed on a
timely basis. Based solely on review of the copies of the forms furnished to
us, or written representations that no Annual Statements of Beneficial
Ownership of Securities on Form 5 were required to be filed, we believe that
for the fiscal year ended December 31, 2003, all other Section 16(a) filing
requirements applicable to its officers, trustees and greater than 10%
shareholders were complied with in 2003. 24




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##### Table of Contents



Item 10. Executive Compensation The following table sets forth the compensation paid for the years ended
December 31, 2003, 2002 and 2001. SecuritiesName and
    
    
    
    
    
    
    
    
    
    Restricted Stock
    
    Underlying
    
    All otherPrincipal Position
    
    Year
    
    Salary (1)
    
    Awards
    
    Options
    
    compensationJames C. Mastandrea
    
    
    2003
    
    
    $
    49,615
    (2)
    
    $
    1,044,117
    (3)
    
    
    Chief Executive
    
    
    2002
    
    
    $
    
    
    
    
    
    
    
    
    Officer, President and
    
    
    2001
    
    
    $
    
    
    
    
    
    
    
    
    ChairmanDuane H. Lund,
    
    
    2003
    
    
    $
    52,045
    (4)
    
    
    
    
    
    
    
    
    
    
    former Chief
    
    
    2002
    
    
    $
    150,000
    (4)
    
    
    
    
    
    
    50,000
    (5)
    
    $
    300,000
    (6)Executive Officer,
    
    
    2001
    
    
    $
    417,000
    (4)
    
    
    
    
    
    
    Chief Financial
Officer and Secretary
  (1)
    
    No bonuses or other compensation were paid for the years ended
December 31, 2003, 2002
and 2001.  (2)
    
    Amount represents base annual salary of $60,000 for the period from
March 4, 2003 through
December 31, 2003.  (3)
    
    Represents 348,039 preferred shares issued on June 30, 2003 at a
closing price of $3.00 per preferred share. Subsequent to the one-time
incentive exchange offer to the preferred shares which concluded on
June 30, 2003, the preferred shares were delisted from the American
Stock Exchange in September 2003 because the market value of
preferred shares held by non-affiliates was below the $1 million requirement of
the exchange. Of the 348,039 preferred shares issued to Mr.
Mastandrea, 267,334 preferred shares were converted into 6,116,869
common shares on June 30, 2003 and 80,705 preferred shares remain
outstanding as of December 31, 2003 and are convertible into 1,846,611
common shares. The total of 7,963,480 common shares had a value of
$1,751,966 based on the closing price of $0.22 per share on December
31, 2003.  (4)
    
    Amounts represent a base annual salary of $60,000 for the period
from April 8 through
June 15, 2003; $150,000 for the period from September 10, 2001
through April 7, 2003;
$200,000 for the period from February 24, 2000 through September 9,
2001; and $80,000 for
the period from January 1, 2000 through February 23, 2000. The 2001
amount includes $240,000
termination fee accrued as of December 31, 2001 and paid in 2002 in
connection with Mr. Lunds
termination as an employee of Stonehaven Technologies during 2001.  (5)
    
    All options were granted in May 2002, bear an exercise price of
$0.45 per common share and
were exercisable on November 15, 2002. The options expired on
September 30, 2003.  (6)
    
    Represents 95,541 preferred shares issued on April 7, 2003 in lieu
of severance payment. Options/SAR Grants In Last Fiscal Year No options were granted to our officers during the year ended December 31,
2003. Employment Agreements Effective as of March 4, 2003, the Compensation Committee approved three new
employment agreements. The employment agreement with Mr. Lund provided for an annual salary of
$150,000 to be paid to Mr. Lund for his services as Chief Executive Officer
through five days after the filing of the Companys December 31, 2002 Form
10-KSB. In connection with the severance provision of this 25




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##### Table of Contents



agreement, on April
7, 2003, Mr. Lund relinquished his position as Chief Executive Officer and, in
consideration for his resignation, received 95,541 preferred shares in lieu of
receiving a $300,000 severance payment. The number of shares issued was based
on two times his annual salary with the price of the preferred shares based on
the average closing price for the 30 calendar days prior to March 1, 2003. Mr.
Lund received compensation based on an annual salary of $60,000 for his
services from April 7, 2003 until June 15, 2003. The employment agreements with James C. Mastandrea and John J. Dee provide for
an annual salary of $60,000 each effective as of March 4, 2003 and in
connection therewith, Mr. Mastandrea was appointed as Chief Executive Officer
and Mr. Dee was appointed as Chief Financial Officer on April 7, 2003. The
initial terms of Messrs. Mastandrea and Dees employment are for two years and
may be extended for terms of one year through their 70th birthday. Messrs.
Mastandrea and Dees base annual salaries may be adjusted from time to time,
except that the adjustment may not be lower than the preceding years base
salary. The employment agreements provide that Messrs. Mastandrea and Dee will
be entitled to base salary and bonus at the rate in effect before any
termination for a period of three years in the event that their employment is
terminated without cause by us or for good reason by either Messrs. Mastandrea
or Dee. The employment agreement with Steven M. Edelman, our Senior Vice President and
Chief Investment Officer, provides for an annual salary of $60,000 effective as
of May 16, 2003. The initial term of Mr. Edelmans employment is for two years
and may be extended for terms of one year through his 70th birthday. Mr.
Edelmans base annual salary may be adjusted from time to time, except that the
adjustment may not be lower than the preceding years base salary. The
employment agreement provides that Mr. Edelman will be entitled to base salary
and bonus at the rate in effect before any termination for a period of three

years in the event that his employment is terminated without cause by us or for
good reason by Mr. Edelman. Effective June 30, 2003, we issued 696,078 preferred shares valued at
approximately $2.4 million to Messrs. Mastandrea and Dee pursuant to separate
restricted share agreements. Under each restricted share agreement, the
restricted shares vest upon the later of the following dates:  
    
    the date our gross assets exceed $50.0 million, or  
    
    348,038 restricted shares will vest on March 4, 2004; 174,020
shares will vest on March 4, 2005 and the remaining 174,020 shares will
vest on March 4, 2006. Effective April 7, 2003, we issued 95,541 preferred shares to Duane H. Lund in
connection with his resignation as Chief Executive Officer in accordance with
the terms of his employment agreement dated March 4, 2003 and recorded
compensation expense of $300,000 as a result of the issuance and employment
termination. Compensation of Trustees Effective May 15, 2002 and through October 28, 2003, each Trustee who was not
an officer of the Company was to receive a retainer of $5,000 per annum, $200
per meeting for each meeting attended in person, $100 per meeting for each
meeting attended via teleconference and 50,000 options as to common shares
which are to vest six months after issuance and to expire 90 days after the
term of the Trustee ends. Effective October 28, 2003, each Trustee who is not an officer of the Company
was to receive a retainer of $5,000 per annum, $500 per meeting for each
meeting attended in person, $100 per meeting for each meeting attended via
teleconference, 25,000 options as to common shares which are to vest one year
after issuance and to expire 90 days after the term of the Trustee ends and
50,000 restricted common shares that will vest one year after their issuance.
Effective October 28, 2003, 26




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##### Table of Contents



100,000 options at an exercise price of $0.22 per
common share and 200,000 restricted common shares were issued. During the year ended December 31, 2003, Trustees were paid approximately
$33,000 and, as of December 31, 2003, the Company has accrued $19,000 for
related amounts due. 
 Item 11. Security Ownership of Management and Certain Beneficial Owners The following table includes certain information with respect to the beneficial
ownership of our shares by: (i) each person known by us to own more than 5% in
interest of the outstanding shares: (ii) each of the trustees and each nominee
for trustee; (iii) each of our executive officers; and (iv) all of the trustees
and executive officers as a group. Except as otherwise noted, the person or
entity named has sole voting and investment power over the shares indicated.
The table shows ownership as of March 18, 2004. Total Common SharesCommon Shares (2)
    
    Preferred Shares (3)
    
    and Units (4)Name and Address (1)
    
    Number
    
    Percent (5)
    
    Number
    
    Percent (5)
    
    Number
    
    Percent (5)James C. Mastandrea
    
    
    18,057,852
    (6)
    
    
    60.4
    %
    
    
    161,410
    (14)
    
    
    58.0
    %
    
    
    40,374,789
    (16)
    
    
    77.3
    %Paragon Real Estate
    
    
    12,233,738
    (7)
    
    
    40.9
    %
    
    
    161,410
    (14)
    
    
    58.0
    %
    
    
    15,926,960
    (17)
    
    
    47.4
    %Development, LLCJohn J. Dee
    
    
    5,574,114
    (8)
    
    
    18.7
    %
    
    
    
    (15)
    
    
    
    
    
    
    5,574,114
    (18)
    
    
    18.7
    %Paul T. Lambert
    
    
    2,408,619
    (9)
    
    
    8.0
    %
    
    
    
    
    
    
    
    
    
    
    2,408,619
    (9)
    
    
    8.0
    %Steven M. Edelman
    
    
    300,000
    (10)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    300,000
    (10)
    
    
    *Daryl J. Carter
    
    
    50,000
    (11)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    50,000
    (11)
    
    
    *Daniel G. DeVos
    
    
    50,000
    (11)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    50,000
    (11)
    
    
    *Michael T. Oliver
    
    
    50,000
    (11)
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    50,000
    (11)
    
    
    *All trustees and
current executive
officers as a group (12)
    
    
    18,907,852
    (13)
    
    
    63.2
    %
    
    
    161,410
    
    
    
    58.0
    %
    
    
    41,224,789
    (19)
    
    
    78.9
    %
  *        Indicates less than one percent(1)
    
    The address of each beneficial owner listed is our corporate headquarters
located at 1240 Huron Road, Suite 301, Cleveland, Ohio 44115.(2)
    
    Based on 29,880,850 common shares, not including 2,859,765 shares held in
treasury, as of March 18, 2004.(3)
    
    Based on 278,455 preferred shares outstanding as of March 18, 2004, which
convert to 4,096,793 common shares as follows: 161,410 preferred shares
are each convertible into 22.881 common shares and 117,045 preferred
shares are each convertible into 3.448 common shares.(4)
    
    Based on: (i) 29,880,850 common shares, not including 2,859,765 shares
held in treasury; (ii) 278,455 preferred shares, which convert to
4,096,793 common shares; and (iii) 813,938 restricted limited partnership
units which may be converted into 18,623,715 common shares or cash, at our
discretion, any time after July 1, 2007.(5)
    
    The ownership percents total more than 100% due to more than one person
or entity being considered the beneficial owner of the same shares, in
accordance with SEC regulations for this table. 27




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##### Table of Contents



(6)
    
    Includes: (i) 2,308,619 common shares held by Mr. Lambert and 2,965,495
common shares held by two former trustees which each of Mr. Mastandrea and
Mr. Dee has the right to vote; (ii) 250,000 restricted shares issued to an
independent third party which Mr. Mastandrea has the right to vote; (iii)
12,233,738 common shares held by Paragon Real Estate Development, LLC, of
which Mr. Mastandrea is the managing member; and (iv) 300,000 restricted
common shares.(7)
    
    Represents shares held by Paragon Real Estate Development, LLC, of which
Mr. Mastandrea is the managing member. These shares are also included in
Mr. Mastandreas common shares.(8)
    
    Includes: (i) 2,308,619 common shares held by Mr. Lambert and 2,965,495
common shares held by two former trustees which each of Mr. Mastandrea and
Mr. Dee has the right to vote; and (ii) 300,000 restricted common shares.
Does not include 12,233,738 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Dee is a member.(9)
    
    Includes: (i) options to purchase 50,000 common shares; (ii) 50,000
restricted common shares; and (iii) 766,354 common shares held by Lambert
Equities II, LLC, of which Mr. Lambert is the controlling majority member
and sole manager. Mr. Lambert has signed a proxy allowing each of Mr.
Mastandrea and Mr. Dee the right to vote 2,308,610 common shares that he
owns.(10)
    
    Includes 300,000 restricted common shares. Does not include 12,233,738
common shares or 161,410 preferred shares held by Paragon Real Estate
Development, LLC, of which Mr. Edelman is a member.(11)
    
    Includes 50,000 restricted common shares.(12)
    
    Includes seven named persons.(13)
    
    Includes: (i) options to purchase 50,000 common shares; (ii) 1,350,000
restricted common shares; (iii) 5,274,114 common shares which each of Mr.
Mastandrea and Mr. Dee has the right to vote; and (iv) 12,233,738 common
shares held by Paragon Real Estate Development.(14)
    
    Represents shares held by Paragon Real Estate Development, LLC, of which
Mr. Mastandrea is the managing member. Each preferred share is convertible
into 22.881 common shares. These shares are also included in Mr.
Mastandreas preferred shares.(15)
    
    Does not include 161,410 preferred shares held by Paragon Real Estate
Development, LLC, of which Mr. Dee is a member.(16)
    
    Includes: (i) 2,308,619 common shares held by Mr. Lambert and 2,965,495
common shares owned by two former trustees which each of Mr. Mastandrea
and Mr. Dee has the right to vote; (ii) 12,233,738 common shares held by
Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the
managing member; (iii) 250,000 restricted shares issued to an independent
third party which Mr. Mastandrea has the right to vote; (iv) 300,000
restricted common shares; (v) 18,623,715 common shares issuable upon the
conversion of 813,938 limited partnership units of Paragon Real Estate,
L.P., our operating partnership, held by Hampton Court Associates, L.P.,
of which Mr. Mastandrea is the general partner; and (vi) 3,693,222 common
shares issuable upon conversion of 161,410 preferred shares held by
Paragon Real Estate Development, LLC.(17)
    
    Includes 3,693,222 common shares issuable upon conversion of 161,410
preferred shares. These shares are also included in Mr. Mastandreas
total shares.(18)
    
    Includes: (i) 2,308,619 common shares held by Mr. Lambert and 2,965,495
common shares held by two former trustees which each of Mr. Mastandrea and
Mr. Dee has the right to vote; and (ii) 300,000 restricted common shares.
Does not include 12,233,738 common shares or 161,410 preferred shares held
by Paragon Real Estate Development, LLC, of which Mr. Dee is a member.(19)
    
    Includes: (i) options to purchase 50,000 common shares; (ii) 1,350,000
restricted common shares; (iii) 5,274,114 common shares which each of Mr.
Mastandrea and Mr. Dee has the right to vote; (iv) 12,233,738 common
shares held by Paragon Real Estate Development, LLC; (v) 18,623,715 common
shares issuable upon conversion of limited partnership units of Paragon
Real Estate, L.P.; and (vi) 3,693,222 common shares issuable upon
conversion of 161,410 preferred shares held by Paragon Real Estate
Development, LLC. 28




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##### Table of Contents



Equity Compensation Plan Information Number of securitiesNumber of
    
    Weighted-
    
    remaining available forsecurities to be
    
    average exercise
    
    future issuance underissued upon exercise
    
    price of
    
    equity compensationof outstanding
    
    outstanding
    
    plans (excludingoptions, warrants
    
    options, warrants
    
    securities reflected inEquity Compensation Plans Approved/
    
    and rights
    
    and rights
    
    column (a))Not Approved by Security Holders
    
    (a)
    
    (b)
    
    (c)Equity compensation plans approved by
security holdersFormer Share Option PlanOptions for common shares
    
    
    54,387
    
    
    $
    5.37
    
    
    
    1998 Share Option PlanRestricted common shares
    
    
    250,000
    
    
    $
    Options for common shares
    
    
    230,000
    
    
    $
    1.20480,000
    
    
    $
    0.58
    
    
    
    2,686,666Equity compensation plans not approved
by security holdersCommon shares
    
    
    500,000
    
    
    $
    Warrants for common shares
    
    
    47,500
    
    
    $
    5.37547,500
    
    
    $
    0.47
    
    
    
    Warrants for preferred shares
    
    
    35,500
    
    
    $
    10.00
    
    
    
    Total all plans  Common shares
    
    
    1,081,887
    
    
    $
    0.76
    
    
    
    2,686,666 Preferred shares
    
    
    35,500
    
    
    $
    10.00
 In addition to the above plans, we entered into an agreement dated March 4,
2003 and approved by the shareholders on June 30, 2003 with Mr. Mastandrea, Mr.
Dee and Paragon Real Estate Development, LLC of which Mr. Mastandrea is the
managing member, and Mr. Dee and Mr. Edelman are members. Pursuant to this
agreement, we may issue up to $26.0 million in our common shares to Paragon
Real Estate Development, LLC in exchange for it and its members procuring
future acquisition, development and re-development real estate transactions for
Paragons benefit. This agreement is intended to serve as incentive for Mr.
Mastandrea and Mr. Dee to increase our assets and net operating income in the
future. The exact number of common shares that would be issued to Paragon Real
Estate Development, LLC will be calculated in accordance with a formula based
on the type of project that they present to us. The formula for a particular
real estate transaction would be calculated by dividing (i) estimated net
operating income to be generated from the real estate transaction for the first
year following its consummation by (ii) the capitalization rate used in the
real estate transaction, less the applicable basis point factor. The
applicable basis point factor is defined as: 75 basis points for the
acquisition of an existing operating property, 87.5 basis points for the
acquisition of a re-development property, and 100 basis points for the
acquisition of a development property. We would issue our common shares to
Paragon Real Estate Development, LLC only upon the closing of the real estate
transaction. For each transaction, Mr. Mastandrea would be allocated half of
the common shares and Mr. Dee would be allocated the other half. All of the
common shares would be held by Paragon Real Estate Development, LLC for the
benefit of its owners. 29




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##### Table of Contents



Item 12. Certain Relationships and Related Transactions Management Fees We maintained a property management agreement with Hoyt Properties, Inc. (Hoyt
Properties), an entity controlled by Steven B. Hoyt, our former Chairman of
the Board, which served as property manager of the commercial properties owned
by us. In connection with the agreement, Hoyt Properties managed the
day-to-day operations of properties owned by us and received a management fee
for this service. Management fees paid to Hoyt Properties were approximately
$49,000 and $66,000 for the years ended December 31, 2003 and 2002,
respectively. On October 1, 2003 we sold our four commercial properties
managed by Hoyt Properties. As a result, these management fees are included in
discontinued operations. James C. Mastandrea, our Chairman, Chief Executive Officer and President is the
general partner of Hampton Court Associates and owns two companies which
provide services to Richton Trail. Mid Illinois Realty Corp. manages Richton
Trail and MDC Realty Corp. is reimbursed, at cost, for Richton Trial
Apartments payroll related costs. The related management fees included in
year ended December 31, 2003 was approximately $13,000. Reimbursement, at
cost, for the payroll related costs paid and accrued for the year ended
December 31, 2003 was approximately $30,700. As the Company acquires more
properties, it intends to use local third party management companies until we
are able to provide management services ourselves. Leasing Commissions During the year ended December 31, 2003, we paid a leasing commission of
approximately $18,000 to Hoyt Properties in connection with two new leases for
a total of approximately 21,000 square feet. On October 1, 2003 we sold our
four commercial properties managed by Hoyt Properties. As a result, these
leasing commissions, net of accumulated amortization are included in
discontinued operations. Rental Expense During the years ended December 31, 2003 and 2002, we recognized rental expense
of approximately $8,000 and $30,000, respectively, related to office space
leased from Hoyt Properties. 
 Item 13. Exhibits and Reports on Form 8-K (a) Exhibits ExhibitNumber
    
    Exhibit Description14
    
    Code of Conduct and Ethics31.1
    
    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.
 30




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##### Table of Contents



(b) Reports On Form 8-K None 
 Item 14. Principal Accountant Fees and Services The aggregate fees billed by the principal independent public accountants
(Boulay, Heutmaker, Zibell & Co., P.L.L.P.) to the Company for the fiscal years
ended December 31, 2003 and 2002 are as follows: Category
    
    Year
    
    FeesAudit Fees
    
    
    2003
    
    
    $
    56,4002002
    
    
    $
    67,800Audit-Related Fees
    
    
    2003
    
    
    $
    4,1002002
    
    
    $
    20,600Tax Fees
    
    
    2003
    
    
    $
    2002
    
    
    $
    6,500All Other Fees
    
    
    2003
    
    
    $
    2002
    
    
    $
    
 Audit Fees  Consists of fees billed for professional services rendered for the
audit of our annual financial statements and review of the interim financial
statements included in quarterly reports, and services that are normally
provided by Boulay, Heutmaker, Zibell & Co., P.L.L.P., in connection with
statutory and regulatory filings or engagements. Audit-Related Fees  Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of
financial statements and are not reported under Audit Fees. These services
include consultations concerning financial accounting and reporting standards
as well as services related to our proxy statement filings in the second
quarter of 2003. Tax Fees  Consists of fees billed for professional services for Federal and
state tax compliance, tax advice and tax planning. All Other Fees  Consists of fees for products and services other than the
services reported above. Policy for pre-approval of Audit and Permissible Non-Audit Services of
Independent Auditors Before the Independent Auditors are engaged by the Company to render audit or
non-audit services, the Audit Committee approves the engagement. 31




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##### Table of Contents



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: March 24, 2004
    
    
    
    James C. MastandreaChief Executive OfficerPARAGON REAL ESTATE EQUITY AND INVESTMENT TRUSTBy:
    
    /s/ John J. DeeDate: March 24, 2004
    
    
    
    John J. DeeChief Financial Officer
 KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John J. Dee, jointly and severally, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-KSB and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof. In accordance with Section 13 or 15(d) of the Securities Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST Signature
    
    Title
    
    Date/s/ James C. Mastandrea
    
    Trustee, Chief ExecutiveJames C. Mastandrea
    
    Officer and President
    
    March 24, 2004/s/ John J. Dee
    
    Trustee, Senior Vice PresidentJohn J. Dee
    
    and Chief Financial Officer
    
    March 24, 2004/s/ Daryl J. CarterDaryl J. Carter
    
    Trustee
    
    March 24, 2004/s/ Daniel G. DeVosDaniel G. DeVos
    
    Trustee
    
    March 24, 2004/s/ Paul T. LambertPaul T. Lambert
    
    Trustee
    
    March 24, 2004/s/ Michael T. OliverMichael T. Oliver
    
    Trustee
    
    March 24, 2004
 32




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##### Table of Contents



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Auditors
    
    
    F-2Consolidated Balance Sheet as of December 31, 2003
    
    
    F-3Consolidated Statements of OperationsYears ended
December 31, 2003 and December 31, 2002
    
    
    F-4Consolidated Statements of Shareholders EquityYears ended
December 31, 2003 and December 31, 2002
    
    
    F-5Consolidated Statements of Cash FlowsYears ended
December 31, 2003 and December 31, 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Board of Trustees and Shareholders of
Paragon Real Estate Equity and Investment Trust and Subsidiaries: We have audited the accompanying consolidated balance sheet of Paragon Real
Estate Equity and Investment Trust and Subsidiaries as of December 31, 2003,
and the related consolidated statements of operations, shareholders equity,
and cash flows for the years ending December 31, 2003 and 2002. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Paragon Real Estate
Equity and Investment Trust and Subsidiaries as of December 31, 2003, and the
results of their operations and their cash flows for the years ending December
31, 2003 and 2002 in conformity with accounting principles generally accepted
in the United States of America. /s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P. Minneapolis, Minnesota
March 8, 2004 F-2




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Balance Sheet
December 31, 2003 ASSETSInvestments in real estate:Land
    
    $
    797,682Buildings and improvements
    
    
    3,188,727Furniture, fixtures and equipment
    
    
    4,8323,991,241Accumulated depreciation and amortization
    
    
    (40,236
    )Net investments in real estate
    
    
    3,951,005Cash and cash equivalents
    
    
    2,218,674Marketable securities, net
    
    
    99,200Restricted cash
    
    
    97,082Accounts receivable
    
    
    9,811Other assets, net
    
    
    369,034TOTAL ASSETS
    
    $
    6,744,806LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Mortgage loan
    
    $
    2,812,136Accounts payable and accrued expenses
    
    
    207,398Security deposits
    
    
    52,824Total liabilities
    
    
    3,072,358Minority interest in consolidated subsidiary
    
    
    2,249,497COMMITMENTS AND CONTINGENCIESShareholders equity:Preferred Shares  $0.01 par value,
10,000,000 authorized: 279,390 Class A
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference
    
    
    2,794Common Shares  $0.01 par value,
100,000,000 authorized; 31,637,393 shares
issued and outstanding
    
    
    316,374Additional paid-in capital
    
    
    28,055,559Accumulated other comprehensive income, net
unrealized gain on marketable securities
    
    
    61,700Accumulated deficit
    
    
    (23,745,270
    )Treasury shares, at cost, 2,859,765 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,467,471
    )Total shareholders equity
    
    
    1,422,951TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    6,744,806
 The accompanying notes are an integral part of the consolidated financial statements. F-3




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Operations For the year ended December 31,2003
    
    2002RevenuesRental revenue
    
    $
    287,762
    
    
    $
    Interest and other
    
    
    18,986
    
    
    
    27,128Total revenues
    
    
    306,748
    
    
    
    27,128ExpensesProperty, operating and maintenance
    
    
    88,278
    
    
    
    Property taxes and insurance
    
    
    48,043
    
    
    
    Depreciation and amortization
    
    
    56,869
    
    
    
    21,262Interest
    
    
    66,013
    
    
    
    1,016General and administrative
    
    
    951,367
    
    
    
    408,615Management fees
    
    
    12,884
    
    
    
    Total expenses
    
    
    1,223,454
    
    
    
    430,893Loss from operations before loss allocated to
minority interest
    
    
    (916,706
    )
    
    
    (403,765
    )Loss allocated to minority interest
    
    
    148,609
    
    
    
    168,388Loss from operations
    
    
    (768,097
    )
    
    
    (235,377
    )Gain on sale of marketable securities
    
    
    136,358
    
    
    
    55,889Provision for loss on marketable securities
    
    
    
    
    
    
    (1,047,600
    )Loss from continuing operations
    
    
    (631,739
    )
    
    
    (1,227,088
    )Discontinued operations:Loss from discontinued operations of
technology segment
    
    
    
    
    
    
    (82,164
    )Loss from discontinued operations of
commercial properties
    
    
    (457,874
    )
    
    
    (2,248,805
    )Net Loss
    
    
    (1,089,613
    )
    
    
    (3,558,057
    )Preferred Share Dividends
    
    
    
    
    
    
    (630,126
    )Net loss attributable to Common Shareholders
    
    $
    (1,089,613
    )
    
    $
    (4,188,183
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.06
    )
    
    $
    (0.93
    )Weighted average number of Common Shares
outstanding
    
    
    18,171,689
    
    
    
    4,517,524Comprehensive loss:Net Loss
    
    $
    (1,089,613
    )
    
    $
    (3,558,057
    )Other comprehensive income:Unrealized gain on marketable securities
    
    
    34,500
    
    
    
    57,600Comprehensive loss
    
    $
    (1,055,113
    )
    
    $
    (3,500,457
    )
 The accompanying notes are an integral part of the consolidated financial statements. F-4




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust
Consolidated Statements of Shareholders Equity
For the year ended December 31, 2003 and 2002 Accumulatedothercomprehensiveincome, netunrealized gain
    
    
    
    
    
    
    
    
    
    UnearnedClass A
    
    
    
    
    
    Additional
    
    (loss) on
    
    
    
    
    
    Cost of
    
    compensationPreferred
    
    Common
    
    Paid-in
    
    marketable
    
    Accumulated
    
    Shares held
    
    and trusteesShares
    
    Shares
    
    Capital
    
    securities
    
    Deficit
    
    in Treasury
    
    fees
    
    TotalBalance at December 31, 2001
    
    $
    6,633
    
    
    $
    45,176
    
    
    $
    25,595,216
    
    
    $
    (30,400
    )
    
    $
    (18,492,523
    )
    
    $
    (39,769
    )
    
    $
    
    
    
    $
    7,084,333Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (630,126
    )
    
    
    
    
    
    
    
    
    
    
    (630,126
    )Unrealized income on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,600Return of capital associated with legal
settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    226,990
    
    
    
    
    
    
    
    
    
    
    
    226,990Adjustment to minority interest resulting
from operations of the operating
partnership by the Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159,578
    )
    
    
    
    
    
    
    
    
    
    
    (159,578
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,558,057
    )
    
    
    
    
    
    
    
    
    
    
    (3,558,057
    )Balance at December 31, 2002
    
    $
    6,633
    
    
    $
    45,176
    
    
    $
    25,595,216
    
    
    $
    27,200
    
    
    $
    (22,613,294
    )
    
    $
    (39,769
    )
    
    $
    
    
    
    $
    3,021,162Unrealized income on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,500Issuance of Preferred Shares
    
    
    955
    
    
    
    
    
    
    
    299,045
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Restricted preferred share grants issued
    
    
    6,961
    
    
    
    
    
    
    
    2,398,010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,404,971
    )
    
    
    Restricted common share grants issued
    
    
    
    
    
    
    2,500
    
    
    
    60,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,500
    )
    
    
    Cost of 2,859,765 common shares acquired
for treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (800,735
    )
    
    
    
    
    
    
    (800,735
    )Cancellation of 15,300 treasury shares
    
    
    
    
    
    
    
    
    
    
    (39,769
    )
    
    
    
    
    
    
    
    
    
    
    39,769
    
    
    
    
    
    
    
    Conversion of Preferred Shares to Common
Shares
    
    
    (11,755
    )
    
    
    268,698
    
    
    
    (256,943
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment to minority interest resulting
from operations of the operating
partnership by the Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,363
    )
    
    
    
    
    
    
    
    
    
    
    (42,363
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,089,613
    )
    
    
    
    
    
    
    
    
    
    
    (1,089,613
    )Balance at December 31, 2003
    
    $
    2,794
    
    
    $
    316,374
    
    
    $
    28,055,559
    
    
    $
    61,700
    
    
    $
    (23,745,270
    )
    
    $
    (800,735
    )
    
    $
    (2,467,471
    )
    
    $
    1,422,951
 The accompanying notes are an integral part of the consolidated financial statements. F-5




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
Consolidated Statements of Cash Flows For the year ended December 31,2003
    
    2002Cash flows from operating activities:Net loss
    
    $
    (1,089,613
    )
    
    $
    (3,558,057
    )Adjustments to reconcile net loss to net cash used
in continuing operations:Discontinued operations:Technology segment, net of tax
    
    
    
    
    
    
    82,164Commercial properties, net of tax
    
    
    457,874
    
    
    
    2,248,806Compensation costs paid through the issuance of
Class A Preferred Shares
    
    
    300,000
    
    
    
    Depreciation and amortization
    
    
    56,869
    
    
    
    21,262Loss allocated to minority interests
    
    
    (148,609
    )
    
    
    (168,388
    )Gain on sale of marketable securities
    
    
    (136,358
    )
    
    
    (55,889
    )Provision for loss on marketable securities
    
    
    
    
    
    
    1,047,600Net change in assets and liabilities:Accounts receivable
    
    
    (9,811
    )
    
    
    Restricted cash
    
    
    (97,082
    )
    
    
    Other assets, net
    
    
    (257,096
    )
    
    
    33,081Accounts payable and accrued expenses
    
    
    18,760
    
    
    
    54,347Rents received in advance and security deposits
    
    
    14,973
    
    
    
    Net cash used in continuing operations
    
    
    (890,093
    )
    
    
    (295,074
    )Cash flows from investing activities:Acquisition and additions to real estate properties
    
    
    (46,509
    )
    
    
    Acquisition of other fixed assets
    
    
    
    
    
    
    (8,250
    )Cash proceeds from disposition of commercial
properties
    
    
    1,119,344
    
    
    
    Cash proceeds from sale of marketable securities
    
    
    248,858
    
    
    
    1,253,491Net cash provided by investing activities
    
    
    1,321,693
    
    
    
    1,245,241Cash flows from financing activities:Proceeds from refinance of mortgage loan
    
    
    1,286,363
    
    
    
    Payments on mortgage loan
    
    
    (18,485
    )
    
    
    Deferred financing costs paid
    
    
    (54,542
    )
    
    
    Dividends/distributions paid
    
    
    
    
    
    
    (630,126
    )Net cash provided by (used in) financing
activities
    
    
    1,213,336
    
    
    
    (630,126
    )Net cash used in discontinued operationsTechnology segment
    
    
    
    
    
    
    (645,550
    )Commercial properties
    
    
    (455,527
    )
    
    
    (185,902
    )Net cash used in discontinued operations
    
    
    (455,527
    )
    
    
    (831,542
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,189,409
    
    
    
    (511,501
    )Cash and cash equivalentsBeginning of period
    
    
    1,029,265
    
    
    
    1,540,766End of period
    
    $
    2,218,674
    
    
    $
    1,029,265
 The accompanying notes are an integral part of the consolidated financial statements. F-6




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Paragon Real Estate Equity and Investment Trust and Subsidiaries 
 Notes to Consolidated Financial Statements Note 1  Organization Paragon Real Estate Equity and Investment Trust, formerly Stonehaven Realty
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 December 31, 2003, 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. In February 2000, the Company purchased a software technology company,
Stonehaven Technologies, Inc, (formerly, RESoft, Inc.), a Delaware company and
a wholly-owned subsidiary of our Company. It provided information technology
consulting and document management solutions until July 2001 when certain of
its assets were sold to Stellent, Inc. (formerly, IntraNet Solutions, Inc.)
(Stellent), a Minnesota company (NASDAQ: STEL). In 2002, the Company
discontinued the operations of the technology segment and wrote off all assets
related to it. We owned four commercial real estate investments through an operating
partnership, Wellington Properties Investments, L.P. (Wellington), of which
we were the sole general partner and owned an approximate 92.9% interest. On
October 1, 2003, we completed the sale of our 92.9% general partnership
interest, resulting in the sale of the commercial properties. Note 2  Basis of Presentation Minority interest at December 31, 2003 represents approximately a 99.0%
aggregate partnership interest Paragon Real Estate, LP held by Hampton for its
partners. The Company is the sole general partner of Paragon Real Estate, LP
and owns the remaining 1.0% interest. After July 1, 2007, the limited partners
may redeem, in whole or in part, their Paragon Real Estate, LP units for cash.
We may, at our option, elect to convert the limited partnership units into our
common shares. The conversion ratio would be 22.881 common shares for each
limited partnership unit, or 18,623,715 common shares. The cash redemption
price would be the cash value of the common shares into which the limited
partnership units could have been converted. We report our investments using the consolidated method of accounting as we own
the outstanding voting interests and can control operations for Paragon Real
Estate, LP. In the consolidation method, the accounts of these entities are
combined with our accounts. All significant intercompany transactions are
eliminated in consolidation. Note 3  Summary of Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements In order to conform with generally accepted accounting principles, management,
in preparation of our consolidated financial statements, is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of December
31, 2003, and the reported amounts of revenues and expenses for the years ended
December 31, 2003 and 2002. 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, may change in the near term. F-7




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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. Further, FAS 144 defines a component of a company to be the
operations that can be clearly distinguished from the rest of the company, and
then requires elimination from our continuing operations for those assets held
for sale or disposed of. Accordingly, one of the impacts of our adoption of
this Standard is that revenues and expenses associated with our commercial
properties sold on October 1, 2003 are classified as discontinued operations on
our Consolidated Statements of Operations for all periods reported. During the quarter ended June 30, 2003, we recorded non-recurring real estate
expense in the amount of $350,000. This expense represented $280,000 of tenant
improvements, $31,000 of leasing commissions and $39,000 of professional
expense incurred on our commercial properties located in Minnesota. The sale
of our 92.9% general partnership interest in these commercial properties closed
on October 1, 2003 and the amount of proceeds received was not increased as a
result of these expenditures. As a result of the sale on October 1, 2003, we
have included these costs in discontinued operations of commercial properties. During the year ended December 31, 2002, a write-down of $2,023,000 was
recorded to adjust the carrying value of our commercial properties to estimated
fair value. The write-down was a result of independent appraisals using a
combination of the following valuation methods, the cost approach to value, the
sales comparison approach to value and the income capitalization approach,
various management estimates and our discussions with various unrelated parties
concerning available alternatives for the Company. 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 F-8




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##### Table of Contents



of approximately $119,000 at December 31, 2003 in a money market account that
was not federally insured. Cash of approximately $97,000 is classified as
restricted at December 31, 2003 because it is held in an escrow account of the
mortgage lender for the payment of property taxes and insurance. Accounts Receivable Our accounts receivable are reported net after writing off uncollectible
accounts of approximately $5,000 at December 31, 2003 for Richton Trail,
acquired July 1, 2003. Other Assets As of December 31, 2003, other assets include deferred financing costs incurred
to obtain and secure mortgage debt financing and a $250,000 refundable deposit
associated with the potential future acquisition of land for the development of
a mixed-use facility including retail, office and residential developments. In
February 2004, this deposit was returned to us because the option period
expired. Other assets are carried at cost, less accumulated amortization. The deferred financing costs of approximately $55,000 are being amortized over
the life of the respective loans on a straight-line basis. Accumulated
amortization related to deferred financing costs as of December 31, 2003 was
approximately $1,000. 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 December 31, 2003, we have one stock-based employee and trustee compensation
plan, which is described more fully in Note 8. During the year ended December
31, 2002, we issued options as to 250,000 common shares under this plan, and on
September 30, 2003, 200,000 of these options expired and were returned to the
Company. During the year ended December 31, 2003, we issued options as to
100,000 common shares and restricted share grants as to 250,000 common shares
under this plan. The Company accounted for the grants of options and
restricted shares using the intrinsic value method of Accounting Principles
Board (APB) Opinions No. 25, Accounting for Stock Issued to Employees and
related interpretations. No stock-based employee compensation cost is
reflected in net loss, as all options granted had an exercise price equal to
the market value of the underlying common stock on the date of grant, and the
amount related to the restricted share grants was not significant for the year
ended December 31, 2003. The Company has adopted the disclosure only provisions of both Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation and SFAS 148, Accounting for Stock-Based Compensation 
Transition and Disclosure. Pursuant to the requirements of SFAS No. 148, the
following are the pro forma net loss amounts for 2003 and 2002, as if the
compensation cost for the options granted to the trustees had been determined
based on the fair value at the grant date: F-9




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##### Table of Contents



For the year ended December 31,2003
    
    2002Net loss attributable to Common Shareholders
    
    $
    (1,089,613
    )
    
    $
    (4,188,183
    )Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    (22,000
    )
    
    
    (44,000
    )Pro forma net loss attributable to Common
Shareholders
    
    $
    (1,111,613
    )
    
    $
    (4,232,183
    )Net loss attributable to Common
Shareholders per Common Share:Basic and Diluted  as reported
    
    $
    (0.06
    )
    
    $
    (0.93
    )Basic and Diluted  pro forma
    
    $
    (0.06
    )
    
    $
    (0.94
    )
 The assumptions made in estimating the fair value of the options on the grant
date based upon the
Black-Scholes option-pricing model are as follows: 2003
    
    2002Risk-free interest rate
    
    4.66%
    
    2.51% and 4.38%Volatility
    
    172.69%
    
    154.68% and 131.43%Dividend yield
    
    0.00%
    
    
    0.00
    %Life expectancy
    
    10 years
    
    1.3 and 4.3 years
 Income Taxes Because we are no longer a REIT for federal income tax purposes, we now 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. We will be eligible to re-elect
REIT status on January 1, 2005. At December 31, 2003, we have net operating losses totaling approximately $11.0
million and capital losses of approximately $0.8 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
carry forwards, which will expire in varying amounts through the year 2023. We are also subject to certain state and local income, excise and franchise
taxes. The provision for state and local taxes has been reflected in general
and administrative expense in the consolidated statements of operations and has
not been separately stated due to its insignificance. Fair Value of Financial Instruments Our financial instruments include cash and cash equivalents, marketable
securities and a mortgage loan. The fair values of the financial instruments
were not materially different from their carrying or contract values at
December 31, 2003. Segment Disclosure In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information.
This Statement requires that a public company report F-10




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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. During 2002 we
discontinued operations of our technology segment. During 2003 we sold our
commercial real estate resulting in the revenues and expenses of these
properties being classified as discontinued operations for the years ended
December 31, 2003 and 2002. Reclassification As a result of reporting our technology segment and commercial real estate
properties as discontinued operations, certain amounts in the December 31, 2002
financial statements have been reclassified to conform to the December 31, 2003
presentation. These reclassifications had no effect on net loss or
shareholders equity as previously reported. Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (R), Consolidation of Variable Interest Entities (FIN
46 (R)). FIN 46 (R) provides guidance on possible consolidation of entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. We
have reviewed our consolidation of Paragon Real Estate, L.P. under
FIN 46 (R)
and believe that it does not apply. Accordingly, consolidation will be
continued under previously issued accounting standards. Note 4  Commercial and Residential Real Estate Properties 2003 Disposition of Investments in Real Estate On October 1, 2003, we closed on the sale of our 92.9% general partnership
interest in four commercial properties. Proceeds from the sale of these
properties, net of closing costs and the mortgage balances assumed by the
purchaser, were approximately $1,601,000. The proceeds from the sale were paid
in a combination of approximately $801,000 in cash and 2,859,765 of our common
shares at an average closing price for the 30 calendar days prior to June 27,
2003 of $0.28. Also as a result of the sale, approximately $318,000
representing cash from the commercial real estate properties was released from
mortgage related restrictions and made available for operations. 2003 Acquisition of Investments in Real Estate Effective as of July 1, 2003, we closed the acquisition of Richton Trail, a
residential apartment complex located near Chicago, Illinois, following
approval by our shareholders of the transaction on June 30, 2003. Our
operating partnership, Paragon Real Estate, acquired the Richton Trail along
with the associated mortgage from Hampton Court Associates, LP (Hampton), 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 received 813,938 restricted limited
partnership units of Paragon Real Estate. Each unit is redeemable after four
years for cash, or, at our option, 22.881 of our common shares. We are the
general partner of Paragon Real Estate. Note 5  Marketable Securities Our investments in marketable securities are available-for-sale as of December
31, 2003, and represent 10,000 common shares of Stellent. The shares were
acquired in connection with the sale of certain assets of Stonehaven
Technologies on July 10, 2001 and were originally recorded at $29.94 per share
based on the NASDAQ closing quote of Stellent on July 9, 2001. The shares were
unregistered when acquired and Stellent subsequently registered the shares with
the Securities and Exchange Commission effective September 5, 2001. As of December 31, 2003, we owned 10,000 shares of Stellent, which had a fair
market value of approximately F-11




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$99,000 (based upon the NASDAQ closing quote of $9.92 per share on December 31,
2003). We recorded an unrealized gain on marketable securities during 2003 of
$34,500, resulting in a balance of $61,700 in shareholders equity for
unrealized gain on marketable securities. As of December 31, 2002, we owned 40,000 shares of Stellent, which had a fair
market value of approximately $177,000 (based upon the NASDAQ closing quote of
$4.43.92 per share on December 31, 2002). We recorded an unrealized gain on
marketable securities during 2002 of $57,600, resulting in a balance of $27,200
in shareholders equity for unrealized gain on marketable securities. During
2002 given the then current market conditions, we viewed the decline in the
market value of these securities as permanently impaired and as of September
30, 2002, recorded a realized loss on marketable securities in the amount of
$1,047,600 (based upon the NASDAQ closing quote of $3.75 per share on September
30, 2002). During the month of January 2002, we sold 40,000 shares of Stellent at an
average price of $31.34 per share and recognized a gain on the sale of these
shares totaling approximately $56,000. During the year ended December 31, 2003, we sold 30,000 shares of Stellent at
an average price of $8.30 per share and recognized a gain on the sale of these
shares totaling approximately $136,000. We recognize gain or loss on the sale of marketable securities based upon the
first-in-first-out method. The NASDAQ closing quote on March 18, 2003 was $8.64 per share of Stellent. Note 6  Pro Forma Consolidated Financial Information (Unaudited) The following pro forma condensed consolidated financial information presented
below is as if the disposition of our 92.9% general partnership interest in our
commercial properties (closed October 1, 2003) and the acquisition of the
Richton Trail (closed July 1, 2003) had occurred on January 1, 2002. The pro
forma financial information is not necessarily indicative of the results that
actually would have occurred if the disposition and acquisition had been
consummated on January 1, 2002, nor does the pro forma information purport to
represent the results of operations for future periods. For the years ended
December 31, 2003 and 2002, all revenues and expenses associated with the
commercial properties have been recorded as discontinued operations. For the year ended December 31,2003
    
    2002Pro forma total revenue
    
    $
    608,000
    
    
    $
    641,000Pro forma loss from continuing operations
    
    $
    742,000
    
    
    $
    1,695,000Pro forma loss attributable to Common Shareholders
    
    $
    742,000
    
    
    $
    1,777,000Pro forma loss per Common Share: Basis and Diluted
    
    $
    0.02
    
    
    $
    0.06
 Note 7  Mortgage Loan The mortgage loans payable relating to our four commercial properties of
approximately $6.4 million were assumed by the purchaser on October 1, 2003. In connection with the acquisition of Richton Trail, we assumed a mortgage loan
payable of approximately $1.5 million, which had a maturity date of October 1,
2012. Payments were required monthly in the amount of approximately $13,000,
which represented principal and interest at 7.25%. On October 31, 2003, we completed the refinance of the Richton Trail with
KeyBank Real Estate Capital. The mortgage loan payable of $2.8 million has 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. The balance F-12




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due at maturity in 2013 will be approximately $2.1 million. The net proceeds
from the loan were approximately $1.3 million. The mortgage loan payable was
approximately $2,812,000 as of December 31, 2003. The mortgage loan matures as follows: Year ending December 31,2004
    
    $
    48,6182005
    
    
    52,0712006
    
    
    55,2562007
    
    
    58,6352008
    
    
    61,780Thereafter
    
    
    2,535,776$
    2,812,136
 Note 8  Shareholders Equity Preferred Shares During 1999, we issued 785,037 Class A Cumulative Convertible Preferred Shares
(preferred shares) to the public. Each of the preferred shares is entitled,
at all meetings of shareholders, to 3.448 votes, the number of common shares
into which they are convertible, subject to adjustment for stock splits and
similar events. The preferred shares are entitled to vote as a class on
certain matters that affect their respective rights. The preferred shares bear
a liquidation value of $10.00 per share and originally accrued a dividend equal
to $0.475 per share, payable every six months. The preferred shares are
convertible into 3.448 common shares subject to certain formulas. We have the
right to redeem the preferred shares. Proceeds from the issuance of the
preferred shares, net of underwriters discount and total offering expenses,
were approximately $6.7 million. Since the original issuance and prior to the
exchange offer on June 30, 2003, a total of 121,746 preferred shares were
converted into 419,779 common shares. Effective April 7, 2003, we issued 95,541 preferred shares to Duane H. Lund in
connection with his resignation as Chief Executive Officer in accordance with
the terms of his employment agreement dated March 4, 2003 and recorded
compensation expense of $300,000 as a result of the issuance and employment
termination. In May 2003, we offered preferred shareholders a one-time incentive to exchange
preferred shares into common shares, which expired June 30, 2003. Through that
exchange offer, preferred shareholders exchanged 1,174,120 of the preferred
shares, or nearly 81%, for 26,865,042 common shares. After the exchange offer
was completed, the remaining preferred shares held by investors not affiliated
with Paragon had an aggregate market value below $1 million and therefore no
longer met the minimum requirement for listing on the American Stock Exchange,
as set forth in Section 1202(b) of the AMEXs Company Guide.This requirement
was disclosed in the proxy statement as well as our intent not to seek another
trading market for the preferred shares. AMEX suspended trading of the
preferred shares and the Securities and Exchange Commission removed the
preferred shares from listing and registration in accordance with Section 12 of
the Securities and Exchange Act of 1934. Preferred shareholders retain the
right to convert each of their shares for 3.448 common shares. The preferred
shares are on the Over the Counter Market with the symbol PRGYP. On June 30, 2003, the holders of our preferred shares consented to waive the
dividend that would otherwise have been payable in May 2003 and to eliminate
any future dividends that would have been payable under the terms of our
preferred shares. The waiver was sought in connection with a one-time
incentive exchange offer under which we offered to exchange each of our
preferred shares for 22.881 common shares. Effective June 30, 2003, we issued 696,078 preferred shares valued at
approximately $2.4 million to Messrs. Mastandrea and Dee pursuant to separate
restricted share agreements. Under each restricted share agreement, the
restricted shares vest upon the later of the following dates: F-13




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
    
    the date our gross assets exceed $50.0 million, or
    
    348,038 restricted shares will vest on March 4, 2004; 174,020 shares
will vest on March 4, 2005 and the remaining 174,020 shares will vest on
March 4, 2006. During the fourth quarter of 2003, 1,400 of the preferred shares were converted
to 4,827 common shares, at a conversion rate of 3.448 common shares for each
preferred share. As of December 31, 2002, treasury stock recorded in the accompanying
consolidated balance sheet was comprised of 15,300 common shares. During 2003,
these treasury shares were cancelled. On October 1, 2003 we completed the sale of our 92.9% general partnership
interest in our four commercial properties. A portion of the proceeds from the
sale were paid in 2,859,765 of our common shares at an average closing price
for the 30 calendar days prior to June 27, 2003 of $0.28 or approximately
$801,000. These shares are recorded at cost in the accompanying consolidated
balance sheet under treasury shares. Common Shares On May 6, 2002, we filed a Registration Statement under the Securities Act of
1933 on Form SB-2 (Registration Statement) registering 3,115,347 common
shares that may be sold by the selling shareholders named in the Registration
Statement representing (a) 2,347,872 common shares currently outstanding and
(b) 509,725 common shares issuable upon conversion of 147,832 preferred shares,
177,750 common shares issuable upon conversion of common units of Wellington
Properties Investments, LP and 80,000 common shares issuable upon exercise of
options. The Registration Statement was effective as of May 17, 2002. Restricted Common Shares On June 30, 2003, our shareholders approved the issuance of additional common
shares to Paragon Real Estate Development, LP for James C. Mastandrea, our
Chief Executive Officer and President, and John J. Dee, our Chief Financial
Officer and Senior Vice President, to encourage them to substantially grow the
asset base, net operating income, funds from operations, net value, and share
value of Paragon. We will issue restricted common shares if they locate and
close on our behalf future acquisition, development or re-development
transactions. Any of these transactions would be subject to approval by our
board of trustees. The maximum number of common shares they may receive under
the additional contribution agreement is limited to a total value of $26
million based on the average closing price of the common shares for 30 calendar
days preceding the closing of any acquisition. The common shares will be
restricted until we achieve the five-year proforma income target for the
acquisition, as approved by the board of trustees, and an increase of 5% in
Paragons net operating income and funds from operations. The restricted shares
would vest immediately upon any shift in ownership, as defined in the
agreement. On October 28, 2003, our board of trustees approved the issuance of 50,000
restricted commons shares to each of four of our six trustees. who are not
officers of the Company. The restricted shares were issued effective as of
October 28, 2003 and will vest on October 28, 2004. The market value of the
shares on the date of grant was $44,000. On December 16, 2003, our board of trustees approved the issuance of 50,000
restricted commons shares to an employee hired June 16, 2003. Half of the
restricted shares vest on each June 16 of 2007 and 2008, provided the employee
remains employed by the Company on the vesting dates. The market value of the
shares on the date of grant was $18,500. On December 16, 2003, our board of trustees approved the issuance of 500,000
restricted common shares to Paragons landlord for 4,000 square feet of fully
furnished office space, including all utilities, phone, high speed internet,
equipment usage, copying, presentation packaging and preliminary design
planning for our proposed projects for two years. Half of the shares will be
issued in each March of 2004 and 2005. The shares F-14




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have restrictions as to voting and transfer. A proxy will be signed when the
shares are issued granting
Mr. Mastandrea the right to vote the shares during the ownership of the
landlord or if transferred in a block sale. The shares are restricted from
being transferred or sold for four years from the date of issuance, and
thereafter have volume limits on the number of shares that may be sold daily in
the open market or transferred in a block sale. The market value of the office
space and services for two years was estimated at $103,000. Warrants On March 5, 1998, we issued a warrant to Credit Suisse First Boston Mortgage
LLC in connection with the refinancing of debt. The warrant provides for the
right to purchase 47,500 common shares at a price of $5.37 per common share and
is exercisable at any time through March 5, 2008. The warrant remains
unexercised as of December 31, 2003. In connection with the issuance of preferred shares on October 28, 1999, we
issued to a representative of the underwriters a warrant to purchase 35,500
preferred shares at a price of $10.00 per share. The warrant is exercisable
through November 2, 2004 and remains unexercised as of December 31, 2003. Options On May 27, 1998, in accordance with our former stock option plan (Former
Plan) we granted options as to 54,387 Common Shares to then existing employees
and Trustees. The options remain unexercised and are exercisable on any date
through May 26, 2008 at a price of $5.37 per share. On November 16, 1998, we adopted the 1998 Share Option Plan (Current Plan),
which provides for the granting of share options to officers, trustees and
employees at a price determined by a formula in the Current Plan agreement.
The options are to be exercisable over a period of time determined by the
Current Plan committee, but no longer than ten years after the grant date.
Compensation resulting from the share options is initially measured at the
grant date based on fair market value of the shares. In connection with employment agreements entered into during 1999 and in
accordance with the Current Plan, we issued options to purchase 80,000 Common
Shares at $2.90 per share to each of our former Chief Executive Officer and
former President. The former Chief Executive Officers options were returned
to the Company in 2003 and the former Presidents options expire on December
31, 2005. Effective May 15, 2002 we issued 50,000 options to each of our five Trustees at
a price of $0.45 per share. The options vest six months after issuance and
expire 90 days after the Trustees term ends. On September 30, 2003, 200,000
options expired and were returned to the Company. Effective October 28, 2003 we issued 25,000 options to each of four of our six
Trustees at a price of $0.22 per share. The options vest twelve months after
issuance and expire 90 days after the Trustees term ends. The following table summarizes the Companys option activity for the years
ended December 31, 2003 and 2002: F-15




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##### Table of Contents



WeightedOptions
    
    Averageto Purchase
    
    Exercise Price
    
    Range of ExerciseCommon Shares
    
    per Share
    
    Price per ShareOutstanding at December 31, 2001
    
    
    1,214,387
    
    
    $
    5.05
    
    
    $2.90 - $6.375Granted
    
    
    250,000
    
    
    $
    0.45
    
    
    $0.45Expired/terminated
    
    
    (1,000,000
    )
    
    $
    5.38
    
    
    $5.375Outstanding at December 31, 2002
    
    
    464,387
    
    
    $
    1.87
    
    
    $0.45-$5.375Granted
    
    
    100,000
    
    
    $
    0.22
    
    
    $0.22Expired/terminated
    
    
    (280,000
    )
    
    $
    1.15
    
    
    $0.45 - $2.90Outstanding at December 31, 2003
    
    
    284,387
    
    
    $
    2.00
    
    
    $0.22 - $5.375Exercisable at December 31, 2002
    
    
    464,387
    
    
    $
    1.87
    
    
    $0.45 - $5.375Exercisable at December 31, 2003
    
    
    184,387
    
    
    $
    2.96
    
    
    $0.45 - $5.375
 The following table summarizes exercisable options outstanding as of December
31, 2003: Number of
    
    WeightedOptions
    
    AverageOutstanding
    
    Remaining
    
    WeightedRange of
    
    and
    
    Contractual
    
    AverageExercise Prices
    
    Exercisable
    
    Life (in years)
    
    Exercise Price$5.37
    
    
    54,387
    
    
    
    4.4
    
    
    $
    5.37$2.90
    
    
    80,000
    
    
    
    2.0
    
    
    $
    2.90$0.45
    
    
    50,000
    
    
    
    1.3
    
    
    $
    0.45$0.45 to $5.37
    
    
    184,387
    
    
    
    2.3
    
    
    $
    2.96
 Note 9  Discontinued Operations On October 1, 2003 we sold our 92.9% general partnership interest in our
commercial properties. The results of operations for these properties are
presented in the accompanying Consolidated Statement of Operations as
Income/Loss from discontinued operations. The following is a summary of the income from discontinued operations of our
commercial properties for the years ended December 31, 2003 and 2002. Year ended December 31,2003
    
    2002Revenues
    
    $
    1,007,813
    
    
    $
    1,362,050Operating expenses
    
    
    (444,995
    )
    
    
    (646,894
    )Depreciation and amortization
    
    
    (157,735
    )
    
    
    (228,450
    )Interest expense
    
    
    (251,900
    )
    
    
    (448,395
    )General and administrative
    
    
    (305,087
    )
    
    
    (264,116
    )Non-recurring real estate expenses
    
    
    (305,970
    )
    
    
    (2,023,000
    )Income (loss) from discontinued operations
    
    $
    (457,874
    )
    
    $
    (2,248,805
    )
 Losses from discontinued operations relating to our technology segment for the
years ended December 31, 2003 F-16




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and 2002 were approximately $0 and $82,000, respectively. The discontinued
operations relating to our technology segment for the year ended December 31,
2002 were primarily composed of general and administrative expense. Note 10  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 years ended December 31,
2003 and 2002 were 17,458,707 and 4,517,524, respectively. Common share
equivalents of approximately 23.4 million and 3.1 million as of December 31,
2003 and December 31, 2002, 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 year ended December 31,2003
    
    2002NumeratorNet loss from continuing operations
    
    $
    (631,739
    )
    
    $
    (1,227,088
    )Discontinued operations:Discontinued operations of technology
segment, net of tax
    
    
    
    
    
    
    (82,164
    )Discontinued operations of commercial
properties, net of tax
    
    
    (457,874
    )
    
    
    (2,248,805
    )Net loss
    
    
    (1,089,613
    )
    
    
    (3,558,057
    )Preferred Share Dividends
    
    
    
    
    
    
    (630,126
    )Net loss attributable to Common Shareholders
    
    $
    (1,089,613
    )
    
    $
    (4,188,183
    )DenominatorWeighted average Common Shares outstanding
at December 31, 2003 and December 31, 2002:Basic and Diluted
    
    
    18,171,689
    
    
    
    4,517,524Basis and Diluted EPSNet loss from continuing operations
    
    $
    (0.03
    )
    
    $
    (0.27
    )Discontinued operations:Discontinued operations of technology
segment, net of tax
    
    
    
    
    
    
    (0.02
    )Discontinued operations of commercial
properties, net of tax
    
    
    (0.03
    )
    
    
    (0.50
    )Net loss
    
    
    (0.06
    )
    
    
    (0.79
    )Preferred Share Dividends
    
    
    
    
    
    
    (0.14
    )Net loss attributable to Common
Shareholders  - Basic and Diluted
    
    $
    (0.06
    )
    
    $
    (0.93
    )
 Note 11  Dividends/Distributions During 2002 cash distributions declared with respect to the preferred shares
were $0.95 per preferred share. No cash distributions were declared during
2003 for preferred shares. On June 30, 2003, the holders of our preferred shares consented to waive the
dividend that would otherwise F-17




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have been payable in May 2003 and to eliminate any future dividends that would
have been payable under the terms of our preferred shares. The waiver was
sought in connection with a one-time incentive exchange offer under which we
offered to exchange each of our preferred shares for 22.881 common shares. No cash distributions were declared during 2003 and 2002 with respect to the
common shares. Note 12  Income taxes There was no income tax provision for the years ended December 31, 2003 and
2002. For the year ended December 31,2003
    
    2002Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Total tax provision
    
    $
    
    
    
    $
    
 The tax provision differs from the expense that would result from applying
Federal statutory rates as follows: For the year ended December 31,2003
    
    2002Benefit at Federal statutory rate
    
    $
    (364,000
    )
    
    $
    (1,191,000
    )State income benefit, net of Federal tax effect
    
    
    (71,000
    )
    
    
    (228,000
    )Permanent differences:Disposal of real estate investments
    
    
    (338,000
    )
    
    
    Temporary differences:Provision for loss on real estate investments
    
    
    (817,000
    )
    
    
    Provision for loss on marketable securities
    
    
    (317,000
    )
    
    
    Change in valuation allowance
    
    
    1,911,000
    
    
    
    1,425,000Other
    
    
    1,000
    
    
    
    (6,000
    )Tax provision
    
    $
    
    
    
    $
    
 Deferred tax assets and liabilities consist of the following: At December 31,2003
    
    2002Deferred tax assets:Net operating loss carryforwards
    
    $
    4,410,000
    
    
    $
    1,671,000Capital loss carryforward
    
    
    317,000
    
    
    
    Provision for loss on real estate investments
    
    
    
    
    
    
    817,000Provision for loss on marketable securities
    
    
    106,000
    
    
    
    423,000Accrual and other temporary variances
    
    
    29,000
    
    
    
    40,000Valuation allowance
    
    
    (4,862,000
    )
    
    
    (2,951,000
    )Deferred tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    
    
    
    $
    
 Realization of deferred tax assets is dependent upon generation of sufficient
future taxable income. Management has determined that sufficient uncertainty
exists regarding the realizability of a significant portion of the net deferred
tax assets. As such, management has provided a valuation allowance of
$4,862,000 and $2,951,000, against such net deferred tax assets of the Company
as of December 31, 2003 and 2002, respectively. F-18




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At December 31, 2003, the Company had net operating loss carryforwards of
approximately $11.0 million and capital loss carryforwards of approximately
$0.8 million available to be carried to future periods. The loss carryforwards
expire as follows: Year Expiring
    
    Net Operating Loss
    
    Capital Loss2008
    
    $
    
    
    
    $
    786,0002012
    
    
    458,000
    
    
    
    2018
    
    
    739,000
    
    
    
    2019
    
    
    115,000
    
    
    
    2020
    
    
    2,025,000
    
    
    
    2021
    
    
    177,000
    
    
    
    2022
    
    
    592,000
    
    
    
    2023
    
    
    6,881,000
    
    
    
    Total loss carryforwards
    
    $
    10,987,000
    
    
    $
    786,000
 Note 13  Commitments and Contingencies Liquidity As of December 31, 2003, our unrestricted cash resources were approximately
$2,219,000 and our marketable securities available for sale were approximately
$99,000. Our marketable securities represented 10,000 shares of Stellent.
The NASDAQ closing quote on March 18, 2004 was $8.64 per share of Stellent. During the year ended December 31, 2003, we sold 30,000 shares of Stellent at
an average price of $8.30 per share and recognized a gain on the sale of these
shares totaling approximately $136,000. Net proceeds from these sales were
approximately $249,000. 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 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 joint venture structures to be used for property and portfolio
acquisitions, and use tax-deferred operating partnership units, convertible
into a separate class of common shares, 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 will materially and adversely affect our
operations, liquidity and financial results. On June 30, 2003, the holders of our preferred shares consented to waive the
dividend that would otherwise have been payable in May 2003 and to eliminate
any future dividends that would have been payable under the terms of our
preferred shares. The waiver was sought in connection with a one-time
incentive exchange offer under which we exchanged each of our preferred shares
for 22.881 common shares. We are dependent on our existing cash 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
employment contracts for our three executive officers. The debt service
payment is being funded from the cash flow of the property secured by the
mortgage, and the current salary requirements of the employment contracts is
only $5,000 per month for each executive officer. We historically have
financed our long-term capital needs, including acquisitions, as follows: F-19




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
    
    Borrowings from new loans;
    
    Additional equity issuances of our common and preferred shares; and
    
    Proceeds from the sales of our real estate and technology segment. There can be no assurance that any of the alternatives will be adopted, or if
adopted, will be successful. On October 1, 2003, we closed on the sale of our 92.9% general partnership
interest in our four commercial properties. Proceeds from the sale of these
properties, net of closing costs and the mortgage balances assumed by the
purchaser, were approximately $1,601,000. The proceeds from the sale were paid
in a combination of approximately $801,000 in cash and 2,859,765 of our common
shares at an average closing price for the 30 calendar days prior to June 27,
2003 of $0.28. Also as a result of the sale approximately $318,000
representing cash from the commercial real estate properties was released from
mortgage related restrictions and made available for operations. On October 31, 2003, we completed the refinance of the Richton Trail with
KeyBank Real Estate Capital. The mortgage loan payable of $2.8 million has 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. The balance due at maturity in 2013 will be approximately $2.1
million. The net cash proceeds from the loan that were made available for
operations were approximately $1.3 million. Employment Agreements Effective as of March 4, 2003, the Compensation Committee approved three new
employment agreements. The employment agreement with Mr. Lund provided for an
annual salary of $150,000 to be paid to Mr. Lund for his services as Chief
Executive Officer through five days after the filing of the Companys December
31, 2002 Form 10-KSB. In connection with the severance provision of this
agreement, on April 7, 2003, Mr. Lund relinquished his position as Chief
Executive Officer and, in consideration for his resignation, received 95,541
preferred shares in lieu of receiving a $300,000 severance payment. The number
of shares issued was based on two times his annual salary with the price of the
preferred shares based on the average closing price for the 30 calendar days
prior to March 1, 2003. Mr. Lund received compensation based on an annual
salary of $60,000 for his services from April 7, 2003 until June 15, 2003. The employment agreements with James C. Mastandrea and John J. Dee provide for
an annual salary of $60,000 each effective as of March 4, 2003 and in
connection therewith, Mr. Mastandrea was appointed as Chief Executive Officer
and Mr. Dee was appointed as Chief Financial Officer on April 7, 2003. The
initial terms of Messrs. Mastandrea and Dees employment are for two years and
may be extended for terms of one year through their 70th birthday. Messrs.
Mastandrea and Dees base annual salaries may be adjusted from time to time,
except that the adjustment may not be lower than the preceding years base
salary. The employment agreements provide that Messrs. Mastandrea and Dee will
be entitled to base salary and bonus at the rate in effect before any
termination for a period of three years in the event that their employment is
terminated without cause by us or for good reason by either Messrs. Mastandrea
or Dee. The employment agreement with Steven M. Edelman, our Senior Vice President and
Chief Investment Officer, provides for an annual salary of $60,000 effective as
of May 16, 2003. The initial term of Mr. Edelmans employment is for two years
and may be extended for terms of one year through his 70th birthday. Mr.
Edelmans base annual salary may be adjusted from time to time, except that the
adjustment may not be lower than the preceding years base salary. The
employment agreement provides that Mr. Edelman will be entitled to base salary
and bonus at the rate in effect before any termination for a period of three
years in the event that his employment is terminated without cause by us or for
good reason by Mr. Edelman. Legal Settlement On August 5, 2002, we reached a settlement with Odeh Muhawesh, a former trustee
of the Company and former F-20




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Chief Knowledge Officer of Stonehaven Technologies. Under the settlement, we
paid Mr. Muhawesh $160,000 in exchange for a promissory note and related
interest in connection with the promissory note we assumed in February 2000
pursuant to the terms of the merger agreement between the Company, Stonehaven
Technologies and NETLink International, Inc. (NETLink), a company founded and
owned by Mr. Muhawesh whereby NETLink was merged into Stonehaven Technologies.
Further under the settlement, Mr. Muhawesh assigned to us his options for 1.0
million of our common shares and all of his stock in MyFreeDesk.com, Inc., and
we released a contractual restriction restricting Mr. Muhawesh from selling
publicly approximately 158,500 of our common shares. The settlement provides
both parties a full, final and complete release of all claims to date. As a
result of the settlement, we recorded an increase to accumulated deficit of
approximately $227,000 during the year ended December 31, 2002. Income Tax Audit Wellington Property Investments, LP, the holding entity for our four commercial
properties sold October 1, 2003, had its income tax returns audited by the
Internal Revenue Service for the tax periods ended December 31, 1999 and 2000.
On December 22, 2003, we received a No adjustments Letter from the Internal
Revenue Service accepting the tax returns for the years under audit. Note 14  Related Party Transactions Management Fees of Commercial Properties We maintained a property management agreement with Hoyt Properties, Inc. (Hoyt
Properties), an entity controlled by Steven B. Hoyt, our former Chairman of
the Board, which served as property manager of the commercial properties owned
by us. In connection with the agreement, Hoyt Properties managed the
day-to-day operations of properties owned by us and received a management fee
for this service. Management fees paid to Hoyt Properties were approximately
$49,000 and $66,000 for the years ended December 31, 2003 and 2002,
respectively. On October 1, 2003 we sold our four commercial properties
managed by Hoyt Properties. As a result, these management fees are included in
discontinued operations. 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), 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 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 Trials payroll related costs. The related
management fees included in year ended December 31, 2003 were approximately
$13,000. Reimbursement, at cost, for the payroll related costs paid and
accrued for the year ended December 31, 2003 was approximately $30,700. As the
Company acquires more properties, it intends to use local third party
management companies until we are able to provide management services
ourselves. Leasing Commissions During the year ended December 31, 2003, we paid a leasing commission of
approximately $18,000 to Hoyt Properties in connection with two new leases for
a total of approximately 21,000 square feet. On October 1, 2003 we sold our
four commercial properties managed by Hoyt Properties. As a result, these
leasing commissions, net of accumulated amortization are included in
discontinued operations. F-21




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Rental Expense During the years ended December 31, 2003 and 2002, we recognized rental expense
of approximately $8,000 and $30,000, respectively, related to office space
leased from Hoyt Properties. Note 15  Supplemental Information to Statements of Cash Flows For the year ended December 31,2003
    
    2002Interest paid
    
    $
    346,333
    
    
    $
    462,276Supplemental schedule of non-cash investing and
financing activities:The following assets and liabilities were assumed in
connection with the acquisition of Richton Trail:Acquisition of residential real estate
    
    $
    (3,986,409
    )
    
    $
    Additions to real estate
    
    
    (4,832
    )
    
    
    Security deposit
    
    
    44,732
    
    
    
    Mortgage note payable
    
    
    1,544,258
    
    
    
    Minority interest
    
    
    2,355,742
    
    
    
    Acquisition and additions to real estate properties
    
    $
    (46,509
    )
    
    $
    The following assets and liabilities were disposed of
in connection with the disposition of commercial
propertiesDisposition of real estate
    
    $
    8,134,097
    
    
    $
    Restricted cash
    
    
    318,609
    
    
    
    Deferred costs and other assets
    
    
    210,862
    
    
    
    Mortgage notes payable
    
    
    (6,408,825
    )
    
    
    Accounts payable and accrued liabilities
    
    
    (289,664
    )
    
    
    Security deposits
    
    
    (45,000
    )
    
    
    Treasury shares
    
    
    (800,735
    )
    
    
    Cash proceeds from disposition of commercial properties
    
    $
    1,119,344
    
    
    $
    The following assets and liabilities were disposed of
in connection with discontinued operations of
technology segment:Accounts payable and accrued expenses
    
    $
    
    
    
    $
    (363,386
    )Related party note payable
    
    
    
    
    
    
    (160,000
    )Gain on disposal of technology segment, net of tax
    
    
    
    
    
    
    (40,000
    )Discontinued operations, net of tax
    
    
    
    
    
    
    (82,164
    )Costs associated with discontinued operations
    
    $
    
    
    
    $
    (645,550
    )The following liabilities were assumed and disposed of
in connection with the refinance of the mortgage loan
of Richton TrailCash proceeds from new mortgage loan
    
    $
    2,820,000
    
    
    $
    Disposition of previous mortgage loan
    
    
    (1,533,637
    )
    
    
    Cash proceeds from refinance of mortgage loan
    
    $
    1,286,363
    
    
    $
    
 F-22