##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 o
    
    TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 Commission File Number: 0-25074
 PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
  Maryland
    
    39-6594066(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification Number)PO Box 631209, Houston, Texas
    
    77263(Address of principal executive offices)
    
    (Zip code)
  
   o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 þ o




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##### 



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 PagePART IItem 1 Business
    
    
    2Item 1A Risk Factors
    
    
    3Item 2 Properties
    
    
    4Item 3 Legal Proceedings
    
    
    4Item 4 Submission of Matters to a Vote of Security Holders
    
    
    4PART IIItem 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    4Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    6Item 8 Financial Statements and Supplementary Data
    
    
    11Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    11Item 9A(T) Controls and Procedures
    
    
    11Item 9B Other Information
    
    
    12PART IIIItem 10 Directors, Executive Officers and Corporate Governance
    
    
    13Item 11 Executive Compensation
    
    
    16Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    18Item 13 Certain Relationships and Related Transactions, and Director Independence
    
    
    21Item 14 Principal Accounting Fees and Services
    
    
    21PART IVItem 15 Exhibits, Financial Statement Schedules
    
    
    22SIGNATURES
    
    
    25EXHIBITSExhibit 31.1Section 302 CEO CertificateExhibit 31.2Section 302 CFO CertificateExhibit 32.1Section 906 CEO & CFO CertificateEX-31.1EX-31.2EX-32.1
  1




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##### Table of Contents



PART I
 
 Item 1. Business.
 Company Overview
     Real Estate
  Real Estate Tenants
   2




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##### Table of Contents



Competition
  Employees
  
 Item 1A. Risk Factors.
  
    
    worsening of national economic conditions, including continuation of
lack of
liquidity in the capital markets and more stringent lending requirements by
financial institutions;
    
    depressed values for commercial real estate properties and companies;
    
    changes in interest rates and in the availability, cost and terms of
mortgage funds;
    
    decreases in market prices of the shares of publicly traded real estate
companies;
    
    adverse changes in governmental rules and fiscal policies; and
    
    other factors which are beyond our control.
  
    
    we have no operating assets;
    
    our cash resources are limited;
    
    we have a history of losses;
    
    we have not raised funds through a public equity offering;
    
    our trustees control a significant percentage of our voting shares;
    
    shareholders could experience possible future dilution through the
issuance of
additional shares;
 3




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##### Table of Contents




    
    we are dependent on a small number of key senior professionals who are
part-time
employees; and
    
    we currently do not plan to distribute dividends to the holders of our
shares.
 
 Item 2. Properties.
  Insurance
  Mortgage Loans
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities.
    4




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High
    
    Low20094th Quarter
    
    $
    0.50
    
    
    $
    0.083rd Quarter
    
    $
    0.10
    
    
    $
    0.052nd Quarter
    
    $
    0.50
    
    
    $
    0.051stQuarter
    
    $
    0.25
    
    
    $
    0.0320084th Quarter
    
    $
    0.05
    
    
    $
    0.033rd Quarter
    
    $
    0.05
    
    
    $
    0.052nd Quarter
    
    $
    0.05
    
    
    $
    0.051stQuarter
    
    $
    0.26
    
    
    $
    0.05
  Dividend Policy
  Preferred Share Conversions
  Issuer Purchases of Equity Securities
  5




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 Cautionary Statements Regarding Forward-Looking Statements
  
    
    worsening of national economic conditions, including continuation of
lack of
liquidity in the capital markets and more stringent lending requirements by
financial institutions;
    
    depressed values for commercial real estate properties and companies;
    
    changes in interest rates and in the availability, cost and terms of
mortgage funds;
    
    decreases in market prices of the shares of publicly traded real estate
companies;
    
    adverse changes in governmental rules and fiscal policies; and
    
    other factors which are beyond our control.
  
    
    we have no operating assets;
    
    our cash resources are limited;
    
    we have a history of losses;
    
    we have not raised funds through a public equity offering;
    
    our trustees control a significant percentage of our voting shares;
    
    shareholders could experience possible future dilution through the
issuance of
additional shares;
    
    we are dependent on a small number of key senior professionals who are
part-time
employees; and
    
    we currently do not plan to distribute dividends to the holders of our
shares.
 Overview
  6




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##### Table of Contents



Brief History
  Recent Developments and Executive Overview
  Results of Operations
  
    
    Explanation of changes in the results of operations in the Consolidated Statements
of Operations for the year ended December 31, 2009 compared to the year ended
December 31, 2008.
    
    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, 2009, and how
we intend to generate cash for long-term capital needs.
    
    Our current income tax status.
 Comparison of the years ended December 31, 2009 and 2008
 Revenues from Operations
  7




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##### Table of Contents



Expenses from Operations
  Loss from operations
  Gain (loss) on sale of marketable securities and impairment loss on marketable securities
    Net loss attributable to Common Shareholders
  Liquidity and Capital Resources
  8




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##### Table of Contents



Cash Flows
    Future Obligations
  Long Term Liquidity and Operating Strategies
  
    
    Borrowings from new loans;
    
    Additional equity issuances of our common and preferred shares; and
    
    Proceeds from the sales of our real estate, a technology segment, and marketable
securities.
  Current Tax Status
   9




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##### Table of Contents



Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  Application of Critical Accounting Estimates
  Valuation Allowance of Deferred Tax Asset
  Fair Value of Financial Instruments
   10




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
  
 Item 9A(T). Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control Over Financial Reporting
   11




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Attestation Report of Independent Registered Public Accounting Firm
  
 Item 9B. Other Information.
  12




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##### Table of Contents



PART III
  
 Item 10. Directors, Executive Officers and Corporate Governance.
 ExpirationName
    
    Age
    
    Position
    

of Term (1)James C. Mastandrea
    
    
    66
    
    
    President, Chief Executive Officer and Chairman of Board of Trustees
    
    2006 (1)John J. Dee
    
    
    58
    
    
    Senior Vice President, Chief
Financial Officer and Trustee
    
    2007 (1)Daryl J. Carter
    
    
    54
    
    
    Trustee
    
    2008 (1)Daniel G. DeVos
    
    
    52
    
    
    Trustee
    
    2006 (1)Paul T. Lambert
    
    
    57
    
    
    Trustee
    
    2007 (1)Michael T. Oliver
    
    
    66
    
    
    Trustee
    
    2008 (1)
 
 (1)
    
    Because the trustees own a significant number of the voting shares and the
Company is reducing expenses to conserve its limited cash, an annual meeting
was not held in 2009, 2008 or 2007. The trustees will continue to serve until
an election of trustees is held, though no election is currently planned. Board of Trustees and Executive Officers
  James C. Mastandrea TM
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##### Table of Contents



John J. Dee TM
 Daryl J. Carter
 Daniel G. DeVos
 Paul T. Lambert
 Michael T. Oliver
 14




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Code of Ethics
  Section 16(a) Beneficial Ownership Reporting Compliance
  15




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##### Table of Contents



Item 11. Executive Compensation.
  Outstanding Equity Awards at Fiscal Year End
  Option Awards
    
    Stock AwardsEquity IncentivePlan Awards:Market
    
    Number ofNumber of
    
    Number of
    
    
    
    
    
    
    
    
    
    Number of
    
    Value of
    
    UnearnedSecurities
    
    Securities
    
    
    
    
    
    
    
    
    
    Shares or
    
    Shares or
    
    Shares, UnitsUnderlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Units of
    
    Units of
    
    or OtherUnexercised
    
    Unexercised
    
    Option
    
    Option
    
    Stock That
    
    Stock That
    
    Rights ThatOptions
    
    Options
    
    Exercise
    
    Expiration
    
    Have Not
    
    Have Not
    
    Have NotName
    
    Exercisable
    
    Unexercisable
    
    Price
    
    Date
    
    Vested
    
    Vested
    
    VestedJames C. Mastandrea
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000

    (1)
    
    $
    320.00
    
    
    
    (2
    )Chief Executive Officer,
President and Chairman
 
 (1)
    
    Represents restricted common shares issued January 2, 2004. Half of the restricted shares
vest in five years or earlier if Paragons share price rises to $75.00 per share. The
remaining half vests when funds from operations has doubled or when Paragons share price is
50% higher compared to the average trading price for the five days preceding the grant date.(2)
    
    On June 30, 2003, our shareholders approved the issuance of additional common shares to
Paragon Real Estate Development, LLC 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. On September 29, 2006, Paragon amended
this agreement to add each of the trustees to the agreement so that if a trustee brings a new
deal to Paragon, he would receive additional common shares of Paragon in accordance with a
formula in the agreement. 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 the members of our board of trustees who are not
receiving the additional common shares. 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 pro
forma 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. Employment Agreements
  16




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
    
    the date our gross assets exceed $50.0 million, or
    
    50% of the restricted shares on March 4, 2004; 25% of the shares on
March 4, 2005, and the remaining 25% of the shares on March 4, 2006.
  Compensation of Trustees
    17




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
   Total Common SharesCommon Shares  (2)
    

Preferred A Shares  (3)
    

Preferred C Shares  (4)
    

and Preferred Shares  (5)Name and Address (1)
    
    Number
    

Percent  (6)
    
    Number
    

Percent (6)
    
    Number
    

Percent
(6)
    
    Number
    

Percent (6)James C. Mastandrea
    
    
    174,163
    (7)
    
    
    43.0
    %
    
    
    161,410
    (15)
    
    
    62.5
    %
    
    
    56,944
    
    
    
    23.3
    %
    
    
    792,846
    (17)
    
    
    77.4
    %Paragon Real Estate
Development, LLC
    
    
    163,117
    (8)
    
    
    40.3
    %
    
    
    161,410
    (15)
    
    
    62.5
    %
    
    
    
    
    
    
    
    
    
    
    212,359
    (18)
    
    
    46.7
    %Paul T. Lambert
    
    
    34,448
    (9)
    
    
    8.5
    %
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    25.6
    %
    
    
    659,448
    (19)
    
    
    63.9
    %John J. Dee
    
    
    4,000
    (10)
    
    
    1.0
    %
    
    
    
    (16)
    
    
    
    
    
    
    12,500
    
    
    
    5.1
    %
    
    
    129,000
    (20)
    
    
    24.3
    %Daryl J. Carter
    
    
    3,000
    (11)
    
    
    
    *

    
    
    
    
    
    
    
    
    
    
    37,500
    
    
    
    15.3
    %
    
    
    378,000
    (21)
    
    
    48.4
    %Daniel G. DeVos
    
    
    3,000
    (11)
    
    
    
    *

    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    25.6
    %
    
    
    628,000
    (22)
    
    
    60.9
    %Michael T. Oliver
    
    
    1,667
    (12)
    
    
    
    *

    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    5.1
    %
    
    
    126,667
    (23)
    
    
    23.9
    %All trustees and
current executive
officers as a group  (13)
    
    
    220,278
    (14)
    
    
    53.8
    %
    
    
    161,410
    
    
    
    62.5
    %
    
    
    244,444
    
    
    
    100.0
    %
    
    
    2,713,961
    (24)
    
    
    93.5
    %
 
 *
    
    Indicates less than one percent (1)
    
    Unless otherwise indicated, the address of all beneficial owners is our corporate headquarters at
P.O. Box 631209, Houston, Texas 77263.(2)
    
    Percentages based on 405,096 common shares outstanding, not including 38,130 shares held in
treasury. For each individual trustee and executive officer, also includes common shares he has
the right to acquire through share options that are currently exercisable as of February 26, 2010.
The total options for all named persons is 4,667.(3)
    
    Percentages based on 258,236 preferred A shares outstanding as of February 26, 2010, which convert
to 53,694 common shares as follows: 161,410 preferred A shares are each convertible into 0.305
common shares and 96,826 preferred A shares are each convertible into 0.046 common shares.(4)
    
    Percentages based on 244,444 preferred C shares outstanding as of February 26, 2010, which convert
to 2,444,440 common shares. Each preferred C share is convertible into 10 common shares.(5)
    
    Percentages based on 405,096 common shares outstanding, not including 38,130 shares held in
treasury, and 244,444 preferred C shares which convert to 2,444,440 common shares. For each
individual trustee and executive officer, also includes common shares he has the right to acquire
through share options that are currently exercisable as of February 26, 2010. Mr. Mastandreas
percentage is calculated using a denominator that includes (i) 405,096 common shares, not
including 38,130 shares held in treasury; (ii) 56,944 preferred C shares that convert to 569,440
common shares; and (iii) 161,410 preferred A shares, which convert to 49,243 common shares.(6)
    
    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.(7)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which
Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 4,000 restricted common
shares; and (v) 379 common shares.
 18




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##### Table of Contents



(8)
    
    Mr. Mastandrea is the managing member of Paragon Real Estate Development, LLC and these shares are
also included in Mr. Mastandreas common shares.(9)
    
    Includes: (i) 1,666 options; (ii) 5,930 common shares held by Lambert Equities II, LLC, of which
Mr. Lambert is the controlling majority member and sole manager; and (iii) 26,852 common shares.(10)
    
    Includes: (i) 4,000 restricted common shares. Does not include 163,117 common shares held by
Paragon Real Estate Development, LLC, of which Mr. Dee is a member.(11)
    
    Includes: (i) 2,000 common shares and (ii) 1,000 options.(12)
    
    Includes (i) 667 common shares and (ii) 1,000 options.(13)
    
    Includes six named persons.(14)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which
Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 8,000 restricted common
shares; (iv) 4,667 options; and (v) 37,827 common shares.(15)
    
    Represents shares held by Paragon Real Estate Development, LLC, of which Mr. Mastandrea is the
managing member. Each preferred A share is convertible into 0.305 common shares.(16)
    
    Does not include 161,410 preferred A shares held by Paragon Real Estate Development, LLC, of which
Mr. Dee is a member.(17)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which
Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 4,000 restricted common
shares; (iv) 49,243 common shares issuable upon conversion of 161,410 preferred A shares held by
Paragon Real Estate Development, LLC; (v) 569,440 common shares issuable upon conversion of 56,944
preferred C shares; and (vi) 379 common shares.(18)
    
    Includes (i) 163,116 common shares and (ii) 49,243 common shares issuable upon conversion of
161,410 preferred A shares. These shares are also included in Mr. Mastandreas total shares.(19)
    
    Includes: (i) 1,666 options; (ii) 625,000 common shares issuable upon conversion of 62,500
preferred C shares; and (iii) 32,782 common shares.(20)
    
    Includes: (i) 4,000 restricted common shares; and (ii) 125,000 common shares issuable upon
conversion of 12,500 preferred C shares. Does not include 163,117 common shares or 161,410
preferred A shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a member.(21)
    
    Includes: (i) 2,000 common shares; (ii) 1,000 options; and (iii) 375,000 common shares issuable
upon conversion of 37,500 preferred C shares.(22)
    
    Includes: (i) 2,000 common shares; (ii) 1,000 options; and (iii) 625,000 common shares issuable
upon conversion of 62,500 preferred C shares.(23)
    
    Includes: (i) 667 common shares; (ii) 1,000 options; and (iii) 125,000 common shares issuable upon
conversion of 12,500 preferred C shares.(24)
    
    Includes: (i) 6,667 restricted common shares issuable to an independent third party which
Mr. Mastandrea has the right to vote; (ii) 163,117 common shares held by Paragon Real Estate
Development, LLC, of which Mr. Mastandrea is the managing member; (iii) 8,000 restricted common
shares; (iv) 4,667 options; (v) 49,243 common shares issuable upon conversion of 161,410 preferred
A shares held by Paragon Real Estate Development, LLC; (vi) 2,444,440 common shares issuable upon
conversion of 244,444 preferred C shares; and (vii) 37,827 common shares.
 19




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Equity Compensation Plan Information
 Number of securitiesNumber of
    
    Weighted-
    
    remaining availablesecurities to be
    
    average exercise
    
    for future issuanceissued upon
    
    price of
    
    under equityexercise of
    
    outstanding
    
    compensation plansoutstanding
    
    options,
    
    (excluding securitiesEquity Compensation Plans
    
    options, warrants
    
    warrants and
    
    reflected in columnApproved/ Not Approved by
    
    and rights
    
    rights
    
    (a))Security Holders
    
    (a)
    
    (b)
    
    (c)Equity compensation plans
approved by security holders2004 Share Option PlanRestricted common shares
    
    
    17,333
    
    
    $
    Options for common shares
    
    
    4,667
    
    
    $
    16.3922,000
    
    
    $
    3.48
    
    
    
    24,666Equity compensation plans not approved
by security holdersCommon shares
    
    
    6,667
    
    
    $
    Warrants for common shares
    
    
    11,667
    
    
    $
    7.5018,334
    
    
    $
    4.77
    
    
    
    Total all plans  Common shares
    
    
    40,334
    
    
    $
    4.07
    
    
    
    24,666
  20




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
 Relationships and Related Transactions
  Trustee Independence
  
 Item 14. Principal Accounting Fees and Services.
  % Approvedby AuditCategory
    
    Year
    
    Fees
    
    CommitteeAudit Fees (1)
    
    
    2009
    
    
    $
    35,500
    
    
    
    100
    %2008
    
    
    $
    40,100
    
    
    
    100
    %Audit-Related Fees
    
    
    2009
    
    
    $
    2008
    
    
    $
    Tax Fees (2)
    
    
    2009
    
    
    $
    2,750
    
    
    
    100
    %2008
    
    
    $
    2,765
    
    
    
    100
    %All Other Fees
    
    
    2009
    
    
    $
    2008
    
    
    $
    
 
 (1)
    
    Audit fees include audits and reviews of required SEC filings and proposed acquisitions
of properties.(2)
    
    Tax fees include the preparation of the Federal tax return. Policy for Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
  21




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##### Table of Contents



PART IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 ExhibitNumber
    
    Exhibit Description2.1
    
    Asset Contribution Agreement among Hampton Court Associates, L.P., Paragon Real Estate, L.P.,
and the Company (filed as Exhibit 2.1 with the Companys Current Report on Form 8-K filed on
March 5, 2003 and incorporated herein by reference)2.2
    
    Additional Contribution Agreement between the Company and Paragon Real Estate Development, LLC
(filed as Exhibit 2.7 with the Companys Current Report on Form 8-K filed on March 5, 2003 and
incorporated herein by reference)2.3
    
    Amendment to Additional Contribution Agreement between the Company, the Board of Trustees and
each Trustee individually dated September 29, 2006. (filed as Exhibit 2.1 with the Companys
Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by reference)2.4
    
    Modification Agreement between the Company and Paragon Real Estate Development, LLC (filed as
Exhibit 2.8 with the Companys Current Report on Form 8-K filed on March 5, 2003 and
incorporated herein by reference)2.5
    
    Amendment No. 1 to the Agreement of Limited Partnership of Wellington Properties Investments,
L.P. among the Company and the Limited Partners named therein (filed as Exhibit 2.9 with the
Companys Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by
reference)2.6
    
    Closing Agreement dated June 27, 2003 among the Company, Hampton Court Associates, L.P., Hoyt
Properties, Inc. and WLPT Funding LLC (filed as Exhibit 2.5 with the Companys Current Report
on Form 8-K filed on July 15, 2003 and incorporated herein by reference)3.1
    
    Articles of Amendment and Restatement of the Declaration of Trust of the Company (filed as
Exhibit 3.1 with the Companys Registration Statement on Form SB-2/A filed on October 14, 1999
and incorporated herein by reference)3.2
    
    Articles of Amendment of Declaration of Trust of the Company (filed as Exhibit 2.3 with the
Companys Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by
reference)3.3
    
    Articles Supplementary to the Declaration of Trust of the Company (filed as Exhibit 3.1 with
the Companys Current Report on Form 8-K filed on July 23, 2004 and incorporated herein by
reference)3.4
    
    Articles of Amendment of Declaration of Trust of the Company (filed as Exhibit 3.1 with the
Companys Current Report on Form 8-K filed on July 17, 2006 and incorporated herein by
reference)3.5
    
    Articles Supplementary to the Declaration of Trust of the Company (filed as Exhibit 3.1 with
the Companys Current Report on Form 8-K filed on October 3, 2006 and incorporated herein by
reference)
 22




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description3.6
    
    Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with the Companys
Registration Statement on Form SB-2/A filed on October 14, 1999 and incorporated herein by
reference)3.7
    
    Amendment No. 1 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.4 with
the Companys Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003 and
incorporated herein by reference)3.8
    
    Amendment No. 2 to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 with
the Companys Current Report on Form 8-K filed on October 19, 2005 and incorporated herein by
reference)4.1
    
    Voting and Stock Restriction Agreement among the Company, Steven B. Hoyt, Duane H. Lund, Paul
T. Lambert, John J. Dee, James C. Mastandrea, and Paragon Real Estate Development, LLC (filed
as Exhibit 2.2 with the Companys Current Report on Form 8-K filed on March 5, 2003 and
incorporated herein by reference)10.1
    
    Employment Agreement of James C. Mastandrea (filed as Exhibit 2.3 with the Companys Current
Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1)10.2
    
    Employment Agreement of John J. Dee (filed as Exhibit 2.4 with the Companys Current Report on
Form 8-K filed on March 5, 2003 and incorporated herein by reference) (1)10.3
    
    Restricted Share Agreement of James C. Mastandrea (filed as Exhibit 2.5 with the Companys
Current Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1)10.4
    
    Restricted Share Agreement of John J. Dee (filed as Exhibit 2.6 with the Companys Current
Report on Form 8-K filed on March 5, 2003 and incorporated herein by reference)
(1)10.5
    
    Form of Restricted Share Agreement for Trustees dated September 26, 2006 (filed as Exhibit 10.3
with the Companys Current Report on Form 8-K filed on October 3, 2006 and incorporated herein
by reference) (1)10.6
    
    Agreement of Limited Partnership of Paragon Real Estate, L.P. (filed as Exhibit 2.2 with the
Companys Current Report on Form 8-K filed on July 15, 2003 and incorporated herein by
reference)10.7
    
    2004 Share Option Plan of the Company (filed as Exhibit 4.1 with the Companys Registration
Statement on Form S-8 filed on July 23, 2004 and incorporated herein by reference)10.8
    
    Stock Subscription Agreement between James C. Mastandrea and the Company dated as of September
29, 2006 (filed as Exhibit 10.2 with the Companys Current Report on Form 8-K filed on October
3, 2006 and incorporated herein by reference)10.9
    
    Form of Stock Subscription Agreement between Investors and the Company dated as of September
29, 2006 (filed as Exhibit 10.1 with the Companys Current Report on Form 8-K filed on October
3, 2006 and incorporated herein by reference)
 23




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.10
    
    Modification Agreement between the Company and John J. Dee dated April 3, 2006 (filed as
Exhibit 10.2 with the Companys Current Report on Form 8-K filed on April 6, 2006 and
incorporated herein by reference)10.11
    
    Modification Agreement between the Company and James C. Mastandrea dated April 3, 2006 (filed
as Exhibit 10.1 with the Companys Current Report on Form 8-K filed on April 6, 2006 and
incorporated herein by reference)10.12
    
    Form of First Amendment to Restricted Share Agreement for Trustees dated September 25, 2008
(filed as Exhibit 10.1 with the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008 and incorporated herein by reference)10.13
    
    First Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company
dated September 25, 2008 (filed as Exhibit 10.2 with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2008 and incorporated herein by reference)10.14
    
    Form of Second Amendment to Restricted Share Agreement for Trustees dated September 21, 2009
(filed as Exhibit 10.1 with the Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009 and incorporated herein by reference)10.15
    
    Second Amendment to Stock Subscription Agreement between James C. Mastandrea and the Company
dated September 21, 2009 (filed as Exhibit 10.2 with the Companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2009 and incorporated herein by reference)14
    
    Code of Conduct and Ethics (filed as Exhibit 14 with the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2003 and incorporated herein by reference)31.1
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002  Chief Executive Officer
(2)31.2
    
    Section 302 Certification pursuant to the Sarbanes-Oxley Act of 2002  Chief Financial Officer
(2)32.1
    
    CEO/CFO Certification under Section 906 of Sarbanes-Oxley Act of 2002 (2)
 
 (1)
    
    Indicates a management contract or compensatory plan or arrangement(2)
    
    Filed or furnished herewith 24




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##### Table of Contents



SIGNATURES  Paragon real estate equity and investment trustBy:

/s/ James C. MastandreaDate: February 26, 2010
    
    James C. MastandreaChief Executive Officer
(principal executive officer)Paragon real estate equity and investment trustBy:

/s/ John J. DeeDate: February 26, 2010
    
    John J. DeeChief Financial Officer
(principal financial officer)   PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
 Signature
    
    Title
    
    Date/s/ James C. Mastandrea
    
    Trustee, Chief Executive Officer and
    
    February 26, 2010James C. Mastandrea
    
    President/s/ John J. Dee
    
    Trustee, Senior Vice President and
    
    February 26, 2010John J. Dee
    
    Chief Financial Officer/s/ Daryl J. Carter
    
    Trustee
    
    February 26, 2010Daryl J. Carter/s/ Daniel G. DeVos
    
    Trustee
    
    February 26, 2010Daniel G. DeVos/s/ Paul T. Lambert
    
    Trustee
    
    February 26, 2010Paul T. Lambert/s/ Michael T. Oliver
    
    
    
    February 26, 2010Michael T. Oliver
    
    Trustee
 25




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##### Table of Contents



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008
    
    
    F-3Consolidated Statements of Operations  Years ended
December 31, 2009 and December 31, 2008
    
    
    F-4Consolidated Statements of Shareholders Equity  Years ended
December 31, 2009 and December 31, 2008
    
    
    F-5Consolidated Statements of Cash Flows  Years ended
December 31, 2009 and December 31, 2008
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7




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##### Table of Contents



F-2




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary



Consolidated Balance Sheets
December 31, 2009 and December 31, 2008
 December 31,
    
    December 31,2009
    
    2008AssetsInvestments in equipment:Furniture, fixtures and equipment
    
    $
    5,370
    
    
    $
    5,370Accumulated depreciation
    
    
    (5,217
    )
    
    
    (4,257
    )Net investments in equipment
    
    
    153
    
    
    
    1,113Cash
    
    
    94,198
    
    
    
    182,373Marketable securities
    
    
    178,520
    
    
    
    111,191Other assets
    
    
    10,662
    
    
    
    9,343Total Assets
    
    $
    283,533
    
    
    $
    304,020Liabilities and Shareholders EquityLiabilities:Accounts payable and accrued expenses
    
    
    1,595
    
    
    
    6,959Total liabilities
    
    
    1,595
    
    
    
    6,959Commitments and ContingenciesShareholders equity:Preferred A Shares  $0.01 par value,
10,000,000 authorized: 258,236 and
276,255 Class A cumulative convertible
shares issued and outstanding at December
31, 2009 and December 31, 2008,
respectively, $10.00 per share
liquidation preference
    
    
    2,583
    
    
    
    2,763Preferred C Shares  $0.01 par value,
300,000 authorized: 244,444 Class C
cumulative convertible shares issued and
outstanding, $10.00 per share liquidation
preference
    
    
    2,444
    
    
    
    2,444Common Shares  $0.01 par value,
100,000,000 authorized: 443,226 and
442,398 shares issued and outstanding at
December 31, 2009 and December 31, 2008,
respectively
    
    
    4,432
    
    
    
    4,424Additional paid-in capital
    
    
    28,146,590
    
    
    
    28,146,404Accumulated deficit
    
    
    (27,108,003
    )
    
    
    (27,021,670
    )Accumulated other comprehensive income,
net unrealized gain (loss) on marketable
securities
    
    
    34,627
    
    
    
    (36,569
    )Treasury stock, at cost, 38,130 shares
    
    
    (800,735
    )
    
    
    (800,735
    )Total shareholders equity
    
    
    281,938
    
    
    
    297,061Total Liabilities and Shareholders Equity
    
    $
    283,533
    
    
    $
    304,020
  F-3




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary



Consolidated Statements of Operations
 For the year ended December 31,2009
    
    2008RevenuesInterest/dividend income
    
    $
    9,729
    
    
    $
    10,080Other income
    
    
    1,078
    
    
    
    12,016Total revenues
    
    
    10,807
    
    
    
    22,096ExpensesDepreciation and amortization
    
    
    959
    
    
    
    1,074General and administrative
    
    
    84,773
    
    
    
    269,568Total expenses
    
    
    85,732
    
    
    
    270,642Loss from operations
    
    
    (74,925
    )
    
    
    (248,546
    )Gain (loss) on sale of marketable securities
    
    
    (11,408
    )
    
    
    4,253Impairment loss on marketable securities
    
    
    
    
    
    
    (32,615
    )Net loss attributable to Common Shareholders
    
    
    (86,333
    )
    
    
    (276,908
    )Net loss attributable to Common Shareholders per Common
Share: Basic and Diluted
    
    $
    (0.19
    )
    
    $
    (0.63
    )Weighted average number of Common Shares
outstanding: Basic and Diluted
    
    
    442,864
    
    
    
    442,359Comprehensive loss:Net loss
    
    $
    (86,333
    )
    
    $
    (276,908
    )Other comprehensive loss:Unrealized gain (loss) on marketable securities
    
    
    34,627
    
    
    
    (36,569
    )Comprehensive loss
    
    $
    (51,706
    )
    
    $
    (313,477
    )
  F-4




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust



Consolidated Statements of Shareholders Equity
For the years ended December 31, 2009 and 2008
 Accumulatedothercomprehensiveincome, netunrealizedClass A
    
    Class C
    
    
    
    
    
    Additional
    
    gain (loss) on
    
    
    
    
    
    Cost ofPreferred
    
    Preferred
    
    Common
    
    Paid-in
    
    marketable
    
    Accumulated
    
    Shares held inShares
    
    Shares
    
    Shares
    
    Capital
    
    securities
    
    Deficit
    
    Treasury
    
    TotalBalance at December 31, 2007
    
    $
    2,780
    
    
    $
    2,444
    
    
    $
    4,424
    
    
    $
    27,958,838
    
    
    $
    
    
    
    $
    (26,744,762
    )
    
    $
    (800,735
    )
    
    $
    422,989Unrealized loss on Marketable Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,569
    )
    
    
    
    
    
    
    
    
    
    
    (36,569
    )Conversion of Preferred Shares
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation and trustee fees, net of market price reduction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,549Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (276,908
    )
    
    
    
    
    
    
    (276,908
    )Balance at December 31, 2008
    
    $
    2,763
    
    
    $
    2,444
    
    
    $
    4,424
    
    
    $
    28,146,404
    
    
    $
    (36,569
    )
    
    $
    (27,021,670
    )
    
    $
    (800,735
    )
    
    $
    297,061Unrealized gain on Marketable Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,196
    
    
    
    
    
    
    
    
    
    
    
    71,196Conversion of Preferred Shares
    
    
    (180
    )
    
    
    
    
    
    
    8
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned compensation and trustee fees, net of market price reduction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86,333
    )
    
    
    
    
    
    
    (86,333
    )Balance at December 31, 2009
    
    $
    2,583
    
    
    $
    2,444
    
    
    $
    4,432
    
    
    $
    28,146,590
    
    
    $
    34,627
    
    
    $
    (27,108,003
    )
    
    $
    (800,735
    )
    
    $
    281,938
  F-5




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiary


Consolidated Statements of Cash Flows
 For the year ended December 31,2009
    
    2008Cash flows from operating activities:Net loss
    
    $
    (86,333
    )
    
    $
    (276,908
    )Adjustments to reconcile net loss to net cash used
in continuing operations:Compensation costs paid through amortization of
restricted common shares
    
    
    14
    
    
    
    50Compensation costs and trustee fees incurred
through the issuance of shares
    
    
    
    
    
    
    187,499Depreciation and amortization
    
    
    959
    
    
    
    1,074Removal of non cash estimated liabilities
    
    
    (1,078
    )
    
    
    (12,016
    )Loss (gain) on sale of marketable securities
    
    
    11,408
    
    
    
    (4,253
    )Impairment loss on marketable securities
    
    
    
    
    
    
    32,615Net change in assets and liabilities:Other assets
    
    
    (1,319
    )
    
    
    4,288Accounts payable and accrued expenses
    
    
    (4,285
    )
    
    
    4,950Net cash used in continuing Operations
    
    
    (80,634
    )
    
    
    (62,701
    )Cash flows from investing activities:Cash used for the purchase of marketable securities
    
    
    (118,252
    )
    
    
    (217,175
    )Proceeds from the sale of marketable securities
    
    
    110,711
    
    
    
    41,053Net cash used for investing activities
    
    
    (7,541
    )
    
    
    (176,122
    )Cash flows from financing activities:Net cash from financing activities
    
    
    
    
    
    
    Net increase (decrease) in cash
    
    
    (88,175
    )
    
    
    (238,823
    )CashBeginning of period
    
    
    182,373
    
    
    
    421,196End of period
    
    $
    94,198
    
    
    $
    182,373
  F-6




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries


Notes to Consolidated Financial Statements
December 31, 2009
 Note 1
 Organization
  Note 2
 Basis of Presentation
 Going Concern
   Note 3
 Summary of Significant Accounting Policies
 Use of Estimates in the Preparation of Financial Statements
  F-7




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##### Table of Contents



Investments in Equipment
   YearsFurniture, fixtures and equipment
    
    
    3-7
 Cash
  Other Assets
  Revenue Recognition
  Stock-Based Compensation
  Income Taxes
   F-8




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##### Table of Contents



Fair Value of Financial Instruments
     Carrying Amountin ConsolidatedBalance Sheet
    
    Fair Value
    
    Fair Value Measurement UsingDecember 31, 2009
    
    December 31, 2009
    
    Level 1
    
    Level 2
    
    Level 3Marketable Securities
    
    $
    178,520
    
    
    $
    178,520
    
    
    $
    178,520
    
    
    $
    
    
    
    $
    
  Recent Accounting Pronouncements
  F-9




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##### Table of Contents



Note 4
 Marketable Securities
      Note 5
 Shareholders Equity
 Preferred Shares
   
    
    the date our gross assets exceed $50.0 million, or
    
    50% of the restricted shares on March 4, 2004; 25% of the shares on March 4, 2005
and the remaining 25% of the shares on March 4, 2006.
   F-10




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##### Table of Contents



Common Shares
  Shares Held in Treasury
  F-11




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##### Table of Contents



Restricted Common Shares
  Unvested Restricted Common SharesWeighted-AverageNumber of
    
    Grant-DateShares
    
    Fair ValueUnvested at January 1, 2008
    
    
    168,450
    
    
    $
    11.44Vested
    
    
    (667
    )
    
    $
    9.75Unvested at December 31, 2008
    
    
    167,783
    
    
    $
    11.44Vested
    
    
    (4,666
    )
    
    $
    15.54Unvested at December 31, 2009
    
    
    163,117
    
    
    $
    11.33
   Options
  F-12




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##### Table of Contents



Options OutstandingWeighted-AverageWeighted-
    
    RemainingAverage
    
    Contractual
    
    AggregateNumber of
    
    Exercise
    
    Term
    
    Intrinsic ValueShares
    
    Price
    
    (in years)
    
    (1)Balance at January 1, 2008
    
    
    9,391
    
    
    $
    48.00
    
    
    
    3.3Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    725
    
    
    
    Balance at December 31, 2008
    
    
    8,666
    
    
    $
    18.17
    
    
    
    2.3Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled/forfeited/expired
    
    
    4,000
    
    
    $
    19.88Balance at December 31, 2009
    
    
    4,666
    
    
    $
    16.39
    
    
    
    4.0
    
    
    $
    0.00Vested and exercisable as of
December 31, 2009
    
    
    4,666
    
    
    $
    16.39
    
    
    
    4.0
    
    
    $
    0.00Vested and expected to vest
as of December 31, 2009
    
    
    4,666
    
    
    $
    16.39
    
    
    
    4.0
    
    
    $
    0.00
 
 (1)
    
    The aggregate intrinsic value is calculated as approximately the difference between the
weighted average exercise price of the underlying awards and the Companys estimated
current fair market value at December 31, 2009. Because the weighted average exercise
price exceeds fair market value at December 31, 2009, there is no aggregate intrinsic value
for the options.  Warrants
   F-13




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##### Table of Contents



Note 6
 Loss Per Share
  For the year ended December 31,2009
    
    
    2008NumeratorNet loss attributable to Common Shareholders
    
    $
    (86,333
    )
    
    $
    (276,908
    )DenominatorWeighted average Common Shares outstanding
at December 31, 2009 and December 31, 2008
- Basic and Diluted
    
    
    442,864
    
    
    
    442,359Basic and Diluted EPSNet loss attributable to Common
Shareholders  Basic and Diluted
    
    $
    (0.19
    )
    
    $
    (0.63
    )
 Note 7
 Dividends/Distributions
  Note 8
 Income taxes
  For the year ended December 31,2009
    
    
    2008Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Total tax provision
    
    $
    
    
    
    $
    
  For the year ended December 31,2009
    
    
    2008Tax / (Benefit) at Federal statutory rate
    
    $
    (29,000
    )
    
    $
    (83,000
    )State income tax / (benefit), net of Federal tax effect
    
    
    (5,000
    )
    
    
    (15,000
    )Adjustment to net operating and capital loss carryforwards
    
    
    (1,000
    )
    
    
    (21,000
    )Change in valuation allowance
    
    
    35,000
    
    
    
    119,000Tax provision
    
    $
    
    
    
    $
    
 F-14




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##### Table of Contents



At December 31,2009
    
    
    2008Deferred tax assets:Net operating loss carryforwards
    
    $
    900,000
    
    
    $
    865,000Valuation allowance
    
    
    (900,000
    )
    
    
    (865,000
    )Net deferred tax assets
    
    $
    
    
    
    $
    
   Year Expiring
    
    Net Operating Loss2026
    
    $
    1,552,0002027
    
    
    365,0002028
    
    
    248,0002029
    
    
    87,000Total loss carryforwards
    
    $
    2,252,000
 Note 9
 Commitments and Contingencies
 Employment Agreements
  F-15




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##### Table of Contents



Note
10  Related Party Transactions
  F-16