##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-KSB
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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)1240 Huron Road, Cleveland, OH
    
    44115(Address of principal executive offices)
    
    (Zip code)
  
   o
 þ o
 þ
 o þ
     o þ




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##### 



PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
2005 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, Related Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    13Item 6
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    14Item 7
    
    Financial Statements
    
    
    20Item 8
    
    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    20Item 8a
    
    Controls and Procedures
    
    
    21Item 8b
    
    Other Information
    
    
    21PART IIIItem 9
    
    Trustees and Executive Officers; Compliance with Section 16(a) of the Exchange Act
    
    
    22Item 10
    
    Executive Compensation
    
    
    24Item 11
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    26Item 12
    
    Certain Relationships and Related Transactions
    
    
    28Item 13
    
    Exhibits
    
    
    29Item 14
    
    Principal Accountant Fees and Services
    
    
    31SIGNATURES
    
    
    
    
    32EX-31.1 302 Certification - CEOEX-31.2 302 Certification - CFOEX-32.1 906 Certification - CEO and CFO
  EXHIBITSExhibit 31.1
    
    Section 302 CEO CertificateExhibit 31.2
    
    Section 302 CFO CertificateExhibit 32.1
    
    Section 906 CEO & CFO Certificate
 1




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PART I
 
 Item 1. Description of Business
 Company Overview
     2




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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.
  Real Estate
   Real Estate Tenants
  Competition
   Employees
  Risk Factors
  3




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Our cash resources are limited.
  We have a history of losses.
  We have not been able to raise funds through a public equity offering.
  We have not been able to meet the American Stock Exchanges continued listing qualifications.
   4




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We have approximately $2.7 million in debt secured by Richton Trail.
 
 We may not be able to consummate the acquisition we have under contract for ten apartment
communities.
  We need additional capital to execute our business plan and may not be able to obtain it.
  
    
    Our limited operating history;
    
    Our inability to meet our business plan; and
    
    Lenders or investors view of real estate operating companies with a focus on one segment of real estate or small-capitalized companies.
  We will be subject to risks with debt financing.
  
    
    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 community 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.
  5




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We may not be able to manage our growth effectively.
  Advantageous transactions may be prevented.
  
    
    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.
 James C. Mastandrea controls a significant percentage of our shares.
  Mr. Mastandrea has the right to appoint a majority of our board of trustees.
  
    
    a majority of the preferred shares; or
    
    40% or more of the sum of the restricted shares issued to Mr. Mastandrea
 6




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and Mr. Dee and the common shares issued to them upon conversion of their
restricted preferred shares into restricted common shares.
  Mr. Mastandrea and Mr. Dee have conflicts of interest.
   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.
  7




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We may face competition from other business interests of Mr. Mastandrea.
  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 board of trustees has the ability to effect changes to our major policies, including our
investment policy, without the vote of shareholders.
  We cannot sell Richton Trail for ten years without Mr. Mastandreas consent.
  Shareholders could experience possible future dilution through the issuance of additional shares or
partnership interests.
  Possible issuances of future series of preferred shares.
  We currently do not plan to distribute dividends to the holders of our shares.
  8




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Our real estate assets are located in only one market.
  Real Estate Risks
 We face competition from numerous real estate entities with greater resources than ours.
  Because real estate is illiquid, we may not be able to sell properties when appropriate.
  Our operating costs may rise, which could reduce our cash flow.
    New development and acquisitions may not produce results in accordance with our expectations and
may require development and renovation costs exceeding our estimates.
  9




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
    
    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.
  Financially distressed tenants may limit our ability to realize the value of our investments.
  We may be unable to renew leases or relet units as leases expire.
  Some potential losses are not fully covered by insurance or may not be covered by insurance at all.
   10




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The ownership of real estate is subject to numerous risks generally.
  
    
    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.
 Liability for environmental matters could adversely affect our financial position.
   Compliance with applicable laws, rules and regulations, including the Americans with Disabilities
Act, can be costly.
   11




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Item 2. Description of Property
    Investments in Real Estate Depreciation and Insurance Coverages
    Mortgage Loan
  12




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##### Table of Contents



Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
 
 Company Guide.
  High
    
    Low20054th Quarter
    
    $
    0.18
    
    
    $
    0.103rd Quarter
    
    $
    0.14
    
    
    $
    0.082nd Quarter
    
    $
    0.19
    
    
    $
    0.101st Quarter
    
    $
    0.26
    
    
    $
    0.1120044th Quarter
    
    $
    0.20
    
    
    $
    0.063rd Quarter
    
    $
    0.24
    
    
    $
    0.112nd Quarter
    
    $
    0.22
    
    
    $
    0.121st Quarter
    
    $
    0.37
    
    
    $
    0.18
  13




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##### Table of Contents



Dividend Policy
   Preferred Share Conversions
  Issuer Purchases of Equity Securities
  
 Item 6. Managements Discussion and Analysis or Plan of Operation
 Overview
     14




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Brief History
   Recent Developments in 2005 and Executive Overview
   Forward-Looking Information
  
    
    Explanation of changes in the results of operations in the Consolidated Statements
of Operations for the year ended December 31, 2005 compared to the year ended
December 31, 2004.
 15




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
    
    Our critical accounting policies and estimates that require our subjective judgment and
are important to the presentation of our financial condition and results of operations.
    
    Our primary sources and uses of cash for the year ended December 31, 2005, and how
we intend to generate cash for long-term capital needs.
    
    Our current income tax status.
  Comparison of the years ended December 31, 2005 and 2004
 Revenues
   Expenses from Continuing Operations
   16




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Loss from operations before minority interests
  (Income) loss allocated to minority interests
  Loss from operations
  Gain on sale of marketable securities
  Net loss attributable to Common Shareholders
  Critical Accounting Policies and Estimates
  Impairment of Long-Lived Assets
  17




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Real Estate Investments
  Valuation Allowance of Deferred Tax Asset
  Liquidity and Capital Resources
  Cash Flows
    18




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Future Obligations
  
    
    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 90% occupancy, it will generate the cash flow needed to pay its current expenses and the mortgage debt service. We intend to keep the property as close to 100% occupancy as possible and do not foresee any market conditions that            would show a decline in occupancy or rents during the coming year. Also, no major improvements are planned at the property for next year.
    
    Each of the two employment contracts has a salary requirement of only $60,000 per year. The Company has the benefit of two 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. Each executive has a significant number
of common shares and expects to share in the growth of the Company along with our
shareholders.
 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 and technology segment.
  19




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Current Tax Status
   Interest Rates and Inflation
   Off-Balance Sheet Arrangements
  
 Item 7.
    
    Financial Statements
  
 Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  20




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Item 8a.
    
    Controls and Procedures
   
 Item 8b.
    
    Other Information
  21




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PART III
 
 Item 9.
    
    Trustees and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act
  ExpirationName
    
    
    
    Age
    
    
    
    Position
    
    
    
    of TermJames C. Mastandrea
    
    
    
    
    62
    
    
    
    
    President, Chief Executive Officer and Chairman of Board of Trustees
    
    
    
    
    2006John J. Dee
    
    
    
    
    54
    
    
    
    
    Senior Vice President, Chief Financial Officer and Trustee
    
    
    
    
    2007Daryl J. Carter
    
    
    
    
    50
    
    
    
    
    Trustee
    
    
    
    
    2008Daniel G. DeVos
    
    
    
    
    48
    
    
    
    
    Trustee
    
    
    
    
    2006Paul T. Lambert
    
    
    
    
    53
    
    
    
    
    Trustee
    
    
    
    
    2007Michael T. Oliver
    
    
    
    
    62
    
    
    
    
    Trustee
    
    
    
    
    2008
 Board of Trustees and Executive Officers
  James C. Mastandrea
 John J. Dee
 22




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##### Table of Contents



Daryl J. Carter
 Daniel G. DeVos
 Paul T. Lambert
 Michael T. Oliver
  23




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Code of Ethics
  Section 16(a) Beneficial Ownership Reporting Compliance
  
 Item 10.
    
    Executive Compensation
  Name and Principal
    
    
    
    
    
    
    
    
    
    Restricted Stock
    
    Securities UnderlyingPosition
    
    Year
    
    Salary(1)
    
    Awards
    
    OptionsJames C. Mastandrea
    
    
    2005
    
    
    $
    60,000
    
    
    
    
    
    
    
    Chief Executive Officer
    
    
    2004
    
    
    $
    60,000
    
    
    $
    66,000
    (2)
    
    
    150,000
    (3)President and Chairman
    
    
    2003
    
    
    $
    49,615
    (4)
    
    $
    1,044,117
    (5)
    
    
    
 
 (1)
    
    No bonuses or other compensation were paid for the years ended December 31, 2005, 2004,
and 2003.(2)
    
    Represents 300,000 restricted common shares issued on January 2, 2004. The value per
share on the issue date was $0.22 per share. Half of the restricted shares vest in five
years or earlier upon Paragons share price being equal to or exceeding $1.00 per share for
20 consecutive trading days. The remaining half of the restricted shares vest when funds
from operations doubles compared to the four consecutive quarters preceding the grant date,
or when Paragons share price is 50% higher compared to the average closing price for the
five trading days preceding the grant date.(3)
    
    Options were granted January 2, 2004 at an exercise price of $0.27 per common share,
representing 110% of the average of the closing price for the common shares for 10 days
preceding the grant date. The options vest one-third on each January 2nd of 2005, 2006,
and 2007, and are exercisable until January 2, 2009.(4)
    
    Amount represents base annual salary of $60,000 for the period from March 4, 2003
through December 31, 2003.(5)
    
    Represents 348,039 preferred shares issued on June 30, 2003 at a closing price of
$3.00 per preferred share. 24




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Options/SAR Value at Fiscal Year End
   Aggregated Option/SAR Exercises in Last Fiscal Year
And FY-End Option/SAR Values
 Number ofSecurities
    
    Value ofUnderlying
    
    UnexercisedUnexercised
    
    In-the-MoneyOptions/
    
    Options/Shares
    
    
    
    
    
    SARs
    
    SARsAcquired
    
    
    
    
    
    at FY End
    
    at FY-Endon
    
    Value
    
    (#)
    
    ($)Exercise
    
    Realized
    
    Exercisable/
    
    Exercisable/Name
    
    (#)
    
    ($)
    
    Unexercisable
    
    UnexercisableJames C. Mastandrea
Chief Executive
Officer, President and
Chairman
    
    
    
    
    
    
    
    
    
    
    50,000/100,000
    
    
    
     / 
 Employment Agreements
 th
  
    
    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
  25




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Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
   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
    
    
    13,162,170
    
    (6)
    
    43.3
    %
    
    
    161,410
    
    (14)
    
    58.0
    %
    
    
    35,479,107
    
    (16)
    
    66.8
    %Paragon Real Estate Development,
LLC
    
    
    12,233,738
    
    (7)
    
    40.3
    %
    
    
    161,410
    
    (14)
    
    58.0
    %
    
    
    15,926,960
    
    (17)
    
    46.8
    %Loeb Partners Corp.
61 Broadway
New York, NY 10006 (8)
    
    
    3,135,349
    
    
    
    10.3
    %
    
    
    
    
    
    
    
    
    
    
    3,135,349
    
    
    
    10.3
    %Paul T. Lambert (9)
    
    
    2,558,619
    
    
    
    8.4
    %
    
    
    
    
    
    
    
    
    
    
    2,558,619
    
    
    
    8.4
    %John J. Dee
    
    
    400,000
    
    (10)
    
    1.3
    %
    
    
    
    
    (15)
    
    
    
    
    
    400,000
    
    (18)
    
    1.3
    %Daryl J. Carter (11)
    
    
    200,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    *Daniel G. DeVos (11)
    
    
    200,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    *Michael T. Oliver (11)
    
    
    200,000
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    *All trustees and
current executive
officers as a group (12)
    
    
    16,720,789
    
    (13)
    
    54.3
    %
    
    
    161,410
    
    
    
    58.0
    %
    
    
    39,037,726
    
    (19)
    
    73.5
    %
 
 *
    
    Indicates less than one percent(1)
    
    Unless otherwise indicated, the address of all beneficial owners is our corporate headquarters at
1240 Huron Road, Cleveland, Ohio 44115.(2)
    
    Percentages based on 30,331,884 common shares outstanding, not including 2,859,765 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 or will become exercisable as of May 15, 2006.(3)
    
    Percentages based on 278,155 preferred shares outstanding as of March 16, 2006, which convert to
4,095,758 common shares as follows: 161,410 preferred shares are each convertible into 22.881
common shares and 116,745 preferred shares are each convertible into 3.448 common shares.(4)
    
    Percentages based on 30,331,884 common shares outstanding, not including 2,859,765 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 or will become exercisable as of May 15, 2006. Mr.
Mastandreas percentage includes (i) 30,331,884 common shares, not including 2,859,765 shares held
in treasury;
(ii) 100,000 options; (iii) 278,155 preferred shares, which convert to 4,095,758 common shares; and
(iv) 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. 26




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##### Table of Contents



(6)
    
    Includes: (i) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea 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) 300,000 restricted common
shares; (iv) 100,000 options; and (v) 28,432 common shares.(7)
    
    Mr. Mastandrea is the managing member of Paragon Real Estate Development, LLC and these shares are
also included in Mr. Mastandreas common shares.(8)
    
    Based solely on information in the Schedule 13D filed on February 11, 2005 with the SEC by Loeb
Partners Corporation listing the following entities and quantities of shares owned: Loeb Arbitrage
Fund 1,970,002 shares; Loeb Partners Corporation 148,480 shares; Loeb Offshore Fund Ltd. 184,967
shares; Robert Grubin 581,000 shares; and other affiliates of Loeb Partners Corporation 250,900
shares. The Schedule 13D reported an ownership percentage of 9.37% based on the number of common
shares reported as outstanding in our filing for the third quarter and nine months ended September
30, 2005, which included shares held in treasury. The ownership percentage reported in the table
above is based on 30,331,884 common shares outstanding, which does not include shares held in
treasury.(9)
    
    Includes: (i) 100,000 options; (ii) 150,000 restricted common shares; (iii) 444,755 common shares
held by Lambert Equities II, LLC, of which Mr. Lambert is the controlling majority member and sole
manager; and (iv) 1,863,864 common shares.(10)
    
    Includes: (i) 300,000 restricted common shares; and (iii) 100,000 options. Does not include
12,233,738 common shares held by Paragon Real Estate Development, LLC, of which Mr. Dee is a
member.(11)
    
    Includes 150,000 restricted common shares and 50,000 options.(12)
    
    Includes six named persons.(13)
    
    Includes: (i) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea 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) 1,200,000 restricted common
shares; (iv) 450,000 options; and (v) 2,337,051 common shares.(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.(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) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea 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) 300,000 restricted common
shares; (iv) 100,000 options; (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; (vi) 3,693,222 common shares issuable upon conversion of
161,410 preferred shares held by Paragon Real Estate Development, LLC; and (vii) 28,432 common
shares.(17)
    
    Includes (i) 12,233,738 common shares and (ii) 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) 300,000 restricted common shares; and (ii) 100,000 options. 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) 500,000 restricted common shares issuable to an independent third party which Mr.
Mastandrea 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) 1,200,000 restricted common
shares; (iv) 450,000 options; (v) 18,623,715 common shares issuable upon the conversion of 813,938
limited partnership units of Paragon Real Estate, LP, our operating partnership, held by Hampton
Court Associates, LP, of which
Mr. Mastandrea is the general partner; (vi) 3,693,222 common shares issuable upon conversion of
161,410 preferred shares held by Paragon Real Estate Development, LLC; and (vii) 2,337,051 common
shares. 27




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##### Table of Contents



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 Security
    
    and rights
    
    
    rights
    
    
    (a))Holders
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by
security holdersFormer Share Option PlanOptions for common shares
    
    
    54,387
    
    
    $
    5.37
    
    
    
    2004 Share Option PlanRestricted common shares
    
    
    1,300,000
    
    
    $
    Options for common shares
    
    
    650,000
    
    
    $
    0.241,950,000
    
    
    $
    0.08
    
    
    
    1,550,000Equity compensation plans not approved
by security holdersCommon shares
    
    
    500,000
    
    
    $
    Warrants for common shares
    
    
    922,500
    
    
    $
    0.371,422,500
    
    
    $
    0.24
    
    
    
    Total all plans  Common shares
    
    
    3,426,887
    
    
    $
    0.23
    
    
    
    1,550,000 Preferred shares
    
    
    
    
    
    $
    
  
 Item 12.
    
    Certain Relationships and Related Transactions
 Management Fees
  28




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##### Table of Contents



Item 13.
    
    Exhibits
 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
    
    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)2.4
    
    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)2.5
    
    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
    
    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)3.5
    
    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)
 29




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description3.6
    
    
    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
    
    
    Employment Agreement of Jack R. Kuhn dated July 19, 2004 (filed as Exhibit 10.1 with the
Companys Registration Statement on Form S-8 filed on July 23, 2004 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
    
    
    Purchase Agreement dated September 26, 2005, by and among Veard Baytown Limited Partnership,
Veard Stafford Limited Partnership, Veard Lake Jackson Limited Partnership, Veard Wharton
Limited Partnership, Veard Irving Limited Partnership, Veard Arlington Limited Partnership,
Veard Amarillo Limited Partnership, Veard Victoria Limited Partnership, Veard Kettering Limited
Partnership, Veard Canton Limited Partnership and Paragon Real Estate Equity and Investment
Trust (filed as Exhibit 2.1 with the Companys Current Report on Form 8-K filed on September
26, 2005 and incorporated herein by reference)10.9
    
    
    Letter Agreement dated December 2, 2005, amending Purchase Agreement dated
September 26, 2005 by and among Veard Baytown Limited Partnership, Veard Stafford Limited
Partnership, Veard Lake Jackson Limited Partnership, Veard Wharton Limited Partnership, Veard
Irving Limited Partnership, Veard Arlington Limited Partnership, Veard Amarillo Limited
Partnership, Veard Victoria Limited Partnership, Veard Kettering Limited Partnership, Veard
Canton Limited Partnership and Paragon Real Estate Equity and Investment Trust (filed as
Exhibit 2.1 with the Companys Current Report on Form 8-K filed on December 8, 2005 and
incorporated herein by reference)
 30




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description14
    
    
    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 
 Item 14. Principal Accountant Fees and Services
  % Approvedby AuditCategory
    
    Year
    
    Fees
    
    CommitteeAudit Fees (1)
    
    
    2005
    
    
    $
    122,675
    
    
    
    100
    %2004
    
    
    $
    67,150
    
    
    
    100
    %Audit-Related Fees
    
    
    2005
    
    
    $
    2004
    
    
    $
    Tax Fees
    
    
    2005
    
    
    $
    2004
    
    
    $
    6,900
    
    
    
    100
    %All Other Fees
    
    
    2005
    
    
    $
    2004
    
    
    $
    
 
 (1)
    
    Audit fees include audits and reviews of required SEC filings and proposed acquisitions of properties. Policy for Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
  31




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##### Table of Contents



SIGNATURES
  Paragon real estate equity and investment trustBy:
    
    /s/ James C. MastandreaDate: March 16, 2006
    
    
    
    James C. MastandreaChief Executive OfficerParagon real estate equity and investment trustBy:
    
    /s/ John J. DeeDate: March 16, 2006
    
    
    
    John J. DeeChief Financial Officer
   PARAGON REAL ESTATE EQUITY AND INVESTMENT TRUST
 Signature
    
    Title
    
    Date/s/ James C. Mastandrea
    
    Trustee, Chief Executive Officer and
President
    
    March 16, 2006James C. Mastandrea/s/ John J. Dee
    
    Trustee, Senior Vice President and
Chief Financial Officer
    
    March 16, 2006John J. Dee/s/ Daryl J. Carter
    
    Trustee
    
    March 16, 2006Daryl J. Carter/s/ Daniel G. DeVos
    
    Trustee
    
    March 16, 2006Daniel G. DeVos/s/ Paul T. Lambert
    
    Trustee
    
    March 16, 2006Paul T. Lambert/s/ Michael T. Oliver
    
    Trustee
    
    March 16, 2006Michael T. Oliver
 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 Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheet as of December 31, 2005
    
    
    F-3Consolidated Statements of Operations  Years ended
December 31, 2005 and December 31, 2004
    
    
    F-4Consolidated Statements of Shareholders Equity  Years ended
December 31, 2005 and December 31, 2004
    
    
    F-5Consolidated Statements of Cash Flows  Years ended
December 31, 2005 and December 31, 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-2




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##### Table of Contents



Paragon Real Estate Equity and Investment Trust and Subsidiaries
 
 Consolidated Balance Sheet
December 31, 2005
 AssetsInvestments in real estate:Land
    
    $
    797,682Buildings and improvements
    
    
    3,217,739Furniture, fixtures and equipment
    
    
    49,4034,064,824Accumulated depreciation and amortization
    
    
    (207,424
    )Net investments in real estate
    
    
    3,857,400Cash and cash equivalents
    
    
    529,114Marketable securities, net
    
    
    1,925Restricted cash
    
    
    117,866Accounts receivable, net
    
    
    9,775Other assets, net
    
    
    182,986Total Assets
    
    $
    4,699,066Liabilities and Shareholders EquityLiabilities:Mortgage loan
    
    $
    2,710,938Accounts payable and accrued expenses
    
    
    268,188Security deposits
    
    
    62,505Total liabilities
    
    
    3,041,631Minority interest in consolidated subsidiary
    
    
    2,171,352Commitments and ContingenciesShareholders equity:Preferred Shares  $0.01 par value, 10,000,000
authorized: 278,155 Class A cumulative convertible
shares issued and outstanding, $10.00 per share
liquidation preference
    
    
    2,782Common Shares  $0.01 par value, 100,000,000
authorized; 33,191,649 shares issued and outstanding
    
    
    331,916Additional paid-in capital
    
    
    28,374,727Accumulated other comprehensive income, net
unrealized gain on marketable securities
    
    
    749Accumulated deficit
    
    
    (25,935,287
    )Treasury shares, at cost, 2,859,765 shares
    
    
    (800,735
    )Unearned compensation and trustees fees
    
    
    (2,488,069
    )Total shareholders equity (deficit)
    
    
    (513,917
    )Total Liabilities and Shareholders Equity
    
    $
    4,699,066
  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 31,2005
    
    2004RevenuesRental revenue
    
    $
    605,291
    
    
    $
    609,389Interest and other
    
    
    41,151
    
    
    
    50,639Total revenues
    
    
    646,442
    
    
    
    660,028ExpensesProperty, operating and maintenance
    
    
    207,917
    
    
    
    217,441Property taxes and insurance
    
    
    110,687
    
    
    
    101,285Depreciation and amortization
    
    
    91,041
    
    
    
    87,105Interest
    
    
    163,017
    
    
    
    166,487General and administrative
    
    
    1,476,710
    
    
    
    958,311Management fees
    
    
    27,520
    
    
    
    27,611Total expenses
    
    
    2,076,892
    
    
    
    1,558,240Loss from operations before loss allocated to
minority interest
    
    
    (1,430,450
    )
    
    
    (898,212
    )(Income) loss allocated to minority interest
    
    
    (3,843
    )
    
    
    81,988Loss from operations
    
    
    (1,434,293
    )
    
    
    (816,224
    )Gain on sale of marketable securities
    
    
    60,500
    
    
    
    Net loss attributable to Common Shareholders
    
    
    (1,373,793
    )
    
    
    (816,224
    )Net loss attributable to Common Shareholders per
Common Share: Basic and Diluted
    
    $
    (0.04
    )
    
    $
    (0.02
    )Weighted average number of Common Shares outstanding
    
    
    33,598,240
    
    
    
    32,993,966Comprehensive loss:Net loss
    
    $
    (1,373,793
    )
    
    $
    (816,224
    )Other comprehensive income:Unrealized gain (loss) on marketable securities
    
    
    176
    
    
    
    (10,427
    )Comprehensive loss
    
    $
    (1,373,617
    )
    
    $
    (826,651
    )
  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, 2005 and 2004
 Accumulated othercomprehensiveincome, net
    
    
    
    
    
    
    
    
    
    UnearnedClass A
    
    
    
    
    
    Additional
    
    unrealized gain (loss)
    
    
    
    
    
    Cost of Shares
    
    compensationPreferred
    
    Common
    
    Paid-in
    
    on marketable
    
    Accumulated
    
    held in
    
    and trusteesShares
    
    Shares
    
    Capital
    
    securities
    
    Deficit
    
    Treasury
    
    fees
    
    TotalBalance at December 31, 2003
    
    $
    2,794
    
    
    $
    316,374
    
    
    $
    28,055,559
    
    
    $
    61,700
    
    
    $
    (23,745,270
    )
    
    $
    (800,735
    )
    
    $
    (2,467,471
    )
    
    $
    1,422,951Restricted common share grants issued
    
    
    3⁄4
    
    
    
    17,000
    
    
    
    295,000
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (312,000
    )
    
    
    3⁄4Restricted common share grants cancelled
    
    
    3⁄4
    
    
    
    (3,500
    )
    
    
    (66,333
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    69,833
    
    
    
    3⁄4Restricted common share grants issued for rent
    
    
    
    
    
    
    2,500
    
    
    
    49,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,500Conversion of preferred shares to common
shares
    
    
    (9
    )
    
    
    32
    
    
    
    (23
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Unrealized loss on marketable securities
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    (10,427
    )
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (10,427
    )Amortization of unearned compensation and
trustee fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,204
    
    
    
    118,204Net loss
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    (816,224
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (816,224
    )Balance at December 31, 2004
    
    $
    2,785
    
    
    $
    332,406
    
    
    $
    28,333,203
    
    
    $
    51,273
    
    
    $
    (24,561,494
    )
    
    $
    (800,735
    )
    
    $
    (2,591,434
    )
    
    $
    766,004Restricted common share grants issued
    
    
    3⁄4
    
    
    
    5,500
    
    
    
    92,500
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (98,000
    )
    
    
    3⁄4Restricted common share grants cancelled
    
    
    3⁄4
    
    
    
    (8,500
    )
    
    
    (99,969
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    108,469
    
    
    
    3⁄4Restricted common share grants issued for rent
    
    
    
    
    
    
    2,500
    
    
    
    49,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,500Conversion of preferred shares to common
shares
    
    
    (3
    )
    
    
    10
    
    
    
    (7
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Unrealized gain on marketable securities
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    176Unrealized gain on marketable securities
converted to realized gain on sale of
marketable securities
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    (50,700
    )
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (50,700
    )Amortization of unearned compensation and
trustee fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92,896
    
    
    
    92,896Net loss
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    (1,373,793
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,373,793
    )Balance at December 31, 2005
    
    $
    2,782
    
    
    $
    331,916
    
    
    $
    28,374,727
    
    
    $
    749
    
    
    $
    (25,935,287
    )
    
    $
    (800,735
    )
    
    $
    (2,488,069
    )
    
    $
    (513,917
    )
  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 31,2005
    
    2004Cash flows from operating activitiesNet loss
    
    $
    (1,373,793
    )
    
    $
    (816,224
    )Adjustments to reconcile net loss to net cash used in
continuing operations:Compensation costs paid through amortization of
restricted Common Shares issued
    
    
    92,896
    
    
    
    118,204Rent expense paid by issuing restricted common shares
    
    
    51,500
    
    
    
    51,500Depreciation and amortization
    
    
    91,041
    
    
    
    87,105Income (loss) allocated to minority interests
    
    
    3,843
    
    
    
    (81,988
    )Gain on sale of marketable securities
    
    
    (60,500
    )
    
    
    Net change in assets and liabilities:Accounts receivable
    
    
    (1,498
    )
    
    
    1,534Restricted cash
    
    
    (11,681
    )
    
    
    (9,104
    )Other assets, net
    
    
    (72,150
    )
    
    
    247,241Accounts payable and accrued expenses
    
    
    4,052
    
    
    
    60,385Rents received in advance and security deposits
    
    
    8,317
    
    
    
    (2,283
    )Net cash used in continuing operations
    
    
    (1,267,973
    )
    
    
    (343,630
    )Cash flows from investing activitiesAcquisition and additions to real estate properties
    
    
    (47,941
    )
    
    
    (25,642
    )Cash proceeds from sale of marketable securities
    
    
    98,000
    
    
    
    Purchase of marketable securities
    
    
    
    
    
    
    (1,176
    )Net cash provided by (used in) investing
activities
    
    
    50,059
    
    
    
    (26,818
    )Cash flows from financing activitiesPayments on mortgage loan
    
    
    (52,334
    )
    
    
    (48,864
    )Net cash provided by (used in) financing
activities
    
    
    (52,334
    )
    
    
    (48,864
    )Net increase (decrease) in cash and cash equivalents
    
    
    (1,270,248
    )
    
    
    (419,312
    )Cash and cash equivalentsBeginning of period
    
    
    1,799,362
    
    
    
    2,218,674End of period
    
    $
    529,114
    
    
    $
    1,799,362
  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, 2005
 Note 1  Organization
   Note 2  Basis of Presentation and Going Concern
 Consolidated Financial Statement Presentation
   Going Concern
   F-7




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##### Table of Contents



Note 3  Summary of Significant Accounting Policies
 Use of Estimates in the Preparation of Financial Statements
  Investments in Real Estate
    F-8




---



##### Table of Contents



YearsBuilding and improvements
    
    
    40Furniture, fixtures and equipment
    
    
    3-7
  Cash and cash equivalents
  Accounts Receivable
  Other Assets
    Revenue Recognition
  Stock Based Compensation
  F-9




---



##### Table of Contents



For the twelve month periods endedDecember 31,2005
    
    
    2004Net loss attributable to Common Shareholders
    
    $
    (1,373,793
    )
    
    $
    (816,224
    )Add: Stock-based employee compensation
expense included in reported net loss, net
of related tax effects
    
    
    92,896
    
    
    
    118,204Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    141,564
    
    
    
    158,704Pro forma net loss attributable to Common
Shareholders
    
    $
    (1,422,461
    )
    
    $
    (856,724
    )Net loss attributable to Common
Shareholders perCommon Share:Basic and Diluted  as reported
    
    $
    (0.04
    )
    
    $
    (0.02
    )Basic and Diluted  pro forma
    
    $
    (0.04
    )
    
    $
    (0.03
    )
  2005
    
    2004Risk-free interest rate
    
    4.05% and 4.02%
    
    3.40% and 5.06%Volatility
    
    168.9% and 175.5%
    
    176.5% and 171.1%Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Life expectancy
    
    10      years
    
    10      years
 Income Taxes
   F-10




---



##### Table of Contents



Fair Value of Financial Instruments
  Segment Disclosure
  Recent Accounting Pronouncements
   Note 4  Marketable Securities
     Note 5  Mortgage Loan
 
 F-11




---



##### Table of Contents



Year ending December 31,2006
    
    
    55,5352007
    
    
    58,9322008
    
    
    62,0922009
    
    
    66,3342010
    
    
    70,392Thereafter
    
    
    2,397,653$
    2,710,938
 Note 6  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.
    Common Shares
  F-12




---



##### Table of Contents



Company Guide
 Shares Held in Treasury
  Restricted Common Shares
      F-13




---



##### Table of Contents



Options
      F-14




---



##### Table of Contents



WeightedOptions
    
    Averageto Purchase
    
    Exercise Price
    
    Range of ExerciseCommon Shares
    
    per Share
    
    Price per ShareOutstanding at January 1, 2004
    
    
    284,387
    
    
    $
    2.00
    
    
    $
    0.22 - $5.375Granted
    
    
    575,000
    
    
    $
    0.25
    
    
    $
    0.18 - $0.27Expired/terminated
    
    
    (25,000
    )
    
    $
    0.22
    
    
    $
    0.22Outstanding at December 31, 2004
    
    
    834,387
    
    
    $
    .85
    
    
    $
    0.18 - $5.37Granted
    
    
    100,000
    
    
    $
    0.14
    
    
    $
    0.14Expired/terminated
    
    
    (230,000
    )
    
    $
    1.18
    
    
    $
    0.27 - $2.90Outstanding at December 31, 2005
    
    
    704,387
    
    
    $
    .64
    
    
    $
    0.14 - $5.37Exercisable at December 31, 2004
    
    
    284,387
    
    
    $
    2.00
    
    
    $
    0.22 - $5.37Exercisable at December 31, 2005
    
    
    404,387
    
    
    $
    0.94
    
    
    $
    0.18 - $5.37
  Exercisable Options as of December 31, 2005Number of
    
    WeightedOptions
    
    AverageOutstanding
    
    Remaining
    
    WeightedRange of
    
    and
    
    Contractual
    
    AverageExercise Prices
    
    Exercisable
    
    Life (in years)
    
    Exercise Price$5.37
    
    
    54,387
    
    
    
    2.4
    
    
    $
    5.37$0.45
    
    
    50,000
    
    
    
    1.2
    
    
    $
    0.45$0.22
    
    
    100,000
    
    
    
    1.2
    
    
    $
    0.22$0.27
    
    
    100,000
    
    
    
    3.0
    
    
    $
    0.27$0.18
    
    
    100,000
    
    
    
    1.2
    
    
    $
    0.18$0.18 to $5.37
    
    
    404,387
    
    
    
    1.8
    
    
    $
    0.94
 Exercisable Options as of December 31, 2004Number of
    
    WeightedOptions
    
    AverageOutstanding
    
    Remainng
    
    WeightedRange of
    
    and
    
    Contractual
    
    AverageExercise Prices
    
    Exercisable
    
    Life (in years)
    
    Exercise Price$5.37
    
    
    54,387
    
    
    
    3.4
    
    
    $
    5.37$2.90
    
    
    80,000
    
    
    
    1.0
    
    
    $
    2.90$0.45
    
    
    50,000
    
    
    
    1.2
    
    
    $
    0.45$0.22
    
    
    100,000
    
    
    
    1.2
    
    
    $
    0.22$0.22 to $5.37
    
    
    284,387
    
    
    
    1.6
    
    
    $
    2.00
 F-15




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##### Table of Contents



Warrants
 
  Note 7  Loss Per Share
  For the year ended December 31,2005
    
    
    2004NumeratorNet loss attributable to Common Shareholders
    
    $
    (1,373,793
    )
    
    $
    (816,224
    )DenominatorWeighted average Common Shares outstanding
at December 31, 2005 and December 31, 2004
 Basic and Diluted
    
    
    33,598,240
    
    
    
    32,993,966Basic and Diluted EPSNet loss attributable to Common
Shareholders  Basic and Diluted
    
    $
    (0.04
    )
    
    $
    (0.02
    )
 Note 8  Dividends/Distributions
   Note 9  Income taxes
  For the year ended December 31,2005
    
    
    2004Current
    
    $
    
    
    
    $
    Deferred
    
    
    
    
    
    
    Total tax provision
    
    $
    
    
    
    $
    
 F-16




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##### Table of Contents



For the year ended December 31,2005
    
    
    2004Tax / (Benefit) at Federal statutory rate
    
    $
    (468,000
    )
    
    $
    (277,000
    )State income tax / (benefit), net of Federal tax effect
    
    
    (88,000
    )
    
    
    (53,000
    )Adjustment to net operating and capital loss carryforwards
    
    
    
    
    
    
    348,000Change in valuation allowance
    
    
    421,000
    
    
    
    (18,000
    )Other
    
    
    135,000
    
    
    
    Tax provision
    
    $
    
    
    
    $
    
  At December 31,2005
    
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    5,003,000
    
    
    $
    4,447,000Capital loss carryforward
    
    
    262,000
    
    
    
    262,000Provision for loss on marketable securities
    
    
    
    
    
    
    106,000Accrual and other temporary variances
    
    
    
    
    
    
    29,000Valuation allowance
    
    
    (5,265,000
    )
    
    
    (4,844,000
    )Deferred tax liabilities
    
    
    
    
    
    
    Net deferred tax assets
    
    $
    
    
    
    $
    
   Year Expiring
    
    Net Operating Loss
    
    
    Capital Loss2008
    
    $
    
    
    
    $
    649,0002012
    
    
    458,000
    
    
    
    2018
    
    
    739,000
    
    
    
    2019
    
    
    115,000
    
    
    
    2020
    
    
    2,025,000
    
    
    
    2021
    
    
    177,000
    
    
    
    2022
    
    
    592,000
    
    
    
    2023
    
    
    6,085,000
    
    
    
    2024
    
    
    819,000
    
    
    
    2025
    
    
    1,374,000Total loss carryforwards
    
    $
    12,384,000
    
    
    $
    649,000
 F-17




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##### Table of Contents



Note
10  Commitments and Contingencies
 Liquidity
   
    
    
    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.
  F-18




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##### Table of Contents



Employment Agreements
 th
 th
 Note
11  Related Party Transactions
 Richton Trail Acquisition and Management Fees
   Note
12  Supplemental Information to Statements of Cash Flows
 For the year ended December 31,2005
    
    
    2004Interest paid
    
    $
    163,017
    
    
    $
    166,487
 F-19