<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ended ______________TO________________
Commission file number 333-35063
BARON CAPITAL TRUST
(Exact name of small business issuer as specified in its charter)
Delaware 31-1574856
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7826 Cooper Road, Cincinnati, Ohio 45242
(Address of principal executive offices)
(513) 984-5001
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
<PAGE>
PART 1 - FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
BARON CAPITAL TRUST
Consolidated Balanace Sheet
December 31, 1998 and September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
ASSETS
Rental Apartments:
Land $ 1,178,693 $ 1,178,693
Depreciable Property 6 ,189,095 6,189,094
---------- ----------
7,367,788 7,367,787
Less: Accumulated Depreciation (1,246,627) (1,379,289)
----------- ----------
6,121,161 5,988,498
---------- ---------
Investment in Partnerships 709,970 1,530,091
---------- ---------
Cash and Cash Equivalents 177,299 125,421
Restricted Cash 66,199 184,972
Reimbursed Administrative
Expenses Receivable, Affiliates 155,071 67,941
Other Receivables 80,112 17,858
Advances to Affiliates 10,750 -
Other Property and Equipment 168,982 162,671
Other Assets 212,761 252,056
---------- ---------
871,174 810,918
----------- -----------
Total Assets $ 7,702,305 $ 8,329,507
============ ===========
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Mortgages Payable $ 4,039,718 $ 4,275,990
Note Payable 375,000 119,000
Accounts Payable and Accrued Liabilities 388,385 647,873
Capital Lease Obligations 55,984 35,659
Security Deposits 38,336 41,896
----------- -----------
Total Liabilities 4,897,423 5,120,419
----------- -----------
Shareholders Equity:
Common Shares of beneficial interest,
no par value; 2,500,000 shares authorized
673,141 shares issued and outstanding 4,454,101 6,299,768
Distributions (72,159) (342,107)
Deficit (1,577,060) (2,748,573)
----------- -----------
Total Shareholders Equity: 2,804,882 3,209,088
----------- -----------
Total Liabilities and Shareholders Equity $ 7,702,305 $ 8,329,507
============ ===========
</TABLE>
<PAGE>
BARON CAPITAL TRUST
Consolidated Income Statement
For the Three and Nine Months Ended: September 30, 1998 and September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
3 MOS. ENDED 3 MOS. ENDED 9 MOS. ENDED 9 MOS. ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Property $ 509,891 $ 260,295 $ 665,207 $ 772,428
Rental (30,927) 20,201 -- 98,573
Equity in Net Loss of
Uncolsolidated Partnership -- 29,093 -- --
Other 110,156 -- 110,892 1,037
----------- ----------- ----------- -----------
Total Revenues 589,120 309,589 776,099 872,038
----------- ----------- ----------- -----------
Real Estate Expenses:
Depreciation 104,008 34,454 119,521 107,361
Interest 208,161 86,043 258,378 230,534
Repairs and Maintenance 50,436 23,365 62,034 61,092
Personnel 53,793 32,105 83,058 89,576
Property Taxes 46,867 20,208 57,878 61,484
Property Insurance 12,555 4,700 18,324 15,418
Utilities 20,935 21,020 39,302 50,621
Other 87,728 12,378 112,365 143,948
----------- ----------- ----------- -----------
Total Real Estate Expenses 584,483 234,273 750,860 760,034
----------- ----------- ----------- -----------
Administrative Expenses:
Personnel 291,634 143,215 389,136 642,633
Management, Investment and
Administrative 86,036 23,934 202,911 196,954
Professional Services 148,693 138,719 269,358 396,254
Other 2,612 5,509 2,889 47,677
----------- ----------- ----------- -----------
Total Administrative Expenses 528,975 311,377 864,294 1,283,518
----------- ----------- ----------- -----------
Total Expenses 1,113,458 545,650 1,615,154 2,043,552
----------- ----------- ----------- -----------
Loss Before Minority Interest (524,338) (236,061) (839,055) (1,171,514)
Minority Interest of Unitholders in
Net Loss of Operating Partnership 27,927 -- 100,000 --
----------- ----------- ----------- -----------
Net Loss $ (496,411) $ (236,061) $ (739,055) $(1,171,514)
----------- ----------- ----------- -----------
Net Loss Per Common Share $ (2.07) $ (0.36) $ (6.49) $ (1.97)
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
BARON CAPITAL TRUST
Consolidated Statement of Cash Flows
For the Nine Months Ended: September 30, 1998 and September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (839,055) $ (1,171,512)
Adjustments to Reconcile Net Loss to Net Cash Used by
Operating Activities:
Provision for Officer Compensation 147,750 -
Depreciation and Amortization 1,205,060 132,662
(Increase) decrease in Operating Assets
Reimbursed Administrative Expenses
Receivable, Affiliates (16,731) 87,130
Other Receivables (90,567) 62,254
Advances to Affiliates - 10,750
Other Assets (304,432) (39,295)
Increase (decrease) in Operating Liabilities
Accounts Payable and Accrued Liabilities 283,538 259,489
Lease Obligations - (20,325)
Security Deposits v 36,756 3,560
----------- ---------
Net Cash Used by Operating Activities 422,319 (675,287)
----------- ---------
Cash Flows from Investing Activities:
Acquisition of Rental Property (7,179,916) -
Investment in Partnerships (341,280) (820,121)
Other Property and Equipment (111,358) 6,311
Increase in Restricted Cash (159,196) (118,773)
----------- ---------
Net Cash Used in Investing Activities (7,791,750) (932,583)
----------- ---------
Cash Flows from Financing Activities:
Proceeds for the Sale of Common Shares 3,328,478 1,845,666
Distributions Paid (11,000) (269,947)
Initial Capital Contributions 41,755 -
Proceeds from Mortgage Financing 4,052,860 236,273
Payments on Notes Payable 575,000 (256,000)
-------- ---------
Net Cash Provided by Financing Activities 7,987,093 1,555,992
---------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 617,662 (51,878)
Cash and Cash Equivalents, Beginning - 177,299
------------ ------------
Cash and Cash Equivalents, Ending $ 617,662 $ 125,421
------------ ------------
------------ ------------
</TABLE>
<PAGE>
BARON CAPITAL TRUST
Consolidated Statement of Shareholder's Equity
For the Nine Months Ended: September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Common Shares of Beneficial Interest
------------------------------------
SHARES AMOUNT DISTRIBUTIONS DEFICIT TOTAL
------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 463,650 $ 4,454,101 $ (72,159) $(1,577,060) $ 2,804,882
PROCEEDS FROM SALE OF COMMON
SHARES OF BENEFICIAL INTEREST 209,491 1,845,667 -- -- 1,845,667
DISTRIBUTIONS PAID -- -- (269,948) -- (269,948)
NET LOSS FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1999 -- -- -- (1,171,512) (1,171,512)
------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1999 673,141 $ 6,299,768 $ (342,107) $(2,748,572) $ 3,209,089
------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CAPITALIZATION
Baron Capital Trust (the "Trust") was organized as a business trust in
Delaware on July 31, 1997. The Trust and its affiliate, Baron Capital
Properties, L.P. (the "Operating Partnership"), a Delaware limited
partnership, have been organized to acquire equity interests in
residential apartment properties located in the United States and to
provide or acquire debt mortgage loans secured by such types of
property.
The Managing Shareholder of the Trust is Baron Advisors, Inc., a
Delaware corporation which will manage the operations of the Trust and
the Operating Partnership subject to the supervisory authority of the
Board of the Trust over the activities of the Trust and the Operating
Partnership and the Board's prior approval authority in respect of
certain actions of the Trust and the Operating Partnership specified in
the Declaration of Trust of the Trust.
The Trust's Declaration authorizes it to issue up to 25,000,000 shares
of beneficial interest, no par value per share, consisting of common
shares and of preferred shares of such classes with such preferences,
conversion or other rights, voting powers, restrictions, limitations as
to dividends, qualifications, or terms or conditions of redemption as
the Managing Shareholder may create and authorize from time to time in
accordance with Delaware law and the Declaration. The Trust commenced
operations on February 3, 1998, at which time it received its initial
capital contribution.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
consolidated accounts of the Trust and the Operating Partnership. The
Trust is the general partner of the Operating Partnership and owns
approximately 81% of the limited partner units of the Operating
Partnership. The consolidated accounts of the Operating Partnership
include the accounts of three limited partnerships in which the
Operating Partnership is the controlling limited partner, by virtue of
its right to remove the general partner due to its ownership percent of
the total partnership interest in those limited partnerships. All
significant inter-company transactions and balances have been
eliminated in consolidation.
UNAUDITED FINANCIAL INFORMATION
The accompanying financial information as of and for the nine months
ended September 30, 1999 is unaudited. However, in the opinion of
management, all adjustments, consisting of normal recurring accruals
and adjustments, necessary for a fair presentation of financial
position, results of operations and cash flows have been made. The
results of operations for interim periods are not necessarily
indicative of results to be expected for a full year.
<PAGE>
BASIS OF PRESENTATION (CONTINUED)
The minority interest of unitholders in the Operating Partnership
represents the 1,202,160 limited partnership units owned by the
Original Investors of the Operating Partnership, and is stated at the
amount of the capital contribution by them to the Operating Partnership
($100,000), reduced by their proportionate share of the net loss of the
Operating Partnership. As of December 31, 1998, the 1,202,160 Operating
Partnership limited partnership units issued to the Original Investors
are subject to escrow restrictions and 108,757 units are convertible
into common shares of the Trust.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Trust to
concentrations of credit risk are comprised of cash and receivables.
CASH
At various times during the year the Trust had deposits in financial
institutions in excess of the federally insured limits. The Trust
maintains its cash with high quality financial institutions, which the
Trust believes limits these risks.
PROPERTY MANAGEMENT REIMBURSEMENTS AND OTHER RECEIVABLES
Receivables are comprised mainly of (a) administrative expense
reimbursements due from a number of other partnerships that are related
to the Operating Partnership and (b) monthly rents due. The Partnership
monitors exposure to credit losses and does not maintain an allowance
for these receivables, as it believes that these receivables are fully
collectible.
REAL ESTATE RENTAL PROPERTIES AND DEPRECIATION
Real estate rental properties are stated at cost less accumulated
depreciation. Ordinary repairs and maintenance are expensed as
incurred; replacements having an estimated useful life of at least one
year and improvements are capitalized and depreciated over their
estimated useful lives.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the properties as follows:
<TABLE>
<CAPTION>
Estimated Useful
Lives (Years)
-------------
<S> <C>
Building 30
Leasehold improvements 10
Furniture and fixtures 7
Computer equipment and software 3-5
</TABLE>
<PAGE>
REAL ESTATE RENTAL PROPERTIES AND DEPRECIATION (CONTINUED)
Losses in carrying values of investment assets are provided by
management when the losses become apparent and the investment asset is
considered impaired in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Management evaluates its investment properties annually to assess
whether any impairment indications are present. If any investment asset
is considered impaired, a loss is provided to reduce the carrying value
of the property to its estimated fair value. No such losses have been
required or provided in the accompanying consolidated financial
statements.
REVENUE RECOGNITION
Apartment units are leased under operating leases with terms of
generally one year or less. Rental income is recognized when due from
tenants.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Trust considers all
investments purchased with an original maturity of three months or less
to be cash equivalents.
INVESTMENTS IN PARTNERSHIPS
The Trust, through the Operating Partnership, accounts for its
investments in limited Partnerships in which it is deemed not to have
the controlling interest, but has more than a minor limited partnership
interest, utilizing the equity method of accounting. The Operating
Partnership's investment in Alexandria Development, L.P., which
represents a 12.3% interest at December 31, 1998, is accounted for
using the equity method.
Investments in partnerships in which the Operating Partnership's
interest is so minor that the Partnership has virtually no influence
over partnership operating and financial policies are accounted for
utilizing the cost method. These investments generally represent less
than 5% of the partnership interest. The investments in certain other
limited partnerships as of December 31, 1998, which represent less than
a 4% partnership interest in each case, are accounted for on the cost
method. The Trust periodically assesses the estimated realizable value
of these investments in order to ascertain that there has been no
impairment in their recorded value.
As of September 30, 1999 the Operating Partnership owned 25.7 units of
limited partnership interest for which it paid $1,285,000.
<PAGE>
CAPITAL RESERVE
In connection with the acquisition of the investment properties, as
required by the lending institutions, the Trust has established a
capital reserve account, which is to be used for significant
improvements to the property.
LOAN COSTS
The Trust has capitalized those costs incurred with obtaining financing
on the investment properties. Such costs (included with other assets)
are being amortized over six years, the remaining term of the
financing.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
INCOME TAXES
The Trust has not provided for federal income taxes because the Trust
believes it qualifies as a real estate investment trust (REIT) under
Section 856 to 860 of the Internal Revenue Code. A REIT will generally
not be subject to federal income taxation on that portion of its income
that qualifies a REIT taxable income to the extent that it distributes
substantially all of its taxable income to its stockholders and
complies with certain other requirements. The Trust made an REIT
election for the year ended December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair value. These instruments include
cash, receivables, accounts payable and accrued liabilities. Fair
values were assumed to approximate carrying values for these financial
instruments since they are short-term in nature and their carrying
amounts approximate fair values or they are receivable or payable on
demand.
The fair value of debt instruments has been estimated by using
discounted cash flow models incorporating discount rates based on
current market interest rates for similar types of instruments. At
December 31, 1998, the differences between estimated fair value and the
carrying value of debt instruments were not material.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and No. 131, "Disclosures about
Segments of an
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and displaying comprehensive income, its components, and
accumulated balances. SFAS No. 131 establishes standards for the way
that public companies report information about operating segments in
annual financial statements and requires reporting of selected
information about operating segments in interim financial statements
issued to the public. Both SFAS No. 130 and SFAS No. 131 are effective
for periods beginning after December 15, 1997. The Trust adopted these
new accounting standards in 1998, and their adoption had no effect on
the Trust's financial statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires companies to recognize all derivatives contracts
as either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match
the timing of the gain or loss recognition of the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized
in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Trust has not entered into derivatives contracts to
hedge existing risks or for speculative purposes. Accordingly, the
Trust does not expect adoption of the new standard on January 1, 2000
to affect its financial statements.
NOTE 2. MATERIAL SUBSEQUENT EVENTS AND CONTINGENCIES
ALEXANDRIA APARTMENTS
On October 14, 1998, the Operating Partnership acquired an approximate
12.3% limited partnership interest in Alexandria Development, L.P. (the
"Alexandria Property"), a Delaware limited partnership which is the
owner and developer of a 168-unit residential apartment property under
construction in Alexandria, Kentucky. The Operating Partnership paid
$400,000 for eight (8) units of limited partnership interest out of a
total of sixty-five (65) units and retains an option to acquire the
remaining fifty-seven (57) units of limited partnership interests for
$50,000 per unit or approximately $2,850,000. The option is exercisable
as additional apartments are completed and rented and expires on June
30, 2000. An affiliate of the Trust, affiliated through common
ownership, sold the partnership interest in the Alexandria Property to
the Operating Partnership and also serves as the managing general
partner of the Alexandria Property. During the construction stage of
the apartment property, the Operating Partnership's limited partnership
interest in the Alexandria Property is entitled to an annual 12%
preferential return, which is senior to the other limited partnership
interests and the general partner's nominal 1% interest.
<PAGE>
ALEXANDRIA APARTMENTS (CONTINUED)
As of September 30, 1999 the Operating Partnership owned 25.7 units of
limited partnership interest for which it paid $1,285,000.
CONTRACT TO PURCHASE ADDITIONAL PROPERTIES
In September 1998, the Trust entered in an agreement with three real
estate development companies to acquire two luxury residential
apartment properties in the development stage upon the completion of
construction. The development companies (Brentwood at Southgate, Ltd.,
Burlington Residential, Ltd. and The Shoppes at Burlington, Ltd.) are
controlled by one of the Trust's founders and chief executive officer.
The properties are scheduled to have a total of 652 units, comprised of
one, two and three bedroom/one or two bathroom apartments. Construction
of one of the properties, located in Louisville, Kentucky, is expected
to be completed prior to the end of 2000, and construction of the other
property, located in Burlington, Kentucky (part of the Cincinnati
metropolitan area), is expected to be completed by the end of 2001. The
aggregate purchase price for the two properties is in the range of
approximately $41,000,000 to $43,000,000. The closing of each
acquisition, which is expected to occur shortly following the
completion of construction, is conditioned on, among other things, the
completion of the respective apartment property, the availability of
first mortgage financing and the Trust's raising the balance of the
funds necessary for the acquisition in its ongoing Cash Offering or
otherwise have funds available to make the acquisition.
In connection with the transaction and in exchange for certain benefits
described below, the Trust agreed to co-guarantee (along with the chief
executive officer), up to 35% (or approximately $12,500,000) of the
development portion of long-term construction loans with an aggregate
principal amount of up to $36,000,000 to be provided by a bank to the
development companies. As of September 30, 1999, approximately
$7,728,000 of such loans had been drawn down, resulting in outstanding
guarantees of approximately $2,704,800. Subject to the fulfillment of
certain closing and funding conditions, the construction loans will be
made to the development companies in connection with the development
and construction of the two apartment properties and of an 111,000
square foot shopping center being developed in Burlington, Kentucky.
The interest rates on the construction loans range from 7.36% to 7.52%.
The Trust also agreed that, if the loans are not repaid prior to the
expiration of the guarantee, it will either buy out the bank's position
on the entire amount of the construction loans or arrange for a third
party to do so. The construction loans are expected to be replaced by a
long-term credit facility.
The Trust expects to receive significant benefits from the transaction
in addition to the acquisition of two large luxury apartment properties
located in attractive communities. In exchange for the guarantee of the
development portion of the construction loans, the Trust will receive a
discount of approximately $212,500 (representing a one-half of one
percent reduction) on the purchase price of the properties. The Trust
and the development companies are negotiating a further price reduction
which would apply if the development
<PAGE>
CONTRACT TO PURCHASE ADDITIONAL PROPERTIES (CONTINUED)
portion of the loans is not repaid prior to the expiration of the
guarantee period and the Trust is required to buy out or arrange for
the buyout of the lender's position on the loans.
NOTE 3. SHAREHOLDERS' EQUITY
CASH OFFERING
On May 15, 1998, pursuant to a registration statement on Form SB-2, the
Trust commenced an initial public offering of a maximum of 2,500,000
common shares of beneficial interest in the Trust at $10 per common
share, which is payable in full upon subscription, for proposed total
gross proceeds of $25,000,000 (the Cash Offering). All of the common
shares to be issued or sold by the Trust in the offering will be
tradable without restriction under the Securities Act, but will be
subject to certain restrictions designed to permit the Trust to qualify
and maintain its status as a Real Estate Investment Trust under the
Internal Revenue Code. The Cash Offering currently terminates on
November 30, 1999, but is being amended to extend to May 31, 2000.
EXCHANGE OFFERING
The Operating Partnership has registered up to 2,500,000 units of
limited partnership interest ("Units") under the Securities Act of
1933, as amended (the "Act") for issuance in connection with an
exchange offering (the "Exchange Offering"). The Commission declared
the registration effective on November 9, 1999. In the Exchange
offering, the Operating Partnership will offer to issue the Units,
which have an initial assigned value of $ 25,000,000 in exchange for
units of limited partnership interest in 23 limited partnerships (the
"Exchange Partnerships"), which directly or indirectly own equity
and/or mortgage interests in one or more residential apartment
properties. The Operating Partnership will commence the Exchange
Offering as soon as practicable. The Exchange Partnerships are managed
by corporate general partners which are affiliated with one of the
founders of the Operating Partnership, who is the sole stockholder and
director of the Managing Shareholder of the Trust.
The number of Units being offered in exchange for the limited
partnership interests in the Exchange Partnerships is based on
appraisals prepared by qualified and licensed independent appraisal
firms for each underlying residential apartment property. For purposes
of the Exchange Offering, each Unit has been arbitrarily assigned an
initial value of $10, which corresponds to the offering price of each
Trust Common Share currently being offered to the public pursuant to
the Cash Offering. The value of each Unit and Common Share outstanding
will be substantially identical since Unit holders, including
recipients of Units in the Exchange Offering, will be entitled to
exchange all or a portion of their Units at any time and from time to
time for an equivalent number of Trust Common Shares, so long as the
exchange would not cause the exchanging party to own (taking into
account certain ownership attribution rules) in excess of 5% of the
then
<PAGE>
EXCHANGE OFFERING (CONTINUED)
outstanding shares in the Trust, subject to the Trust's right to cash
out any holder of Units who requests an exchange and subject to certain
other exceptions. To facilitate such exchanges of Units into Common
Shares, 2,500,000 Common Shares (in addition to the 2,500,000 Common
Shares being offered by the Trust in the Cash Offering) have been
registered with the Commission.
As its initial investment targets in the Exchange Offering, the
Operating Partnership is offering to acquire equity and/or subordinated
mortgage interests in 26 properties (the "Exchange Properties")
directly or indirectly owned by the 23 Exchange Partnerships. The
Operating Partnership will acquire interests in a particular property
and/or mortgages by acquiring from limited partners their units of
limited partnership interest in the respective Exchange Partnership.
Each of the Exchange Partnerships directly or indirectly owns equity
and/or mortgage interests in one or more properties. Certain of the
Exchange Partnerships directly or indirectly own equity interests in 16
properties which consist of an aggregate of 1,012 residential units
(comprised of studio, one, two, three and four bedroom units). Certain
of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 properties, which consist of an aggregate of 813
existing residential units (studio and one and two bedroom units) and
168 units (two and three bedroom units) under development. Of the
Exchange Properties, 21 properties are located in Florida , three
properties in Ohio and one property each in Georgia and Indiana.
OPERATING PARTNERSHIP LIMITED PARTNERSHIP UNITS
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors each subscribed for 601,080 limited
partnership units of the Operating Partnership (a total of 1,202,160
units). In consideration for the units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the
Operating Partnership. If the Cash Offering and the Exchange Offering
are fully subscribed, those Units would represent 19% of the total
Common Shares outstanding after completion of the Cash Offering and
exchange by the Operating Partnership of 2,500,000 of its Units for
units of limited partnership interest in real estate limited
partnerships (including any exchange pursuant to the Exchange
Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been
exchanged into an equivalent number of Common Shares. If, however, as
of November 30, 1999 (being amended to extend to May 31, 2000), the
Cash Offering and/or the Exchange Offering has been completed and the
number of Units subscribed for by each Original Investment represents a
percentage greater than 19% of the then outstanding Common Shares,
calculated on a fully diluted basis assuming that all then outstanding
Units (other than those acquired by the Trust) have been exchanged into
an equivalent number of Common Shares, each Original Investor has
agreed to return any excess Units to the Operating Partnership for
cancellation. The Original Investors have deposited Units subscribed
for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
<PAGE>
OPERATING PARTNERSHIP LIMITED PARTNERSHIP UNITS (CONTINUED)
The fair value of the units issued to the Original Investors amounted
to $100,000, based upon a determination made by the Independent
Trustees of the Trust as of the date of subscription for these units
(February 3, 1998). The determination of the fair value took into
consideration that (a) at the time of the subscription for the units,
the Trust and the Partnership were development stage companies, with no
cash or other significant tangible assets, operating history or revenue
and no certainty of successful offerings or future operations; the
founders had at risk their initial capital contributions plus certain
additional unreimbursed advances to cover certain offering and
operating expenses; the founders have significant experience and
developed know-how critical to the success of the Trust and the
Partnership; and the founders' units are subject to significant
transfer restrictions. The Partnership has accounted for the units as
being issued and outstanding, but subject to escrow restrictions, in
the accompanying consolidated financial statements, and has included
the units as outstanding in determining the weighted average shares
outstanding for purposes of calculating net loss per partnership unit
in the accompanying consolidated financial statements. Because the
release of the units from escrow is not dependent upon the achievement
of any specified level of profits, the release of the units from escrow
is not considered to be compensatory and, accordingly, no accounting
measurement will be given to the release of the units from escrow.
Under the subscription agreement, the Original Investors agreed to
waive future administrative fees for managing Participating Exchange
Partnerships; agreed to assign to the Operating Partnership the right
to receive all residual economic rights attributable to the general
partner interests in Participating Exchange Partnerships; and, in order
to permit management of the Exchange Properties by the Operating
Partnership, caused the Exchange Partnerships to cancel the
partnerships' prior property management agreements and agreed to forego
the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties
in which the Trust or the Operating Partnership invest.
After the exchange with the limited partners and assignment of economic
rights of the general partner, the Operating Partnership will control
the Participating Exchange Partnerships by virtue of its ownership of
at least 90% of the limited partnership interests, which will provide
the Operating Partnership the ability to remove the general partner
under the provisions of the limited partnership agreements that limited
partners holding over 50% of total partnership interest have the right
to remove the general partner.
Based upon the total Common Shares outstanding as of September 30,
1999, the Original Investors would be entitled to exchange their
limited partnership units for a net amount of 154,056 (three months
ended September 30, 1999) or 139,314 (nine months ended September 30,
1999) Common Shares. These equivalent common shares have been taken
into consideration in the calculation of net loss per share on an
as-converted basis (see Note 4).
<PAGE>
NOTE 4. NET LOSS PER SHARE
The Trust computes per share data in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share". SFAS 128 requires dual presentation of basic and diluted
earnings per share on the face of the income statement.
Basic net loss per share equals net loss divided by the weighted
average shares outstanding during the year. The computation of diluted
net loss per share that includes dilutive common stock equivalents in
the weighted average shares outstanding has not been presented as it is
anti-dilutive for the three months ended September 30, 1999.
The components used in calculating basic net loss per share are as
follows:
<TABLE>
<CAPTION>
Weighted
Average Loss
Net Loss Shares Per Share
---------- -------- -----------
<S> <C> <C> <C>
Three months ended
September 30, 1999 $ (236,061) 656,764 $ (.36)
=========== ======= ========
Nine months ended
September 30, 1999 $(1,171,514) 593,918 $(1.97)
=========== ======= ========
</TABLE>
Assuming that the Original Investors had exchanged their limited
partnership units for an equivalent net amount of 154,056 (for the
three months ended September 30, 1999) or 139,314 (for the nine months
ended September 30, 1999) Common Shares, the net loss per share on an
as-converted basis would have been $.29 (for the three months ended
September 30, 1999) and $1.60 (for the nine months ended September 30,
1999) per share.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
Registrant's Consolidated Financial Statements and Notes thereto.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis or Plan of Operation and
other sections of this Report contain certain forward-looking
statements within the meaning of the Securities Litigation Reform Act
of 1995 that are based on current expectations, estimates and
projections about the Registrant's business, management's beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and variations of
such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted
in such forward-looking statements due to numerous factors, including,
but not limited to those discussed in Management's Discussion and
Analysis or Plan of Operation, as well as those discussed elsewhere in
this Report and from time to time in the Registrant's other Securities
and Exchange Commission filings and reports. In addition, such
statements could be affected by general domestic and international
economic conditions. The forward-looking statements contained in this
Report speak only as of the date on which they are made, and the
Registrant does not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the
date of this Report. If the Registrant does update one or more
forward-looking statements, investors and others should not conclude
that the Registrant will make additional updates with respect thereto
or with respect to other forward-looking statements.
PLAN OF OPERATION
The Registrant and Baron Capital Properties, L.P. (the "Operating
Partnership") (which conducts all of the Registrant's real estate
operations and holds title to all of its real estate assets and of
which the Registrant is the sole general partner and a limited partner)
commenced operations in February 1998. Since June 1998, the Operating
Partnership has applied net proceeds of the Registrant's Cash Offering
to acquire property interests. In June 1998, the Operating Partnership
acquired beneficial ownership of a 67-unit residential apartment
property located in Kissimmee, Florida known as the Heatherwood
Apartments - Phase I. The purchase price for the acquisition was
$830,000. In July 1998, the Operating Partnership acquired beneficial
ownership of an 80-unit residential apartment property located in
Lakeland, Florida
2
<PAGE>
known as the Crystal Court Apartments - Phase II. The purchase price
for the acquisition was $704,000.
In July 1998, the Operating Partnership also acquired a limited
partnership interest (less than 4% in each case) in 13 real estate
limited partnerships, including certain of the Exchange Partnerships,
managed by affiliates of Mr. McGrath (a founder and Chief Executive
Officer of the Registrant and the Operating Partnership) in
consideration of a capital contribution ranging from $2,900 to $83,300
in each such partnership (aggregate amount approximately $341,000).
These various partnerships will be accounted for on the cost method
since their respective ownership interests represent less than 20% of
the equity ownership therein. In addition, the partnerships will
periodically assess the realizable value of these investments in order
to ascertain that there has been no impairment in their recorded value.
In September 1998, the Operating Partnership acquired beneficial
ownership of a 50-unit residential apartment property located in New
Smyrna Beach, Florida known as the Riverwalk Apartments. The purchase
price for the acquisition was $700,000. In September 1998, the
Registrant entered into an agreement to acquire two luxury residential
apartment properties (total 652 units) in Louisville and Burlington,
Kentucky upon the completion of construction for an aggregate purchase
price in the range of approximately $41,000,000 to $43,000,000. In
connection therewith, the Registrant agreed to co-guarantee (along with
Mr. McGrath), for a period of 60 days (plus any extensions which may be
granted), up to $3,000,000 of the development portion of long-term
construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment
properties and a shopping center in Burlington, Kentucky.
Between October 1998, and September 1999, the Operating Partnership
acquired an approximately 40% limited partnership interest in a limited
partnership which is the owner and developer of a 168-unit residential
apartment property under construction in Alexandria, Kentucky known as
Alexandria Apartments. The aggregate purchase price for the acquired
partnership interest was $1,285,000. An affiliate of Mr. McGrath sold
the partnership interest to the Operating Partnership and also serves
as the limited partnership's managing general partner. One hundred
twelve of the 168 residential units (approximately 67%) have been
completed and are in the rent-up stage.
The Registrant and the Operating Partnership intend to continue to
acquire similar property interests using proceeds from the Registrant's
Cash Offering, securities of the Registrant and the Operating
Partnership, including Units registered in connection with
3
<PAGE>
the Operating Partnership's proposed Exchange Offering described below,
and available operating cash flow and financing from other sources.
The operating results of the Registrant and the Operating Partnership
will depend primarily upon income from the residential apartment
properties in which they directly or indirectly acquire an equity or
Subordinated Mortgage Interest. Operating results in respect of equity
interests will be substantially influenced by the demand for and supply
of residential apartment units in their primary market and sub-markets,
and operating expense levels. Operating results in respect of mortgage
and other debt interests will depend upon interest income, including,
in certain cases, participation interest, whose payment will depend
upon the operating performance, sale or refinancing of the underlying
properties. The operating results of the Registrant and the Operating
Partnership will also depend upon the pace and price at which they can
acquire and improve additional property interests.
The target metropolitan markets and sub-markets have benefited in
recent periods from demographic trends (including population and job
growth) which increase the demand for residential apartment units,
while financing constraints (specifically, reduced availability of
development capital) have limited new construction to levels
significantly below construction activity in prior years. Consequently,
rental rates for residential apartment units have increased at or above
the inflation rate for the last two years and are expected to continue
to experience such increases for the next 18 months based on market
statistics made available to management of the Registrant in terms of
occupancy rates, supply, demographic factors, job growth rates and
recent rental trends. Expense levels also influence operating results,
and rental expenses (other than real estate taxes) for residential
apartment properties have generally increased at approximately the rate
of inflation for the past three years and are expected to increase at
the rate of inflation for the next 18 months.
The Registrant believes that known trends, events or uncertainties
which will or are reasonably likely to affect the short-term and
long-term liquidity and current and future prospects of the Registrant
and the Operating Partnership include the performance of the economy
and the building of new apartment communities. Although the Registrant
cannot reliably predict the effects of these trends, events and
uncertainties on the property investments of the Registrant and the
Operating Partnership as a whole, some of the reasonably anticipated
effects might include downward pressure on rental rates and occupancy
levels.
Generally, there are no seasonal aspects of the operations of the
Registrant or the Operating Partnership which might have a material
effect on their financial condition or results of operation. However,
for the last 36 months, one 60-unit student housing property owned by
one of the Exchange Partnerships involved in the proposed
4
<PAGE>
Exchange Offering has had an average occupancy rate of 93% for nine
months of the year and 40% for the remaining three months of the year.
The Registrant and the Operating Partnership have the ability to
satisfy their cash requirements for the foreseeable future. However, it
will be necessary to raise additional capital during the next 12 months
to make acquisitions and to meet management's revenue and cash flow
goals. The Registrant and the Operating Partnership intend to
investigate making an additional public or private offering of Common
Shares and/or Units within the 12-month period following the
commencement of the proposed Exchange Offering.
The Registrant and the Operating Partnership expect no material change
in the number of employees over the next 12 months.
EXCHANGE OFFERING
The Operating Partnership has registered up to 2,500,000 units of
limited partnership interest ("Units") under the Securities Act of
1933, as amended for issuance in connection with an exchange offering
(the "Exchange Offering"). The Commission declared the registration
effective on November 9, 1999. In the Exchange Offering, the Operating
Partnership will offer to issue the Units, which have an initial
assigned value of $25,000,000, in exchange for units of limited
partnership interest in 23 limited partnerships (the "Exchange
Partnerships"), which directly or indirectly own equity and/or mortgage
interests in one or more residential apartment properties. The
Operating Partnership will commence the Exchange Offering as soon as
practicable. The Exchange Partnerships are managed by corporate general
partners which are affiliated with one of the founders of the
Registrant and the Operating Partnership, who is the sole stockholder
and director of the Managing Shareholder of the Registrant.
Offerees who accept the Exchange Offering will receive Units of the
Operating Partnership. The holders of such Units will be entitled to
exchange all or a portion of their Units for an equivalent number of
Common Shares in the Registrant at any time and from time to time, so
long as the exchange would not cause the seller to own in excess of
5.0% of the then outstanding Common Shares. Instead of the exchange,
the Registrant has the right to cash out any holder of Units who
requests an exchange. To facilitate these exchanges, the Registrant has
registered 2,500,000 additional Common Shares (in addition to the
2,500,000 Common Shares being offered in the Cash Offering) for
issuance to holders of Units who in the future request the Registrant
to issue Common Shares in exchange for Units.
5
<PAGE>
YEAR 2000
The computer systems of the Registrant and the Operating Partnership
have been tested for year 2000 problems and the Registrant and the
Operating Partnership believe that such systems are year 2000
compatible. It is possible, however, that certain computer systems or
software products of their suppliers may experience year 2000 problems
and that such problems could adversely affect them. The Registrant and
the Operating Partnership are in the process of inquiring as to the
progress of its principal suppliers in identifying and addressing
problems that their computer systems will face in correctly processing
date information as the year 2000 approaches. However, there can be no
assurance that the Registrant and the Operating Partnership will
identify the future date-handling problems of their suppliers in
advance of the occurrence of such problems, or that such parties will
be able to successfully remedy any problems that are discovered. With
respect to their own computer systems, the Registrant and the Operating
Partnership intend to upgrade their principal operating computer
software to the most recent available revision sold by their software
supplier, which the supplier has represented to be year 2000 compliant.
The Registrant and the Operating Partnership believe that such upgrade
will identify and solve those year 2000 problems that could affect
their operating software and can be accomplished before the year 2000
at a reasonable cost. The failure to identify and solve all year 2000
problems affecting their business could have an adverse effect on the
business, financial condition and results of operations of the
Registrant and the Operating Partnership.
6
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Registrant is a claimant in the Georgia Pacific class action
law suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Registrant's Form SB-2 Registration Statement (the
"Registration Statement") (Commission file number 333-35063) was
declared effective by the Commission on May 15, 1998. On May 18,
1998, the Registrant commenced its public offering (the
"Offering") of common shares of beneficial interest in the
Registrant ("Common Shares"), the class of securities registered.
On June 2, 1999, the Registrant filed Post-Effective Amendment No.
1 (the "Amendment") to the Registration Statement, which the
Commission declared effective on June 11, 1999. The Registrant's
Offering is currently ongoing.
The name of the managing underwriter of the Offering is Sigma
Financial Corporation. The amount of Common Shares registered is
2,500,000 shares. The offering price per Common Share is $10.00,
and the aggregate price of the offering amount registered is
$25,000,000. As of the date of this report, 673,441 Common Shares
have been sold in the Offering, for an aggregate offering price of
$6,734,413.
From the effective date of the Registration Statement through
September 30, 1999, the following expenses have been incurred for
the Registrant's account in connection with the issuance and
distribution of the registered Common Shares:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $531,745 (plus five-year warrants to
acquire 34,568 Common Shares at an
exercise price of $13.00 per share)
Finder's Fees: $0
Expenses Paid to or for Underwriter: $0
Other Expenses (reimbursement for advisory
and investment expenses): $426,256
Total Expenses: $958,001
</TABLE>
Of such expense payments, $407,019 were made directly to Baron
Advisors, Inc., the Managing Shareholder of the Registrant. The
remaining payments of $550,982 were
7
<PAGE>
made directly or indirectly to others. The net offering proceeds
to the Registrant after deducting the foregoing total expenses
were $5,773,412.
From the effective date of the Registration Statement through
September 30, 1999, the net offering proceeds to the Registrant
were used for the following purposes:
<TABLE>
<S> <C>
Improvements to buildings and facilities: $0
Purchase and installation of equipment: $0
Repayment of indebtedness: $0
Working capital: $696,172
Temporary investments: $0
Investment in Baron Capital Properties, L.P. (the
Operating Partnership) $5,077,240
Other purposes for which 5% or more of net
offering proceeds or $100,000 (whichever is less)
have been used: $0
</TABLE>
Of such net proceeds, $5,077,240 was directly contributed to the
Operating Partnership in exchange for Units of limited partnership
interest therein. The Operating Partnership will conduct all of
the real estate operations of the Registrant and hold all of its
real property assets. In September 1999, the Registrant made a
return of capital to Shareholders in the amount of $102,351.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits attached.
(b) The Registrant did not file any Current Reports on Form 8-K
during the quarter for which this Report is filed.
8
<PAGE>
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
November 12, 1999
BARON CAPITAL TRUST
By: /s/ GREGORY K. MCGRATH
---------------------------------
Gregory K. McGrath
Chief Executive Officer
By: /s/ MARK L. WILSON
---------------------------------
Mark L. Wilson
Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BARON
CAPITAL TRUST FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 310,393
<SECURITIES> 0
<RECEIVABLES> 85,799
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 396,192
<PP&E> 7,782,513
<DEPRECIATION> (1,379,289)
<TOTAL-ASSETS> 8,329,507
<CURRENT-LIABILITIES> 844,428
<BONDS> 4,275,990
0
0
<COMMON> 6,299,769
<OTHER-SE> (3,090,680)
<TOTAL-LIABILITY-AND-EQUITY> 8,329,507
<SALES> 0
<TOTAL-REVENUES> 872,038
<CGS> 0
<TOTAL-COSTS> 760,034
<OTHER-EXPENSES> 1,283,518
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,171,514)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,171,514)
<EPS-BASIC> (1.97)
<EPS-DILUTED> (1.97)
</TABLE>
