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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-35063
------------------------
BARON CAPITAL TRUST
(Name of Small Business Issuer as Specified in its Charter)
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<S> <C>
Delaware 31-1574856
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
7826 COOPER ROAD
CINCINNATI, OHIO 45242
(Address of Principal Executive Offices including Zip Code)
(513) 984-5001
(Issuer's Telephone Number, including Area Code)
------------------------
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: COMMON SHARES OF
BENEFICIAL INTEREST, NO
PAR VALUE
Check whether the Issuer (1) has 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
- --
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-
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The issuer's revenues for its most recent fiscal year were $396,884.
As of March 31, 1999 the aggregate market value of voting and non-voting equity
common stock held by non-affiliates (based on total shares outstanding reduced
by the number of shares held by trustees, officers, and other affiliates) of the
registrant was five million eight hundred thirty-eight thousand four hundred and
three dollars ($5,838,403) based on the actual cash paid for shares issued by
the four hundred and six (406) investors.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes______ No_______
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BARON CAPITAL TRUST
FORM 10-KSB ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1998
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<CAPTION>
PAGE:
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<S> <C>
PART I:
Item 1 Description of Business.........................
Item 2 Description of Properties.......................
Item 3 Legal Proceedings...............................
Item 4 Submission of Matters to a Vote of Security
Holders.........................................
PART II:
Item 5 Market for Common Equity and
Related Stockholder Matters.....................
Item 6 Management's Discussion and Analysis or
Plan of Operation...............................
Item 7 Financial Statements............................
Item 8 Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.............
PART III:
Item 9 Trustees, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(A)
of the Exchange Act.............................
Item 10 Executive Compensation..........................
Item 11 Security Ownership of Certain Beneficial Owners
and Management..................................
Item 12 Certain Relationships and Related Transactions..
Item 13 Exhibits and Reports on Form 8-K................
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Baron Capital Trust, a Delaware real estate investment trust, (the
"Trust") was formed on July 31, 1997. The Trust and its affiliate, Baron Capital
Properties, L.P. (the "Operating Partnership"), constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and/or to provide
or acquire mortgage loans secured by such types of property. On May 15, 1998
pursuant to a registration statement on Form SB-2 the Trust commenced a public
offering of 2,500,000 common shares of beneficial interest at an offering price
of $10 per share ("Cash Offering"). The Cash Offering will terminate no later
than November 30, 1999. The net cash proceeds from the issuance of common shares
will be contributed by the Trust to the Operating Partnership for an equivalent
number of units of limited partnership in the Operating Partnership. As of March
31, 1999, the Trust had sold and/or issued to the public 583,840 common shares,
and the Trust intends to continue to sell common shares. The Trust, indirectly
through the Operating Partnership, intends to acquire, own, operate, manage and
improve residential apartment property interests for long-term ownership, and
thereby to seek to maximize current and long-term income and the value of its
assets. To this end, the Operating Partnership has filed a registration
statement with the SEC to acquire 23 real estate partnerships. (See Exchange
Offering below). The Trust is the general partner of the Operating Partnership
and holds units of limited partnership interest as well.
The Trust intends to make regular quarterly pro rata distributions to its
Shareholders of net income generated from investments in property interests. The
Trust intends to operate as a REIT for federal income tax purposes, provided,
however, that if its Managing Shareholder determines, with the affirmative vote
of a Majority of Shareholders entitled to vote on such matter approving the
Managing Shareholder's determination, that it is no longer in the best interests
of the Trust to continue to qualify as a REIT, the Managing Shareholder may
revoke or otherwise terminate the Trust's REIT election pursuant to applicable
federal tax law.
The Operating Partnership conducts all of the Trust's real estate
operations and holds all direct or indirect property interests acquired. The
Operating Partnership owns record title to properties or limited partnership
interests or other equity interests in limited partnerships and other entities
which own direct or indirect interests in properties. The Trust is the sole
General Partner of the Operating Partnership, and, in such capacity, the Trust
controls the activities of the Operating Partnership. The operations of the
Trust will be carried on through the Operating Partnership (and any other
subsidiaries the Trust may have in the future), among other reasons, in order to
(i) enhance the ability of the Trust to qualify and maintain its status as a
REIT for federal income tax purposes, and (ii) enable the Trust to indirectly
acquire interests in residential apartment properties in exchange transactions
that involve the exchange of Operating Partnership Units for limited partnership
interests in limited partnerships which directly or indirectly own such property
interests, and thereby provide the opportunity for deferral until a later date
of any tax liabilities that sellers of partnership interests otherwise would
incur if they received cash or Trust common shares in connection therewith. The
Operating Partnership will be responsible for, and pay when due, its share of
all administrative and operating expenses of properties in which it acquires an
interest.
The Trust's executive offices are located in Cincinnati, Ohio at 7826
Cooper Road, Cincinnati, Ohio 45242. The Trust's main telephone number is (513)
984-5001.
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Brief Description of Properties
Through the Operating Partnership, the Trust invests in direct or
indirect ownership interests in multifamily apartment communities and manages
affiliated apartment properties. As of December 31, 1998, the Trust had an
indirect ownership interest in 4 apartment communities (consisting of an
aggregate of 365 apartment units) in 2 states (individually a "Property" and
collectively, the "Properties"). Three of the Properties were constructed during
the 1980s and are comprised of one story garden style apartment buildings of
modular construction. One of the Properties is still under construction. As of
March 31, 1999 that Property had 98 units ready to rent and 70 units planned for
completion by the end of 1999. The Properties are located in urban and suburban
and secondary markets in Florida and Kentucky. During the period that the
Properties were held in 1998, the average economic occupancy of the Properties
was 94.3% and the average monthly rent collected per occupied unit was $463.
The table below indicates the geographic locations of the Properties in
which the Trust had an ownership interest at December 31, 1998:
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STATE SITES PROPERTIES UNITS
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Florida 3 3 197
Kentucky 1 1 168
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4 4 365
=== === ======
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Exchange Offering
The Operating Partnership has filed a registration statement on Form S-4
with the Securities and Exchange Commission covering up to 2,500,000 units of
limited partnership interest ("Units") to be registered under the Securities Act
of 1933, as amended (the "Act") ("Exchange Offering").
It is proposed that these units would be exchanged 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 Exchange Partnerships are managed by
corporate general partners (the "Corporate General Partners") which are
affiliated with one of the founders of the Operating Partnership, Gregory K.
McGrath, who is the sole stockholder and director of the Managing Shareholder of
the Trust. This registration statement has not yet become effective.
The number of Units being offered in exchange for the limited partnership
interests in the Exchange Partnerships will be 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 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
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registered under the Act.
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.
Investment Objectives
The Trust and the Operating Partnership have been organized to acquire
equity interests in residential apartment properties located in the United
States and/or to provide or acquire mortgage loans secured by such types of
property. Such investments are expected to consist primarily of: (i) the direct
and indirect acquisition, ownership, operation, management, improvement and
disposition of equity interests in such types of properties and/or (ii) mortgage
loans which the Trust and the Operating Partnership provide or acquire which are
secured by mortgages on such types of properties. It is expected that the
proposed investments will(1) generate current cash flow for distribution to
Shareholders from rental payments from the rental of residential apartment units
which the Trust and the Operating Partnership may acquire and/or principal and
interest payments in respect of mortgage loans which the Trust and the Operating
Partnership may provide or acquire and (2), where applicable, provide the
opportunity for capital appreciation of residential apartment properties. The
Trust intends to pay regular quarterly distributions to the Shareholders.
Properties in which the Trust and the Operating Partnership acquire an interest
are expected to use the straight-line method of depreciation over 30 years.
The management of the Trust and the Operating Partnership has been
involved in the residential property business for over 10 years and has
extensive experience and presence in the residential property business which
have enabled it to form key alliances and working relationships with owners of
residential apartment properties and financial institutions.
The Trust and the Operating Partnership intend to acquire, own, operate,
manage, and improve residential apartment property interests for long-term
ownership, and thereby to seek to maximize current and long-term income and the
value of its assets. The strategy of the Trust and the Operating Partnership is
to pursue acquisitions of interests in properties that (i) are available at
prices below estimated replacement cost; (ii) may provide attractive returns
with significant potential growth in cash flow from property operations; (iii)
are strategically located, of high quality and competitive in their respective
markets; (iv) have been under-managed or are otherwise capable of improved
performance through intensive management and leasing that will result in
increased occupancy and rental revenues, and (v) provide anticipated total
returns that will increase distributions by the Trust and the Operating
Partnership and their overall market value. The Trust will make investments in
properties indirectly through the Operating Partnership in which it will hold
all of its real estate assets and conduct all real estate operations.
The primary business objective of the Trust is to increase distributions
to Shareholders and to increase the value of the Trust's portfolio of properties
in which it
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acquires an interest. The Trust intends to achieve these objectives by:
(i) Acquiring interests in properties that are available at prices below
estimated replacement cost and capable of enhanced performance, both in terms of
cash flow and investment value, through application of the Trust's management
ability and strategic capital improvements;
(ii) Increasing cash flow of the Trust's property interests through
active leasing, rent increases, improvements in tenant retention, expense
controls, effective property management, and regular maintenance and periodic
renovations, including additions to amenities;
(iii) Managing operating expenses through the use of affiliated leasing,
marketing, financing, accounting, legal, and data processing functions; and
(iv) Emphasizing capital improvements to enhance the Trust's competitive
advantages in its markets.
The Trust and the Operating Partnership intend to provide or acquire
subordinated mortgage loans which provide for the payment of a fixed or
adjustable rate of interest plus, in certain cases, participation interest that
is payable out of available cash flow remaining after the payment of operating
expenses and debt service requirements and/or out of net proceeds from the sale
or refinancing of such property remaining after the payment of transaction
expenses and indebtedness secured by such property. The repayment of such loans
would be secured by a subordinated mortgage on the underlying property. The
Trust will not provide or acquire mortgage loans in respect of any property
where the amount invested by the Trust or the Operating Partnership plus the
amount of any existing indebtedness in respect of such property exceeds 80% of
the property's estimated replacement cost new unless substantial justification
exists.
Results of Operations
The Trust commenced operations on February 3, 1998. Through its Operating
Partnership, it started acquiring interests in Properties including the total
limited partnership interests in Heatherwood I Apartments in June, 1998; Crystal
Court II Apartments in July 1998; and Riverwalk Apartments in September, 1998.
In July it acquired a limited partnership interest in 20 real estate
partnerships managed by affiliates of the managing Shareholder of the Trust. In
October, 1998 it acquired a 12.3 percent interest in Alexandria Apartments (see
ITEM 2 - DESCRIPTION OF PROPERTIES). The table below summarizes the Results of
Operations for the partial year ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
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<S> <C>
Property Revenues $ 394,104
Property Income (Loss) $ (211,911)
Administrative Expenses $ 1,238,939
(net of Interest Income)
Net Loss $(1,450,850)
Total Assets $ 7,731,515
Shareholders Equity $ 2,834,092
</TABLE>
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Competition
The apartment industry is highly competitive and fragmented with numerous
owners and developers competing with the Trust on a national, regional and local
basis. Competition for residents of apartment communities is subject to the
conditions and pricing of individual units, local market conditions, the
location of the apartment community and other factors. In addition, other forms
of housing, including manufactured housing communities and single family homes
provide alternatives to potential residents.
The Trust's current Portfolio is diversified across 4 metropolitan areas
throughout Florida and Kentucky. The Trust's Properties tend to be located in
urban, suburban and secondary markets, where the Trust competes locally with
other apartment communities.
Environmental
The Trust is subject to Federal, state, and local environmental
regulations that apply to the development of real property, including
construction activities, the ownership of real property, and the operation of
multifamily apartment communities.
The Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C. 9601, et seq. ("CERCLA"), and applicable state Superfund laws subject
the owner of real property to claims or liability for the costs of removal or
remediation of hazardous substances that are disposed of on real property in
amounts that require removal or remediation. Liability under CERCLA and
applicable state Superfund laws can be imposed on the owner of real property or
the operator of a facility without regard to fault or even knowledge of the
disposal of hazardous substances on the property or at the facility. The
presence of hazardous substances in amounts requiring response action or the
failure to undertake remediation where it is necessary may adversely affect an
owner's ability to sell real estate or borrow money using such real estate as
collateral. In addition to claims for cleanup costs, the presence of hazardous
substances on a property could result in a claim by a private party for personal
injury or a claim by an adjacent property owner for property damage.
The Trust, where required, intends to retain a qualified environmental
consultant to conduct an environmental investigation of each property that it
considers for investment. If there is any indication of contamination, sampling
of the property will be performed by the environmental consultant. The
environmental investigation report will be reviewed by the Trust and counsel
prior to purchase of an interest in any property.
Employees
The Trust and the Operating Partnership currently employ a total of 17
employees.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company has executive and administrative offices, financial
operations and a portion of property operations located in 120 and 4,800 square
feet of space in two buildings located at 7826 and 7809 Cooper Road, Cincinnati,
Ohio 45242 respectively. The Company shares the space in 7826 Cooper Road with
other companies affiliated with the Managing Shareholder of the Trust. The space
at 7809 Cooper Road was leased in May, 1998 from Grammas Development Company, an
unaffiliated entity, for a term of 5 years and one month. Management believes
that the lease terms are competitive with commercial lease rates in the
Cincinnati market.
Set forth below is a description of the Operating Partnership's
acquisition between June and December 1998 of beneficial ownership of 67-unit,
80-unit, and 50-unit residential apartment properties located in Orlando,
Lakeland and New Smyrna Beach, Florida, respectively, and a 12.3% interest in a
168-unit residential apartment property located in Alexandria, Kentucky, and a
limited partnership interest in 20 real estate partnerships managed by
affiliates of the Managing Shareholder of the Trust. Also
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described is a purchase agreement recently entered into by the Trust under which
the Trust, subject to certain conditions, will acquire two residential apartment
properties (totaling 652 units) under development in Burlington and Louisville,
Kentucky upon completion of construction.
Heatherwood I Apartments
In June 1998, the Operating Partnership acquired the entire limited
partnership interest in Heatherwood Kissimmee, Ltd., a Florida limited
partnership (the "Heatherwood Partnership") which owns fee simple title to a
67-unit residential apartment property referred to as the Heatherwood Apartments
- - Phase I (the "Heatherwood Property") located at 1005 Airport Road in
Kissimmee, Florida 32741. Set forth below is certain information describing the
property, first mortgage financing to which the property is subject and the
acquisition by the Operating Partnership of beneficial ownership of the
property.
The Heatherwood Property, completed in 1981, consists of 17 studio/one
bathroom units, 45 one bedroom/one bathroom units, and five two bedroom/one
bathroom units. The property is situated on approximately 2.26 acres and has
approximately 35,136 square feet of rentable area. The average unit size of the
studio, one bedroom and two bedroom units is approximately 288, 576 and 864
square feet, respectively. The average monthly rental rate as of November 1,
1998 for each type of unit is approximately $379, $439 and $539, respectively,
or $1.31, $.76 and $.62 per square foot, respectively. The units were
approximately 91% occupied as of November 1, 1998. The average monthly occupancy
rates for 1993, 1994, 1995, 1996 and 1997 were approximately 89%, 91%, 88%, 93%
and 97%, respectively.
The Operating Partnership acquired the entire limited partnership
interest in the Heatherwood Partnership from an unaffiliated third party, Rylex
Capital, L.L.C., a Florida limited liability company, for a purchase price of
$830,000. The purchase price was determined by the parties in an arm's-length
negotiation. The Heatherwood Property is subject to first mortgage financing
with a current principal balance of approximately $1,239,000. The mortgage is
held by GMAC Commercial Mortgage Corp. The maturity date of the first mortgage
loan is December 2004. Assuming no prepayments of principal, the balance that
will be due at maturity is approximately $1,083,553. The monthly debt service
payments are $8,847, or an annual amount of $106,164. The loan bears a fixed
interest rate of 7.625% and amortizes on a 30-year basis. The loan is prepayable
with a prepayment fee equal to 1% of the then outstanding principal balance.
Crystal Court II Apartments
In July 1998, the Operating Partnership acquired the entire limited
partnership interest in Crystal Court Apartments II, Ltd., a Florida limited
partnership (the "Crystal Court Partnership") which owns fee simple title to
an80-unit residential apartment property referred to as Crystal Court Apartments
- - Phase II (the "Crystal Court Property") located in Lakeland, Florida. Set
forth below is certain information describing the property, first mortgage
financing to which the property is subject and the acquisition by the Operating
Partnership of beneficial ownership of the property.
The Crystal Court Property, completed in 1986, consists of 20 studio/one
bathroom units, 54 one bedroom/one bathroom units, and six two bedroom/one
bathroom units. The property is situated on approximately 6.8 acres and has
approximately 42,048 square feet of rentable area. The average unit size of the
studio, one bedroom and two bedroom units is approximately 288, 576 and 864
square feet, respectively. The average monthly rental rate as of November 1,
1998 for each type of unit is approximately $319, $369 and $455, respectively,
or $1.11, $.64and $.53 per square foot, respectively. The units were
approximately 98%occupied as of November 1, 1998. The average monthly occupancy
rates for 1993,1994, 1995, 1996 and 1997 were approximately 95%, 91%, 91%, 90%
and 95%,respectively.
The Operating Partnership acquired the entire limited partnership
interest in the
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Crystal Court Partnership from an unaffiliated third party, Rylex Capital,
L.L.C., a Florida limited liability company, for a purchase price of
approximately $704,000. The purchase price was determined by the parties in an
arm's-length negotiation. The Crystal Court Property is subject to first
mortgage financing with a current principal balance of approximately $1,478,000.
The mortgage is held by GMAC Commercial Mortgage Corp. The maturity date of the
first mortgage loan is October 2004. Assuming no prepayments of principal, the
balance that will be due at maturity is approximately $1,366,490. The monthly
debt service payments are $10,446, or an annual amount of $125,352. The loan
bears a fixed interest rate of 7.5% and amortizes on a 30-year basis. The loan
is prepayable with a prepayment fee equal to 1% of the then outstanding
principal balance.
Riverwalk Apartments
In September 1998, the Operating Partnership acquired the entire limited
partnership interest in Riverwalk Enterprises, Ltd., a Florida limited
partnership ("Riverwalk"), which owns fee simple title to a 50-unit residential
apartment property located at 47 Jacaranda Cay Court, New Smyrna Beach, Florida
32169 (the "Riverwalk Property"). Simultaneously, an affiliate of the Operating
Partnership, Riverwalk, LC, a Florida limited liability company, acquired the
general partnership interest in Riverwalk. Riverwalk, LC was organized for the
express purpose of acquiring such general partnership interest. Gregory K.
McGrath, the Chief Executive Officer of the Operating Partnership and the Trust,
is the manager of Riverwalk, LC. The Operating Partnership owns 99% of the
membership interests in Riverwalk, LC. The remaining 1% membership interest is
nominally held by the Managing Shareholder of the Trust, as agent for the
Operating Partnership.
The Riverwalk Property, completed in 1986, consists of 50 two bedroom
units. Forty-five units have two bathrooms and five have one bathroom. The
property is located directly on the intracoastal waterway and was originally
built for condominium sale. The Operating Partnership will operate the property
as a rental community for the indefinite future. As of November 1, 1998, the
property was 92% occupied. The average year to date occupancy has been 96%. The
average monthly occupancy for 1997 was 95%. The property has 51,024 square feet
of rentable space, or approximately 1,020 square feet per unit. The current rent
per square foot is approximately $.55. The average monthly rental rate is
approximately $565 per unit.
The Operating Partnership acquired the Riverwalk limited partnership
interests from 12 unaffiliated individuals. Riverwalk, LC acquired the Riverwalk
general partnership interest from Riverwalk Enterprises, Inc., whose principal
was Michael Green. Mr. Green is not affiliated with the Trust or the Operating
Partnership. The sale was subject to a first mortgage of approximately
$1,330,000, held by TMG Life Insurance Company. The current principal balance
of the mortgage is approximately $1,323,000. The mortgage matures in October
2004 and has a current interest rate of 8.75%. The holder of the first mortgage
has a right to adjust the rate in October 1999 for the remaining five years of
the loan, to a rate equal to 200 basis points above the then current rate for
five-year treasury notes. Assuming no prepayments of principal, the balance that
will be due at maturity is approximately $1,151,636. The monthly debt service
payments are $11,626, or an annual amount of $139,510. Prepayment is permitted
at any time, subject however to a yield maintenance termination fee calculated
in accordance with the terms of the loan.
Alexandria Property
In October 1998, the Operating Partnership acquired an approximately
12.3% limited partnership interest in Alexandria Development, L.P. (the
"Alexandria Partnership"), a Delaware limited partnership which is the owner and
developer of a 168-unit residential apartment property under construction in
Alexandria, Kentucky. 98 of the 168 residential units (approximately 58%) have
been completed as of March 31, 1999 and are in the rent-up stage. As of November
1, 1998, 25 units have been rented at an average monthly rental rate of $687.
The Operating Partnership paid $400,000 for the acquired partnership interest
and retains an option to acquire the remaining limited partnership interests at
the same price
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per percentage interest (for a total price of approximately $3,250,000 for the
entire limited partnership interest). The option is exercisable as additional
apartment buildings are completed and rented. An affiliate of Mr. McGrath sold
the partnership interest in the Alexandria Partnership to the Operating
Partnership and also serves as its managing general partner. During the
construction stage of the apartment property, the Operating Partnership's
limited partnership interest in the Alexandria Partnership 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.
Acquisition of Limited Partnership Interests
In July 1998, the Operating Partnership also was admitted as a limited
partner in 13 real estate limited partnerships managed by affiliates of the
Managing Shareholder of the Trust. The Operating Partnership acquired the
interests in consideration of a capital contribution ranging from approximately
$2,900 to $83,300 in each such partnership. The aggregate contribution made by
the Operating Partnership was approximately $341,000. The percentage interest
acquired by the Operating Partnership (less than 4% in each case) was calculated
at fair market value. In each instance, the Operating Partnership agreed that
its right to receive distributions from cash flow or from a capital event would
be subordinate to the right of the existing limited partners to receive any
preferred return described in the partnership agreement of the respective
partnership.
Contract to Purchase Two 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 Gregory K. McGrath,
one of the founders of the Operating Partnership. The properties are scheduled
to have a total of 652 units, comprised of studios and 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 having funds available to make the acquisition.
ITEM 3. LEGAL PROCEEDINGS
The Trust is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the common shares
of the Trust.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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The following discussion should be read in conjunction with the
Trust's Consolidated Financial Statements and Notes thereto. (SEE ITEM 7 -
"FINANCIAL STATEMENTS").
a. Plan of Operation
The Trust commenced operations on February 3, 1998, at which time it
received its initial capital contribution. Through its Operating Partnership, it
started acquiring interests in properties including the total limited
partnership interests in Heatherwood I Apartments in June, 1998; Crystal Court
II Apartments in July 1998; and Riverwalk Apartments in September, 1998. In
July, 1998 it acquired a limited partnership interest in 13 real estate limited
partnerships managed by affiliates of Gregory K. McGrath (Chief Executive
Officer of the Trust and a founder of the Operating Partnership). In October,
1998, the Trust acquired a 12.3 percent interest in Alexandria Apartments (see
ITEM 2 - DESCRIPTION OF PROPERTIES).
The Trust plans to continue raising equity under the $25,000,000 Cash
Offering which will terminate on November 30, 1999. Through March 31, 1999 the
Trust has raised $5,838,403. The net cash proceeds from the issuance of Common
Shares in connection with the Cash Offering and the net cash proceeds of any
subsequent issuance of Common Shares will be contributed by the Trust to the
Operating Partnership in exchange for an equivalent number of Units in the
Operating Partnership. The Operating Partnership will use the net cash proceeds
of the offering, unissued units of limited partnership interest in the Operating
Partnership or a combination of net cash proceeds and unissued units to acquire
interests in residential apartment properties or interests in other partnerships
substantially all of whose assets consist of residential apartment property
interests, and payment of fees and expenses as described in the Cash Offering
Prospectus, dated May 15, 1998. The Trust has the ability to satisfy its 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 Operating Partnership intends to conduct an Exchange Offering under
which it will offer to issue Units to be registered under the Act with an
initial assigned value of $25,000,000, in exchange for limited partnership
interests in real estate limited partnerships which directly or indirectly own
interests in residential apartment properties (see ITEM 1 - DESCRIPTION OF
BUSINESS; EXCHANGE OFFERING). The Trust and the Operating Partnership intend to
investigate making an additional public or private offering of Common Shares
and/or Units within the next 12 months.
The Registrant and the Operating Partnership expect no significant change
in the number of employees over the next 12 months.
b. Year 2000 Issue
Although the computer systems of the Trust and the Operating Partnership
have been tested for year 2000 problems and management believes that such
systems are year 2000 compatible, it is possible that certain computer systems
or software products of their suppliers may experience year 2000 problems and
that such problems could adversely affect their operations. The Trust is in the
process of inquiring as to the progress of the principal suppliers of the Trust
and the Operating Partnership 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 Trust 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. The
failure to identify and solve all year 2000 problems affecting them could have
an adverse effect on the business, financial condition and results of operations
of the Trust and the Operating Partnership.
9
<PAGE> 13
c. 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 Trust'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 Trust'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 Trust does not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this Report. If the Trust does update one or
more forward-looking statements, investors and others should not conclude that
the Trust will make additional updates with respect thereto or with respect to
other forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS
10
<PAGE> 14
BARON CAPITAL TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F-2
Statement of Operations F-3
Statement of Shareholders' Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6 TO F-19
</TABLE>
<PAGE> 15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees and Stockholders
Baron Capital Trust
Cincinnati, Ohio
We have audited the accompanying consolidated balance sheet of Baron Capital
Trust (the "Trust") as of December 31, 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows from inception
(February 3, 1998) to December 31, 1998. These consolidated financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Baron
Capital Trust as of December 31, 1998, and the consolidated results of their
operations and their cash flows from inception (February 3, 1998) to December
31, 1998, in conformity with generally accepted accounting principles.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
April 13, 1999
F-1
<PAGE> 16
BARON CAPITAL TRUST
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Rental Apartments:
Land $ 1,178,693
Depreciable property 6,189,095
-----------
7,367,788
Less accumulated depreciation 1,246,627
-----------
6,121,161
Investments in Partnerships 730,330
Cash and Cash Equivalents 177,299
Restricted Cash 66,199
Property Management Reimbursements Receivable, Affiliates 155,071
Other Receivables 80,112
Advances to Affiliates 10,750
Other Property and Equipment 168,982
Other Assets 221,611
-----------
$ 7,731,515
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 4,039,718
Note payable 375,000
Accounts payable and accrued liabilities, including
$136,941 to Managing Shareholder 388,385
Capital lease obligation 55,984
Security deposits 38,336
-----------
Total liabilities 4,897,423
-----------
Commitments, Contingencies and Other Matters -
Shareholders' Equity:
Common shares of beneficial interest, no par value; 2,500,000
shares authorized; 463,650 shares issued and outstanding 4,257,101
Operating Partnership limited partnership units; 1,202,160
units issued and outstanding, which are subject to escrow
restrictions (108,757 units convertible into common shares) 100,000
Deficit (1,450,850)
Distributions (72,159)
-----------
Total shareholders' equity 2,834,092
-----------
$ 7,731,515
===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 17
BARON CAPITAL TRUST
CONSOLIDATED STATEMENT OF OPERATIONS
FROM INCEPTION (FEBRUARY 3, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues:
Property:
Rental $ 358,949
Other 35,155
Interest income 2,780
-----------
396,884
-----------
Real Estate Expenses:
Depreciation 80,296
Interest 164,333
Repairs and maintenance 86,349
Personnel 53,860
Property taxes 34,496
Property insurance 20,477
Utilities 27,299
Other 138,905
-----------
606,015
-----------
Administrative Expenses:
Personnel 721,715
Management, investment and administrative fees,
Managing Shareholder 324,213
Professional services 175,646
Other 20,145
-----------
1,241,719
-----------
Total expenses 1,847,734
-----------
Net Loss $(1,450,850)
===========
Net Loss Per Common Share $ (5.52)
===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 18
BARON CAPITAL TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FROM INCEPTION (FEBRUARY 3, 1998) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Shares of Limited
Beneficial Interest Partnership Units
------------------- ------------------------ Distributions
Shares Amount Units Amount Deficit Paid Total
------ ------ ----- ------ -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Capital Contributions:
Managing Shareholder 10 $ 100 - $ - $ - $ - $ 100
Founders - - 1,202,160 100,000 - - 100,000
Proceeds from Sale of Common
Shares of Beneficial
Interest, Net of Offering
Costs 463,640 4,257,001 - - - - 4,257,001
Dividends Paid - - - - - (72,159) (72,159)
Net Loss - - - - (1,450,850) - (1,450,850)
------- ----------- --------- --------- ----------- -------- -----------
Balance, December 31, 1998 463,650 $ 4,257,101 1,202,160 $ 100,000 $(1,450,850) $(72,159) $ 2,834,092
======= =========== ========= ========= =========== ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 19
BARON CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM INCEPTION (FEBRUARY 3, 1998) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss $(1,450,850)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 80,296
Increase in operating assets and liabilities:
Other receivables (80,112)
Property management reimbursements receivable (155,071)
Other assets (221,611)
Accounts payable and accrued liabilities 388,385
Security deposits 38,336
Other (8,088)
-----------
Net cash used by operating activities (1,408,715)
-----------
Cash Flows from Investing Activities:
Acquisitions of rental apartments (1,559,162)
Investment in partnerships, net of cash distributions (730,330)
Purchases of other property and equipment (117,771)
Advances to affiliates (10,750)
-----------
Net cash used in investing activities (2,418,013)
-----------
Cash Flows from Financing Activities:
Proceeds from sale of common shares of beneficial interest 4,265,089
Dividends paid (72,159)
Initial capital contributions 100,100
Payment on note payable (200,000)
Payments on mortgages payable (19,019)
Payments on capital lease obligation (3,785)
-----------
Net cash provided by financing activities 4,070,226
-----------
Net Increase in Cash and Cash Equivalents 243,498
Cash and Cash Equivalents, Beginning -
-----------
Cash and Cash Equivalents, Ending $ 243,498
===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for mortgage and other interest $ 164,333
===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 20
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, constitute an
integrated real estate company which has 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
accounts of the Trust and the Operating Partnership and all of
the Trust's interest in the partnerships that own Heatherwood
Kissimmee, Ltd., Riverwalk Enterprises, Ltd., and Crystal Court
Apartments II, Ltd.
All significant inter-company transactions and balances have
been eliminated in consolidation.
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.
F-6
<PAGE> 21
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATIONS OF CREDIT RISK (Continued)
Property Management Reimbursements and Other Receivables
Receivables are comprised mainly of property management
reimbursements due to the Operating Partnership from various
properties it manages and monthly rents due. The Operating
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 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>
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.
F-7
<PAGE> 22
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS IN PARTNERSHIPS
The Trust's investments in unconsolidated partnerships are
accounted for on the cost method inasmuch as the respective
ownership interests represent less than 20% of the equity
ownership therein. The Trust periodically assesses the
realizable value of these investments in order to ascertain
that there has been no impairment in their recorded value.
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 the estimated term
of the financing of ten years.
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.
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.
F-8
<PAGE> 23
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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 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. RENTAL APARTMENTS
HEATHERWOOD APARTMENTS
On June 30, 1998, the Operating Partnership acquired the entire
limited partnership interest in Heatherwood Kissimmee, Ltd.,
(the "Heatherwood Property") a Florida limited partnership
which owns fee simple title to a 67-unit residential property
located at Kissimmee, Florida for
F-9
<PAGE> 24
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. RENTAL APARTMENTS (Continued)
HEATHERWOOD APARTMENTS (Continued)
a purchase price of approximately $830,000. The Heatherwood
Property is subject to first mortgage financing with an
original balance of approximately $1,250,000 collateralized by
the property. The mortgage calls for monthly payments of
principal and interest of $8,847 and bears a fixed interest
rate of 7.625%. The entire balance, including accrued interest,
is due on December 2004 and may be prepaid with a prepayment
fee equal to 1% of the then outstanding principal balance. The
principal balance outstanding as of December 31, 1998 was
$1,238,755.
Subsequent to December 31, 1998, the Operating Partnership
received $7,000 in distributions from the Heatherwood Property.
CRYSTAL COURT APARTMENTS
On July 31, 1998, the Operating Partnership acquired the entire
limited partnership interest in Crystal Court Apartments II,
Ltd., (the "Crystal Court Property") a Florida limited
Partnership which owns fee simple title to an 80-unit
residential apartment property located in Lakeland, Florida for
a purchase price of approximately $704,000. The Crystal Court
Property is subject to first mortgage financing with an
original balance of $1,494,000 collateralized by the property.
The mortgage calls for monthly payments of principal and
interest of $10,446 and bears a fixed interest rate of 7.5%.
The entire balance, including accrued interest, is due on
October 2004 and may be prepaid with a prepayment fee equal to
1% of the then outstanding principal balance. The principal
balance outstanding as of December 31, 1998 was $1,477,797.
Subsequent to December 31, 1998, the Operating Partnership
received $20,000 in distributions from the Crystal Court
Property.
RIVERWALK APARTMENTS
On September 1, 1998, the Operating Partnership acquired the
entire limited partnership interest in Riverwalk Enterprises,
Ltd., (the "Riverwalk Property") a Florida limited partnership
which owns fee simple title to a 50-unit residential property
located at New Smyrna Beach, Florida for a purchase price of
approximately $700,000. The Riverwalk Property is subject to
first mortgage financing with an original balance of
approximately $1,400,000 collateralized by the property. The
mortgage calls for monthly payments of principal and interest
of $11,626 and bears a fixed interest rate of 8.75% amortized
over 25 years. The holder of the first mortgage has the right
to adjust the rate in October 1999 for the remaining five years
of the loan to a rate equal to 200 basis points above the then
current rate for five-year treasury notes. The entire balance,
including accrued interest, is due on October 2004 and may be
prepaid with a prepayment fee equal to 1% of the then
outstanding principal balance. The principal balance
outstanding as of December 31, 1998 was $1,323,166.
F-10
<PAGE> 25
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. RENTAL APARTMENTS (Continued)
RIVERWALK APARTMENTS (Continued)
In connection with the purchase of the Riverwalk Property, the
Trust executed a promissory note payable to the sellers of the
Riverwalk Property with an original balance of $575,000. The
note called for a lump-sum payment of principal and accrued
interest at a rate of 18% per annum on December 1, 1998. In
December 1998, the Operating Partnership paid $226,163 of
principal and interest towards the note and exercised its
option to extend the maturity of the note to February 1, 1999
for an extension fee of one (1%) percent of the original loan
amount or $5,750. The principal balance outstanding as of
December 31, 1998 was $375,000.
Subsequent to December 31, 1998, the Operating Partnership
exercised another option to extend the note to June 1, 1999 for
an extension fee of one (1%) percent of the outstanding loan
amount or $3,750. Also, subsequent to December 31, 1998, the
Operating Partnership received $17,000 in distributions from
the Riverwalk Property.
NOTE 3. INVESTMENTS IN PARTNERSHIPS
<TABLE>
<CAPTION>
<S> <C>
Alexandria Property, net of distributions $389,050
Other Limited Partnership Interests 341,280
-------
$730,330
=======
</TABLE>
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 October 15, 1999. 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.
Subsequent to December 31, 1998, the Operating Partnership
exercised its option to purchase an additional fourteen (14)
units of limited partnership interest for $675,000. In
addition, $12,000 was distributed to the Operating Partnership.
F-11
<PAGE> 26
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. INVESTMENTS IN PARTNERSHIPS (Continued)
OTHER LIMITED PARTNERSHIP INTERESTS
In July 1998, the Operating Partnership also was admitted as a
limited partner in 13 real estate limited partnerships managed
by affiliates of the Managing Partnership. The Operating
Partnership acquired the interests in consideration of a
capital contribution ranging from approximately $2,900 to
$83,300 in each such partnership. The aggregate contribution
made by the Operating Partnership was approximately $341,000.
The percentage interest acquired by the Operating Partnership
(less than 4% in each case) was calculated at fair market
value. In each instance, the Operating Partnership agreed that
its right to receive distributions from cash flow or from a
capital event would be subordinate to the right of the existing
limited partners to receive any preferred return described in
the partnership agreement of the respective partnership.
NOTE 4. OTHER PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
<S> <C>
Furniture and equipment $112,272
Computer equipment and software 44,455
Leasehold improvements 20,813
-------
177,540
Less accumulated depreciation 8,558
-------
$168,982
=======
</TABLE>
NOTE 5. MORTGAGES PAYABLE
<TABLE>
<CAPTION>
Balance at
Original Maturity Interest December 31,
Property Amount Date Rate 1998
-------- ------ ---- ---- ----
<S> <C> <C> <C> <C>
Heatherwood Apartments $1,250,000 12/31/2004 7.625% $1,238,755
Crystal Court Apartments 1,494,000 10/31/2004 7.5 1,477,797
Riverwalk Apartments 1,400,000 10/31/2004 8.75 1,323,166
--------- ---------
Total mortgage note payables $4,139,000 $4,039,718
========= =========
</TABLE>
All mortgage notes payable are collateralized by the underlying
properties described in Note 2 above.
The aggregate maturities of mortgages payable for each of the
five years subsequent to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Principal
---------
Year ending December 31:
<S> <C>
1999 $ 50,544
2000 54,799
2001 59,415
2002 64,420
2003 69,872
Thereafter (2004) 3,740,668
---------
Total $4,039,718
=========
</TABLE>
F-12
<PAGE> 27
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. CAPITAL LEASE OBLIGATION
During 1998, the Operating Partnership purchased office furniture
financed through a capital lease obligation. The loan is
non-interest bearing, secured by the office furniture purchased and
requires forty-eight (48) monthly payments of $1,245. Future minimum
capital lease payments and the net present value of the future
minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31:
<S> <C>
1999 $14,942
2000 14,942
2001 14,942
2002 11,158
------
Total minimum lease payments $55,984
======
</TABLE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
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 December 31, 1998, approximately
$4,600,000 of such loans had been drawn down, resulting in
outstanding guarantees of approximately $1,600,000. 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.
F-13
<PAGE> 28
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. COMMITMENTS AND CONTINGENCIES (Continued)
CONTRACT TO PURCHASE ADDITIONAL PROPERTIES (Continued)
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 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.
OFFICERS' COMPENSATION
A founder of the Trust and the Operating Partnership serves as
Chief Executive Officer of the Trust, the Operating Partnership
and the Managing Shareholder. He has agreed to serve a Chief
Executive Officer for the first year in exchange for
compensation in the form of common shares in an amount not to
exceed 25,000 shares to be determined by the Executive
Compensation Committee based upon his performance, in addition
to benefits and eligibility for participation in any option
plan and bonus incentive compensation plan which may be
implemented by the Trust.
The other founder of the Trust and Operating Partnership serves
as the Chief Operating Officer of the Trust, the Operating
Partnership and the Managing Shareholder. His initial annual
salary has been set at $100,000, in addition to benefits, and
eligibility for participation in any common share option plan
and bonus incentive compensation plan which may be implemented
by the Trust.
OPERATING LEASES
During 1998, the Operating Partnership executed an operating
lease for its office facilities. The lease, which expires in
June 15, 2003, requires monthly payments of $5,000. The
Operating Partnership has three options of five years each to
extend its lease for a total of fifteen additional years.
Minimum future lease payments on this lease are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 60,000
2000 60,000
2001 60,000
2002 60,000
2003 30,000
-------
Total $270,000
=======
</TABLE>
Rent expense was approximately $ 24,000 for 1998.
F-14
<PAGE> 29
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. RELATED PARTY TRANSACTIONS
TRUST MANAGEMENT AGREEMENT
The Trust has entered into a Trust Management Agreement with
the Managing Shareholder under which the Managing Shareholder
is obligated to provide management, administrative and
investment advisory services to the Trust. The services to be
rendered include, among other things, communicating with and
reporting to investors, administering accounts, providing to
the Trust of office space, equipment and facilities and other
services necessary for the Trust's operation, and representing
the Trust in its relations with custodians, depositories,
accountants, attorneys, brokers and dealers, corporate
fiduciaries, insurers, banks and others, as required. The
Managing Shareholder is also responsible for determining which
real estate investments and non-real estate investments
(including the temporary investment of the Trust's available
funds prior to their commitment to particular real estate
investments) the Trust will make and for making divestment
decisions, subject to the provisions of the Declaration. The
Trust Management Agreement has an initial term of one year and
may be extended on a year-to-year basis on approval of (i) the
Board or a majority of the stockholders entitled to vote on
such matter or (ii) a majority of the Independent Trustees.
The Trust will reimburse the Managing Shareholder for all Trust
expenses in an amount not to exceed 2% of gross proceeds from
the sale by the Trust of common shares in the Trust's initial
offering. As compensation for the Managing Shareholder's
performance under the Trust Management Agreement, beginning
June 1, 1998, the Trust will pay to the Managing Shareholder,
on a monthly basis during the term of the agreement, an annual
management fee in the sum of (i) 1% of the gross proceeds from
the sale by the Trust of common shares in the Trust's initial
offering, and (ii) 1% of the initial stock price for each unit
of limited partnership interest ("Unit") in the Operating
Partnership issued in connection with a Proposed Exchange
Offering of Units as contemplated in the Trust's Prospectus,
(iii) an investment fee in an amount equal to 4% of the gross
proceeds from the sale by the Trust of common shares in the
Trust's initial offering for the Managing Shareholder's
services in investigating and evaluating investment
opportunities and assisting the Trust in consummating its
investments. The Managing Shareholder in its sole discretion
may elect to receive payment for its service in the form of
common shares with an equivalent value.
During 1998, the Trust paid the Managing Shareholder $92,393
for reimbursable expenses, $185,456 for investment fees and
$46,364 as management fees. As of December 31, 1998, $136,941
is due to the Managing Shareholder for reimbursable expenses
and investment fees.
TRANSACTIONS WITH AFFILIATED ENTITIES
During 1998, the Operating Partnership paid approximately
$12,000 to an affiliated corporation for computers being used
by the Operating Partnership.
F-15
<PAGE> 30
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. RELATED PARTY TRANSACTIONS (Continued)
PROPERTY MANAGEMENT REIMBURSEMENTS
The Operating Partnership is reimbursed for administrative
expenses relating to the management of 36 rental properties
affiliated to the Trust through common ownership. During 1998,
the Operating Partnership was reimbursed for approximately
$496,000 in expenses relating to administrative duties
performed for the rental properties.
ADVANCES
From time to time, the Operating Partnership advances funds to
affiliates. These advances do not accrue interest and are due
on demand. As of December 31, 1998, the Operating Partnership
had advanced $10,750 to two affiliates.
NOTE 9. 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 will
terminate no later than November 30, 1999.
EXCHANGE OFFERING
The Operating Partnership has filed a registration statement on
Form S-4 with the Securities and Exchange Commission covering
up to 2,500,000 units of limited partnership interest ("Units")
to be registered under the Securities Act of 1933, as amended
(the "Act") ("Exchange Offering").
It is proposed that these units would be exchanged 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 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. This registration statement has not yet become
effective.
F-16
<PAGE> 31
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SHAREHOLDERS' EQUITY (Continued)
EXCHANGE OFFERING (Continued)
The number of Units being offered in exchange for the limited
partnership interests in the Exchange Partnerships will be
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 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
F-17
<PAGE> 32
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SHAREHOLDERS' EQUITY (Continued)
OPERATING PARTNERSHIP LIMITED PARTNERSHIP UNITS (Continued)
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 May 14, 1999, 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.
Based upon the total Common Shares outstanding as of December
31, 1998, the Original Investors would be entitled to exchange
their limited partnership units for a net amount of 108,757
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 10).
NOTE 10. NET LOSS PER SHARE
The Trust computes per share data in accordance with 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 in 1998.
The components used in calculating basic net loss per share are as
follows:
<TABLE>
<CAPTION>
Weighted
Average Loss
Net Loss Shares (a) Per Share
-------- ---------- ---------
<S> <C> <C> <C>
1998 $(1,450,850) 262,631 $(5.52)
========== ======= =====
</TABLE>
(a) Weighted average shares are comprised of the following:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Investors 212,731
Founders (on an as-converted basis) 49,900
-------
Total 262,631
=======
</TABLE>
F-18
<PAGE> 33
BARON CAPITAL TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
During 1998, the Operating Partnership acquired three rental
apartment properties through the assumption of mortgage payables and
a note payable, as follows:
<TABLE>
<S> <C>
Mortgages payable $4,058,737
Note payable 575,000
---------
$4,633,737
=========
</TABLE>
Also, the Operating Partnership acquired furniture and equipment in
1998 by means of capital lease financing in the amount of $59,769.
F-19
<PAGE> 34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. TRUSTEES, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS'
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The persons who serve as Trustees and executive officers1/ of the
Trust and the Operating Partnership, their ages and respective positions are set
forth below. The term of each independent trustee is one year.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James H. Bownas 51 Trustee
Peter M. Dickson 48 Trustee
Gregory K. McGrath2/ 37 Chief Executive Officer - Trust and Operating Partnership
Robert S. Geiger3/ 48 Chief Operating Officer - Trust and Operating Partnership
Robert L. Astorino 52 President - Operating Partnership
Mark L. Wilson 52 Interim Chief Financial Officer - Operating Partnership
Mary E. Keane 45 Vice President - Accounting Operating Partnership
</TABLE>
- -------------------------
1/The Trust has entered into a Trust Management Agreement with
Baron Advisers, Inc., (the "Managing Shareholder") under which the
Managing Shareholder is obligated to provide management, administrative
and investment advisory services to the Trust from the commencement of
the Cash Offering. The services to be rendered include, among other
things, communicating with and reporting to Investors, administering
accounts, providing to the Trust office space, equipment and facilities
and other services necessary for the Trust's operation, and representing
the Trust in its relations with custodians, depositories, accountants,
attorneys, brokers and dealers, corporate fiduciaries, insurers, banks
and others, as required. The Managing Shareholder is also responsible for
determining which real estate investments and non-real estate investments
(including the temporary investment of the Trust's available funds prior
to their commitment to particular real estate investments) the Trust will
make and for making divestment decisions, subject to the provisions of
the Declaration of Trust.
2/Mr. McGrath is Chief Executive Officer, sole shareholder and
sole director of the Managing Shareholder. He is also the Chief Executive
Officer, sole shareholder and director of Baron Properties, Inc., a
Delaware corporation, which is the Corporate Trustee of the Trust.
3/Mr. Geiger serves as the Chief Operating Officer of the Managing
Shareholder.
11
<PAGE> 35
Baron Advisors, Inc. ("Baron Advisers"), the Managing Shareholder of the
Trust, was incorporated in July 1997 as a Delaware corporation. The management
of Baron Advisors has substantial prior experience in and knowledge of the
residential apartment property and single-family housing market and its
financing and experience in the management of investment programs and in
directing their operations. The Chief Executive Officer, sole director and sole
shareholder of Baron Advisors is Gregory K. McGrath and its Chief Operating
Officer is Robert S. Geiger. The Managing Shareholder will be compensated for
its services pursuant to a Trust Management Agreement. Officers and employees of
the Managing Shareholder who perform services on behalf of the Trust will not be
paid any additional compensation by the Trust. Such officers and employees
generally will serve in the same capacity for the Trust and will be compensated
by the Trust in amounts determined by the Managing Shareholder, in the case of
employees, and by the Executive Compensation Committee of the Trust.
Gregory K. McGrath is the Chief Executive Officer, sole director and sole
shareholder of Baron Advisors, Inc. and Chief Executive Officer of the Trust.
Mr. McGrath has over 10 years experience in all aspects of the real estate
industry, including site selection and acquisition, arrangement and closing of
mortgage financing, and property acquisition and management. Between January
1993 and June 1994, Mr. McGrath served as Senior Vice President of Realty
Capital, Inc., a Florida corporation which sponsored real estate limited
partnerships. Mr. McGrath is also the President, sole director and sole
shareholder of Baron Real Estate Services, Inc. ("Baron"), an Ohio corporation
headquartered in Cincinnati, Ohio, which he co-founded in 1989. Mr. McGrath is
also the President, sole director and sole shareholder of Brentwood Management,
LLP, an Ohio limited liability company which provides property management
services. Mr. McGrath is also a principal of The Baron Organization, Inc., a
Delaware corporation which manages an approximately $100 million real estate
portfolio.
Robert S. Geiger is a practicing attorney. From 1994 to August 1998, he
was managing director of the law firm of Geiger Kasdin Heller Kuperstein Chames
& Weil, P.A., a Miami, Florida law firm with a general practice. From 1986 to
1994, he was managing director of Levine & Geiger, a Miami, Florida law firm.
Mr. Geiger's practice is concentrated in complex commercial and real property
transactions and business reorganizations. He serves as general counsel for
national, regional and local corporations engaged in a wide range of business
activities, including regulated industry matters.
James H. Bownas is a principal in Gamble Hartshorn Alden Co. LPA, a
Columbus, Ohio law firm with a general practice. Mr. Bownas's practice is
concentrated in securities, real estate, taxation, corporate and estate
planning. Between 1989 and January 1996, Mr. Bownas served as General Counsel,
Vice President and Secretary of Cardinal Realty Services, Inc. ("Cardinal")
(formerly known as Cardinal Industries, Inc.), a publicly traded company
headquartered in Reynoldsburg, Ohio which has sponsored numerous real estate
investment limited partnerships. At Cardinal, Mr. Bownas developed significant
experience in the syndication of real estate investment limited partnerships,
negotiated the resolution of over $2 billion of creditors' claims in connection
with the bankruptcy reorganization of Cardinal Industries, Inc., and coordinated
the transition of Cardinal Industries, Inc. from a bankruptcy creditor to a
successful publicly traded company. Since 1995, Cardinal has engaged in several
arms-length transactions (none of which represented a material portion of
Cardinal's assets, liabilities, revenues or expenditures) with affiliates of the
Managing Shareholder pursuant to which multi-family real estate was sold to,
purchased from and managed by and for such entities.
Peter M. Dickson has been managing director of the Guardian Management
Company Limited, a global financial services corporation based in Bermuda since
1991. In addition, since 1994 Mr. Dickson has served as a director to Grosvenor
Trust Company Limited,
12
<PAGE> 36
another Bermuda-based financial services corporation. Between 1985 and 1990, Mr.
Dickson served as the Executive Vice President of Finance for The Wraxall Group,
Bermuda. Between 1979 and 1985, Mr. Dickson held several positions with Peat,
Marwick.
The Corporate Trustee of the Trust is Baron Capital Properties, Inc.
("Baron Properties"), a Delaware corporation formed in July 1997 and an
Affiliate of the Managing Shareholder. The primary duty of the Corporate Trustee
will be to operate an office in the State of Delaware as Delaware law requires
that at least one of the trustees of a Delaware business trust (such as the
Trust) have an office in Delaware. Baron Properties, as Corporate Trustee of the
Trust, will act only at the direction of the Managing Shareholder, and will not
take independent discretionary action on behalf of the Trust. The Corporate
Trustee will not be compensated for its services, but will be reimbursed only
for its reasonable out-of-pocket expenses in serving in such capacity which are
approved in advance by the Managing Shareholder. Such expenses are expected to
be limited to those incurred in connection with the operation of its Delaware
office. Baron Properties may be a trustee of other similar entities that may
organized by the Managing Shareholder, Baron Capital, Inc., and any of their
Affiliates. The President, sole director and sole stockholder of Baron
Properties is Gregory K. McGrath. The principal office of Baron Properties is at
1105 North Market Street, Suite 1300, Wilmington, Delaware 19899.
Robert L. Astorino has served as President of the Operating Partnership
since May 25, 1998. From February 1998 through May 25, 1998, he served as
President - Property of Strategic Management Inc., a real estate management
company affiliated with the Mr. McGrath. From 1992 through January 1998, he
served as President of The Housing Partnership, Inc., a Louisville,
Kentucky-based real estate investment and consulting company. Between 1991 and
1992, Mr. Astorino served as Assistant Vice President, Real Estate Operations at
Great Western Bank in Beverly Hills, California, where his responsibilities
included the operation and sale of residential and commercial real estate
obtained in foreclosure.
Mark L. Wilson was elected Interim Chief Financial Officer of the
Operating Partnership in November 1998. Between 1989 and 1997, Mr. Wilson served
as Vice President of Baron Real Estate Services, Inc., an affiliate of Mr.
McGrath. Mr. Wilson was responsible for financial control, accounting and tax
functions for that company in addition to financial control and accounting for
all of the properties which it managed. In addition, Mr. Wilson served as
President of The Baron Companies, a registered securities broker-dealer which
served as the dealer manager of numerous private offerings of limited
partnerships affiliated with Mr. McGrath.
Mary E. Keane, age 45, has served as Vice President - Accounting and
Strategic Planing for the Operating Partnership since May 25, 1998. She has also
served as Secretary of the Trust since May 15, 1998. From March 1998 through May
25, 1998, she served as Vice President - Accounting for Strategic Management
Inc., a real estate management company affiliated with Mr. McGrath. From 1996
through February 1998, Ms. Keane served as Vice President, Finance - Consumer
Services Division for Blue Cross of California, a subsidiary of WellPoint Health
Networks, Inc., a Fortune 250 company. Her responsibilities there included
financial preparation, reporting and analysis for a $2 billion annual revenue
company. From 1992 through 1995, she served as Chief Financial Officer for
Steptoe & Johnson, a prominent international law firm headquartered in
Washington, D.C.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based upon written representations from certain reporting persons that no
reports were required, no person failed to file on a timely basis reports
required by Section 16(a) of the Exchange Act in the most recent fiscal year.
13
<PAGE> 37
ITEM 10. EXECUTIVE COMPENSATION
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Long Term All Other
Position Compensation Compensation
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gregory K. McGrath, Chief Executive officer 1998 1/
- ------------------------------------------------------------------------------------------------------------------
Robert L. Astorino, President-Operating
Partnership 1998 $125,000 $8,500 2/
- ------------------------------------------------------------------------------------------------------------------
Mary E. Keane, Vice President Accounting 1998 $97,500 $10,000 3/
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
1/ Mr. McGrath's compensation for the first year of the Trust is payable
in the form of Common Shares of the Trust or Units of the Operating Partnership
in an amount not to exceed 25,000 shares to be determined by the Compensation
Committee of the Board of the Trust, plus health benefits. The Executive
Compensation Committee has not yet met to determine Mr. McGrath's compensation.
In addition, Mr. McGrath is the sole shareholder and director of Baron Advisors,
Inc., which is the Managing Shareholder of the Trust. Pursuant to a Trust
management Agreement, dated as of May 15, 1998, which is renewable annually,
Baron Advisors, Inc. is to be reimbursed for its operating expenses relating to
the business of the Trust and the Operating Partnership in an amount up to 1% of
the gross proceeds of the initial value of Units issued in connection with the
Exchange Offering up to a maximum of $500,000 per year. In 1998, the Trust paid
Baron Advisors, Inc. a total of $324,213 for: reimbursable expenses ($92,393),
investment advisory fees ($185,456) and management fees ($46,364).
2/ Car Allowance
3/ Relocation Advance
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Shares of the Trust by (i) each Trustee, (ii) the
Trust's Chief Executive Officer and each executive officer of the Trust, (iii)
all executive officers of the Trust and the Operating Partnership as a group,
and (iv) to the Trust's knowledge, by any person owning beneficially more than
5% of the outstanding shares of such class, in each case at March 31, 1999.
Except as otherwise noted, each person named in the table has sole voting and
investment power with respect to all Common Shares shown as beneficially owned
by such person.
14
<PAGE> 38
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Amount and Nature of
Beneficial Owner Beneficial Ownership Percentage of Class
---------------- -------------------- -------------------
- ------------------------------------------------------------------------------------------
<S> <C> <C>
James H. Bownas -0- -0-
- ------------------------------------------------------------------------------------------
Peter M. Dickson -0- -0-
- ------------------------------------------------------------------------------------------
Gregory K. McGrath 1/ 9.5%
- ------------------------------------------------------------------------------------------
Robert S. Geiger 1/ 9.5%
- ------------------------------------------------------------------------------------------
All executive officers of the
Trust and Operating Partnership,
as a group 1/ 19%
- ------------------------------------------------------------------------------------------
</TABLE>
1/ Mr. McGrath and Mr. Geiger, the original investors in the Operating
Partnership, each own an amount of Operating Partnership Units which are
exchangeable into 9.5% of the Common Shares of the Trust outstanding as of the
earlier to occur of the completion of the Cash Offering or May 14, 1999 (up to
601,080 Common Shares out of total maximum outstanding of 6,327,160 Common
Shares), calculated on a fully diluted basis assuming that all then outstanding
Units (other than those owned by the Trust) have been exchanged into an
equivalent number of Common Shares. Pursuant to an agreement among Messrs.
McGrath, Geiger, the Trust and the Operating Partnership, these Units have been
deposited in escrow. The number of units will be adjusted to enable each of them
to convert his Units into 9.5% of the Trust's Common Shares upon completion of
the Cash Offering. The escrowed Units and/or common shares are to be redeemed in
equal amounts on the sixth, seventh, eighth and ninth anniversary dates of the
effectiveness of the Cash Offering, or earlier if certain financial goals are
achieved by the Trust. Under the Declaration of Trust, no other Shareholder or
Unitholder may hold more than 5% of the beneficial interest in the Trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1998, the Trust directly or
indirectly entered into several transactions in which the amount exceeded
$60,000 and in which an executive officer of the Trust had an interest. The
Trust expects to enter into additional such transactions in 1999 (SEE ITEM 1 -
DESCRIPTION OF BUSINESS: EXCHANGE OFFERING). This is more fully outlined in
Amendment No. 2 to the Registration Statement on Form S-4 filed by the Operating
Partnership. In 1998, the following transactions occurred.
1. The Trust contributed $3,858,240 to the Operating Partnership in
exchange for units of limited partnership interest. The Operating Partnership
was founded by Messrs. Gregory K., McGrath and Robert S. Geiger, who are the
Chief Executive Officer an Chief Operating Officer of the Trust and who each own
individually units of limited partnership interest in the Operating Partnership.
2. A limited partnership interest in Alexandria Development, L.P. was
acquired from an affiliate of Mr. McGrath. The Operating Partnership acquired
limited partnership interests in real estate limited partnerships managed by an
affiliate of Mr. McGrath. The Operating Partnership contracted with three real
estate development companies owned by Mr. McGrath to acquire two luxury
residential apartment properties in development upon completion of the
construction. (SEE ITEM 2 - DESCRIPTION OF PROPERTIES).
15
<PAGE> 39
3. As discussed in ITEM 1 - DESCRIPTION OF BUSINESS: EXCHANGE OFFERING,
the Trust proposes to indirectly acquire interests in properties through an
Exchange Offering between the Operating Partnership and 23 limited partnerships
in which Mr. McGrath either directly or indirectly holds a beneficial interest.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Documents filed as part of this report:
(a) Exhibits are either attached as part of this Report or
incorporated by reference herein.
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<C> <S>
3.1* Certificate of Business Trust Registration of the Registrant
3.2* Amended and Restated Declaration of Trust for the Registrant made as of May 15, 1998
3.3* Form of by-laws of the Registrant
4.1* Form of Common Share Certificate
10.1* Trust Management Agreement, dated as of May 15, 1998 between the Registrant and Baron
Advisors, Inc.
10.2* Form of Escrow Agreement, dated as of _____________, 1998, between the Registrant and
Sigma Financial Corporation
10.3* Form of Indemnification Agreement among the Registrant, Baron Advisors, Inc., and the
Registrant's Independent Trustees and officers (included in Sections 3.6 and 3.7 of the
Amended and Restated Declaration of Trust attached hereto as Exhibit 3.2)
10.4* Warrant Purchase Agreement, dated as of May 15, 1998, between the Registrant and Sigma
Financial Corporation
10.5* Form of Subscription Documents
10.6* Agreement of Limited Partnership of Baron Capital Properties, L.P. dated as of May 15, 1998
10.7* Form of Security Escrow Agreement dated as of ___________, 1998 among Gregory K. McGrath,
Robert S. Geiger, Baron Capital Trust and American Stock Transfer & Transfer Company
10.8 Amended and Restated Security Escrow Agreement dated as of May 15, 1998 among Gregory K. McGrath,
Robert S. Geiger, Baron Capital Trust
and American Stock and Transfer Company
23 Consent of Rachlin Cohen & Holtz, Independent Certified Public Accountants
27 Financial Data Schedule
</TABLE>
- -----------------------
* Incorporated by reference to Registration Statement on Form SB-2, as
amended, filed September 5, 1997.
16
<PAGE> 40
(b) Reports on Form 8-K:
The following information summarizes the events reported on Form
8-K during the quarter ended December 31, 1998.
1. Report on Form 8-K, dated October 23, 1998 reporting on the
following item:
Item 2. Acquisition or Disposition of Assets.
2. Report on Form 8-K/A, dated November 24, 1998 reporting on
the following item:
Item 2. Acquisition or Disposition of Assets.
17
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BARON CAPITAL TRUST
April 15, 1999 By: /s/ Gregory K. McGrath
---------------------------
Gregory K. McGrath
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Gregory K. McGrath Chief Executive Officer April 15, 1999
- ---------------------- (Principal Executive Officer)
Gregory K. McGrath
/s/ Mark L. Wilson Interim Chief Financial Officer April 15, 1999
- ---------------------- (Principal Financial and Accounting
Mark L. Wilson Officer)
/s/ James H. Bownas Trustee April 15, 1999
- ----------------------
James H. Bownas
/s/ Peter M. Dickson Trustee April 15, 1999
- ----------------------
Peter M. Dickson
/s/ Gregory K. McGrath Corporate Trustee April 15, 1999
- ----------------------
Gregory K. McGrath
President, Chief Executive
Officer of Baron Capital
Properties, Inc.
</TABLE>
18
<PAGE> 1
EXHIBIT 10.8
AMENDED AND RESTATED
SECURITY ESCROW AGREEMENT
<PAGE> 2
AMENDED AND RESTATED SECURITY ESCROW AGREEMENT
THIS AMENDED AND RESTATED ESCROW AGREEMENT (this "Agreement") made and
entered into as of May 15, 1998, among Gregory K. McGrath and Robert S. Geiger
(herein referred to individually as a "Security Holder" and collectively as the
"Security Holders"), Baron Capital Trust (the "Trust"), Baron Capital
Properties, L.P. (the "Partnership") and American Stock Transfer & Trust Company
(the "Escrow Agent").
WITNESSETH THAT:
A. Each Security Holder is owner of the number of units of limited
partnership interest ("Units") in the Partnership, an affiliate of the Trust,
listed opposite his name on Exhibit A attached hereto which he acquired in
exchange for his initial capital contribution to the Partnership and other
consideration.
B. The Trust has registered with the Securities and Exchange
Commission (the "Commission") 2,500,000 Common Shares of the Trust pursuant to a
Form SB-2 Registration Statement in connection with the proposed public offering
of such Common Shares for cash (the "Cash Offering"), and the Partnership will
apply for registration of 2,500,000 Units in the Partnership (which Units may be
exchanged for an equivalent number of Common Shares as described in the
Prospectus contained in the Form SB-2 Registration Statement), pursuant to a
Form S-4 Registration Statement in connection with the proposed public exchange
offering of Units (the "Exchange Offering"). As a condition of such
registrations, the Security Holders, the Escrow Agent, the Trust and the
Partnership agree to be bound by this Agreement.
C. Each Security Holder has deposited with the Escrow Agent a
certificate representing the number of Units listed opposite his name on Exhibit
A, and the Escrow Agent hereby acknowledges receipt thereof. Such Units,
together with any Common Shares of the Trust into which the Units may be
converted in accordance with this Agreement, are herein collectively referred to
as "Escrowed Shares."
NOW THEREFORE, the parties hereto agree as follows:
1. Deposit of Certificates. Simultaneously with the execution of this
Agreement, each Security Holder has deposited with the Escrow Agent, and the
Escrow Agent hereby acknowledges receipt of, a certificate representing the
Escrowed Shares owned by the respective Security Holder. Escrowed Shares
comprised of Units are exchangeable into an equivalent number of Common Shares
of the Trust in accordance with the terms of the Declaration of Trust of the
Trust (the "Declaration of Trust") and the Agreement of Limited Partnership of
the Partnership (the "Partnership Agreement"), as they may be amended from time
to time. The number of Units comprising the Escrowed Shares deposited with the
Escrow Agent was determined based upon the assumption that the Cash Offering and
Exchange Offering would each be fully subscribed, and is intended to evidence
the ownership by each Security Holder of nine and one-half percent (9-1/2%) of
the Common Shares outstanding after completion of the Cash Offering and exchange
by the Partnership of 2,500,000 of its Units for units of limited partnership
<PAGE> 3
interest in real estate limited partnerships (including any exchange completed
pursuant to the Exchange Offering), calculated on a fully diluted basis assuming
all then outstanding Units (other than those to be acquired by the Trust) have
been exchanged into an equivalent number of Common Shares. Copies of
certificates representing the Escrowed Shares are attached hereto as Exhibit B.
2. Term. The term of this Agreement and of the escrow provided herein
shall commence on the date that the Cash Offering is declared effective by the
Commission. The certificates evidencing the securities are to be deposited with
the Escrow Agent and are to be held until their release pursuant to paragraph 3
of this Agreement.
3. Release of Escrowed Shares.
3.1 Return of Excess Units and Common Shares. On May 14, 1999, (the
"Share Determination Date"), the Chief Financial Officer of the Partnership
shall certify to the Escrow Agent the number of Units and/or Common Shares
comprising the Escrowed Shares, as the case may be, which are in excess of the
number to which the Security Holders are entitled under the Subscription
Agreement dated as of February 3, 1998 among the Security Holders, the
Partnership and the Trust, and shall simultaneously deliver to the Escrow Agent
replacement certificates evidencing ownership by the Security Holders of the
proper number of Units and/or Common Shares. Upon receipt of such certification
and replacement certificates, the Escrow Agent shall return the certificates
representing the original Escrowed Shares to the Partnership and the replacement
certificates shall thereupon be deemed to represent the Escrowed Shares for all
purposes hereunder.
3.2 Release to the Security Holders. The Escrowed Shares owned by each
Security Holder shall be released to such Security Holder as set forth below,
and once released from escrow hereunder, Escrowed Shares shall no longer be
subject to the terms and conditions of this Agreement:
a. 25% of the Escrowed Shares shall be released from escrow on the
sixth, seventh, eighth, and ninth anniversary dates of the
effectiveness of the Cash Offering; or
b. 100% of the Escrowed Shares shall be released from escrow after
the Trust has had annual net earnings per share according to
generally accepted accounting principles ("GAAP") equal to at
least 5% of the public offering price (after taxes and excluding
extraordinary items) for any two consecutive fiscal years
following the date of effectiveness of the Cash Offering; or
c. 100% of the Escrowed Shares shall be released from escrow after
the Trust has had average annual net earnings per share according
to GAAP (after
2
<PAGE> 4
taxes and excluding extraordinary items) equal to at least 5% of
the public offering price, for any five consecutive fiscal years
following the date of effectiveness of the Cash Offering; or
d. 100% of the Escrowed Shares shall be released from escrow after
the Trust's Common Shares have traded on a national stock exchange
at a price equal to at least 175% of the initial public offering
price for at least 90 consecutive trading days following the first
anniversary of the date of effectiveness of the Cash Offering.
3.2.1 Documentation to Escrow Agent Regarding Release of Escrowed Shares
to Security Holders. A request for termination of the escrow, based on the
satisfaction of the conditions described in paragraphs 3.2.a, 3.2.b, 3.2.c or
3.2.d above, shall be forwarded by each Security Holder to the Escrow Agent. A
request for termination of the escrow based upon satisfaction of the conditions
described in paragraph 3.2.b or 3.2.c. shall be accompanied by an earnings per
share calculation audited and reported on by an independent certified public
accountant retained by the Trust. A request for termination of the escrow based
upon satisfaction of the conditions described in paragraph 3.2.d shall be
accompanied by evidence of the stock price conditions provided therein.
3.3. Terminated or Partial Offerings. The foregoing notwithstanding,
the Escrowed Shares will be released by the Escrow Agent:
a. If the Cash Offering and the Exchange Offering have been
terminated and no securities were sold or exchanged thereunder; or
b. If the Cash Offering is terminated without sale of the minimum
offering amount required to complete the offering and all proceeds
have been returned to investors in such offering.
4. Restriction on Transfer. The Escrowed Shares may be transferred by
will, or pursuant to the laws of descent and distribution, or through
appropriate legal proceedings, but in all cases the Escrowed Shares shall remain
in escrow and subject to the terms of this Agreement until released pursuant to
paragraph 3 above. Upon the death of the holder of any Escrowed Shares, the
Escrowed Shares of the deceased holder may be hypothecated, subject to all of
the terms of this Agreement, to the extent necessary to pay the expenses
(including, without limitation, tax liabilities) of the estate. The Escrowed
Shares may be transferred by gift to family members, provided that the Escrowed
Shares shall remain subject to the terms of this Agreement. The Escrowed Shares
may not be pledged to secure a debt except as noted above.
5. Voting Rights. The Security Holders shall be entitled to exercise
all voting rights in respect of the Escrowed Shares owned by him to which the
owners of non-escrowed Units or Common Shares, as the case may be, are entitled;
provided however that until the Share
3
<PAGE> 5
Determination Date, a Security Holder shall only be entitled to vote those Units
and/or Common Shares owned by him and held in escrow hereunder which, when added
to all non-escrowed Units and Common Shares owned by him, represent nine and
one-half percent (9-1/2%) of the Common Shares then issued and outstanding,
calculated on a fully diluted basis assuming all then outstanding Units (other
than those to be acquired by the Trust) have been exchanged into an equivalent
number of Common Shares.
6. Dividends and Distributions.
6.1 Payment to Escrow Agent. Any dividends paid on Common Shares
and/or distributions paid with respect to Units while they are held in escrow
hereunder shall be paid to the Escrow Agent by check or wire transfer by the
Trust or the Partnership, respectively. Until the Share Determination Date,
dividends and distributions shall only be paid with respect to those Escrowed
Shares which a Security Holder would be entitled to vote under paragraph 5
hereof. The Escrow Agent shall invest such dividends and distributions and
interest earned thereon in an interest-bearing account. Until the Escrowed
Shares are released to the Security Holders pursuant to paragraph 3 of this
Agreement, the Escrow Agent shall treat dividends and distributions paid on the
Escrowed Shares and interest earned thereon (less amounts thereof required under
paragraph 6.3 hereof to pay tax obligations of the Security Holders in respect
of Escrowed Shares owned by them and held in escrow hereunder) as assets of the
Trust or the Partnership, as the case may be, available for distribution under
the terms and conditions set forth in paragraph 10 below.
6.2 Release to the Security Holders with Escrowed Shares. Dividends
and distributions paid on the Escrowed Shares and interest earned thereon while
the Escrowed Shares are held in escrow thereunder (less amounts thereof required
under paragraph 6.3 hereof to pay tax obligations of the Security Holders in
respect of Escrowed Shares owned by them and held in escrow hereunder) shall be
disbursed to the Security Holders together with Escrowed Shares released from
the escrow pursuant to paragraph 3, in an amount proportionate to the number of
Escrowed Shares so released in relation to the number of Escrowed Shares held in
escrow hereunder immediately prior to such disbursement.
6.3 Payment of Tax Obligations on Dividends. At the written request of
the independent Trustees (identified on Exhibit D hereto, as it may be amended
from time to time), the Escrow Agent shall deliver a check or wire transfer to
each Security Holders each year out of the dividends and distributions paid on
the Escrowed Shares and interest earned thereon held in escrow hereunder, in an
amount equal to the tax due from such Security Holder on such dividends,
distributions and interest.
7. Stock Dividends or Splits. Stock dividends on, and shares
resulting from stock splits of, the Escrowed Shares shall be delivered to the
Escrow Agent and held pursuant to this Agreement. In the event of any stock
dividend, stock split or recapitalization of the Partnership or the Trust, any
rights or duties described in terms of a per share requirement in this Agreement
4
<PAGE> 6
shall be adjusted appropriately.
8. Additional Shares. Upon the exercise by a Security Holder of any
conversion rights, warrants or options to acquire additional Units or Common
Shares earned by reason of his ownership of Escrowed Shares under any agreement
now effective or coming into effect during the term of the escrow hereunder,
such additional Units or Common Shares received by the Security Holder shall
forthwith be deposited in escrow with the Escrow Agent and shall be subject to
the terms and conditions of this Agreement.
9. Right to Convert Units into Common Shares. Each Security Holder
shall have the right to convert Units which are subject to the escrow hereunder
into Common Shares at any time conversion is permitted under the Declaration of
Trust and the Partnership Agreement; provided, however, that until the Share
Determination Date occurs, only Units which a Security Holder would be entitled
to vote pursuant to paragraph 5 above may be so converted. Security Holders may
exercise their conversion rights by notifying the Escrow Agent of such
conversions and such conversion shall be effected immediately upon the Escrow
Agent's receipt of such notice. Upon each conversion and any partial release of
Escrowed Shares under this Agreement, the Escrow Agent shall immediately revise
Exhibit A to reflect the number of Common Shares and Units which remain subject
to this Agreement.
10. Dissolution Preference. Subject to the limitations set forth
below, each Security Holder agrees in the event of dissolution, liquidation,
merger, consolidation, sale of assets, exchange, or any transaction or
proceeding ( a "Capital Event") that results in the distribution or sale of all
or substantially all of the assets of the Partnership or the Trust, to defer
receipt of and subordinate the economic benefits to which he would otherwise be
entitled by reason of his ownership of the Units and Common Shares held in
escrow hereunder on the effective date of such an event, in favor of any
original purchasers in the Cash Offering or the Exchange Offering which have
remained the holders of Common Shares or Units, until such original purchasers
have received, or have had irrevocably set aside for them, cash, securities, or
assets of any other kind (including, without limitation, any dividends and/or
distributions of any of the foregoing paid to the original investors prior to
the capital event) with an aggregate value at least equal to 100% of their
initial public offering price per Common Share or Unit, adjusted for stock
splits and stock dividends. Thereafter, the Security Holders shall participate
on a pro rata basis. No transferee from an original purchaser other than by
reason of descent shall have benefit of this provision. No original purchaser of
Units or Common Shares in the Exchange Offering or the Cash Offering, as the
case may be, shall have benefit of this provision if such purchaser voted in
favor of the Capital Event at a meeting held for such purpose, unless the
Security Holders also voted in favor of such Capital Event. The Escrow Agent
shall act in accordance with the written direction of the Independent Trustees
(whose determination shall be conclusive) in respect of the holders of Units and
Common Shares which shall be entitled to the benefits of this Section 10 and the
amount of any such benefits.
11. Reliance by Escrow Agent. The Escrow Agent may conclusively rely
on, and shall
5
<PAGE> 7
be protected, when its acts in good faith upon, any statement, certificate,
notice, request, consent, order or other document which it believes to be
genuine and signed by the proper party. The Escrow Agent shall have no duty or
liability to verify any such statement, certificate, notice, request, consent,
order or other document and its sole responsibility shall be to act only as
expressly set forth in this Agreement. The Escrow Agent shall be under no
obligation to institute or defend any action, suit or proceeding in connection
with this Agreement unless it is indemnified to its reasonable satisfaction. The
Escrow Agent may consult counsel with respect to any question arising under this
Agreement and the Escrow Agent shall not be liable for any action taken, or
omitted, in good faith upon advice of counsel. In performing any of its duties
hereunder, the Escrow Agent shall not incur any liability to anyone for any
damages, losses or expenses except those which arise out of the Escrow Agent's
willful default or negligence, and it shall accordingly not incur any such
liability with respect to: (i) any action taken or omitted in good faith upon
advice of its counsel or counsel of the Trust given with respect to any
questions relating to the duties and responsibility of the Escrow Agent under
this Agreement, or (ii) any action taken or omitted in reliance upon any
instrument, including written advice provided for herein, not only as to its due
execution and the validity and effectiveness of its provisions, but also as to
the truth and accuracy of any information contained therein, which the Escrow
Agent shall in good faith believe to be genuine, to have been signed or
presented by a proper person or persons, and to conform with the provisions of
this Agreement. All Escrowed Shares and funds held pursuant to this Agreement
shall constitute trust property. The Escrow Agent shall not be liable for any
interest on the Escrowed Shares.
12. Compensation to Escrow Agent. The Escrow Agent shall be entitled
to receive from the Trust reasonable compensation for its services as set forth
in Exhibit B attached hereto. In the event that the Escrow Agent renders any
additional services not provided for herein, or if any controversy arises
hereunder, or if the Escrow Agent is made a party to, or intervenes in any
action, suit or proceeding pertaining to this Agreement, it shall be entitled to
receive from the Security Holders or at the option of the Escrow Agent, the
Trust, reasonable compensation for such additional services.
13. Qualification and Independence of Escrow Agent. The Trust and
each of the Security Holders hereby represent that a complete list of its
respective officers and members of the Board of the Board is attached hereto as
Exhibit D. Based thereon, the Escrow Agent hereby represents and warrants that
it is not affiliated with the Trust, the Security Holders or any of their
respective officers or directors.
14. Indemnification. The Trust and each Security Holder agrees to hold
the Escrow Agent harmless from, and indemnify the Escrow Agent for, any and all
costs of investigation or claims, costs, expenses, reasonable attorney fees or
other liabilities or disbursements arising out of any administrative
investigation or proceeding or any litigation, commenced or threatened, relating
to this Agreement, including without limitation, the implementation of this
Agreement, the distribution of stock or funds, the investment of funds, the
interpretation of this Agreement or similar matters, provided that the Escrow
Agent shall not be indemnified for any costs of
6
<PAGE> 8
investigation or claims, costs, expenses, attorney fees or other liability
arising from its bad faith or negligence or that of any of its employees,
officers, directors or agents; and further provided that the Escrow Agent shall
look first to the Trust, its assets, and the assets subject to escrow, before
seeking recourse under this indemnity against the Security Holders.
15. Scope. This Agreement shall be binding upon, and inure to the
benefit of, the parties hereto and their respective heirs, successors and
assigns.
16. Termination. Except for the indemnification provisions of
paragraph 14 above, which shall survive in any event, this Agreement shall
terminate in its entirety when all the Escrowed Shares have been released as
provided in paragraph 3 above.
17. Substitute Escrow Agent. The Escrow Agent may, upon not less than
60 days prior written notice to the Trust and the Security Holders, resign as
the Escrow Agent. The Trust and the Security Holders shall, before the effective
date of the Escrow Agent's resignation, mutually agree upon and appoint a
successor Escrow Agent. If the Trust and the Security Holders fail to agree upon
a successor Escrow Agent at least 10 days prior to the date of resignation, an
impasse shall be deemed to exist, at which time the Independent Trustees shall
have the right to select the successor Escrow Agent. Pending resolution of the
impasse and selection of the successor Escrow Agent, the Escrow Agent then
serving under this Agreement shall continue to serve as the Escrow Agent, but
shall have no liability for its actions other than for gross negligence or acts
amounting to criminal misconduct.
18. Notice of Non-liability. Under the Delaware Business Trust Act and
Sections 3.3 and 3.4 of the Declaration of Trust, neither the Shareholders, the
Trustees nor any other members of the Board of the Trust shall be personally
liable hereunder, and the Escrow Agent expressly agrees to look solely to the
Trust's property for the satisfaction of any claims hereunder against the Trust
or the Security Holders.
[balance of page intentionally left blank]
7
<PAGE> 9
IN WITNESS WHEREOF, the Security Holders, the Trust and the Escrow Agent
have entered into this Agreement as of the date first above written, in multiple
counterparts, each of which shall be considered an original.
SECURITY HOLDERS:
/s/ Gregory K. McGrath
---------------------------
Gregory k. McGrath
/s/ Robert S. Geiger
---------------------------
Robert S. Geiger
TRUST:
BARON CAPITAL TRUST
By: /s/ Gregory K. McGrath
---------------------------
Gregory K. McGrath
Chief Executive Officer
PARTNERSHIP:
BARON CAPITAL PROPERTIES, L.P.
By: /s/ Gregory K. McGrath
---------------------------
Gregory K. McGrath
Chief Executive Officer
ESCROW AGENT:
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: /s/ Herbert J. Lemmer
------------------------
Herbert J. Lemmer
Vice President
8
<PAGE> 10
EXHIBIT A
<TABLE>
<CAPTION>
Number of Units
Name of Security Holder Originally Placed in Escrow*
----------------------- ----------------------------
<S> <C>
Gregory K. McGrath 601,080
Robert S. Geiger 601,080
</TABLE>
*The number of Units originally placed in escrow is based upon the assumed full
subscription of the Cash Offering and exchange by the Partnership of 2,500,000
Units for units of limited partnership interest in real estate limited
partnerships completed by May 14, 1999. On that date, a calculation will be made
as to whether the Security Holders received excess Escrowed Shares, and if so,
such excess Escrowed Shares will be released from escrow and canceled. Pending
this determination, voting rights as well as distribution payments will be
limited as set forth in this Agreement.
<PAGE> 11
EXHIBIT B
ESCROWED SHARE CERTIFICATES
<PAGE> 12
EXHIBIT C
COMPENSATION OF ESCROW AGENT
One-time only fee of $ 1,000.00.
<PAGE> 13
EXHIBIT D
LIST OF OFFICERS AND MEMBERS OF THE BOARD OF THE TRUST
<TABLE>
<CAPTION>
Name of Officer and
Member of the Board Position
------------------- --------
<S> <C>
Gregory K. McGrath Chief Executive Officer
Robert S. Geiger Chief Operating Officer
Baron Advisors, Inc. Member of the Board
James H. Bownas Member of the Board (Independent Trustee)
Peter M. Dickson Member of the Board (Independent Trustee)
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Annual Report on Form 10-KSB of our report
dated April 13, 1999 relating to the financial statements of Baron Capital
Trust.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
April 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-03-1998
<PERIOD-END> DEC-31-1998
<CASH> 177,299
<SECURITIES> 0
<RECEIVABLES> 235,183
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,367,788
<DEPRECIATION> 1,246,627
<TOTAL-ASSETS> 7,731,515
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 4,257,101
<OTHER-SE> (1,423,009)
<TOTAL-LIABILITY-AND-EQUITY> 7,731,515
<SALES> 0
<TOTAL-REVENUES> 396,884
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,683,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,333
<INCOME-PRETAX> (1,450,850)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,450,850)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,450,850)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
