UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ended ______________to________________
Commission file number 333-35063
Baron Capital Trust
(Exact name of small business issuer as specified in its charter)
Delaware 31-1574856
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7826 Cooper Road, Cincinnati, Ohio 45242
(Address of principal executive offices)
(513) 984-5001
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ ] No [ X ]
As of the date of this Report, the Registrant has outstanding 702,076 common
shares of beneficial interest ("Common Shares"), its only class of common
equity.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
See following pages
2
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
BARON CAPITAL TRUST
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheet F-2
Statements of Operations F-3
Statement of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6-F-15
F-1
<PAGE>
Baron Capital Trust
CONSOLIDATED BALANCE SHEET
June 30, 2000
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
Assets: (Unaudited)
<S> <C> <C>
Rental Apartments:
Land $ 7,318,862 $ 1,178,693
Depreciable property 32,249,572 6,189,095
------------ ------------
39,568,434 7,367,788
Less accumulated depreciation (6,414,750) (1,453,177)
------------ ------------
33,153,684 5,914,611
Investment In Partnerships 4,277,246 930,970
Cash and Cash Equivalents 127,372 33,774
Restricted Cash 762,969 52,089
Accrued Interest Receivable, Affiliate 1,338,564 36,997
-- 14,783
Other Receivables 113,798 3,724
Advances to Affiliates 6,251,905 5,141
Other Property and Equipment 281,221 134,981
Other Assets 809,827 209,128
------------ ------------
9,685,655 490,617
------------ ------------
$ 47,116,585 $ 7,336,198
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable 25,203,107 4,278,117
Accounts payable and accrued liabilities 2,116,448 1,295,092
Note payable 190,000 100,000
Notes payable, affiliates 3,778,779 50,000
Capital lease obligation 40,775 42,369
Security deposits 227,066 40,308
------------ ------------
Total liabilities 31,556,176 5,805,886
Commitments, Contingencies, Subsequent Events and Other Matters -- --
Minority Interest 536,900 --
Shareholders' Equity:
Common Shares of beneficial interest, no par value, 5,000,000 shares authorized;
702,076 and 675,086 shares issued and outstanding or
assumed to be issued as of June 30, 2000 and December 31, 1999 respectively 29,780,835 6,616,806
Distributions (342,507) (342,507)
Deficit (14,414,819) (4,743,987)
------------ ------------
Total Shareholders' Equity 15,023,509 1,530,312
------------ ------------
$ 47,116,585 $ 7,336,198
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
BARON CAPITAL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2000 and June 30, 1999
<TABLE>
<CAPTION>
Six Six Three Three
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Property:
Rental $ 1,744,414 $ 590,505 $ 1,477,091 $ 317,703
Equity in net loss of unconsolidated partnership (78,994) (29,093) (41,154) (25,667)
Interest and other income 368,479 1,037 342,939 654
------------ ------------ ------------ ------------
2,033,899 562,449 1,778,876 292,690
------------ ------------ ------------ ------------
Real Estate Expenses:
Depreciation 319,217 72,907 278,392 36,453
Interest 660,580 144,491 575,121 80,526
Repairs and maintenance 237,806 37,727 211,997 18,176
Personnel 440,451 57,471 423,779 27,814
Property Taxes 151,027 41,276 131,123 20,680
Property Insurance 38,030 10,718 32,670 3,513
Utilities 185,657 29,601 172,283 16,714
Other 209,751 131,570 203,891 86,528
------------ ------------ ------------ ------------
2,242,519 525,760 2,029,256 290,404
------------ ------------ ------------ ------------
Provision for Property Impairment 8,356,638 -- 8,356,638 --
------------ ------------ ------------ ------------
Administrative Expenses:
Personnel, including officer's compensation 535,461 465,509 375,843 132,711
Professional services 249,539 258,889 88,419 188,187
Other 320,574 101,734 342,725 38,775
------------ ------------ ------------ ------------
1,105,573 826,132 806,986 359,673
------------ ------------ ------------ ------------
Total expenses 11,704,730 1,351,892 11,192,880 650,077
------------ ------------ ------------ ------------
Net Loss $ (9,670,832) $ (789,443) $ (9,414,004) $ (357,387)
============ ============ ============ ============
Net Loss per Common Share Basic and Diluted $ (14.01) $ (1.39) $ (13.47) $ (0.58)
============ ============ ============ ============
Weighted Average Number of Common Shares Outstanding 690,306 567,840 698,947 614,813
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
BARON CAPITAL TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the
Six Months ended June 30, 2000
<TABLE>
<CAPTION>
SHARES AMOUNT DISTRIBUTIONS DEFICIT TOTAL
------ ------ ------------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 675,086 $ 6,616,806 $ (342,507) $ (4,743,987) $ 1,530,312
Proceeds from sale of common shares of
beneficial interest, net of offering costs 26,990 230,118 -- -- 230,118
Common Shares assumed to be issued net; (see Note 6,
Exchange Offering) 2,449,525 22,825,371 -- -- 22,825,371
Net Loss -- -- -- (9,670,832) (9,670,832)
Credit for estimated fair value of services
performed by officer -- 108,540 -- -- 108,540
------------ ------------ ----------- ------------ ------------
Balance, June 30, 2000 3,151,601 $ 29,780,835 $ (342,507) $(14,414,819) $ 15,023,509
============ ============ =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
BARON CAPITAL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(9,670,832) $ (789,443)
Adjustmnets to reconcile net loss to
net cash used by operating activities:
Provision for officers compensation 108,540 --
Depreciation 319,217 94,721
Equity in net loss of unconsolidated partnership 78,994 29,093
Recognition of Provision for Impairment 8,356,638
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Property management reimbursemnets 36,997 38,476
Due from managing shareholder 14,783 --
Other receivables (110,074) 80,984
Other assets 122,343 (30,894)
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities 112,876 (14,178)
Security Deposits 186,758 (840)
----------- -----------
Net cash used by operating activities (443,760) (592,081)
----------- -----------
Cash Flows from Investing Activities:
Investment in partnerships 9,318 (885,000)
Cash distribution from partnerships 357,260 27,000
Restricted Cash (40,664) --
Advances to afiliates 27,109 10,750
Other property and equipment (146,240) (10,073)
----------- -----------
Net cash provided by (used in) investing activities 206,783 (857,323)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from the sale of common shares of beneficial interest 230,118 1,681,653
Distributions paid -- (167,596)
Proceeds from mortgage financing -- 273,499
Notes payable affiliates 89,141 --
Payments on mortgages payable (77,090) (22,141)
Proceeds from Notes Payable 90,000 --
Payments on notes payable -- (275,000)
Other (1,594) 20,000
----------- -----------
Net cash provided by financing activities 330,575 1,510,415
----------- -----------
Net Increase in Cash and Cash Equivalents 93,598 61,011
Cash and Cash Equivalents, Beginning 33,774 243,498
----------- -----------
Cash and Cash Equivalents, Ending $ 127,372 $ 304,509
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for mortgage and other interest $ 660,580 $ 144,491
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated balance sheet as of June 30, 2000, consolidated
statements of operations for the six months ended June 30, 2000 and 1999
and three months ended June 30, 2000 and 1999, the consolidated
statements of cash flows for the six months ended June 30, 2000 and
1999, and the consolidated statement of shareholders' equity for the six
months ended June 30, 2000 have been prepared by the Trust. In the
opinion of management, all adjustments (which include reclassifications
and normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at June 30,
2000 and for the period presented, have been made. The results of
operations for the three and six months ended June 30, 2000 are not
necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the Trust's financial statements and notes thereto
included in the Trust's December 31, 1999 Form 10-KSB.
Organization and Capitalization
Baron Capital Trust (the "Trust") was organized as a business trust in
Delaware on July 31, 1997. The Trust and its affiliate, Baron Capital
Properties, L.P. (the "Operating Partnership"), a Delaware limited
partnership, have been organized to acquire equity interests in
residential apartment properties located in the United States and to
provide or acquire 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 "Declaration").
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.
F-6
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which assume
that the Trust will continue on a going concern basis, including the
realization of assets and liquidation of liabilities in the ordinary
course of business. For the six months ended June 30, 2000 and the year
ended December 31, 1999 the Trust incurred net losses of $9,670,832 and
$3,166,927 and negative cash flows from operations of $443,760 and
$1,022,587. The auditors' report for the year ended December 31, 1999
was qualified to express substantial doubt about the Trust's ability to
continue as a going concern.
Management's plans to continue its operations and become profitable
encompass the following:
o The Trust plans to attempt to raise capital through additional
public or private offerings of common shares and/or Operating
Partnership units within the next 12 months.
o The Trust, through its Operating Partnership, intends to
continue to acquire rental properties with proceeds from any
future public or private offering of common shares ("Common
Shares") of beneficial interest in the Trust and/or units
("Units") of limited partnership interest in the Operating
Partnership. The operating results of the Trust and the
Operating Partnership will depend primarily upon income from the
residential apartment properties in which they directly or
indirectly acquire an equity or subordinate mortgage interest.
Operating results in respect of equity interests will be
substantially influenced by the demand and supply of residential
apartment units in their primary market and sub-markets, and
operating expense levels. Operating results in respect of
mortgage and other debt interests will depend upon interest
income, including, in certain cases, participation interest,
whose payment will depend upon the operating performance, sale
or refinancing of the underlying properties. The operating
results of the Trust and Operating Partnership will also depend
upon the pace and price at which they can acquire and improve
additional property interests.
o The Trust intends to review its entire portfolio of properties
to determine the potential for restructuring and refinancing
various first mortgage loans and to evaluate certain properties
for possible sale due to recent performance that negatively
impacts overall operating results. The Trust will also explore
possible business combinations with other apartment owners that
would give it the economies of scale and the size that it
requires to list its Common Shares on a recognized securities
exchange.
o The Trust will also negotiate with the firms who are owed
accounts payable for services performed in connection with the
Exchange Offering of the Operating Partnership in order to
extend payment terms and, where possible, to reduce the amounts
due.
In view of these matters, realization of a major portion of the assets
in the accompanying consolidated balance sheet is dependent upon the
continued operations of the Trust, which in turn is dependent upon the
Trust's ability to meet its capital and financing requirements, and the
success of its future operations. Management believes that the actions
presently being taken by the Trust provide the opportunity for the Trust
to continue as a going concern. However, there can be no assurance that
management will be successful in the implementation of its plans to
raise
F-7
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
adequate amounts of capital or that future operations will become
profitable. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which has been deferred by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133, and amended by the
issuance in June 2000 of SFAS 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. SFAS 133 requires that every derivative instrument be
recorded on the balance sheet as an asset or liability measured at its
fair value and that changes in the fair value of derivative instruments
be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after
June 15, 2000.
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, 2001 to
affect its financial statements.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Contract to Purchase Additional Properties
In September 1998, the Trust entered into an agreement with three real
estate development companies (Brentwood at Southgate, Ltd., Burlington
Residential, Ltd. and The Shoppes at Burlington, Ltd.) to acquire two
luxury residential apartment properties in the development stage upon
the completion of construction. The three development companies are
controlled by Gregory K. McGrath, a founder and the Chief Executive
Officer of the Trust. One of the residential properties has been sold to
a third party with the Trust's consent. The remaining property is
scheduled to have a total of 396 units, comprised of one, two and three
bedroom/one or two bathroom apartments. Construction of the property
(the "Burgundy Hills Property"), located in Florence, Kentucky (part of
the Cincinnati metropolitan area), is expected to be completed by the
end of the first quarter of 2004. The Trust has a right of first
negotiation to purchase the property from the development company upon
completion and a right of first refusal to purchase the property on the
same terms offered by a third party. The purchase price is expected to
be approximately $30,000,000. It is contemplated that a significant
portion of that amount would be covered by first mortgage financing. At
the current time the Trust does not have adequate resources to close on
the transaction and it is uncertain whether the Trust will have adequate
resources to complete the transaction upon completion of construction.
In connection with the transaction, the Trust (along with its Chief
Executive Officer) agreed to co-guarantee up to 35% (or approximately
$6,000,000) of existing long-term construction financing provided by
KeyBank National Association ("KeyBank") in respect of the Burgundy
Hills Property. As of December 15, 2000, approximately $5,300,000 of the
loan had been drawn down, resulting in outstanding guarantees of
approximately $1,900,000. The interest rate on the construction loan is
KeyBank's prime rate (currently 9.25%) or the LIBOR rate plus 2%. The
F-8
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
Trust also agreed that, if the loan is not repaid prior to the
expiration of the guarantee, it would either buy out the bank's position
on the entire amount of the construction loan or arrange for a third
party to do so.
In September 2000, the Trust received notice from counsel to KeyBank
that Burlington Residential, Ltd. ("Borrower"), the owner and developer
of the Burgundy Hills Property, had defaulted on its loan for failure to
pay current interest due and meet certain equity requirements and
covenants under the loan agreement, adverse changes in the financial
conditions of the Borrower and the Trust, and the Trust's failure to
meet certain tangible net worth tests set forth in the loan agreements.
KeyBank has indicated that it was exercising its right to accelerate the
loan. According to Mr. McGrath, KeyBank agreed to forego further action
for at least 60 days while the parties attempted to reach an
arrangement. The extension expired in November 2000 and, according to
Mr. McGrath, is currently being extended on a month-to-month basis. The
Borrower paid down the outstanding accrued interest and a portion of the
principal and is currently negotiating a new long-term construction
facility with another institutional lender to replace the KeyBank loan.
The Borrower anticipates completion of the refinancing in the first
quarter of 2001.
Officers' Compensation
A founder of the Trust and the Operating Partnership serves as Chief
Executive Officer of the Trust and the Managing Shareholder. He agreed
to serve as Chief Executive Officer for the first year in exchange for
compensation in the form of Common Shares or Units in an amount not to
exceed 25,000 shares or units, as applicable, to be determined by the
Executive Compensation Committee of the Board of the Trust 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. During 1998 and 1999, no Common
Shares or Units were issued to the Chief Executive Officer as
compensation. However, in order to reflect all appropriate
administrative expenses of the Operating Partnership, a provision of
$108,540 has been made in the accompanying financial statements for the
estimated fair value of the services rendered by the Chief Executive
Officer for the first two quarters 2000. This amount has been charged to
compensation expense, with corresponding credits to partners' capital.
This estimate of the fair value of such services was determined by
management based upon an analysis of compensation paid to chief
executive officers of a number of comparable real estate investment
trusts. Compensation and benefits for the Chief Executive Officer are
determined annually by the Executive Compensation Committee of the Board
of the Trust.
The other founder of the Trust and Operating Partnership serves as the
Chief Operating Officer of the Trust 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.
Underwriting Agreement
In connection with the Cash Offering which terminated on May 31, 2000
(see "Note 6. Shareholders' Equity"), the Trust issued to Sigma
Financial Corporation (the "Underwriter"), warrants to purchase Common
Shares in an amount equal to 8.5% of the number of Common Shares sold on
a best effort basis, by the Underwriter and participating broker-dealers
selected by
F-9
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
the Underwriter and the Trust. The warrants may be exercised at any time
and from time to time through May 15, 2003 at an exercise price of $13
per warrant share. The Trust has reserved 59,676 Common Shares under the
Underwriting Agreement, which represents 8.5% of the 702,076 Common
Shares sold in the Cash Offering.
NOTE 5. 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 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. The Trust Management Agreement had an
initial term of one year, has been renewed for two one-year periods, and
may be extended following the expiration of its current term on a
year-to-year basis on approval of the Board or a majority of the
shareholders entitled to vote on such matter or a majority of the
Independent Trustees.
Under the Trust Management Agreement, the Trust will reimburse the
Managing Shareholder, on a monthly basis during the term of the
agreement, for its operating expenses relating to the business of the
Trust and the Operating Partnership in an amount up to the sum of 1% of
the gross proceeds from the sale by the Trust of Common Shares in the
Trust's Cash Offering, and 1% of the initial assigned value of each Unit
in the Operating Partnership issued in connection with the Exchange
Offering. 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.
Accrued Interest Receivable, Affiliates
Certain of the Exchange Partnerships acquired by the Operating
Partnership in the Exchange Offering hold subordinated notes due from
limited partnerships controlled by Mr. McGrath. See "Note 6.
Shareholders' Equity." These debt instruments have varying interest
rates and the interest is accrued and/or paid on a monthly basis. As of
June 30, 2000 the Trust was due $1,338,564 on these notes.
F-10
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
NOTE 6. 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 (the "Cash Offering"). The Cash Offering, as amended, was
terminated May 31, 2000. The Trust sold 702,076 Common Shares in the
offering for an aggregate offering price of $7,020,763. All of the
Common Shares issued by the Trust in the offering are tradable without
restriction under the Securities Act, but are 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 Common Shares are not listed for trading on any stock
exchange, and no market currently exists for the Common Shares.
Exchange Offering
In April 2000, pursuant to a registration statement on Form S-4, the
Operating Partnership completed an exchange offering (the "Exchange
Offering") under which it acquired additional interests in residential
apartment properties. In the Exchange Offering, the Operating
Partnership issued 2,449,525 registered Operating Partnership Units
(with an initial assigned value of $24,495,249) in exchange for
substantially all outstanding units of limited partnership interest
owned by individual limited partners ("Exchange Limited Partners") in 23
limited partnerships (the "Exchange Partnerships"), which directly or
indirectly own equity and/or debt interests in one or more of 26
residential apartment properties located in the southeast and mid-west
United States. Prior to the completion of the Exchange Offering, the
Exchange Partnerships were managed by corporate general partners (the
"Corporate General Partners"), which were controlled by Gregory K.
McGrath, who is the Chief Executive Officer of the Trust and the Chief
Executive Officer, sole stockholder and sole director of the Managing
Shareholder of the Trust.
Following the completion of the Exchange Offering, the Exchange
Partnerships continue to own the same property interests they owned
prior to the offering; substantially all of the limited partnership
interests in the 23 Exchange Partnership are owned by the Operating
Partnership; Mr. McGrath, for nominal consideration, assigned to the
Trust all of the equity stock in 18 of the Corporate General Partners
and granted to the Board of the Trust a management proxy coupled with an
interest to vote the shares of the remaining five Corporate General
Partners; the Corporate General Partner of each of the Exchange
Partnerships assigned to the Operating Partnership all of its economic
interest in the partnership; and Mr. McGrath caused each Corporate
General Partner to waive its right to receive from its Exchange
Partnership any ongoing fees, effective upon completion of the exchange.
As a result of the foregoing, the Operating Partnership (and indirectly
the Trust) own substantially all of the economic interest represented by
the equity and debt interests owned by the Exchange Partnerships and
control management of such partnerships.
The Exchange Offering expired on April 7, 2000. Under the terms of the
Exchange Offering, Exchange Limited Partners in a particular Exchange
Partnership were entitled to participate in the offering only if limited
partners holding at least 90% of the units of limited partnership
interest in that partnership affirmatively elected to accept the
offering. Exchange Limited Partners holding approximately 97.4% of the
outstanding units of limited partnership interest in such partnerships
F-11
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
accepted the offering, and each of the Exchange Partnerships exceeded
the 90% requirement. As a result, following the completion of the
Exchange Offering, the limited partnership interests of nine Exchange
Partnerships are owned entirely by the Operating Partnership (in the
case of nine Exchange Partnership in which all Exchange Limited Partners
accepted the offering), and substantially all of the limited partnership
interests in the other 14 Exchange Partnerships are owned by the
Operating Partnership, with the remaining limited partnership interests
being retained by Exchange Limited Partners who elected not to accept
the offering or failed to respond to the offering.
For financial statement presentation purposes it is assumed that the
Units of limited partnership interest in the Operating Partnership
issued to Exchange Limited Partners in the Exchange Offering have been
issued as Common Shares of the Trust, since the unitholders are entitled
to exchange all or a portion of their Units at any time and from time to
time for an equivalent number of Common Shares, so long as the exchange
would not cause the exchanging party to own in excess of 5% of the then
outstanding Common Shares, subject to the Trust's right to cash out any
unitholder who requests an exchange and subject to certain other
exceptions.
Operating Partnership Limited Partnership Units
In connection with the formation of the Trust and the Operating
Partnership, their two founders (the "Original Investors") each
subscribed for 601,080 Units of limited partnership interest in 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. The number of Units
subscribed for by the Original Investors represented 19% of the maximum
Common Shares that would have been outstanding following the completion
of the Cash Offering and the Exchange Offering, assuming that the Trust
had sold all Common Shares offered in the Cash Offering and that the
Operating Partnership had issued the maximum number of Units (2,500,000)
offered in the Exchange Offering, calculated on a fully diluted basis
assuming all then outstanding Units (other than those acquired by the
Trust) had been exchanged into an equivalent number of Common Shares.
The Original Investors deposited the Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier
release under certain conditions.
The subscription agreement entered into by the Original Investors
provided that if, as of May 31, 2000, the number of Units subscribed for
by the Original Investors represents a percentage greater than 19% of
the then outstanding Common Shares, calculated on a fully diluted basis,
each of the Original Investors would be required to return any excess
Units to the Operating Partnership for cancellation. Therefore, as of
May 31, 2000, an adjustment, reducing the number of Units held in escrow
by 444,414, is necessary to accurately reflect the number of Units held
by the Original Investors.
The fair value of the Units issued to the Original Investors amounted to
$100,000, based upon a determination made by the Independent Trustees of
the Trust as of the date of subscription for these Units (February 3,
1998). The determination of the fair value took into consideration that
at the time of the subscription for the Units, the Trust and the
Operating Partnership were development stage companies, with no cash or
other significant tangible assets, operating history or revenue and no
certainty of successful offerings or future operations; the founders had
at risk
F-12
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
their initial capital contributions plus certain additional unreimbursed
advances to cover certain offering and operating expenses; the founders
have significant experience and developed know-how critical to the
success of the Trust and the Operating Partnership; and the founders'
Units are subject to significant transfer restrictions. The Operating
Partnership has accounted for the Units as being issued and outstanding,
but subject to escrow restrictions, in the accompanying consolidated
financial statements, and has included the Units as outstanding in
determining the weighted average shares outstanding for purposes of
calculating net loss per partnership unit in the accompanying
consolidated financial statements. Because the release of the Units from
escrow is not dependent upon the achievement of any specified level of
profits, the release of the Units from escrow is not considered to be
compensatory and, accordingly, no accounting measurement will be given
to the release of the Units from escrow.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Exchange Partnerships which
participated in the Exchange Offering; agreed to assign to the Operating
Partnership the right to receive all residual economic rights
attributable to the general partner interests in the Exchange
Partnerships; and, in order to permit management by the Operating
Partnership of the properties owned by the Exchange Partnerships, caused
the Exchange Partnerships to cancel the partnerships' prior property
management agreements and agreed to forego the right to have a property
management firm controlled by the Original Investors assume the property
management role in respect of properties in which the Trust or the
Operating Partnership invest.
Following the Exchange Offering, the Operating Partnership controls all
of the Exchange Partnerships by virtue of its ownership of substantially
all of the limited partnership interests therein, which provides the
Operating Partnership the ability to remove the general partner under
the provisions of the limited partnership agreement pertaining to each
Exchange Partnership that authorize limited partners holding over 50% of
total partnership interest to remove the general partner.
Distributions
There were no distributions in the six months ended June 30, 2000.
NOTE 7. NET LOSS PER SHARE
The Trust computes per share data in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share".
SFAS 128 requires dual presentation of basic and diluted earnings per
share on the face of the income statement.
Basic net loss per share equals net loss divided by the weighted average
shares outstanding during the year. The computation of diluted net loss
per share that includes dilutive Common Share equivalents in the
weighted average shares outstanding has not been presented, as it is
anti-dilutive for both the three and six months ended June 30, 2000 and
1999.
F-13
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
The components used in calculating basic net loss per share are as follows:
Weighted
Average Loss
Net Loss Shares Per Share
------------ ------ ---------
Three Months Ended June 30, 2000 $(9,414,004) 698,947 (13.47)
Three Months Ended June 30, 1999 $ (357,387) 614,813 $ (0.58)
Six Months Ended June 30, 2000 $(9,670,832) 690,306 (14.01)
----------- ------- ------
Six Months Ended June 30, 1999 $ (789,443) 567,840 $ (1.39)
=========== ======= =====
NOTE 8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma condensed consolidated statements of operation
for the six months ended June 30, 2000 have been prepared assuming that
the Exchange Offering had been fully subscribed and occurred on January
1, 2000.
The pro forma information is not necessarily indicative of what the
Trust's results of operations would have been assuming the completion of
the described transaction at the beginning of the period indicated, nor
does it purport to project the Trust's results of operations for any
future period.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Six Months ended June 30, 2000
<TABLE>
<CAPTION>
Statement of
Operations as of June Pro Forma
30, 2000 Adjustments Pro Forma
<S> <C> <C> <C>
Total Revenues $2,034,000 $1,486,000(1) $3,520,000
Cost and Expenses $3,348,100 $1,350,000(2) 4,698,100
Provision for Property
Impairment $8,357,000 $(8,357,000)(3)
Net Income (loss) $(9,671,000) $(1,178,100)
Weighted Average
Number of Common
Shares 690,306 690,306
Net Loss Per Share $(14.01) $(1.71)
</TABLE>
Pro Forma Adjustments
The unaudited pro forma condensed consolidated financial statements
represent the acquisition of substantially all of the partnership
interests in the Exchange Partnerships, which will be accounted
F-14
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
for under the purchase method of accounting. The Trust has estimated the
adjustments necessary to allocate the aggregate purchase price over the
recorded book value of these partnerships. Such allocations are subject
to final determination based upon valuations provided by the Trust and
other valuations of fair value as if the acquisitions were effective
January 1, 2000. Therefore, the allocations reflected in the unaudited
pro forma condensed consolidated financial statements may differ from
amounts ultimately determined. Differences between the amounts included
herein and the final allocations are not expected to have a material
effect on the unaudited pro forma financial statements.
Pro forma depreciation for the period ended June 30, 2000 is based upon
assets at fair value at January 1, 2000, primarily based upon 30-year
asset lives.
Summary pro forma adjustments to present comparative per share data
assume that the Exchange Offering had been consummated January 1, 2000
(assumes Units outstanding for entire period). The Original Investors'
escrowed Units are not included in the pro forma computation with basic
loss per share because there is no assurance that the Units will be
released from escrow and their inclusion would be antidilutive.
The pro forma adjustments detailed above are as follows:
1) The Exchange Partnerships provide an additional $1.4 million in
revenue if assumed to have been included from January 1, 2000.
2) The Exchange Partnerships incur an additional $1.35 million in
expenses if assumed to have been included from January 1, 2000.
3) A one-time Provision for Property Impairment of $8.4 million was
recognized at the end of the second quarter to account for the
excess of the exchanged value over the estimated equity value of
the Exchange Partnerships.
NOTE 9. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In April 2000, in connection with the completion of the Exchange
Offering, the Operating Partnership acquired indirect equity interests
in 13 rental properties and subordinated mortgage interests in 10
additional properties through the acquisition of substantially all
partnership interests in the Exchange Partnerships, which own land and
depreciable property, accrued interest, advances, other assets,
mortgages and notes payable, as follows:
Land and Depreciable Property $32,474,270
Accrued Interest - Affiliate 1,338,564
Advances to Affiliates 6,048,286
Other Assets 736,604
-----------
Total Assets $40,597,724
Mortgages Payable $19,725,536
Notes Payable - Affiliate 3,639,638
-----------
Total Liabilities $23,365,174
===========
Equity $17,232,550
===========
F-15
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Baron Capital Trust (the
"Registrant" or the "Trust") and the Notes thereto. (See ITEM 1 -
FINANCIAL STATEMENTS.)
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 this Management's Discussion and Analysis or Plan of
Operation section of this Report, 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.
Results of Operations
The Trust commenced operations in the first half of 1998. The Trust and
its affiliate, Baron Capital Properties, L.P. (the "Operating
Partnership"), a Delaware limited partnership, constitute an affiliated
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.
The Operating Partnership conducts all of the Trust's real estate
operations and holds all direct or indirect property interests acquired.
The Trust is the sole general partner of the Operating Partnership, and,
in such capacity, the Trust controls the activities of the Operating
Partnership. As of December 15, 2000, the Trust also owned 546,786
Operating Partnership Units, representing approximately 14.0% of the
then outstanding Units. Since the Units comprise substantially all of
the assets of the Trust, the operating results of the Trust are
primarily dependent upon the operating results of the Operating
Partnership.
3
<PAGE>
As described below in this Report, in May 1998, the Trust commenced an
offering (the "Cash Offering") of up to 2,500,000 common shares of
beneficial interest ("Common Shares") in the Trust at a purchase price
of $10.00 per share (maximum proceeds of $25,000,000). In the Cash
Offering, which expired on May 31, 2000, the Trust sold 702,076 Common
Shares for an aggregate purchase price of $7,020,763.
Through the Operating Partnership, the Trust has acquired substantially
all the beneficial interests in 16 residential apartment properties,
including the Heatherwood I Apartments (67 studio, one bedroom and two
bedroom units located in Kissimmee, Florida) in June 1998; Crystal Court
II Apartments (80 studio, one bedroom and two bedroom units located in
Lakeland, Florida) in July 1998; and Riverwalk Apartments (50 two
bedroom units located in New Smyrna, Florida) and 13 properties acquired
as part of the Exchange Offering (discussed below). In July 1998 the
Operating Partnership also acquired a minority limited partnership
interest in 13 real estate limited partnerships then managed by
affiliates of Gregory K. McGrath (a founder and Chief Executive Officer
of the Trust and founder of the Operating Partnership), including
certain of the Exchange Partnerships which participated in the Exchange
Offering and which are now managed by the Trust.
During 1998 and 1999, the Trust acquired a total of 40% of the limited
partnership interests in Alexandria Development, L.P., which owns
Alexandria Apartments, a 168-unit residential apartment property under
construction in Alexandria, Kentucky. As of June 30, 2000, 112 of the
168 residential units (approximately 67%) had been completed and were in
the rent-up stage. Of the completed units, 107 units have been rented.
In September 1998, the Trust entered into an agreement with three real
estate development companies (Brentwood at Southgate, Ltd., Burlington
Residential, Ltd. and The Shoppes at Burlington, Ltd.) to acquire two
luxury residential apartment properties in the development stage upon
the completion of construction. The three development companies are
controlled by Mr. McGrath. One of the residential properties has been
sold to a third party with the Trust's consent. The remaining property
is scheduled to have a total of 396 units, comprised of one, two and
three bedroom/one or two bathroom apartments. Construction of the
property (the "Burgundy Hills Property"), located in Florence, Kentucky
(part of the Cincinnati metropolitan area), is expected to be completed
by the end of the first quarter of 2004. The Trust has a right of first
negotiation to purchase the property from the development company upon
completion and a right of first refusal to purchase the property on the
same terms offered by a third party. The purchase price is expected to
be approximately $30,000,000. It is contemplated that a significant
portion of that amount would be covered by first mortgage financing. At
the current time the Trust does not have adequate resources to close on
the transaction and it is uncertain whether the Trust will have adequate
resources to complete the transaction upon completion of construction.
4
<PAGE>
In connection with the transaction, the Trust (along with its Chief
Executive Officer) agreed to co-guarantee up to 35% (or approximately
$6,000,000) of existing long-term construction financing provided by
KeyBank National Association ("KeyBank") in respect of the Burgundy
Hills Property. As of December 15, 2000, approximately $5,300,000 of the
loan had been drawn down, resulting in outstanding guarantees of
approximately $1,900,000. The interest rate on the construction loan is
KeyBank's prime rate (currently 9.25%) or the LIBOR rate plus 2%. The
Trust also agreed that, if the loan is not repaid prior to the
expiration of the guarantee, it would either buy out the bank's position
on the entire amount of the construction loan or arrange for a third
party to do so.
In September 2000, the Trust received notice from counsel to KeyBank
that Burlington Residential, Ltd. ("Borrower"), the owner and developer
of the Burgundy Hills Property, had defaulted on its loan for failure to
pay current interest due and meet certain equity requirements and
covenants under the loan agreement, adverse changes in the financial
conditions of the Borrower and the Trust, and the Trust's failure to
meet certain tangible net worth tests set forth in the loan agreements.
KeyBank has indicated that it was exercising its right to accelerate the
loan. According to Mr. McGrath, KeyBank agreed to forego further action
for at least 60 days while the parties attempted to reach an
arrangement. The extension expired in November 2000 and, according to
Mr. McGrath, is currently being extended on a month-to-month basis. The
Borrower paid down the outstanding accrued interest and a portion of the
principal and is currently negotiating a new long-term construction
facility with another institutional lender to replace the KeyBank loan.
The Borrower anticipates completion of the refinancing in the first
quarter of 2001.
In April 2000, pursuant to a registration statement on Form S-4, the
Operating Partnership completed an exchange offering (the "Exchange
Offering") under which it acquired additional interests in residential
apartment properties. In the Exchange Offering, the Operating
Partnership issued 2,449,525 registered units of limited partnership
interest in the Operating Partnership (the "Operating Partnership Units"
or "Units") (with an initial assigned value of $24,495,249) in exchange
for substantially all outstanding units of limited partnership interest
owned by individual limited partners ("Exchange Limited Partners") in 23
limited partnerships (the "Exchange Partnerships"). The Exchange
Partnerships directly or indirectly own equity and/or debt interests in
one or more of 26 residential apartment properties (the "Exchange
Properties") located in the southeast and mid-west United States.
Holders of Operating Partnership Units (other than the Trust) are
entitled to exchange all or a portion of their Units at any time and
from time to time for an equivalent number of Common Shares of the
Trust, 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 Common Shares, subject to the Trust's
right to cash out any holder of Units who requests an exchange and
subject to certain other exceptions.
5
<PAGE>
Prior to the completion of the Exchange Offering, the Exchange
Partnerships were managed by corporate general partners (the "Corporate
General Partners"), which were controlled by Mr. McGrath.
Following the completion of the Exchange Offering, the Exchange
Partnerships continue to own the same property interests they owned
prior to the offering; substantially all of the limited partnership
interests in the 23 Exchange Partnership are owned by the Operating
Partnership; Mr. McGrath, for nominal consideration, assigned to the
Trust all of the equity stock in 18 of the Corporate General Partners
and granted to the Board of the Trust a management proxy coupled with an
interest to vote the shares of the remaining five Corporate General
Partners; the Corporate General Partner of each of the Exchange
Partnerships assigned to the Operating Partnership all of its economic
interest in the partnership; and Mr. McGrath caused each Corporate
General Partner to waive its right to receive from its Exchange
Partnership any ongoing fees, effective upon completion of the exchange.
As a result of the foregoing, the Operating Partnership (and indirectly
the Trust) own substantially all of the economic interest represented by
the equity and debt interests owned by the Exchange Partnerships and
control management of such partnerships.
Certain of the Exchange Partnerships own direct or indirect equity
interests in 16 Exchange Properties which consist of an aggregate of
1,012 residential units (comprised of studio and one, two, three and
four-bedroom units). Certain of the Exchange Partnerships own direct or
indirect mortgage interests in 10 Exchange Properties, which consist of
an aggregate of 813 existing residential units (studio and one and two
bedroom) and 168 units (two and three bedroom) under development. Of the
Exchange Properties, 21 properties are located in Florida, three
properties in Ohio and one property each in Georgia and Indiana.
Consolidated Balance Sheet as of June 30, 2000 Compared to December 31,
1999
Due to the completion of the Exchange Offering, the balance sheet for
the Trust reflects large increases in assets, liabilities and partners'
equity. During the six months ended June 30, 2000, total assets
increased to $47.1 million while liabilities increased to $31.6 million.
As described above, the Exchange Offering increased the number of
properties in which the Operating Partnership indirectly owns an equity
and/or mortgage interest by adding 26 Exchange Properties. The Operating
Partnership now has rental apartment assets in excess of $39.6 million,
which are subject to $25.2 million in first mortgage debt.
Shareholders' equity increased to $15.0 million due to the issuance in
the Exchange Offering of more than 2.4 million Units with an initial
assigned value of $24.5 million, reduced by a one-time write off charge
of $1.7 million (which represents unamortized loan costs recorded on the
Exchange Partnerships' books that were in place at the time of the
Exchange Offering from the syndication of the prior partnership
structure) and a net loss for the six months ended June 30, 2000 of $9.7
million.
6
<PAGE>
Operations for the Six Months Ended June 30, 2000 Compared to Six Months
Ended June 30, 1999
Revenues, real estate expenses and administrative expenses all increased
substantially for the six months ended June 30, 2000 in comparison to
the six months ended June 30, 1999 due to the completion of the Exchange
Offering mentioned above and the addition of the 26 Exchange Properties
and their related operating costs.
The Trust recognized a one-time charge of $8.4 million to operations as
a Provision for Property Impairment in the second quarter of 2000. This
provision is the result of writing off the excess of the exchanged value
of the Exchange Partnerships over the estimated equity value of the
Exchange Properties. The equity value is calculated by reducing the
appraised value of the Exchange Properties by any mortgages or interest
payables due on the Exchange Properties.
Liquidity and Capital Resources
Net Cash Used by Operating Activities in the six months ended June 30,
2000 was ($443,760) compared to ($592,081) in the six months ended June
30, 1999. A number of items, including an increase in certain
liabilities and a decrease in certain assets, contributed to the reduced
use of cash by operating activities.
Net cash provided by investing activities in the six months ended June
30, 2000 was $206,783 compared to ($857,323) in the six months ended
June 30, 1999. The increase in cash for 2000 was due primarily to an
increase in cash distributions from the Exchange Partnerships and a
decrease in investments in partnerships.
Net cash provided by financing activities in the six months ended June
30, 2000 was $330,575 compared to $1,510,415 for the six months ended
June 30, 1999. The decrease in cash was due to a decrease in the sale of
Trust shares in the Cash Offering, which expired in May 2000.
The net cash proceeds from the issuance of Common Shares in connection
with the Cash Offering have been contributed by the Trust to the
Operating Partnership in exchange for an equivalent number of Units in
the Operating Partnership. The Trust is the sole general partner of the
Operating Partnership and, as of December 15, 2000, owned 546,786
Operating Partnership Units, representing approximately 14.0% of the
then outstanding Units.
Because of the net loss of $3,166,927 incurred by the Trust in the
period ended December 31, 1999, and the $1,123,000 in accounts payable
owed to professionals in connection with the Exchange Offering as of
December 31, 1999, and its limited liquid resources as of December 31,
1999, the Trust's independent auditors qualified their auditors' report
to reflect a going concern contingency.
The completion in April 2000 of the Exchange Offering described above
has completed the first effort, in the opinion of management, to provide
the critical mass
7
<PAGE>
necessary for profitable operations. The Company is negotiating with the
firms who are owed accounts payable in order to extend payment terms
and, where possible, reduce the amounts due. Distributions will be made
by the Trust as cash flow allows, but will be negatively impacted until
the open accounts payable are reduced. Management does not anticipate
that the Trust will make distributions to its shareholders for the next
several quarters.
The Trust and the Operating Partnership intend to use securities of the
Trust and the Operating Partnership (including Common Shares and Units),
proceeds from future sales of such securities, and available operating
cash flow and financing from other sources to acquire interests in
additional residential apartment properties or interests in other
partnerships substantially all of whose assets consist of residential
apartment property interests, and payment of applicable fees and
expenses.
The operating results of the Trust and the Operating Partnership will
depend primarily upon income from the residential apartment properties
in which they directly or indirectly own or acquire an equity or debt
interest. Operating results in respect of equity interests will be
substantially influenced by the demand for and supply of residential
apartment units in their primary market and sub-markets, and operating
expense levels. Operating results in respect of mortgage and other debt
interests will depend upon interest income, including, in certain cases,
participation interest, whose payment will depend upon the operating
performance, sale or refinancing of the underlying properties. The
operating results of the Trust and the Operating Partnership will also
depend upon the pace and price at which they can acquire and improve
additional property interests.
The target metropolitan markets and sub-markets have benefited in recent
periods from demographic trends (including population and job growth)
which increase the demand for residential apartment units, while
financing constraints (specifically, reduced availability of development
capital) have limited new construction to levels significantly below
construction activity in prior years. Consequently, rental rates for
residential apartment units have increased at or above the inflation
rate for the last two years and are expected to continue to experience
such increases for the next 18 months based on market statistics made
available to management of the Trust in terms of occupancy rates,
supply, demographic factors, job growth rates and recent rental trends.
Expense levels also influence operating results, and rental expenses
(other than real estate taxes) for residential apartment properties have
generally increased at approximately the rate of inflation for the past
three years and are expected to increase at the rate of inflation for
the next 18 months. Changes in interest rates are not expected to
materially impact operations, because the majority of the real estate
mortgages have fixed interest rates, as do all of the inter-company
loans.
The Trust believes that known trends, events or uncertainties which will
or are reasonably likely to affect the short-term and long-term
liquidity and current and future prospects of the Trust and the
Operating Partnership include the performance of the economy and the
building of new apartment communities. Although the Trust
8
<PAGE>
cannot reliably predict the effects of these trends, events and
uncertainties on the property investments of the Trust and the Operating
Partnership as a whole, some of the reasonably anticipated effects might
include downward pressure on rental rates and occupancy levels.
Generally, there are no seasonal aspects of the operations of the Trust
or the Operating Partnership that might have a material effect on their
financial conditions or results of operation. However, for the last 36
months, one 60-unit student housing property owned by one of the
Exchange Partnerships involved in the Exchange Offering has had an
average occupancy rate of 88% for nine months of the year and 61% for
the remaining three months of the year.
Subject to the foregoing discussion, management believes that the Trust
and the Operating Partnership have the ability to satisfy their cash
requirements for the foreseeable future. However, management of the
Trust believes that 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 Trust and the Operating Partnership
intend to investigate making an additional public or private offering of
Common Shares and/or Units during the next 12 months.
As part of the Trust's ongoing operations, management is reviewing the
entire portfolio of properties to determine the potential for
restructuring or refinancing various first mortgage loans. Additionally,
properties whose recent performance has materially negatively impacted
the Trust's operating results are being evaluated for possible sale.
Certain of these properties have been listed for sale. The Trust is also
in discussions with other apartment owners, and is exploring business
combinations that will bring it economies of scale and the size it needs
for listing its Common Shares on a recognized securities exchange.
Additional size would also give the Company the operating margin
necessary to support its valuable management team that is believed
necessary for its long-term growth.
The Trust and the Operating Partnership expect no material change in the
number of employees over the next 12 months.
In an effort to increase profitability, the Trust has also entered into
agreements with WaKuL, Inc. (formerly Rapid Transmit Technology, Inc.),
a provider of integrated communications services to owners, property
managers and residents of residential apartment properties, including
discounted local and long distance phone service, digital cable TV, high
speed Internet access, monitored security systems, utility sub-metering
and various property management services. WaKuL will provide these
services at no capital cost to the Trust, and has entered into revenue
sharing relationships with the Trust. (WaKuL is an affiliate of the
Trust by virtue of the overlapping management and ownership capacities
in the Trust, the Operating Partnership and WaKuL of Gregory K. McGrath,
a founder of the Trust, the Operating Partnership, and WaKul.) The WaKuL
services are expected to provide the Trust's properties with a
significant marketing advantage over its competitors, and
9
<PAGE>
to provide significant rental and other revenues that the properties
otherwise would not have generated.
Year 2000
The computer systems of the Trust and the Operating Partnership have
been tested for year 2000 problems and the Trust and the Operating
Partnership believe that such systems are year 2000 compatible. The
Trust and the Operating Partnership have not experienced any material
year 2000 problems so far in 2000. It is possible, however, that the
computer systems of the Trust and the Operating Partnership and certain
computer systems or software products of their suppliers could
experience year 2000 problems and that such problems could adversely
affect them. With respect to their own computer systems, the Trust and
the Operating Partnership have upgraded their principal operating
computer software to the most recent available revision sold by their
software supplier, which software the supplier has represented to be
year 2000 compliant. The Trust and the Operating Partnership believe
that such upgrade will solve any year 2000 problems that could affect
their operating software. The failure to identify and solve all year
2000 problems affecting their business could have an adverse effect on
the business, financial condition and results of operations of the Trust
and the Operating Partnership.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Trust is a claimant in the Georgia Pacific class action lawsuit, and
is not a party to any other legal proceeding.
Item 2. Changes in Securities and Use of Proceeds
The Trust's Form SB-2 Registration Statement (the "Registration
Statement") (Commission file number 333-35063) was declared effective by
the Commission on May 15, 1998. On May 18, 1998, the Trust commenced its
public offering (the "Cash Offering") of common shares of beneficial
interest in the Trust ("Common Shares"), the class of securities
registered. On June 2, 1999, the Trust filed Post-Effective Amendment
No. 1 (the "Amendment") to the Registration Statement, which the
Commission declared effective on June 11, 1999. The Cash Offering
expired on May 31, 2000.
The managing underwriter of the Cash Offering was Sigma Financial
Corporation. The amount of Common Shares registered was 2,500,000
shares. The offering price per Common Share was $10.00, and the
aggregate price of the offering amount registered was $25,000,000. The
Trust sold 702,076 Common Shares in the Cash Offering, for an aggregate
offering price of $7,020,763.
From the effective date of the Registration Statement through June 30,
2000, the following expenses have been incurred for the Trust's account
in connection with the issuance and distribution of the registered
Common Shares:
<TABLE>
<S> <C>
Underwriting discounts and commissions: $ 565,557 (plus five-year warrants to
acquire 59,676 Common Shares at an
exercise price of $13.00 per share)
Finder's Fees: $0
Expenses Paid to or for Underwriter: $0
Other Expenses (reimbursement for advisory
and investment expenses): $521,008
Total Expenses: $1,086,565
</TABLE>
Of such expense payments, $471,472 were made directly to Baron Advisors,
Inc., the Managing Shareholder of the Trust. The remaining payments of
$615,093 were made directly or indirectly to others. The net offering
proceeds to the Trust after deducting the foregoing total expenses were
$5,991,522.
11
<PAGE>
From the effective date of the Registration Statement through June 30,
2000, the net offering proceeds to the Trust were used for the following
purposes:
Improvements to buildings and facilities: $0
Purchase and installation of equipment: $0
Repayment of indebtedness: $0
Working capital: $519,770
Temporary investments: $0
Investment in Baron Capital Properties, L.P. (the
Operating Partnership) $5,467,858
Other purposes for which 5% or more of net
offering proceeds or $100,000 (whichever is less)
have been used: $0
Of such net proceeds, $5,467,858 was directly contributed to the
Operating Partnership in exchange for Units of limited partnership
interest therein. The Operating Partnership conducts all of the real
estate operations of the Trust and holds all of its real property
assets. Thus, the operating results of the Trust are primarily dependent
upon the operating results of the Operating Partnership.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)
12
<PAGE>
Exhibit
Number Description
3.1 Certificate of Business Trust Registration of the
Registrant (incorporated herein by reference to
Exhibit 3.1 to the Form SB-2 Registration
Statement of Baron Capital Trust filed with the
Securities and Exchange Commission on September 5,
1997).
3.2 Amended and Restated Declaration of Trust for the
Registrant made as of August 11, 1998
(incorporated herein by reference to Exhibit 10.2
to Amendment No. 1 to the Form S-4 Registration
Statement of Baron Capital Properties, L.P. filed
with the Securities and Exchange Commission on
September 22, 1998 (Registration No. 333-55753)).
3.3 Form of by-laws of the Registrant (incorporated
herein by reference to Exhibit 3.3 to Amendment
No. 3 to the Form SB-2 Registration Statement of
Baron Capital Trust filed with the Securities and
Exchange Commission on May 15, 1998).
27 Financial Data Schedule
(b) The Registrant did not file any Current Reports on Form 8-K
during the quarter for which this Report is filed.
13
<PAGE>
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
December 20, 2000
BARON CAPITAL TRUST
By: /s/ Gregory K. McGrath
-------------------------------
Gregory K. McGrath
Chief Executive Officer
By: /s/ Mark L. Wilson
-------------------------------
Mark L. Wilson
Chief Financial Officer
14
