SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number 1-6613
VALUE PROPERTY TRUST
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 23-1862664
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
120 Albany Street, 8th Floor
New Brunswick, New Jersey 08901-2163
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 296-3080
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ].
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
Number of Common Shares Outstanding at August 5, 1997: 11,226,310
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements..........................
Consolidated Balance Sheets at June 30, 1997 (Unaudited)
and September 30, 1996...............................
Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 1997 and 1996 (Unaudited)......
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1997 and 1996 (Unaudited).............
Consolidated Statement of Shareholders' Equity for the Nine
Months Ended June 30, 1997 (Unaudited)...............
Notes to the Consolidated Financial Statements.............
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...........................
Part II: OTHER INFORMATION
Item 5. Other Information..........................................
Item 6. Exhibits and Reports on Form 8-K...........................
Signatures.................................................
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, September 30,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Assets Held for Sale:
Investment in partnerships .............................. $ 11,366 $ 10,219
Real estate owned ....................................... 23,249 38,171
-------- --------
Total Assets Held for Sale ........................ 34,615 48,390
-------- --------
Assets Held for Investment:
Mortgage loans .......................................... 583 663
Investment in partnerships .............................. -- 13,486
Real estate owned ....................................... 37,935 63,196
-------- --------
Total Assets Held for Investment .................. 38,518 77,345
-------- --------
Total Invested Assets ............................. 73,133 125,735
Cash and cash equivalents .................................. 65,932 29,501
Restricted cash ............................................ 34,734 12,213
Interest receivable and other assets ....................... 3,683 4,962
-------- --------
Total Assets ...................................... $177,482 $172,411
======== ========
LIABILITIES
Senior secured notes (due 1999) ............................ $ 42,882 $ 63,226
Accounts payable and accrued expenses ...................... 1,396 1,804
Interest payable ........................................... 244 334
-------- --------
Total Liabilities ................................. 44,522 65,364
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In Thousands) (continued)
June 30, September 30,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value: 3,500,000 shares authorized,
none issued ............................................. -- --
Common shares, $1 par value: 20,000,000 shares authorized,
11,226,310 and 11,226,310 shares issued and outstanding . 11,226 11,226
Additional paid-in capital ................................. 88,848 88,848
Accumulated earnings ....................................... 32,886 6,973
-------- --------
Total Shareholders' Equity ........................ 132,960 107,047
-------- --------
Total Liabilities and Shareholders' Equity ........ $177,482 $172,411
======== ========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Rental properties:
Rental income ....................... $ 5,052 $ 6,909 $16,701 $20,454
Operating expense reimbursements .... 843 985 2,518 2,681
Interest and fee income on mortgage loans 19 19 61 2,833
Interest on short-term investments ...... 829 543 1,943 1,310
Other ................................... 0 6 8 17
------- ------- ------- -------
Total Revenue ....................... 6,743 8,462 21,231 27,295
------- ------- ------- -------
Expenses:
Interest ................................ 1,389 2,064 4,162 9,049
Rental properties:
Operating ........................... 2,171 2,978 7,102 9,104
Depreciation and amortization ....... 377 585 1,321 1,780
Other operating expenses ................ 802 819 2,317 2,459
------- ------- ------- -------
Total Expenses ...................... 4,739 6,446 14,902 22,392
------- ------- ------- -------
Income before gain on sale of real estate .. 2,004 2,016 6,329 4,903
Gain on sale of real estate ................ 11,712 -- 19,584 --
------- ------- ------- -------
Net income ................................. $13,716 $ 2,016 $25,913 $ 4,903
======= ======= ======= =======
Per share:
Income before gain on sale of real estate .. $ .18 $ .18 $ .56 $ .44
Gain on sale of real estate ................ 1.04 -- 1.75 --
------- ------- ------- -------
Net income ................................. $ 1.22 $ .18 $ 2.31 $ .44
======= ======= ======= =======
Weighted average number of common
shares outstanding ...................... 11,226 11,226 11,226 11,226
======= ======= ======= =======
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Nine Months Ended
June 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................. $ 25,913 $ 4,903
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization on real estate ....... 1,321 1,780
Decrease in payables and accrued expenses .......... (408) (2,897)
(Decrease) increase in interest payable ............ (90) 357
Decrease in receivables and other assets ........... 1,647 3,061
Gain on sale of real estate ........................ (19,584) --
--------- ---------
Total adjustments ........................................... (17,114) 2,301
--------- ---------
Net cash provided by operating activities ........................ 8,799 7,204
--------- ---------
Cash flows from investing activities: Investment in real estate:
Real estate ............................................. (2,706) (3,403)
Partnerships ............................................ (629) (145)
Advances on mortgage loans .............................. -- (73)
Principal repayments on mortgage loans ...................... 80 2,357
Proceeds from the sale of real estate ....................... 73,752 14,677
Proceeds from the sale of mortgage loans and notes receivable -- 53,991
Principal repayments on notes receivable .................... -- 366
--------- ---------
Net cash provided by investing activities ........................ 70,497 67,770
--------- ---------
Cash flows from financing activities:
Payment of mortgage payable ................................. -- (17,535)
Prepayment of senior secured notes (due 2002) ............... -- (109,975)
Borrowing of senior secured notes (due 1999) ................ -- 67,379
Prepayment of senior secured notes (due 1999) ............... (20,344) --
Increase in restricted cash ................................. (22,521) (3,243)
--------- ---------
Net cash used in financing activities ............................ (42,865) (63,374)
--------- ---------
Net increase in cash and cash equivalents ........................ 36,431 11,600
Cash and cash equivalents at beginning of period ................. 29,501 9,977
--------- ---------
Cash and cash equivalents at end of period ....................... $ 65,932 $ 21,577
========= =========
Supplemental schedule of non-cash investment and
financing activities:
Transfer of mortgage loans to real estate owned ............. $ -- $ 5,120
========= =========
Interest paid ............................................... $ 2,747 $ 7,787
========= =========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
(Amounts In Thousands)
For the Nine Months Ended June 30, 1997
Additional Total
Common Shares Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 ...... 11,226 $ 11,226 $ 88,848 $ 6,973 $107,047
Net income ......................... -- -- -- 25,913 25,913
-------- -------- -------- -------- --------
Balance at June 30, 1997 ........... 11,226 $ 11,226 $ 88,848 $ 32,886 $132,960
======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF FINANCIAL INFORMATION AND PLAN OF REORGANIZATION
In connection with its emergence from the Chapter 11 proceeding (the
"1995 Restructuring"), the Trust implemented Fresh Start Reporting as of
September 30, 1995, as set forth in Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code." Fresh Start
Reporting was required because (1) the reorganization value of the Trust's
assets immediately before the date of confirmation was less than the total of
all post-petition liabilities, (2) there was more than a 50% change in the
ownership of the Trust, and (3) there was a permanent and substantive loss of
control by existing shareholders. As a result, all assets and liabilities were
restated to reflect their respective reorganization value or fair value.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of only normal
recurring accruals, considered necessary for a fair presentation have been
included. Operating results for the nine-month and three-month periods ended
June 30, 1997 are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 1997. These financial statements should
be read in conjunction with the Trust's September 30, 1996 audited financial
statements and notes thereto included in the Trust's Annual Report on Form 10-K.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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. The most significant of these estimates relate to the carrying
value of the Assets Held for Sale and the estimated useful lives of Assets Held
for Investment. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accounts of the Trust and its wholly owned subsidiaries are
consolidated in the accompanying financial statements. All significant
intercompany balances and transactions have been eliminated in consolidation.
INCOME TAXES
The Trust is a real estate investment trust ("REIT") that has elected
to be taxed under Sections 856-860 of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, the Trust does not pay Federal income tax on
income as long as income distributed to shareholders is at least equal to 95% of
real estate investment trust taxable income, and pays no Federal income tax on
capital gains distributed to shareholders.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
In July 1997, the Trust contacted the Internal Revenue Service (the
"IRS") regarding interpretative advice concerning a technical provision of the
REIT requirements of the Internal Revenue Code and, based upon such interpretive
advice, potential violations of such provision during fiscal 1994 and 1995. The
Trust does not believe that any such potential violations would have a material
adverse effect on the Trust. However, the Trust has sought the IRS'
interpretation of the technical provision of the REIT requirements and its
concurrence that, if any technical violations were deemed to have occurred, such
violations would not affect the Trust's REIT status. The Trust believes that if
its status as a REIT was terminated, potential corporate taxes for prior periods
would not be material due to the net operating losses available in prior
periods. Moreover, there should be no material adverse tax consequences to
shareholders during such prior periods since no distributions were made to
shareholders during such periods. The effect of a termination of REIT status in
current and future periods would be based upon a number of factors; because the
Trust is unable to predict the occurrence or magnitude of such factors; it is
unable to predict the effect of a termination of REIT status on the Trust or its
shareholders for such periods.
For the fiscal years ended September 30, 1996, 1995 and 1994, there
were significant differences between taxable net loss and net income (loss) as
reported in the financial statements. The differences were related to the
recognition of bad debt deductions and accounting for reorganization costs and
Fresh Start Reporting. For financial accounting purposes, these items are
expensed currently, while for tax purposes some portion of these items are
deferred to future periods or may not be deductible. In addition, the Fresh
Start Reporting discussed in Note 1 is not recognized for tax purposes, and will
result in future years financial reporting and tax basis differences.
The Trust has approximately $115 million in net operating losses (the
"NOLs") for tax purposes attributable to losses generated in fiscal years 1992
through 1996. The NOLs attributable to each year can be carried forward up to
fifteen years from the year the loss was generated. The use of NOLs in any
taxable year (together with any recognized losses that are economically
attributable to the period up to the Restructuring) will be subject to an annual
limitation under Section 382 of the Code. The Trust estimates that this annual
limitation is approximately $6 million.
INTEREST INCOME
Interest income on each loan is recorded as earned. Interest income is
not recognized if, in the opinion of the management, collection is doubtful. The
Trust generally considers loans as delinquent if payment of interest and/or
principal, as required by the terms of the note, is more than 60 days past due.
Accrual of interest income is generally terminated and foreclosure proceedings
are started if payment is more than 60 days past due.
ALLOWANCE FOR LOSSES
Impairment on mortgage loans is accounted for in accordance with
Financial Accounting Standards Board Statement No. 114 - Accounting by Creditors
for Impairment of a Loan.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
NET INCOME PER SHARE
Net income per share is computed using the weighted average common
shares outstanding during the period.
DEPRECIATION AND AMORTIZATION
At September 30, 1995, as a result of Fresh Start Reporting, all assets
and liabilities of the Trust were restated to reflect their respective
reorganization value or fair value. The accumulated depreciation on real estate
owned was reset to zero as a result of the adoption of Fresh Start Reporting. At
September 30, 1995, the Trust segregated the real estate portfolio into two
categories: Held for Sale and Held for Investment. The Trust depreciates the
Held for Investment category over the estimated useful lives of the assets; 40
years for buildings, three to five years for other property and over the term of
the related lease for lease commissions and tenant improvements. The Held for
Sale category is not depreciated. During fiscal 1996, the Trust reclassified
seven real estate properties totaling $18.7 million to Assets Held for Sale from
Assets Held for Investment and no longer depreciates these assets. During the
second quarter of fiscal 1997, the Trust reclassified five real estate
properties totaling $35.7 million to Assets Held for Sale from Assets Held for
Investment and no longer depreciates these assets.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents and restricted cash include short-term
investments (high grade commercial paper, bank CDS and US Treasury and Agency
Securities) with original maturities not exceeding a term greater than 90 days.
INVESTMENT IN PARTNERSHIPS
Investment in partnerships represents the Trust's investment in real
estate partnerships. The Trust owns a majority percentage interest in most of
these partnerships and receives substantially all of the cash flow. The Trust
accounts for all of these partnerships, except one, in a similar manner as real
estate investments; the one partnership was accounted for using the equity
method.
REAL ESTATE OWNED
As of September 30, 1995, the Trust's invested assets were adjusted to
reorganization value which became the new historical cost basis. Subsequently,
Assets Held for Investment are carried at historical cost less depreciation.
Assets Held for Sale are carried at lower of cost or net realizable value. In
conjunction with the adoption of Fresh Start Reporting on September 30, 1995,
all gains or losses for a period of one year after such adoption were applied
against the carrying value of long lived assets Held for Investment. Through
September 30, 1996, the Trust reduced the carrying values of Assets Held for
Investment by $12.6 million as a result of the net gains on both the disposition
of substantially all of its mortgage loan portfolio in March 1996 and the sale
of nine real estate properties classified as Assets Held for Sale. For the nine
months ended of June 30, 1997, a gain of $19.6 million is recorded in net income
as a result of real estate property sales. At June 30, 1997, the Trust owned 23
real estate properties of which eight are classified as Assets Held for Sale.
The fiscal 1996 revenue and net operating income from these eight real estate
properties were $7.8 million and $4.4 million, respectively.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
DEFERRED COSTS
Included in other assets are costs incurred in obtaining debt financing
which are deferred and amortized over the term of the related debt agreement.
Amortization expense is included in interest expense in the accompanying
statement of operations. Net deferred financing costs included in other assets
in the accompanying balance sheet amounted to $0.7 million at June 30, 1997.
REVENUE RECOGNITION
The Trust recognizes base rental revenue for financial statement
purposes ratably as earned over the term of the lease.
INTEREST RATE SWAP AGREEMENT
The Trust is a party to an interest rate protection agreement (the
"Cap") used to hedge its interest rate exposure on floating rate debt (See Note
4 "Borrowings"). The differential to be paid or received is recognized in the
period incurred and included in interest expense.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" and SFAS No. 129, "Disclosure of Information about Capital
Structure." In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
SFAS 128, which simplifies existing computational guidelines,
supersedes Accounting Principles Board ("APB") Opinion 15, "Earnings Per Share,"
and specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted, and all prior period EPS figures that are
presented are required to be restated. The Trust is currently evaluating SFAS
128 and believes that the adoption of SFAS 128 will not have a significant
impact on the disclosures in the financial statements of the Trust.
SFAS 129, "Disclosure of Information about Capital Structure" lists
required disclosure about capital structure that had been included in a number
of separate statements and opinions of authoritative accounting literature. SFAS
129 is effective for financial statements issued for periods ending after
December 15, 1997. The Trust believes that the adoption of SFAS 129 will not
have a significant impact on the disclosures in the financial statements of the
Trust.
SFAS No. 130, "Reporting Comprehensive Income" establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. SFAS No. 131 is effective for
financial statements issued for periods beginning after December 15, 1997.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information anout operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for financial statements issued for periods beginning after December
15, 1997.
NOTE 3. MORTGAGE LOANS AND INVESTMENTS IN REAL ESTATE
During the second quarter of fiscal 1996, the Trust completed the
disposition of substantially all of its mortgage loan portfolio. The Trust
received $55.5 million in net cash proceeds through a series of transactions
which included loan repayments and a bulk sale of mortgage loans. The carrying
value of the mortgage loans involved in these transactions totaled $50.5
million. The Trust's remaining mortgage loan holdings are currently less than
$0.6 million.
The following table summarizes the Trust's investments in real estate
owned at June 30, 1997.
<TABLE>
<CAPTION>
Type of
Real Estate Number Carrying Accumulated Book
Property of Properties Amount Depreciation Value
-------- ------------- ------ ------------ -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Real Estate Held for Sale:
Real Estate Owned ........ 6 $23,384 $ (135) $23,249
Investment in Partnerships 2 11,562 (196) 11,366
------- ------- ------- -------
Total .................... 8 $34,946 $ (331) $34,615
======= ======= ======= =======
Real Estate Held for Investment:
Real Estate Owned ........ 15 $40,015 $(2,080) $37,935
------- ------- ------- -------
Total .................... 15 $40,015 $(2,080) $37,935
======= ======= ======= =======
</TABLE>
NOTE 4. BORROWINGS
SENIOR SECURED NOTES
The Holders of the Prior Notes had a first priority lien on all of the
Trust's collateral. The Prior Notes were governed by the Prior Indenture between
the Trust and Wilmington Trust Co., as Trustee, dated as of the effective date
of the Trust's reorganization (September 29, 1995). Interest on the Prior Notes
accrued at 11-1/8% per annum and was payable semi-annually in arrears on each
June 30 and December 31. The Prior Indenture included affirmative covenants,
negative covenants and financial covenants.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
On March 28, 1996, the Trust entered into a financing agreement which
provided for the issuance of $67.4 million of new Floating Rate Notes (the
"Floating Rate Notes"), which issuance occurred on April 30, 1996. The Floating
Rate Notes bear interest at 30 day LIBOR + 1.375%, payable monthly, and have a
stated maturity date of May 1, 1999.
The indenture relative to the Floating Rate Notes (the "New Indenture")
generally requires that, on a monthly basis, the Trust deposit into a Trapped
Funds Account, as defined in the New Indenture, maintained by the indenture
trustee (the "New Indenture Trustee") for the Floating Rate Notes all Cash Flow
and Asset Sale Proceeds (each as defined in the New Indenture). Cash Flow from
the Trapped Funds Account will be distributed to pay the New Indenture Trustee's
expenses, pay all accrued but unpaid interest on the Floating Rate Notes and to
maintain a Debt Service Reserve Account before any funds are released to the
Trust. In the event of a sale of, or certain casualty, or indemnification events
with respect to any of the remaining sixteen real estate properties of the
original twenty-four real estate properties mortgaged under the terms of the
Floating Rate Notes (underlying collateralized value of $46.1 million at June
30, 1997), the proceeds therefrom will be used to retire up to 125% of a portion
of the allocated debt of such property before any funds are released to the
Trust. The New Indenture includes affirmative covenants and negative covenants.
At June 30, 1997, the Trust was in compliance with the New Indenture.
The proceeds received from the Floating Rate Notes, together with
approximately $56.5 million of cash on hand, were used to prepay the Trust's
Prior Notes and Mortgage Payable. The face amount outstanding of the Prior Notes
and the Mortgage Payable at the time of repayment was $110.0 million and $13.9
million, respectively. The Prior Notes and Mortgage Payable were repaid in full
on April 30, 1996.
Effective April 30, 1996, the Trust entered into an interest rate
protection agreement (the "Cap") that serves to cap the floating interest
component of the Floating Rate Notes at 8%. The Trust paid a one-time fee of
$377,000 to the counterparty to the Cap.
During fiscal 1996, the Trust sold nine real estate properties, three
of which were encumbered under the terms of the New Indenture. The Trust used a
portion of the net proceeds from the sale of encumbered real estate properties
to prepay a portion of the Floating Rate Notes, as required under the terms of
the New Indenture. In July of fiscal 1996, the Trust used $4.2 million of the
net proceeds and in October and November of fiscal 1997 used $2.6 million and
$4.4 million, respectively, of the net proceeds of fiscal 1996 sales to prepay a
portion of the Floating Rate Notes.
During the nine months ended June 30, 1997, the Trust sold five real
estate properties and three of nine buildings owned by the Trust in an
industrial park, which were encumbered under the terms of the New Indenture. In
addition, the Trust sold three real estate properties which were not encumbered
under the terms of the New Indenture. During the nine months ended June 30,
1997, the Trust used $13.3 million of the net proceeds of the encumbered sales
to prepay a portion of the Floating Rate Notes. In July of fiscal 1997, the
Trust used $22.1 million of the net proceeds of two encumbered sales which
occurred in June of fiscal 1997 to prepay a portion of the Floating Rate Notes.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
NOTE 5. SHARE OPTION PLAN
1995 SHARE OPTION PLAN
On October 2, 1995, the Board of Trustees adopted a 1995 Share Option
Plan (the "1995 Plan") for Trustees, officers, employees and other key persons
of the Trust. On February 15, 1996, the Trust's shareholders approved the
adoption of the 1995 Plan at the Trust's 1996 Annual Meeting of Shareholders.
The 1995 Plan provides for the grant of options to purchase up to
870,000 common shares at not less than 100% of the fair market value of the
common shares, subject to adjustment for share splits, share dividends and
similar events. To the extent that awards under the 1995 Plan do not vest or
otherwise revert to the Trust, the common shares represented by such awards may
be the subject of subsequent awards.
The 1995 Plan provides for the grant of incentive stock options
("Incentive Options") which qualify under Section 422 of the Code and
non-qualified stock options ("Non-Qualified Options"). Holders of options also
receive dividend equivalent rights. During fiscal 1996, 894,000 shares from the
1995 Plan were granted with a price range from $10.00 to $12.25 per share and
55,000 shares were canceled at a price of $10.00 per share. During the nine
months ended June 30, 1997, no shares from the 1995 Plan were granted or
canceled. The options expire four years from the date of grant.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following section includes a discussion and analysis of the results
of operations for the nine months and three months ended June 30, 1997 and 1996.
The Trust has, for the past several years, reported significant net losses. As a
result of the 1995 Restructuring, past results should not be indicative of
future operating performance. Future results of operations of the Trust will not
be comparable to the historical operating performance.
RESULTS OF OPERATIONS-NINE MONTHS ENDED JUNE 30, 1997 VERSUS NINE MONTHS
ENDED JUNE 30, 1996
Net income for the nine months ended June 30, 1997 was $25.9 million,
or $2.31 per share, compared to $4.9 million, or $0.44 per share, for the nine
months ended June 30, 1996. Income before gain on sale of real estate was $6.3
million, or $0.56 per share, for the nine months ended June 30, 1997 compared to
$4.9 million, or $0.44 per share, for the nine months ended June 30, 1996.
Rental income was $16.7 million for the nine months ended June 30, 1997
compared to $20.5 million for the nine months ended June 30, 1996. In addition
to rental income, the Trust received reimbursement of certain operating expenses
totaling $2.5 million and $2.7 million for the nine months ended June 30, 1997
and 1996, respectively. The decrease in rental income was the result of the real
estate property sales that occurred during fiscal 1996 and 1997. At June 30,
1997 the Trust owned 23 real estate properties compared to 34 at June 30, 1996
and 38 at September 30, 1995. During the third and fourth quarters of fiscal
1996, the Trust sold eight real estate properties and during the nine months
ended June 30, 1997, the Trust sold eight real estate properties and three of
nine buildings owned by the Trust in an industrial park. The eight real estate
properties sold during the last two quarters of fiscal 1996 contributed $2.8
million in revenue during the nine months ended June 30, 1996. Occupancy levels
decreased to 85.9% at June 30, 1997 compared to 87.5% at September 30, 1996,
88.7% at June 30, 1996 and increased compared to 81.1% at September 30, 1995.
Occupancy levels, adjusted for real estate property sales, increased to 85.9% at
June 30, 1997 compared to 85.1% at June 30, 1996.
Interest and fee income on mortgage loans was $61,000 for the nine
months ended June 30, 1997 compared to $2.8 million for the nine months ended
June 30, 1996. In March 1996, the Trust completed the disposition of
substantially all of its mortgage loan portfolio. The Trust received $55.5
million in net cash proceeds through a series of transactions which included
loan repayments and a bulk sale of mortgage loans. As a result, interest income
earned on the mortgage loan portfolio was substantially reduced. The Trust's
remaining mortgage loan portfolio is currently less than $0.6 million.
Interest on short-term investments was $1.9 million for the nine months
ended June 30, 1997 compared to $1.3 million for the nine months ended June 30,
1996. The increase was due to the increase in cash balances as a result of 11
real estate property sales since June 30, 1996 and the disposition of
substantially all of the mortgage loan portfolio in March 1996.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
Interest expense was $4.2 million for the nine months ended June 30,
1997 compared to $9.0 million for the nine months ended June 30, 1996. During
October of fiscal 1996, the Trust used $3.5 million to repay a portion of the
Mortgage Payable. On April 30, 1996, the Trust refinanced its outstanding Senior
Secured Notes at a substantially lower rate of interest with the issuance of new
Floating Rate Notes in the amount of $67.4 million. The proceeds received from
the Floating Rate Notes, together with approximately $56.5 million of cash on
hand, were used to prepay the Trust's Senior Secured Notes and Mortgage Payable.
The face amount outstanding of the Senior Secured Notes and the Mortgage Payable
at the time of repayment was $110.0 million and $13.9 million, respectively. The
Senior Secured Notes and Mortgage Payable were repaid in full on April 30, 1996.
Included in interest expense for fiscal 1997 and for two months of fiscal 1996
is the amortization of deferred costs incurred in obtaining the Floating Rate
Notes which are amortized over the term of the debt agreement. The Trust has
reduced the Floating Rate Notes by $24.5 million through June 30, 1997 as a
result of the prepayments required under the New Indenture from the sale of six
encumbered real estate properties and three of nine buildings owned by the Trust
in an industrial park. In July of fiscal 1997, the Trust used $22.1 million of
the net proceeds of two encumbered sales which occurred in June of fiscal 1997
to prepay a portion of the Floating Rate Notes.
Operating expenses on rental properties was $7.1 million for the nine
months ended June 30, 1997 compared to $9.1 million for the nine months ended
June 30, 1996. The decrease in operating expenses on rental properties is the
result of real estate property sales that occurred during fiscal 1996 and cost
containment measures. At June 30, 1997 the Trust owned 23 real estate properties
compared to 34 at June 30, 1996 and 38 at September 30, 1995. During the third
and fourth quarters of fiscal 1996, the Trust sold eight real estate properties
and during the nine months of fiscal 1997, the Trust sold eight real estate
properties and three of nine buildings owned by the Trust in an industrial park.
The eight real estate properties sold during the last two quarters of fiscal
1996 contributed $1.0 million in operating expenses during the nine months ended
June 30, 1996. Occupancy levels decreased to 85.9% at June 30, 1997 compared to
87.5% at September 30, 1996, 88.7% at June 30, 1996 and increased compared to
81.1% at September 30, 1995. Occupancy levels, adjusted for real estate property
sales, increased to 85.9% at June 30, 1997 compared to 85.1% at June 30, 1996.
Depreciation and amortization on rental properties was $1.3 million for
the nine months ended June 30, 1997 compared to $1.8 million for the nine months
ended June 30, 1996. At September 30, 1995, the Trust segregated the real estate
portfolio into two categories: Held for Sale and Held for Investment.
Additionally, all assets and liabilities of the Trust were restated to reflect
their respective reorganization value or fair value. The Trust depreciates the
Held for Investment category over the estimated useful lives of the assets. The
Held for Sale category is not depreciated. During fiscal 1996, the Trust
reclassified seven real estate properties with a carrying value of $18.7 million
to Assets Held for Sale from Assets Held for Investment. During the nine months
ended June 30, 1997, the Trust reclassified five real estate properties with a
carrying value of $35.7 million to Assets Held for Sale from Assets Held for
Investment and no longer depreciates these assets.
Other operating expenses decreased 5.8% for the nine months ended June
30, 1997 compared to the nine months ended June 30, 1996.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
RESULTS OF OPERATIONS-THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE
MONTHS ENDED JUNE 30, 1996
Net income for the three months ended June 30, 1997 was $13.7 million,
or $1.22 per share, compared to $2.0 million, or $0.18 per share, for the three
months ended June 30, 1996. Income before gain on sale of real estate was
unchanged at $2.0 million, or $0.18 per share, for the three months ended June
30, 1997 compared to the same period last fiscal year.
Rental income was $5.1 million for the three months ended June 30, 1997
compared to $6.9 million for the three months ended June 30, 1996. In addition
to rental income, the Trust received reimbursement of certain operating expenses
totaling $0.8 million and $1.0 million for the three months ended June 30, 1997
and 1996, respectively. The decrease in rental income is the result of real
estate property sales that occurred during fiscal 1996 and fiscal 1997. At June
30, 1997 the Trust owned 23 real estate properties compared to 34 at June 30,
1996 and 38 at September 30, 1995. During the last two quarters of fiscal 1996,
the Trust sold eight real estate properties and during the nine months of fiscal
1997, the Trust sold eight real estate properties and three of nine buildings
owned by the Trust in an industrial park. The eight real estate properties sold
during the last two quarters of fiscal 1996 contributed $0.9 million in revenue
during the three months ended June 30, 1996. Occupancy levels decreased to 85.9%
at June 30, 1997 compared to 87.5% at September 30, 1996, 88.7% at June 30, 1996
and 81.1% at September 30, 1995. Occupancy levels, adjusted for real estate
property sales, increased to 85.9% at June 30, 1997 compared to 85.1% at June
30, 1996.
Interest and fee income on mortgage loans was unchanged at $19,000 for
the three months ended June 30, 1997 compared to the same period last year. In
March 1996, the Trust completed the disposition of substantially all of the
mortgage loan portfolio. The Trust received $55.5 million in net cash proceeds
through a series of transactions which included loan repayments and a bulk sale
of mortgage loans. As a result, interest income earned on the mortgage loan
portfolio was substantially reduced. The Trust's remaining mortgage loan
portfolio is currently less than $0.6 million.
Interest on short-term investments was $0.8 million for the three
months ended June 30, 1997 compared to $0.5 million for the three months ended
June 30, 1996. The increase was due to the increase in cash balances as a result
of 11 real estate property sales since June 30, 1996 and the disposition of
substantially all of the mortgage loan portfolio in March 1996.
Interest expense was $1.4 million for the three months ended June 30,
1997 compared to $2.1 million for the three months ended June 30, 1996. On April
30, 1996, the Trust refinanced its outstanding Senior Secured Notes at a
substantially lower rate of interest with the issuance of new Floating Rate
Notes in the amount of $67.4 million. The proceeds received from the Floating
Rate Notes, together with approximately $56.5 million of cash on hand, were used
to prepay the Trust's Senior Secured Notes and Mortgage Payable. The face amount
outstanding of the Senior Secured Notes and the Mortgage Payable at the time of
repayment was $110.0 million and $13.9 million, respectively. The Senior Secured
Notes and Mortgage Payable were repaid in full on April 30, 1996. Included in
interest expense for fiscal 1997 and for two months of fiscal 1996 is the
amortization of deferred costs incurred in obtaining the Floating Rate Notes
which are amortized over the term of the debt agreement. The Trust has reduced
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
the Floating Rate Notes by $24.5 million through June 30, 1997 as a result of
the prepayments required under the New Indenture from the sale of six encumbered
real estate properties and three of nine buildings owned by the Trust in an
industrial park. In July of fiscal 1997, the Trust used $22.1 million of the net
proceeds of two encumbered sales which occurred in June of fiscal 1997 to prepay
a portion of the Floating Rate Notes.
Operating expenses on rental properties was $2.2 million for the three
months ended June 30, 1997 compared to $3.0 million for the three months ended
June 30, 1996. The decrease in operating expenses on rental properties is the
result of real estate property sales that occurred during fiscal 1996 and cost
containment measures. At June 30, 1997 the Trust owned 23 real estate properties
compared to 34 at June 30, 1996 and 38 at September 30, 1995. During the third
and fourth quarters of fiscal 1996, the Trust sold eight real estate properties
and during the nine months of fiscal 1997, the Trust sold eight real estate
properties and three of nine buildings owned by the Trust in an industrial park.
The eight real estate properties sold during the last two quarters of fiscal
1996 contributed $0.3 million in operating expenses during the third quarter
ended June 30, 1996. Occupancy levels decreased to 85.9% at June 30, 1997
compared to 87.5% at September 30, 1996, 88.7% at June 30, 1996 and increased
compared to 81.1% at September 30, 1995. Occupancy levels, adjusted for real
estate property sales, increased to 85.9% at June 30, 1997 compared to 85.1% at
June 30, 1996.
Depreciation and amortization on rental properties was $0.4 million for
the three months ended June 30, 1997 compared to $0.6 million for the three
months ended June 30, 1996. At September 30, 1995, the Trust segregated the real
estate portfolio into two categories: Held for Sale and Held for Investment.
Additionally, all assets and liabilities of the Trust were restated to reflect
their respective reorganization value or fair value. The Trust depreciates the
Held for Investment category over the estimated useful lives of the assets. The
Held for Sale category is not depreciated. During fiscal 1996, the Trust
reclassified seven real estate properties with a carrying value of $18.7 million
to Assets Held for Sale from Assets Held for Investment. During the second
quarter of fiscal 1997, the Trust reclassified five real estate properties with
a carrying value of $35.7 million to Assets Held for Sale from Assets Held for
Investment and no longer depreciates these assets.
Other operating expenses decreased 2.1% for the three months ended June
30, 1997 compared to the three months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the 1995 Restructuring, the Trust faced significant liquidity
problems. The Trust did not generate sufficient cash flow from normal operations
and was not able to liquidate mortgage loans and real estate investments in
order to meet scheduled amortization on its indebtedness. As a result of the
1995 Restructuring, management believes the cash flow from operating activities
will be sufficient to meet minimum debt service requirements. In the near term,
the Trust expects to fund capital expenditures from available funds from
operations and cash on hand, however, no assurance can be given that this
expectation will be achieved. The Trust's present liquidity, cash flow from
operating activities and ability to liquidate existing assets to meet its
obligations can be adversely impacted by a negative change in the national
economy, particularly as those changes may relate to real estate markets in
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
which the Trust operates. Certain factors that might cause such a difference
include the following: risks and uncertainties inherent to general and local
real estate conditions; the supply and demand for the types of rental properties
which the Trust operates; interest rate levels; non-payment of rent by tenants
or that operating costs may be greater than anticipated.
Taxable income required to be distributed in order for the Trust to
maintain its REIT status will be less than income reported for financial
reporting purposes under generally accepted accounting principles due to
differences related to depreciation, use of NOLs (subject to the Code Section
382 limitations) and timing differences related to bad debt deductions.
On March 28, 1996, the Trust entered into a financing agreement which
provided for the issuance of $67.4 million of new Floating Rate Notes, which
issuance occurred on April 30, 1996. The Floating Rate Notes bear interest at 30
day LIBOR + 1.375%, payable monthly, and have a stated maturity date of May 1,
1999.
The New Indenture generally requires that, on a monthly basis, the
Trust deposit into a Trapped Funds Account maintained by the New Indenture
Trustee all Cash Flow and Asset Sale Proceeds. Cash Flow from the Trapped Funds
Account will be distributed by the New Indenture Trustee to pay the New
Indenture Trustee's expenses, pay all accrued but unpaid interest on the
Floating Rate Notes and maintain a Debt Service Reserve Account before any funds
are released to the Trust. In the event of a sale of, or certain casualty or
indemnification events with respect to, any of the real estate properties
mortgaged under the terms of the debt instruments, the proceeds therefrom will
be used to retire up to 125% of a portion of the Floating Rate Notes that has
been allocated to such real estate property before any funds are released to the
Trust. The New Indenture includes affirmative covenants and negative covenants.
At June 30, 1997, the Trust was in compliance with the New Indenture.
The proceeds received from the Floating Rate Notes, together with
approximately $56.5 million of cash on hand, were used to prepay the Trust's
Senior Secured Notes and Mortgage Payable. The face amount outstanding of the
Senior Secured Notes and the Mortgage Payable at the time of repayment was
$110.0 million and $13.9 million, respectively. The Senior Secured Notes and
Mortgage Payable were repaid in full on April 30, 1996.
Effective April 30, 1996, the Trust entered into an interest rate
protection agreement (the "Cap") that serves to cap the floating interest
component of the Floating Rate Notes at 8%. The Trust paid a one-time fee of
$377,000 to the counterparty to the Cap.
During fiscal 1996, the Trust reclassified seven real estate properties
with a carrying value of $18.7 million to Assets Held for Sale from Assets Held
for Investment. During fiscal 1996, the Trust received $26.6 million in net
proceeds from the sale of nine real estate properties with a carrying value of
$19.2 million classified as Assets Held for Sale.
During the second quarter of fiscal, 1997, the Trust reclassified five
real estate properties with a carrying value of $35.7 million to Assets Held for
Sale from Assets Held for Investment. During the nine months ended June 30,
1997, the Trust received $73.8 million in net proceeds from the sale of real
estate properties classified as Assets Held for Sale with a carrying value of
$54.3 million. These sales included eight real estate properties and three of
nine buildings owned by the Trust in an industrial park.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
The Trust's cash flow is derived from operating, investing and
financing activities. For the nine months ended June 30, 1997, cash provided by
operating activities increased to $8.8 million compared to $7.2 million for the
nine months ended June 30, 1996. The increase in cash provided by operating
activities was primarily attributable to a reduced number of real estate
properties offset by lower interest payments in connection with the senior
indebtedness. The outstanding balance on the Senior Secured Notes decreased to
$42.9 million at June 30, 1997 from $67.4 million at June 30, 1996.
Cash provided by investing activities increased to $70.5 million for
the nine months ended June 30, 1997 compared to $67.8 million for the nine
months ended June 30, 1996. The increase in cash provided by investing
activities was primarily attributable to the increase in real estate sales
activity to $73.8 million for the nine months ended June 30, 1997 compared to
$14.7 million for the nine months ended June 30, 1996. Partial offsetting the
increase was the disposition of substantially all of the Trust's mortgage loan
portfolio in March 1996 offset the increase in the real estate sales activity.
Cash used in financing activities decreased to $42.9 million for the
nine months ended June 30, 1997 compared to $63.4 million for the nine months
ended June 30, 1996. In April of fiscal 1996, the Trust issued $67.4 million in
New Floating Rate Notes and used the proceeds from the issuance along with
approximately $56.5 million of cash on hand to repay the Old Notes and the
Mortgage Payable.
During the nine months ended June 30, 1997, the Trust used $20.3 million to
prepay a portion of the Floating Rate Notes. Restricted cash increased to $22.5
million for the nine months ended June 30, 1997 compared to an increase of $3.2
million for the nine months ended June 30, 1996. The increase in restricted cash
is related to the funds held by the New Indenture Trustee in the Trapped Funds
Account as a result of the June 1997 real estate property sales.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1993 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE TRUST'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN FORWARD-LOOKING STATEMENTS. THOSE FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE THOSE SET FORTH UNDER "LIQUIDITY AND CAPITAL
RESOURCES" SECTION OF ITEM 2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Trust filed a Current Report on Form 8-K dated June 24,
1997 under Item 2 and Item 7 of Form 8-K regarding the Trust's
disposition of three real estate properties during the current
quarter.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
SIGNATURES
Pursuant to the requirements 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.
Value Property Trust
/s/George R. Zoffinger
----------------------
George R. Zoffinger
President, Chief Executive
Officer and Trustee
(Principal Executive Officer)
/s/Robert T. English
--------------------
Robert T. English
Secretary, Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
DATE: August 14, 1997
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 100,666
<SECURITIES> 0
<RECEIVABLES> 3,665
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 104,331
<PP&E> 34
<DEPRECIATION> 16
<TOTAL-ASSETS> 177,482
<CURRENT-LIABILITIES> 1,640
<BONDS> 42,882
0
0
<COMMON> 11,226
<OTHER-SE> 121,734
<TOTAL-LIABILITY-AND-EQUITY> 177,482
<SALES> 0
<TOTAL-REVENUES> 21,231
<CGS> 0
<TOTAL-COSTS> 8,423
<OTHER-EXPENSES> 2,317
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<INTEREST-EXPENSE> 4,162
<INCOME-PRETAX> 6,329
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<INCOME-CONTINUING> 6,329
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