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 December 31, 1996
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
confirmed by a court.
Yes [ X ] No [ ]
Number of Common Shares Outstanding at February 3, 1997: 11,226,310
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1996 (Unaudited)
and September 30, 1996
Consolidated Statement of Operations for the Three Months
Ended December 31, 1996 and 1995 (Unaudited)
Consolidated Statement of Cash Flows for the Three Months
Ended December 31, 1996 and 1995 (Unaudited)
Consolidated Statement of Shareholders' Equity for the Three
Months Ended December 31, 1996 (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)
- ---------------------------------------------------------------------------------------------------
December 31, September 30,
1996 1996
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Assets Held for Sale:
Investment in partnerships .................................... $ 10,417 $ 10,219
Real estate owned ............................................. 36,181 38,171
-------- --------
Total Assets Held for Sale .............................. 46,598 48,390
-------- --------
Assets Held for Investment:
Mortgage loans ................................................ 651 663
Investment in partnerships .................................... 13,510 13,486
Real estate owned ............................................. 63,325 63,196
-------- --------
Total Assets Held for Investment ........................ 77,486 77,345
-------- --------
Total Invested Assets ................................... 124,084 125,735
Cash and cash equivalents ........................................ 34,978 29,501
Restricted cash .................................................. 3,440 12,213
Interest receivable and other assets ............................. 5,356 4,962
-------- --------
Total Assets ............................................ $167,858 $172,411
======== ========
LIABILITIES
Senior secured notes (due 1999) .................................. $ 54,832 $ 63,226
Accounts payable and accrued expenses ............................ 1,697 1,804
Interest payable ................................................. 308 334
-------- --------
Total Liabilities ....................................... 56,837 65,364
-------- --------
(Continued)
<PAGE>
<CAPTION>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
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CONSOLIDATED BALANCE SHEETS
(In Thousands)
(continued)
- ---------------------------------------------------------------------------------------------------
December 31, September 30,
1996 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 ............................................. 10,947 6,973
-------- --------
Total Shareholders' Equity .............................. 111,021 107,047
-------- --------
Total Liabilities and Shareholders' Equity .............. $167,858 $172,411
======== ========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(In Thousands Except Per Share Data)
- --------------------------------------------------------------------------------
Three Months Ended
December 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
Revenue:
Rental properties:
Rental income .................................. $ 5,924 $ 6,560
Operating expense reimbursements ............... 845 843
Interest and fee income on mortgage loans .......... 21 1,679
Interest on short-term investments ................. 519 305
Other .............................................. -- 8
------- -------
Total Revenue .................................. 7,309 9,395
------- -------
Expenses:
Interest ........................................... 1,381 3,565
Rental properties:
Operating ...................................... 2,484 3,076
Depreciation and amortization .................. 529 564
Other operating expenses ........................... 736 753
------- -------
Total Expenses ................................. 5,130 7,958
------- -------
Income before gain on sale of real estate ............. 2,179 1,437
Gain on sale of real estate ........................... 1,795 --
------- -------
Net income ............................................ $ 3,974 $ 1,437
======= =======
Per share:
Income before gain on sale of real estate ............. $ .19 $ .13
Gain on sale of real estate ........................... .16 --
------- -------
Net income ............................................ $ .35 $ .13
======= =======
Weighted average number of common
shares outstanding ................................. 11,226 11,226
======= =======
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In Thousands)
- ----------------------------------------------------------------------------------------------------------
Three Months Ended
December 31,
---------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 3,974 $ 1,437
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization on real estate............ 529 564
Decrease in payables and accrued expenses............... (107) (785)
(Decrease) increase in interest payable................. (26) 3,127
(Increase) decrease in receivables and other assets..... (298) 2,006
Gain on sale of real estate............................. (1,795) --
----------- -----------
Total adjustments................................................ (1,697) 4,912
----------- -----------
Net cash provided by operating activities............................. 2,277 6,349
----------- -----------
Cash flows from investing activities: Investment in real estate:
Real estate.................................................. (1,188) (1,445)
Partnerships................................................. (284) (49)
Advances on mortgage loans................................... -- (67)
Principal repayments on mortgage loans........................... 12 100
Proceeds from the sale of real estate............................ 4,280 1,770
Principal repayments on notes receivable......................... -- 300
----------- -----------
Net cash provided by investing activities............................. 2,820 609
----------- -----------
Cash flows from financing activities:
Payment of mortgage payable...................................... -- (3,582)
Prepayment of senior secured notes (due 1999).................... (8,394) --
Decrease in restricted cash...................................... 8,774 4,336
----------- -----------
Net cash provided by financing activities............................. 380 754
----------- -----------
Net increase in cash and cash equivalents............................. 5,477 7,712
Cash and cash equivalents at beginning of period...................... 29,501 9,977
----------- -----------
Cash and cash equivalents at end of period............................ $ 34,978 $ 17,689
=========== ===========
<PAGE>
<CAPTION>
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CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(In Thousands)
(continued)
- ----------------------------------------------------------------------------------------------------------
Three Months Ended
December 31,
---------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Supplemental schedule of non-cash investment and
financing activities:
Transfer of mortgage loans to real estate owned.................. $ -- $ 5,120
=========== ===========
Interest paid.................................................... $ 1,009 $ --
=========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
(Amounts In Thousands)
- ----------------------------------------------------------------------------------------------------------------------
For the Three Months Ended December 31, 1996
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 ...................................... -- -- -- 3,974 3,974
------ -------- -------- -------- --------
Balance at December 31, 1996 .................... 11,226 $ 11,226 $ 88,848 $ 10,947 $111,021
====== ======== ======== ======== ========
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 three-month period ended December 31, 1996
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 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
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 $102 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.
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 properties totaling $18.7 million to Assets Held for Sale from Assets Held
for Investment and no longer depreciates these assets.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
CASH AND CASH EQUIVALENTS
Cash and cash equivalents and restricted cash include short-term
investments (high grade commercial paper, bank CDs and US Treasury 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 is 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 properties classified as Assets Held for Sale. For the first three
months of fiscal 1997, a gain of $1.8 million is recorded in net income as a
result of property sales. At December 31, 1996, the Trust owned 30 properties of
which nine are classified as Assets Held for Sale. The fiscal 1996 revenue and
net operating income from these nine properties were $9.9 million and $5.7
million, respectively.
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 $1.8 million at December 31, 1996.
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.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
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
$0.7 million.
The following table summarizes the Trust's investments in real estate
owned at December 31, 1996.
<TABLE>
<CAPTION>
Type of 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 7 $ 36,252 $ (71) $ 36,181
Investment in Partnerships 2 10,487 (70) 10,417
---- ------- ------ -------
Total 9 $ 46,739 $ (141) $ 46,598
==== ======= ===== =======
Real Estate Held for Investment:
Real Estate Owned 18 $ 65,605 $ (2,280) $ 63,325
Investment in Partnerships 3 13,813 (303) 13,510
--- ------- ------- -------
Total 21 $ 79,418 $ (2,583) $ 76,835
=== ======= ======= =======
</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.
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.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
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 twenty properties of the original
twenty-four properties mortgaged under the terms of the Floating Rate Notes
(underlying collateralized value of $84.6 million at December 31, 1996), 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 December
31, 1996, 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 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 first quarter of fiscal 1997, the Trust sold one real estate
property and one of nine buildings owned by the Trust in an industrial park,
which were encumbered under the terms of the New Indenture. In November and
February of fiscal 1997, the Trust used $1.3 million and $0.2 million,
respectfully of the net proceeds of these sales to prepay a portion of the
Floating Rate Notes.
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.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
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 first
quarter of fiscal 1997, no shares from the 1995 Plan were granted or canceled.
The options expire four years from the date of grant.
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 three months ended December 31, 1996 and 1995. 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-THREE MONTHS ENDED DECEMBER 31, 1996 VS. THREE
MONTHS ENDED DECEMBER 31, 1995
Net income for the three months ended December 31, 1996 was $4.0
million, or $0.35 per share, compared to $1.4 million, or $0.13 per share, for
the three months ended December 31, 1995. Income before gain on sale of real
estate was $2.2 million, or $0.19 per share, for the three months ended December
31, 1996 compared to $1.4 million, or $0.13 per share, for the three months
ended December 31, 1995.
Rental income was $5.9 million for the three months ended December 31,
1996 compared to $6.6 million for the three months ended December 31, 1995. In
addition to rental income, the Trust received reimbursement of certain operating
expenses totaling $0.8 million for both the three months ended December 31, 1996
and 1995. The decrease in rental income is the result of nine property sales
that occurred during fiscal 1996 offset by increased occupancy levels. At
December 31, 1996 the Trust owned 30 real estate properties compared to 39 at
December 31, 1995 and 38 at September 30, 1995. During fiscal 1996, two
properties were added early in the year as a result of foreclosures. Nine
properties were sold during fiscal 1996, one of which occurred in the first
quarter and the remaining eight occurred during the last two quarters. Two of
the eight property sales occurred during the last month of fiscal 1996. During
the first quarter of fiscal 1997, the Trust sold one real estate property and
one of nine buildings owned by the Trust in an industrial park. Occupancy levels
increased to 87.6% at December 31, 1996 compared to 87.5% at September 30, 1996
and 81.1% at September 30, 1995.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
Interest and fee income on mortgage loans was $21,000 for the three
months ended December 31, 1996 compared to $1.7 million for the three months
ended December 31, 1995. In March 1996, the Trust completed the disposition of
substantially all of the 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 $0.7 million.
Interest on short-term investments was $0.5 million for the three
months ended December 31, 1996 compared to $0.3 million for the three months
ended December 31, 1995. The increase was due to the increase in cash balances
as a result of nine property sales and the disposition of substantially all of
the mortgage loan portfolio.
Interest expense was $1.4 million for the three months ended December
31, 1996 compared to $3.6 million for the three months ended December 31, 1995.
During the first quarter 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
is the amortization of deferred costs incurred in obtaining debt financing which
are amortized over the term of the debt agreement.
Operating expenses on rental properties was $2.5 million for the three
months ended December 31, 1996 compared to $3.1 million for the three months
ended December 31, 1995. The decrease in operating expenses on rental properties
is the result of nine property sales that occurred during fiscal 1996 and cost
containment measures offset by increased occupancy levels. At December 31, 1996
the Trust owned 30 real estate properties compared to 39 at December 31, 1995
and 38 at September 30, 1995. During fiscal 1996, two properties were added
early in the year as a result of foreclosures. Nine properties were sold during
fiscal 1996, one of which occurred in the first quarter and the remaining eight
occurred during the last two quarters. Two of the eight property sales occurred
during the last month of fiscal 1996. During the first quarter of fiscal 1997,
the Trust sold one real estate property and one of nine buildings owned by the
Trust in an industrial park. Occupancy levels increased to 87.6% at December 31,
1996 compared to 87.5% at September 30, 1996 and 81.1% at September 30, 1995.
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
Depreciation and amortization on rental properties was $0.5 million for
the three months ended December 31, 1996 compared to $0.6 million for the three
months ended December 31, 1995. 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 properties totaling $18.7 million to Assets Held
for Sale from Assets Held for Investment.
Other operating expenses were unchanged for the three months ended
December 31, 1996 compared to the three months ended December 31, 1995.
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
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 properties mortgaged under
the terms of the debt instruments, the proceeds therefrom will be used to retire
<PAGE>
VALUE PROPERTY TRUST AND SUBSIDIARIES FORM 10Q
up to 125% of a portion of the Floating Rate Notes that has been allocated to
such property before any funds are released to the Trust. The New Indenture
includes affirmative covenants and negative covenants. At December 31, 1996, 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 properties totaling
$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 properties with a carrying value of $19.2 million classified as Assets Held
for Sale.
During the first quarter of fiscal 1997, the Trust received $4.3
million in net proceeds from the sale of real estate property classified as
Assets Held for Sale with a carrying value of $2.6 million. The sales included
one real estate property and one of nine buildings owned by the Trust in an
industrial park.
The Trust's cash flow is derived from operating, investing and
financing activities. For the three months ended December 31, 1996, cash
provided by operating activities decreased to $2.3 million compared to $6.3
million for the three months ended December 31, 1995. The decrease in cash
provided by operating activities was primarily attributable to a reduced number
of properties and lower interest payments in connection with the senior
indebtedness. The outstanding balance on the Senior Secured Notes decreased to
$54.8 million at December 31, 1996 from $110.0 million at December 31, 1995.
Cash provided by investing activities increased to $2.8 million for the
three months ended December 31, 1996 compared to $0.6 million for the three
months ended December 31, 1995. Real estate sales activity accounted for the
largest increase, increasing to $4.3 million for the three months ended December
31, 1996 compared to $1.8 million for the three months ended December 31, 1995.
Cash provided by financing activities remained flat for the three
months ended December 31, 1996 compared to the same period last year. Restricted
cash decreased by $8.8 million for the three months ended December 31, 1996
compared to a decrease of $4.3 million for the three months ended December 31,
1995. The decrease in restricted cash is related to the funds held by the New
Indenture Trustee in the Debt Service Reserve and Trapped Funds Account. The
decrease in the restricted cash was offset by prepayments on the Senior Secured
Notes.
<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 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE TRUST'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. THOSE FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE THOSE SET FORTH UNDER THE "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
None.
<PAGE>
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: February 14, 1997
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 38,418
<SECURITIES> 0
<RECEIVABLES> 5,333
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,751
<PP&E> 34
<DEPRECIATION> 11
<TOTAL-ASSETS> 167,858
<CURRENT-LIABILITIES> 2,005
<BONDS> 54,832
0
0
<COMMON> 11,226
<OTHER-SE> 99,795
<TOTAL-LIABILITY-AND-EQUITY> 167,858
<SALES> 0
<TOTAL-REVENUES> 7,309
<CGS> 0
<TOTAL-COSTS> 3,013
<OTHER-EXPENSES> 736
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 2,179
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,179
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<EXTRAORDINARY> 1,795
<CHANGES> 0
<NET-INCOME> 3,974
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