-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O283Sj8GLz0TLII5JmW/+Ig1+kCEZ8cOMI8dc6F6ZtL9Qfv0yT7H2V3JAmwkhQ/E SLCJ8+dKRGMUYkZz2tWgfw== 0000914317-97-000247.txt : 19970520 0000914317-97-000247.hdr.sgml : 19970520 ACCESSION NUMBER: 0000914317-97-000247 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALUE PROPERTY TRUST CENTRAL INDEX KEY: 0000079259 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 231862664 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06613 FILM NUMBER: 97606613 BUSINESS ADDRESS: STREET 1: 120 ALBANY STREET STREET 2: 8TH FLOOR CITY: NEW BRUNSWICK STATE: NJ ZIP: 08901- BUSINESS PHONE: 9082963080 FORMER COMPANY: FORMER CONFORMED NAME: MORTGAGE & REALTY TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PNB MORTGAGE & REALTY INVESTORS DATE OF NAME CHANGE: 19850102 10-Q 1 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 March 31, 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 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 May 5, 1997: 11,226,310 VALUE PROPERTY TRUST AND SUBSIDIARIES INDEX Part I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements.......................... Consolidated Balance Sheets at March 31, 1997 (Unaudited) and September 30, 1996............................... Consolidated Statement of Operations for the Three and Six Months Ended March 31, 1997 and 1996 (Unaudited)..... Consolidated Statement of Cash Flows for the Six Months Ended March 31, 1997 and 1996 (Unaudited)............ Consolidated Statement of Shareholders' Equity for the Six Months Ended March 31, 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 4. Submission of Matters to a Vote of Security Holders........ Item 5. Other Information.......................................... Item 6. Exhibits and Reports on Form 8-K........................... Signatures................................................. PART I: FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEETS (In Thousands) - ------------------------------------------------------------------------------------ March 31, September 30, 1997 1996 ------- -------- (Unaudited) ASSETS Assets Held for Sale: Investment in partnerships ..................... $ 15,906 $ 10,219 Real estate owned .............................. 47,076 38,171 ------- -------- Total Assets Held for Sale ............... 62,982 48,390 ------- -------- Assets Held for Investment: Mortgage loans ................................. 605 663 Investment in partnerships ..................... -- 13,486 Real estate owned .............................. 37,801 63,196 ------- -------- Total Assets Held for Investment ......... 38,406 77,345 ------- -------- Total Invested Assets .................... 101,388 125,735 Cash and cash equivalents ......................... 53,526 29,501 Restricted cash ................................... 11,943 12,213 Interest receivable and other assets .............. 3,908 4,962 ------- -------- Total Assets ............................. $170,765 $172,411 ======== ======== LIABILITIES Senior secured notes (due 1999) ................... $ 49,729 $ 63,226 Accounts payable and accrued expenses ............. 1,540 1,804 Interest payable .................................. 252 334 ------- -------- Total Liabilities ........................ 51,521 65,364 ------- -------- - ------------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEETS (In Thousands)(continued) - ------------------------------------------------------------------------------------ March 31, September 30, 1997 1996 ------- -------- (Unaudited) 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 .............................. 19,170 6,973 -------- -------- Total Shareholders' Equity ............... 119,244 107,047 -------- -------- Total Liabilities and Shareholders' Equity $170,765 $172,411 ======== ======== See accompanying notes to the consolidated financial statements.
- -------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (In Thousands Except Per Share Data) - -------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended March 31, March 31, ------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- Revenue: Rental properties: Rental income ....................... $ 5,725 $ 6,880 $11,649 $13,545 Operating expense reimbursements .... 830 853 1,675 1,696 Interest and fee income on mortgage loans 21 1,240 42 2,814 Interest on short-term investments ...... 595 462 1,114 767 Other ................................... 8 3 8 11 ------- ------- ------- ------- Total Revenue ....................... 7,179 9,438 14,488 18,833 ------- ------- ------- ------- Expenses: Interest ................................ 1,392 3,420 2,773 6,985 Rental properties: Operating ........................... 2,447 3,051 4,931 6,126 Depreciation and amortization ....... 415 630 944 1,195 Other operating expenses ................ 779 887 1,515 1,640 ------- ------- ------- ------- Total Expenses ...................... 5,033 7,988 10,163 15,946 ------- ------- ------- ------- Income before gain on sale of real estate .. 2,146 1,450 4,325 2,887 Gain on sale of real estate ................ 6,077 -- 7,872 -- ------- ------- ------- ------- Net income ................................. $ 8,223 $ 1,450 $12,197 $ 2,887 ======= ======= ======= ======= Per share: Income before gain on sale of real estate .. $ .19 $ .13 $ .39 $ .26 Gain on sale of real estate ................ .55 -- .70 -- ------- ------- ------- ------- Net income ................................. $ .74 $ .13 $ 1.09 $ .26 ======= ======= ======= ======= Weighted average number of common shares outstanding ...................... 11,226 11,226 11,226 11,226 ======= ======= ======= ======= See accompanying notes to the consolidated financial statements.
- --------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In Thousands) - --------------------------------------------------------------------------------------------- Six Months Ended March 31, 1997 1996 -------- -------- Cash flows from operating activities: Net income .................................................. $ 12,197 $ 2,887 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization on real estate ....... 944 1,195 Decrease in payables and accrued expenses .......... (264) (2,918) (Decrease) increase in interest payable ............ (82) 3,059 Decrease in receivables and other assets ........... 1,021 4,955 Gain on sale of real estate ........................ (7,872) -- -------- -------- Total adjustments ........................................... (6,253) 6,291 -------- -------- Net cash provided by operating activities ........................ 5,944 9,178 -------- -------- Cash flows from investing activities: Investment in real estate: Real estate ............................................. (1,933) 2,393 Partnerships ............................................ (440) (139) Advances on mortgage loans .............................. -- (73) Principal repayments on mortgage loans ...................... 58 244 Proceeds from the sale of real estate ....................... 33,623 658 Proceeds from the sale of mortgage loans and notes receivable -- 51,123 Principal repayments on notes receivable .................... -- 338 -------- -------- Net cash provided by investing activities ........................ 31,308 54,544 -------- -------- Cash flows from financing activities: Payment of mortgage payable ................................. -- (3,638) Prepayment of senior secured notes (due 1999) ............... (13,497) -- Decrease in restricted cash ................................. 270 5,592 -------- -------- Net cash (used in) provided by financing activities .............. (13,227) 1,954 -------- -------- Net increase in cash and cash equivalents ........................ 24,025 65,676 Cash and cash equivalents at beginning of period ................. 29,501 9,977 -------- -------- Cash and cash equivalents at end of period ....................... $ 53,526 $ 75,653 ======== ======== Supplemental schedule of non-cash investment and financing activities: Transfer of mortgage loans to real estate owned ............. $ -- $ 5,120 ======== ======== Interest paid ............................................... $ 1,952 $ 3,127 ======== ======== See accompanying notes to the consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) (Amounts In Thousands) - ------------------------------------------------------------------------------------------------------------------- For the Six Months Ended March 31, 1997 Additional Total Common Shares Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity -------- -------- -------- -------- -------- Balance at September 30, 1996 ................... 11,226 $ 11,226 $ 88,848 $ 6,973 $107,047 Net income ...................................... -- -- -- 12,197 12,197 -------- -------- -------- -------- -------- Balance at March 31, 1997 ....................... 11,226 $ 11,226 $ 88,848 $ 19,170 $119,244 ======== ======== ======== ======== ======== See accompanying notes to the consolidated financial statements.
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 six-month and three-month periods ended March 31, 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 real estate investment trust taxable income, and pays no Federal income tax on capital gains distributed to shareholders. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. During the six months ended March 31, 1997, the Trust reclassified five properties totaling $35.7 million to Assets Held for Sale from Assets Held for Investment and no longer depreciates these assets. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 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 six months of fiscal 1997, a gain of $7.9 million is recorded in net income as a result of property sales. At March 31, 1997, the Trust owned 26 properties of which 11 are classified as Assets Held for Sale. The fiscal 1996 revenue and net operating income from these 11 properties were $12.8 million and $7.8 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 $1.3 million at March 31, 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS RECENTLY ISSUED ACCOUNTING PRONOUNCMENTS 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." 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. 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Trust's investments in real estate owned at March 31, 1997.
Type of Number Carrying Accumulated Book Property of Properties Amount Depreciation Value -------- ------------- ------ ------------ ----- (dollars in thousands) Real Estate Held for Sale: Real Estate Owned ........ 8 $48,066 $ (990) $47,076 Investment in Partnerships 3 16,247 (341) 15,906 ------- ------- ------- ------- Total .................... 11 $64,313 $(1,331) $62,982 ======= ======= ======= ======= Real Estate Held for Investment: Real Estate Owned ........ 15 $39,527 $(1,726) $37,801 ------- ------- ------- ------- Total .................... 15 $39,527 $(1,726) $37,801 ======= ======= ======= =======
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. 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS with respect to any of the remaining eighteen properties of the original twenty-four properties mortgaged under the terms of the Floating Rate Notes (underlying collateralized value of $69.8 million at March 31, 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 March 31, 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 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 six months ended March 31, 1997, the Trust sold three 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 two real estate properties which were not encumbered under the terms of the New Indenture. During the six months ended March 31, 1997, the Trust used $6.5 million of the net proceeds of the encumbered sales to prepay a portion of the Floating Rate Notes. In April of fiscal 1997, the Trust used $6.8 million of the net proceeds of an encumbered sale which occurred in March 1997 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. 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. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 six months ended March 31, 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 six months and three months ended March 31, 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-SIX MONTHS ENDED MARCH 31, 1997 VS. SIX MONTHS ENDED MARCH 31, 1996 Net income for the six months ended March 31, 1997 was $12.2 million, or $1.09 per share, compared to $2.9 million, or $0.26 per share, for the six months ended March 31, 1996. Income before gain on sale of real estate was $4.3 million, or $0.39 per share, for the six months ended March 31, 1997 compared to $2.9 million, or $0.26 per share, for the six months ended March 31, 1996. Rental income was $11.6 million for the six months ended March 31, 1997 compared to $13.5 million for the six months ended March 31, 1996. In addition to rental income, the Trust received reimbursement of certain operating expenses totaling $1.7 million for both the six months ended March 31, 1997 and 1996. The decrease in rental income was the result of the property sales that occurred during fiscal 1996. At March 31, 1997 the Trust owned 26 real estate properties compared to 39 at March 31, 1996 and 38 at September 30, 1995. During the third and fourth quarters of fiscal 1996, the Trust sold eight properties and during the first six months ended March 31, 1997, the Trust sold five real estate properties and three of nine buildings owned by the Trust in an industrial park. The eight properties sold during the last two quarters of fiscal 1996 contributed $1.9 million in revenue during the six months ended March 31, 1996. Occupancy levels decreased to 85.5% at March 31, 1997 compared to 87.5% at September 30, 1996 and 81.1% at September 30, 1995. Occupancy levels, adjusted for property sales, increased to 85.5% at March 31, 1997 compared to 85.0% at March 31, 1996. Interest and fee income on mortgage loans was $42,000 for the six months ended March 31, 1997 compared to $2.8 million for the six months ended March 31, 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 $0.7 million. Interest on short-term investments was $1.1 million for the six months ended March 31, 1997 compared to $0.8 million for the six months ended March 31, 1996. The increase was due to the increase in cash balances as a result of 13 property sales after March 31, 1996 and the disposition of substantially all of the mortgage loan portfolio in March 1996. Interest expense was $2.8 million for the six months ended March 31, 1997 compared to $7.0 million for the six months ended March 31, 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 is the amortization of deferred costs incurred in obtaining debt financing which are amortized over the term of the debt agreement. The Trust has reduced the Floating Rate Notes by $17.7 million through March 31, 1997 as a result of the prepayments required under the New Indenture from the sale of five encumbered properties and three of nine buildings owned by the Trust in an industrial park. In April of fiscal 1997, the Trust used $6.8 million of the net proceeds of an encumbered sale which occurred in March of fiscal 1997 to prepay a portion of the Floating Rate Notes. Operating expenses on rental properties was $4.9 million for the six months ended March 31, 1997 compared to $6.1 million for the six months ended March 31, 1996. The decrease in operating expenses on rental properties is the result of property sales that occurred during fiscal 1996 and cost containment measures. At March 31, 1997 the Trust owned 26 real estate properties compared to 39 at March 31, 1996 and 38 at September 30, 1995. During the third and fourth quarters of fiscal 1996, the Trust sold eight properties and during the first six months of fiscal 1997, the Trust sold five real estate properties and three of nine buildings owned by the Trust in an industrial park. The eight properties sold during the last two quarters of fiscal 1996 contributed $0.7 million in operating expenses during the six months ended March 31, 1996. Occupancy levels decreased to 85.5% at March 31, 1997 compared to 87.5% at September 30, 1996 and 81.1% at September 30, 1995. Occupancy levels, adjusted for property sales, increased to 85.5% at March 31, 1997 compared to 85.0% at March 31, 1996. Depreciation and amortization on rental properties was $0.9 million for the six months ended March 31, 1997 compared to $1.2 million for the six months ended March 31, 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 properties totaling $18.7 million to Assets Held for Sale from Assets Held for Investment. During the six months ended March 31, 1997, the Trust reclassified five properties totaling $35.7 million to Assets Held for Sale from Assets Held for Investment and no longer depreciates these assets. Other operating expenses decreased 7.6% for the six months ended March 31, 1997 compared to the six months ended March 31, 1996. RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 1997 VS.THREE MONTHS ENDED MARCH 31, 1996 Net income for the three months ended March 31, 1997 was $8.2 million, or $0.74 per share, compared to $1.5 million, or $0.13 per share, for the three months ended March 31, 1996. Income before gain on sale of real estate was $2.1 million, or $0.19 per share, for the three months ended March 31, 1997 compared to $1.5 million, or $0.13 per share, for the three months ended March 31, 1996. Rental income was $5.7 million for the three months ended March 31, 1997 compared to $6.9 million for the three months ended March 31, 1996. In addition to rental income, the Trust received reimbursement of certain operating expenses totaling $0.8 million and $0.9 million for the three months ended March 31, 1997 and 1996, respectively. The decrease in rental income is the result of property sales that occurred during fiscal 1996. At March 31, 1997 the Trust owned 26 real estate properties compared to 39 at March 31, 1996 and 38 at September 30, 1995. During the last six months of fiscal 1996, the Trust sold eight properties. During the first six months of fiscal 1997, the Trust sold five real estate properties and three of nine buildings owned by the Trust in an industrial park. The eight properties sold during the last two quarters of fiscal 1996 contributed $1.0 million in revenue during the three months ended March 31, 1996. Occupancy levels decreased to 85.5% at March 31, 1997 compared to 87.5% at September 30, 1996 and 81.1% at September 30, 1995. Occupancy levels, adjusted for property sales, increased to 85.5% at March 31, 1997 compared to 85.0% at March 31, 1996. Interest and fee income on mortgage loans was $21,000 for the three months ended March 31, 1997 compared to $1.2 million for the three months ended March 31, 1996. 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 $0.7 million. Interest on short-term investments was $0.6 million for the three months ended March 31, 1997 compared to $0.5 million for the three months ended March 31, 1996. The increase was due to the increase in cash balances as a result of 13 property sales after March 31, 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 March 31, 1997 compared to $3.4 million for the three months ended March 31, 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 is the amortization of deferred costs incurred in obtaining debt financing which are amortized over the term of the debt agreement. The Trust has reduced the Floating Rate Notes by $17.7 million through March 31, 1997 as a result of the prepayments required under the New Indenture from the sale of five encumbered properties and three of nine buildings owned by the Trust in an industrial park. In April of fiscal 1997, the Trust used $6.8 million of the net proceeds of an encumbered sale in March of fiscal 1996 to prepay a portion of the Floating Rate Notes. Operating expenses on rental properties was $2.4 million for the three months ended March 31, 1997 compared to $3.1 million for the three months ended March 31, 1996. The decrease in operating expenses on rental properties is the result of property sales that occurred during fiscal 1996 and cost containment measures. At March 31, 1997 the Trust owned 26 real estate properties compared to 39 at March 31, 1996 and 38 at September 30, 1995. During the third and fourth quarters of fiscal 1996, the Trust sold eight properties and during the first six months of fiscal 1997, the Trust sold five real estate properties and three of nine buildings owned by the Trust in an industrial park. The eight properties sold during the last two quarters of fiscal 1996 contributed $0.4 million in operating expenses during the second quarter ended March 31, 1996. Occupancy levels decreased to 85.5% at March 31, 1997 compared to 87.5% at September 30, 1996 and 81.1% at September 30, 1995. Occupancy levels, adjusted for property sales, increased to 85.5% at March 31, 1997 compared to 85.0% at March 31, 1996. Depreciation and amortization on rental properties was $0.4 million for the three months ended March 31, 1997 compared to $0.6 million for the three months ended March 31, 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 properties totaling $18.7 million to Assets Held for Sale from Assets Held for Investment. During the second quarter of fiscal 1997, the Trust reclassified five properties totaling $35.7 million to Assets Held for Sale from Assets Held for Investment and no longer depreciates these assets. Other operating expenses decreased 12.2% for the three months ended March 31, 1997 compared to the three months ended March 31, 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 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 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 March 31, 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 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 six months ended March 31, 1997, the Trust reclassified five properties totaling $35.7 million to Assets Held for Sale from Assets Held for Investment. During the six months ended March 31, 1997, the Trust received $33.6 million in net proceeds from the sale of real estate property classified as Assets Held for Sale with a carrying value of $25.7 million. The sales included five real estate properties and three 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 six months ended March 31, 1997, cash provided by operating activities decreased to $5.9 million compared to $9.2 million for the six months ended March 31, 1996. The decrease in cash provided by operating activities was primarily attributable to a reduced number of properties offset by lower interest payments in connection with the senior indebtedness. The outstanding balance on the Senior Secured Notes decreased to $49.7 million at March 31, 1997 from $110.0 million at March 31, 1996. Cash provided by investing activities decreased to $31.3 million for the six months ended March 31, 1997 compared to $54.5 million for the six months ended March 31, 1996. The decrease in cash provided by investing activities was primarily attributable to the disposition of substantially all of the Trust's mortgage loan portfolio in March 1996. Real estate sales activity offset this decrease by increasing to $33.6 million for the six months ended March 31, 1997 compared to $0.7 million for the six months ended March 31, 1996. Cash used in financing activities increased to $13.2 million for the six months ended March 31, 1997 compared to cash provided by financing activities of $2.0 million for the six months ended March 31, 1996. The Trust used $13.5 million in the six months ended March 31, 1997 to prepay a portion of the Senior Secured Notes. Restricted cash was flat for the six months ended March 31, 1997 compared to a decrease of $5.6 million for the six months ended March 31, 1996. 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. PART II: OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Trust held its Annual Meeting of Shareholders on Tuesday, February 25, 1997. The shareholders approved the following proposals as set forth in the Trust's 1997 Annual Proxy Statement: Proposal 1 - Election of seven (7) Trustees to serve until the next Annual Meeting of Shareholders and until their successors have been duly elected and qualified.
Trustee For Withheld ------- --- -------- Jeffrey A. Altman....................... 9,725,434 4,846 Martin Bernstein........................ 9,725,455 4,825 Richard S. Frary........................ 9,725,465 4,815 Richard B. Jennings..................... 9,725,464 4,816 John B. Levy............................ 9,725,450 4,830 Carl A. Mayer, Jr....................... 9,725,449 4,831 George R. Zoffinger..................... 9,725,444 4,836
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 March 17, 1997 under Item 2 and Item 7 of Form 8-K regarding the Trust's disposition of four real estate properties during the current quarter. 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: May 15, 1997 EX-27 2
5 1,000 6-MOS SEP-30-1997 MAR-31-1997 65,469 0 3,887 0 0 69,356 34 14 170,765 1,792 49,729 0 0 11,226 108,018 170,765 0 14,488 0 5,875 1,515 0 2,773 4,325 0 4,325 0 7,872 0 12,197 1.09 1.09
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