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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
COMMISSION FILE NUMBER 1-13561
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 43-1790877
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
ONE KANSAS CITY PLACE
1200 MAIN STREET, SUITE 3250, KANSAS CITY, MISSOURI 64105
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700
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. X Yes
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At April 30, 1999, there were 13,867,412 Common Shares of Beneficial Interest
outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(Dollars in thousands)
MARCH 31, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
ASSETS
Rental properties, net $ 443,702 $ 438,348
Land held for development 19,220 17,649
Cash and cash equivalents 4,333 2,341
Other assets 5,555 6,033
========= =========
Total assets $ 472,810 $ 464,371
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,450 $ 1,066
Dividend payable 5,822 5,545
Unearned rents 3,561 3,161
Long-term debt 213,739 206,037
--------- ---------
Total liabilities 224,572 215,809
Commitments and Contingencies -- --
Shareholders' equity
Preferred Shares, $.01 par value; 5,000,000 shares
Authorized; no shares issued or outstanding -- --
Common Shares, $.01 par value; 50,000,000 shares
Authorized; 13,861,991 and 13,861,964 shares issued and
outstanding at March 31, 1999 and December 31, 1998, 139 139
respectively
Additional paid-in-capital 255,756 255,756
Loans to officers (2,400) (2,400)
Non-vested shares (880) (940)
Distributions in excess of net income (4,377) (3,993)
--------- ---------
Shareholders' equity 248,238 248,562
========= =========
Total liabilities and shareholders' equity $ 472,810 $ 464,371
========= =========
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ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
Three Months Ended March 31,
1999 1998
--------------------- -------------------
Rental revenue $ 11,497 $ 6,293
General and administrative expense 582 497
Depreciation and amortization 2,325 1,356
-------- --------
Income from operations 8,590 4,440
Interest expense (income) 3,152 (140)
-------- --------
Net income $ 5,438 $ 4,580
======== ========
Basic and diluted net income per common share $ 0.39 $ 0.33
======== ========
Shares used for computation (in thousands):
Basic 13,814 13,800
Diluted 13,892 13,860
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ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended March 31,
1999 1998
------------- ------------
OPERATING ACTIVITIES
Net income $ 5,438 $ 4,580
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 2,325 1,356
(Increase) decrease in other assets 461 (1,952)
(Decrease) increase in accounts payable and accrued
liabilities 383 (1,874)
Decrease in other liabilities -- (1,368)
Increase in unearned rent 400 528
-------- --------
Net cash provided by operating activities 9,007 1,270
INVESTING ACTIVITIES
Acquisition of rental properties (7,601) (95,408)
Acquisition of development properties (1,571) (3,773)
-------- --------
Net cash used in investing activities (9,172) (99,181)
FINANCING ACTIVITIES
Proceeds from long-term debt 8,000 57,000
Principal payments on long-term debt (298) --
Distributions to shareholders (5,545) (2,495)
-------- --------
Net cash provided by financing activities 2,157 54,505
-------- --------
Net increase (decrease) in cash and cash equivalents 1,992 (43,406)
Cash and cash equivalents at beginning of period 2,341 45,220
-------- --------
Cash and cash equivalents at end of period $ 4,333 $ 1,814
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY
Declaration of dividend to common shareholders $ 5,822 $ 5,544
======== ========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1). ORGANIZATION
Entertainment Properties Trust (the "Company") is a Maryland real estate
investment trust (REIT) organized on August 29, 1997. The Company was formed to
acquire and develop entertainment properties including megaplex theatres and
entertainment-themed retail centers.
In November 1997, the Company completed an initial public offering of 13,860,000
common shares, the proceeds of which were used to acquire theatre properties in
accordance with its business plan.
2). SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements of Entertainment
Properties Trust 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 of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999.
The consolidated balance sheet as of December 31, 1998 has been derived from the
audited consolidated balance sheet at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Entertainment Properties Trust annual report
on Form 10-K for the year ended December 31, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of Entertainment
Properties Trust and its wholly- owned subsidiaries, EPT DownReit, Inc. and EPT
DownReit II, Inc. All significant intercompany transactions have been
eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results may differ significantly from
such estimates and assumptions.
3). COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", effective for fiscal years beginning after
December 15, 1998. SFAS No. 130 requires that changes in the amounts of certain
items, including gains and losses on certain securities, be shown in the
Financial Statements. The Company adopted the provisions of SFAS No. 130 on
January 1, 1998. The Company's comprehensive income is equivalent to net income
for the three months ended March 31, 1999.
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4). PROPERTY ACQUISITIONS
During the three month period ended March 31, 1999, the Company completed its
acquisition of the Muvico Paradise 24 theatre property for an aggregate purchase
price of $6.5 million. This property is subject to lease arrangements consistent
with the lease terms of the Company's other rental properties. Additionally,
during the three month period ended March 31, 1999, the Company acquired certain
undeveloped land parcels for an aggregate purchase price of $1.6 million. These
parcels are adjacent to a theatre property currently under development.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company included in this quarterly report on Form
10-Q. The forward-looking statements included in this discussion and elsewhere
in this Form 10-Q involve risks and uncertainties, including anticipated
financial performance, business prospects, industry trends, anticipated capital
expenditures, shareholder returns and other matters, which reflect management's
best judgment based on factors currently known. Actual results and experience
could differ materially from the anticipated results and other expectations
expressed in the Company's forward-looking statements as a result of a number of
factors including but not limited to those discussed in this Item.
RESULTS OF OPERATIONS
The Company's revenues, which consist of property rentals, were $11.5 million
for the three months ended March 31, 1999 compared to $6.3 million for the three
months ended March 31, 1998. The increase was attributable to (i) the
acquisition of nine megaplex theatres subsequent to March 31, 1998; (ii) a full
quarter of rent in 1999 for three megaplex theatres acquired in the first
quarter of 1998; and (iii) increases in base rent for eleven theatres acquired
in 1997.
General and administrative expense totaled $0.6 million for the three months
ended March 31, 1999 compared to $0.5 million for the three months ended March
31, 1998. The increase was due primarily to increases in personnel costs.
Net interest expense totaled $3.2 million for the three months ended March 31,
1999 compared to net interest income of $0.1 million for the three months ended
March 31, 1998. The $3.3 million increase in interest expense resulted from the
long-term debt incurred in conjunction with the properties acquired subsequent
to March 31, 1998.
Depreciation and amortization expense was $2.3 million for the three months
ended March 31, 1999 compared to $1.4 million for the three months ended March
31, 1998. The increase resulted from the additional property acquisitions made
during the past year.
Net income for the three months ended March 31, 1999 totaled $5.4 million or
$0.39 per Share. For the three months ended March 31, 1998, net income was $4.6
million or $0.33 per Share.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had $4.3 million in cash and cash equivalents,
secured mortgage indebtedness of approximately $108 million, and unsecured
indebtedness of $106 million under the Bank Credit Facility. The $214 million
aggregate principal amount of mortgage and unsecured indebtedness bears interest
at a weighted average rate of 6.88%.
As of March 31, 1999, the Company had drawn $106 million under the Bank Credit
Facility. The remaining credit availability of $44 million will be utilized to
acquire additional entertainment properties and to fund operations, if needed.
The Bank Credit Facility contains a number of financial covenants and
restrictions, including restrictions on the amount of secured indebtedness that
can be obtained by the Company, a restriction on dividends to 90% of FFO
(provided that the Company may at all times pay the dividends required to
maintain its status as a REIT) and provisions governing the eligibility and
value of properties for borrowing base calculations.
The Company anticipates that its cash from operations and credit available under
the Bank Credit Facility will provide adequate liquidity to conduct its
operations, fund administrative and operating costs, interest payments,
additional planned property acquisitions and allow distributions to the
Company's shareholders in accordance with Internal Revenue Code requirements for
qualification as a REIT and to avoid any corporate level federal income tax or
excise tax.
Future acquisitions will be made subject to the Company's investment objectives
and policies to maximize both current income and long-term growth in income. As
such acquisition opportunities are presented that would cause the Company to
exhaust its available credit under the Bank Credit Facility, the Company intends
to consider: (i) entering into joint ventures with other investors to acquire or
develop properties; (ii) issuing Company securities in exchange for properties;
and/or (iii) conducting a public offering or direct placement of the Company's
securities designed to raise capital for acquisitions and/or reduce borrowings
under the Bank Credit Facility, thereby replenishing the available credit for
future acquisitions. There can be no assurance these objectives can be achieved.
See the annual report on Form 10-K for a discussion of the Companies'
capitalization strategies and capital requirements for future growth.
The Company's liquidity requirements with respect to future acquisitions may be
reduced to the extent the Company uses common Shares as consideration for such
purchases. Accordingly, the Company plans to file a registration statement on
Form S-4 with the Securities and Exchange Commission to register Shares for
issuance in exchange for the acquisition of additional properties as such
opportunities may arise.
On February 9, 1999, the Company instituted a dividend reinvestment and direct
share purchase plan pursuant to which shareholders may elect to automatically
reinvest their dividends by purchasing Shares issued directly by the Company and
shareholders and others may purchase Shares for cash directly from the Company.
The Company anticipates that additional capital will be obtained through the
dividend reinvestment and direct share purchase plan.
FUNDS FROM OPERATIONS
The Company believes that to facilitate a clear understanding of the historical
consolidated operating results, FFO should be examined in conjunction with net
income as presented in the Consolidated Financial Statements. FFO is considered
by management as an appropriate measure of the performance of an equity REIT
because it is predicated on cash flow analysis, which management believes is
more reflective of the value of real estate companies, such as the Company,
rather than a measure predicated on net income, which includes non-cash
expenses, such as depreciation. FFO is generally defined as net income plus
certain non-cash items, primarily depreciation of real estate properties.
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The following table summarizes the Company's FFO (in thousands except per Share
data):
Three months ended March 31,
1999 1998
---- ----
Net Income $5,438 $4,580
Real estate depreciation 2,248 1,286
------ ------
FFO $7,686 $5,866
====== ======
Basic FFO per common Share $ 0.56 $ 0.42
====== ======
Diluted FFO per common Share $ 0.55 $ 0.42
====== ======
YEAR 2000 DISCLOSURE
The Year 2000 issue concerns the inability of certain systems and devices to
properly use or store dates beyond December 31, 1999, resulting in system
failures or malfunctions that disrupt normal operations. This issue affects most
companies to some degree.
The Company believes its own internal operations, information systems and
software applications are Year 2000 compliant. The Company's only computer
software, other than standard office automation software, is its accounting
software. The third party vendor of the Company's accounting software has
certified that the system is Year 2000 compliant. The Company did not incur any
additional expenditures for its accounting software relating to Year 2000
issues.
The Company is in the process of assessing the extent to which it is vulnerable
to any failure of its tenants or third-party service providers to remedy their
own Year 2000 issues. The Company plans to process information from tenant
surveys beginning in 1999 and complete its assessment by mid-1999.
The Company's evaluation of these issues has been conducted by its own personnel
or by inquiries of tenants and vendors in connection with their servicing
operations. The Company's expenditures for assessing Year 2000 issues have not
been material. In addition, the Company is not aware of any Year 2000 issues
that will require material expenditures by the Company in the future.
The Company does not believe the risk posed by Year 2000 related problems at any
of the Company's third-party service providers, such as its banks, payroll
processor or telecommunications providers, would have a material effect on its
operations. Nevertheless, Year 2000 related problems at such third-party service
providers could delay the processing of financial transactions and the Company's
payroll and could temporarily disrupt the Company's internal and external
communications. However, the Company expects such disruptions, should they
occur, to be temporary.
The Company intends to complete outstanding assessments and continue to monitor
Year 2000 issues, and develop contingency plans to the extent deemed necessary.
However, based on current information, the Company does not anticipate
developing any substantive contingency plans with respect to Year 2000 issues.
In addition, the Company currently has no plans to use any independent
verification or review of its assessments.
While the Company believes it will be Year 2000 ready by December 31, 1999,
there can be no assurance the Company will be successful in identifying and
assessing all compliance issues. There can be no assurance that systems of other
companies on which the Company relies will be Year 2000 compliant on a timely
basis and thus no assurance that those companies' systems would not have a
material adverse effect on the Company's business or results of operations.
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FORWARD LOOKING INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND,"
"CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL,"
"FORECAST," OR OTHER COMPARABLE TERMS. THE COMPANY'S ACTUAL FINANCIAL CONDITION,
RESULTS OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY
SUCH FORWARD LOOKING STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO THE FOLLOWING:
- - The Company's dependence on its largest tenant and lease guarantor for a
substantial portion of its lease revenues and ability to make distributions
to its shareholders
- - The Company's continuing ability to diversify its portfolio
- - Competition from other entities providing capital to the entertainment
industry
- - Dependence on key personnel
- - Operating risks in the entertainment industry that may affect the
operations of the Company's tenants
- - Tax risks arising from the Company's continuing ability to qualify as a
REIT
- - Interest rates and availability of debt financing
- - Availability of capital for future expansion
- - General real estate investment risks
- - Other risk and uncertainties
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING
STATEMENTS AND ARE ENCOURAGED TO REVIEW THE RISK FACTORS IDENTIFIED IN THE
COMPANY'S PROSPECTUS CONTAINED IN ITS REGISTRATION STATEMENT ON FORM S-11 AND
FORM S-3.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, primarily relating to potential losses
due to changes in interest rates. The Company seeks to mitigate the effects of
fluctuations in interest rates by matching the term of new investments with new
long-term fixed rate borrowings whenever possible.
The Company is subject to risks associated with debt financing, including the
risk that existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of the Company's borrowings are subject to mortgages or contractual
agreements which limit the amount of indebtedness the Company may incur.
Accordingly, if the Company is unable to raise additional equity or borrow money
due to these limitations, the Company's ability to acquire additional properties
may be limited.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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.
ENTERTAINMENT PROPERTIES TRUST
Dated: May 14, 1999 By /s/ David M. Brain
-----------------------
David M. Brain, Chief Operating Officer
and Chief Financial Officer
Dated: May 14, 1999 By /s/ Fred L. Kennon
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Fred L. Kennon, Vice President - Treasurer
and Controller