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 June 30, 2003
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)
30 PERSHING ROAD, SUITE 201
KANSAS CITY, MISSOURI 64108
(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. Yes [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X]
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 July 15, 2003, there were 17,294,883 Common Shares of Beneficial Interest
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(Dollars in thousands)
<Table>
<Caption>
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
ASSETS (UNAUDITED)
Rental properties, net $ 746,628 $ 679,937
Land held for development 14,751 12,985
Investment in joint venture 1,059 1,109
Cash and cash equivalents 21,982 10,091
Restricted cash 6,495 6,495
Receivable from joint venture -- 8,438
Other assets 16,469 11,332
------------ ------------
Total assets $ 807,384 $ 730,387
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 2,081 $ 1,653
Common dividend payable 8,647 8,162
Preferred dividend payable 1,366 1,366
Unearned rents 682 4,036
Long-term debt 426,946 346,617
------------ ------------
Total liabilities 439,722 361,834
Commitments and contingencies -- --
Minority interest in consolidated subsidiary 15,375 15,375
Shareholders' equity:
Common Shares, $.01 par value; 50,000,000 shares authorized;
17,767,083 and 17,655,822 shares issued at June 30, 2003
and December 31, 2002, respectively 178 177
Preferred Shares, $.01 par value; 5,000,000 shares authorized;
2,300,000 shares issued at June 30, 2003
and December 31, 2002 23 23
Additional paid-in-capital 381,871 379,447
Treasury shares at cost: 472,200 common shares at June 30,
2003 and December 31, 2002 (6,533) (6,533)
Loans to shareholders (3,525) (3,525)
Non-vested shares (2,088) (1,276)
Distributions in excess of net income (17,639) (15,135)
------------ ------------
Shareholders' equity 352,287 353,178
------------ ------------
Total liabilities and shareholders' equity $ 807,384 $ 730,387
============ ============
</Table>
2
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands except per share data)
<Table>
<Caption>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Rental revenue $ 21,944 $ 16,989 $ 42,402 $ 32,785
Other income -- -- 587 --
------------ ------------ ------------ ------------
Total Revenue 21,944 16,989 42,989 32,785
Property operating expense 83 75 178 146
General and administrative expense, excluding
amortization of non-vested shares below 1,150 567 2,006 1,089
Interest expense 7,477 5,883 14,711 11,616
Depreciation and amortization 3,857 3,098 7,544 5,846
Amortization of non-vested shares 232 150 463 300
------------ ------------ ------------ ------------
Income before minority interest and income from
joint venture 9,145 7,216 18,087 13,788
Equity in income from joint venture 97 385 188 760
Minority interest (375) (375) (750) (445)
------------ ------------ ------------ ------------
Net income $ 8,867 $ 7,226 $ 17,525 $ 14,103
Preferred dividend requirements (1,366) (494) (2,731) (494)
------------ ------------ ------------ ------------
Net income available to common shareholders $ 7,501 $ 6,732 $ 14,794 $ 13,609
============ ============ ============= ==============
Net income per common share
Basic $ 0.44 $ 0.39 $ 0.86 $ 0.82
Diluted $ 0.43 $ 0.39 $ 0.85 $ 0.81
Shares used for computation (in thousands):
Basic 17,137 16,990 17,106 16,492
Diluted 18,382 18,155 18,332 17,286
Dividends per common share $ 0.50 $ 0.475 $ 1.00 $ 0.95
============ ============ ============ ============
</Table>
3
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<Table>
<Caption>
Six Months Ended June 30,
-----------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 17,525 $ 14,103
Adjustments to reconcile net income to net cash provided by operating activities
Minority interest in net income 750 445
Equity in income from joint venture (188) (760)
Depreciation and amortization 7,557 5,846
Non-cash compensation expense 463 300
Common shares issued to management and trustees 63 54
(Increase) decrease in other assets 1,899 (1,819)
Decrease in receivable from joint venture 8,438 --
Increase (decrease) in accounts payable and accrued liabilities 428 (407)
Decrease in unearned rents (3,354) (1,866)
------------ ------------
Net cash provided by operating activities 33,581 15,896
------------ ------------
INVESTING ACTIVITIES
Acquisition of rental properties (68,636) (105,611)
Acquisition of development properties (6,702) --
Distributions from joint venture 238 927
Development and capitalized costs (573) (764)
------------ ------------
Net cash used in investing activities (75,673) (105,448)
------------ ------------
FINANCING ACTIVITIES
Proceeds from long-term debt facilities 175,500 --
Principal payments on long-term debt (95,171) (2,540)
Deferred financing fees paid (7,126) --
Proceeds from issuance of common shares 1,046 42,928
Proceeds from issuance of preferred shares, net of costs -- 55,435
Distribution to minority interest (750) (70)
Distribution to shareholders (19,516) (14,784)
------------ ------------
Net cash provided by financing activities 53,983 80,969
------------ ------------
Net increase (decrease) in cash and cash equivalents 11,891 (8,583)
Cash and cash equivalents at beginning of period 10,091 24,590
------------ ------------
Cash and cash equivalents at end of period $ 21,982 $ 16,007
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY
Declaration of dividend to common shareholders $ 8,647 $ 8,157
Declaration of dividend to preferred shareholders $ 1,366 $ 494
Transfer of land held for development to rental property $ 5,509 $ --
Minority interest issued in exchange for rental property $ -- $ 15,000
Sale of equity interest in joint venture $ -- $ 1,341
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during six-month period for interest $ 13,871 $ 11,302
Issuance of non-vested stock grants to management $ 1,304 1,219
</Table>
4
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.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company 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 six-month period ended June 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
The consolidated balance sheet as of December 31, 2002 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 Company's annual report on Form 10-K for the
year ended December 31, 2002.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion (68%)
of the megaplex theatre rental properties held by the Company at June 30, 2003
as a result of a series of sale leaseback transactions pertaining to a number of
AMC megaplex theatres. A substantial portion of the Company's revenues
(approximately 70%) result from rental payments by AMC under the leases, or its
parent, AMC Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations
under the leases. AMC Entertainment, Inc. is a publicly held company (AMEX:AEN)
and accordingly, their financial information is publicly available.
SHARE BASED COMPENSATION
During 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," which provides alternative methods of
accounting for stock-based compensation and amends SFAS No. 123 "Accounting for
Stock-Based Compensation." The Company adopted SFAS 148 as of January 1, 2003.
Share Options
The Company has historically measured share-based compensation expense using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations. Under APB 25, because the exercise price of the Company's
employee share options equals the market price of the underlying shares at the
date of grant, no compensation expense is recognized for stock options. As
allowed by SFAS No. 148, we have elected to apply the recognition provisions of
SFAS No. 123 to all employee awards granted, modified, or settled
5
after January 1, 2003. If the Company had measured compensation cost for the
stock awards granted prior to January 1, 2003 to our employees under the fair
value based method prescribed by SFAS No. 123, net income would have been
changed to the pro forma amounts set forth below. For the purposes of pro forma
disclosures, the estimated fair value of the option is amortized to expense over
the options' vesting periods.
<Table>
<Caption>
Six Months Ended June 30,
2003 2002
------------ ------------
Net income available to common shareholders:
As reported $ 14,794 $ 13,609
Pro forma $ 14,730 $ 13,523
Basic earnings per share:
As reported $ 0.86 $ .82
Pro forma $ 0.86 $ .81
Diluted earnings per share:
As reported $ .85 $ .81
Pro forma $ .84 $ .81
</Table>
Restricted Shares
During the first quarter of 2003, the Company issued 29,579 restricted common
shares for bonus compensation to executives and other employees of the Company.
During the first quarter of 2003, the Company also issued 24,027 restricted
common shares to executives under a long-term compensation plan. Based upon the
market price of the Company's common shares on the grant dates, approximately
$1.3 million was recognized as non-vested shares issued in the first quarter of
2003.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior quarter amounts to conform
to the current quarter presentation.
3. PROPERTY ACQUISITIONS
During the three month period ended June 30, 2003, we completed approximately
$61 million of operating rental property acquisitions. We acquired the Southwind
12 megaplex theatre in Lawrence, Kansas for a cash purchase price of $5 million.
The property is leased to Wallace Theatres under a 20 year triple-net lease. We
acquired the Veterans 24 AMC megaplex theatre in Tampa, Florida for a cash
purchase price of $24.5 million. The property is leased to AMC under a 20 year
lease. We acquired the Star Southfield Center in Southfield, Michigan for a cash
purchase price of $28.2 million. The property includes a movie theatre that is
leased to Loews under a 20 year lease. Also during May, we completed the
acquisition of the Hawaiian Falls Adventure Waterpark in Garland, Texas for a
cash purchase price of $3.3 million. The water park is leased to Horizon
Amusement South, LLC under a 20 year lease. Also during the quarter, we
completed the purchase of a land parcel in Peoria, IL, for $2.7 million. We
ground lease the land parcel to a third-party during construction of an 18
screen megaplex theatre, which is expected to be completed in 2004.
6
4. EARNINGS PER SHARE
The following table summarizes the Company's common shares used for computation
of basic and diluted earnings per share (in thousands):
<Table>
<Caption>
Three months Six months
ended June 30, 2003 ended June 30, 2003
Income Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ----------- ----------- ------------- -----------
Basic earnings:
Income available to common shareholders $ 7,501 17,137 $ 0.44 $ 14,794 17,106 $ 0.86
Effect of dilutive securities:
Stock options -- 264 (.01) -- 245 (.01)
Contingent shares from conversion of
minority interest 375 857 -- 750 857 --
Non-vested common share grants -- 124 -- -- 124 --
----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings $ 7,876 18,382 $ 0.43 $ 15,544 18,332 $ 0.85
=========== =========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
Three months Six months
ended June 30, 2002 ended June 30, 2002
Income Shares Per Share Income Shares Per Share
(numerator) (denominator) Amount (numerator) (denominator) Amount
----------- ------------- ----------- ----------- ------------- -----------
Basic earnings:
Income available to common shareholders $ 6,732 16,990 $ 0.39 $ 13,609 16,492 $ 0.82
Effect of dilutive securities:
Stock options -- 178 -- -- 154 --
Contingent shares from conversion of
minority interest 375 857 -- 445 510 (0.01)
Non-vested common share grants -- 130 -- -- 130 --
----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings $ 7,107 18,155 $ 0.39 $ 14,054 17,286 $ 0.81
=========== =========== =========== =========== =========== ===========
</Table>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto 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, shareholder returns,
performance of leases by tenants 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 and in Item I
"Business - Risk Factors", in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 and in "Risk Factors" in the Company's prospectus
filed under Rule 424(b) of the SEC on May 24, 2002, incorporated by reference
herein.
7
OVERVIEW
Our primary business strategy is to purchase real estate (land, buildings and
other improvements) leased to operators of destination based entertainment and
entertainment related properties under long-term, triple-net leases. As of June
30, 2003, we had invested approximately $816 million (before accumulated
depreciation) in 41 megaplex theatre properties and 27 restaurant /retail
properties and one recreational Waterpark located in 17 states.
Substantially all of our properties are leased pursuant to long-term, triple-net
leases, under which the tenants typically pay all operating expenses of a
property, including, but not limited to, all real estate taxes, assessments and
other government charges, insurance, utilities, repairs and maintenance.
Substantially all of our revenues are derived from rents received or accrued
under long-term, triple-net leases and interest earned from the temporary
investment of funds in short-term investments.
The Company incurs general and administrative expenses including compensation
expense for our executive officers and other employees, professional fees and
various expenses incurred in the process of identifying and acquiring additional
properties. We are self-administered and managed by our trustees, executive
officers and other employees. Our primary non-cash expense is the depreciation
of our properties. We depreciate buildings and improvements on our properties
over a seven-year to 40-year period for tax purposes and primarily a 40-year
period for financial reporting purposes. We do not own or lease any significant
personal property or equipment at any property we currently own.
Recent Developments
During the three month period ended June 30, 2003, we completed approximately
$61 million of property acquisitions. On June 5, 2003, we acquired the Southwind
12 megaplex theatre in Lawrence, Kansas for a cash purchase price of $5 million.
The property is leased to Wallace Theatres under a 20 year triple-net lease. On
June 5, 2003, we acquired the Veterans 24 AMC megaplex theatre in Tampa, Florida
for a cash purchase price of $24.5 million. The property is leased to AMC under
a 20 year lease. On May 27, 2003, we acquired the Star Southfield Center in
Southfield, Michigan for a cash purchase price of $28.2 million. The property
includes a movie theatre that is leased to Loews under a 20 year lease. Also
during May, we completed the acquisition of the Hawaiian Falls Adventure
Waterpark in Garland, Texas for a cash purchase price of $3.3 million. The water
park is leased to Horizon Amusement South, LLC under a 20 year lease.
CRITICAL ACCOUNTING POLICIES
There have been no changes from the policies discussed in our Annual Report on
Form 10-K for the year ended December 31, 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenue from property rentals was $21.9 million for the three months ended June
30, 2003 compared to $17.0 million for the three months ended June 30, 2002. The
$4.9 million increase resulted primarily from the property acquisitions
completed in 2002 and 2003 ($4.7 million) and from base rent increases and
percentage rents on existing properties ($0.2 million).
Our property operating expenses totaled $83 thousand for the three months ended
June 30, 2003 compared to $75 thousand for the three months ended June 30, 2002.
These expenses arise from the operations of retail space in Greenville, South
Carolina and Westcol Center, an entertainment and retail center in Westminster
Colorado.
8
Our general and administrative expenses totaled $1.2 million for the three
months ended June 30, 2003 compared to $0.6 million for the same period in 2002.
The increase in operating expenses is due primarily to:
o Increases in insurance expense, including premiums for both Director
and Officer insurance and property and casualty insurance for the
second quarter 2003 compared to the same quarter in 2002 due to an
overall increase in premiums in the insurance market. The Company
expects insurance premiums to remain stable in the future.
o An increase in fees paid for professional services, primarily for
accounting and legal fees related to compliance with the Sarbanes
Oxley Act.
o An increase in payroll and related expenses attributable to increases
in base compensation, bonus awards, payroll taxes related to the
vesting of stock grants and stock bonuses, and the addition of one
employee.
o Increased costs associated with our Board of Trustees meetings.
o Increases in franchise and other miscellaneous taxes paid.
Our net interest expense increased by $1.6 million to $7.5 million for the three
months ended June 30, 2003 from $5.9 million for the three months ended June 30,
2002. The increase in net interest expense primarily resulted from increases in
long-term debt used to finance real estate acquisitions.
Depreciation and amortization expenses, including amortization of non-vested
shares, totaled $4.1 million for the three months ended June 30, 2003 compared
to $3.2 million for the same period in 2002. The $0.9 million increase resulted
from the property acquisitions completed in 2002 and 2003 and recent grants of
restricted shares.
Income from joint venture totaled $97 thousand for the three months ended June
30, 2003 compared to $385 thousand for the same period in 2002. The decrease was
due to the Company's lower ownership interest in the Atlantic-EPR I joint
venture (20% ownership in the current quarter compared to 84% interest in the
prior year).
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenue from property rentals was $42.4 million for the six months ended June
30, 2003 compared to $32.8 million for the six months ended June 30, 2002. The
$9.6 million increase resulted primarily from the property acquisitions
completed in 2002 and 2003 and from base rent increases and percentage rents on
existing properties.
Other income was $0.6 million for the six months ended June 30, 2003 which
resulted from payments received related to settlement of claims we filed in the
Loews Cineplex bankruptcy proceedings. For the six months ended June 30, 2002,
the Company had no other income reported.
Our property operating expenses totaled $178 thousand for the six months ended
June 30, 2003 compared to $146 thousand for the six months ended June 30, 2002.
These expenses arise from the operations of retail space in Greenville, South
Carolina and Westcol Center, an entertainment and retail center in Westminster
Colorado.
General and administrative expenses totaled $2.0 million for the six months
ended June 30, 2003 compared to $1.1 million for the same period in 2002. The
increase in operating expenses is due primarily to:
o Increases in insurance expense, including premiums for both Director
and Officer insurance and property and casualty insurance for the
second quarter 2003 compared to the same quarter in 2002 due to an
overall increase in premiums in
9
the insurance market. The Company expects insurance premiums to remain
stable in the future.
o An increase in payroll and related expenses attributable to increases
in base compensation, bonus awards, payroll taxes related to the
vesting of stock grants and stock bonuses, and the addition of one
employee.
o An increase in fees paid for professional services, primarily for
accounting and legal fees related to compliance with the Sarbanes
Oxley Act.
o Increased costs associated with our Board of Trustees meetings.
o Increases in franchise and other miscellaneous taxes paid.
Net interest expense increased to $14.7 million for the six months ended June
30, 2003 from $11.6 million for the six months ended June 30, 2002. The $3.1
million increase in net interest expense resulted primarily from increases in
long-term debt used to finance real estate acquisitions.
Our depreciation and amortization expenses, including amortization of non-vested
shares, totaled $8.0 million for the six months ended June 30, 2003 compared to
$6.1 million for the same period in 2002. The $1.9 million increase resulted
primarily from the property acquisitions completed in 2002 and 2003 and recent
grants of restricted shares.
For the six months ended June 30, 2003 minority interest in net income was $750
thousand as compared to $445 thousand in the prior year period. The increase is
due to the impact of ownership of the related properties for a full three months
in the current period compared to a partial period in 2002.
Income from joint venture totaled $188 thousand for the six months ended June
30, 2003 compared to $760 thousand for the same period in 2002. The decrease was
due to the Company's lower ownership interest in the Atlantic-EPR I joint
venture (20% ownership in the current period compared to 84% interest in the
prior year).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $22.0 million at June 30, 2003. In addition, the
Company had restricted cash of $6.5 million available for debt service in
connection with the $120.1 million mortgage debt due in February 2006.
Mortgage Debt and Credit Facilities
As of June 30, 2003, we had total debt outstanding of $426.9 million. All of our
debt is mortgage debt secured by substantially all of our rental properties. Of
this debt, $20 million was variable rate debt and $406.9 million was fixed rate
debt. The $426.9 million aggregate principal amount of indebtedness had a
weighted average interest rate of approximately 6.7% as of June 30, 2003.
At June 30, 2003, we had no debt outstanding under our $50 million Fleet Bank
credit facility. The Fleet Bank credit facility is a secured facility and at
June 30, 2003, there were no real estate properties pledged to that facility and
therefore, none of the $50 million was available to draw. As we acquire
additional properties that qualify as collateral under that credit facility, we
expect to use proceeds from the facility for additional acquisitions of rental
property and general corporate purposes. The credit facility has two years
remaining and carries interest at LIBOR plus 300 basis points.
As of June 30, 2003, we had $20 million of debt outstanding under our iSTAR $75
million credit facility. As we acquire additional properties that qualify as
collateral, we expect to use proceeds from the facility for additional
acquisitions of rental
10
property and general corporate purposes. The credit facility has three years
remaining and carries interest at LIBOR plus 400 basis points.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring
corporate operating expenses, debt service requirements and distributions to
shareholders. At June 30, 2003, we had no unfunded acquisition or development
commitments. We anticipate that our cash on hand and cash from operations will
provide adequate liquidity to conduct operations, fund administrative and
operating costs and interest and principal payments on our debt, and allow
distributions to the Company's shareholders and avoidance of corporate level
federal income or excise tax in accordance with Internal Revenue Code
requirements for qualification as a REIT.
FUNDS FROM OPERATIONS (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO
as a relative non-GAAP financial measure of performance and liquidity of an
equity REIT in order to recognize that income-producing real estate historically
has not depreciated on the basis determined under GAAP. FFO is a widely used
measure of the operating performance of real estate companies and is provided
here as a supplemental measure to Generally Accepted Accounting Principles
(GAAP) net income available to common shareholders and earnings per share. FFO,
as defined under the revised NAREIT definition and presented by us, is net
income, computed in accordance with GAAP, excluding gains and losses from sales
of depreciable operating properties, plus real estate related depreciation and
amortization, and after adjustments for unconsolidated partnerships, joint
ventures and other affiliates. Adjustments for unconsolidated partnerships,
joint ventures and other affiliates are calculated to reflect FFO on the same
basis. FFO is a non-GAAP financial measure. FFO does not represent cash flows
from operations as defined by GAAP and is not indicative that cash flows are
adequate to fund all cash needs and is not to be considered an alternative to
net income or any other GAAP measure as a measurement of the results of the
Company's operations or the Company's cash flows or liquidity as defined by
GAAP.
The following tables summarize the Company's FFO for the three and six month
periods ended June 30, 2003 and June 30, 2002 (in thousands):
<Table>
<Caption>
Three months Six months
ended June 30, ended June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income available to common shareholders $ 7,501 $ 6,732 $ 14,794 $ 13,609
Add: Real estate depreciation 3,813 3,056 7,454 5,787
Add: Allocated share of joint venture depreciation 32 137 64 275
------------ ------------ ------------ ------------
Basic Funds From Operations 11,346 9,925 22,312 19,671
------------ ------------ ------------ ------------
Add: minority interest in net income 375 375 750 445
------------ ------------ ------------ ------------
Diluted Funds From Operations $ 11,721 $ 10,300 $ 23,062 $ 20,116
============ ============ ============ ============
FFO per common share:
Basic $ 0.66 $ 0.58 $ 1.30 $ 1.18
Diluted $ 0.64 $ 0.57 $ 1.26 $ 1.16
Shares used for computation (in thousands):
Basic 17,137 16,990 17,106 16,492
Diluted 18,382 18,155 18,332 17,286
</Table>
11
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company adopted SFAS No. 148 effective January 1, 2003, as required,
without material effect on the Company's financial condition or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures three
classes of freestanding financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS 150 was effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The company does not
anticipate that the adoption of SFAS No. 150 will have a material impact on its
financial position and results of operations. In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51" (FIN 46). FIN 46 addresses the consolidation of
entities whose equity holders have either (a) not provided sufficient equity at
risk to allow the entity to finance its own activities or (b) do not possess
certain characteristics of a controlling financial interest. FIN 46 requires the
consolidation of these entities, known as variable interest entities ("VIEs"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any, that is subject to a majority of the risk of loss from the VIE's
activities, entitled to receive a majority of the VIE's residual returns, or
both. FIN 46 applies immediately to variable interests in VIEs created or
obtained after January 31, 2003. For variable interests in a VIE created before
February 1, 2003, FIN 46 is applied to the VIE no later than the beginning of
the first interim or annual reporting period beginning after June 15, 2003. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003, if it is reasonably possible that the Company will consolidate
or disclose information about variable interest entities when the Interpretation
becomes effective.
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 THOSE DISCUSSED UNDER "RISK FACTORS" IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002 AND
ITS PROSPECTUS FILED UNDER RULE 424(b) OF THE SEC ON MAY 24, 2002. INVESTORS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
12
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.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of June 30, 2003, the end of the period
covered by this report. Based on that review and evaluation, the CEO and CFO
have concluded that the Company's current disclosure controls and procedures, as
designed and implemented, were effective. There have been no significant changes
in the Company's internal controls subsequent to the date of their evaluation.
There were no significant material weaknesses identified in the course of such
review and evaluation and, therefore, no corrective measures were taken by the
Company.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in the
ordinary course of business, the Company is not presently involved in any
litigation nor, to its knowledge, is any litigation threatened against the
Company or its properties, which is reasonably likely to have a material adverse
effect on the liquidity or results of operations of the Company.
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act.
B. Reports on Form 8-K.
Form 8-K filed May 12, 2003 in connection with the release of the
Company's earnings for the quarter ended March 31, 2003.
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: July 24, 2003 By /s/ David M. Brain
-----------------------------------------
David M. Brain, President -
Chief Executive Officer and Trustee
Dated: July 24, 2003 By /s/ Fred L. Kennon
-----------------------------------------
Fred L. Kennon, Vice President -
Chief Financial Officer
14