10-Q 1 c78744e10vq.txt FORM 10-Q 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)
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 ============ ============
2 ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Income (Unaudited) (Dollars in thousands except per share data)
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 ============ ============ ============ ============
3 ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Cash Flows (Unaudited - in thousands)
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
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.
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
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):
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 =========== =========== =========== =========== =========== ===========
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 =========== =========== =========== =========== =========== ===========
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):
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
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