10-Q 1 c80318e10vq.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 September 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 W. 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 October 24, 2003, there were 20,124,833 Common Shares of Beneficial Interest outstanding. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENTERTAINMENT PROPERTIES TRUST Consolidated Balance Sheets (Dollars in thousands)
SEPTEMBER 30, 2003 DECEMBER 31, 2002 ------------------ ----------------- ASSETS (UNAUDITED) Rental properties, net $ 742,658 $ 679,937 Land held for development 17,035 12,985 Investment in joint venture 1,046 1,109 Cash and cash equivalents 107,314 10,091 Restricted cash 6,495 6,495 Receivable from joint venture - 8,438 Other assets 15,899 11,332 --------- --------- Total assets $ 890,447 $ 730,387 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued liabilities $ 1,211 $ 1,653 Common dividend payable 9,827 8,162 Preferred dividend payable 1,366 1,366 Unearned rents 377 4,036 Long-term debt 439,152 346,617 --------- --------- Total liabilities 451,933 361,834 Commitments and contingencies - - Minority interest in consolidated subsidiary 15,375 15,375 Shareholders' equity: Common Shares, $.01 par value; 50,000,000 shares authorized; 20,124,833 and 17,655,822 shares issued at September 30, 2003 and December 31, 2002, respectively 201 177 Preferred Shares, $.01 par value; 5,000,000 shares authorized; 2,300,000 shares issued at September 30, 2003 and December 31, 2002 23 23 Additional paid-in-capital 454,030 379,447 Treasury shares at cost: 472,200 common shares at September 30, 2003 and December 31, 2002 (6,533) (6,533) Loans to shareholders (3,525) (3,525) Non-vested shares (1,856) (1,276) Distributions in excess of net income (19,201) (15,135) --------- --------- Shareholders' equity 423,139 353,178 --------- --------- Total liabilities and shareholders' equity $ 890,447 $ 730,387 ========= =========
2 ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Income (Unaudited) (Dollars in thousands except per share data)
Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 -------- -------- -------- -------- Rental revenue $ 22,406 $ 18,797 $ 64,808 $ 51,582 Other income 608 - 1,195 - -------- -------- -------- -------- Total revenue 23,014 18,797 66,003 51,582 Property operating expense 220 25 398 171 General and administrative expense, excluding amortization of non-vested shares below 929 589 2,935 1,679 Interest expense, net 7,653 6,278 22,363 17,895 Depreciation and amortization 4,085 3,410 11,631 9,256 Amortization of non-vested shares 232 248 694 548 -------- -------- -------- -------- Income before minority interest, gain on sale of real estate and income from joint venture 9,895 8,247 27,982 22,033 Gain on sale of real estate - 202 - 202 Equity in income from joint venture 111 339 299 1,100 Minority interest (375) (375) (1,125) (820) -------- -------- -------- -------- Net income $ 9,631 $ 8,413 $ 27,156 $ 22,515 Preferred dividend requirements (1,366) (1,366) (4,097) (1,860) -------- -------- -------- -------- Net income available to common shareholders $ 8,265 $ 7,047 $ 23,059 $ 20,655 ======== ======== ======== ======== Net income per common share Basic $ 0.48 $ 0.41 $ 1.34 $ 1.24 Diluted $ 0.46 $ 0.41 $ 1.31 $ 1.22 Shares used for computation (in thousands): Basic 17,353 17,035 17,189 16,675 Diluted 18,641 18,183 18,456 17,589 Dividends per common share $ 0.50 $ 0.475 $ 1.50 $ 1.425 ======== ======== ======== ========
3 ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Cash Flows (Unaudited - in thousands)
Nine Months Ended September 30, 2003 2002 --------- --------- OPERATING ACTIVITIES Net income $ 27,156 $ 22,515 Adjustments to reconcile net income to net cash provided by operating activities Minority interest in net income 1,125 820 Gain on sale of land held for development - (202) Equity in income from joint venture (299) (1,100) Depreciation and amortization 11,631 9,256 Non-cash compensation expense 713 548 Common shares issued to management and trustees 63 54 (Increase) decrease in other assets 2,714 (647) Decrease in receivable from joint venture 8,438 - Decrease in accounts payable and accrued liabilities (441) (279) Decrease in unearned rents (3,659) (1,819) --------- --------- Net cash provided by operating activities 47,441 29,146 --------- --------- INVESTING ACTIVITIES Acquisition of rental properties (68,709) (131,489) Acquisition of development properties (8,589) - Proceeds from sale of land - 3,533 Distributions from joint venture 362 1,347 Proceeds from sale of equity interest in joint venture - 2,186 Development and capitalized costs (970) (1,270) --------- --------- Net cash used in investing activities (77,906) (125,693) --------- --------- FINANCING ACTIVITIES Proceeds from long-term debt facilities 190,200 22,000 Principal payments on long-term debt (97,665) (3,819) Deferred financing fees paid (7,414) (1,629) Proceeds from issuance of common shares, net of costs 73,220 43,069 Proceeds from issuance of preferred shares, net of costs - 55,435 Distribution to minority interest (1,125) (445) Distribution to shareholders (29,528) (23,434) --------- --------- Net cash provided by financing activities 127,688 91,177 --------- --------- Net increase (decrease) in cash and cash equivalents 97,223 (5,370) Cash and cash equivalents at beginning of period 10,091 24,590 --------- --------- Cash and cash equivalents at end of period $ 107,314 $ 19,220 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITY Declaration of dividend to common shareholders $ 9,827 $ 8,160 Declaration of dividend to preferred shareholders $ 1,366 $ 1,366 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 $ - $ 411 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during nine-month period for interest $ 21,178 $ 17,383 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 nine-month period ended September 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 September 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 72%) 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 5 the underlying shares at the date of grant, no compensation expense is recognized for stock options. As allowed by SFAS No. 148, we elected to apply the recognition provisions of SFAS No. 123 to all employee awards granted, modified, or settled after January 1, 2003. If the Company had measured compensation cost for the stock awards granted prior to January 1, 2003 to our trustees and 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 options are amortized to expense over the options' vesting periods.
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------ ------ ------- ------- Net income available to common shareholders: As reported $8,265 $7,047 $23,059 $20,655 Pro forma $8,233 $7,004 $22,963 $20,525 Basic earnings per share: As reported $ 0.48 $ 0.41 $ 1.34 $ 1.24 Pro forma $ 0.47 $ 0.41 $ 1.34 $ 1.23 Diluted earnings per share: As reported $ 0.46 $ 0.41 $ 1.31 $ 1.22 Pro forma $ 0.46 $ 0.41 $ 1.31 $ 1.21
Restricted Shares During the first quarter of 2003, the Company issued 29,579 restricted common shares as 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. COMMON SHARE OFFERING On September 23, 2003, the Company completed the sale of 2,352,000 common shares to RBC Capital Markets at a net price after underwriting discount of $30.70 per share, for total net proceeds, after offering expenses, of $72.2 million. The Company expects to use the proceeds from the offering for general corporate purposes, including the acquisition of properties. 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 Nine months ended September 30, 2003 ended September 30, 2003 Income Shares Per Share Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic earnings: Income available to common shareholders $ 8,265 17,353 $ 0.48 $ 23,059 17,189 $ 1.34 Effect of dilutive securities: Stock options - 307 (0.01) - 286 (0.02) Contingent shares from conversion of minority interest 375 857 - 1,125 857 - Non-vested common share grants - 124 (0.01) - 124 (0.01) ----------- ------------- -------- --------- ------------- -------- Diluted earnings $ 8,640 18,641 $ 0.46 $ 24,184 18,456 $ 1.31 =========== ============= ======== ========= ============ ======== Three months Nine months ended September 30, 2002 ended September 30, 2002 Income Shares Per Share Income Shares Per Share (numerator) (denominator) Amount (numerator) (denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic earnings: Income available to common shareholders $ 7,047 17,035 $ 0.41 $ 20,655 16,675 $ 1.24 Effect of dilutive securities: Stock options - 161 - - 157 (0.01) Contingent shares from conversion of minority interest 375 857 - 820 627 - Non-vested common share grants - 130 - - 130 (0.01) ----------- ------------- -------- --------- ------------- -------- Diluted earnings $ 7,422 18,183 $ 0.41 $ 21,475 17,589 $ 1.22 =========== ============= ======== ========= ============ ========
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 September 19, 2003, 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 September 30, 2003, we had invested approximately $818 million (before accumulated depreciation) in 41 megaplex theatre properties, 31 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. 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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002 Total revenue was $23.0 million for the three months ended September 30, 2003 compared to $18.8 million for the three months ended September 30, 2002. The $4.2 million increase resulted primarily from rental income associated with the property acquisitions completed in 2002 and 2003 ($3.2 million), base rent increases and percentage rents on existing properties ($0.4 million). In addition, other income increased $608 thousand due to a payment related to our Van's Skate Park lease at the retail property in Westminster, Colorado which was closed and vacated during the third quarter ($439 thousand), and income received from claims we filed in the Loews Cineplex bankruptcy proceedings ($169 thousand). Our property operating expenses totaled $220 thousand for the three months ended September 30, 2003 compared to $25 thousand for the three months ended September 30, 2002. These expenses arise from our non-triple net retail property operations in Detroit, Michigan; Greenville, South Carolina; and Westminster, Colorado. Our general and administrative expenses totaled $0.9 million for the three months ended September 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 compared to the same quarter in 2002 due to an overall increase in premiums in the insurance market. o An increase in fees paid for professional services, primarily for legal fees related to compliance with the Sarbanes 8 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 two employees. 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 $1.4 million to $7.7 million for the three months ended September 30, 2003 from $6.3 million for the three months ended September 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 $4.3 million for the three months ended September 30, 2003 compared to $3.7 million for the same period in 2002. The $0.6 million increase resulted from the property acquisitions completed in 2002 and 2003 and the 2003 grants of restricted shares. Income from joint venture totaled $111 thousand for the three months ended September 30, 2003 compared to $339 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 74.3% interest in the prior year). NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002 Total revenue was $66.0 million for the nine months ended September 30, 2003 compared to $51.6 million for the nine months ended September 30, 2002. The $14.4 million increase resulted primarily from the property acquisitions completed in 2002 and 2003 and from base rent increases and percentage rents on existing properties ($13.6 million) and from increases in other income ($1.2 million) including payments received from claims filed in the Loews Cineplex bankruptcy proceedings and from a payment related to Van's skate park lease which was closed and vacated during the third quarter at our Westminster, Colorado retail and entertainment center. Our property operating expenses totaled $398 thousand for the nine months ended September 30, 2003 compared to $171 thousand for the nine months ended September 30, 2002. These expenses arise from our non-triple net retail property operations in Detroit, Michigan; Greenville, South Carolina; and Westminster, Colorado. General and administrative expenses totaled $2.9 million for the nine months ended September 30, 2003 compared to $1.7 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 due to an overall increase in premiums in the insurance market. 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 two employees. o An increase in fees paid for professional services, primarily for legal fees related to compliance with the Sarbanes Oxley Act. o Increased costs associated with our Board of Trustees meetings. 9 o Increases in franchise and other miscellaneous taxes paid. Net interest expense increased to $22.4 million for the nine months ended September 30, 2003 from $17.9 million for the nine months ended September 30, 2002. The $4.5 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 $12.3 million for the nine months ended September 30, 2003 compared to $9.8 million for the same period in 2002. The $2.5 million increase resulted primarily from the property acquisitions completed in 2002 and 2003 and 2003 grants of restricted shares. Income from joint venture totaled $299 thousand for the nine months ended September 30, 2003 compared to $1.1 million 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 80.4% interest in the prior year). For the nine months ended September 30, 2003 minority interest in net income was $1.1 million as compared to $820 thousand in the prior year period. The increase is due to the impact of ownership of the related properties for a full nine months in the current period compared to a partial period in 2002. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $107.3 million at September 30, 2003. In addition, the Company had restricted cash of $6.5 million available for debt service in connection with the $120.5 million mortgage debt due in February 2006. We received approximately $72 million in proceeds from a common share offering in September 2003. Also during the quarter, we received approximately $15 million from a mortgage loan on one of our properties. We expect to use substantially all of those proceeds to fund planned acquisitions and for general corporate purposes. Mortgage Debt and Credit Facilities As of September 30, 2003, we had total debt outstanding of $439.2 million. All of our debt is mortgage debt secured by a substantial portion of our rental properties. Of this debt, $20 million was variable rate debt and $419.2 million was fixed rate debt. The $439.2 million aggregate principal amount of indebtedness had a weighted average interest rate of approximately 6.6% as of September 30, 2003. At September 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 September 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 September 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 property and general corporate purposes. The credit facility has three years remaining and carries interest at LIBOR plus 400 basis points. Liquidity Requirements 10 Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. At September 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 fund the operations of the Company, make 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 nine month periods ended September 30, 2003 and September 30, 2002 (in thousands):
Three months Nine months ended September 30, ended September 30, 2003 2002 2003 2002 -------- -------- -------- -------- Net income available to common shareholders $ 8,265 $ 7,047 $ 23,059 $ 20,655 Less: Gain on sale of real estate - (202) - (202) Add: Real estate depreciation 4,042 3,365 11,496 9,152 Add: Allocated share of joint venture depreciation 34 119 101 387 -------- -------- -------- -------- Basic Funds From Operations 12,341 10,329 34,656 29,992 -------- -------- -------- -------- Add: minority interest in net income 375 375 1,125 820 -------- -------- -------- -------- Diluted Funds From Operations $ 12,716 $ 10,704 $ 35,781 $ 30,812 ======== ======== ======== ======== FFO per common share: Basic $ 0.71 $ 0.61 $ 2.02 $ 1.80 Diluted $ 0.68 $ 0.59 $ 1.94 $ 1.75 Shares used for computation (in thousands): Basic 17,353 17,035 17,189 16,675 Diluted 18,641 18,183 18,456 17,589
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. As allowed by SFAS No. 148, we elected to apply the recognition provisions of SFAS No. 123 to all employee awards granted, modified, or settled after January 1, 2003. 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 No. 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 adopted SFAS No. 150 effective July 1, 2003, without 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. For variable interests in a VIE created before February 1, 2003, the FASB has recently delayed the implementation date to the first interim date or annual period ending after December 15, 2003. The Company is currently evaluating the impact of FIN 46 on its financial condition and results of operations. 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 SEPTEMBER 19, 2003. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12 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 September 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 in the Company's internal control over financial reporting. 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. 13 31 Certifications pursuant to Section 302 of the Sarbanes- Oxley Act 32 Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. B. Reports on Form 8-K. Form 8-K filed July 24, 2003 in connection with the release of the Company's earnings for the quarter ended June 30, 2003. Form 8-K filed September 19, 2003 in order to file as an exhibit the Underwriting Agreement with RBC Dain Rauscher, Inc. entered into by the Company in connection with the public offering of the Company's common shares which closed on September 23, 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: October 24, 2003 By /s/ David M. Brain ------------------------ David M. Brain, President - Chief Executive Officer and Trustee Dated: October 24, 2003 By /s/ Fred L. Kennon ------------------------ Fred L. Kennon, Vice President - Chief Financial Officer 14