UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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, UNION STATION SUITE 201 KANSAS CITY, MISSOURI 64108 (Address of principal executive office) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Class Name of each exchange on which registered -------------- ----------------------------------------- Common Shares of Beneficial Interest, New York Stock Exchange par value $.01 per share 9.5% Series A Cumulative Preferred Shares, New York Stock Exchange par value $.01 per share SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.
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, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES [X] NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12b-2). YES [X] NO [ ] THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST ("COMMON SHARES") OF THE REGISTRANT HELD BY NON-AFFILIATES ON FEBRUARY 13, 2004, WAS $718,627,679 (BASED ON THE CLOSING SALES PRICE PER COMMON SHARE ON THE NEW YORK STOCK EXCHANGE ON FEBRUARY 13, 2004 OF $36.55). AT FEBRUARY 13, 2004, THERE WERE 19,661,496 COMMON SHARES OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A are incorporated by reference in Part III of this Form 10-K.
PART I ITEM 1. BUSINESS Investors should review the Risk Factors commencing on page 4 of this Report for a discussion of risks that may impact our financial condition, business or share price. GENERAL Entertainment Properties Trust ("we," "us," "EPR" or the "Company") was formed on August 22, 1997 as a Maryland real estate investment trust ("REIT") to capitalize on the opportunities created by the development of destination entertainment and entertainment-related properties, including megaplex movie theatre complexes. We completed an initial public offering of our common shares of beneficial interest ("Common Shares") on November 18, 1997. We are the first publicly-traded REIT formed exclusively to invest in entertainment-related properties. We are a self-administered REIT. As of December 31, 2003, our real estate portfolio was comprised primarily of 45 megaplex theatre properties located in eighteen states, two entertainment retail centers ("ERCs") located in Westminster, Colorado, and New Rochelle, New York, and land parcels leased to restaurant and retail operators adjacent to several of our theatre properties. Our theatre properties are leased to leading theatre operators, including American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC Entertainment, Inc. ("AMCE"), Muvico Entertainment, LLC ("Muvico"), Regal Cinemas, Inc. ("Regal"), Consolidated Theatres ("Consolidated"), Loews Cineplex Entertainment ("Loews"), Rave Motion Pictures ("Rave"), AmStar Cinemas, LLC ("AmStar") , Wallace Theatres ("Wallace") and Crown Theatres ("Crown"). Approximately 62% of the Company's megaplex theatre properties are leased to AMC. For a discussion of material property acquisitions during the three months ended December 31, 2003, see Item 7 - "Management's Discussion and Analysis - Recent Developments" and our current report on Form 8-K filed with the Securities and Exchange Commission on November 12, 2003, as amended by Form 8-K/A filed January 12, 2004 incorporated by reference herein. We aggregate the financial information of all our properties into one reportable segment because the properties all have similar economic characteristics and provide similar services to similar types and classes of customers. We believe entertainment is an important sector of the retail real estate industry and that, as a result of our focus on properties in this sector and the industry relationships of our management, we have a competitive advantage in providing capital to operators of these types of properties. Our principal business strategy is to be the nation's leading entertainment real estate company by continuing to acquire high-quality properties leased to entertainment and entertainment-related business operators, generally under long-term triple-net leases that require the tenant to pay substantially all expenses associated with the operation and maintenance of the property. Megaplex theatres typically have at least 14 screens with stadium-style seating (seating with elevation between rows to provide unobstructed viewing) and are equipped with amenities that significantly enhance the audio and visual experience of the patron. We believe the development of megaplex theatres has accelerated the obsolescence of many of the previous generation of existing multiplex movie theatres by setting new standards for moviegoers, who, in our experience, have demonstrated their preference for the more attractive surroundings, wider variety of films and superior customer service typical of megaplex theatres (see "Operating risks in the entertainment industry may affect the ability of our tenants to perform 1
under their leases" and "Market prices for our shares may be affected by perceptions about the financial health or share value of our tenants or the performance of REIT stocks generally" under "Risk Factors"). We expect the development of megaplex theatres to continue in the United States and abroad for the foreseeable future. With the development of the stadium style megaplex theatre as the preeminent store format for cinema exhibition, the older generation of smaller flat-floor theatres has generally experienced a significant downturn in attendance and performance. As a result of the significant capital commitment involved in building these new properties and the experience and industry relationships of our management, we believe we will continue to have opportunities to provide capital to businesses that seek to develop and operate these properties but would prefer to lease rather than own the properties. We believe our ability to finance these properties will enable us to continue to grow and diversify our asset base. See Item 7 - "Management's Discussion and Analysis" for a discussion of capital requirements necessary for the Company's continued growth. BUSINESS OBJECTIVES AND STRATEGIES Our primary business objective is to continue to enhance shareholder value by achieving predictable and increasing Funds From Operations ("FFO") per Share (See Item 7 - "Management's Discussion and Analysis - Funds From Operations" for a discussion of FFO), through the acquisition of high-quality properties leased to entertainment and entertainment-related business operators. We intend to achieve this objective by continuing to execute the Growth Strategies, Operating Strategies and Capitalization Strategies described below: GROWTH STRATEGIES FUTURE PROPERTIES We intend to pursue acquisitions of high-quality entertainment related properties from operators with a strong market presence. As a part of our growth strategy, we will consider entering into additional joint ventures with other developers or investors in real estate, developing additional megaplex theatre properties and developing or acquiring entertainment retail centers ("ERCs") and single-tenant, out-of-home, location-based entertainment and entertainment-related properties. OPERATING STRATEGIES LEASE RISK MINIMIZATION To avoid initial lease-up risks and produce a predictable income stream, we typically acquire single-tenant properties that are leased under long-term leases. We believe our willingness to make long-term investments in properties offers our tenants financial flexibility and allows tenants to allocate capital to their core businesses. Although we will continue to emphasize single-tenant properties, we have acquired and may continue to acquire multi-tenant properties we believe add value to our shareholders. LEASE STRUCTURE We typically structure leases on a triple-net basis under which the tenants bear the principal portion of the financial and operational responsibility for the properties. During each lease term and any renewal periods, the leases typically provide for periodic increases in rent and/or percentage rent based upon a percentage of the tenant's gross sales over a pre-determined level. In our multi-tenant property leases and some of our theatre leases, we require the tenant to pay a common area maintenance (CAM) charge to defray its pro rata share of insurance, taxes and maintenance costs. TENANT RELATIONSHIPS We intend to continue developing and maintaining long-term working relationships with theatre, restaurant, retail and other entertainment-related business operators and developers by providing capital for 2
multiple properties on a national or regional basis, thereby enhancing efficiency and value to those operators and to the Company. PORTFOLIO DIVERSIFICATION We will endeavor to further diversify our asset base by property type, geographic location and tenant. In pursuing this diversification strategy, the Company will target theatre, restaurant, retail and other entertainment-related business operators which management views as leaders in their market segments and which have the financial strength to compete effectively and perform under their leases with the Company. CAPITALIZATION STRATEGIES USE OF LEVERAGE; DEBT TO TOTAL CAPITALIZATION We seek to enhance shareholder return through the use of leverage (see "Risk Factors - "There is risk in using debt to fund property acquisitions" and "We must obtain new financing in order to grow"). In addition, we have issued and may in the future seek to issue additional equity as circumstances warrant and opportunities to do so become available. We expect to maintain a debt to total capitalization ratio (i.e., total debt of the Company as a percentage of shareholder equity plus total debt) of approximately 50% to 55%. JOINT VENTURES We will examine and pursue potential additional joint venture opportunities with institutional investors or developers if they are considered to add value to our shareholders. We may employ higher leverage in joint ventures (See "Risk Factors - - Joint ventures may limit flexibility with jointly owned investments"). PAYMENT OF REGULAR DISTRIBUTIONS We have paid and expect to continue paying quarterly dividend distributions to our Common and Preferred shareholders. Our Preferred Shares have a dividend rate of 9.5%. Among the factors the Board of Trustees considers in setting the Common Share distribution rate are the applicable REIT rules and regulations that apply to distributions, the Company's results of operations, including FFO per Share, and the Company's Cash Available for Distribution (defined as net cash flow available for distribution after payment of operating expenses, debt service, and other obligations). We expect to periodically increase distributions as FFO and Cash Available for Distribution increase and as other considerations and factors warrant. See "Risk Factors - We cannot assure you we will continue paying dividends at historical rates". COMPETITION We compete for real estate financing opportunities with other companies that invest in real estate, as well as traditional financial sources such as banks and insurance companies. While we were the first publicly traded REIT formed to specialize in entertainment-themed properties, other REITs have sought and may continue to seek to finance entertainment properties as new megaplex theatres, ERCs and related restaurant and retail properties are developed or become available for acquisition. EMPLOYEES As of December 31, 2003, the Company had nine full time employees. WEBSITE ACCESS TO EXCHANGE ACT REPORTS AND OTHER DOCUMENTS Our internet website address is www.eprkc.com. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to the SEC. You may also view our Code of Business Conduct and Ethics, Corporate Governance Guidelines and the charters of our audit, nominating and compensation committees on our website. 3
RISK FACTORS There are many risks and uncertainties that can affect our future business, financial performance or share price. Some of these are beyond our control. Here is a brief description of some of the important factors which could cause our future business, operating results, financial condition or share price to be materially different than our expectations. This discussion includes a number of forward-looking statements. You should refer to the description of the qualifications and limitations on forward-looking statements on page 22 of this report. RISKS THAT MAY IMPACT OUR FINANCIAL CONDITION OR PERFORMANCE WE COULD BE ADVERSELY AFFECTED BY A TENANT'S BANKRUPTCY If a tenant becomes bankrupt or insolvent, that could diminish the income we expect from that tenant's leases. We may not be able to evict a tenant solely because of its bankruptcy. On the other hand, a bankruptcy court might authorize the tenant to terminate its leases with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be subject to statutory limitations that might be substantially less than the remaining rent owed under the leases. In addition, any claim we have for unpaid past rent would likely not be paid in full. The development of megaplex movie theatres has rendered many older multiplex theatres obsolete. To the extent our tenants own a substantial number of multiplexes, they have been, or may in the future be, required to take significant charges against earnings resulting from the impairment of these assets. Megaplex theatre operators have also been and could in the future be adversely affected by any overbuilding of megaplex theatres in their markets and the cost of financing, building and leasing megaplex theatres. Two of our tenants, Edwards Theatre Circuit, Inc., (now part of the Regal Entertainment Group), which operates two of our theatre properties, and Loews Cineplex Entertainment, which operates two of our theatres, have filed for, and emerged from, bankruptcy reorganization. The Company did not incur any significant expenses or loss of revenue as a result of those bankruptcy reorganizations. OPERATING RISKS IN THE ENTERTAINMENT INDUSTRY MAY AFFECT THE ABILITY OF OUR TENANTS TO PERFORM UNDER THEIR LEASES The ability of our tenants to operate successfully in the entertainment industry and remain current on their lease obligations depends on a number of factors, including the availability and popularity of motion pictures, the performance of those pictures in tenants' markets, the allocation of popular pictures to tenants and the terms on which the pictures are licensed. Neither we nor our tenants control the operations of motion picture distributors. Megaplex theatres represent a greater capital investment, and generate higher rents, than the previous generation of multiplex theatres. For this reason, the ability of our tenants to operate profitably and perform under their leases could be dependent on their ability to generate higher revenues per screen than multiplex theatres typically produce. The success of "out-of-home" entertainment venues such as megaplex theatres and entertainment retail centers also depends on general economic conditions and the willingness of consumers to spend time and money on out-of-home entertainment. 4
A SINGLE TENANT REPRESENTS A SUBSTANTIAL PORTION OF OUR LEASE REVENUES Approximately 62% of our megaplex theatre properties are leased to AMC, one of the nation's largest movie exhibition companies. AMCE has guaranteed AMC's performance under the leases. We have diversified and expect to continue to diversify our real estate portfolio by entering into lease transactions with a number of other leading theatre operators. Nevertheless, our revenues and our continuing ability to pay shareholder dividends are currently substantially dependent on AMC's performance under its leases and AMCE's performance under its guaranty. We believe AMC occupies a strong position in the industry and we intend to continue acquiring and leasing back AMC theatres. However, if for any reason AMC failed to perform under its lease obligations and AMCE did not perform under its guaranty, we could be required to reduce or suspend our shareholder dividends and may not have sufficient funds to support operations until substitute tenants are obtained. If that happened, we cannot predict when or whether we could obtain substitute quality tenants on acceptable terms. THERE IS RISK IN USING DEBT TO FUND PROPERTY ACQUISITIONS We have used leverage to acquire properties and expect to continue to do so in the future. Although the use of leverage is common in the real estate industry, our use of debt to acquire properties does expose us to some risks. If a significant number of our tenants fail to make their lease payments and we don't have sufficient cash to pay principal and interest on the debt, we could default on our debt obligations. Our debt financing is secured by mortgages on our properties. If we fail to meet our mortgage payments, the lenders could declare a default and foreclose on those properties. A PORTION OF OUR SECURED DEBT HAS "HYPER-AMORTIZATION" PROVISIONS WHICH MAY REQUIRE US TO REFINANCE THE DEBT OR SELL THE PROPERTIES SECURING THE DEBT PRIOR TO MATURITY As of December 31, 2003, we had approximately $98.1 million outstanding under a single secured mortgage loan agreement that contains a "hyper-amortization" feature, in which the principal payment schedule is rapidly accelerated, and our principal payments are substantially increased, if we fail to pay the balance on the anticipated prepayment date of July 11, 2008. We undertook this debt on the assumption that we can refinance the debt prior to these hyper-amortization payments becoming due. If we cannot obtain acceptable refinancing at the appropriate time, the hyper-amortization payments will require substantially all of the revenues from those properties securing the debt to be applied to the debt repayment, which would substantially reduce our Common Share dividend rate and could adversely affect our financial condition and liquidity. WE MUST OBTAIN NEW FINANCING IN ORDER TO GROW As a REIT, we are required to distribute at least 90% of our taxable net income to shareholders in the form of dividends. This means we are limited in our ability to use internal capital to acquire properties and must continually raise new capital in order to continue to grow and diversify our real estate portfolio. Our ability to raise new capital depends in part on factors beyond our control, including conditions in equity and credit markets, conditions in the cinema exhibition industry and the performance of real estate investment trusts generally. We continually consider and evaluate a variety of potential transactions to raise additional capital, but we cannot assure that attractive alternatives will always be available to us, nor that our share price will increase or remain at a level that will permit us to continue to raise equity capital privately or publicly. 5
IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE TAXED AS A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR PAYMENT OF DIVIDENDS TO OUR SHAREHOLDERS If we fail to qualify as a REIT for federal income tax purposes, we will be taxed as a corporation. We are organized and believe we qualify as a REIT, and intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we will remain qualified in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code on which there are only limited judicial and administrative interpretations, and depends on facts and circumstances not entirely within our control. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws, the application of the tax laws to our qualification as a REIT or the federal income tax consequences of that qualification. If we fail to qualify as a REIT we will face tax consequences that will substantially reduce the funds available for payment of dividends: - We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to federal income tax at regular corporate rates - We could be subject to the federal alternative minimum tax and possibly increased state and local taxes - Unless we are entitled to relief under statutory provisions, we could not elect to be treated as a REIT for four taxable years following the year in which we were disqualified In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends. As a result of these factors, our failure to qualify as a REIT could adversely affect the market price for our shares. OUR DEVELOPMENT FINANCING ARRANGEMENTS EXPOSE US TO FUNDING AND PURCHASE RISKS Our ability to meet our construction financing obligations which we may enter into from time to time depends on our ability to obtain equity or debt financing in the required amounts. There is no assurance we can obtain this financing at rates which will lock-in a spread between our cost of capital and the rent payable under the leases to be entered into upon completion of construction. We will be obligated to purchase and lease-back the theatres that are subject to certain arrangements at predetermined rates. (See Item 7 - "Management's Discussion and Analysis - Liquidity and Capital Resources - Liquidity Requirements.") RISKS THAT APPLY TO OUR REAL ESTATE BUSINESS THERE ARE RISKS ASSOCIATED WITH OWNING AND LEASING REAL ESTATE Although our lease terms obligate the tenants to bear substantially all of the costs of operating the properties, investing in real estate involves a number of risks, including: - The risk that tenants will not perform under their leases, reducing our income from the leases or requiring us to assume the cost of performing obligations (such as taxes, insurance and maintenance) that are the tenant's responsibility under the lease - The risk that changes in economic conditions or real estate markets may adversely affect the value of our properties - The risk that local conditions (such as oversupply of megaplex theatres or other entertainment-related properties) could adversely affect the value of our properties - We may not always be able to lease properties at favorable rates - We may not always be able to sell a property when we desire to do so at a favorable price - Changes in tax, zoning or other laws could make properties less attractive or less profitable 6
If a tenant fails to perform on its lease covenants, that would not excuse us from meeting any debt obligation secured by the property and could require us to fund reserves in favor of our lenders, thereby reducing funds available for payment of dividends. We cannot be assured that tenants will elect to renew their leases when the terms expire. If a tenant does not renew its lease or if a tenant defaults on its lease obligations, there is no assurance we could obtain a substitute tenant on acceptable terms. If we cannot obtain another quality movie exhibitor to lease a megaplex theatre property, we may be required to modify the property for a different use, which may involve a significant capital expenditure and a delay in re-leasing the property. SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE Our leases require the tenants to carry comprehensive liability, casualty, workers' compensation, extended coverage and rental loss insurance on our properties. We believe the required coverage is of the type, and amount, customarily obtained by an owner of similar properties. We believe all of our properties are adequately insured. However, there are some types of losses, such as catastrophic acts of nature, for which we or our tenants cannot obtain insurance at an acceptable cost. If there is an uninsured loss or a loss in excess of insurance limits, we could lose both the revenues generated by the affected property and the capital we have invested in the property. We would, however, remain obligated to repay any mortgage indebtedness or other obligations related to the property. Since September 11, 2001, the cost of insurance protection against terrorist acts has risen dramatically. There can be no assurance our tenants will be able to obtain terrorism insurance coverage, or that any coverage they do obtain will adequately protect our properties against loss from terrorist attack. JOINT VENTURES MAY LIMIT FLEXIBILITY WITH JOINTLY OWNED INVESTMENTS We may continue to acquire or develop properties in joint ventures with third parties when those transactions appear desirable. We would not own the entire interest in any property acquired by a joint venture. If we have a dispute with a joint venture partner, we may feel it necessary or become obligated to acquire the partner's interest in the venture. However, we cannot assure you that the price we would have to pay or the timing of the acquisition would be favorable to us. If we own less than a 50% interest in any joint venture, or if the venture is jointly controlled, the assets and financial results of the joint venture may not be reportable by us on a consolidated basis. To the extent we owe commitments to, or are dependant on, any such "off-balance sheet" arrangements, or if those arrangements or their properties or leases are subject to material contingencies, our liquidity, financial condition and operating results could be adversely affected by those commitments or off-balance sheet arrangements. OUR MULTI-TENANT PROPERTIES EXPOSE US TO ADDITIONAL RISKS Our entertainment retail centers in Westminster, Colorado and New Rochelle, New York and similar properties we may seek to acquire or develop in the future involve risks not typically encountered in the purchase and lease-back of megaplex theatres which are operated by a single tenant. The ownership or development of multi-tenant retail centers could expose us to the risk that a sufficient number of suitable tenants may not be found to enable the center to operate profitably and provide a return to us. Retail centers are also subject to tenant turnover and fluctuations in occupancy rates, which could affect our operating results. Multi-tenant retail centers also expose us to the risk of potential "CAM slippage," which may occur when CAM fees paid by tenants are exceeded by the actual cost of taxes, insurance and maintenance at the property. FAILURE TO COMPLY WITH THE AMERICANS WITH DISABILITIES ACT AND OTHER LAWS COULD RESULT IN SUBSTANTIAL COSTS Our theatres must comply with the Americans with Disabilities Act (ADA). The ADA requires that public accommodations reasonably accommodate individuals with disabilities and that new construction or alterations be made to commercial facilities to conform to accessibility guidelines. Failure to comply with the ADA can result in injunctions, fines, damage awards to private parties and additional capital 7
expenditures to remedy noncompliance. Our leases require the tenants to comply with the ADA. Our properties are also subject to various other federal, state and local regulatory requirements. We believe our properties are in material compliance with all applicable regulatory requirements. However, we do not know whether existing requirements will change or whether compliance with future requirements will involve significant unanticipated expenditures. Although these expenditures would be the responsibility of our tenants, if tenants fail to perform these obligations, we may be required to do so. POTENTIAL LIABILITY FOR ENVIRONMENTAL CONTAMINATION COULD RESULT IN SUBSTANTIAL COSTS Under federal, state and local environmental laws, we may be required to investigate and clean up any release of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or actual responsibility, simply because of our current or past ownership of the real estate. If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our shareholders. This is so because: - As owner we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination - The law may impose clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination - Even if more than one person is responsible for the contamination, each person who shares legal liability under environmental laws may be held responsible for all of the clean-up costs - Governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous substances or petroleum products or the failure to properly remediate contamination may adversely affect our ability to borrow against, sell or lease an affected property. In addition, some environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. Most of our loan agreements require the Company or a subsidiary to indemnify the lender against environmental liabilities. Our leases require the tenants to operate the properties in compliance with environmental laws and to indemnify us against environmental liability arising from the operation of the properties. We believe all of our properties are in material compliance with environmental laws. However, we could be subject to strict liability under environmental laws because we own the properties. There is also a risk that tenants may not satisfy their environmental compliance and indemnification obligations under the leases. Any of these events could substantially increase our cost of operations, require us to fund environmental indemnities in favor of our lenders and reduce our ability to service our debt and pay dividends to shareholders. REAL ESTATE INVESTMENTS ARE RELATIVELY NON-LIQUID We may desire to sell a property in the future because of changes in market conditions or poor tenant performance or to avail ourselves of other opportunities. We may also be required to sell a property in the future to meet debt obligations or avoid a default. Specialty real estate projects such as megaplex theatres cannot always be sold quickly, and we cannot assure you that we could always obtain a favorable price. We may be required to invest in the restoration or modification of a property before we can sell it. RISKS THAT MAY AFFECT THE MARKET PRICE OF OUR SHARES WE CANNOT ASSURE YOU WE WILL CONTINUE PAYING DIVIDENDS AT HISTORICAL RATES Our ability to continue paying dividends at historical rates or to increase our Common Share dividend rate will depend on a number of factors, including our financial condition and results of future operations, the performance of lease terms by tenants, our ability to acquire, finance and lease additional properties at 8
attractive rates, and provisions in our loan covenants. If we do not maintain or increase our dividend rate, that could have an adverse effect on the market price of our Common Shares. 9
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR SHARES One of the factors that investors may consider in deciding whether to buy or sell our Common Shares is our dividend rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend on our Common Shares or seek securities paying higher dividends or interest. MARKET PRICES FOR OUR SHARES MAY BE AFFECTED BY PERCEPTIONS ABOUT THE FINANCIAL HEALTH OR SHARE VALUE OF OUR TENANTS OR THE PERFORMANCE OF REIT STOCKS GENERALLY. To the extent any of our tenants or other movie exhibitors report losses or slower earnings growth, take charges against earnings resulting from the obsolescence of multiplex theatres or enter bankruptcy proceedings, the market price for our shares could be adversely affected. The market price for our shares could also be affected by any weakness in movie exhibitor stocks generally. We believe these trends had an adverse impact on our Common Share price during 2001 and 2000. LIMITS ON CHANGES IN CONTROL MAY DISCOURAGE TAKEOVER ATTEMPTS WHICH MAY BE BENEFICIAL TO OUR SHAREHOLDERS There are a number of provisions in our Declaration of Trust, Maryland law and agreements we have with others which could make it more difficult for a party to make a tender offer for our shares or complete a takeover of the Company which is not approved by our Board of Trustees. These include: - A staggered Board of Trustees that can be increased in number without shareholder approval - A limit on beneficial ownership of our shares, which acts as a defense against a hostile takeover or acquisition of a significant or controlling interest, in addition to preserving our REIT status - The ability of the Board of Trustees to issue preferred shares or reclassify preferred or common shares without shareholder approval - Limits on the ability of shareholders to remove trustees without cause - Requirements for advance notice of shareholder proposals at annual shareholder meetings - Provisions of Maryland law restricting business combinations and control share acquisitions not approved by the Board of Trustees - Provisions of Maryland law protecting corporations (and by extension REITs) against unsolicited takeovers by limiting the duties of the trustees in unsolicited takeover situations - Provisions in Maryland law providing that the trustees are not subject to any higher duty or greater scrutiny than that applied to any other director under Maryland law in transactions relating to the acquisition or potential acquisition of control - Provisions of Maryland law creating a statutory presumption that an act of the trustees satisfies the applicable standards of conduct for directors under Maryland law - Provisions in loan or joint venture agreements putting the Company in default upon a change in control - Provisions of employment agreements with our officers calling for share purchase loan forgiveness upon a hostile change in control Any or all of these provisions could delay or prevent a change in control of the Company, even if the change was in our shareholders' interest or offered a greater return to our shareholders. ITEM 2. PROPERTIES As of December 31, 2003, the Company's real estate portfolio consisted of 45 megaplex theatre properties and various restaurant, retail and other properties located in 18 states. Except as otherwise noted, all of the real estate investments listed below are owned or ground leased directly by the Company. The following table lists the Company's properties, their locations, acquisition dates, number of theatre screens, number of seats, gross square footage, and the tenant. 10
<TABLE> <CAPTION> ACQUISITION BUILDING PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT - ------------------------------- -------------------- ----------- ------- ------- -------------- ------------ <S> <C> <C> <C> <C> <C> <C> Megaplex Theatre Properties: Grand 24(3) Dallas, TX 11/97 24 5,067 98,175 AMC Mission Valley 20(1)(3) San Diego, CA 11/97 20 4,361 84,352 AMC Promenade 16(3) Los Angeles, CA 11/97 16 2,860 129,822 AMC Ontario Mills 30(3) Los Angeles, CA 11/97 30 5,469 131,534 AMC Lennox 24(1)(3) Columbus, OH 11/97 24 4,412 98,261 AMC West Olive 16(3) St. Louis, MO 11/97 16 2,817 60,418 AMC Studio 30(3) Houston, TX 11/97 30 6,032 136,154 AMC Huebner Oaks 24(3) San Antonio, TX 11/97 24 4,400 96,004 AMC First Colony 24(1)(6) Houston, TX 11/97 24 5,098 107,690 AMC Oakview 24(1)(6)(10) Omaha, NE 11/97 24 5,098 107,402 AMC Leawood Town Center 20(6) Leawood, KS 2/98 20 2,995 75,224 AMC Gulf Pointe 30(2)(6) Houston, TX 3/98 30 6,008 130,891 AMC South Barrington 30(6) Chicago, IL 3/98 30 6,210 130,891 AMC Cantera 30(2)(5) Chicago, IL 4/98 30 6,210 130,757 AMC Mesquite 30(2)(6) Dallas, TX 6/98 30 6,008 130,891 AMC Hampton Town Center 24(6) Norfolk, VA 8/98 24 5,098 107,396 AMC Raleigh Grand 16(4) Raleigh, NC 8/98 16 2,596 51,450 Consolidated Pompano 18(4) Pompano Beach, FL 11/98 18 3,424 73,637 Muvico Paradise 24(6) Davie, FL 12/98 24 4,180 96,497 Muvico Boise Stadium(1)(4) Boise, ID 12/98 21 4,734 140,300 Regal Aliso Veijo Stadium 20(6) Los Angeles, CA 12/98 20 4,352 98,557 Regal Westminster 24(7) Westminster, CO 6/99 24 4,812 107,000 AMC Woodridge 18(2)(10) Woodridge, IL 6/99 18 4,384 84,206 Loews Tampa Starlight 20(10) Tampa, FL 1/00 20 3,928 84,000 Muvico Palm Promenade 24(10) San Diego, CA 1/00 24 4,586 88,610 AMC Cary Crossroads 20(10) Cary, NC 3/02 20 3,936 77,475 Consolidated Elmwood Palace 20(10) New Orleans, LA 3/02 20 4,357 90,391 AMC Hammond Palace 10(10) New Orleans, LA 3/02 10 1,531 39,850 AMC Houma Palace 10(10) New Orleans, LA 3/02 10 1,871 44,450 AMC Westbank Palace 16(10) New Orleans, LA 3/02 16 3,176 71,607 AMC Clearview Palace 12(10) New Orleans, LA 3/02 12 2,495 70,000 AMC Olathe Studio 30(10) Olathe, KS 6/02 30 5,731 113,108 AMC Forum 30(10) Sterling Heights, MI 6/02 30 5,041 107,712 AMC Cherrydale 16(10) Greenville, SC 6/02 16 2,744 51,450 Consolidated Livonia 20(10) Detroit, MI 8/02 20 3,808 75,106 AMC Hoffman Town Centre 22(10) Alexandria, VA 10/02 22 4,150 132,903 AMC Colonel Glenn 18(8) Little Rock, AR 12/02 18 4,122 79,330 Rave AmStar Cinema 16(9) Macon, GA 3/03 16 2,950 55,000 AmStar Star Southfield 20(9) Southfield, MI 5/03 20 7,000 110,000 Loews Southwind 12(9) Lawrence, KS 6/03 12 2,481 42,497 Wallace Veterans 24(11) Tampa, FL 6/03 24 4,580 94,774 AMC New Roc City 18 and IMAX(12) New Rochelle, NY 10/03 18 3,400 103,000 Regal Harbour View Grande 16(9) Suffolk, VA 11/03 16 3,036 61,500 Consolidated Columbiana Grande 14(9) Columbiana, SC 11/03 14 3,000 55,400 Consolidated The Grande 18(9) Hialeah, FL 12/03 18 4,900 77,400 Crown --- ------- --------- Subtotal Megaplex Theatres 943 189,448 4,133,072 --- ------- --------- </TABLE> 11
<TABLE> <CAPTION> ACQUISITION BUILDING PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT - ---------------------------------------- ----------------- ----------- ------- ------- -------------- ---------------------- <S> <C> <C> <C> <C> <C> <C> Retail, Restaurant and Other Properties: Pompano Kmart (8) Pompano Beach, FL 11/98 -- -- 80,540 Kmart Pompano Restaurant (8) Pompano Beach, FL 11/98 -- -- 5,600 Pompano Restaurant Westminster Promenade(8) Westminster, CO 6/99 -- -- 140,000 Multi-Tenant On-The-Border (8) Dallas, TX 1/99 -- -- 6,580 Brinkers Bennigan's (8) Houston, TX 5/00 -- -- 6,575 S & A Bennigan's (8) Dallas, TX 5/00 -- -- 6,575 S & A Texas Land & Cattle (8) Houston, TX 5/00 -- -- 6,600 Tx.C.C., Inc. Texas Roadhouse (8) Dallas, TX 1/99 -- -- 6,000 TX Roadhouse Roadhouse Grill (8) Atlanta, GA 8/00 -- -- 6,850 Roadhouse Grill Cherrydale Shops Greenville, SC 6/02 -- -- 10,000 Multi-Tenant Johnny Carino's Dallas, TX 3/03 -- -- 6,200 Kona Rest. Group, Inc. Star Southfield, Center(9) Southfield, MI 5/03 -- -- 45,200 Multi-Tenant Hawaiian Adventures Waterpark Garland, TX 5/03 -- -- -- Horizon Amusement New Roc City(12) New Rochelle, NY 10/03 -- -- 344,000 Multi-Tenant Harbour View Station(9) Suffolk, SC 11/03 -- -- 21,855 Multi-Tenant --- ------- --------- Subtotal -- -- 692,575 --- ------- --------- Total 943 189,448 4,825,647 === ======= ========= </TABLE> (1) Third party ground leased property. Although the Company is the tenant under the ground leases and has assumed responsibility for performing the obligations thereunder, pursuant to the leases, the theatre tenants are responsible for performing the Company's obligations under the ground leases. (2) In addition to the theatre property itself, the Company has acquired land parcels adjacent to the theatre property, which the Company has or intends to ground lease or sell to restaurant or other entertainment themed operators. (3) Property is included as security for a $105 million mortgage note payable. (4) Property is included as security for $20 million in mortgage notes payable. (5) Property is included in the Atlantic-EPR I joint venture. (6) Property is included as security for $125 million in mortgage notes payable. (7) Property is included as security for a $17 million mortgage note payable. (8) Property is included as security for a $75 million secured credit facility. (9) Property is included as security for a $50 million revolving credit facility. (10) Property is included as security for a $155.5 million mortgage. (11) Property is included as security for a $14.7 million mortgage. (12) Property is included as security for a $66 million and $4 million credit facility. OFFICE LOCATION. The Company's executive office is located in Kansas City, Missouri and is leased from a third party landlord. The office occupies approximately 10,960 square feet with annual rentals of $192,000. The lease expires in December, 2009. TENANTS AND LEASES The Company's existing leases on rental property (on a consolidated basis - excluding joint venture property) provide for aggregate annual rentals of approximately $100.4 million (not including periodic rent escalations or percentage rent). The megaplex theatre leases have an average remaining base term lease life of 13.2 years and may be extended for predetermined extension terms at the option of the tenant. The theatre leases are typically triple-net leases that require the tenant to pay substantially all expenses associated with the operation of the properties, including taxes, other governmental charges, insurance, utilities, service, maintenance and any ground lease payments. 12
PROPERTY ACQUISITIONS IN 2003 The following table lists the rental properties acquired or developed during 2003: <TABLE> <CAPTION> PROPERTY LOCATION TENANT - ---------------------------- ---------------------------------------- ------------------------------- <S> <C> <C> Johnny Carino's Dallas, TX Kona Restaurants Group, Inc. AmStar Cinema 16 Macon, GA AmStar Star Southfield Center Southfield, MI Loews and Various Retail Veterans 24 Tampa, FL AMC Southwind 12 Lawrence, KS Wallace Hawaiian Adventure Waterpark Dallas, TX Horizon Amusement South New Roc City New Rochelle, NY Regal and Various Retail Harbour View Station Suffolk, VA Consolidated and Various Retail Columbiana Grande 14 Columbia, NC Consolidated The Grande 18 Hialeah, FL Crown Theatres </TABLE> ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the quarterly periods indicated, the high and low sales prices per Share for the Company's Common Shares on the New York Stock Exchange under the trading symbol "EPR" and the distributions declared. <TABLE> <CAPTION> SHARE PRICE DECLARED HIGH LOW DISTRIBUTION ----------- --------- ------------ <S> <C> <C> <C> 2003: Fourth quarter $ 35.79 30.70 0.500 Third quarter 32.71 28.22 0.500 Second quarter 28.75 26.65 0.500 First quarter 27.30 23.20 0.500 2002: Fourth quarter $ 24.70 19.85 0.475 Third quarter 24.76 18.60 0.475 Second quarter 24.70 22.00 0.475 First quarter 22.65 18.90 0.475 </TABLE> The Company declared quarterly distributions to shareholders aggregating $2.00 per Common Share in 2003 and $1.90 per Common Share in 2002. 13
While we intend to continue paying regular quarterly dividends, future dividend declarations will be at the discretion of the Board of Trustees and will depend on the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code, debt covenants and other factors the Board of Trustees deems relevant. The actual cash flow available to pay dividends may be affected by a number of factors, including the revenues received from rental properties, the operating expenses of the Company, interest expense on Company borrowings, the ability of lessees to meet their obligations to the Company and any unanticipated capital expenditures (See "Risk Factors - We cannot assure you we will continue paying dividends at historical rates," in Item 1, and "Liquidity and Capital Resources" in Item 7 - "Management's Discussion and Analysis"). The Company's Preferred Shares have a fixed dividend rate of 9.5%. ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------- ------ ------ ------ ------ 2003 2002 2001 2000 1999 -------- ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Total revenue $ 91,160 71,610 54,667 53,287 48,319 Property operating expense 698 201 -- -- -- General and administrative expense 3,859 2,293 2,507 1,850 2,179 Interest expense, net 30,570 24,475 20,334 18,909 13,278 Depreciation and amortization expense 16,359 12,862 10,209 10,184 9,609 Amortization of restricted share grants 926 1,048 240 276 373 -------- ------ ------ ------ ------ Income before minority interest, income from joint venture and gain on sale of real estate 38,748 30,731 21,377 22,068 22,880 Gain on sale of real estate -- 202 -- -- -- Minority interest (1,555) (1,195) -- -- -- Equity in income from joint ventures 401 1,421 2,203 2,104 333 Preferred dividend requirements (5,463) (3,225) -- -- -- -------- ------ ------ ------ ------ Net income available to common shareholders $ 32,131 27,934 23,580 24,172 23,213 ======== ====== ====== ====== ====== Net income per common share: Basic $ 1.81 1.66 1.60 1.63 1.60 Diluted 1.77 1.64 1.60 1.63 1.60 Weighted average number of common shares outstanding: Basic 17,780 16,791 14,715 14,786 14,516 Diluted 19,051 17,762 14,783 14,810 14,552 Cash dividends declared per common share $ 2.00 1.90 1.80 1.76 1.68 </TABLE> 14
<TABLE> <CAPTION> DECEMBER 31, 2003 2002 2001 2000 1999 -------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Net real estate investments $900,096 692,922 530,280 472,795 478,706 Total assets 965,918 730,387 583,351 513,534 516,291 Common dividends payable 9,829 8,162 6,659 6,479 6,273 Preferred dividends payable 1,366 1,366 -- -- -- Long-term debt 506,555 346,617 314,766 244,547 238,737 Total liabilities 521,509 361,834 325,223 252,915 249,904 Minority interest 21,630 15,375 -- -- -- Shareholders' equity 422,779 353,178 258,128 260,619 266,387 </TABLE> 15
ITEM 7. 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 of the Company included in this Annual Report on Form 10-K. The forward-looking statements included in this discussion and elsewhere in this Form 10-K involve risks and uncertainties, including anticipated financial performance, business prospects, industry trends, shareholder returns and other matters, which reflect management's best judgment based on factors currently known. Actual results and experience could differ materially from the anticipated results and other expectations expressed in the Company's forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1 "Business - Risk Factors". 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 December 31, 2003, we had invested approximately $936 million (before accumulated depreciation) in 45 megaplex theatre properties and various restaurant, retail and other properties located in 18 states. As of December 31, 2003, we had invested approximately $29.2 million in development land, for which we actively develop or pursue development projects that we feel would add value to the overall entertainment experience of theatre patrons. Substantially all of our single-tenant 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 governmental charges, insurance, utilities, repairs and maintenance. Tenants at our multi-tenant properties pay CAM charges to defray their pro rata portion of these costs. Substantially all of our revenues are derived from rents received or accrued under long-term 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 The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related notes. In preparing these financial statements, management has made its best estimates and assumptions that affect the reported assets and liabilities. The most significant assumptions and estimates relate to revenue recognition, depreciable lives of the real estate and the valuation of real estate. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Revenue Recognition Base rents are recognized on a straight-line basis over the term of the lease, and the base rent escalation is recognized when measurable. Base rent escalation in most of our leases is dependant upon increases in the Consumer Price Index (CPI) and accordingly, management does not include any future base rent escalation 16
amounts in current revenue. Most of our leases provide for percentage rents based upon the level of sales achieved by the tenant. These percentage rents are recognized once the required sales level is achieved. Real Estate Useful Lives We are required to make subjective assessments as to the useful lives of our properties for the purpose of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Depreciation and amortization are provided on the straight-line method over the useful lives of the assets, as follows: <TABLE> <S> <C> Buildings 40 years Tenant improvements Base term of lease or useful life, whichever is shorter Equipment 3 to 7 years </TABLE> Impairment of Real Estate Values We are required to make subjective assessments as to whether there are impairments in the value of our rental properties. These estimates of impairment may have a direct impact on the Company's consolidated financial statements. We apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We assess the carrying value of our rental properties whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable. Certain factors that may occur and indicate that impairments may exist include, but are not limited to: underperformance relative to projected future operating results, tenant difficulties and significant adverse industry or market economic trends. No such indicators existed during 2003. If an indicator of possible impairment exists, a property is evaluated for impairment by a comparison of the carrying amount of the property to the estimated undiscounted future cash flows expected to be generated by the property. If the carrying amount of a property exceeds its estimated future cash flows on an undiscounted basis, an impairment charge is recognized by the amount by which the carrying amount of the property exceeds the fair value of the property. Management estimates fair value of its rental properties based on projected discounted cash flows using a discount rate determined by management to be commensurate with the risk inherent in the Company. Management did not record any impairment charges for 2003. RECENT DEVELOPMENTS During the three months ended December 31, 2003, we completed approximately $133 million of rental property acquisitions. Our purchase of 71.4% in New Roc Associates, LP closed on October 27, 2003. The partnership property is an entertainment retail center in New Rochelle, New York, called New Roc City. The remaining acquisitions during the last three months of 2003 were theatre properties in Suffolk, VA, Columbia, SC, and Hialeah, FL. Also, during the three months ended December 31, 2003, we completed approximately $8.6 million of development land acquisitions. This land is currently being used to develop megaplex theatres. We paid cash and assumed certain indebtedness to acquire the properties described above. The cash portions were primarily obtained from our common stock offering completed in September of 2003. 17
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Rental revenue was $90 million for the year ended December 31, 2003, as compared to $71.6 million for the year ended December 31, 2002. The $18.4 million increase resulted primarily from property acquisitions completed in 2002 and 2003, base rent increases and percentage rents on existing properties. In addition, other revenue increased by $1.2 million in 2003 due to a payment received related to the cancellation of the Van's Skate Park lease at the entertainment retail center in Westminster, Colorado, which was closed during the third quarter, and income received from claims we filed in the Loews Cineplex bankruptcy proceedings. Percentage rents of $1.9 million and $600 thousand were recognized in 2003 and 2002, respectively. Our property operating expenses totaled $698 thousand for the year ended December 31, 2003, as compared to $201 thousand for the year ended December 31, 2002. These expenses arise from our non-triple net retail property operations in Southfield, Michigan; Greenville, South Carolina; Westminster, Colorado; Tampa, Florida; New Rochelle, New York; and Suffolk, Virginia. Our general and administrative expenses were $3.9 million for the year ended December 31, 2003, as compared to $2.3 million for the year ended December 31, 2002. The increase is primarily due to the following: - Increases in insurance expense, including premiums for both Director and Officer insurance and property and casualty insurance compared to 2002 due to an overall increase in premiums in the insurance market. - An increase in fees paid for professional services, primarily for legal fees related to compliance with the Sarbanes Oxley Act. - 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. - Increased costs associated with our Board of Trustees meetings and increases in trustee compensation. - Increases in franchise and other miscellaneous taxes paid. Our net interest expense increased by $6 million to $30.6 million for the year ended December 31, 2003 from $24.5 million for the year ended December 31, 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, totaled $16.4 million for the year ended December 31, 2003 compared to $12.9 million for the same period in 2002. The $3.5 million increase resulted from the property acquisitions completed in 2002 and 2003. Amortization of non-vested shares was $926 million and $1,048 million in 2003 and 2002, respectively. Income from joint venture totaled $401 thousand for the year ended December 31, 2003 compared to $1.4 million for the same period in 2002. The decrease was due to the Company's lower ownership interest in 18
the Atlantic-EPR I joint venture (20% ownership throughout 2003 compared to 76.9% weighted average interest in 2002). YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Total revenue was $71.6 million for the year ended December 31, 2002, as compared to $54.7 million for the year ended December 31, 2001. The $16.9 million increase resulted from property acquisitions completed in 2002, property acquisitions completed during 2001, the acquisition and consolidation in December 2001 of the remaining third party interest in the Westcol joint venture, and from base rent increases and percentage rent payments on existing properties. Our property operating expenses totaled $200 thousand for the year ended December 31, 2002. These expenses arise from the operations of Westcol Center, an entertainment and retail center in Westminster Colorado, in which the Company acquired sole ownership in December 2001 by buying the remaining interest in the Westcol joint venture. For the same period in 2001, we accounted for our partial interest in the Westcol joint venture under the equity method of accounting. Therefore, the Company did not recognize expenses related to the venture in 2001. Our interest expense increased to $24.5 million for the year ended December 31, 2002 from $20.3 million for the year ended December 31, 2001. The $4.1 million increase in interest expense resulted from an increase in long-term debt related to financings of property acquisitions made during fiscal 2002 and 2001, and the recognition of interest expense from the Westcol theatre first mortgage loan, acquired with the acquisition/consolidation of the remaining third party interest in the Westcol joint venture in December 2001. Our depreciation and amortization expenses, including amortization of share based compensation, totaled $13.9 million for the year ended December 31, 2002 compared to $10.4 million for the same period in 2001. The $3.5 million increase resulted from the property acquisitions completed in 2001 and 2002 and from increases in amortization of stock based compensation. Income from joint venture totaled $1.4 million for the year ended December 31, 2002 compared to $2.2 million for the same period in 2001. The decrease was primarily attributed to the acquisition of the remaining third party interest in the Westcol joint venture in December 2001 which was consolidated for entire year in 2002. During 2001, through the date of acquisition, we accounted for our interest in the Westcol joint venture using the equity method of accounting, which represented $735,000 of the 2001 income from joint ventures. In December 2002, our partner in our remaining joint venture substantially increased its interest in that joint venture. For the year ended December 31, 2002 minority interest in net income was $1.2 million, arising from the issuance of $15 million of common and preferred interests by EPT Gulf States, LLC, our consolidated subsidiary, as a result of the Gulf States theatres acquisition completed on March 15, 2002. In 2001, the Company had no minority interest outstanding. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $30.5 million at December 31, 2003. In addition, the Company had restricted cash of $6.5 million available for debt service in connection with the $116.5 million mortgage debt due in February 2006. 19
Mortgage Debt and Credit Facilities As of December 31, 2003, we had total debt outstanding of $506.6 million. All of our debt was mortgage debt secured by substantially all of our rental properties. Of this debt, $86 million was variable rate debt and $420.6 million was fixed rate debt. All of our debt is described in footnote 5 in the "Notes to Consolidated Financial Statements" in this Form 10-K. At December 31, 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 December 31, 2003, there were four theatre properties and two theatre and retail mix properties pledged to that facility. We expect to use proceeds from the facility for additional acquisitions of rental property and general corporate purposes. The credit facility matures in April 2005 and carries interest at LIBOR plus 300 basis points. As of December 31, 2003, we had $20 million of debt outstanding under our iSTAR $75 million credit facility. The credit facility has three years remaining and carries interest at LIBOR plus 400 basis points. On September 23, 2003, the Company issued 2.4 million common shares in a registered public offering for net proceeds of $72.2 million. The proceeds were used to fund the acquisition of three megaplex theatres (including one with retail shops), one entertainment retail center, and three land parcels for theatre development in fourth quarter 2003. Our principal investing activity is the purchase of rental property, which is generally financed with mortgage debt and the proceeds from equity offerings. Continued growth of our rental property portfolio will depend in part on our continued ability to access funds through additional borrowings and equity security offerings. Liquidity Requirements Short-term liquidity requirements consist primarily of normal recurring corporate operating expenses, debt service requirements and distributions to shareholders. Cash provided by operating activities was $51 million in 2003, $45.9 million in 2002 and $34.9 million in 2001. We anticipate that our cash on hand and cash provided by operating activities 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 so as to avoid corporate level federal income or excise tax in accordance with Internal Revenue Code requirements for qualification as a REIT. Long-term liquidity requirements at December 31, 2003 consisted primarily of maturities of long-term debt. Contractual obligations as of December 31, 2003 are as follows (in thousands): <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS 2004 2005 2006 2007 2008 THEREAFTER TOTAL - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Long Term Debt Obligations $76,757 30,038 137,285 8,422 8,920 245,133 506,555 Operating Lease Obligations 192 198 203 209 214 220 1,236 ------- ------ ------- ----- ----- ------- ------- Total $76,949 30,236 137,488 8,631 9,134 245,353 507,791 ======= ====== ======= ===== ===== ======= ======= </TABLE> 20
In February of 2004, the Company entered into an agreement to refinance the $66 million in variable rate debt which matures in 2003. We believe that we will be able to obtain financing in order to repay our debt obligations by refinancing the properties as the debt comes due. However, there can be no assurance that additional financing or capital will be available, or that terms will be acceptable or advantageous to us. We anticipate that long-term liquidity requirements will also include amounts for acquisition of properties. We have identified approximately $260 million in properties for acquisition in 2004. We expect to meet long-term liquidity requirements through long-term borrowings and other debt and equity financing alternatives. The availability and terms of any such financing will depend upon market and other conditions. There can be no assurance that we will be able to obtain such financing in the future, which would not affect our liquidity, but would affect our ability to grow (See "We must obtain new financing in order to grow", and "Risks that may affect the market price of our shares" under "Risk Factors"). In addition to the contractual obligations listed in the table above, the Company had five theatre projects under construction at December 31, 2003. These theatres will have a total of 86 screens and their development costs will be approximately $66 million. The Company has already purchased the development land for $16.3 million as of December 31, 2003, and plans to fund the remaining estimated development costs of these properties through new debt facilities and additional equity. The cost of development is paid by the Company either in periodic draws or upon successful completion of construction. If management of the Company determines the construction is not being completed per the executed development agreement, the Company can discontinue funding of periodic draws or refuse to purchase the completed theatre. Upon successful completion of construction, the Company will lease these theatres to already established theatre operators for approximately $7.6 million in annual rentals. Off Balance Sheet Arrangements At December 31, 2003, the Company had a 20% investment interest in one non-consolidated real estate joint venture, Atlantic-EPR I, which is accounted for under the equity method of accounting. We do not anticipate any material impact on our liquidity as a result of any commitments that may arise involving that joint venture. The following is a brief description of the joint venture: On May 11, 2000, the Company completed the formation of a joint venture partnership, Atlantic-EPR I, a Delaware general partnership (Atlantic-EPR I), with Atlantic of Hamburg, Germany (Atlantic), whereby the Company contributed the AMC Cantera 30 theatre with a carrying value of $33.5 million in exchange for cash proceeds from mortgage financing of $17.8 million and a 100% interest in Atlantic-EPR I. During 2000 through 2002, the Company sold to Atlantic a total of an 80% interest in Atlantic-EPR I in exchange for $14.3 million in cash. The final contribution by Atlantic of $8.4 million was paid to the partnership in December 2002 but was not paid to the Company until January 2003. Accordingly, such contribution is included as a receivable from joint venture in the consolidated balance sheet at December 31, 2002. The joint venture agreement allows Atlantic to exchange up to a maximum of 10% of its ownership interest in Atlantic-EPR I per year, beginning in 2005, for Common Shares of the Company or, at the discretion of the Company, cash. The Company accounts for its investment in Atlantic-EPR I under the equity method of accounting. The Company recognized income of $401, $1,421, and $1,468 (in thousands) from its investment in this joint venture during 2003, 2002 and 2001, respectively. 21
FUNDS FROM OPERATIONS (FFO) The National Association of Real Estate Investment Trusts (NAREIT) developed FFO as a 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 to help management and investors evaluate 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 years ended December 31, 2003 and December 31, 2002 (in thousands): <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 ------- ------ <S> <C> <C> Net income available to common shareholders $32,131 27,934 Less gain on sale of real estate -- (202) Add real estate depreciation 16,175 12,700 Add allocated share of joint venture depreciation 135 497 ------- ------ Basic Funds From Operations 48,441 40,929 Add: minority interest in net income 1,555 1,195 ------- ------ Diluted Funds From Operations $49,996 42,124 ======= ====== Weighted average common shares: Basic 17,780 16,791 Diluted 19,051 17,762 </TABLE> IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003. The Company must apply FIN 46R to variable interest in VIEs created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the 22
VIE. As of December 31, 2003, the Company's financial statements have not been impacted by the issuance of FIN 46R. Further, the Company does not expect any impact on the financial statements in the future. FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatory redeemable financial instruments. For certain mandatory redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatory redeemable financial instruments. As of December 31, 2003, the Company's financial statements have not been impacted by the issuance of FASB Statement No. 150. Further, the Company does not expect any impact on the financial statements in the future. INFLATION Investments by the Company are financed with a combination of equity and secured mortgage indebtedness. During inflationary periods, which are generally accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. All of the Company's megaplex theatre leases provide for base and participating rent features. To the extent inflation causes tenant revenues at the Company's properties to increase over baseline amounts, the Company would participate in those revenue increases through its right to receive annual percentage rent. The Company's leases also generally provide for escalation in base rents in the event of increases in the Consumer Price Index, with a limit of 2% per annum, or fixed periodic increases. All of the Company's theatre leases are triple-net leases requiring the tenants to pay substantially all expenses associated with the operation of the properties, thereby minimizing the Company's exposure to increases in costs and operating expenses resulting from inflation. FORWARD LOOKING INFORMATION CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-K 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 "BUSINESS - RISK FACTORS." INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS. 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks, primarily relating to potential losses due to changes in interest rates. We seek 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. We are 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. Our borrowings are subject to mortgages or contractual agreements which limit the amount of indebtedness we may incur. Accordingly, if we are unable to raise additional equity or borrow money due to these limitations, our ability to acquire additional properties may be limited. The following table presents the principal amounts, weighted average interest rates, and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of December 31: Expected Maturities (in millions) <TABLE> <CAPTION> ESTIMATED 2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE ----- ---- ----- ---- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> December 31, 2003: Fixed rate debt $10.8 30.0 117.4 8.4 8.9 245.1 420.6 425.3 Average interest rate 8.9% 8.5% 7.3% 6.0% 6.0% 6.1% 6.7% -- Variable rate debt $66.0 -- 20.0 -- -- -- 86.0 86.0 Average interest rate (as of December 31, 2003) 3.6% -- 5.1% -- -- -- 4.0% -- </TABLE> <TABLE> <CAPTION> ESTIMATED 2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE ----- ---- ----- ----- ---- ---------- ----- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> December 31, 2002: Fixed rate debt $ 5.5 5.9 24.9 111.9 2.7 104.7 255.6 270.0 Average interest rate 11.7% 11.7% 9.1% 7.4% 6.9% 6.9% 7.5% -- Variable rate debt $ -- 54.0 37.0 -- -- -- 91.0 91.0 Average interest rate (as of December 31, 2002) -- 6.2% 4.4% -- -- -- 5.5% -- </TABLE> We have not engaged extensively in the use of derivatives to manage our interest rate and market risk due to the Company's limited use of variable rate debt. For a discussion of derivative financial instruments and interest rate hedging activity, see note 9 to the consolidated financial statements. 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Entertainment Properties Trust CONTENTS <TABLE> <S> <C> Reports of Independent Auditors........................................... 26 Audited Financial Statements Consolidated Balance Sheets .............................................. 28 Consolidated Statements of Income ........................................ 29 Consolidated Statements of Changes in Shareholders' Equity ............... 30 Consolidated Statements of Cash Flows .................................... 31 Notes to Consolidated Financial Statements ............................... 33 Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation .................. 50 </TABLE> 25
Independent Auditors' Report The Board of Trustees Entertainment Properties Trust: We have audited the accompanying consolidated balance sheets of Entertainment Properties Trust (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended. In connection with our audit of the consolidated financial statements, we have also audited the accompanying financial statement schedules listed in the Index at Item 15(d). These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Entertainment Properties Trust as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Kansas City, Missouri February 3, 2004 26
Report of Independent Auditors The Board of Trustees Entertainment Properties Trust We have audited the accompanying consolidated statements of income, changes in shareholders' equity and cash flows of Entertainment Properties Trust (the Company) for the year ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flow of Entertainment Properties Trust for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Kansas City, Missouri March 28, 2002 27
ENTERTAINMENT PROPERTIES TRUST Consolidated Balance Sheets (In thousands except share and per share data) <TABLE> <CAPTION> DECEMBER 31 ----------------------- 2003 2002 --------- ------- <S> <C> <C> ASSETS Rental properties, net (notes 2 and 5) $ 870,944 679,937 Land held for development 29,152 12,985 Investment in joint ventures (note 3) 1,336 1,109 Cash and cash equivalents 30,527 10,091 Restricted cash (note 5) 6,495 6,495 Receivable from joint venture (note 3) -- 8,438 Other assets 27,464 11,332 --------- ------- Total assets $ 965,918 730,387 ========= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities $ 2,864 1,653 Common dividends payable 9,829 8,162 Preferred dividends payable 1,366 1,366 Unearned rents 895 4,036 Long-term debt (note 5) 506,555 346,617 --------- ------- Total liabilities 521,509 361,834 Commitments and contingencies (note 17) -- -- Minority interests (notes 10 and 16) 21,630 15,375 Shareholders' equity: Common shares, $.01 par value. Authorized 50,000,000 shares; issued 20,129,749 and 17,655,822 shares at December 31, 2003 and 2002, respectively 201 177 Preferred shares, $.01 par value. Authorized 5,000,000 shares; issued 2,300,000 shares 23 23 Additional paid-in-capital 454,195 379,447 Treasury shares, at cost: 472,200 common shares (6,533) (6,533) Loans to shareholders (note 7) (3,525) (3,525) Non-vested shares (note 6) (1,625) (1,276) Distributions in excess of net income (19,957) (15,135) --------- ------- Shareholders' equity 422,779 353,178 --------- ------- Total liabilities and shareholders' equity $ 965,918 730,387 ========= ======= </TABLE> See accompanying notes to consolidated financial statements. 28
ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Income (In thousands except per share data) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------- 2003 2002 2001 -------- ------ ------ <S> <C> <C> <C> Rental revenue (note 4) $ 89,965 71,610 54,667 Other revenue 1,195 -- -- -------- ------ ------ Total Revenue 91,160 71,610 54,667 -------- ------ ------ Property operating expense 698 201 -- General and administrative expense, excluding share based compensation below 3,859 2,293 2,507 Interest expense (note 5) 30,570 24,475 20,334 Depreciation and amortization 16,359 12,862 10,209 Amortization of share based compensation 926 1,048 240 -------- ------ ------ Income before gain on sale of real estate, income from joint venture, and minority interest 38,748 30,731 21,377 Gain on sale of real estate -- 202 -- Equity in income from joint ventures (note 3) 401 1,421 2,203 Minority interests (notes 10 and 17) (1,555) (1,195) -- -------- ------ ------ Net income 37,594 31,159 23,580 Preferred dividend requirements (note 11) (5,463) (3,225) -- -------- ------ ------ Net income available to common shareholders $ 32,131 27,934 23,580 ======== ====== ====== Basic net income per common share $ 1.81 1.66 1.60 ======== ====== ====== Diluted net income per common share $ 1.77 1.64 1.60 ======== ====== ====== Shares used for computation: Basic 17,780 16,791 14,715 Diluted 19,051 17,762 14,783 </TABLE> See accompanying notes to consolidated financial statements. 29
ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Changes in Shareholders' Equity (In thousands) <TABLE> <CAPTION> COMMON STOCK PREFERRED STOCK ADDITIONAL ------------- --------------- PAID-IN TREASURY SHARES PAR SHARES PAR CAPITAL SHARES ------ ----- ------ ---- ---------- -------- <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 2000 15,196 $ 152 -- $ -- 278,574 (6,533) Shares issued to Directors 3 -- -- -- 54 -- Issuance of restricted share grant 64 1 -- -- 857 -- Amortization of restricted share grant -- -- -- -- -- -- Net income -- -- -- -- -- -- Common shares issued in Dividend Reinvestment Plan 7 -- -- -- 118 -- Dividends to common shareholders ($1.80 per share) -- -- -- -- -- -- ------ ----- ----- ---- -------- ------ Balance at December 31, 2001 15,270 153 -- -- 279,603 (6,533) Shares issued to Directors 2 -- -- -- 54 -- Issuance of restricted share grant 62 1 -- -- 1,218 -- Amortization of restricted share grant -- -- -- -- -- -- Net income -- -- -- -- -- -- Common Shares issued in Dividend Reinvestment Plan 22 -- -- -- 475 -- Common Shares issued in secondary offering, net of offering costs of $1.03 million 2,300 23 -- -- 42,685 -- Preferred shares issued, net of offering costs of $1.6 million -- -- 2,300 23 55,412 -- Dividends to common shareholders ($1.90 per share) -- -- -- -- -- -- Dividends to preferred shareholders ($1.40 per share) -- -- -- -- -- -- ------ ----- ----- ---- -------- ------ Balance at December 31, 2002 17,656 177 2,300 23 379,447 (6,533) Shares issued to Directors 2 -- -- -- 62 -- Issuance of restricted share grant 54 1 -- -- 1,303 -- Amortization of restricted share grant -- -- -- -- -- -- Stock option expense -- -- -- -- 25 -- Net income -- -- -- -- -- -- Common Shares issued in Dividend Reinvestment Plan 21 -- -- -- 586 -- Common Shares issued in secondary offering, net of offering costs of $1.4 million 2,397 23 -- -- 72,772 -- Dividends to common shareholders ($2.00 per share) -- -- -- -- -- -- Dividends to preferred shareholders ($2.375 per share) -- -- -- -- -- -- ------ ----- ----- ---- -------- ------ Balance at December 31, 2003 20,130 $ 201 2,300 $ 23 454,195 (6,533) ====== ===== ===== ==== ======== ====== <CAPTION> DISTRIBUTIONS IN LOANS TO NON-VESTED EXCESS OF SHAREHOLDERS SHARES NET INCOME TOTAL ------------ ---------- ---------------- ------- <S> <C> <C> <C> <C> Balance at December 31, 2000 (3,525) (546) (7,503) 260,619 Shares issued to Directors -- -- -- 54 Issuance of restricted share grant -- (860) -- (2) Amortization of restricted share grant -- 330 -- 330 Net income -- -- 23,580 23,580 Common shares issued in Dividend Reinvestment Plan -- -- -- 118 Dividends to common shareholders ($1.80 per share) -- -- (26,571) (26,571) ------ ------ ------- ------- Balance at December 31, 2001 (3,525) (1,076) (10,494) 258,128 Shares issued to Directors -- -- -- 54 Issuance of restricted share grant -- (1,219) -- -- Amortization of restricted share grant -- 1,048 -- 1,048 Net income -- -- 31,159 31,159 Common Shares issued in Dividend Reinvestment Plan -- -- -- 475 Common Shares issued in secondary offering, net of offering costs of $1.03 million -- -- -- 42,708 Preferred shares issued, net of offering costs of $1.6 million -- -- -- 55,435 Dividends to common shareholders ($1.90 per share) -- -- (32,604) (32,604) Dividends to preferred shareholders ($1.40 per share) -- -- (3,225) (3,225) ------ ------ ------- ------- Balance at December 31, 2002 (3,525) (1,247) (15,164) 353,178 Shares issued to Directors -- -- -- 62 Issuance of restricted share grant -- (1,304) -- -- Amortization of restricted share grant -- 926 -- 926 Stock option expense -- -- -- 25 Net income -- -- 37,594 37,594 Common Shares issued in Dividend Reinvestment Plan -- -- -- 586 Common Shares issued in secondary offering, net of offering costs of $1.4 million -- -- -- 72,795 Dividends to common shareholders ($2.00 per share) -- -- (36,924) (36,924) Dividends to preferred shareholders ($2.375 per share) -- -- (5,463) (5,463) ------ ------ ------- ------- Balance at December 31, 2003 (3,525) (1,625) (19,957) 422,779 ====== ====== ======= ======= </TABLE> See accompanying notes to consolidated financial statements. 30
ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------------------------- 2003 2002 2001 ---------- --------- -------- <S> <C> <C> <C> Operating activities: Net income $ 37,594 31,159 23,580 Adjustments to reconcile net income to net cash provided by operating activities Minority interest in net income 1,555 1,195 -- Gain on sale of real estate -- (202) -- Equity in income from joint venture (401) (1,421) -- Depreciation and amortization 16,359 12,862 10,209 Non-cash compensation expense 951 1,048 240 Common shares issued to management and trustees 62 54 54 Increase in other assets (2,679) (731) (819) Increase (decrease) in other accounts payable and accrued liabilities 836 (190) 84 Increase (decrease) in unearned rent (3,275) 2,081 1,565 --------- -------- ------- Net cash provided by operating activities 51,002 45,855 34,913 --------- -------- ------- Investing activities: Acquisition of rental properties (125,675) (161,514) (20,822) Net proceeds from sale of real estate -- 3,533 -- Distributions received from joint venture 8,923 1,735 -- Proceeds from sale of equity interest in joint venture -- 3,065 1,445 Investment in secured note receivable (5,000) -- -- Acquisition of Westcol joint venture interest, net of cash acquired -- -- (12,036) Capital contribution to Westcol joint venture -- -- (1,300) Acquisition of development properties, including related capitalized costs (21,987) (2,160) (1,554) --------- -------- ------- Net cash used in investing activities (143,739) (155,341) (34,267) --------- -------- ------- Financing activities: Proceeds from long-term debt facilities 190,200 37,000 179,000 Principal payments on long-term debt (100,263) (5,149) (126,150) Deferred financing fees paid (7,550) (1,702) (2,084) Net proceeds from issuance of common shares 73,381 43,183 118 Net proceeds from issuance of preferred shares -- 55,435 -- Funding of restricted cash escrow deposits -- -- (6,495) Distributions paid to minority interests (1,875) (820) -- Dividends paid to preferred shareholders (5,463) (1,859) -- Dividends paid to common shareholders (35,257) (31,101) (26,393) --------- -------- ------- Net cash provided by financing activities 113,173 94,987 17,996 --------- -------- ------- </TABLE> 31
ENTERTAINMENT PROPERTIES TRUST Consolidated Statements of Cash Flows (In thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2003 2002 2001 ------- -------- ------ <S> <C> <C> <C> Net increase (decrease) in cash and cash equivalents $20,436 (14,499) 18,642 Cash and cash equivalents at beginning of year 10,091 24,590 5,948 ------- ------- ------ Cash and cash equivalents at end of year 30,527 10,091 24,590 ======= ======= ====== Supplemental schedule of non-cash activity: Acquisition of rental properties in exchange for minority interest in subsidiary $ -- 15,000 -- Sale of equity interest in joint venture received in 2003 -- 8,359 -- Transfer of land held for development to rental property 5,509 -- 886 Exchange of development property in connection with acquisition of rental property -- -- 1,818 Assumption of debt of New Roc 70,000 -- -- Consolidation of assets and liabilities associated with purchase of Westcol joint venture Fair value of assets -- -- 46,534 Fair value of liabilities, net of amounts due to the Company -- -- 17,767 Less Company's interest ownership prior to acquisition -- -- 15,267 Cash paid for remaining interest -- -- 13,500 Supplemental disclosure of cash flow information: Cash paid for interest $29,010 23,315 19,436 </TABLE> See accompanying notes to consolidated financial statements 32
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS 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 retail centers. At December 31, 2003, the Company owned 45 megaplex theatre properties, including two joint venture properties, located in eighteen states, two entertainment retail centers ("ERC") located in Westminster, Colorado, and New Rochelle, New York, and land parcels leased to restaurant and retail operators and related properties adjacent to several of its theatre properties. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Entertainment Properties Trust and its subsidiaries all of which are substantially wholly-owned except for New Roc Associates, LP (New Roc). New Roc was acquired in October 2003 and is 71.4% owned. All significant inter-company transactions have been eliminated in consolidation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. RENTAL PROPERTIES Rental properties are carried at cost less accumulated depreciation. Costs incurred for the acquisition of the properties are capitalized. Accumulated depreciation is computed over the estimated useful lives of the assets, which generally are estimated to be 40 years for buildings, 5 to 7 years for furniture, fixtures and equipment, and the base term of the lease for tenant improvements. Expenditures for ordinary maintenance and repairs are charged to operations in the period incurred. Significant renovations and improvements which improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful life. The Company applies Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", for the recognition and measurement of impairment of long-lived assets to be held and used. Management reviews a property for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. The review of recoverability is based on an estimate of undiscounted future cash flows expected to result from its use and eventual disposition. If impairment exists due to the inability to recover the carrying value of the property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value. DEFERRED FINANCING COSTS Included in other assets are deferred financing costs which are amortized over the terms of the related long-term debt obligations. 33
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 CAPITALIZED DEVELOPMENT COSTS The Company capitalizes certain costs that relate to real estate under development including interest and development personnel costs. OPERATING SEGMENT The Company aggregates the financial information of all its properties into one reportable segment because the properties all have similar economic characteristics and provide similar services to similar types and classes of customers. REVENUE RECOGNITION A majority of the Company's leases contain provisions for periodic escalation in base rent (base rent escalation), which are primarily based on an inflation index. Base rents are recognized on a straight-line basis over the term of the lease, and the base rent escalation is recognized when measurable. In addition, tenants are subject to additional rents if gross revenues of the properties exceed certain thresholds defined in the lease agreements (percentage rents). Percentage rents are recognized at the time when specific triggering events occur as provided by the lease agreements. Percentage rents of $1.9 million and $600 thousand were recognized in 2003 and 2002, respectively. No percentage rents were recognized in 2001. INCOME TAXES The Company operates in a manner intended to enable it to qualify as a REIT under the Internal Revenue Code (the Code). A REIT which distributes at least 90% of its taxable income to its shareholders each year and which meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. The Company intends to continue to qualify as a REIT and distribute substantially all of its taxable income to its shareholders. Accordingly, no provision has been made for income taxes. Earnings and profits, which determine the taxability of distributions to shareholders, may differ from that reported for financial reporting purposes due primarily to differences in the basis of the assets and the estimated useful lives used to compute depreciation. CONCENTRATION OF RISK American Multi-Cinema, Inc. (AMC) is the lessee of 62% of the megaplex theatre rental properties owned by the Company (including joint venture properties) at December 31, 2003. A substantial portion of the Company's revenues (approximately $66.1 million or 73%, and $51.6 million or 72% for the years ended December 31 2003 and 2002, respectively, including joint ventures) result from the 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. CASH EQUIVALENTS Cash equivalents include bank demand deposits and shares of highly liquid institutional money market mutual funds for which cost approximates market value. 34
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 RESTRICTED CASH Restricted cash represents demand deposits required in connection with the $125 million secured non-recourse mortgage notes payable due in 2006. These deposits are restricted for debt service under the terms of the loans. SHARE BASED COMPENSATION Prior to 2003, the Company accounted for stock options issued under its share incentive plan under the recognition and measurement provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations. No stock-based compensation cost related to such options is reflected in 2002 and 2001 net income, as all options had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," prospectively for all employee awards granted, modified, or settled after January 1, 2003. Awards under the Company's plan vest either immediately or up to a period of 5 years. Therefore the cost related to stock based employee compensation related to stock options included in the determination of net income for 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards for each period (in thousands): 35
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 <TABLE> <CAPTION> 2003 2002 2001 ---------- ------ ------ <S> <C> <C> <C> Net income available to common shareholders, as reported $ 32,131 27,934 23,580 Add: Stock-based employee compensation expense included in reported net income 25 -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (128) (172) (172) ---------- ------ ------ Pro forma net income $ 32,028 27,762 23,408 ========== ====== ====== Basic earnings per share: As reported $ 1.81 1.66 1.60 Pro forma 1.80 1.65 1.60 Diluted earnings per share: As reported $ 1.77 1.64 1.60 Pro forma 1.76 1.64 1.60 </TABLE> The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.0% in 2003, 4% in 2002, and 5.0% in 2001, dividend yield of 8%, volatility factors of the expected market price of the Company's common shares of 14.6% in 2003, 22.3% to 25.1% in 2002, and 35% in 2001; and an expected life of the options of eight years. Restricted share awards, which vest over time, are recorded as unearned compensation when granted using the fair value of the stock at the grant date, and amortized to expense over the vesting period. 2. RENTAL PROPERTIES The following table summarizes the carrying amounts of rental properties as of December 31, 2003 and 2002 (in thousands): <TABLE> <CAPTION> 2003 2002 --------- ------- <S> <C> <C> Buildings and improvements $ 741,519 572,276 Furniture, fixtures & equipment 4,000 -- Land 190,610 153,899 --------- ------- 936,129 726,175 Accumulated depreciation (65,185) (46,238) --------- ------- Total $ 870,944 679,937 ========= ======= </TABLE> 36
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 Depreciation expense on rental properties was $16.2 million, $12.7 million and $10.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. 3. REAL ESTATE JOINT VENTURES ATLANTIC JOINT VENTURE On May 11, 2000, the Company completed the formation of a joint venture partnership, Atlantic-EPR I, a Delaware general partnership (Atlantic-EPR I), with Atlantic of Hamburg, Germany (Atlantic), whereby the Company contributed the AMC Cantera 30 theatre with a carrying value of $33.5 million in exchange for cash proceeds from mortgage financing of $17.8 million and a 100% interest in Atlantic-EPR I. During 2000 through 2002, the Company sold to Atlantic a total of an 80% interest in Atlantic-EPR I in exchange for $14.3 million in cash. The final contribution by Atlantic of $8.4 million was paid to Atlantic-EPR I in December 2002 but was not paid to the Company until January 2003. Accordingly, such contribution is included as a receivable from joint venture in the consolidated balance sheet at December 31, 2002. The joint venture agreement allows Atlantic to exchange up to a maximum of 10% of its ownership interest in Atlantic-EPR I per year, beginning in 2005, for Common Shares of the Company or, at the discretion of the Company, cash. The Company accounts for its investment in Atlantic-EPR I under the equity method of accounting. The Company recognized income of $401, $1,421, and $1,468 (in thousands) from its investment in this joint venture during 2003, 2002 and 2001, respectively. Condensed financial information for Atlantic-EPR I is as follows as of and for the years ended December 31, 2003, 2002, and 2001 (in thousands): <TABLE> <CAPTION> 2003 2002 2001 ------- ------ ------ <S> <C> <C> <C> Rental properties, net $31,177 31,821 32,465 Cash 141 9,342 141 Long-term debt 17,039 17,291 17,524 Payable to Entertainment Properties -- 8,438 -- Partners' equity 14,173 14,563 14,973 Rental revenue 4,006 3,932 3,869 Net income 1,911 1,845 1,717 </TABLE> WESTCOL JOINT VENTURE On June 30, 1999, the Company completed the formation of a joint venture, whereby the Company contributed certain undeveloped land parcels with a carrying value of $8.7 million in exchange for a 50% interest in the real estate joint venture, comprised of undeveloped land parcels and the Westminster AMC 24 screen theatre in Westminster, Colorado. In December 2001, the Company purchased the remaining third party interest in the Westcol joint venture for $13.5 million, which approximated the book value of the proportionate share of the underlying net assets of Westcol. As a result of the acquisition of the 37
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 remaining interest, the Company consolidated the assets and liabilities of the joint venture at the time of acquisition. The Company recognized income of $735 in thousands from its investment in this joint venture during 2001. 4. OPERATING LEASES The Company's rental properties are leased under operating leases with expiration dates ranging from 9 to 25 years. Future minimum rentals on non-cancelable tenant leases at December 31, 2003 are as follows (in thousands): <TABLE> <S> <C> 2004 $ 100,567 2005 100,796 2006 100,078 2007 100,468 2008 100,917 Thereafter 833,165 ----------- $ 1,335,991 =========== </TABLE> 5. LONG-TERM DEBT Long term debt at December 31, 2003 and 2002 consists of the following (in thousands): <TABLE> <CAPTION> 2003 2002 -------- ------- <S> <C> <C> (1) Secured variable rate credit facility, due February 28, 2006 $ 20,000 54,000 (2) Revolving variable rate credit facility, due May 1, 2005 -- 37,000 (3) Mortgage notes payable, 8.18% , due February 1, 2005 19,166 19,460 (4) Mortgage notes payable, 6.50% -15.03% , due February 10, 2006 116,524 119,724 (5) Mortgage note payable, 6.77% , due July 11, 2028 98,115 99,593 (6) Mortgage note payable, 7.37% , due July 15, 2018 16,270 16,840 (7) Mortgage notes payable, 4.26% -9.012% , due February 10, 2013 151,856 -- (8) Mortgage note payable, 6.33% , due September 1, 2013 14,624 -- (9) Variable rate mortgage note payable, due April 9, 2004 66,000 -- Other 4,000 -- -------- ------- Total $506,555 346,617 ======== ======= </TABLE> (1) The Company's secured variable rate credit facility due February 28, 2006 is secured by one theatre property, several retail and restaurant properties and other land parcels, which had a net book value of approximately $35.8 million at December 31, 2003. The note requires monthly payments of interest with the outstanding principal due at maturity. Principal amounts bear interest at LIBOR plus 400 basis points (5.125% at December 31, 2003). 38
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 (2) The Company's secured revolving variable rate credit facility due May 1, 2005 is secured by four theatre properties and two theatre and retail mix properties, which had a net book value of approximately $66.4 million at December 31, 2003. There was no outstanding balance on the revolving credit facility at December 31, 2003. The note requires monthly payments of interest with the outstanding principal due at maturity. Principal amounts bear interest at LIBOR plus 300 basis points (4.125% at December 31, 2003). (3) The Company's mortgage notes payable due February 1, 2005 is secured by three theatre properties, which had a net book value of approximately $38.7 million at December 31, 2003. The note requires monthly principal and interest payments of approximately $158 thousand with a final principal payment at maturity of approximately $18.7 million. (4) The Company's mortgage notes payable due February 10, 2006 are secured by nine theatre properties, which had a net book value of approximately $184.3 million at December 31, 2003, and by $6.5 million in cash escrow deposits. The escrow deposits are recorded as restricted cash in the accompanying consolidated balance sheets at December 31, 2003 and 2002. The escrow deposits are required by the terms of the mortgage notes and are available to pay debt service on the mortgage notes if certain triggering events occur, or they may be applied to the principal amount at maturity. The note requires monthly principal and interest payments of approximately $1.1 million with a final principal payment at maturity of approximately $109.0 million. (5) The Company's mortgage note payable due July 11, 2028 is secured by eight theatre properties, which had a net book value of approximately $142.4 million at December 31, 2003. The note requires monthly principal and interest payments of approximately $689 thousand. This mortgage agreement contains a "hyper-amortization" feature, in which the principal payment schedule is rapidly accelerated, and our principal payments are substantially increased, if we fail to pay the balance of approximately $89.9 million on the anticipated prepayment date of July 11, 2008. (6) The Company's mortgage note payable due June 15, 2018 is secured by one theatre property, which had a net book value of approximately $22.3 million at December 31, 2003. The notes require monthly principal and interest payments of approximately $151 thousand with a final principal payment at maturity of approximately $0.8 million. (7) The Company's mortgage notes payable due February 10, 2013 are secured by fourteen theatre properties, which had a net book value of approximately $230.6 million at December 31, 2003. The note requires monthly principal and interest payments of approximately $1.1 million with a final principal payment at maturity of approximately $99.2 million. (8) The Company's mortgage note payable due September 1, 2013 is secured by one theatre property, which had a net book value of approximately $24.3 million at December 31, 2003. The note requires monthly principal and interest payments of approximately $98 thousand with a final principal payment at maturity of approximately $11.5 million. (9) The Company's variable rate mortgage note payable due April 9, 2004 is secured by one theatre and 39
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 retail mix property, which had a net book value of approximately $100.5 million at December 31, 2003. The note requires monthly payments of interest with the outstanding principal due at maturity. Principal amounts bear interest at LIBOR plus 250 basis points (3.625% at December 31, 2003). In February of 2004, the Company entered into an agreement to refinance this note payable (see note 17). Certain of the Company's long-term debt agreements contain customary restrictive covenants related to financial and operating performance. At December 31, 2003, the Company was in compliance with all restrictive covenants. Principal payments due on long term debt obligations subsequent to December 31, 2003 are as follows (in thousands): <TABLE> <CAPTION> AMOUNT --------- <S> <C> Year: 2004 $ 76,757 2005 30,038 2006 137,285 2007 8,422 2008 8,920 Thereafter 245,133 -------- Total $506,555 ========= </TABLE> The Company capitalizes a portion of interest costs as a component of land held for development. The following is a summary of interest costs during 2003, 2002 and 2001 (in thousands): <TABLE> <CAPTION> 2003 2002 2001 ------- ------ ------ <S> <C> <C> <C> Interest cost charged to income $30,570 24,475 20,334 Interest cost capitalized 832 961 880 ------- ------ ------ Total interest costs incurred $31,402 25,436 21,214 ======= ====== ====== </TABLE> 6. SHARE INCENTIVE PLAN The Company maintains a Share Incentive Plan (the Plan) under which Common Shares and options to purchase up to 1,500,000 of the Company's Common Shares, subject to adjustment in the event of certain corporate events, may be granted. At December 31, 2003, there were 350,769 shares available for grant under the Plan. SHARE OPTIONS Share options granted under the Plan have exercise prices equal to the fair market value of a Common Share at the date of grant. The options may be granted for any reasonable term, not to exceed 10 years, and typically become exercisable at a rate of 20% per year over a five-year period. For Trustees, share options 40
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 become exercisable at a rate of one-third per year over a three-year period. A summary of the Company's share option activity and related information is as follows: <TABLE> <CAPTION> WEIGHTED AVERAGE NUMBER OF OPTION PRICE EXERCISE SHARES PER SHARE PRICE --------- -------------- --------- <S> <C> <C> <C> Outstanding at December 31, 2000 404,664 $ 14.00-$20.00 $ 15.88 Granted 179,732 $ 16.05-$16.30 16.07 --------- Outstanding at December 31, 2001 584,396 $ 14.00-$20.00 15.93 Exercised 6,400 $ 16.30-$19.50 18.50 Granted 164,791 $ 19.30-$22.90 22.64 Canceled/Expired 9,000 $ 16.30-$19.30 18.10 --------- Outstanding at December 31, 2002 733,787 $ 14.00-$20.00 17.25 Exercised 66,863 $ 14.00-$22.89 18.50 Granted 326,029 $ 23.26-$26.87 24.87 --------- Outstanding at December 31, 2003 992,953 $ 14.00-$26.87 19.67 ========= </TABLE> The weighted average fair value of options granted was $.41, $.58, and $1.41 during 2003, 2002 and 2001, respectively. The following table summarizes outstanding and exercisable options at December 31, 2003: <TABLE> <CAPTION> EXERCISE OPTIONS OPTIONS WEIGHTED AVG. PRICE RANGE OUTSTANDING EXERCISABLE LIFE REMAINING - ------------- ----------- ----------- -------------- <C> <C> <C> <C> $ 14.00-20.00 529,132 331,492 6.2 20.00-26.87 463,821 44,957 9.0 ------- ------- --- 992,953 376,449 7.5 ======= ======= === </TABLE> RESTRICTED SHARES During 2003, 2002 and 2001, the Company issued 30,453, 37,275, and 37,336, respectively, restricted common shares for bonus compensation to executives and other employees of the Company. During 2003, 2002 and 2001, the Company also issued 24,027, 22,855 and 26,458, respectively, 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, $1.2 million, and $860 thousand were recognized as non-vested shares issued in 2003, 2002 and 2001 respectively. 41
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 The holders of these restricted shares have voting rights and are eligible to receive dividends from the date of grant. These shares vest over a period of three years for bonus compensation and five years for long-term compensation from the date of grant. The Company records compensation expense pertaining to these restricted shares ratably over the period of vesting. Total expenses related to the restricted shares recorded during 2003, 2002 and 2001 amounted to $926 thousand, $1.05 million, and $330 thousand, respectively. At December 31, 2003, there were 123,619 non-vested restricted shares issued and outstanding. 7. RELATED PARTY TRANSACTIONS In 2000, the Company loaned an aggregate of $3.5 million to Company executives. The loans were made in order for the executives to purchase Common Shares of the Company at the market value of the shares on the date of the loan, as well as to repay borrowings on certain amounts previously loaned. The loans are recourse to the executive's assets and bear interest at 6.24%, are due on January 1, 2011 and interest is payable at maturity. These loans were issued with terms that include a Loan Forgiveness Program, under which the Compensation Committee of the Board of Trustees may forgive a portion of the above referenced indebtedness after application of proceeds from the sale of shares, following a change in control of the Company. The Compensation Committee may also forgive the debt incurred upon termination of employment by reason of death, disability, normal retirement or without cause. At December 31, 2003 and 2002, accrued interest receivable on these loans, included in other assets in the accompanying consolidated balance sheets, totaled $1.37 and $1.1 million, respectively. 8. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per Common Share for the years ended December 31, 2003, 2002 and 2001 (amounts in thousands except per share information): 42
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 <TABLE> <CAPTION> 2003 2002 2001 ----------- ---------- ---------- <S> <C> <C> <C> Net income available to common shareholders $ 32,131 27,934 23,580 Weighted-average shares outstanding 17,780,380 16,790,889 14,714,756 Basic net income per common share $ 1.81 1.66 1.60 Numerator for diluted earnings per common share: Net income available to common shareholders $ 32,131 27,934 23,580 Minority interests 1,555 1,195 -- ----------- ---------- ---------- Numerator for diluted earning per common share $ 33,686 29,129 23,580 =========== ========== ========== Weighted-average shares outstanding 17,780,380 16,790,889 14,714,756 Effect of dilutive securities: Employee options to acquire common shares 321,429 167,476 30,065 Minority interest convertible into common shares 857,142 685,243 -- Non-vested common share grants 92,377 118,190 38,458 ----------- ---------- ---------- Dilutive potential common shares 1,270,948 970,909 68,523 ----------- ---------- ---------- Denominator for diluted earnings per share 19,051,328 17,761,798 14,783,279 =========== ========== ========== Diluted net income per common share $ 1.77 1.64 1.60 </TABLE> 9. DERIVATIVE FINANCIAL INSTRUMENTS The Company holds one interest rate cap instrument with a notional amount of $10 million and a strike rate of 6.0% on three-month LIBOR which expires on December 20, 2004. The $6,500 cost of the rate cap is amortized over the life of the agreement. The fair value of the interest rate cap is immaterial to the Company's financial statements at December 31, 2003. In 1998, the Company entered into a forward contract in connection with a mortgage note payable due July 2008 to essentially fix the base rate of interest on a notional amount of $105 million. The forward contract settled on June 29, 1998, the closing date of the long-term debt issuance, and the Company incurred a loss of $1.4 million, which is being amortized as an increase to interest expense over the ten year term of the long-term debt and will result in an effective interest rate of 6.84%. The remaining unamortized amount of $776 thousand and $947 thousand is included in other assets in the accompanying 2003 and 2002 consolidated balance sheets, respectively. 43
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 10. COMPLETED PROPERTY ACQUISITIONS The Company acquired a 71.4% ownership interest in New Roc Associates, LP ("New Roc") on October 27, 2003 in exchange for cash of $25 million. New Roc owns an entertainment retail center encompassing 446 thousand square feet located in New Rochelle, New York. The results of New Roc's operations have been included in the consolidated financial statements since the date of acquisition. The fair value of New Roc's real property was approximately $105 million and New Roc had mortgage debt of $70 million at the date of acquisition. Other assets and liabilities of New Roc were insignificant. The net assets of New Roc have been recorded in the accompanying consolidated financial statements at their fair values to the extent of the Company's ownership interest in New Roc, and at carryover basis (predecessor cost) to the extent of the minority ownership interest retained by the former owner of New Roc. Rental property of $103.7 million and minority interest of $7 million were recorded by the Company in its consolidated financial statements at the date of acquisition. The following unaudited pro forma result of operations reflects the Company's acquisition as if it had occurred on January 1, 2002: <TABLE> <CAPTION> PRO FORMA YEAR ENDED DECEMBER 31, ------------------------ 2003 2002 ---------- -------- <S> <C> <C> Total revenue $ 97,269 82,991 Net income available to common shareholders $ 33,431 27,924 Basic net income per common share $ 1.88 1.66 Diluted net income per common share $ 1.86 1.64 </TABLE> In connection with the acquisition, the Company loaned $5 million to the minority partner in New Roc. That note is included in other assets, bears interest at 10% per year, matures on the earlier to occur of May 9, 2004 or the refinancing of the $66 million note (see note 17), and is secured by the minority partner's interest in the partnership. If the property achieves certain operating performance levels, the minority partner can, after two years, convert it's ownership interest to cash or Company Common Stock of approximately $10 million. During 2003 and 2002, the Company acquired various other rental and development properties. Those acquisitions were recorded at the Company's cost of acquisition. Rental properties acquired generally consisted of properties subject to triple-net leases. 11. SHARE OFFERINGS On September 23, 2003, the Company issued 2.4 million common shares in a registered public offering for net proceeds of $72.2 million. A portion of the proceeds were used to fund the acquisition of rental 44
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 properties and land held for development. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Management compares the carrying value and the estimated fair value of our financial instruments. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments at December 31, 2003 and 2002: CASH AND CASH EQUIVALENTS: Due to the highly liquid nature of our short term investments, the carrying value of our cash approximates the fair market value of our cash equivalents. ACCOUNTS RECEIVABLE: The carrying value of our accounts receivable approximates the fair market value due to the short term maturities of these amounts. DEBT INSTRUMENTS: The fair value of the Company's debt as of December 31, 2003, 2002 and 2001 is estimated by discounting the future cash flows of each instrument using current market rates. At December 31, 2003, the Company had a carrying value of $86 million in variable rate debt outstanding, which management believes represents fair value. At December 31, 2003, the Company had a carrying value of $420.55 million in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 6.6%. Discounting the future cash flows for fixed rate debt using a 6% rate, or a change of 0.6 percentage points, management estimates that the fixed rate debt would have a fair value of approximately $425.3 million at December 31, 2003. At December 31, 2002 the Company had a carrying value of $255.6 million in fixed rate long-term debt outstanding with an average weighted interest rate of approximately 7.5%. Discounting the future cash flows for fixed rate debt using a 6% rate, management estimates that the fixed rate debt would have had a fair value of approximately $270.0 million at December 31, 2002. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: The carrying value of accounts payable and accrued liabilities approximates fair value due to the short term maturities of these amounts. 13. OPERATING LEASES The Company leases its executive office from a third party landlord through December, 2009. Rental expense for this lease totaled approximately $137 thousand, $114 thousand, and $111 thousand in 2003, 2002 and 2001, respectively, and is included as a component of general and administrative expense in the accompanying consolidated statements of income. Future minimum lease payments under this lease at December 31, 2003 are (in thousands): 45
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 <TABLE> <CAPTION> AMOUNT ------ <S> <C> Year: 2004 $ 192 2005 198 2006 203 2007 209 2008 214 Thereafter 220 ------ Total $1,236 ------ </TABLE> 14. QUARTERLY FINANCIAL INFORMATION (unaudited) Summarized quarterly financial data for the years ended December 31, 2003 and 2002 are as follows (in thousands, except per share data): <TABLE> <CAPTION> March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- <S> <C> <C> <C> <C> 2003: Total revenue $21,045 21,944 23,014 25,157 Net income 8,658 8,867 9,631 10,437 Net income available to common shareholders 7,292 7,501 8,265 9,072 Basic net income per common share 0.43 0.44 0.48 0.46 Diluted net income per common share 0.42 0.43 0.46 0.46 2002: Total revenue $15,796 16,989 18,797 20,028 Net income 6,877 7,226 8,413 8,643 Net income available to common shareholders 6,877 6,732 7,047 7,278 Basic net income per common share 0.43 0.39 0.41 0.42 Diluted net income per common share 0.42 0.39 0.41 0.42 </TABLE> 46
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 15. DIVIDENDS COMMON SHARES The Board of Trustees declared cash dividends totaling $2.00 per Common Share for the year ended December 31, 2003 and $1.90 per Common Share for the year ended December 31, 2002. Of the total dividends calculated for tax purposes, the amounts characterized as ordinary income, return of capital and capital gain for 2003 and 2002 are as follows: Cash dividends paid per Common Share for the year ended December 31, 2003: <TABLE> <CAPTION> CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN - ----------- ---- --------- -------- ------- ------------ <S> <C> <C> <C> <C> <C> 12-31-02 01-15-03 $ 0.4750 0.3286 0.1464 -- 03-28-03 04-15-03 0.5000 0.3459 0.1541 -- 06-30-03 07-15-03 0.5000 0.3459 0.1541 -- 09-30-03 10-15-03 0.5000 0.3459 0.1541 -- -------- ------ ------ ----- Total for 2003 $ 1.9750 1.3663 0.6087 -- ======== ====== ====== ===== $ 100.0% 69.2% 30.8% -- </TABLE> Cash dividends paid per Common Share for the year ended December 31, 2002: <TABLE> <CAPTION> CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN - ----------- ---- --------- -------- ------- ------------ <S> <C> <C> <C> <C> <C> 12-28-01 01-15-02 $ 0.4500 0.3822 0.0651 0.0027 03-28-02 04-16-02 0.4750 0.4034 0.0688 0.0028 06-28-02 07-16-02 0.4750 0.4034 0.0688 0.0028 09-30-02 10-15-02 0.4750 0.4034 0.0688 0.0028 -------- ------ ------ ------ Total for 2002 $ 1.8750 1.5924 0.2715 0.0111 ======== ====== ====== ====== $ 100.0% 84.9% 14.5% 0.6% </TABLE> PREFERRED SHARES On May 29, 2002, the Company issued 2.3 million 9.5% Series A cumulative Preferred Shares in a registered public offering. The Board of Trustees declared cash dividends totaling $2.375 and $0.80855 per Preferred Share for the years ended December 31, 2003 and December 31, 2002, respectively. Of the total dividends calculated for tax purposes, the amounts characterized as ordinary income, return of capital and capital gain for 2003 and 2002 are as follows: 47
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 Cash dividends paid per Preferred Share for the year ended December 31, 2003: <TABLE> <CAPTION> CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN - ----------- ---- --------- -------- ------- ------------ <S> <C> <C> <C> <C> <C> 12-31-02 01-15-03 $0.59375 0.59375 -- -- 03-28-03 04-15-03 0.59375 0.59375 -- -- 06-30-03 07-15-03 0.59375 0.59375 -- -- 09-30-03 10-15-03 0.59375 0.59375 -- -- -------- ------- ------ --- Total for 2003 $ 2.3750 2.3750 -- -- ======== ======= ====== === $ 100.0% 100.0% -- -- </TABLE> Cash dividends paid per Preferred Share for the Year ended December 31, 2002: <TABLE> <CAPTION> CASH TAXABLE CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN - ----------- ---- --------- -------- ------- ------------ <S> <C> <C> <C> <C> <C> 06-28-02 07-16-02 $0.21480 0.21240 -- 0.00240 09-30-02 10-15-02 0.59375 0.58710 -- 0.00665 -------- ------- ------ -------- Total for 2002 $0.80855 0.79950 -- 0.00905 ======== ======= ====== ======== $ 100.0% 98.9% -- 1.1% </TABLE> 16. SUBSEQUENT DEVELOPMENTS On February 3, 2004, the Company announced a pending acquisition of four Canadian entertainment and retail centers, anchored by movie theatres, with a value in Canadian dollars of approximately C$200 million (approximately US$152 million). In connection with those acquisitions, the Company will issue common shares to the sellers with an aggregate value in Canadian dollars of C$36 million (approximately US$27 million). Also in connection with those acquisitions, the Company has obtained Canadian dollar denominated loan commitments which total approximately C$128.6 million (approximately US$97 million). The acquisitions are expected to close in connection with the funding of those loan commitments during the first quarter of 2004. In February of 2004, the Company entered into an agreement to refinance the $66 million in variable rate debt, which matures in 2003 and is secured by the New Roc property. The refinancing is expected to be completed in March 2004. The new debt will have a ten year term and its interest will be fixed at a rate of 5.68%. 48
Entertainment Properties Trust Notes to Consolidated Financial Statements December 31, 2003, 2002, and 2001 17. COMMITMENTS AND CONTINGENCIES As of December 31, 2003, the Company had five theatre projects under construction. These theatres will have a total of 86 screens and their development costs will be approximately $66 million. The Company has already purchased the development land for $16.3 million as of December 31, 2003, and plans to fund the remaining estimated development costs of these properties through new debt facilities and additional equity. The cost of development is paid by the Company either in periodic draws or upon successful completion of construction. If management of the Company determines the construction is not being completed per the executed development agreement, the Company can discontinue funding of periodic draws or refuse to purchase the completed theatre. Upon successful completion of construction, the Company will lease these theatres to already established theatre operators for approximately $7.6 million in annual rentals. The Company and wholly-owned subsidiary, EPT Gulf States, LLC ("Gulf States") issued preferred interest in connection with the acquisition of certain rental properties by Gulf States in 2002. Those preferred interests earn annual dividends of 10%, are presented in minority interests in the accompanying consolidated balance sheets, and are convertible into 857,142 Common Shares of the Company. 49
ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation December 31, 2003 <TABLE> <CAPTION> INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2003 --------------------- --------------------------------- BUILDINGS, ADDITIONS BUILDINGS, EQUIPMENT & SUBSEQUENT TO EQUIPMENT & DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL - ---------------------- -------------------- ----------- ------- ------------ ------------- ------- ------------ ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Grand 24 Dallas, TX $ 1,214 3,060 15,540 3,060 15,281 18,341 Mission Valley 20 San Diego, CA 9,800 16,300 16,028 16,028 Promenade 16 Los Angeles, CA 17,198 6,021 22,479 6,021 22,104 28,125 Ontario Mills 30 Los Angeles, CA 15,268 5,521 19,779 5,521 19,450 24,971 Lennox 24 Columbus, OH 7,756 12,900 12,685 12,685 West Olive 16 St. Louis, MO 10,753 4,985 12,815 4,985 12,602 17,587 Studio 30 Houston, TX 15,934 6,023 20,377 6,023 20,037 26,060 Huebner Oaks 24 San Antonio, TX 10,192 3,006 13,894 3,006 13,662 16,668 First Colony 24 Houston, TX 10,666 19,100 67 19,167 19,167 Oakview 24 Omaha, NE 13,115 5,215 16,700 59 5,215 16,759 21,974 Leawood 20 Kansas City, MO 8,815 3,714 12,086 43 3,714 12,129 15,843 Gulf Pointe 30 Houston, TX 14,398 4,304 21,496 76 4,304 21,572 25,876 South Barrington 30 Chicago, IL 19,140 6,577 27,723 98 6,577 27,821 34,398 Mesquite 30 Dallas, TX 12,949 2,912 20,288 72 2,912 20,360 23,272 Hampton Town Center 24 Norfolk, VA 15,907 3,822 24,678 88 3,822 24,766 28,588 Pompano 18 Pompano Beach, FL 7,600 6,376 9,899 2,426 6,376 12,325 18,701 Raleigh Grand 16 Raleigh, NC 3,967 2,919 5,559 2,919 5,559 8,478 Paradise 24 Miami, FL 13,083 2,000 13,000 8,519 2,000 21,519 23,519 Pompano Kmart Pompano Beach, FL 600 2,423 600 2,423 3,023 Pompano Restaurant Pompano Beach, FL 200 803 430 200 1,233 1,433 Aliso Viejo 20 Los Angeles, CA 12,240 8,000 14,000 8,000 14,000 22,000 Bosie Stadium 20 Boise, ID 7,600 16,003 16,003 16,003 Woodridge 18 Chicago, IL 8,681 9,926 8,968 9,926 8,968 18,894 Cary Crossroads 20 Cary, NC 9,292 3,352 11,653 155 3,352 11,808 15,160 Tampa Palms 20 Tampa, FL 11,004 6,000 12,809 6,000 12,809 18,809 Palms Promenade San Diego, CA 14,611 7,500 17,750 7,500 17,750 25,250 On The Border Dallas, TX 674 205 879 879 Bennigans Dallas, TX 565 1,000 565 1,000 1,565 Bennigans Houston, TX 511 891 652 750 1,402 Texas Land & Cattle Dallas, TX 511 1,008 1,519 1,519 Texas Roadhouse Grill Atlanta, GA 886 886 886 Roadhouse Grill Atlanta, GA 868 868 868 Westminster 24 Denver, CO 16,270 5,850 17,314 5,850 17,314 23,164 Westminster Center Denver, CO 10,000 6,204 12,600 742 6,204 13,342 19,546 Subway Denver, Co 27 27 27 Westbank Palace 10 Westbank, LA 9,781 4,378 12,330 4,378 12,330 16,708 Houma Palace 10 Houma, LA 5,502 2,404 6,780 2,404 6,780 9,184 Hammond Palace 10 Hammond, LA 5,349 2,404 6,780 2,404 6,780 9,184 Elmwood Palace 10 Elmwood, LA 14,061 5,264 14,820 5,264 14,820 20,084 Clearview Palace 12 Clearview, LA 7,336 11,740 11,740 11,740 Sterling Forum 30 Sterling Heights, MI 17,117 5,975 17,956 3,400 5,975 21,356 27,331 Olathe Studio 30 Olathe, KS 12,227 4,000 15,935 4,000 15,935 19,935 Cherrydale 16 Greenville, SC 5,044 1,660 7,570 1,660 7,570 9,230 Livonia Livonia, MI 14,000 4,500 17,525 4,500 17,525 22,025 Hoffman 22 Alexandria, VA 14,061 22,035 22,035 22,035 Little Rock Rave Little Rock, AR 10,000 3,858 7,990 3,858 7,990 11,848 -------- ------- ------- ------ ------- ------- ------- Subtotals carried over to page 49 $421,931 152,545 560,424 19,279 153,899 576,114 730,013 ======== ======= ======= ====== ======= ======= ======= </TABLE> <TABLE> <CAPTION> ACCUMULATED DATE DEPRECIATION DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE - ---------------------- -------------------- ------------ -------- ------------ <S> <C> <C> <C> <C> Grand 24 Dallas, TX 2,101 11/97 (1) 40 years Mission Valley 20 San Diego, CA 2,204 11/97 (1) 40 years Promenade 16 Los Angeles, CA 3,039 11/97 (1) 40 years Ontario Mills 30 Los Angeles, CA 2,674 11/97 (1) 40 years Lennox 24 Columbus, OH 1,744 11/97 (1) 40 years West Olive 16 St. Louis, MO 1,733 11/97 (1) 40 years Studio 30 Houston, TX 2,755 11/97 (1) 40 years Huebner Oaks 24 San Antonio, TX 1,879 11/97 (1) 40 years First Colony 24 Houston, TX 2,909 11/97 40 years Oakview 24 Omaha, NE 2,544 11/97 40 years Leawood 20 Kansas City, MO 1,841 11/97 40 years Gulf Pointe 30 Houston, TX 3,184 2/98 40 years South Barrington 30 Chicago, IL 4,049 3/98 40 years Mesquite 30 Dallas, TX 2,879 4/98 40 years Hampton Town Center 24 Norfolk, VA 3,394 6/98 40 years Pompano 18 Pompano Beach, FL 1,652 8/98 40 years Raleigh Grand 16 Raleigh, NC 784 8/98 40 years Paradise 24 Miami, FL 2,591 11/98 40 years Pompano Kmart Pompano Beach, FL 304 11/98 40 years Pompano Restaurant Pompano Beach, FL 118 11/98 40 years Aliso Viejo 20 Los Angeles, CA 1,750 12/98 40 years Bosie Stadium 20 Boise, ID 2,000 12/98 40 years Woodridge 18 Chicago, IL 1,004 6/99 40 years Cary Crossroads 20 Cary, NC 1,165 6/99 40 years Tampa Palms 20 Tampa, FL 1,308 6/99 40 years Palms Promenade San Diego, CA 1,738 6/99 40 years On The Border Dallas, TX 11/97 Bennigans Dallas, TX 134 11/97 20 years Bennigans Houston, TX 179 11/97 20 years Texas Land & Cattle Dallas, TX 11/97 Texas Roadhouse Grill Atlanta, GA 3/99 Roadhouse Grill Atlanta, GA 3/99 Westminster 24 Denver, CO 902 12/01 40 years Westminster Center Denver, CO 690 12/01 40 years Subway Denver, Co 9 4/2 5 years Westbank Palace 10 Westbank, LA 552 3/2 40 years Houma Palace 10 Houma, LA 303 3/2 40 years Hammond Palace 10 Hammond, LA 303 3/2 40 years Elmwood Palace 10 Elmwood, LA 664 3/2 40 years Clearview Palace 12 Clearview, LA 526 3/2 40 years Sterling Forum 30 Sterling Heights, MI 858 6/2 40 years Olathe Studio 30 Olathe, KS 598 6/2 40 years Cherrydale 16 Greenville, SC 285 6/2 40 years Livonia Livonia, MI 621 8/2 40 years Hoffman 22 Alexandria, VA 689 10/2 40 years Little Rock Rave Little Rock, AR 208 12/2 40 years ------ Subtotals carried over to page 49 60,864 ====== </TABLE> 50
ENTERTAINMENT PROPERTIES TRUST Continued Schedule III - Real Estate and Accumulated Depreciation December 31, 2003 <TABLE> <CAPTION> INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2003 --------------------- --------------------------------- BUILDINGS, ADDITIONS BUILDINGS, EQUIPMENT & SUBSEQUENT TO EQUIPMENT & DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL - ---------------------- -------------------- ----------- ------- ------------ ------------- ------- ------------ ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Subtotal from page 48 n/a $421,931 152,545 560,424 19,279 153,899 576,114 730,013 AmStar Cinema 16 Macon, GA 1,982 5,056 1,982 5,056 7,038 Star Southfield Center Southfield, MI 8,000 20,520 8,000 20,520 28,520 Southwind 12 Lawrence, KS 1,500 3,526 1,500 3,526 5,026 Veterans 24 Tampa, FL 14,624 6,100 18,431 6,100 18,431 24,531 New Roc City New Rochelle, NY 70,000 6,100 97,601 6,100 97,601 103,701 Harbour View Station Suffolk, VA 3,255 9,206 3,255 9,206 12,461 Columbiana Grande 14 Columbiana, SC 1,000 10,535 1,000 10,535 11,535 The Grande 18 Hialeah, FL 7,985 7,985 7,985 Johnny Carino's Mesquite, TX 789 990 789 990 1,779 Hawaiian Adv. Waterpark Garland, TX 3,300 3,300 3,300 Rocky Mountain Choc. Westminster, CO 16 16 16 Leasing Commissions Various 224 224 224 Development Various 29,152 29,152 29,152 -------- ------- ------- ------ ------- ------- ------- Total $506,555 218,408 729,829 19,279 219,762 745,519 965,281 ======== ======= ======= ====== ======= ======= ======= <CAPTION> ACCUMULATED DATE DEPRECIATION DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE - ---------------------- -------------------- ------------ -------- ------------ <S> <C> <C> <C> <C> Subtotal from page 48 n/a 60,864 n/a n/a AmStar Cinema 16 Macon, GA 95 3/3 40 years Star Southfield Center Southfield, MI 403 5/3 40 years Southwind 12 Lawrence, KS 51 6/3 40 years Veterans 24 Tampa, FL 269 6/3 40 years New Roc City New Rochelle, NY 3,219 10/3 40 years Harbour View Station Suffolk, VA 34 11/3 40 years Columbiana Grande 14 Columbiana, SC 139 11/3 40 years The Grande 18 Hialeah, FL 12/3 40 years Johnny Carino's Mesquite, TX 20 3/3 40 years Hawaiian Adv. Waterpark Garland, TX 90 6/3 20 years Rocky Mountain Choc. Westminster, CO 11/3 10 years Leasing Commissions Various 1 Development Various ------ Total 65,185 ====== </TABLE> 51
ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation December 31, 2002 <TABLE> <CAPTION> INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2002 --------------------- ADDITIONS --------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL - ---------------------- ----------------- ----------- ------- ------------ ------------- ------- ------------ ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Grand 24 Dallas, TX $ 11,383 3,060 15,540 3,060 15,281 18,341 Mission Valley 20 San Diego, CA 9,948 16,300 16,028 16,028 Promenade 16 Los Angeles, CA 17,456 6,021 22,479 6,021 22,104 28,125 Ontario Mills 30 Los Angeles, CA 15,498 5,521 19,779 5,521 19,450 24,971 Lennox 24 Columbus, OH 7,873 12,900 12,685 12,685 West Olive 16 St. Louis, MO 10,915 4,985 12,815 4,985 12,602 17,587 Studio 30 Houston, TX 16,175 6,023 20,377 6,023 20,037 26,060 Huebner Oaks 24 San Antonio, TX 10,345 3,006 13,894 3,006 13,662 16,668 First Colony 24 Houston, TX 10,959 19,100 67 19,167 19,167 Oakview 24 Omaha, NE 9,582 5,215 16,700 59 5,215 16,759 21,974 Leawood 20 Kansas City, MO 9,057 3,714 12,086 43 3,714 12,129 15,843 Gulf Pointe 30 Houston, TX 14,793 4,304 21,496 76 4,304 21,572 25,876 South Barrington 30 Chicago, IL 19,665 6,577 27,723 98 6,577 27,821 34,398 Mesquite 30 Dallas, TX 13,305 2,912 20,288 72 2,912 20,360 23,272 Hampton Town Center 24 Norfolk, VA 16,344 3,822 24,678 88 3,822 24,766 28,588 Pompano 18 Pompano Beach, FL 7,716 6,376 9,899 2,426 6,376 12,325 18,701 Raleigh Grand 16 Raleigh, NC 4,028 2,919 5,559 2,919 5,559 8,478 Paradise 24 Miami, FL 13,442 2,000 13,000 8,519 2,000 21,519 23,519 Pompano Kmart Pompano Beach, FL 1,789 600 2,423 600 2,423 3,023 Nickels Restaurant Pompano Beach, FL 589 200 803 200 803 1,003 Aliso Viejo 20 Los Angeles, CA 12,577 8,000 14,000 8,000 14,000 22,000 Bosie Stadium 20 Boise, ID 7,716 16,003 16,003 16,003 Woodridge 18 Chicago, IL 11,451 9,926 8,968 9,926 8,968 18,894 Cary Crossroads 20 Cary, NC 9,058 3,352 11,653 155 3,352 11,808 15,160 Tampa Palms 20 Tampa, FL 11,387 6,000 12,809 6,000 12,809 18,809 Palms Promenade San Diego, CA 15,317 7,500 17,750 7,500 17,750 25,250 On The Border Dallas, TX 549 674 205 879 879 Bennigans Dallas, TX 958 565 1,000 565 1,000 1,565 Bennigans Houston, TX 856 511 891 652 750 1,402 Texas Land & Cattle Dallas, TX 949 511 1,008 1,519 1,519 Texas Roadhouse Grill Atlanta, GA 554 886 886 886 Roadhouse Grill Atlanta, GA 543 868 868 868 Westminster 24 Denver, CO 16,840 5,850 17,314 5,850 17,314 23,164 Westminster Center Denver, CO 6,204 12,600 733 6,204 13,333 19,537 Subway Denver, Co 27 27 27 Westbank Palace 10 Westbank, LA 5,471 4,378 12,330 4,378 12,330 16,708 Houma Palace 10 Houma, LA 3,028 2,404 6,780 2,404 6,780 9,184 Hammond Palace 10 Hammond, LA 3,028 2,404 6,780 2,404 6,780 9,184 Elmwood Palace 10 Elmwood, LA 6,890 5,264 14,820 5,264 14,820 20,084 Clearview Palace 12 Clearview, LA 3,919 11,740 11,740 11,740 Sterling Forum 30 Sterling Heights, MI 7,998 5,975 17,956 5,975 17,957 23,932 Olathe Studio 30 Olathe, KS 6,666 4,000 15,935 4,000 15,935 19,935 Cherrydale 16 Greenville, SC 1,660 7,570 1,660 7,570 9,230 Livonia Livonia, MI 4,500 17,525 4,500 17,525 22,025 Hoffman 22 Alexandria, VA 22,035 22,035 22,035 Little Rock Rave Little Rock, AR 3,858 7,990 3,858 7,990 11,848 Development Various -- 12,218 367 400 12,985 -- 12,985 -------- ------- ------- ------ ------- ------- ------- Total $346,617 164,763 560,791 15,840 166,884 572,276 739,160 ======== ======= ======= ====== ======= ======= ======= <CAPTION> ACCUMULATED DATE DEPRECIATION DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE - ---------------------- ----------------- ------------ --------- ------------ <S> <C> <C> <C> <C> Grand 24 Dallas, TX 1,719 11/97 (1) 40 years Mission Valley 20 San Diego, CA 1,803 11/97 (1) 40 years Promenade 16 Los Angeles, CA 2,487 11/97 (1) 40 years Ontario Mills 30 Los Angeles, CA 2,188 11/97 (1) 40 years Lennox 24 Columbus, OH 1,427 11/97 (1) 40 years West Olive 16 St. Louis, MO 1,418 11/97 (1) 40 years Studio 30 Houston, TX 2,254 11/97 (1) 40 years Huebner Oaks 24 San Antonio, TX 1,537 11/97 (1) 40 years First Colony 24 Houston, TX 2,430 11/97 40 years Oakview 24 Omaha, NE 2,125 11/97 40 years Leawood 20 Kansas City, MO 1,538 11/97 40 years Gulf Pointe 30 Houston, TX 2,645 2/98 40 years South Barrington 30 Chicago, IL 3,354 3/98 40 years Mesquite 30 Dallas, TX 2,370 4/98 40 years Hampton Town Center 24 Norfolk, VA 2,777 6/98 40 years Pompano 18 Pompano Beach, FL 1,344 8/98 40 years Raleigh Grand 16 Raleigh, NC 645 8/98 40 years Paradise 24 Miami, FL 2,053 11/98 40 years Pompano Kmart Pompano Beach, FL 243 11/98 40 years Nickels Restaurant Pompano Beach, FL 80 11/98 40 years Aliso Viejo 20 Los Angeles, CA 1,400 12/98 40 years Bosie Stadium 20 Boise, ID 1,600 12/98 40 years Woodridge 18 Chicago, IL 780 6/99 40 years Cary Crossroads 20 Cary, NC 874 6/99 40 years Tampa Palms 20 Tampa, FL 987 6/99 40 years Palms Promenade San Diego, CA 1,294 6/99 40 years On The Border Dallas, TX 11/97 Bennigans Dallas, TX 71 11/97 20 years Bennigans Houston, TX 83 11/97 20 years Texas Land & Cattle Dallas, TX 11/97 Texas Roadhouse Grill Atlanta, GA 3/99 Roadhouse Grill Atlanta, GA 3/99 Westminster 24 Denver, CO 469 12/01 40 years Westminster Center Denver, CO 356 12/01 40 years Subway Denver, Co 4 4/2 5 years Westbank Palace 10 Westbank, LA 244 3/2 40 years Houma Palace 10 Houma, LA 134 3/2 40 years Hammond Palace 10 Hammond, LA 134 3/2 40 years Elmwood Palace 10 Elmwood, LA 293 3/2 40 years Clearview Palace 12 Clearview, LA 232 3/2 40 years Sterling Forum 30 Sterling Heights, MI 224 6/2 40 years Olathe Studio 30 Olathe, KS 199 6/2 40 years Cherrydale 16 Greenville, SC 95 6/2 40 years Livonia Livonia, MI 182 8/2 40 years Hoffman 22 Alexandria, VA 138 10/2 40 years Little Rock Rave Little Rock, AR 8 12/2 40 years Development Various -- ------ Total 46,238 ====== </TABLE> 52
ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation (continued) Reconciliation December 31, 2003 <TABLE> <S> <C> Real Estate: Reconciliation: Balance at beginning of the year $ 739,160 Acquisition of rental properties during the year 209,954 Acquisition of development properties, including related capitalized costs, during the year 16,167 ---------- Balance at close of year $ 965,281 ========== </TABLE> See accompanying independent auditor's report. ENTERTAINMENT PROPERTIES TRUST Schedule III - Real Estate and Accumulated Depreciation (continued) Reconciliation December 31, 2002 <TABLE> <S> <C> Real Estate: Reconciliation: Balance at beginning of the year $ 563,878 Acquisition of rental properties during the year 161,514 Acquisition of rental properties in exchange for minority interest in subsidiary during the year 15,000 Acquisition of development properties, including related capitalized costs, during the year 2,160 Net proceeds from sale of real estate (3,533) Gain on sale of real estate 201 Correcting reclassification between cost and accumulated depreciation (60) ---------- Balance at close of year $ 739,160 ========== </TABLE> See accompanying independent auditor's report. 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company previously reported a change in certifying accountants for 2002 in its current report on Form 8-K filed on April 12, 2002. ITEM 9A. 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 the end of the period covered by this annual 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 12, 2004 (the "Proxy Statement"), contains under the captions "Election of Trustees", "Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" the information required by Item 10 of this Form 10-K, which information is incorporated herein by this reference. We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer, Chief Financial Officer, and all other officers, employees and trustees. A copy of the Code may be viewed on our website at www.eprkc.com. ITEM 11. EXECUTIVE COMPENSATION The Proxy Statement contains under the captions "Election of Trustees -- Compensation of Trustees", "Executive Compensation", "Compensation Committee", and "Company Performance" the information required by Item 11 of this Form 10-K, which information is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The Proxy Statement contains under the captions "Share Ownership" and "Equity Compensation Plan Information" the information required by Item 12 of this Form 10-K, which information is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Proxy Statement contains under the caption "Transactions Between the Company and Trustees, Officers or their Affiliates" the information required by Item 13 of this Form 10-K, which information is incorporated herein by this reference. 54
PART IV ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Proxy Statement contains under the caption "Ratification of Appointment of Independent Auditors" the information required by Item 14 of this Form 10-K, which information is incorporated herein by this reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits, Financial Statements and Financial Statement Schedules: Financial Statements: Reports of Independent Auditors Consolidated Balance Sheets as of December 31, 2003 and 2002. Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001. Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001. Notes to Consolidated Financial Statements (b) Reports on Form 8-K: Form 8-K filed October 23, 2003 in connection with the release of the Company's earnings for the quarter ended September 30, 2003 Form 8-K filed November 12, 2003 announcing the acquisition of interest in New Roc Associates, LP, which occurred on October 27, 2003, and as amended by Form 8-K/A on January 12, 2004. (c) Exhibits 21 Subsidiaries of the Company 23.1 Consent of KPMG LLP 23.2 Consent of Ernst & Young LLP 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act 32 Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act. (d) Financial Statement Schedules 55
Schedule III - Real Estate and Accumulated Depreciation No other schedules meet the requirement for disclosure. 56
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 5, 2004 By /s/ David M. Brain ------------------------------------------- David M. Brain, President - Chief Executive Officer Dated: March 5, 2004 By /s/ Fred L. Kennon ------------------------------------------- Fred L. Kennon, Vice President - Chief Financial Officer Treasurer and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: <TABLE> <CAPTION> SIGNATURE AND TITLE DATE - ------------------------------------------------------ ------------- <S> <C> /s/ Robert J. Druten March 5, 2004 - ------------------------------------------------- Robert J. Druten, Chairman of the Board /s/ David M. Brain March 5, 2004 - ------------------------------------------------ David M. Brain, Chief Executive Officer and Trustee /s/ Morgan G. Earnest, II March 5, 2004 - ---------------------------------------------- Morgan G. Earnest, II, Trustee /s/ Scott H. Ward March 5, 2004 - ------------------------------------------------- Scott H. Ward, Trustee /s/ James A. Olson March 5, 2004 - ------------------------------------------------ James A. Olson, Trustee </TABLE> 57
EXHIBIT INDEX <TABLE> <CAPTION> Exhibit Description - ---------------------------- --------------------------------------------------------- <S> <C> 21 Subsidiaries of the Company 23.1 Consent of KPMG LLP 23.2 Consent of Ernst & Young LLP 31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act 32 Certifications Furnished Pursuant to Section 906 of the Sarbanes-Oxley Act </TABLE> 58