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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, 1999
COMMISSION FILE NUMBER 1-13561
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 43-1790877
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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 New York Stock Exchange
Interest, par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
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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.
THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST OF THE
REGISTRANT HELD BY NON-AFFILIATES ON MARCH 17, 2000, WAS $202,713,989 (BASED ON
THE CLOSING SALES PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE ON MARCH 17,
2000). AT MARCH 17, 2000, THERE WERE 15,015,851 COMMON SHARES OF BENEFICIAL
INTEREST OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2000 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.
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PART I
ITEM 1. BUSINESS
Investors are encouraged to review the Risk Factors commencing on page 5 of this
Report for a discussion of risks that may impact our financial condition,
business or share price.
GENERAL
Entertainment Properties Trust (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.
The Company completed an initial public offering ("IPO") of its common shares of
beneficial interest ("Shares") on November 18, 1997. The Company is the first
publicly-traded REIT formed exclusively to invest in entertainment-related
properties.
The Company is a self-administered REIT. As of December 31, 1999, the Company's
real estate portfolio was comprised of 23 megaplex theatre properties located in
eleven states, and one entertainment-themed retail center ("ETRC") development
property located in Westminster, Colorado. The Company also owns land parcels
and related properties adjacent to several of its theatre properties. The
Company's theatre properties are leased to leading theatre operators, including
American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC Entertainment, Inc.
("AMCE"), Consolidated Theatres ("Consolidated"), Muvico Entertainment LLC
("Muvico"), Edwards Theatre Circuits, Inc. ("Edwards") and Loews Cineplex
Entertainment ("Loews").
The Company believes entertainment is an important and discrete sector of the
retail real estate industry and that, as a result of the Company's focus on
properties in this sector and the industry relationships of its management, it
has a competitive advantage in providing capital to operators of these types of
properties. The principal business strategy of the Company is to continue
acquiring a portfolio of 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 predominantly
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. The Company believes the
development of megaplex theatres has accelerated the obsolescence of many
existing movie theatres by setting new standards for moviegoers, who, in the
Company's experience, have demonstrated their preference for the more attractive
surroundings, wider variety of films, superior customer service and more
comfortable seating typical of megaplex theatres (see "Operating risks in the
entertainment industry may affect the ability of our tenants to perform 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").
The Company expects the development of megaplex theatres to continue in the
United States and abroad for the foreseeable future. As a result of the
significant capital commitment involved in building these properties and the
experience and industry relationships of the Company's management, the Company
believes it 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. The Company believes its ability to finance
these properties will enable it to continue to grow and diversify its asset
base. See Item
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7 - "Management's Discussion and Analysis" for a discussion of capital
requirements necessary for the Company's continued growth.
As a REIT, the Company primarily leases its properties to tenants on a
triple-net basis and does not operate its properties. Instead, the tenants, and
not the Company, assume the primary risks involved in the operation of the
properties. The Company's existing theatre leases provide (and it is intended
that future leases will provide) for constant rental payments with periodic
escalators, together with an obligation to pay percentage rentals based on gross
receipts as certain baseline revenues are achieved by the tenant.
BUSINESS OBJECTIVES AND STRATEGIES
The Company's business objectives are to continue to enhance shareholder value
by achieving predictable and increasing Funds From Operations ("FFO") per Share
(defined as net income plus depreciation divided by the number of Shares
outstanding) and acquiring and developing a diversified portfolio of
high-quality properties leased to entertainment and entertainment-related
business operators, generally under long-term triple-net leases. The Company
intends to achieve these objectives by continuing to execute the Growth
Strategies, Operating Strategies and Capitalization Strategies described below:
GROWTH STRATEGIES
- - Purchase additional properties pursuant to existing agreements between the
Company and leading theatre operators.
- - Develop or acquire additional megaplex theatre properties and lease those
properties to qualified theatre exhibitors.
- - Develop or acquire, and lease to qualified operators or master tenants,
entertainment-themed retail centers ("ETRCs") and single-tenant,
out-of-home, location-based entertainment and entertainment-related
properties.
FUTURE PROPERTIES. The Company intends to pursue acquisitions of high-quality
properties from existing operators and other operators with a strong market
presence and believes it will continue to have opportunities to purchase
megaplex theatres developed by these operators. See "Competition", this Item.
Pursuant to agreements with AMCE, Muvico and Real Estate Innovations LLC, the
Company has the right to acquire and lease back to the operator a number of
existing and future megaplex theatre properties. See "Tenants and Leases" and
"Additional Property Acquisitions" in Item 2 - "Properties" for a discussion of
these agreements.
ENTERTAINMENT-THEMED RETAIL CENTERS. The Company intends to pursue acquisitions
of additional ETRCs, which are generally large multi-tenant retail developments
that incorporate such elements as megaplex theatres, restaurants, book and/or
music superstores, interactive entertainment venues and other specialty retail
or leisure-time activities. The Company believes the most important component of
an ETRC is a megaplex theatre because it attracts substantial customer traffic
to the site. ETRC's typically provide a family entertainment experience by
creating an atmosphere of fun and excitement. The Company believes that by
broadening the traditional retail shopping concept, ETRC's attract a greater
number of customers to spend more time and money at a single location. The
Company also believes access to capital in this developing market is generally
limited for all but the largest entertainment companies.
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The Company's ability to continue to grow and diversify its asset base as
described above will depend on its ability to obtain additional capital for
investment in properties. See "Capital Requirements for Additional Acquisitions
and Future Growth" in Item 7 - "Management's Discussion and Analysis" for a
discussion of these capital requirements and the Company's strategies for
obtaining this capital, and "Risk Factors - We must obtain new financing in
order to grow".
OPERATING STRATEGIES
- - Purchase single-tenant properties supported by long-term leases or
multi-tenant properties that are substantially leased to minimize the risks
inherent in initial leasing.
- - Structure leases, where possible, on a triple-net or similar basis under
which the tenants bear substantially all operational expenses connected
with the properties.
- - Structure leases for contractual increases in rent and/or percentage rent
based upon a percentage of a tenant's gross sales over a pre-determined
level.
- - Develop and maintain long-term working relationships with theatre,
restaurant, retail and other entertainment-related business operators and
developers.
- - Diversify the Company's asset base by property type and tenant.
LEASE RISK MINIMIZATION. To avoid initial lease-up risks and produce a
predictable income stream, the Company typically acquires single-tenant
properties that are leased under long-term leases. The Company believes its
willingness to make long-term investments in properties offers tenants financial
flexibility and allows tenants to allocate capital to their core businesses.
LEASE STRUCTURE. The Company typically structures 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.
TENANT RELATIONSHIPS. The Company intends to continue developing and maintaining
long-term working relationships with theatre, restaurant and other
entertainment-related business operators and developers by providing capital for
multiple properties on a national or regional basis, thereby enhancing
efficiency and value to those operators and to the Company. In addition to
existing tenants, the Company will target tenants whose competitive position and
financial strength are deemed adequate to meet their obligations throughout the
lease terms (see "Risk Factors - We must obtain new financing in order to
grow").
PORTFOLIO DIVERSIFICATION. The Company will endeavor to further diversify its
asset base by property type 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. Management is
actively pursuing opportunities to finance the acquisition of additional
properties through joint ventures, direct equity placements and other
arrangements. See Item 7-"Management's Discussion and Analysis".
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CAPITALIZATION STRATEGIES
- - Employ leverage, including the Bank Credit Facility, to fund additional
acquisitions.
- - Pursue joint venture opportunities and other arrangements to fund
additional property acquisitions.
- - Maintain a debt to total capitalization ratio consistent with prudent
management and market expectations.
- - Pay regular distributions and periodically increase distributions to
shareholders to the extent expected increases in FFO and Cash Available for
Distribution (net earnings plus depreciation and amortization minus capital
expenditures and principal payments on indebtedness) are realized.
USE OF LEVERAGE; DEBT TO TOTAL CAPITALIZATION. The Company seeks to enhance
shareholder return through the use of leverage. The Company currently has $18
million in availability under its Bank Credit Facility to fund the acquisition
of additional properties consistent with the Company's investment policies and
the terms of the credit agreement (See "Risk Factors - We must obtain new
financing in order to grow" and "Liquidity and Capital Resources" and "Capital
Requirements for Additional Acquisitions and Future Growth" in Item 7 -
"Management's Discussion and Analysis"). In addition, the Company may in the
future obtain additional secured debt and/or refinance its existing unsecured
debt with long-term debt or proceeds from the issuance of additional equity as
circumstances warrant and opportunities to do so become available. The Company
expects to maintain a debt to total capitalization ratio (i.e., total debt of
the Company as a percentage of shareholder's equity plus total debt) of
approximately 50%.
JOINT VENTURES. The Company will examine and pursue potential joint venture
opportunities with institutional investors or developers if they are considered
to add value to the shareholders. The Company may employ higher leverage in
joint ventures (See "Risk Factors - Joint Ventures may limit flexibility with
jointly held investments").
PAYMENT OF REGULAR DISTRIBUTIONS. The Company has paid and expects to continue
paying quarterly dividend distributions to its shareholders. Among the factors
the Board of Trustees considers in setting the distribution rate are the
Company's results of operations, including FFO per Share, and the Company's Cash
Available for Distribution. The Company expects to periodically increase
distributions as FFO and Cash Available for Distribution increase and as other
considerations and factors warrant. See "Cautionary Statement Regarding
Forward-Looking Information" in Item 7 of this Form 10-K.
COMPETITION
The Company competes for real estate financing opportunities with traditional
financial sources such as banks, non-bank providers of leveraged lease and other
structured finance facilities, equity markets and insurance companies, as well
as other REITs. While the Company is the first publicly traded REIT formed to
specialize in entertainment-themed properties, other entertainment-oriented
REITs may enter the market in the future as new megaplex theatres and ETRCs are
developed.
EMPLOYEES
As of December 31, 1999, the Company had six full time employees.
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RISK FACTORS
There are many factors 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 19 of this
report.
RISKS THAT MAY IMPACT OUR FINANCIAL CONDITION OR PERFORMANCE
A SINGLE TENANT REPRESENTS A SUBSTANTIAL PORTION OF OUR LEASE REVENUES
Approximately 70% 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 remain substantially dependent
on AMC's performance under its leases and AMCE's performance under its guaranty.
If for any reason AMC failed to perform 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. Peter
C. Brown, the Chairman of our Board of Trustees, is Chairman of AMCE. Mr. Brown
does not participate in discussions with AMC regarding acquisition or lease
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. Some of our
debt is payable at a variable interest rate. When interest rates rise, our cost
of servicing the debt may increase, which may reduce funds available to pay
shareholder dividends. 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, the debt could go into default. A portion of our debt financing is
secured by mortgages on some of our properties. If we fail to meet our mortgage
payments, the lenders could declare a default and foreclose on those properties.
Although it has been our policy that total debt represent approximately 50% of
the total market capitalization of the Company, we may utilize higher leverage
in the future if we believe it is reasonable to do so.
OUR LOAN COVENANTS COULD ADVERSELY AFFECT OUR ABILITY TO GROW AND PAY DIVIDENDS
As of December 31, 1999, we had $132 million in unsecured debt outstanding under
our Bank Credit Facility. Our Bank Credit Facility has a number of covenants
that restrict the amount of secured debt we can obtain and the amount of
dividends we can pay our shareholders (dividends may not exceed 90% of funds
from operations unless a higher amount is necessary to preserve our status as a
REIT). The Bank Credit Facility also has provisions which affect the eligibility
and value of properties in our borrowing base, which in turn determine how much
we can borrow under the Bank Credit Facility. These provisions may limit the
amount of funds available under the Bank Credit Facility to acquire properties,
or require us to pay down the Bank Credit Facility if previously eligible
properties become ineligible.
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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, 1999, we had approximately $103 million outstanding under
secured mortgage arrangements which contain "hyper-amortization" features, in
which the principal payment schedule is rapidly accelerated, and our principal
payments are substantially increased, after a period of time but prior to the
maturity date of the loan. We undertook this debt on the assumption that we can
refinance the debt when these hyper-amortization payments become due. If we
cannot obtain acceptable refinancing at the appropriate time, we may have to
sell properties to repay the debt, or some properties could be foreclosed upon.
If any of our mortgages are foreclosed, that could cause our Bank Credit
Facility to become due. Any of these events could require us to sell properties
at a time or at a price which is not favorable to us.
WE MUST OBTAIN NEW FINANCING IN ORDER TO GROW
As a REIT, we are required to distribute at least 95% of our 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 and the performance of real
estate investment trusts generally. Market prices for many REIT stocks
(including ours) are significantly below their previous levels. For this reason,
our ability to raise cash by selling new shares to the public is currently
limited. We 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. Interest rates are currently increasing, which could
increase the cost and risk of new financing.
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.
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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 acquire new properties on favorable terms
- 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
If a tenant fails to perform on its lease covenants, that would not excuse us
from meeting any debt obligation secured by the property. If the property is
unencumbered by a mortgage but is in the borrowing base for our Bank Credit
Facility or is owned by a joint venture in which we may participate, we may be
required to substitute properties in order to avoid an obligation to pay down
the Bank Credit Facility or avoid a default under the joint venture agreement.
However, we cannot predict whether or on what terms we could acquire quality
substitute properties on a timely basis. We cannot assure 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 would involve
a significant capital expenditure.
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, remain current on their lease obligations and pay percentage rent
depend 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 movie 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-themed retail centers also depends on general economic conditions
and the willingness of consumers to spend time and money on out-of-home
entertainment. 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 may be required to take charges against earnings
resulting from this obsolescence. This could affect the eligibility of those
tenants' properties for inclusion in the borrowing base for our Bank Credit
Facility, or adversely affect our other financing efforts. Megaplex theatre
operators could also be adversely affected by any overbuilding of megaplex
theatres in their markets. If a tenant defaults on a lease, our ability to
recover our investment in the property would be uncertain.
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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.
JOINT VENTURES MAY LIMIT FLEXIBILITY WITH JOINTLY OWNED INVESTMENTS
We may 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. Although we intend to be the manager of
any joint venture in which we participate, there will be some actions (such as
the incurrence of debt or the sale of a property) which will require the consent
of the other party. 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.
WE FACE ADDITIONAL RISKS IF WE DEVELOP PROPERTIES
Our entertainment-themed retail center development in Westminster, Colorado and
similar properties we may seek to develop in the future will involve risks not
typically encountered in the purchase and lease-back of megaplex theatres which
are developed by the operator. The development of 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 fluctuations in occupancy rates, which could affect
our operating results.
COMPLIANCE OR 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 expenditures to remedy noncompliance. Our leases require the
tenants to comply with the ADA, and we believe our theatres provide disabled
access in compliance 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
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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 or toxic 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.
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 and reduce our ability to service
our debt and pay dividends to shareholders.
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 the lease. Although we have not experienced any tenant bankruptcies
in the past, any tenant could file for bankruptcy protection in the future. 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 lease 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 lease. In addition, any claim we have for
unpaid past rent would likely not be paid in full.
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
dividend rate will depend on a number of factors, including our financial
condition and results of future operations, the performance of
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lease terms by tenants, our ability to acquire, finance and lease additional
properties at 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 shares.
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 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 shares or seek
securities paying higher dividends or interest. Higher market interest rates
would not result in more funds for distribution to shareholders except to the
extent we are able to acquire new properties which can be leased at higher
rates. Higher interest rates can increase our borrowing cost and potentially
decrease funds available for distribution. This could have a negative effect on
the market price for our shares.
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 or take charges against earnings resulting from the
obsolescence of multiplex theatres, 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.
Market prices for many REIT shares (including ours) are currently lower than
their historically high levels, and REIT stocks have generally not performed as
well as stocks of other types of companies over the last two years. Although we
believe the fundamentals of our business and the quality of our assets and
income are sound, we cannot predict when, or whether, the market price for our
shares will increase in the future.
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 EPR which is not
approved by our Board of Trustees. These include:
- A staggered Board of Trustees
- A limit on beneficial ownership of our shares
- 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
- A requirement 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
- AMCE's ability to terminate a Right to Purchase Agreement for
additional megaplex theatre properties if there is a change in control
of EPR
- Recently enacted provisions of Maryland law limiting a court's ability
to scrutinize the trustees' exercise of their business judgment in the
event of a hostile takeover
- Provisions in loan or joint venture agreements putting EPR 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
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Any or all of these provisions could delay or prevent a change in control of
EPR, even if the change was in our shareholders' interest or offered a greater
return to our shareholders.
ITEM 2. PROPERTIES
As of December 31, 1999, the Company's real estate portfolio consisted of 23
megaplex theatre properties located in eleven states and one
entertainment-themed retail center ("ETRC") development property located in
Westminster, Colorado. 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.
Building
Acquisition (gross
Property Location Date Screens Seats sq. ft) Tenant
- -------- -------- ---- ------- ----- ------- ------
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) Houston, TX 11/97 24 5,098 107,690 AMC
Oakview 24 (1) Omaha, NE 11/97 24 5,098 107,402 AMC
Leawood Town Center 20 Kansas City, MO 11/97 20 2,995 75,224 AMC
Gulf Pointe 30 (2) Houston, TX 02/98 30 6,008 130,891 AMC
South Barrington 30 Chicago, IL 03/98 30 6,210 130,891 AMC
Cantera 30 (2) Chicago, IL 03/98 30 6,210 130,757 AMC
Mesquite 30 (2) Dallas, TX 04/98 30 6,008 130,891 AMC
Hampton Town Center 24 Norfolk, VA 06/98 24 5,098 107,396 AMC
Raleigh Grand 16 Raleigh, NC 08/98 16 2,596 51,450 Consolidated
Pompano 18 Pompano Beach, FL 08/98 18 3,424 73,637 Muvico
Westminster Promenade (4) Westminster, CO 10/98 -- -- -- Multi-Tenant
Pompano Kmart Pompano Beach, FL 11/98 -- -- 80,540 Kmart
Nickels Restaurant Pompano Beach, FL 11/98 -- -- 5,600 Nickels
Paradise 24 Davie, FL 11/98 24 4,180 96,497 Muvico
Boise Stadium (1) Boise, ID 12/98 20 4,734 140,300 Edwards
Aliso Veijo 20 Los Angeles, CA 12/98 20 4,352 98,557 Edwards
Westminster 24 (4) Westminster, CO 6/99 24 4,812 107,000 AMC
Woodridge 18 (2) Woodridge, IL 6/99 18 4,343 80,600 Loews
Tampa Palms 20 Tampa, FL 6/99 20 4,200 83,000 Muvico
---- ------- ---------
TOTAL 556 110,784 2,573,043
(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.
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(3) Property is included as security for a $105 million mortgage facility.
(4) Property is included in the Westminster ETRC joint venture.
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 5,200 square feet with annual rentals of $109,000.
TENANTS AND LEASES
The Company acquired an initial portfolio of sixteen megaplex theatre properties
(the "AMC Properties") from subsidiaries of AMCE, including AMC, for an
aggregate purchase price of approximately $362 million. Eleven of the AMC
Properties were acquired in 1997 and five were acquired in 1998. The AMC
Properties have an aggregate of 396 screens and 78,160 seats. Each AMC Property
is located in a large metropolitan market and was constructed on or after May
1995. Each AMC Property was acquired by the Company at a price equal to AMCE's
cost of development and construction.
The Company's existing leases with AMC (the "AMC Leases") provide for aggregate
annual rentals of approximately $38.5 million, or an average annual rental of
approximately $2.4 million per Property. AMC's obligations under each Lease are
guaranteed by AMCE. The Leases have initial terms ranging from 13 to 15 years
(the "Fixed Term") and may be extended upon the same terms and conditions for
four additional five-year terms at the option of AMC. The Leases are triple-net
leases that require AMC to pay substantially all expenses associated with the
operation of the Properties, including taxes and other governmental charges,
insurance, utilities, service, maintenance and any ground lease payments. Each
Lease requires that, for a period of ten years, AMC must operate the Property
only as a movie theatre and activities incidental thereto.
The rental schedules under the AMC Leases provide a stable source of cash flow
while allowing the Company to participate in future revenue growth experienced
at those theatres. Rent for the first year of each Lease was set at a fixed
amount and is subject to increase each year by the percentage increase in the
Consumer Price Index ("CPI") for the previous year, not to exceed 2%. In
addition, once AMC earns revenues in excess of a baseline amount it becomes
obligated to pay annual percentage rent on the basis of such revenues. However,
the Company does not expect to receive any annual percentage rent from AMC for
at least five years after the commencement date of each Lease.
During each Fixed Term, certain of AMC's obligations, including payment
obligations, under each Lease are cross-defaulted to each of the other AMC
Leases until AMCE's senior debt obligations or corporate credit are rated
investment grade or AMC's rental payments to the Company represent less than 50%
of the Company's rental income for any fiscal quarter. AMC accounted for
approximately 80% of the Company's rental revenue in 1999. The Company has
general recourse to AMC under the Leases and to AMCE under its guarantees of
AMC's Lease obligations, but AMC's payment obligations under the Leases and
AMCE's obligations under its guarantees are not secured by any assets of AMC or
AMCE.
Rental amounts for the AMC Properties were determined by the management of AMCE
and the Company and were not negotiated on an arms-length basis. The rental
payments were based on an initial capitalization rate of 10.5%, which the
Company believes reflects the fair market value of the Properties to the Company
based on rates for comparable triple-net lease transactions.
Until November 2002, the Company has a right of first refusal and first offer to
purchase and lease back to AMC any megaplex theatre and related entertainment
property acquired or developed and owned (or ground leased) by AMCE or its
subsidiaries, exercisable upon AMCE's intended disposition of the
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property. This right to purchase is intended to give the Company access to new
projects developed by AMCE and its subsidiaries, thereby providing opportunities
for future growth, although AMCE may lease entertainment and
entertainment-related properties from owners other than the Company.
ADDITIONAL PROPERTY ACQUISITIONS
In June 1999, the Company and Excel Legacy Corporation formed a 50/50 joint
venture for the development of the Westminster Promenade ETRC. The Westminster
ETRC development includes approximately 100,000 square feet of restaurant sites
and light retail shops, currently in the development phase, and the Westminster
AMC 24 screen theatre which opened in 1998.
The following table lists the properties acquired during 1999:
PROPERTY LOCATION OPERATOR SCREENS
- -------- -------- -------- -------
Woodridge 18 Chicago, IL Loews Cineplex Entertainment 18
Paradise 24 (1) Davie, FL Muvico Entertainment 24
Tampa Palms 20 Tampa, FL Muvico Entertainment 20
(1) Building and land initially purchased in 1998. Final construction funding
completed in 1999.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 Shares on the New York Stock
Exchange under the trading symbol "EPR" and the distributions declared.
Share Price
----------- Declared
High Low Distribution
---- --- ------------
1999
----
Fourth Quarter $14.3125 $12.75 $0.42
Third Quarter $18.00 $14.625 0.42
Second Quarter $19.9375 $16.25 0.42
First Quarter $17.4375 $15.625 0.42
1998
----
Fourth Quarter $18.9375 $16.00 $0.40
Third Quarter $18.875 $14.00 0.40
Second Quarter $19.8125 $18.25 0.40
First Quarter $20.00 $19.1875 0.40
At March 17, 2000, there were approximately 7,614 holders of record of the
Company's Shares.
The Company declared quarterly distributions to shareholders aggregating $1.68
per Share in 1999 and $1.60 per Share in 1998. The Company has determined that
100% of the dividends paid during 1999 and 1998 represented ordinary dividend
income to its shareholders.
The Company declared a dividend at the increased rate of $0.44 per Share on
March 16, 2000 for the first quarter of 2000, payable April 17, 2000 to
shareholders of record as of March 31, 2000.
While the Company intends 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 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 "Liquidity and Capital Resources" in Item 7 - "Management's
Discussion and Analysis").
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ITEM 6. SELECTED FINANCIAL DATA
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
Rental revenue $48,319 $35,031 $ 1,887
Income from joint venture 333 - -
----------- ------------ -----------
Total revenues 48,652 35,031 1,887
Depreciation and amortization 9,982 7,280 659
Income from operations 36,491 25,699 855
Interest expense (income) 13,278 6,461 (587)
Net income 23,213 19,238 1,442
Net income per common Share:
Basic $1.60 $1.39 $0.10
Diluted 1.60 1.39 0.10
Weighted average number of common Shares
outstanding
Basic 14,516 13,802 13,800
Diluted 14,552 13,880 13,860
Funds from operations $32,618 $26,213 $2,101
Cash dividends declared per common Share $1.68 $1.60 $0.18
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
Net real estate investments $478,706 $455,997 $213,812
Total assets 516,291 464,371 259,488
Dividends payable 6,273 5,545 2,495
Long-term debt 238,737 206,037 0
Total liabilities 249,904 215,809 8,262
Shareholders' equity 266,387 248,562 251,226
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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,
anticipated capital expenditures, shareholder returns and other matters, which
reflect management's best judgment based on factors currently known. Actual
results and experience could differ materially from the anticipated results and
other expectations expressed in the Company's forward-looking statements as a
result of a number of factors, including but not limited to those discussed in
this Item and in Item 1 "Business Risk Factors".
The discussion of the results of operations compares the year ended December 31,
1999 with the year ended December 31, 1998. The Company began operations
concurrent with its initial public offering on November 18, 1997, consequently
there is insufficient historical information with which to compare much of the
1998 results of operations to 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues increased $13.6 million, or 39%, to $48.7 million for the year
ended December 31, 1999, as compared to $35.0 million for the year ended
December 31, 1998. This increase resulted from the combined effect of (i) the
full year impact of 9 properties acquired in 1998 providing incremental revenues
of $10.1 million, (ii) the acquisition of 3 properties in 1999 providing
incremental revenues of $2.6 million, (iii) annual rent adjustments as provided
under some leases ($0.7 million) and (iv) income from a joint venture formed in
June 1999 ($0.3 million).
General and administrative expense increased $0.1 million to $2.2 million for
the year ended December 31, 1999 as compared to $2.1 million for the year ended
December 31, 1998. The increase during 1999 was due primarily to increases in
personnel costs and costs related to the growth of the Company.
Depreciation and amortization expense increased $2.7 million to $10.0 million
for the year ended December 31, 1999 as compared to $7.3 million for the year
ended December 31, 1998. The increase was a result of additional property
acquisitions during 1999 and 1998.
Net interest expense increased $6.8 million to $13.3 million for the year ended
December 31, 1999, as compared to $6.5 million for the year ended December 31,
1998. The increase in interest expense during 1999 was primarily attributable to
the increase in outstanding advances under the Company's $150 million Bank
Credit Facility.
Net income for the year ended December 31, 1999 increased $4.0 million to $23.2
million or $1.60 per diluted Share. For the year ended December 31, 1998, net
income was $19.2 million or $1.39 per diluted Share. The increase was
attributable to the Company's property acquisitions.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD ENDED DECEMBER 31, 1997
The Company began operations concurrent with its initial public offering on
November 18, 1997. Consequently, there is insufficient historical information
for 1997 with which to compare 1998 results.
16
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The Company's revenues, which consist of property rentals, were $35.0 million
for the year ended December 31, 1998. Rental revenue increased in 1998
consistent with the property acquisitions during the year. Revenues for the six
week period ended December 31, 1997 were $1.9 million.
General and administrative expense totaled $2.1 million for the year ended
December 31, 1998 and $0.4 million for the period ended December 31, 1997. The
increase in general and administrative expense for 1998 resulted from the impact
of a full year of operations during 1998 compared to a six week period of
operations in 1997.
Depreciation and amortization expense was $7.3 million for the year ended
December 31, 1998, as a result of additional property acquisitions during the
year. Depreciation and amortization was $0.7 million for the period ended
December 31, 1997.
Net interest expense totaled $6.5 million for the year ended December 31, 1998.
For the period ended December 31, 1997, the Company had net interest income of
$0.6 million.
Funds from operations for the year ended December 31, 1998 were $26.2 million or
$1.89 per Share. For the six week period ended December 31, 1997, FFO was $2.1
million or $0.15 per Share.
Net income for the year ended December 31, 1998 totaled $19.2 million or $1.39
per diluted Share. For the six week period ended December 31, 1997, net income
was $1.4 million or $0.10 per diluted Share.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $22.3 million in cash and cash
equivalents, secured mortgage indebtedness of approximately $107 million, and
unsecured indebtedness of $132 million under the Bank Credit Facility. The $239
million aggregate principal amount of mortgage and unsecured indebtedness bears
interest at a weighted average rate of 7.7% as of December 31, 1999.
As of December 31, 1999, the Company had drawn $132 million under the Bank
Credit Facility. The remaining credit availability of $18 million will be
utilized to acquire additional entertainment properties and to fund operations,
if needed. The Bank Credit Facility contains a number of financial covenants and
restrictions, including restrictions on the amount of secured indebtedness that
can be obtained by the Company, and a restriction on dividends to 90% of FFO
(provided that the Company may at all times pay the dividends required to
maintain its status as a REIT) and provisions governing the eligibility and
value of properties for borrowing base calculations (See "Risk Factors - Our
loan covenants could adversely affect our ability to grow and pay dividends").
The Company anticipates that its cash from operations and credit available under
the Bank Credit Facility will provide adequate liquidity to conduct its
operations, fund administrative and operating costs, interest payments and
additional planned property acquisitions, and allow distributions to the
Company's shareholders and avoidance of corporate level federal income or excise
tax in accordance with Internal Revenue Code requirements for qualification as a
REIT.
The Company's liquidity requirements with respect to future acquisitions may be
reduced to the extent the Company is able to use common Shares as consideration
for such purchases. Accordingly, the Company has filed a registration statement
on Form S-4 with the Securities and Exchange Commission to register 5,000,000
Shares for issuance in exchange for the acquisition of additional properties as
such opportunities may arise.
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20
The Company has also filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission for the purpose of registering 5,000,000
Shares which may be issued from time to time in public offerings or direct
placements with institutional investors as such opportunities may arise. On June
4, 1999, the Company completed a direct sale of 1,200,000 of the Shares included
in the shelf registration. The net proceeds of $20.9 million were used to
finance the acquisition of the Loews Woodridge 18 screen theatre and the Muvico
Tampa Palms 20 screen theatre, and reduce the Company's debt under its Bank
Credit Facility.
On October 6, 1999, the Company announced that the Board of Trustees approved
the repurchase of up to one million of its outstanding common Shares. As of
December 31, 1999, the Company had repurchased a total of 155,200 Shares in the
open market.
CAPITAL REQUIREMENTS FOR ADDITIONAL ACQUISITIONS AND FUTURE GROWTH
The ability of the Company to continue to increase FFO and distributions to its
shareholders will depend on the Company's ability to grow its portfolio by
making additional property acquisitions, which in turn will depend on the
Company's continued access to additional financing in the capital markets. The
Company has $18 million of unused and available credit remaining under the Bank
Credit Facility for making future acquisitions.
As opportunities are presented for property acquisitions consistent with the
Company's investment objectives that would cause the Company to exhaust its
available credit under the Bank Credit Facility, the Company intends to
consider: (i) entering into joint ventures with other investors to acquire or
develop properties (ii) issuing Company securities in exchange for properties
and/or (iii) conducting a public offering or direct placement of the Company's
securities designed to raise capital for acquisitions and/or reduce borrowings
under the Bank Credit Facility, thereby replenishing the available credit for
future acquisitions. There can be no assurance these objectives can be achieved
(See "We must obtain new financing in order to grow" and "Joint ventures may
limit flexibility with jointly owned investments" under "Risk Factors").
The Company anticipates that additional capital will be obtained through its
dividend reinvestment and direct share purchase plan, pursuant to which
shareholders may elect to automatically reinvest their dividends to purchase
Shares issued directly by the Company and shareholders and others may purchase
Shares for cash directly from the Company.
FUNDS FROM OPERATIONS
The Company believes that to facilitate a clear understanding of the historical
consolidated operating results, FFO should be examined in conjunction with net
income as presented in the Consolidated Financial Statements. FFO is considered
by management as an appropriate measure of the performance of an equity REIT
because it is predicated on cash flow analysis, which management believes is
more reflective of the value of real estate companies, such as the Company,
rather than a measure predicated on net income, which includes non-cash
expenses, such as depreciation. FFO is generally defined as net income plus
certain non-cash items, primarily depreciation of real estate properties. The
following table summarizes the Company's FFO for the years ended December 31,
1999 and December 31, 1998 (in thousands except per Share data):
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Net Income $23,213 $ 19,238
Real estate depreciation 9,405 6,975
-------- ----------
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FFO $ 32,618 $ 26,213
========= =========
Basic FFO per Share $ 2.25 $ 1.90
========= =========
Diluted FFO per Share $ 2.24 $ 1.89
========= =========
INFLATION
Investments by the Company are financed with a combination of equity, mortgages
and borrowings under the Bank Credit Facility. 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 provide for escalation in base rent 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 lessees
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, primarily relating to potential losses
due to changes in interest rates. The Company seeks to mitigate the effects of
fluctuations in interest rates by matching the term of new investments with new
long-term fixed rate borrowings whenever possible.
The Company is subject to risks associated with debt financing, including the
risk that existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of the Company's borrowings are subject to mortgages or contractual
agreements which limit the amount of indebtedness the Company may incur.
Accordingly, if the Company is unable to raise additional equity or borrow money
due to these limitations, the Company's ability to acquire additional properties
may be limited.
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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 Data (in millions)
1999
----
2000 2001 2002 Thereafter
---- ---- ---- ----------
Fixed rate debt $1.2 $ 4.6 $1.4 $99.5
Average interest rate 6.77% 6.77% 6.77% 6.77%
Variable rate debt $ - $132.0 $ - $ -
Average interest rate
(as of December 31, 1999) - 7.15% - -
1998
----
1999 2000 2001 Thereafter
---- ---- ---- ----------
Fixed rate debt $1.1 $1.2 $4.6 $101.0
Average interest rate 6.77% 6.77% 6.77% 6.77%
Variable rate debt $ - $0.2 $98.0 $ -
Average interest rate
(as of December 31, 1998) - 7.25% 7.15% -
As the table incorporates only those exposures that existed as of December 31,
1999, it does not consider exposures or positions that could arise after that
date. As a result, the Company's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise during the
period, our hedging strategies at that time and interest rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Entertainment Properties Trust
CONTENTS
Report of Independent Auditors...................................................................................22
Audited Financial Statements
Consolidated Balance Sheets .....................................................................................23
Consolidated Statements of Income ...............................................................................24
Consolidated Statements of Changes in Shareholders' Equity ......................................................25
Consolidated Statements of Cash Flows ...........................................................................26
Notes to Consolidated Financial Statements ......................................................................27
Other Financial Information
Real Estate and Accumulated Depreciation ........................................................................36
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Report of Independent Auditors
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, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 1999 and December 31, 1998 and the period
from August 29, 1997 (date of inception) to December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(d).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits 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 financial position of Entertainment
Properties Trust at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for the years ended December 31, 1999 and
December 31, 1998 and the period from August 29, 1997 (date of inception) to
December 31, 1997, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
Kansas City, Missouri
January 21, 2000
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Entertainment Properties Trust
Consolidated Balance Sheets
(In thousands except per share data)
DECEMBER 31
1999 1998
---------------- ----------------
ASSETS
Rental properties, net $466,406 $ 438,348
Land held for development 12,300 17,649
Investment in joint venture 9,117 -
Cash and cash equivalents 22,265 2,341
Notes receivable 406 -
Other assets 5,797 6,033
============= =============
Total assets $ 516,291 $ 464,371
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 1,538 $ 1,066
Dividends payable 6,273 5,545
Unearned rents 3,356 3,161
Long-term debt 238,737 206,037
------------- --------------
Total liabilities 249,904 215,809
Commitments and contingencies - -
Shareholders' equity
Common Shares, $.01 par value; 50,000,000 shares
Authorized; 15,091,051 and 13,861,964 shares issued in
1999 and 1998, respectively 151 139
Preferred Shares, $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding - -
Additional paid-in-capital 277,126 255,756
Treasury Stock, at cost: 155,200 shares (2,136) -
Loans to shareholders (2,400) (2,400)
Non-vested shares (805) (940)
Distributions in excess of net income (5,549) (3,993)
------------- ---------------
Shareholders' equity 266,387 248,562
============= ===============
Total liabilities and shareholders' equity $ 516,291 $ 464,371
============= ===============
See accompanying notes.
23
26
Entertainment Properties Trust
Consolidated Statements of Income
(In thousands except per share data)
PERIOD FROM
YEAR ENDED YEAR ENDED AUGUST 29 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
---- ---- ----
Rental revenue $ 48,319 $ 35,031 $ 1,887
Income from joint venture 333 - -
-------- --------- --------
Total revenue 48,652 35,031 1,887
General and administrative expense 2,179 2,052 373
Depreciation and amortization 9,982 7,280 659
-------- --------- --------
Income from operations 36,491 25,699 855
Interest expense (income) 13,278 6,461 (587)
-------- --------- --------
Net income $ 23,213 $ 19,238 $ 1,442
======== ========= ========
Basic and diluted net income per common share $ 1.60 $ 1.39 $ 0.10
======== ========= ========
Shares used for computation:
Basic 14,516 13,802 13,800
Diluted 14,552 13,880 13,860
See accompanying notes.
24
27
ENTERTAINMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
COMMON ADDITIONAL DISTRIBUTIONS
STOCK PAID-IN TREASURY LOANS TO NON-VESTED IN EXCESS OF
SHARES PAR CAPITAL STOCK SHAREHOLDERS SHARES NET INCOME TOTAL
---------------------------------------------------------------------------------------------
Issuance of common stock 13,860 $ 139 $ 275,863 $ -- $ -- $ -- $ -- $ 276,002
Costs of issuance of common stock -- -- (20,143) -- -- -- -- (20,143)
Loans to officers -- -- -- -- (2,400) -- (2,400)
Non-vested stock -- -- -- -- -- (1,200) -- (1,200)
Amortization of stock grant -- -- -- -- -- 20 -- 20
Net income -- -- -- -- -- 1,442 1,442
Dividends to common shareholders
($.18 per share) -- -- -- -- -- (2,495) (2,495)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 13,860 139 255,720 -- (2,400) (1,180) (1,053) 251,226
Issuance of common stock 2 -- 36 -- -- -- -- 36
Amortization of stock grant -- -- -- -- -- 240 -- 240
Net income -- -- -- -- -- -- 19,238 19,238
Dividends to common shareholders --
($1.60 per share) -- -- -- -- -- -- (22,178) (22,178)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 13,862 139 255,756 -- (2,400) (940) (3,993) 248,562
Issuance of common stock 1,200 12 20,905 -- -- -- -- 20,917
Shares issued to Directors 3 -- 54 -- -- -- -- 54
Issuance of stock grant 18 -- 298 -- -- (238) -- 60
Amortization of stock grant -- -- -- -- -- 373 -- 373
Net income -- -- -- -- -- -- 23,213 23,213
Shares issued through 8 -- 113 -- -- -- -- 113
Dividend Reinvestment Plan
Purchase of Treasury Stock -- -- (2,136) -- -- -- (2,136)
Dividends to common shareholders
($1.68 per share) -- -- -- -- -- (24,769) (24,769)
--------------------------------------------------------------------------------------------
Balance at December 31, 1999 15,091 $ 151 $ 277,126 $(2,136) $ (2,400) $ (805) $ (5,549) $ 266,387
============================================================================================
See accompanying notes.
25
28
Entertainment Properties Trust
Consolidated Statements of Cash Flows
(In thousands)
PERIOD FROM
YEAR ENDED YEAR ENDED AUGUST 29 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
---- ---- ----
OPERATING ACTIVITIES
Net income $ 23,213 $ 19,238 $ 1,442
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 9,982 7,280 659
Compensation pertaining to common shares
issued to trustees and employees 114 36 -
Increase in other assets (374) (5,642) (456)
(Decrease) increase in accounts payable and
accrued liabilities 318 (1,458) 2,524
(Decrease) increase in other liabilities - (1,368) 1,368
Increase in unearned rent 195 1,286 1,875
----------- ----------- -----------
Net cash provided by operating activities 33,448 19,372 7,412
INVESTING ACTIVITIES
Acquisition of rental properties (36,741) (231,511) (214,471)
Acquisition of development properties (4,490) (17,649) -
----------- ------------ -----------
Net cash used in investing activities (41,231) (249,160) (214,471)
FINANCING ACTIVITIES
Issuance of common shares, net of costs 21,029 - 252,279
Proceeds from long-term debt 34,000 206,459 -
Principal payments on long-term debt (1,145) (422) -
Purchase of treasury stock (2,136) - -
Distribution to shareholders (24,041) (19,128) -
----------- ----------- -----------
Net cash provided by financing activities 27,707 186,909 252,279
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 19,924 (42,879) 45,220
Cash and cash equivalents at beginning of period 2,341 45,220 -
----------- ----------- -----------
Cash and cash equivalents at end of period $ 22,265 $ 2,341 $ 45,220
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY
Declaration of dividend to common shareholders $ 6,273 $ 5,545 $ 2,495
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 14,229 $ 5,738 $ -
=========== =========== ===========
See accompanying notes.
26
29
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
1. ORGANIZATION
Entertainment Properties Trust (the Company) is a Maryland real estate
investment trust (REIT) organized on August 29, 1997. The Company was formed to
acquire and develop entertainment properties including megaplex theatres and
entertainment-themed retail centers.
In November 1997, the Company completed an initial public offering of 13,860,000
common shares, the proceeds of which were used to acquire theatre properties in
accordance with its business plan.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Entertainment
Properties Trust and its wholly- owned subsidiaries, EPT DownREIT, Inc. and EPT
DownREIT II, Inc. All significant intercompany transactions have been
eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results may
differ significantly from such estimates and assumptions.
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 and 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 its
estimated useful life.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company would record impairment losses on long-lived assets
if events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets were less than
the carrying amounts of those assets.
27
30
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
All leases contain provisions for periodic escalation in base rent (base rent
escalation). In addition, tenants are subject to additional rents if gross
revenues of the properties exceed certain thresholds defined in the lease
agreements (percentage rents). Base rents are recognized on a straight-line
basis over the term of the lease, and the base rent escalation and percentage
rents are recognized when earned.
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
95% 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 to distribute substantially all of its taxable income to its
shareholders. Accordingly, no provision has been made for income taxes.
Earnings and profits, which will determine the taxability of distributions to
shareholders, will 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.
SHARE BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee Share options rather than the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
and Disclosure for Stock Based Compensation." Under APB 25, because the exercise
price of the Company's employee Share options equals the market price of the
underlying Shares at the date of grant, no compensation expense is recognized.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of a substantial portion of the
rental properties held by the Company at December 31, 1999 as a result of a
series of sale leaseback transactions pertaining to a number of AMC megaplex
theatres. A substantial portion of the Company's revenues, and its ability to
make distributions to its shareholders, will depend on rental payments by AMC
under the leases, or its parent, AMC Entertainment, Inc. (AMCE), as the
guarantor of AMC's obligations under the leases.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in 2001. Management does not anticipate that the adoption
of the new statement will have a significant effect on earnings or the financial
position of the Company.
28
31
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES
The Company enters into interest rate cap agreements to mitigate changes in
interest rates on variable rate borrowings. The notional amounts of such
agreements are used to measure the interest to be paid or received and do not
represent the amount of exposure to loss. None of these agreements are used for
speculative or trading purposes. The costs of these agreements are included in
other assets and are being amortized on a straight line basis over the life of
the agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company to estimate the
fair value of each class of financial instrument presented as of December 31,
1999 and 1998.
Cash and cash equivalents: The carrying amount of cash and cash equivalents
approximates fair value due to the short term maturities of these financial
instruments.
Long term debt: The fair value of long-term debt at December 31, 1999 and
1998, which is estimated as the present value of future cash flows,
discounted at market interest rates of debt instruments with similar terms
and remaining maturities, approximates its carrying value.
Derivatives: The estimated fair value of the interest rate cap
agreement at December 31, 1999 and 1998 approximates its carrying value.
CASH EQUIVALENTS
Cash equivalents include demand deposits and shares of a money market mutual
fund for which cost approximates market value.
3. RENTAL PROPERTIES
The following table summarizes the carrying amounts of rental properties as of
December 31, 1999 and 1998 (in thousands);
1999 1998
---- ----
Buildings and improvements $ 396,779 $ 368,429
Land 84,432 77,553
--------- ---------
481,211 445,982
Accumulated depreciation (14,805) (7,634)
--------- ---------
Total $ 466,406 $ 438,348
========= =========
Depreciation expense on rental properties was $9.4 million, $7.0 million and
$0.7 million for the years ended December 31, 1999 and December 31, 1998 and the
period ended December 31, 1997, respectively.
29
32
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
4. REAL ESTATE JOINT VENTURE
On June 30, 1999, the Company finalized a joint venture with Excel Legacy Corp.
(Amex: XLG), 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 the undeveloped land parcels and the
Westminster AMC 24 screen theatre in Westminster, Colorado. The joint venture
intends to develop the properties as an entertainment-themed retail center. The
Company accounts for its investment in the real estate joint venture under the
equity method of accounting.
5. OPERATING LEASES
The Company's rental properties are leased under operating leases with
expiration dates ranging from 13 to 20 years. Future minimum rentals on
non-cancelable tenant leases at December 31, 1999 are as follows (in thousands):
2000 $ 51,738
2001 51,738
2002 51,477
2003 51,477
2004 51,477
Thereafter 502,123
----------
$760,030
==========
6. LONG TERM DEBT
Long term debt at December 31 consists of the following (in thousands):
1999 1998
---- ----
Mortgage note payable, 6.77%, due July 11, 2028 $103,433 $104,578
Revolving line of credit, variable rates
ranging from 8.25% to 9.00%, due March 2, 2001 132,000 98,000
Mortgage note payable, 7%, due December 28, 2001 3,304 3,304
Note payable, 7.5%, due December 1, 2000 - 155
-------- --------
Total $238,737 $206,037
======== ========
The Company's mortgage note payable due July 11, 2028 is collateralized by
certain rental properties, which had a net book value of approximately $155.5
million at December 31, 1999.
30
33
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
The Company's mortgage note payable due December 28, 2001 is collateralized by
certain development property, which had a net book value of approximately $4.5
million at December 31, 1999.
6. LONG TERM DEBT (CONTINUED)
The Company's revolving line of credit is unsecured and provides for borrowing
up to $150 million. Amounts available under this line of credit at December 31,
1999 totaled $18 million. The line of credit contains a number of financial
covenants and restrictions, including restrictions on the amount of secured
indebtedness that can be obtained by the Company, a restriction on dividends to
95% of funds from operations in the first year and 90% of funds from operations
thereafter, and provisions governing the eligibility and value of properties for
borrowing base calculations.
Payments due on long term debt subsequent to December 31, 1999 are as follows
(in thousands):
2000 $ 1,184
2001 136,593
2002 1,380
2003 1,478
2004 1,563
Thereafter 96,539
--------
Total $238,737
========
7. SHARE INCENTIVE PLAN
The Company maintains a Share Incentive Plan (the Plan) under which 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. These options provide
the right to purchase Shares at a price not less than the fair market value of
the Shares at the date of grant. The options may be granted for any reasonable
term, not to exceed 10 years.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for the
periods ended December 31, 1999, 1998 and 1997, respectively: risk-free interest
rate of 5.0%, 4.7% and 5.8%, dividend yield of 8%, volatility factors of the
expected market price of the Company's common Shares of 0.18, 0.37 and 0.19 and
an expected life of the options of eight years.
31
34
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
7. SHARE INCENTIVE PLAN (CONTINUED)
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information for each of the periods ended December 31, 1999, 1998 and
1997 is as follows (in thousands except for earnings per Share information):
1999 1998 1997
---- ---- ----
Net income:
As reported $23,213 $19,238 $1,442
Pro forma 23,174 19,231 1,442
Basic earnings per Share:
As reported $1.60 $1.39 $0.10
Pro forma 1.59 1.39 0.10
A summary of the Company's stock option activity and related information is as
follows:
WEIGHTED
AVERAGE
NUMBER OF OPTIONS PRICE EXERCISE
SHARES PER SHARE PRICE EXERCISABLE
-------------- -------------- ----------- -----------
Outstanding at August 29, 1997 - $- $- -
Exercised - $- $-
Granted 90,000 $20.00 $20.00
Canceled/Expired - $- $-
-------------
Outstanding at December 31, 1997 90,000 $20.00 $20.00 -
Exercised - $- $-
Granted 135,999 $14.81-$19.50 $17.97
Canceled/Expired (25,000) $19.50 $19.50
-------------
Outstanding at December 31, 1998 200,999 $14.81-$20.00 $18.69 42,000
Exercised - $- $-
Granted 9,999 $19.12 $19.12
Canceled/Expired - $- $-
-------------
Outstanding at December 31, 1999 210,998 $14.81-$20.00 $18.71 84,199
=============
32
35
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
The following table summarizes outstanding and exercisable options at December
31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE OUTSTANDING PRICE
- ------------------------------------------------------------------ -----------------------------------------
$14.81 30,000 $14.81 6,000 $14.81
$18.19 50,000 $18.19 10,000 $18.19
$19.12 9,999 $19.12 - -
$19.31 9,999 $19.31 9,999 $19.31
$19.50 21,000 $19.50 4,200 $19.50
$20.00 90,000 $20.00 54,000 $20.00
During 1997, the Company also granted 60,000 restricted Shares at the initial
public offering price of $20 per Share to certain executives of the Company. The
holders of these restricted Shares have voting rights and are eligible to
receive dividends from the date of grant. These shares vest in equal increments
over a period of five years from the date of grant. The Company records
compensation expense pertaining to these restricted Shares ratably over the
period of vesting.
During 1999, the Company also issued 18,044 restricted Shares for bonus
compensation to executives and other employees of the Company. The holders of
these restricted Shares have voting rights and are eligible to receive dividends
from the date of grant. These shares vest in various increments over a period of
three years from the date of grant. The Company records compensation expense
pertaining to these restricted Shares ratably over the period of vesting.
8. RELATED PARTIES
In 1997, the Company loaned an aggregate of $2,400,000 to its President, and its
Chief Financial Officer to purchase an aggregate of 120,000 Shares at the
initial public offering price of $20 per Share. These notes bear interest at
6.1% and are due in approximately equal annual installments on November 30,
2000, 2001 and 2002. The Company has adopted a Loan Forgiveness Program, under
which the Compensation Committee 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.
9. EARNINGS PER SHARE
33
36
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
The following table sets forth the computation of the basic and diluted earnings
per Share for the years ended December 31, 1999 and 1998, and the period ended
December 31, 1997 (dollars in thousands except Share information):
1999 1998 1997
---- ---- ----
Numerator for basic and diluted earnings per Share -
net income available to common shareholders $ 23,213 $ 19,238 $ 1,442
============ ============ ============
Denominator:
Denominator for basic earnings per Share -
weighted-average Shares 14,515,619 13,802,467 13,800,100
Effect of dilutive securities:
Employee Share options - 30,000 -
Non-vested Share grants 36,000 48,000 60,000
------------ ------------ ------------
Dilutive potential common Shares 36,000 78,000 60,000
------------ ------------ ------------
Denominator for diluted earnings per Share -
adjusted weighted-average Shares 14,551,619 13,880,467 13,860,100
============ ============ ============
Basic and diluted net income per Share $1.60 $1.39 $0.10
===== ===== =====
10. DERIVATIVES
In connection with a long-term debt agreement due July 2028, the Company entered
into a forward contract to essentially fix the base rate of interest on a
notional amount of $105,000,000. The forward contract settled on June 29, 1998,
the closing date of the long-term debt issuance, and as a result of a decrease
in market interest rates, the Company recorded a loss of $1,442,000. This loss
is being amortized as an increase to interest expense over the term of the
long-term debt and will result in an effective interest rate of 6.84%.
As required by its Bank Credit Facility agreement, the Company is party to an
interest rate cap agreement with a notional amount of $20,000,000 at an interest
rate of 9.75% and maturity date of May 7, 2001. The fair value of the interest
rate cap agreement is not material to the consolidated financial statements at
December 31, 1999.
11. COMMITMENTS
At December 31, 1999, the Company is obligated under a purchase agreement to
acquire a theatre property in the amount of $13.5 million, subject to certain
conditions, including completion of construction of the property. The theatre
opened in 1999 and the Company is currently performing a due diligence review of
the property.
12. SUBSEQUENT EVENTS
34
37
Entertainment Properties Trust
Notes to Consolidated Financial Statements (continued)
In January 2000, the Company completed a $20.2 million five year, fixed rate
secured financing which is collateralized by three properties. Proceeds from the
financing, together with borrowings under the Bank Credit Facility, were used to
acquire two properties in the first quarter of 2000 for an aggregate price of
$32.4 million.
13. QUARTERLY RESULTS (unaudited)
1999 Quarterly Consolidated Statements of Income
(Dollars in thousands except per Share data)
3/31/99 6/30/99 9/30/99 12/31/99
------- -------- ------- --------
Rental revenue $11,497 $12,006 $12,325 $12,491
Income from joint venture - - 177 156
------- ------- ------- -------
Total revenue 11,497 12,006 12,502 12,647
General and administrative expense 582 611 520 466
Depreciation and amortization 2,325 2,447 2,524 2,686
------- ------- ------- -------
Income from operations 8,590 8,948 9,458 9,495
Interest expense 3,152 3,431 3,270 3,425
------- ------- ------- -------
Net income $ 5,438 $ 5,517 $ 6,188 $ 6,070
======= ======= ======= =======
Basic net income per common Share $0.39 $0.39 $0.41 $0.41
======= ======= ======= =======
Diluted net income per common Share $0.39 $0.39 $0.41 $0.40
======= ======= ======= =======
1998 Quarterly Consolidated Statements of Income
(Dollars in thousands except per Share data)
3/31/98 6/30/98 9/30/98 12/31/98
------- ------- ------- --------
Rental revenue $ 6,293 $ 8,616 $ 9,817 $10,305
General and administrative expense 497 572 490 493
Depreciation and amortization 1,356 1,821 2,030 2,073
------- ------- ------- -------
Income from operations 4,440 6,223 7,297 7,739
Interest expense (income) (140) 1,547 2,381 2,673
------- ------- ------- -------
Net income $ 4,580 $ 4,676 $ 4,916 $ 5,066
======= ======= ======= =======
Basic and diluted net income per common Share $0.33 $0.34 $0.35 $0.37
======= ======= ======= =======
35
38
Entertainment Properties Trust
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1999
Initial Cost to Gross Amount at which
Company Carried as Close of Period
---------------------- Costs Capitalized -----------------------------
Subsequent to
Buildings Acquisition Buildings
and -------------------------- and
Description Market Encumbrance Land Improvements Improvements Carrying costs Land Improvements Total
- ----------- ------ ----------- ---- ------------ ------------ -------------- ---- ------------ -----
Grand 24 Dallas, TX $ 11,822 $ 3,060 $ 15,540 $ 3,060 $ 15,540 $ 18,600
Mission Valley 20 San Diego, CA 10,332 16,300 16,300 16,300
Promenade 16 Los Angeles, CA 18,129 6,021 22,479 6,021 22,479 28,500
Ontario Mills 30 Los Angeles, CA 16,096 5,521 19,779 5,521 19,779 25,300
Lennox 24 Columbus, OH 8,176 12,900 12,900 12,900
West Olive 16 St. Louis, MO 11,336 4,985 12,815 4,985 12,815 17,800
Studio 30 Houston, TX 16,798 6,023 20,377 6,023 20,377 26,400
Huebner Oaks 24 San Antonio, TX 10,744 3,006 13,894 3,006 13,894 16,900
First Colony 24 Houston, TX 19,100 19,100 19,100
Oakview 24 Omaha, NE 16,700 16,700 16,700
Leawood 20 Kansas City, MO 3,714 12,086 3,714 12,086 15,800
Gulf Pointe 30 Houston, TX 4,304 21,496 4,304 21,496 25,800
South Barrington 30 Chicago, IL 6,577 27,723 6,577 27,723 34,300
Cantera 30 Chicago, IL 7,513 27,487 7,513 27,487 35,000
Mesquite 30 Dallas, TX 2,912 20,288 2,912 20,288 23,200
Hampton Town Center Norfolk, VA 3,822 24,678 3,822 24,678 28,500
24
Pompano 18 Pompano Beach, 6,376 9,898 2,426 6,376 12,324 18,700
FL
Raleigh Grand 16 Raleigh, NC 2,919 5,839 2,919 5,839 8,758
Paradise 24 Miami, FL 2,000 13,000 8,519 2,000 13,000 15,000
Pompano Kmart Pompano Beach, 600 2,423 600 2,423 3,023
FL
Nickels Restaurant Pompano Beach, 200 800 200 800 1,000
FL
Aliso Viejo 20 Los Angeles, CA 8,000 14,000 8,000 14,000 22,000
Bosie Stadium 20 Boise, ID 16,000 16,000 16,000
Woodridge 18 Chicago, IL 8,922 8,922 8,922
Tampa Palms 20 Tampa, FL 9,000 12,809 6,000 12,809 18,809
On The Border Dallas, TX 879 879 879
In Development Various 3,304 11,278 1,022 12,300 12,300
Acquisition Costs - - 733 - - - 733 733
-------- ------- -------- ------- ------ ------- -------- --------
TOTAL $106,737 $95,710 $388,066 $10,947 $1,022 $96,732 $399,013 $495,745
======== ======= ======== ======= ====== ======= ======== ========
Life on
Which
Depreciation
in Latest
Income
Accumulated Date of Date Statement
Description Market Depreciation Construction Acquired is Computed
- ----------- ------ ------------- ------------ -------- ------------
Grand 24 Dallas, TX $ 451 5/95 11/97(1) 40 years
Mission Valley 20 San Diego, CA 473 12/95 11/97(1) 40 years
Promenade 16 Los Angeles, CA 654 3/96 11/97(1) 40 years
Ontario Mills 30 Los Angeles, CA 574 12/96 11/97(1) 40 years
Lennox 24 Columbus, OH 375 12/96 11/97(1) 40 years
West Olive 16 St. Louis, MO 372 4/97 11/97(1) 40 years
Studio 30 Houston, TX 592 5/97 11/97(1) 40 years
Huebner Oaks 24 San Antonio, TX 403 6/97 11/97(1) 40 years
First Colony 24 Houston, TX 517 12/97 11/97 40 years
Oakview 24 Omaha, NE 452 2/98 11/97 40 years
Leawood 20 Kansas City, MO 330 12/97 11/97 40 years
Gulf Pointe 30 Houston, TX 495 1/98 2/98 40 years
South Barrington 30 Chicago, IL 580 3/98 3/98 40 years
Cantera 30 Chicago, IL 517 3/98 3/98 40 years
Mesquite 30 Dallas, TX 339 4/98 4/98 40 years
Hampton Town Center Norfolk, VA 311 6/98 6/98 40 years
24
Pompano 18 Pompano Beach, 116 8/98 8/98 40 years
FL
Raleigh Grand 16 Raleigh, NC 63 5/98 8/98 40 years
Paradise 24 Miami, FL 11/98 11/98 40 years
Pompano Kmart Pompano Beach, 6 6/77 11/98 40 years
FL
Nickels Restaurant Pompano Beach, 4 9/98 11/98 40 years
FL
Aliso Viejo 20 Los Angeles, CA 4/98 12/98 40 years
Bosie Stadium 20 Boise, ID 12/97 12/98 40 years
Woodridge 18 Chicago, IL 111 3/99 6/99 40 years
Tampa Palms 20 Tampa, FL 27 11/99 6/99 40 years
On The Border Dallas, TX 1/99 11/97
In Development Various
Acquisition Costs 10 Various Various 40 years
-------
$17,039
=======
(1) Properties initially acquired in November 1997 were transferred to wholly
owned subsidiary in June 1998 at net book value.
RECONCILIATION:
Real Estate
-----------
Balance at beginning $ 463,631
of the period
Additions during the $31,753
period
Improvements 8,519
Other 959 41,231
-------
Deductions during
period - transfer of 9,117
property to joint
venture
Balance at Close of $ 495,745
period ==========
36
39
Entertainment Properties Trust
Schedule III Real Estate and Accumulated Depreciation
December 31, 1998
Initial Cost to Company Costs Capitalized
----------------------------
Buildings and Subsequent to Acquisition
----------------------------
Description Location Encumbrance Land Improvements Improvements Carrying Costs
- ----------- -------- ----------- ---- ------------ ------------ --------------
Grand 24 Dallas, TX $ 11,953 $ 3,060 $ 15,540
Mission Valley 20 San Diego, CA 10,446 16,300
Promenade 16 Los Angeles, CA 18,330 6,021 22,479
Ontario Mills 30 Los Angeles, CA 16,274 5,521 19,779
Lennox 24 Columbus, OH 8,267 12,900
West Olive 16 St. Louis, MO 11,461 4,985 12,815
Studio 30 Houston, TX 16,984 6,023 20,377
Huebner Oaks 24 San Antonio, TX 10,863 3,006 13,894
First Colony 24 Houston, TX 19,100
Oakview 24 Omaha, NE 16,700
Leawood 20 Kansas City, MO 3,714 12,086
Gulf Pointe 30 Houston, TX 4,304 21,496
South Barrington 30 Chicago, IL 6,577 27,723
Cantera 30 Chicago, IL 7,513 27,487
Mesquite 30 Dallas, TX 2,912 20,288
Hampton Town Center 24 Norfolk, VA 3,822 24,678
Pompano 18 Pompano Beach, FL 6,376 9,898 2,426
Raleigh Grand 16 Raleigh, NC 2,919 5,839
Paradise 24 Davie, FL 2,000 13,000
Pompano Kmart Pompano Beach, FL 600 2,423
Nickels Restaurant Pompano Beach, 200 800
Aliso Viejo 20 Los Angeles, CA 8,000 14,000
Bosie Stadium Boise, ID 16,000
Property under Development Various 3,304 17,254 395
Acquisition Costs - - 401 - -
-------- ------- -------- ------ ----
TOTAL $107,882 $94,807 $366,003 $2,426 $395
======== ======= ======== ====== ====
Gross Amount at Which Life on Which
Carried at Close of Period Depreciation
--------------------------- in Latest
Buildings and Accumulated Date of Date Income
Statement
Description Land Improvements Total Depreciation Construction Acquired is Computed
- ----------- ---- ------------ ----- ------------ ------------ -------- -------------
Grand 24 $3,060 $15,540 $ 18,600 $ 451 5/95 11/97(1) 40 years
Mission Valley 20 16,300 16,300 473 12/95 11/97(1) 40 years
Promenade 16 6,021 22,479 28,500 654 3/96 11/97(1) 40 years
Ontario Mills 30 5,521 19,779 25,300 574 12/96 11/97(1) 40 years
Lennox 24 12,900 12,900 375 12/96 11/97(1) 40 years
West Olive 16 4,985 12,815 17,800 372 4/97 11/97(1) 40 years
Studio 30 6,023 20,377 26,400 592 5/97 11/97(1) 40 years
Huebner Oaks 24 3,006 13,894 16,900 403 6/97 11/97(1) 40 years
First Colony 24 19,100 19,100 517 12/97 11/97 40 years
Oakview 24 16,700 16,700 452 2/98 11/97 40 years
Leawood 20 3,714 12,086 15,800 330 12/97 11/97 40 years
Gulf Pointe 30 4,304 21,496 25,800 495 1/98 2/98 40 years
South Barrington 30 6,577 27,723 34,300 580 3/98 3/98 40 years
Cantera 30 7,513 27,487 35,000 517 3/98 3/98 40 years
Mesquite 30 2,912 20,288 23,200 339 4/98 4/98 40 years
Hampton Town Center 24 3,822 24,678 28,500 311 6/98 6/98 40 years
Pompano 18 6,376 12,324 18,700 116 8/98 8/98 40 years
Raleigh Grand 16 2,919 5,839 8,758 63 5/98 8/98 40 years
Paradise 24 2,000 13,000 15,000 11/98 11/98 40 years
Pompano Kmart 600 2,423 3,023 6 6/77 11/98 40 years
Nickels Restaurant 200 800 1,000 4 9/98 11/98 40 years
Aliso Viejo 20 8,000 14,000 22,000 4/98 12/98 40 years
Bosie Stadium 16,000 16,000 12/97 12/98 40 years
Property under Development 17,649 17,649
Acquisition Costs - 401 401 10 Various Various 40 years
------- -------- -------- ------
TOTAL $95,202 $368,429 $463,631 $7,634
======= ======== ======== ======
(1) Properties initially acquired in November 1997 were transferred to wholly
owned subsidiary in June 1998 at net book value.
RECONCILIATION:
Real Estate
-----------
Balance at beginning $ 214,471
of the period
Additions during the $246,339
period
Improvements 2,426
Other 395 249,160
--------
Deductions during period -
Balance at Close of period $ 463,631
=========
37
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 17, 2000 (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 Form 10-K, which
information is incorporated herein by this reference.
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 Form 10-K,
which information is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement contains under the caption "Share Ownership" the information
required by Item 12 of 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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits, Financial Statements and Financial Statement Schedules:
Financial Statements:
Report of Independent Auditors
38
41
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999 and December 31, 1998 and the period from August 29, 1997
(dated of inception) to December 31, 1997.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999 and December 31, 1998 and the period
from August 29, 1997 (dated of inception) to December 31, 1997.
Consolidated Statements of Cash Flows for the years ended December
31, 1999 and December 31, 1998 and the period from August 29, 1997
(dated of inception) to December 31, 1997.
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K: Report on Form 8-K filed with the Securities and
Exchange Commission on June 7, 1999, solely for the purpose of filing
as Exhibits, an Underwriting Agreement between the Company and CIBC
World Markets Corp., the Company's Amended and Restated Declaration of
Trust and Bylaws, and the tax opinion of EPR's counsel in connection
with the direct placement of 1,200,000 Shares of the Company.
(c) Exhibits
21 Subsidiaries of the Company
23 Consent of Independent Auditors
27 Financial Data Schedule
(d) Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
No other schedules meet the requirement for disclosure.
39
42
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 29, 2000 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:
SIGNATURE AND TITLE DATE
------------------- ----
/s/ Peter C. Brown March 29, 2000
- --------------------------------------------------------
Peter C. Brown, Chairman of the Board
/s/ David M. Brain March 29, 2000
- --------------------------------------------------------
David M. Brain, Chief Executive Officer and Trustee
/s/ Robert J. Druten March 29, 2000
- --------------------------------------------------------
Robert J. Druten, Trustee
/s/ Scott H. Ward March 29, 2000
- --------------------------------------------------------
Scott H. Ward, Trustee
/s/ Charles S. Paul March 29, 2000
- --------------------------------------------------------
Charles S. Paul, Trustee
43
INDEX OF EXHIBITS
Exhibit No. Description
- ----------- ------------
21 Subsidiaries of the Company
27 Financial Data Schedule