UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
COMMISSION FILE NUMBER 1-13561
ENTERTAINMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 43-1790877
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
30 PERSHING ROAD, UNION STATION SUITE 201
KANSAS CITY, MISSOURI 64108
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 472-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Class Name of each exchange on which registered
-------------- -----------------------------------------
Common Shares of Beneficial Interest, New York Stock Exchange
par value $.01 per share
9.5% Series A Cumulative Preferred Shares, New York Stock Exchange
par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12b-2). YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF THE COMMON SHARES OF BENEFICIAL INTEREST ("COMMON
SHARES") OF THE REGISTRANT HELD BY NON-AFFILIATES ON FEBRUARY 13, 2004, WAS
$718,627,679 (BASED ON THE CLOSING SALES PRICE PER COMMON SHARE ON THE NEW YORK
STOCK EXCHANGE ON FEBRUARY 13, 2004 OF $36.55). AT FEBRUARY 13, 2004, THERE WERE
19,661,496 COMMON SHARES OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Shareholders to be filed with the Commission pursuant to Regulation
14A are incorporated by reference in Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
Investors should review the Risk Factors commencing on page 4 of this Report for
a discussion of risks that may impact our financial condition, business or share
price.
GENERAL
Entertainment Properties Trust ("we," "us," "EPR" or the "Company") was formed
on August 22, 1997 as a Maryland real estate investment trust ("REIT") to
capitalize on the opportunities created by the development of destination
entertainment and entertainment-related properties, including megaplex movie
theatre complexes. We completed an initial public offering of our common shares
of beneficial interest ("Common Shares") on November 18, 1997. We are the first
publicly-traded REIT formed exclusively to invest in entertainment-related
properties.
We are a self-administered REIT. As of December 31, 2003, our real estate
portfolio was comprised primarily of 45 megaplex theatre properties located in
eighteen states, two entertainment retail centers ("ERCs") located in
Westminster, Colorado, and New Rochelle, New York, and land parcels leased to
restaurant and retail operators adjacent to several of our theatre properties.
Our theatre properties are leased to leading theatre operators, including
American Multi-Cinema, Inc. ("AMC"), a subsidiary of AMC Entertainment, Inc.
("AMCE"), Muvico Entertainment, LLC ("Muvico"), Regal Cinemas, Inc. ("Regal"),
Consolidated Theatres ("Consolidated"), Loews Cineplex Entertainment ("Loews"),
Rave Motion Pictures ("Rave"), AmStar Cinemas, LLC ("AmStar") , Wallace Theatres
("Wallace") and Crown Theatres ("Crown"). Approximately 62% of the Company's
megaplex theatre properties are leased to AMC.
For a discussion of material property acquisitions during the three months ended
December 31, 2003, see Item 7 - "Management's Discussion and Analysis - Recent
Developments" and our current report on Form 8-K filed with the Securities and
Exchange Commission on November 12, 2003, as amended by Form 8-K/A filed January
12, 2004 incorporated by reference herein.
We aggregate the financial information of all our properties into one reportable
segment because the properties all have similar economic characteristics and
provide similar services to similar types and classes of customers.
We believe entertainment is an important sector of the retail real estate
industry and that, as a result of our focus on properties in this sector and the
industry relationships of our management, we have a competitive advantage in
providing capital to operators of these types of properties. Our principal
business strategy is to be the nation's leading entertainment real estate
company by continuing to acquire high-quality properties leased to entertainment
and entertainment-related business operators, generally under long-term
triple-net leases that require the tenant to pay substantially all expenses
associated with the operation and maintenance of the property.
Megaplex theatres typically have at least 14 screens with stadium-style seating
(seating with elevation between rows to provide unobstructed viewing) and are
equipped with amenities that significantly enhance the audio and visual
experience of the patron. We believe the development of megaplex theatres has
accelerated the obsolescence of many of the previous generation of existing
multiplex movie theatres by setting new standards for moviegoers, who, in our
experience, have demonstrated their preference for the more attractive
surroundings, wider variety of films and superior customer service typical of
megaplex theatres (see "Operating risks in the entertainment industry may affect
the ability of our tenants to perform
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under their leases" and "Market prices for our shares may be affected by
perceptions about the financial health or share value of our tenants or the
performance of REIT stocks generally" under "Risk Factors").
We expect the development of megaplex theatres to continue in the United States
and abroad for the foreseeable future. With the development of the stadium style
megaplex theatre as the preeminent store format for cinema exhibition, the older
generation of smaller flat-floor theatres has generally experienced a
significant downturn in attendance and performance. As a result of the
significant capital commitment involved in building these new properties and the
experience and industry relationships of our management, we believe we will
continue to have opportunities to provide capital to businesses that seek to
develop and operate these properties but would prefer to lease rather than own
the properties. We believe our ability to finance these properties will enable
us to continue to grow and diversify our asset base. See Item 7 - "Management's
Discussion and Analysis" for a discussion of capital requirements necessary for
the Company's continued growth.
BUSINESS OBJECTIVES AND STRATEGIES
Our primary business objective is to continue to enhance shareholder value by
achieving predictable and increasing Funds From Operations ("FFO") per Share
(See Item 7 - "Management's Discussion and Analysis - Funds From Operations" for
a discussion of FFO), through the acquisition of high-quality properties leased
to entertainment and entertainment-related business operators. We intend to
achieve this objective by continuing to execute the Growth Strategies, Operating
Strategies and Capitalization Strategies described below:
GROWTH STRATEGIES
FUTURE PROPERTIES
We intend to pursue acquisitions of high-quality entertainment related
properties from operators with a strong market presence. As a part of our growth
strategy, we will consider entering into additional joint ventures with other
developers or investors in real estate, developing additional megaplex theatre
properties and developing or acquiring entertainment retail centers ("ERCs") and
single-tenant, out-of-home, location-based entertainment and
entertainment-related properties.
OPERATING STRATEGIES
LEASE RISK MINIMIZATION
To avoid initial lease-up risks and produce a predictable income stream, we
typically acquire single-tenant properties that are leased under long-term
leases. We believe our willingness to make long-term investments in properties
offers our tenants financial flexibility and allows tenants to allocate capital
to their core businesses. Although we will continue to emphasize single-tenant
properties, we have acquired and may continue to acquire multi-tenant properties
we believe add value to our shareholders.
LEASE STRUCTURE
We typically structure leases on a triple-net basis under which the tenants bear
the principal portion of the financial and operational responsibility for the
properties. During each lease term and any renewal periods, the leases typically
provide for periodic increases in rent and/or percentage rent based upon a
percentage of the tenant's gross sales over a pre-determined level. In our
multi-tenant property leases and some of our theatre leases, we require the
tenant to pay a common area maintenance (CAM) charge to defray its pro rata
share of insurance, taxes and maintenance costs.
TENANT RELATIONSHIPS
We intend to continue developing and maintaining long-term working relationships
with theatre, restaurant, retail and other entertainment-related business
operators and developers by providing capital for
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multiple properties on a national or regional basis, thereby enhancing
efficiency and value to those operators and to the Company.
PORTFOLIO DIVERSIFICATION
We will endeavor to further diversify our asset base by property type,
geographic location and tenant. In pursuing this diversification strategy, the
Company will target theatre, restaurant, retail and other entertainment-related
business operators which management views as leaders in their market segments
and which have the financial strength to compete effectively and perform under
their leases with the Company.
CAPITALIZATION STRATEGIES
USE OF LEVERAGE; DEBT TO TOTAL CAPITALIZATION
We seek to enhance shareholder return through the use of leverage (see "Risk
Factors - "There is risk in using debt to fund property acquisitions" and "We
must obtain new financing in order to grow"). In addition, we have issued and
may in the future seek to issue additional equity as circumstances warrant and
opportunities to do so become available. We expect to maintain a debt to total
capitalization ratio (i.e., total debt of the Company as a percentage of
shareholder equity plus total debt) of approximately 50% to 55%.
JOINT VENTURES
We will examine and pursue potential additional joint venture opportunities with
institutional investors or developers if they are considered to add value to our
shareholders. We may employ higher leverage in joint ventures (See "Risk Factors
- - Joint ventures may limit flexibility with jointly owned investments").
PAYMENT OF REGULAR DISTRIBUTIONS
We have paid and expect to continue paying quarterly dividend distributions to
our Common and Preferred shareholders. Our Preferred Shares have a dividend rate
of 9.5%. Among the factors the Board of Trustees considers in setting the Common
Share distribution rate are the applicable REIT rules and regulations that apply
to distributions, the Company's results of operations, including FFO per Share,
and the Company's Cash Available for Distribution (defined as net cash flow
available for distribution after payment of operating expenses, debt service,
and other obligations). We expect to periodically increase distributions as FFO
and Cash Available for Distribution increase and as other considerations and
factors warrant. See "Risk Factors - We cannot assure you we will continue
paying dividends at historical rates".
COMPETITION
We compete for real estate financing opportunities with other companies that
invest in real estate, as well as traditional financial sources such as banks
and insurance companies. While we were the first publicly traded REIT formed to
specialize in entertainment-themed properties, other REITs have sought and may
continue to seek to finance entertainment properties as new megaplex theatres,
ERCs and related restaurant and retail properties are developed or become
available for acquisition.
EMPLOYEES
As of December 31, 2003, the Company had nine full time employees.
WEBSITE ACCESS TO EXCHANGE ACT REPORTS AND OTHER DOCUMENTS
Our internet website address is www.eprkc.com. We make available free of charge
through our website our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to the SEC. You may also view our Code of Business Conduct and
Ethics, Corporate Governance Guidelines and the charters of our audit,
nominating and compensation committees on our website.
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RISK FACTORS
There are many risks and uncertainties that can affect our future business,
financial performance or share price. Some of these are beyond our control. Here
is a brief description of some of the important factors which could cause our
future business, operating results, financial condition or share price to be
materially different than our expectations. This discussion includes a number of
forward-looking statements. You should refer to the description of the
qualifications and limitations on forward-looking statements on page 22 of this
report.
RISKS THAT MAY IMPACT OUR FINANCIAL CONDITION OR PERFORMANCE
WE COULD BE ADVERSELY AFFECTED BY A TENANT'S BANKRUPTCY
If a tenant becomes bankrupt or insolvent, that could diminish the income we
expect from that tenant's leases. We may not be able to evict a tenant solely
because of its bankruptcy. On the other hand, a bankruptcy court might authorize
the tenant to terminate its leases with us. If that happens, our claim against
the bankrupt tenant for unpaid future rent would be subject to statutory
limitations that might be substantially less than the remaining rent owed under
the leases. In addition, any claim we have for unpaid past rent would likely not
be paid in full.
The development of megaplex movie theatres has rendered many older multiplex
theatres obsolete. To the extent our tenants own a substantial number of
multiplexes, they have been, or may in the future be, required to take
significant charges against earnings resulting from the impairment of these
assets. Megaplex theatre operators have also been and could in the future be
adversely affected by any overbuilding of megaplex theatres in their markets and
the cost of financing, building and leasing megaplex theatres. Two of our
tenants, Edwards Theatre Circuit, Inc., (now part of the Regal Entertainment
Group), which operates two of our theatre properties, and Loews Cineplex
Entertainment, which operates two of our theatres, have filed for, and emerged
from, bankruptcy reorganization. The Company did not incur any significant
expenses or loss of revenue as a result of those bankruptcy reorganizations.
OPERATING RISKS IN THE ENTERTAINMENT INDUSTRY MAY AFFECT THE ABILITY OF OUR
TENANTS TO PERFORM UNDER THEIR LEASES
The ability of our tenants to operate successfully in the entertainment industry
and remain current on their lease obligations depends on a number of factors,
including the availability and popularity of motion pictures, the performance of
those pictures in tenants' markets, the allocation of popular pictures to
tenants and the terms on which the pictures are licensed. Neither we nor our
tenants control the operations of motion picture distributors. Megaplex theatres
represent a greater capital investment, and generate higher rents, than the
previous generation of multiplex theatres. For this reason, the ability of our
tenants to operate profitably and perform under their leases could be dependent
on their ability to generate higher revenues per screen than multiplex theatres
typically produce.
The success of "out-of-home" entertainment venues such as megaplex theatres and
entertainment retail centers also depends on general economic conditions and the
willingness of consumers to spend time and money on out-of-home entertainment.
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A SINGLE TENANT REPRESENTS A SUBSTANTIAL PORTION OF OUR LEASE REVENUES
Approximately 62% of our megaplex theatre properties are leased to AMC, one of
the nation's largest movie exhibition companies. AMCE has guaranteed AMC's
performance under the leases. We have diversified and expect to continue to
diversify our real estate portfolio by entering into lease transactions with a
number of other leading theatre operators. Nevertheless, our revenues and our
continuing ability to pay shareholder dividends are currently substantially
dependent on AMC's performance under its leases and AMCE's performance under its
guaranty.
We believe AMC occupies a strong position in the industry and we intend to
continue acquiring and leasing back AMC theatres. However, if for any reason AMC
failed to perform under its lease obligations and AMCE did not perform under its
guaranty, we could be required to reduce or suspend our shareholder dividends
and may not have sufficient funds to support operations until substitute tenants
are obtained. If that happened, we cannot predict when or whether we could
obtain substitute quality tenants on acceptable terms.
THERE IS RISK IN USING DEBT TO FUND PROPERTY ACQUISITIONS
We have used leverage to acquire properties and expect to continue to do so in
the future. Although the use of leverage is common in the real estate industry,
our use of debt to acquire properties does expose us to some risks. If a
significant number of our tenants fail to make their lease payments and we don't
have sufficient cash to pay principal and interest on the debt, we could default
on our debt obligations. Our debt financing is secured by mortgages on our
properties. If we fail to meet our mortgage payments, the lenders could declare
a default and foreclose on those properties.
A PORTION OF OUR SECURED DEBT HAS "HYPER-AMORTIZATION" PROVISIONS WHICH MAY
REQUIRE US TO REFINANCE THE DEBT OR SELL THE PROPERTIES SECURING THE DEBT PRIOR
TO MATURITY
As of December 31, 2003, we had approximately $98.1 million outstanding under a
single secured mortgage loan agreement that contains a "hyper-amortization"
feature, in which the principal payment schedule is rapidly accelerated, and our
principal payments are substantially increased, if we fail to pay the balance on
the anticipated prepayment date of July 11, 2008. We undertook this debt on the
assumption that we can refinance the debt prior to these hyper-amortization
payments becoming due. If we cannot obtain acceptable refinancing at the
appropriate time, the hyper-amortization payments will require substantially all
of the revenues from those properties securing the debt to be applied to the
debt repayment, which would substantially reduce our Common Share dividend rate
and could adversely affect our financial condition and liquidity.
WE MUST OBTAIN NEW FINANCING IN ORDER TO GROW
As a REIT, we are required to distribute at least 90% of our taxable net income
to shareholders in the form of dividends. This means we are limited in our
ability to use internal capital to acquire properties and must continually raise
new capital in order to continue to grow and diversify our real estate
portfolio. Our ability to raise new capital depends in part on factors beyond
our control, including conditions in equity and credit markets, conditions in
the cinema exhibition industry and the performance of real estate investment
trusts generally. We continually consider and evaluate a variety of potential
transactions to raise additional capital, but we cannot assure that attractive
alternatives will always be available to us, nor that our share price will
increase or remain at a level that will permit us to continue to raise equity
capital privately or publicly.
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IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE TAXED AS A CORPORATION, WHICH WOULD
SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR PAYMENT OF DIVIDENDS TO OUR
SHAREHOLDERS
If we fail to qualify as a REIT for federal income tax purposes, we will be
taxed as a corporation. We are organized and believe we qualify as a REIT, and
intend to operate in a manner that will allow us to continue to qualify as a
REIT. However, we cannot assure you that we will remain qualified in the future.
This is because qualification as a REIT involves the application of highly
technical and complex provisions of the Internal Revenue Code on which there are
only limited judicial and administrative interpretations, and depends on facts
and circumstances not entirely within our control. In addition, future
legislation, new regulations, administrative interpretations or court decisions
may significantly change the tax laws, the application of the tax laws to our
qualification as a REIT or the federal income tax consequences of that
qualification.
If we fail to qualify as a REIT we will face tax consequences that will
substantially reduce the funds available for payment of dividends:
- We would not be allowed a deduction for dividends paid to shareholders
in computing our taxable income and would be subject to federal income
tax at regular corporate rates
- We could be subject to the federal alternative minimum tax and possibly
increased state and local taxes
- Unless we are entitled to relief under statutory provisions, we could
not elect to be treated as a REIT for four taxable years following the
year in which we were disqualified
In addition, if we fail to qualify as a REIT, we will no longer be required to
pay dividends. As a result of these factors, our failure to qualify as a REIT
could adversely affect the market price for our shares.
OUR DEVELOPMENT FINANCING ARRANGEMENTS EXPOSE US TO FUNDING AND PURCHASE RISKS
Our ability to meet our construction financing obligations which we may enter
into from time to time depends on our ability to obtain equity or debt financing
in the required amounts. There is no assurance we can obtain this financing at
rates which will lock-in a spread between our cost of capital and the rent
payable under the leases to be entered into upon completion of construction. We
will be obligated to purchase and lease-back the theatres that are subject to
certain arrangements at predetermined rates. (See Item 7 - "Management's
Discussion and Analysis - Liquidity and Capital Resources - Liquidity
Requirements.")
RISKS THAT APPLY TO OUR REAL ESTATE BUSINESS
THERE ARE RISKS ASSOCIATED WITH OWNING AND LEASING REAL ESTATE
Although our lease terms obligate the tenants to bear substantially all of the
costs of operating the properties, investing in real estate involves a number of
risks, including:
- The risk that tenants will not perform under their leases, reducing our
income from the leases or requiring us to assume the cost of performing
obligations (such as taxes, insurance and maintenance) that are the
tenant's responsibility under the lease
- The risk that changes in economic conditions or real estate markets may
adversely affect the value of our properties
- The risk that local conditions (such as oversupply of megaplex theatres
or other entertainment-related properties) could adversely affect the
value of our properties
- We may not always be able to lease properties at favorable rates
- We may not always be able to sell a property when we desire to do so at
a favorable price
- Changes in tax, zoning or other laws could make properties less
attractive or less profitable
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If a tenant fails to perform on its lease covenants, that would not excuse us
from meeting any debt obligation secured by the property and could require us to
fund reserves in favor of our lenders, thereby reducing funds available for
payment of dividends. We cannot be assured that tenants will elect to renew
their leases when the terms expire. If a tenant does not renew its lease or if a
tenant defaults on its lease obligations, there is no assurance we could obtain
a substitute tenant on acceptable terms. If we cannot obtain another quality
movie exhibitor to lease a megaplex theatre property, we may be required to
modify the property for a different use, which may involve a significant capital
expenditure and a delay in re-leasing the property.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
Our leases require the tenants to carry comprehensive liability, casualty,
workers' compensation, extended coverage and rental loss insurance on our
properties. We believe the required coverage is of the type, and amount,
customarily obtained by an owner of similar properties. We believe all of our
properties are adequately insured. However, there are some types of losses, such
as catastrophic acts of nature, for which we or our tenants cannot obtain
insurance at an acceptable cost. If there is an uninsured loss or a loss in
excess of insurance limits, we could lose both the revenues generated by the
affected property and the capital we have invested in the property. We would,
however, remain obligated to repay any mortgage indebtedness or other
obligations related to the property. Since September 11, 2001, the cost of
insurance protection against terrorist acts has risen dramatically. There can be
no assurance our tenants will be able to obtain terrorism insurance coverage, or
that any coverage they do obtain will adequately protect our properties against
loss from terrorist attack.
JOINT VENTURES MAY LIMIT FLEXIBILITY WITH JOINTLY OWNED INVESTMENTS
We may continue to acquire or develop properties in joint ventures with third
parties when those transactions appear desirable. We would not own the entire
interest in any property acquired by a joint venture. If we have a dispute with
a joint venture partner, we may feel it necessary or become obligated to acquire
the partner's interest in the venture. However, we cannot assure you that the
price we would have to pay or the timing of the acquisition would be favorable
to us. If we own less than a 50% interest in any joint venture, or if the
venture is jointly controlled, the assets and financial results of the joint
venture may not be reportable by us on a consolidated basis. To the extent we
owe commitments to, or are dependant on, any such "off-balance sheet"
arrangements, or if those arrangements or their properties or leases are subject
to material contingencies, our liquidity, financial condition and operating
results could be adversely affected by those commitments or off-balance sheet
arrangements.
OUR MULTI-TENANT PROPERTIES EXPOSE US TO ADDITIONAL RISKS
Our entertainment retail centers in Westminster, Colorado and New Rochelle, New
York and similar properties we may seek to acquire or develop in the future
involve risks not typically encountered in the purchase and lease-back of
megaplex theatres which are operated by a single tenant. The ownership or
development of multi-tenant retail centers could expose us to the risk that a
sufficient number of suitable tenants may not be found to enable the center to
operate profitably and provide a return to us. Retail centers are also subject
to tenant turnover and fluctuations in occupancy rates, which could affect our
operating results. Multi-tenant retail centers also expose us to the risk of
potential "CAM slippage," which may occur when CAM fees paid by tenants are
exceeded by the actual cost of taxes, insurance and maintenance at the property.
FAILURE TO COMPLY WITH THE AMERICANS WITH DISABILITIES ACT AND OTHER LAWS COULD
RESULT IN SUBSTANTIAL COSTS
Our theatres must comply with the Americans with Disabilities Act (ADA). The ADA
requires that public accommodations reasonably accommodate individuals with
disabilities and that new construction or alterations be made to commercial
facilities to conform to accessibility guidelines. Failure to comply with the
ADA can result in injunctions, fines, damage awards to private parties and
additional capital
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expenditures to remedy noncompliance. Our leases require the tenants to comply
with the ADA.
Our properties are also subject to various other federal, state and local
regulatory requirements. We believe our properties are in material compliance
with all applicable regulatory requirements. However, we do not know whether
existing requirements will change or whether compliance with future requirements
will involve significant unanticipated expenditures. Although these expenditures
would be the responsibility of our tenants, if tenants fail to perform these
obligations, we may be required to do so.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONTAMINATION COULD RESULT IN SUBSTANTIAL
COSTS
Under federal, state and local environmental laws, we may be required to
investigate and clean up any release of hazardous or toxic substances or
petroleum products at our properties, regardless of our knowledge or actual
responsibility, simply because of our current or past ownership of the real
estate. If unidentified environmental problems arise, we may have to make
substantial payments, which could adversely affect our cash flow and our ability
to make distributions to our shareholders. This is so because:
- As owner we may have to pay for property damage and for investigation
and clean-up costs incurred in connection with the contamination
- The law may impose clean-up responsibility and liability regardless of
whether the owner or operator knew of or caused the contamination
- Even if more than one person is responsible for the contamination, each
person who shares legal liability under environmental laws may be held
responsible for all of the clean-up costs
- Governmental entities and third parties may sue the owner or operator
of a contaminated site for damages and costs
These costs could be substantial and in extreme cases could exceed the value of
the contaminated property. The presence of hazardous substances or petroleum
products or the failure to properly remediate contamination may adversely affect
our ability to borrow against, sell or lease an affected property. In addition,
some environmental laws create liens on contaminated sites in favor of the
government for damages and costs it incurs in connection with a contamination.
Most of our loan agreements require the Company or a subsidiary to indemnify the
lender against environmental liabilities. Our leases require the tenants to
operate the properties in compliance with environmental laws and to indemnify us
against environmental liability arising from the operation of the properties. We
believe all of our properties are in material compliance with environmental
laws. However, we could be subject to strict liability under environmental laws
because we own the properties. There is also a risk that tenants may not satisfy
their environmental compliance and indemnification obligations under the leases.
Any of these events could substantially increase our cost of operations, require
us to fund environmental indemnities in favor of our lenders and reduce our
ability to service our debt and pay dividends to shareholders.
REAL ESTATE INVESTMENTS ARE RELATIVELY NON-LIQUID
We may desire to sell a property in the future because of changes in market
conditions or poor tenant performance or to avail ourselves of other
opportunities. We may also be required to sell a property in the future to meet
debt obligations or avoid a default. Specialty real estate projects such as
megaplex theatres cannot always be sold quickly, and we cannot assure you that
we could always obtain a favorable price. We may be required to invest in the
restoration or modification of a property before we can sell it.
RISKS THAT MAY AFFECT THE MARKET PRICE OF OUR SHARES
WE CANNOT ASSURE YOU WE WILL CONTINUE PAYING DIVIDENDS AT HISTORICAL RATES
Our ability to continue paying dividends at historical rates or to increase our
Common Share dividend rate will depend on a number of factors, including our
financial condition and results of future operations, the performance of lease
terms by tenants, our ability to acquire, finance and lease additional
properties at
8
attractive rates, and provisions in our loan covenants. If we do not maintain or
increase our dividend rate, that could have an adverse effect on the market
price of our Common Shares.
9
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR SHARES
One of the factors that investors may consider in deciding whether to buy or
sell our Common Shares is our dividend rate as a percentage of our share price,
relative to market interest rates. If market interest rates increase,
prospective investors may desire a higher dividend on our Common Shares or seek
securities paying higher dividends or interest.
MARKET PRICES FOR OUR SHARES MAY BE AFFECTED BY PERCEPTIONS ABOUT THE FINANCIAL
HEALTH OR SHARE VALUE OF OUR TENANTS OR THE PERFORMANCE OF REIT STOCKS
GENERALLY.
To the extent any of our tenants or other movie exhibitors report losses or
slower earnings growth, take charges against earnings resulting from the
obsolescence of multiplex theatres or enter bankruptcy proceedings, the market
price for our shares could be adversely affected. The market price for our
shares could also be affected by any weakness in movie exhibitor stocks
generally. We believe these trends had an adverse impact on our Common Share
price during 2001 and 2000.
LIMITS ON CHANGES IN CONTROL MAY DISCOURAGE TAKEOVER ATTEMPTS WHICH MAY BE
BENEFICIAL TO OUR SHAREHOLDERS
There are a number of provisions in our Declaration of Trust, Maryland law and
agreements we have with others which could make it more difficult for a party to
make a tender offer for our shares or complete a takeover of the Company which
is not approved by our Board of Trustees. These include:
- A staggered Board of Trustees that can be increased in number without
shareholder approval
- A limit on beneficial ownership of our shares, which acts as a defense
against a hostile takeover or acquisition of a significant or
controlling interest, in addition to preserving our REIT status
- The ability of the Board of Trustees to issue preferred shares or
reclassify preferred or common shares without shareholder approval
- Limits on the ability of shareholders to remove trustees without cause
- Requirements for advance notice of shareholder proposals at annual
shareholder meetings
- Provisions of Maryland law restricting business combinations and
control share acquisitions not approved by the Board of Trustees
- Provisions of Maryland law protecting corporations (and by extension
REITs) against unsolicited takeovers by limiting the duties of the
trustees in unsolicited takeover situations
- Provisions in Maryland law providing that the trustees are not subject
to any higher duty or greater scrutiny than that applied to any other
director under Maryland law in transactions relating to the acquisition
or potential acquisition of control
- Provisions of Maryland law creating a statutory presumption that an act
of the trustees satisfies the applicable standards of conduct for
directors under Maryland law
- Provisions in loan or joint venture agreements putting the Company in
default upon a change in control
- Provisions of employment agreements with our officers calling for share
purchase loan forgiveness upon a hostile change in control
Any or all of these provisions could delay or prevent a change in control of the
Company, even if the change was in our shareholders' interest or offered a
greater return to our shareholders.
ITEM 2. PROPERTIES
As of December 31, 2003, the Company's real estate portfolio consisted of 45
megaplex theatre properties and various restaurant, retail and other properties
located in 18 states. Except as otherwise noted, all of the real estate
investments listed below are owned or ground leased directly by the Company. The
following table lists the Company's properties, their locations, acquisition
dates, number of theatre screens, number of seats, gross square footage, and the
tenant.
10
ACQUISITION BUILDING
PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT
- ------------------------------- -------------------- ----------- ------- ------- -------------- ------------
Megaplex Theatre Properties:
Grand 24(3) Dallas, TX 11/97 24 5,067 98,175 AMC
Mission Valley 20(1)(3) San Diego, CA 11/97 20 4,361 84,352 AMC
Promenade 16(3) Los Angeles, CA 11/97 16 2,860 129,822 AMC
Ontario Mills 30(3) Los Angeles, CA 11/97 30 5,469 131,534 AMC
Lennox 24(1)(3) Columbus, OH 11/97 24 4,412 98,261 AMC
West Olive 16(3) St. Louis, MO 11/97 16 2,817 60,418 AMC
Studio 30(3) Houston, TX 11/97 30 6,032 136,154 AMC
Huebner Oaks 24(3) San Antonio, TX 11/97 24 4,400 96,004 AMC
First Colony 24(1)(6) Houston, TX 11/97 24 5,098 107,690 AMC
Oakview 24(1)(6)(10) Omaha, NE 11/97 24 5,098 107,402 AMC
Leawood Town Center 20(6) Leawood, KS 2/98 20 2,995 75,224 AMC
Gulf Pointe 30(2)(6) Houston, TX 3/98 30 6,008 130,891 AMC
South Barrington 30(6) Chicago, IL 3/98 30 6,210 130,891 AMC
Cantera 30(2)(5) Chicago, IL 4/98 30 6,210 130,757 AMC
Mesquite 30(2)(6) Dallas, TX 6/98 30 6,008 130,891 AMC
Hampton Town Center 24(6) Norfolk, VA 8/98 24 5,098 107,396 AMC
Raleigh Grand 16(4) Raleigh, NC 8/98 16 2,596 51,450 Consolidated
Pompano 18(4) Pompano Beach, FL 11/98 18 3,424 73,637 Muvico
Paradise 24(6) Davie, FL 12/98 24 4,180 96,497 Muvico
Boise Stadium(1)(4) Boise, ID 12/98 21 4,734 140,300 Regal
Aliso Veijo Stadium 20(6) Los Angeles, CA 12/98 20 4,352 98,557 Regal
Westminster 24(7) Westminster, CO 6/99 24 4,812 107,000 AMC
Woodridge 18(2)(10) Woodridge, IL 6/99 18 4,384 84,206 Loews
Tampa Starlight 20(10) Tampa, FL 1/00 20 3,928 84,000 Muvico
Palm Promenade 24(10) San Diego, CA 1/00 24 4,586 88,610 AMC
Cary Crossroads 20(10) Cary, NC 3/02 20 3,936 77,475 Consolidated
Elmwood Palace 20(10) New Orleans, LA 3/02 20 4,357 90,391 AMC
Hammond Palace 10(10) New Orleans, LA 3/02 10 1,531 39,850 AMC
Houma Palace 10(10) New Orleans, LA 3/02 10 1,871 44,450 AMC
Westbank Palace 16(10) New Orleans, LA 3/02 16 3,176 71,607 AMC
Clearview Palace 12(10) New Orleans, LA 3/02 12 2,495 70,000 AMC
Olathe Studio 30(10) Olathe, KS 6/02 30 5,731 113,108 AMC
Forum 30(10) Sterling Heights, MI 6/02 30 5,041 107,712 AMC
Cherrydale 16(10) Greenville, SC 6/02 16 2,744 51,450 Consolidated
Livonia 20(10) Detroit, MI 8/02 20 3,808 75,106 AMC
Hoffman Town Centre 22(10) Alexandria, VA 10/02 22 4,150 132,903 AMC
Colonel Glenn 18(8) Little Rock, AR 12/02 18 4,122 79,330 Rave
AmStar Cinema 16(9) Macon, GA 3/03 16 2,950 55,000 AmStar
Star Southfield 20(9) Southfield, MI 5/03 20 7,000 110,000 Loews
Southwind 12(9) Lawrence, KS 6/03 12 2,481 42,497 Wallace
Veterans 24(11) Tampa, FL 6/03 24 4,580 94,774 AMC
New Roc City 18 and IMAX(12) New Rochelle, NY 10/03 18 3,400 103,000 Regal
Harbour View Grande 16(9) Suffolk, VA 11/03 16 3,036 61,500 Consolidated
Columbiana Grande 14(9) Columbiana, SC 11/03 14 3,000 55,400 Consolidated
The Grande 18(9) Hialeah, FL 12/03 18 4,900 77,400 Crown
--- ------- ---------
Subtotal Megaplex
Theatres 943 189,448 4,133,072
--- ------- ---------
11
ACQUISITION BUILDING
PROPERTY LOCATION DATE SCREENS SEATS (GROSS SQ. FT) TENANT
- ---------------------------------------- ----------------- ----------- ------- ------- -------------- ----------------------
Retail, Restaurant and Other Properties:
Pompano Kmart (8) Pompano Beach, FL 11/98 -- -- 80,540 Kmart
Pompano Restaurant (8) Pompano Beach, FL 11/98 -- -- 5,600 Pompano Restaurant
Westminster Promenade(8) Westminster, CO 6/99 -- -- 140,000 Multi-Tenant
On-The-Border (8) Dallas, TX 1/99 -- -- 6,580 Brinkers
Bennigan's (8) Houston, TX 5/00 -- -- 6,575 S & A
Bennigan's (8) Dallas, TX 5/00 -- -- 6,575 S & A
Texas Land & Cattle (8) Houston, TX 5/00 -- -- 6,600 Tx.C.C., Inc.
Texas Roadhouse (8) Dallas, TX 1/99 -- -- 6,000 TX Roadhouse
Roadhouse Grill (8) Atlanta, GA 8/00 -- -- 6,850 Roadhouse Grill
Cherrydale Shops Greenville, SC 6/02 -- -- 10,000 Multi-Tenant
Johnny Carino's Dallas, TX 3/03 -- -- 6,200 Kona Rest. Group, Inc.
Star Southfield, Center(9) Southfield, MI 5/03 -- -- 45,200 Multi-Tenant
Hawaiian Adventures Waterpark Garland, TX 5/03 -- -- -- Horizon Amusement
New Roc City(12) New Rochelle, NY 10/03 -- -- 344,000 Multi-Tenant
Harbour View Station(9) Suffolk, SC 11/03 -- -- 21,855 Multi-Tenant
--- ------- ---------
Subtotal -- -- 692,575
--- ------- ---------
Total 943 189,448 4,825,647
=== ======= =========
(1) Third party ground leased property. Although the Company is the tenant
under the ground leases and has assumed responsibility for performing the
obligations thereunder, pursuant to the leases, the theatre tenants are
responsible for performing the Company's obligations under the ground
leases.
(2) In addition to the theatre property itself, the Company has acquired land
parcels adjacent to the theatre property, which the Company has or intends
to ground lease or sell to restaurant or other entertainment themed
operators.
(3) Property is included as security for a $105 million mortgage note payable.
(4) Property is included as security for $20 million in mortgage notes payable.
(5) Property is included in the Atlantic-EPR I joint venture.
(6) Property is included as security for $125 million in mortgage notes
payable.
(7) Property is included as security for a $17 million mortgage note payable.
(8) Property is included as security for a $75 million secured credit facility.
(9) Property is included as security for a $50 million revolving credit
facility.
(10) Property is included as security for a $155.5 million mortgage.
(11) Property is included as security for a $14.7 million mortgage.
(12) Property is included as security for a $66 million and $4 million credit
facility.
OFFICE LOCATION. The Company's executive office is located in Kansas City,
Missouri and is leased from a third party landlord. The office occupies
approximately 10,960 square feet with annual rentals of $192,000. The lease
expires in December, 2009.
TENANTS AND LEASES
The Company's existing leases on rental property (on a consolidated basis -
excluding joint venture property) provide for aggregate annual rentals of
approximately $100.4 million (not including periodic rent escalations or
percentage rent). The megaplex theatre leases have an average remaining base
term lease life of 13.2 years and may be extended for predetermined extension
terms at the option of the tenant. The theatre leases are typically triple-net
leases that require the tenant to pay substantially all expenses associated with
the operation of the properties, including taxes, other governmental charges,
insurance, utilities, service, maintenance and any ground lease payments.
12
PROPERTY ACQUISITIONS IN 2003
The following table lists the rental properties acquired or developed during
2003:
PROPERTY LOCATION TENANT
- ---------------------------- ---------------------------------------- -------------------------------
Johnny Carino's Dallas, TX Kona Restaurants Group, Inc.
AmStar Cinema 16 Macon, GA AmStar
Star Southfield Center Southfield, MI Loews and Various Retail
Veterans 24 Tampa, FL AMC
Southwind 12 Lawrence, KS Wallace
Hawaiian Adventure Waterpark Dallas, TX Horizon Amusement South
New Roc City New Rochelle, NY Regal and Various Retail
Harbour View Station Suffolk, VA Consolidated and Various Retail
Columbiana Grande 14 Columbia, NC Consolidated
The Grande 18 Hialeah, FL Crown Theatres
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in the
ordinary course of business, the Company is not presently involved in any
litigation nor, to its knowledge, is any litigation threatened against the
Company or its properties, which is reasonably likely to have a material adverse
effect on the liquidity or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the quarterly periods indicated, the high
and low sales prices per Share for the Company's Common Shares on the New York
Stock Exchange under the trading symbol "EPR" and the distributions declared.
SHARE PRICE DECLARED
HIGH LOW DISTRIBUTION
----------- --------- ------------
2003:
Fourth quarter $ 35.79 30.70 0.500
Third quarter 32.71 28.22 0.500
Second quarter 28.75 26.65 0.500
First quarter 27.30 23.20 0.500
2002:
Fourth quarter $ 24.70 19.85 0.475
Third quarter 24.76 18.60 0.475
Second quarter 24.70 22.00 0.475
First quarter 22.65 18.90 0.475
The Company declared quarterly distributions to shareholders aggregating $2.00
per Common Share in 2003 and $1.90 per Common Share in 2002.
13
While we intend to continue paying regular quarterly dividends, future dividend
declarations will be at the discretion of the Board of Trustees and will depend
on the actual cash flow of the Company, its financial condition, capital
requirements, the annual distribution requirements under the REIT provisions of
the Code, debt covenants and other factors the Board of Trustees deems relevant.
The actual cash flow available to pay dividends may be affected by a number of
factors, including the revenues received from rental properties, the operating
expenses of the Company, interest expense on Company borrowings, the ability of
lessees to meet their obligations to the Company and any unanticipated capital
expenditures (See "Risk Factors - We cannot assure you we will continue paying
dividends at historical rates," in Item 1, and "Liquidity and Capital Resources"
in Item 7 - "Management's Discussion and Analysis"). The Company's Preferred
Shares have a fixed dividend rate of 9.5%.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------- ------ ------ ------ ------
2003 2002 2001 2000 1999
-------- ------ ------ ------ ------
Total revenue $ 91,160 71,610 54,667 53,287 48,319
Property operating expense 698 201 -- -- --
General and administrative expense 3,859 2,293 2,507 1,850 2,179
Interest expense, net 30,570 24,475 20,334 18,909 13,278
Depreciation and amortization expense 16,359 12,862 10,209 10,184 9,609
Amortization of restricted share grants 926 1,048 240 276 373
-------- ------ ------ ------ ------
Income before minority interest,
income from joint venture and
gain on sale of real estate 38,748 30,731 21,377 22,068 22,880
Gain on sale of real estate -- 202 -- -- --
Minority interest (1,555) (1,195) -- -- --
Equity in income from joint ventures 401 1,421 2,203 2,104 333
Preferred dividend requirements (5,463) (3,225) -- -- --
-------- ------ ------ ------ ------
Net income available to
common shareholders $ 32,131 27,934 23,580 24,172 23,213
======== ====== ====== ====== ======
Net income per common share:
Basic $ 1.81 1.66 1.60 1.63 1.60
Diluted 1.77 1.64 1.60 1.63 1.60
Weighted average number of
common shares outstanding:
Basic 17,780 16,791 14,715 14,786 14,516
Diluted 19,051 17,762 14,783 14,810 14,552
Cash dividends declared per
common share $ 2.00 1.90 1.80 1.76 1.68
14
DECEMBER 31,
2003 2002 2001 2000 1999
-------- ------- ------- ------- -------
Net real estate investments $900,096 692,922 530,280 472,795 478,706
Total assets 965,918 730,387 583,351 513,534 516,291
Common dividends payable 9,829 8,162 6,659 6,479 6,273
Preferred dividends payable 1,366 1,366 -- -- --
Long-term debt 506,555 346,617 314,766 244,547 238,737
Total liabilities 521,509 361,834 325,223 252,915 249,904
Minority interest 21,630 15,375 -- -- --
Shareholders' equity 422,779 353,178 258,128 260,619 266,387
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included in this Annual
Report on Form 10-K. The forward-looking statements included in this discussion
and elsewhere in this Form 10-K involve risks and uncertainties, including
anticipated financial performance, business prospects, industry trends,
shareholder returns and other matters, which reflect management's best judgment
based on factors currently known. Actual results and experience could differ
materially from the anticipated results and other expectations expressed in the
Company's forward-looking statements as a result of a number of factors,
including but not limited to those discussed in this Item and in Item 1
"Business - Risk Factors".
OVERVIEW
Our primary business strategy is to purchase real estate (land, buildings and
other improvements) leased to operators of destination-based entertainment and
entertainment-related properties under long-term, triple-net leases. As of
December 31, 2003, we had invested approximately $936 million (before
accumulated depreciation) in 45 megaplex theatre properties and various
restaurant, retail and other properties located in 18 states. As of December 31,
2003, we had invested approximately $29.2 million in development land, for which
we actively develop or pursue development projects that we feel would add value
to the overall entertainment experience of theatre patrons.
Substantially all of our single-tenant properties are leased pursuant to
long-term, triple-net leases, under which the tenants typically pay all
operating expenses of a property, including, but not limited to, all real estate
taxes, assessments and other governmental charges, insurance, utilities, repairs
and maintenance. Tenants at our multi-tenant properties pay CAM charges to
defray their pro rata portion of these costs.
Substantially all of our revenues are derived from rents received or accrued
under long-term leases and interest earned from the temporary investment of
funds in short-term investments.
The Company incurs general and administrative expenses including compensation
expense for our executive officers and other employees, professional fees and
various expenses incurred in the process of identifying and acquiring additional
properties. We are self-administered and managed by our trustees, executive
officers and other employees. Our primary non-cash expense is the depreciation
of our properties. We depreciate buildings and improvements on our properties
over a seven-year to 40-year period for tax purposes and primarily a 40-year
period for financial reporting purposes. We do not own or lease any significant
personal property or equipment at any property we currently own.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying Consolidated Financial Statements and related notes. In preparing
these financial statements, management has made its best estimates and
assumptions that affect the reported assets and liabilities. The most
significant assumptions and estimates relate to revenue recognition, depreciable
lives of the real estate and the valuation of real estate. Application of these
assumptions requires the exercise of judgment as to future uncertainties and, as
a result, actual results could differ from these estimates.
Revenue Recognition
Base rents are recognized on a straight-line basis over the term of the lease,
and the base rent escalation is recognized when measurable. Base rent escalation
in most of our leases is dependant upon increases in the Consumer Price Index
(CPI) and accordingly, management does not include any future base rent
escalation
16
amounts in current revenue. Most of our leases provide for percentage rents
based upon the level of sales achieved by the tenant. These percentage rents are
recognized once the required sales level is achieved.
Real Estate Useful Lives
We are required to make subjective assessments as to the useful lives of our
properties for the purpose of determining the amount of depreciation to reflect
on an annual basis with respect to those properties. These assessments have a
direct impact on the Company's net income. Depreciation and amortization are
provided on the straight-line method over the useful lives of the assets, as
follows:
Buildings 40 years
Tenant improvements Base term of
lease or useful
life, whichever
is shorter
Equipment 3 to 7 years
Impairment of Real Estate Values
We are required to make subjective assessments as to whether there are
impairments in the value of our rental properties. These estimates of impairment
may have a direct impact on the Company's consolidated financial statements.
We apply the provisions of Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We
assess the carrying value of our rental properties whenever events or changes in
circumstances indicate that the carrying amount of a property may not be
recoverable. Certain factors that may occur and indicate that impairments may
exist include, but are not limited to: underperformance relative to projected
future operating results, tenant difficulties and significant adverse industry
or market economic trends. No such indicators existed during 2003. If an
indicator of possible impairment exists, a property is evaluated for impairment
by a comparison of the carrying amount of the property to the estimated
undiscounted future cash flows expected to be generated by the property. If the
carrying amount of a property exceeds its estimated future cash flows on an
undiscounted basis, an impairment charge is recognized by the amount by which
the carrying amount of the property exceeds the fair value of the property.
Management estimates fair value of its rental properties based on projected
discounted cash flows using a discount rate determined by management to be
commensurate with the risk inherent in the Company. Management did not record
any impairment charges for 2003.
RECENT DEVELOPMENTS
During the three months ended December 31, 2003, we completed approximately $133
million of rental property acquisitions. Our purchase of 71.4% in New Roc
Associates, LP closed on October 27, 2003. The partnership property is an
entertainment retail center in New Rochelle, New York, called New Roc City. The
remaining acquisitions during the last three months of 2003 were theatre
properties in Suffolk, VA, Columbia, SC, and Hialeah, FL. Also, during the three
months ended December 31, 2003, we completed approximately $8.6 million of
development land acquisitions. This land is currently being used to develop
megaplex theatres. We paid cash and assumed certain indebtedness to acquire the
properties described above. The cash portions were primarily obtained from our
common stock offering completed in September of 2003.
17
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Rental revenue was $90 million for the year ended December 31, 2003, as compared
to $71.6 million for the year ended December 31, 2002. The $18.4 million
increase resulted primarily from property acquisitions completed in 2002 and
2003, base rent increases and percentage rents on existing properties. In
addition, other revenue increased by $1.2 million in 2003 due to a payment
received related to the cancellation of the Van's Skate Park lease at the
entertainment retail center in Westminster, Colorado, which was closed during
the third quarter, and income received from claims we filed in the Loews
Cineplex bankruptcy proceedings. Percentage rents of $1.9 million and $600
thousand were recognized in 2003 and 2002, respectively.
Our property operating expenses totaled $698 thousand for the year ended
December 31, 2003, as compared to $201 thousand for the year ended December 31,
2002. These expenses arise from our non-triple net retail property operations in
Southfield, Michigan; Greenville, South Carolina; Westminster, Colorado; Tampa,
Florida; New Rochelle, New York; and Suffolk, Virginia.
Our general and administrative expenses were $3.9 million for the year ended
December 31, 2003, as compared to $2.3 million for the year ended December 31,
2002. The increase is primarily due to the following:
- Increases in insurance expense, including premiums for both
Director and Officer insurance and property and casualty
insurance compared to 2002 due to an overall increase in
premiums in the insurance market.
- An increase in fees paid for professional services, primarily
for legal fees related to compliance with the Sarbanes Oxley
Act.
- An increase in payroll and related expenses attributable to
increases in base compensation, bonus awards, payroll taxes
related to the vesting of stock grants and stock bonuses, and
the addition of two employees.
- Increased costs associated with our Board of Trustees meetings
and increases in trustee compensation.
- Increases in franchise and other miscellaneous taxes paid.
Our net interest expense increased by $6 million to $30.6 million for the year
ended December 31, 2003 from $24.5 million for the year ended December 31, 2002.
The increase in net interest expense primarily resulted from increases in
long-term debt used to finance real estate acquisitions.
Depreciation and amortization expenses, totaled $16.4 million for the year ended
December 31, 2003 compared to $12.9 million for the same period in 2002. The
$3.5 million increase resulted from the property acquisitions completed in 2002
and 2003. Amortization of non-vested shares was $926 million and $1,048 million
in 2003 and 2002, respectively.
Income from joint venture totaled $401 thousand for the year ended December 31,
2003 compared to $1.4 million for the same period in 2002. The decrease was due
to the Company's lower ownership interest in
18
the Atlantic-EPR I joint venture (20% ownership throughout 2003 compared to
76.9% weighted average interest in 2002).
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Total revenue was $71.6 million for the year ended December 31, 2002, as
compared to $54.7 million for the year ended December 31, 2001. The $16.9
million increase resulted from property acquisitions completed in 2002, property
acquisitions completed during 2001, the acquisition and consolidation in
December 2001 of the remaining third party interest in the Westcol joint
venture, and from base rent increases and percentage rent payments on existing
properties.
Our property operating expenses totaled $200 thousand for the year ended
December 31, 2002. These expenses arise from the operations of Westcol Center,
an entertainment and retail center in Westminster Colorado, in which the Company
acquired sole ownership in December 2001 by buying the remaining interest in the
Westcol joint venture. For the same period in 2001, we accounted for our partial
interest in the Westcol joint venture under the equity method of accounting.
Therefore, the Company did not recognize expenses related to the venture in
2001.
Our interest expense increased to $24.5 million for the year ended December 31,
2002 from $20.3 million for the year ended December 31, 2001. The $4.1 million
increase in interest expense resulted from an increase in long-term debt related
to financings of property acquisitions made during fiscal 2002 and 2001, and the
recognition of interest expense from the Westcol theatre first mortgage loan,
acquired with the acquisition/consolidation of the remaining third party
interest in the Westcol joint venture in December 2001.
Our depreciation and amortization expenses, including amortization of share
based compensation, totaled $13.9 million for the year ended December 31, 2002
compared to $10.4 million for the same period in 2001. The $3.5 million increase
resulted from the property acquisitions completed in 2001 and 2002 and from
increases in amortization of stock based compensation.
Income from joint venture totaled $1.4 million for the year ended December 31,
2002 compared to $2.2 million for the same period in 2001. The decrease was
primarily attributed to the acquisition of the remaining third party interest in
the Westcol joint venture in December 2001 which was consolidated for entire
year in 2002. During 2001, through the date of acquisition, we accounted for our
interest in the Westcol joint venture using the equity method of accounting,
which represented $735,000 of the 2001 income from joint ventures. In December
2002, our partner in our remaining joint venture substantially increased its
interest in that joint venture.
For the year ended December 31, 2002 minority interest in net income was $1.2
million, arising from the issuance of $15 million of common and preferred
interests by EPT Gulf States, LLC, our consolidated subsidiary, as a result of
the Gulf States theatres acquisition completed on March 15, 2002. In 2001, the
Company had no minority interest outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $30.5 million at December 31, 2003. In addition,
the Company had restricted cash of $6.5 million available for debt service in
connection with the $116.5 million mortgage debt due in February 2006.
19
Mortgage Debt and Credit Facilities
As of December 31, 2003, we had total debt outstanding of $506.6 million. All of
our debt was mortgage debt secured by substantially all of our rental
properties. Of this debt, $86 million was variable rate debt and $420.6 million
was fixed rate debt. All of our debt is described in footnote 5 in the "Notes to
Consolidated Financial Statements" in this Form 10-K.
At December 31, 2003, we had no debt outstanding under our $50 million Fleet
Bank credit facility. The Fleet Bank credit facility is a secured facility and
at December 31, 2003, there were four theatre properties and two theatre and
retail mix properties pledged to that facility. We expect to use proceeds from
the facility for additional acquisitions of rental property and general
corporate purposes. The credit facility matures in April 2005 and carries
interest at LIBOR plus 300 basis points.
As of December 31, 2003, we had $20 million of debt outstanding under our iSTAR
$75 million credit facility. The credit facility has three years remaining and
carries interest at LIBOR plus 400 basis points. On September 23, 2003, the
Company issued 2.4 million common shares in a registered public offering for net
proceeds of $72.2 million. The proceeds were used to fund the acquisition of
three megaplex theatres (including one with retail shops), one entertainment
retail center, and three land parcels for theatre development in fourth quarter
2003.
Our principal investing activity is the purchase of rental property, which is
generally financed with mortgage debt and the proceeds from equity offerings.
Continued growth of our rental property portfolio will depend in part on our
continued ability to access funds through additional borrowings and equity
security offerings.
Liquidity Requirements
Short-term liquidity requirements consist primarily of normal recurring
corporate operating expenses, debt service requirements and distributions to
shareholders. Cash provided by operating activities was $51 million in 2003,
$45.9 million in 2002 and $34.9 million in 2001. We anticipate that our cash on
hand and cash provided by operating activities will provide adequate liquidity
to conduct operations, fund administrative and operating costs and interest and
principal payments on our debt, and allow distributions to the Company's
shareholders so as to avoid corporate level federal income or excise tax in
accordance with Internal Revenue Code requirements for qualification as a REIT.
Long-term liquidity requirements at December 31, 2003 consisted primarily of
maturities of long-term debt. Contractual obligations as of December 31, 2003
are as follows (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS 2004 2005 2006 2007 2008 THEREAFTER TOTAL
- -----------------------------------------------------------------------------------------------------------------
Long Term Debt Obligations $76,757 30,038 137,285 8,422 8,920 245,133 506,555
Operating Lease Obligations 192 198 203 209 214 220 1,236
------- ------ ------- ----- ----- ------- -------
Total $76,949 30,236 137,488 8,631 9,134 245,353 507,791
======= ====== ======= ===== ===== ======= =======
20
In February of 2004, the Company entered into an agreement to refinance the $66
million in variable rate debt which matures in 2003.
We believe that we will be able to obtain financing in order to repay our debt
obligations by refinancing the properties as the debt comes due. However, there
can be no assurance that additional financing or capital will be available, or
that terms will be acceptable or advantageous to us. We anticipate that
long-term liquidity requirements will also include amounts for acquisition of
properties. We have identified approximately $260 million in properties for
acquisition in 2004. We expect to meet long-term liquidity requirements through
long-term borrowings and other debt and equity financing alternatives. The
availability and terms of any such financing will depend upon market and other
conditions.
There can be no assurance that we will be able to obtain such financing in the
future, which would not affect our liquidity, but would affect our ability to
grow (See "We must obtain new financing in order to grow", and "Risks that may
affect the market price of our shares" under "Risk Factors").
In addition to the contractual obligations listed in the table above, the
Company had five theatre projects under construction at December 31, 2003. These
theatres will have a total of 86 screens and their development costs will be
approximately $66 million. The Company has already purchased the development
land for $16.3 million as of December 31, 2003, and plans to fund the remaining
estimated development costs of these properties through new debt facilities and
additional equity. The cost of development is paid by the Company either in
periodic draws or upon successful completion of construction. If management of
the Company determines the construction is not being completed per the executed
development agreement, the Company can discontinue funding of periodic draws or
refuse to purchase the completed theatre. Upon successful completion of
construction, the Company will lease these theatres to already established
theatre operators for approximately $7.6 million in annual rentals.
Off Balance Sheet Arrangements
At December 31, 2003, the Company had a 20% investment interest in one
non-consolidated real estate joint venture, Atlantic-EPR I, which is accounted
for under the equity method of accounting. We do not anticipate any material
impact on our liquidity as a result of any commitments that may arise involving
that joint venture. The following is a brief description of the joint venture:
On May 11, 2000, the Company completed the formation of a joint venture
partnership, Atlantic-EPR I, a Delaware general partnership (Atlantic-EPR I),
with Atlantic of Hamburg, Germany (Atlantic), whereby the Company contributed
the AMC Cantera 30 theatre with a carrying value of $33.5 million in exchange
for cash proceeds from mortgage financing of $17.8 million and a 100% interest
in Atlantic-EPR I. During 2000 through 2002, the Company sold to Atlantic a
total of an 80% interest in Atlantic-EPR I in exchange for $14.3 million in
cash. The final contribution by Atlantic of $8.4 million was paid to the
partnership in December 2002 but was not paid to the Company until January 2003.
Accordingly, such contribution is included as a receivable from joint venture in
the consolidated balance sheet at December 31, 2002.
The joint venture agreement allows Atlantic to exchange up to a maximum of 10%
of its ownership interest in Atlantic-EPR I per year, beginning in 2005, for
Common Shares of the Company or, at the discretion of the Company, cash.
The Company accounts for its investment in Atlantic-EPR I under the equity
method of accounting. The Company recognized income of $401, $1,421, and $1,468
(in thousands) from its investment in this joint venture during 2003, 2002 and
2001, respectively.
21
FUNDS FROM OPERATIONS (FFO)
The National Association of Real Estate Investment Trusts (NAREIT) developed FFO
as a non-GAAP financial measure of performance and liquidity of an equity REIT
in order to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. FFO is a widely used measure to
help management and investors evaluate the operating performance of real estate
companies and is provided here as a supplemental measure to Generally Accepted
Accounting Principles (GAAP) net income available to common shareholders and
earnings per share. FFO, as defined under the revised NAREIT definition and
presented by us, is net income, computed in accordance with GAAP, excluding
gains and losses from sales of depreciable operating properties, plus real
estate related depreciation and amortization, and after adjustments for
unconsolidated partnerships, joint ventures and other affiliates. Adjustments
for unconsolidated partnerships, joint ventures and other affiliates are
calculated to reflect FFO on the same basis. FFO is a non-GAAP financial
measure. FFO does not represent cash flows from operations as defined by GAAP
and is not indicative that cash flows are adequate to fund all cash needs and is
not to be considered an alternative to net income or any other GAAP measure as a
measurement of the results of the Company's operations or the Company's cash
flows or liquidity as defined by GAAP.
The following tables summarize the Company's FFO for the years ended December
31, 2003 and December 31, 2002 (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
------- ------
Net income available to common shareholders $32,131 27,934
Less gain on sale of real estate -- (202)
Add real estate depreciation 16,175 12,700
Add allocated share of joint venture depreciation 135 497
------- ------
Basic Funds From Operations 48,441 40,929
Add: minority interest in net income 1,555 1,195
------- ------
Diluted Funds From Operations $49,996 42,124
======= ======
Weighted average common shares:
Basic 17,780 16,791
Diluted 19,051 17,762
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company must apply FIN 46R to variable interest in VIEs created after
December 31, 2003. For variable interests in VIEs created before January 1,
2004, the Interpretation will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created before January 1,
2004, the assets, liabilities and non-controlling interests of the VIE initially
would be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the
22
VIE. As of December 31, 2003, the Company's financial statements have not been
impacted by the issuance of FIN 46R. Further, the Company does not expect any
impact on the financial statements in the future.
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatory redeemable financial
instruments. For certain mandatory redeemable financial instruments, the
Statement will be effective for the Company on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of mandatory
redeemable financial instruments. As of December 31, 2003, the Company's
financial statements have not been impacted by the issuance of FASB Statement
No. 150. Further, the Company does not expect any impact on the financial
statements in the future.
INFLATION
Investments by the Company are financed with a combination of equity and secured
mortgage indebtedness. During inflationary periods, which are generally
accompanied by rising interest rates, the Company's ability to grow may be
adversely affected because the yield on new investments may increase at a slower
rate than new borrowing costs.
All of the Company's megaplex theatre leases provide for base and participating
rent features. To the extent inflation causes tenant revenues at the Company's
properties to increase over baseline amounts, the Company would participate in
those revenue increases through its right to receive annual percentage rent. The
Company's leases also generally provide for escalation in base rents in the
event of increases in the Consumer Price Index, with a limit of 2% per annum, or
fixed periodic increases.
All of the Company's theatre leases are triple-net leases requiring the tenants
to pay substantially all expenses associated with the operation of the
properties, thereby minimizing the Company's exposure to increases in costs and
operating expenses resulting from inflation.
FORWARD LOOKING INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
WITH THE EXCEPTION OF HISTORICAL INFORMATION, THIS REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 AND IDENTIFIED BY SUCH WORDS AS "WILL BE," "INTEND,"
"CONTINUE," "BELIEVE," "MAY," "EXPECT," "HOPE," "ANTICIPATE," "GOAL,"
"FORECAST," OR OTHER COMPARABLE TERMS. THE COMPANY'S ACTUAL FINANCIAL CONDITION,
RESULTS OF OPERATIONS OR BUSINESS MAY VARY MATERIALLY FROM THOSE CONTEMPLATED BY
SUCH FORWARD LOOKING STATEMENTS AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED UNDER "BUSINESS - RISK FACTORS."
INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING
STATEMENTS.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, primarily relating to potential losses due to
changes in interest rates. We seek to mitigate the effects of fluctuations in
interest rates by matching the term of new investments with new long-term fixed
rate borrowings whenever possible.
We are subject to risks associated with debt financing, including the risk that
existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. Our
borrowings are subject to mortgages or contractual agreements which limit the
amount of indebtedness we may incur. Accordingly, if we are unable to raise
additional equity or borrow money due to these limitations, our ability to
acquire additional properties may be limited.
The following table presents the principal amounts, weighted average interest
rates, and other terms required by year of expected maturity to evaluate the
expected cash flows and sensitivity to interest rate changes as of December 31:
Expected Maturities (in millions)
ESTIMATED
2004 2005 2006 2007 2008 THEREAFTER TOTAL FAIR VALUE
----- ---- ----- ---- ---- ---------- ----- ----------
December 31, 2003:
Fixed rate debt $10.8 30.0 117.4 8.4 8.9 245.1 420.6 425.3
Average interest rate 8.9% 8.5% 7.3% 6.0% 6.0% 6.1% 6.7% --
Variable rate debt $66.0 -- 20.0 -- -- -- 86.0 86.0
Average interest rate (as of
December 31, 2003) 3.6% -- 5.1% -- -- -- 4.0% --
ESTIMATED
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
----- ---- ----- ----- ---- ---------- ----- ----------
December 31, 2002:
Fixed rate debt $ 5.5 5.9 24.9 111.9 2.7 104.7 255.6 270.0
Average interest rate 11.7% 11.7% 9.1% 7.4% 6.9% 6.9% 7.5% --
Variable rate debt $ -- 54.0 37.0 -- -- -- 91.0 91.0
Average interest rate (as of
December 31, 2002) -- 6.2% 4.4% -- -- -- 5.5% --
We have not engaged extensively in the use of derivatives to manage our interest
rate and market risk due to the Company's limited use of variable rate debt. For
a discussion of derivative financial instruments and interest rate hedging
activity, see note 9 to the consolidated financial statements.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Entertainment Properties Trust
CONTENTS
Reports of Independent Auditors........................................... 26
Audited Financial Statements
Consolidated Balance Sheets .............................................. 28
Consolidated Statements of Income ........................................ 29
Consolidated Statements of Changes in Shareholders' Equity ............... 30
Consolidated Statements of Cash Flows .................................... 31
Notes to Consolidated Financial Statements ............................... 33
Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation .................. 50
25
Independent Auditors' Report
The Board of Trustees
Entertainment Properties Trust:
We have audited the accompanying consolidated balance sheets of Entertainment
Properties Trust (the Company) as of December 31, 2003 and 2002, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. In connection with our audit of the consolidated
financial statements, we have also audited the accompanying financial statement
schedules listed in the Index at Item 15(d). These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Entertainment
Properties Trust as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
Kansas City, Missouri
February 3, 2004
26
Report of Independent Auditors
The Board of Trustees
Entertainment Properties Trust
We have audited the accompanying consolidated statements of income, changes in
shareholders' equity and cash flows of Entertainment Properties Trust (the
Company) for the year ended December 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flow of
Entertainment Properties Trust for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Kansas City, Missouri
March 28, 2002
27
ENTERTAINMENT PROPERTIES TRUST
Consolidated Balance Sheets
(In thousands except share and per share data)
DECEMBER 31
-----------------------
2003 2002
--------- -------
ASSETS
Rental properties, net (notes 2 and 5) $ 870,944 679,937
Land held for development 29,152 12,985
Investment in joint ventures (note 3) 1,336 1,109
Cash and cash equivalents 30,527 10,091
Restricted cash (note 5) 6,495 6,495
Receivable from joint venture (note 3) -- 8,438
Other assets 27,464 11,332
--------- -------
Total assets $ 965,918 730,387
========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 2,864 1,653
Common dividends payable 9,829 8,162
Preferred dividends payable 1,366 1,366
Unearned rents 895 4,036
Long-term debt (note 5) 506,555 346,617
--------- -------
Total liabilities 521,509 361,834
Commitments and contingencies (note 17) -- --
Minority interests (notes 10 and 16) 21,630 15,375
Shareholders' equity:
Common shares, $.01 par value. Authorized
50,000,000 shares; issued 20,129,749 and 17,655,822
shares at December 31, 2003 and 2002, respectively 201 177
Preferred shares, $.01 par value. Authorized
5,000,000 shares; issued 2,300,000 shares 23 23
Additional paid-in-capital 454,195 379,447
Treasury shares, at cost: 472,200 common shares (6,533) (6,533)
Loans to shareholders (note 7) (3,525) (3,525)
Non-vested shares (note 6) (1,625) (1,276)
Distributions in excess of net income (19,957) (15,135)
--------- -------
Shareholders' equity 422,779 353,178
--------- -------
Total liabilities and shareholders' equity $ 965,918 730,387
========= =======
See accompanying notes to consolidated financial statements.
28
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Income
(In thousands except per share data)
YEAR ENDED DECEMBER 31,
----------------------------------
2003 2002 2001
-------- ------ ------
Rental revenue (note 4) $ 89,965 71,610 54,667
Other revenue 1,195 -- --
-------- ------ ------
Total Revenue 91,160 71,610 54,667
-------- ------ ------
Property operating expense 698 201 --
General and administrative expense,
excluding share based compensation
below 3,859 2,293 2,507
Interest expense (note 5) 30,570 24,475 20,334
Depreciation and amortization 16,359 12,862 10,209
Amortization of share based compensation 926 1,048 240
-------- ------ ------
Income before gain on
sale of real estate, income
from joint venture, and
minority interest 38,748 30,731 21,377
Gain on sale of real estate -- 202 --
Equity in income from joint ventures
(note 3) 401 1,421 2,203
Minority interests (notes 10 and 17) (1,555) (1,195) --
-------- ------ ------
Net income 37,594 31,159 23,580
Preferred dividend requirements (note 11) (5,463) (3,225) --
-------- ------ ------
Net income available to
common shareholders $ 32,131 27,934 23,580
======== ====== ======
Basic net income per common share $ 1.81 1.66 1.60
======== ====== ======
Diluted net income per common share $ 1.77 1.64 1.60
======== ====== ======
Shares used for computation:
Basic 17,780 16,791 14,715
Diluted 19,051 17,762 14,783
See accompanying notes to consolidated financial statements.
29
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Changes in Shareholders' Equity
(In thousands)
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------- --------------- PAID-IN TREASURY
SHARES PAR SHARES PAR CAPITAL SHARES
------ ----- ------ ---- ---------- --------
Balance at December 31, 2000 15,196 $ 152 -- $ -- 278,574 (6,533)
Shares issued to Directors 3 -- -- -- 54 --
Issuance of restricted share grant 64 1 -- -- 857 --
Amortization of restricted share
grant -- -- -- -- -- --
Net income -- -- -- -- -- --
Common shares issued in Dividend
Reinvestment Plan 7 -- -- -- 118 --
Dividends to common
shareholders ($1.80 per share) -- -- -- -- -- --
------ ----- ----- ---- -------- ------
Balance at December 31, 2001 15,270 153 -- -- 279,603 (6,533)
Shares issued to Directors 2 -- -- -- 54 --
Issuance of restricted share grant 62 1 -- -- 1,218 --
Amortization of restricted share grant -- -- -- -- -- --
Net income -- -- -- -- -- --
Common Shares issued in
Dividend Reinvestment Plan 22 -- -- -- 475 --
Common Shares issued in
secondary offering, net of
offering costs of $1.03 million 2,300 23 -- -- 42,685 --
Preferred shares issued, net of
offering costs of $1.6 million -- -- 2,300 23 55,412 --
Dividends to common
shareholders ($1.90 per share) -- -- -- -- -- --
Dividends to preferred
shareholders ($1.40 per share) -- -- -- -- -- --
------ ----- ----- ---- -------- ------
Balance at December 31, 2002 17,656 177 2,300 23 379,447 (6,533)
Shares issued to Directors 2 -- -- -- 62 --
Issuance of restricted share grant 54 1 -- -- 1,303 --
Amortization of restricted share grant -- -- -- -- -- --
Stock option expense -- -- -- -- 25 --
Net income -- -- -- -- -- --
Common Shares issued in
Dividend Reinvestment Plan 21 -- -- -- 586 --
Common Shares issued in secondary
offering, net of offering costs
of $1.4 million 2,397 23 -- -- 72,772 --
Dividends to common
shareholders ($2.00 per share) -- -- -- -- -- --
Dividends to preferred
shareholders ($2.375 per share) -- -- -- -- -- --
------ ----- ----- ---- -------- ------
Balance at December 31, 2003 20,130 $ 201 2,300 $ 23 454,195 (6,533)
====== ===== ===== ==== ======== ======
DISTRIBUTIONS IN
LOANS TO NON-VESTED EXCESS OF
SHAREHOLDERS SHARES NET INCOME TOTAL
------------ ---------- ---------------- -------
Balance at December 31, 2000 (3,525) (546) (7,503) 260,619
Shares issued to Directors -- -- -- 54
Issuance of restricted share grant -- (860) -- (2)
Amortization of restricted share
grant -- 330 -- 330
Net income -- -- 23,580 23,580
Common shares issued in Dividend
Reinvestment Plan -- -- -- 118
Dividends to common
shareholders ($1.80 per share) -- -- (26,571) (26,571)
------ ------ ------- -------
Balance at December 31, 2001 (3,525) (1,076) (10,494) 258,128
Shares issued to Directors -- -- -- 54
Issuance of restricted share grant -- (1,219) -- --
Amortization of restricted share grant -- 1,048 -- 1,048
Net income -- -- 31,159 31,159
Common Shares issued in
Dividend Reinvestment Plan -- -- -- 475
Common Shares issued in
secondary offering, net of
offering costs of $1.03 million -- -- -- 42,708
Preferred shares issued, net of
offering costs of $1.6 million -- -- -- 55,435
Dividends to common
shareholders ($1.90 per share) -- -- (32,604) (32,604)
Dividends to preferred
shareholders ($1.40 per share) -- -- (3,225) (3,225)
------ ------ ------- -------
Balance at December 31, 2002 (3,525) (1,247) (15,164) 353,178
Shares issued to Directors -- -- -- 62
Issuance of restricted share grant -- (1,304) -- --
Amortization of restricted share grant -- 926 -- 926
Stock option expense -- -- -- 25
Net income -- -- 37,594 37,594
Common Shares issued in
Dividend Reinvestment Plan -- -- -- 586
Common Shares issued in secondary
offering, net of offering costs
of $1.4 million -- -- -- 72,795
Dividends to common
shareholders ($2.00 per share) -- -- (36,924) (36,924)
Dividends to preferred
shareholders ($2.375 per share) -- -- (5,463) (5,463)
------ ------ ------- -------
Balance at December 31, 2003 (3,525) (1,625) (19,957) 422,779
====== ====== ======= =======
See accompanying notes to consolidated financial statements.
30
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
---------- --------- --------
Operating activities:
Net income $ 37,594 31,159 23,580
Adjustments to reconcile net income to
net cash provided by operating
activities
Minority interest in net income 1,555 1,195 --
Gain on sale of real estate -- (202) --
Equity in income from joint venture (401) (1,421) --
Depreciation and amortization 16,359 12,862 10,209
Non-cash compensation expense 951 1,048 240
Common shares issued to management and trustees 62 54 54
Increase in other assets (2,679) (731) (819)
Increase (decrease) in other accounts
payable and accrued liabilities 836 (190) 84
Increase (decrease) in unearned rent (3,275) 2,081 1,565
--------- -------- -------
Net cash provided by
operating activities 51,002 45,855 34,913
--------- -------- -------
Investing activities:
Acquisition of rental properties (125,675) (161,514) (20,822)
Net proceeds from sale of real estate -- 3,533 --
Distributions received from joint venture 8,923 1,735 --
Proceeds from sale of equity interest
in joint venture -- 3,065 1,445
Investment in secured note receivable (5,000) -- --
Acquisition of Westcol joint venture
interest, net of cash acquired -- -- (12,036)
Capital contribution to Westcol joint venture -- -- (1,300)
Acquisition of development properties,
including related capitalized costs (21,987) (2,160) (1,554)
--------- -------- -------
Net cash used in investing
activities (143,739) (155,341) (34,267)
--------- -------- -------
Financing activities:
Proceeds from long-term debt facilities 190,200 37,000 179,000
Principal payments on long-term debt (100,263) (5,149) (126,150)
Deferred financing fees paid (7,550) (1,702) (2,084)
Net proceeds from issuance of common
shares 73,381 43,183 118
Net proceeds from issuance of preferred
shares -- 55,435 --
Funding of restricted cash escrow
deposits -- -- (6,495)
Distributions paid to minority interests (1,875) (820) --
Dividends paid to preferred shareholders (5,463) (1,859) --
Dividends paid to common shareholders (35,257) (31,101) (26,393)
--------- -------- -------
Net cash provided by
financing activities 113,173 94,987 17,996
--------- -------- -------
31
ENTERTAINMENT PROPERTIES TRUST
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31,
2003 2002 2001
------- -------- ------
Net increase (decrease) in cash and
cash equivalents $20,436 (14,499) 18,642
Cash and cash equivalents at beginning
of year 10,091 24,590 5,948
------- ------- ------
Cash and cash equivalents at end of year 30,527 10,091 24,590
======= ======= ======
Supplemental schedule of
non-cash activity:
Acquisition of rental properties in
exchange for minority interest
in subsidiary $ -- 15,000 --
Sale of equity interest in joint venture
received in 2003 -- 8,359 --
Transfer of land held for
development to rental property 5,509 -- 886
Exchange of development property in
connection with acquisition of
rental property -- -- 1,818
Assumption of debt of New Roc 70,000 -- --
Consolidation of assets and liabilities
associated with purchase of
Westcol joint venture
Fair value of assets -- -- 46,534
Fair value of liabilities, net of
amounts due to the Company -- -- 17,767
Less Company's interest
ownership prior to acquisition -- -- 15,267
Cash paid for remaining interest -- -- 13,500
Supplemental disclosure of cash flow
information:
Cash paid for interest $29,010 23,315 19,436
See accompanying notes to consolidated financial statements
32
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Entertainment Properties Trust (the Company) is a Maryland real estate
investment trust (REIT) organized on August 29, 1997. The Company was formed to
acquire and develop entertainment properties including megaplex theatres and
entertainment retail centers. At December 31, 2003, the Company owned 45
megaplex theatre properties, including two joint venture properties, located in
eighteen states, two entertainment retail centers ("ERC") located in
Westminster, Colorado, and New Rochelle, New York, and land parcels leased to
restaurant and retail operators and related properties adjacent to several of
its theatre properties.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Entertainment
Properties Trust and its subsidiaries all of which are substantially
wholly-owned except for New Roc Associates, LP (New Roc). New Roc was acquired
in October 2003 and is 71.4% owned. All significant inter-company transactions
have been eliminated in consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates.
RENTAL PROPERTIES
Rental properties are carried at cost less accumulated depreciation. Costs
incurred for the acquisition of the properties are capitalized. Accumulated
depreciation is computed over the estimated useful lives of the assets, which
generally are estimated to be 40 years for buildings, 5 to 7 years for
furniture, fixtures and equipment, and the base term of the lease for tenant
improvements. Expenditures for ordinary maintenance and repairs are charged to
operations in the period incurred. Significant renovations and improvements
which improve or extend the useful life of the asset are capitalized and
depreciated over their estimated useful life.
The Company applies Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", for the
recognition and measurement of impairment of long-lived assets to be held and
used. Management reviews a property for impairment whenever events or changes in
circumstances indicate that the carrying value of a property may not be
recoverable. The review of recoverability is based on an estimate of
undiscounted future cash flows expected to result from its use and eventual
disposition. If impairment exists due to the inability to recover the carrying
value of the property, an impairment loss is recorded to the extent that the
carrying value of the property exceeds its estimated fair value.
DEFERRED FINANCING COSTS
Included in other assets are deferred financing costs which are amortized over
the terms of the related long-term debt obligations.
33
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
CAPITALIZED DEVELOPMENT COSTS
The Company capitalizes certain costs that relate to real estate under
development including interest and development personnel costs.
OPERATING SEGMENT
The Company aggregates the financial information of all its properties into one
reportable segment because the properties all have similar economic
characteristics and provide similar services to similar types and classes of
customers.
REVENUE RECOGNITION
A majority of the Company's leases contain provisions for periodic escalation in
base rent (base rent escalation), which are primarily based on an inflation
index. Base rents are recognized on a straight-line basis over the term of the
lease, and the base rent escalation is recognized when measurable. In addition,
tenants are subject to additional rents if gross revenues of the properties
exceed certain thresholds defined in the lease agreements (percentage rents).
Percentage rents are recognized at the time when specific triggering events
occur as provided by the lease agreements. Percentage rents of $1.9 million and
$600 thousand were recognized in 2003 and 2002, respectively. No percentage
rents were recognized in 2001.
INCOME TAXES
The Company operates in a manner intended to enable it to qualify as a REIT
under the Internal Revenue Code (the Code). A REIT which distributes at least
90% of its taxable income to its shareholders each year and which meets certain
other conditions is not taxed on that portion of its taxable income which is
distributed to its shareholders. The Company intends to continue to qualify as a
REIT and distribute substantially all of its taxable income to its shareholders.
Accordingly, no provision has been made for income taxes.
Earnings and profits, which determine the taxability of distributions to
shareholders, may differ from that reported for financial reporting purposes due
primarily to differences in the basis of the assets and the estimated useful
lives used to compute depreciation.
CONCENTRATION OF RISK
American Multi-Cinema, Inc. (AMC) is the lessee of 62% of the megaplex theatre
rental properties owned by the Company (including joint venture properties) at
December 31, 2003. A substantial portion of the Company's revenues
(approximately $66.1 million or 73%, and $51.6 million or 72% for the years
ended December 31 2003 and 2002, respectively, including joint ventures) result
from the rental payments by AMC under the leases, or its parent, AMC
Entertainment, Inc. (AMCE), as the guarantor of AMC's obligations under the
leases. AMC Entertainment, Inc. is a publicly held company (AMEX:AEN) and
accordingly, their financial information is publicly available.
CASH EQUIVALENTS
Cash equivalents include bank demand deposits and shares of highly liquid
institutional money market mutual funds for which cost approximates market
value.
34
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
RESTRICTED CASH
Restricted cash represents demand deposits required in connection with the $125
million secured non-recourse mortgage notes payable due in 2006. These deposits
are restricted for debt service under the terms of the loans.
SHARE BASED COMPENSATION
Prior to 2003, the Company accounted for stock options issued under its share
incentive plan under the recognition and measurement provisions of APB Opinion
No. 25 "Accounting for Stock Issued to Employees," and related interpretations.
No stock-based compensation cost related to such options is reflected in 2002
and 2001 net income, as all options had an exercise price equal to the market
value of the underlying common stock on the date of grant.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
prospectively for all employee awards granted, modified, or settled after
January 1, 2003. Awards under the Company's plan vest either immediately or up
to a period of 5 years. Therefore the cost related to stock based employee
compensation related to stock options included in the determination of net
income for 2003 is less than that which would have been recognized if the fair
value based method had been applied to all awards since the original effective
date of Statement 123. The following table illustrates the effect on net income
and earnings per share if the fair value based method had been applied to all
outstanding and unvested awards for each period (in thousands):
35
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
2003 2002 2001
---------- ------ ------
Net income available to common shareholders,
as reported $ 32,131 27,934 23,580
Add: Stock-based employee compensation
expense included in reported net income 25 -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (128) (172) (172)
---------- ------ ------
Pro forma net income $ 32,028 27,762 23,408
========== ====== ======
Basic earnings per share:
As reported $ 1.81 1.66 1.60
Pro forma 1.80 1.65 1.60
Diluted earnings per share:
As reported $ 1.77 1.64 1.60
Pro forma 1.76 1.64 1.60
The fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 4.0% in 2003, 4% in 2002, and 5.0% in 2001, dividend yield of
8%, volatility factors of the expected market price of the Company's common
shares of 14.6% in 2003, 22.3% to 25.1% in 2002, and 35% in 2001; and an
expected life of the options of eight years.
Restricted share awards, which vest over time, are recorded as unearned
compensation when granted using the fair value of the stock at the grant date,
and amortized to expense over the vesting period.
2. RENTAL PROPERTIES
The following table summarizes the carrying amounts of rental properties as of
December 31, 2003 and 2002 (in thousands):
2003 2002
--------- -------
Buildings and improvements $ 741,519 572,276
Furniture, fixtures & equipment 4,000 --
Land 190,610 153,899
--------- -------
936,129 726,175
Accumulated depreciation (65,185) (46,238)
--------- -------
Total $ 870,944 679,937
========= =======
36
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Depreciation expense on rental properties was $16.2 million, $12.7 million and
$10.1 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
3. REAL ESTATE JOINT VENTURES
ATLANTIC JOINT VENTURE
On May 11, 2000, the Company completed the formation of a joint venture
partnership, Atlantic-EPR I, a Delaware general partnership (Atlantic-EPR I),
with Atlantic of Hamburg, Germany (Atlantic), whereby the Company contributed
the AMC Cantera 30 theatre with a carrying value of $33.5 million in exchange
for cash proceeds from mortgage financing of $17.8 million and a 100% interest
in Atlantic-EPR I. During 2000 through 2002, the Company sold to Atlantic a
total of an 80% interest in Atlantic-EPR I in exchange for $14.3 million in
cash. The final contribution by Atlantic of $8.4 million was paid to
Atlantic-EPR I in December 2002 but was not paid to the Company until January
2003. Accordingly, such contribution is included as a receivable from joint
venture in the consolidated balance sheet at December 31, 2002.
The joint venture agreement allows Atlantic to exchange up to a maximum of 10%
of its ownership interest in Atlantic-EPR I per year, beginning in 2005, for
Common Shares of the Company or, at the discretion of the Company, cash.
The Company accounts for its investment in Atlantic-EPR I under the equity
method of accounting. The Company recognized income of $401, $1,421, and $1,468
(in thousands) from its investment in this joint venture during 2003, 2002 and
2001, respectively.
Condensed financial information for Atlantic-EPR I is as follows as of and for
the years ended December 31, 2003, 2002, and 2001 (in thousands):
2003 2002 2001
------- ------ ------
Rental properties, net $31,177 31,821 32,465
Cash 141 9,342 141
Long-term debt 17,039 17,291 17,524
Payable to Entertainment Properties -- 8,438 --
Partners' equity 14,173 14,563 14,973
Rental revenue 4,006 3,932 3,869
Net income 1,911 1,845 1,717
WESTCOL JOINT VENTURE
On June 30, 1999, the Company completed the formation of a joint venture,
whereby the Company contributed certain undeveloped land parcels with a carrying
value of $8.7 million in exchange for a 50% interest in the real estate joint
venture, comprised of undeveloped land parcels and the Westminster AMC 24 screen
theatre in Westminster, Colorado. In December 2001, the Company purchased the
remaining third party interest in the Westcol joint venture for $13.5 million,
which approximated the book value of the proportionate share of the underlying
net assets of Westcol. As a result of the acquisition of the
37
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
remaining interest, the Company consolidated the assets and liabilities of the
joint venture at the time of acquisition. The Company recognized income of $735
in thousands from its investment in this joint venture during 2001.
4. OPERATING LEASES
The Company's rental properties are leased under operating leases with
expiration dates ranging from 9 to 25 years. Future minimum rentals on
non-cancelable tenant leases at December 31, 2003 are as follows (in thousands):
2004 $ 100,567
2005 100,796
2006 100,078
2007 100,468
2008 100,917
Thereafter 833,165
-----------
$ 1,335,991
===========
5. LONG-TERM DEBT
Long term debt at December 31, 2003 and 2002 consists of the following (in
thousands):
2003 2002
-------- -------
(1) Secured variable rate credit facility, due
February 28, 2006 $ 20,000 54,000
(2) Revolving variable rate credit facility, due May 1, 2005 -- 37,000
(3) Mortgage notes payable, 8.18% , due February 1, 2005 19,166 19,460
(4) Mortgage notes payable, 6.50% -15.03% , due
February 10, 2006 116,524 119,724
(5) Mortgage note payable, 6.77% , due July 11, 2028 98,115 99,593
(6) Mortgage note payable, 7.37% , due July 15, 2018 16,270 16,840
(7) Mortgage notes payable, 4.26% -9.012% , due
February 10, 2013 151,856 --
(8) Mortgage note payable, 6.33% , due September 1, 2013 14,624 --
(9) Variable rate mortgage note payable, due April 9, 2004 66,000 --
Other 4,000 --
-------- -------
Total $506,555 346,617
======== =======
(1) The Company's secured variable rate credit facility due February 28, 2006 is
secured by one theatre property, several retail and restaurant properties and
other land parcels, which had a net book value of approximately $35.8 million at
December 31, 2003. The note requires monthly payments of interest with the
outstanding principal due at maturity. Principal amounts bear interest at LIBOR
plus 400 basis points (5.125% at December 31, 2003).
38
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
(2) The Company's secured revolving variable rate credit facility due May 1,
2005 is secured by four theatre properties and two theatre and retail mix
properties, which had a net book value of approximately $66.4 million at
December 31, 2003. There was no outstanding balance on the revolving credit
facility at December 31, 2003. The note requires monthly payments of interest
with the outstanding principal due at maturity. Principal amounts bear interest
at LIBOR plus 300 basis points (4.125% at December 31, 2003).
(3) The Company's mortgage notes payable due February 1, 2005 is secured by
three theatre properties, which had a net book value of approximately $38.7
million at December 31, 2003. The note requires monthly principal and interest
payments of approximately $158 thousand with a final principal payment at
maturity of approximately $18.7 million.
(4) The Company's mortgage notes payable due February 10, 2006 are secured by
nine theatre properties, which had a net book value of approximately $184.3
million at December 31, 2003, and by $6.5 million in cash escrow deposits. The
escrow deposits are recorded as restricted cash in the accompanying consolidated
balance sheets at December 31, 2003 and 2002. The escrow deposits are required
by the terms of the mortgage notes and are available to pay debt service on the
mortgage notes if certain triggering events occur, or they may be applied to the
principal amount at maturity. The note requires monthly principal and interest
payments of approximately $1.1 million with a final principal payment at
maturity of approximately $109.0 million.
(5) The Company's mortgage note payable due July 11, 2028 is secured by eight
theatre properties, which had a net book value of approximately $142.4 million
at December 31, 2003. The note requires monthly principal and interest payments
of approximately $689 thousand. This mortgage agreement contains a
"hyper-amortization" feature, in which the principal payment schedule is rapidly
accelerated, and our principal payments are substantially increased, if we fail
to pay the balance of approximately $89.9 million on the anticipated prepayment
date of July 11, 2008.
(6) The Company's mortgage note payable due June 15, 2018 is secured by one
theatre property, which had a net book value of approximately $22.3 million at
December 31, 2003. The notes require monthly principal and interest payments of
approximately $151 thousand with a final principal payment at maturity of
approximately $0.8 million.
(7) The Company's mortgage notes payable due February 10, 2013 are secured by
fourteen theatre properties, which had a net book value of approximately $230.6
million at December 31, 2003. The note requires monthly principal and interest
payments of approximately $1.1 million with a final principal payment at
maturity of approximately $99.2 million.
(8) The Company's mortgage note payable due September 1, 2013 is secured by one
theatre property, which had a net book value of approximately $24.3 million at
December 31, 2003. The note requires monthly principal and interest payments of
approximately $98 thousand with a final principal payment at maturity of
approximately $11.5 million.
(9) The Company's variable rate mortgage note payable due April 9, 2004 is
secured by one theatre and
39
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
retail mix property, which had a net book value of approximately $100.5 million
at December 31, 2003. The note requires monthly payments of interest with the
outstanding principal due at maturity. Principal amounts bear interest at LIBOR
plus 250 basis points (3.625% at December 31, 2003). In February of 2004, the
Company entered into an agreement to refinance this note payable (see note 17).
Certain of the Company's long-term debt agreements contain customary restrictive
covenants related to financial and operating performance. At December 31, 2003,
the Company was in compliance with all restrictive covenants.
Principal payments due on long term debt obligations subsequent to December 31,
2003 are as follows (in thousands):
AMOUNT
---------
Year:
2004 $ 76,757
2005 30,038
2006 137,285
2007 8,422
2008 8,920
Thereafter 245,133
--------
Total $506,555
=========
The Company capitalizes a portion of interest costs as a component of land held
for development. The following is a summary of interest costs during 2003, 2002
and 2001 (in thousands):
2003 2002 2001
------- ------ ------
Interest cost charged to income $30,570 24,475 20,334
Interest cost capitalized 832 961 880
------- ------ ------
Total interest costs incurred $31,402 25,436 21,214
======= ====== ======
6. SHARE INCENTIVE PLAN
The Company maintains a Share Incentive Plan (the Plan) under which Common
Shares and options to purchase up to 1,500,000 of the Company's Common Shares,
subject to adjustment in the event of certain corporate events, may be granted.
At December 31, 2003, there were 350,769 shares available for grant under the
Plan.
SHARE OPTIONS
Share options granted under the Plan have exercise prices equal to the fair
market value of a Common Share at the date of grant. The options may be granted
for any reasonable term, not to exceed 10 years, and typically become
exercisable at a rate of 20% per year over a five-year period. For Trustees,
share options
40
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
become exercisable at a rate of one-third per year over a three-year period. A
summary of the Company's share option activity and related information is as
follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
--------- -------------- ---------
Outstanding at
December 31, 2000 404,664 $ 14.00-$20.00 $ 15.88
Granted 179,732 $ 16.05-$16.30 16.07
---------
Outstanding at
December 31, 2001 584,396 $ 14.00-$20.00 15.93
Exercised 6,400 $ 16.30-$19.50 18.50
Granted 164,791 $ 19.30-$22.90 22.64
Canceled/Expired 9,000 $ 16.30-$19.30 18.10
---------
Outstanding at
December 31, 2002 733,787 $ 14.00-$20.00 17.25
Exercised 66,863 $ 14.00-$22.89 18.50
Granted 326,029 $ 23.26-$26.87 24.87
---------
Outstanding at
December 31, 2003 992,953 $ 14.00-$26.87 19.67
=========
The weighted average fair value of options granted was $.41, $.58, and $1.41
during 2003, 2002 and 2001, respectively.
The following table summarizes outstanding and exercisable options at December
31, 2003:
EXERCISE OPTIONS OPTIONS WEIGHTED AVG.
PRICE RANGE OUTSTANDING EXERCISABLE LIFE REMAINING
- ------------- ----------- ----------- --------------
$ 14.00-20.00 529,132 331,492 6.2
20.00-26.87 463,821 44,957 9.0
------- ------- ---
992,953 376,449 7.5
======= ======= ===
RESTRICTED SHARES
During 2003, 2002 and 2001, the Company issued 30,453, 37,275, and 37,336,
respectively, restricted common shares for bonus compensation to executives and
other employees of the Company. During 2003, 2002 and 2001, the Company also
issued 24,027, 22,855 and 26,458, respectively, restricted common shares to
executives under a long-term compensation plan. Based upon the market price of
the Company's common shares on the grant dates, approximately $1.3 million, $1.2
million, and $860 thousand were recognized as non-vested shares issued in 2003,
2002 and 2001 respectively.
41
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
The holders of these restricted shares have voting rights and are eligible to
receive dividends from the date of grant. These shares vest over a period of
three years for bonus compensation and five years for long-term compensation
from the date of grant. The Company records compensation expense pertaining to
these restricted shares ratably over the period of vesting. Total expenses
related to the restricted shares recorded during 2003, 2002 and 2001 amounted to
$926 thousand, $1.05 million, and $330 thousand, respectively. At December 31,
2003, there were 123,619 non-vested restricted shares issued and outstanding.
7. RELATED PARTY TRANSACTIONS
In 2000, the Company loaned an aggregate of $3.5 million to Company executives.
The loans were made in order for the executives to purchase Common Shares of the
Company at the market value of the shares on the date of the loan, as well as to
repay borrowings on certain amounts previously loaned. The loans are recourse to
the executive's assets and bear interest at 6.24%, are due on January 1, 2011
and interest is payable at maturity. These loans were issued with terms that
include a Loan Forgiveness Program, under which the Compensation Committee of
the Board of Trustees may forgive a portion of the above referenced indebtedness
after application of proceeds from the sale of shares, following a change in
control of the Company. The Compensation Committee may also forgive the debt
incurred upon termination of employment by reason of death, disability, normal
retirement or without cause. At December 31, 2003 and 2002, accrued interest
receivable on these loans, included in other assets in the accompanying
consolidated balance sheets, totaled $1.37 and $1.1 million, respectively.
8. EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings
per Common Share for the years ended December 31, 2003, 2002 and 2001 (amounts
in thousands except per share information):
42
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
2003 2002 2001
----------- ---------- ----------
Net income available to common
shareholders $ 32,131 27,934 23,580
Weighted-average shares outstanding 17,780,380 16,790,889 14,714,756
Basic net income per common share $ 1.81 1.66 1.60
Numerator for diluted earnings per
common share:
Net income available to common
shareholders $ 32,131 27,934 23,580
Minority interests 1,555 1,195 --
----------- ---------- ----------
Numerator for diluted earning per
common share $ 33,686 29,129 23,580
=========== ========== ==========
Weighted-average shares outstanding 17,780,380 16,790,889 14,714,756
Effect of dilutive securities:
Employee options to acquire common
shares 321,429 167,476 30,065
Minority interest convertible into
common shares 857,142 685,243 --
Non-vested common share grants 92,377 118,190 38,458
----------- ---------- ----------
Dilutive potential common shares 1,270,948 970,909 68,523
----------- ---------- ----------
Denominator for diluted earnings per
share 19,051,328 17,761,798 14,783,279
=========== ========== ==========
Diluted net income per common share $ 1.77 1.64 1.60
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company holds one interest rate cap instrument with a notional amount of $10
million and a strike rate of 6.0% on three-month LIBOR which expires on December
20, 2004. The $6,500 cost of the rate cap is amortized over the life of the
agreement. The fair value of the interest rate cap is immaterial to the
Company's financial statements at December 31, 2003.
In 1998, the Company entered into a forward contract in connection with a
mortgage note payable due July 2008 to essentially fix the base rate of interest
on a notional amount of $105 million. The forward contract settled on June 29,
1998, the closing date of the long-term debt issuance, and the Company incurred
a loss of $1.4 million, which is being amortized as an increase to interest
expense over the ten year term of the long-term debt and will result in an
effective interest rate of 6.84%. The remaining unamortized amount of $776
thousand and $947 thousand is included in other assets in the accompanying 2003
and 2002 consolidated balance sheets, respectively.
43
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
10. COMPLETED PROPERTY ACQUISITIONS
The Company acquired a 71.4% ownership interest in New Roc Associates, LP ("New
Roc") on October 27, 2003 in exchange for cash of $25 million. New Roc owns an
entertainment retail center encompassing 446 thousand square feet located in New
Rochelle, New York. The results of New Roc's operations have been included in
the consolidated financial statements since the date of acquisition.
The fair value of New Roc's real property was approximately $105 million and New
Roc had mortgage debt of $70 million at the date of acquisition. Other assets
and liabilities of New Roc were insignificant. The net assets of New Roc have
been recorded in the accompanying consolidated financial statements at their
fair values to the extent of the Company's ownership interest in New Roc, and at
carryover basis (predecessor cost) to the extent of the minority ownership
interest retained by the former owner of New Roc. Rental property of $103.7
million and minority interest of $7 million were recorded by the Company in its
consolidated financial statements at the date of acquisition.
The following unaudited pro forma result of operations reflects the Company's
acquisition as if it had occurred on January 1, 2002:
PRO FORMA YEAR ENDED
DECEMBER 31,
------------------------
2003 2002
---------- --------
Total revenue $ 97,269 82,991
Net income available to common shareholders $ 33,431 27,924
Basic net income per common share $ 1.88 1.66
Diluted net income per common share $ 1.86 1.64
In connection with the acquisition, the Company loaned $5 million to the
minority partner in New Roc. That note is included in other assets, bears
interest at 10% per year, matures on the earlier to occur of May 9, 2004 or the
refinancing of the $66 million note (see note 17), and is secured by the
minority partner's interest in the partnership. If the property achieves certain
operating performance levels, the minority partner can, after two years, convert
it's ownership interest to cash or Company Common Stock of approximately $10
million.
During 2003 and 2002, the Company acquired various other rental and development
properties. Those acquisitions were recorded at the Company's cost of
acquisition. Rental properties acquired generally consisted of properties
subject to triple-net leases.
11. SHARE OFFERINGS
On September 23, 2003, the Company issued 2.4 million common shares in a
registered public offering for net proceeds of $72.2 million. A portion of the
proceeds were used to fund the acquisition of rental
44
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
properties and land held for development.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management compares the carrying value and the estimated fair value of our
financial instruments. The following methods and assumptions were used by
the Company to estimate the fair value of each class of financial
instruments at December 31, 2003 and 2002:
CASH AND CASH EQUIVALENTS:
Due to the highly liquid nature of our short term investments, the carrying
value of our cash approximates the fair market value of our cash
equivalents.
ACCOUNTS RECEIVABLE:
The carrying value of our accounts receivable approximates the fair market
value due to the short term maturities of these amounts.
DEBT INSTRUMENTS:
The fair value of the Company's debt as of December 31, 2003, 2002 and 2001
is estimated by discounting the future cash flows of each instrument using
current market rates. At December 31, 2003, the Company had a carrying
value of $86 million in variable rate debt outstanding, which management
believes represents fair value. At December 31, 2003, the Company had a
carrying value of $420.55 million in fixed rate long-term debt outstanding
with an average weighted interest rate of approximately 6.6%. Discounting
the future cash flows for fixed rate debt using a 6% rate, or a change of
0.6 percentage points, management estimates that the fixed rate debt would
have a fair value of approximately $425.3 million at December 31, 2003.
At December 31, 2002 the Company had a carrying value of $255.6 million in
fixed rate long-term debt outstanding with an average weighted interest
rate of approximately 7.5%. Discounting the future cash flows for fixed
rate debt using a 6% rate, management estimates that the fixed rate debt
would have had a fair value of approximately $270.0 million at December 31,
2002.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
The carrying value of accounts payable and accrued liabilities approximates
fair value due to the short term maturities of these amounts.
13. OPERATING LEASES
The Company leases its executive office from a third party landlord through
December, 2009. Rental expense for this lease totaled approximately $137
thousand, $114 thousand, and $111 thousand in 2003, 2002 and 2001,
respectively, and is included as a component of general and administrative
expense in the accompanying consolidated statements of income. Future
minimum lease payments under this lease at December 31, 2003 are (in
thousands):
45
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
AMOUNT
------
Year:
2004 $ 192
2005 198
2006 203
2007 209
2008 214
Thereafter 220
------
Total $1,236
------
14. QUARTERLY FINANCIAL INFORMATION (unaudited)
Summarized quarterly financial data for the years ended December 31, 2003 and
2002 are as follows (in thousands, except per share data):
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2003:
Total revenue $21,045 21,944 23,014 25,157
Net income 8,658 8,867 9,631 10,437
Net income available to
common shareholders 7,292 7,501 8,265 9,072
Basic net income per
common share 0.43 0.44 0.48 0.46
Diluted net income per
common share 0.42 0.43 0.46 0.46
2002:
Total revenue $15,796 16,989 18,797 20,028
Net income 6,877 7,226 8,413 8,643
Net income available to
common shareholders 6,877 6,732 7,047 7,278
Basic net income per
common share 0.43 0.39 0.41 0.42
Diluted net income per
common share 0.42 0.39 0.41 0.42
46
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
15. DIVIDENDS
COMMON SHARES
The Board of Trustees declared cash dividends totaling $2.00 per Common Share
for the year ended December 31, 2003 and $1.90 per Common Share for the year
ended December 31, 2002.
Of the total dividends calculated for tax purposes, the amounts characterized as
ordinary income, return of capital and capital gain for 2003 and 2002 are as
follows:
Cash dividends paid per Common Share for the year ended December 31, 2003:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN
- ----------- ---- --------- -------- ------- ------------
12-31-02 01-15-03 $ 0.4750 0.3286 0.1464 --
03-28-03 04-15-03 0.5000 0.3459 0.1541 --
06-30-03 07-15-03 0.5000 0.3459 0.1541 --
09-30-03 10-15-03 0.5000 0.3459 0.1541 --
-------- ------ ------ -----
Total for 2003 $ 1.9750 1.3663 0.6087 --
======== ====== ====== =====
$ 100.0% 69.2% 30.8% --
Cash dividends paid per Common Share for the year ended December 31, 2002:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN
- ----------- ---- --------- -------- ------- ------------
12-28-01 01-15-02 $ 0.4500 0.3822 0.0651 0.0027
03-28-02 04-16-02 0.4750 0.4034 0.0688 0.0028
06-28-02 07-16-02 0.4750 0.4034 0.0688 0.0028
09-30-02 10-15-02 0.4750 0.4034 0.0688 0.0028
-------- ------ ------ ------
Total for 2002 $ 1.8750 1.5924 0.2715 0.0111
======== ====== ====== ======
$ 100.0% 84.9% 14.5% 0.6%
PREFERRED SHARES
On May 29, 2002, the Company issued 2.3 million 9.5% Series A cumulative
Preferred Shares in a registered public offering. The Board of Trustees declared
cash dividends totaling $2.375 and $0.80855 per Preferred Share for the years
ended December 31, 2003 and December 31, 2002, respectively.
Of the total dividends calculated for tax purposes, the amounts characterized as
ordinary income, return of capital and capital gain for 2003 and 2002 are as
follows:
47
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
Cash dividends paid per Preferred Share for the year ended December 31, 2003:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN
- ----------- ---- --------- -------- ------- ------------
12-31-02 01-15-03 $0.59375 0.59375 -- --
03-28-03 04-15-03 0.59375 0.59375 -- --
06-30-03 07-15-03 0.59375 0.59375 -- --
09-30-03 10-15-03 0.59375 0.59375 -- --
-------- ------- ------ ---
Total for 2003 $ 2.3750 2.3750 -- --
======== ======= ====== ===
$ 100.0% 100.0% -- --
Cash dividends paid per Preferred Share for the Year ended December 31, 2002:
CASH TAXABLE
CASH PAYMENT DISTRIBUTION ORDINARY RETURN OF LONG-TERM
RECORD DATE DATE PER SHARE DIVIDEND CAPITAL CAPITAL GAIN
- ----------- ---- --------- -------- ------- ------------
06-28-02 07-16-02 $0.21480 0.21240 -- 0.00240
09-30-02 10-15-02 0.59375 0.58710 -- 0.00665
-------- ------- ------ --------
Total for 2002 $0.80855 0.79950 -- 0.00905
======== ======= ====== ========
$ 100.0% 98.9% -- 1.1%
16. SUBSEQUENT DEVELOPMENTS
On February 3, 2004, the Company announced a pending acquisition of four
Canadian entertainment and retail centers, anchored by movie theatres, with a
value in Canadian dollars of approximately C$200 million (approximately US$152
million). In connection with those acquisitions, the Company will issue common
shares to the sellers with an aggregate value in Canadian dollars of C$36
million (approximately US$27 million). Also in connection with those
acquisitions, the Company has obtained Canadian dollar denominated loan
commitments which total approximately C$128.6 million (approximately US$97
million). The acquisitions are expected to close in connection with the funding
of those loan commitments during the first quarter of 2004.
In February of 2004, the Company entered into an agreement to refinance the $66
million in variable rate debt, which matures in 2003 and is secured by the New
Roc property. The refinancing is expected to be completed in March 2004. The new
debt will have a ten year term and its interest will be fixed at a rate of
5.68%.
48
Entertainment Properties Trust
Notes to Consolidated Financial Statements
December 31, 2003, 2002, and 2001
17. COMMITMENTS AND CONTINGENCIES
As of December 31, 2003, the Company had five theatre projects under
construction. These theatres will have a total of 86 screens and their
development costs will be approximately $66 million. The Company has already
purchased the development land for $16.3 million as of December 31, 2003, and
plans to fund the remaining estimated development costs of these properties
through new debt facilities and additional equity. The cost of development is
paid by the Company either in periodic draws or upon successful completion of
construction. If management of the Company determines the construction is not
being completed per the executed development agreement, the Company can
discontinue funding of periodic draws or refuse to purchase the completed
theatre. Upon successful completion of construction, the Company will lease
these theatres to already established theatre operators for approximately $7.6
million in annual rentals.
The Company and wholly-owned subsidiary, EPT Gulf States, LLC ("Gulf States")
issued preferred interest in connection with the acquisition of certain rental
properties by Gulf States in 2002. Those preferred interests earn annual
dividends of 10%, are presented in minority interests in the accompanying
consolidated balance sheets, and are convertible into 857,142 Common Shares of
the Company.
49
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2003
INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2003
--------------------- ---------------------------------
BUILDINGS, ADDITIONS BUILDINGS,
EQUIPMENT & SUBSEQUENT TO EQUIPMENT &
DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ---------------------- -------------------- ----------- ------- ------------ ------------- ------- ------------ -------
Grand 24 Dallas, TX $ 1,214 3,060 15,540 3,060 15,281 18,341
Mission Valley 20 San Diego, CA 9,800 16,300 16,028 16,028
Promenade 16 Los Angeles, CA 17,198 6,021 22,479 6,021 22,104 28,125
Ontario Mills 30 Los Angeles, CA 15,268 5,521 19,779 5,521 19,450 24,971
Lennox 24 Columbus, OH 7,756 12,900 12,685 12,685
West Olive 16 St. Louis, MO 10,753 4,985 12,815 4,985 12,602 17,587
Studio 30 Houston, TX 15,934 6,023 20,377 6,023 20,037 26,060
Huebner Oaks 24 San Antonio, TX 10,192 3,006 13,894 3,006 13,662 16,668
First Colony 24 Houston, TX 10,666 19,100 67 19,167 19,167
Oakview 24 Omaha, NE 13,115 5,215 16,700 59 5,215 16,759 21,974
Leawood 20 Kansas City, MO 8,815 3,714 12,086 43 3,714 12,129 15,843
Gulf Pointe 30 Houston, TX 14,398 4,304 21,496 76 4,304 21,572 25,876
South Barrington 30 Chicago, IL 19,140 6,577 27,723 98 6,577 27,821 34,398
Mesquite 30 Dallas, TX 12,949 2,912 20,288 72 2,912 20,360 23,272
Hampton Town Center 24 Norfolk, VA 15,907 3,822 24,678 88 3,822 24,766 28,588
Pompano 18 Pompano Beach, FL 7,600 6,376 9,899 2,426 6,376 12,325 18,701
Raleigh Grand 16 Raleigh, NC 3,967 2,919 5,559 2,919 5,559 8,478
Paradise 24 Miami, FL 13,083 2,000 13,000 8,519 2,000 21,519 23,519
Pompano Kmart Pompano Beach, FL 600 2,423 600 2,423 3,023
Pompano Restaurant Pompano Beach, FL 200 803 430 200 1,233 1,433
Aliso Viejo 20 Los Angeles, CA 12,240 8,000 14,000 8,000 14,000 22,000
Bosie Stadium 20 Boise, ID 7,600 16,003 16,003 16,003
Woodridge 18 Chicago, IL 8,681 9,926 8,968 9,926 8,968 18,894
Cary Crossroads 20 Cary, NC 9,292 3,352 11,653 155 3,352 11,808 15,160
Tampa Palms 20 Tampa, FL 11,004 6,000 12,809 6,000 12,809 18,809
Palms Promenade San Diego, CA 14,611 7,500 17,750 7,500 17,750 25,250
On The Border Dallas, TX 674 205 879 879
Bennigans Dallas, TX 565 1,000 565 1,000 1,565
Bennigans Houston, TX 511 891 652 750 1,402
Texas Land & Cattle Dallas, TX 511 1,008 1,519 1,519
Texas Roadhouse Grill Atlanta, GA 886 886 886
Roadhouse Grill Atlanta, GA 868 868 868
Westminster 24 Denver, CO 16,270 5,850 17,314 5,850 17,314 23,164
Westminster Center Denver, CO 10,000 6,204 12,600 742 6,204 13,342 19,546
Subway Denver, Co 27 27 27
Westbank Palace 10 Westbank, LA 9,781 4,378 12,330 4,378 12,330 16,708
Houma Palace 10 Houma, LA 5,502 2,404 6,780 2,404 6,780 9,184
Hammond Palace 10 Hammond, LA 5,349 2,404 6,780 2,404 6,780 9,184
Elmwood Palace 10 Elmwood, LA 14,061 5,264 14,820 5,264 14,820 20,084
Clearview Palace 12 Clearview, LA 7,336 11,740 11,740 11,740
Sterling Forum 30 Sterling Heights, MI 17,117 5,975 17,956 3,400 5,975 21,356 27,331
Olathe Studio 30 Olathe, KS 12,227 4,000 15,935 4,000 15,935 19,935
Cherrydale 16 Greenville, SC 5,044 1,660 7,570 1,660 7,570 9,230
Livonia Livonia, MI 14,000 4,500 17,525 4,500 17,525 22,025
Hoffman 22 Alexandria, VA 14,061 22,035 22,035 22,035
Little Rock Rave Little Rock, AR 10,000 3,858 7,990 3,858 7,990 11,848
-------- ------- ------- ------ ------- ------- -------
Subtotals carried over to page 49 $421,931 152,545 560,424 19,279 153,899 576,114 730,013
======== ======= ======= ====== ======= ======= =======
ACCUMULATED DATE DEPRECIATION
DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE
- ---------------------- -------------------- ------------ -------- ------------
Grand 24 Dallas, TX 2,101 11/97 (1) 40 years
Mission Valley 20 San Diego, CA 2,204 11/97 (1) 40 years
Promenade 16 Los Angeles, CA 3,039 11/97 (1) 40 years
Ontario Mills 30 Los Angeles, CA 2,674 11/97 (1) 40 years
Lennox 24 Columbus, OH 1,744 11/97 (1) 40 years
West Olive 16 St. Louis, MO 1,733 11/97 (1) 40 years
Studio 30 Houston, TX 2,755 11/97 (1) 40 years
Huebner Oaks 24 San Antonio, TX 1,879 11/97 (1) 40 years
First Colony 24 Houston, TX 2,909 11/97 40 years
Oakview 24 Omaha, NE 2,544 11/97 40 years
Leawood 20 Kansas City, MO 1,841 11/97 40 years
Gulf Pointe 30 Houston, TX 3,184 2/98 40 years
South Barrington 30 Chicago, IL 4,049 3/98 40 years
Mesquite 30 Dallas, TX 2,879 4/98 40 years
Hampton Town Center 24 Norfolk, VA 3,394 6/98 40 years
Pompano 18 Pompano Beach, FL 1,652 8/98 40 years
Raleigh Grand 16 Raleigh, NC 784 8/98 40 years
Paradise 24 Miami, FL 2,591 11/98 40 years
Pompano Kmart Pompano Beach, FL 304 11/98 40 years
Pompano Restaurant Pompano Beach, FL 118 11/98 40 years
Aliso Viejo 20 Los Angeles, CA 1,750 12/98 40 years
Bosie Stadium 20 Boise, ID 2,000 12/98 40 years
Woodridge 18 Chicago, IL 1,004 6/99 40 years
Cary Crossroads 20 Cary, NC 1,165 6/99 40 years
Tampa Palms 20 Tampa, FL 1,308 6/99 40 years
Palms Promenade San Diego, CA 1,738 6/99 40 years
On The Border Dallas, TX 11/97
Bennigans Dallas, TX 134 11/97 20 years
Bennigans Houston, TX 179 11/97 20 years
Texas Land & Cattle Dallas, TX 11/97
Texas Roadhouse Grill Atlanta, GA 3/99
Roadhouse Grill Atlanta, GA 3/99
Westminster 24 Denver, CO 902 12/01 40 years
Westminster Center Denver, CO 690 12/01 40 years
Subway Denver, Co 9 4/2 5 years
Westbank Palace 10 Westbank, LA 552 3/2 40 years
Houma Palace 10 Houma, LA 303 3/2 40 years
Hammond Palace 10 Hammond, LA 303 3/2 40 years
Elmwood Palace 10 Elmwood, LA 664 3/2 40 years
Clearview Palace 12 Clearview, LA 526 3/2 40 years
Sterling Forum 30 Sterling Heights, MI 858 6/2 40 years
Olathe Studio 30 Olathe, KS 598 6/2 40 years
Cherrydale 16 Greenville, SC 285 6/2 40 years
Livonia Livonia, MI 621 8/2 40 years
Hoffman 22 Alexandria, VA 689 10/2 40 years
Little Rock Rave Little Rock, AR 208 12/2 40 years
------
Subtotals carried over to page 49 60,864
======
50
ENTERTAINMENT PROPERTIES TRUST
Continued Schedule III - Real Estate and Accumulated Depreciation
December 31, 2003
INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2003
--------------------- ---------------------------------
BUILDINGS, ADDITIONS BUILDINGS,
EQUIPMENT & SUBSEQUENT TO EQUIPMENT &
DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ---------------------- -------------------- ----------- ------- ------------ ------------- ------- ------------ -------
Subtotal from page 48 n/a $421,931 152,545 560,424 19,279 153,899 576,114 730,013
AmStar Cinema 16 Macon, GA 1,982 5,056 1,982 5,056 7,038
Star Southfield Center Southfield, MI 8,000 20,520 8,000 20,520 28,520
Southwind 12 Lawrence, KS 1,500 3,526 1,500 3,526 5,026
Veterans 24 Tampa, FL 14,624 6,100 18,431 6,100 18,431 24,531
New Roc City New Rochelle, NY 70,000 6,100 97,601 6,100 97,601 103,701
Harbour View Station Suffolk, VA 3,255 9,206 3,255 9,206 12,461
Columbiana Grande 14 Columbiana, SC 1,000 10,535 1,000 10,535 11,535
The Grande 18 Hialeah, FL 7,985 7,985 7,985
Johnny Carino's Mesquite, TX 789 990 789 990 1,779
Hawaiian Adv. Waterpark Garland, TX 3,300 3,300 3,300
Rocky Mountain Choc. Westminster, CO 16 16 16
Leasing Commissions Various 224 224 224
Development Various 29,152 29,152 29,152
-------- ------- ------- ------ ------- ------- -------
Total $506,555 218,408 729,829 19,279 219,762 745,519 965,281
======== ======= ======= ====== ======= ======= =======
ACCUMULATED DATE DEPRECIATION
DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE
- ---------------------- -------------------- ------------ -------- ------------
Subtotal from page 48 n/a 60,864 n/a n/a
AmStar Cinema 16 Macon, GA 95 3/3 40 years
Star Southfield Center Southfield, MI 403 5/3 40 years
Southwind 12 Lawrence, KS 51 6/3 40 years
Veterans 24 Tampa, FL 269 6/3 40 years
New Roc City New Rochelle, NY 3,219 10/3 40 years
Harbour View Station Suffolk, VA 34 11/3 40 years
Columbiana Grande 14 Columbiana, SC 139 11/3 40 years
The Grande 18 Hialeah, FL 12/3 40 years
Johnny Carino's Mesquite, TX 20 3/3 40 years
Hawaiian Adv. Waterpark Garland, TX 90 6/3 20 years
Rocky Mountain Choc. Westminster, CO 11/3 10 years
Leasing Commissions Various 1
Development Various
------
Total 65,185
======
51
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2002
INITIAL COST GROSS AMOUNT AT DECEMBER 31, 2002
--------------------- ADDITIONS ---------------------------------
BUILDINGS & SUBSEQUENT TO BUILDINGS &
DESCRIPTION MARKET ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTAL
- ---------------------- ----------------- ----------- ------- ------------ ------------- ------- ------------ -------
Grand 24 Dallas, TX $ 11,383 3,060 15,540 3,060 15,281 18,341
Mission Valley 20 San Diego, CA 9,948 16,300 16,028 16,028
Promenade 16 Los Angeles, CA 17,456 6,021 22,479 6,021 22,104 28,125
Ontario Mills 30 Los Angeles, CA 15,498 5,521 19,779 5,521 19,450 24,971
Lennox 24 Columbus, OH 7,873 12,900 12,685 12,685
West Olive 16 St. Louis, MO 10,915 4,985 12,815 4,985 12,602 17,587
Studio 30 Houston, TX 16,175 6,023 20,377 6,023 20,037 26,060
Huebner Oaks 24 San Antonio, TX 10,345 3,006 13,894 3,006 13,662 16,668
First Colony 24 Houston, TX 10,959 19,100 67 19,167 19,167
Oakview 24 Omaha, NE 9,582 5,215 16,700 59 5,215 16,759 21,974
Leawood 20 Kansas City, MO 9,057 3,714 12,086 43 3,714 12,129 15,843
Gulf Pointe 30 Houston, TX 14,793 4,304 21,496 76 4,304 21,572 25,876
South Barrington 30 Chicago, IL 19,665 6,577 27,723 98 6,577 27,821 34,398
Mesquite 30 Dallas, TX 13,305 2,912 20,288 72 2,912 20,360 23,272
Hampton Town Center 24 Norfolk, VA 16,344 3,822 24,678 88 3,822 24,766 28,588
Pompano 18 Pompano Beach, FL 7,716 6,376 9,899 2,426 6,376 12,325 18,701
Raleigh Grand 16 Raleigh, NC 4,028 2,919 5,559 2,919 5,559 8,478
Paradise 24 Miami, FL 13,442 2,000 13,000 8,519 2,000 21,519 23,519
Pompano Kmart Pompano Beach, FL 1,789 600 2,423 600 2,423 3,023
Nickels Restaurant Pompano Beach, FL 589 200 803 200 803 1,003
Aliso Viejo 20 Los Angeles, CA 12,577 8,000 14,000 8,000 14,000 22,000
Bosie Stadium 20 Boise, ID 7,716 16,003 16,003 16,003
Woodridge 18 Chicago, IL 11,451 9,926 8,968 9,926 8,968 18,894
Cary Crossroads 20 Cary, NC 9,058 3,352 11,653 155 3,352 11,808 15,160
Tampa Palms 20 Tampa, FL 11,387 6,000 12,809 6,000 12,809 18,809
Palms Promenade San Diego, CA 15,317 7,500 17,750 7,500 17,750 25,250
On The Border Dallas, TX 549 674 205 879 879
Bennigans Dallas, TX 958 565 1,000 565 1,000 1,565
Bennigans Houston, TX 856 511 891 652 750 1,402
Texas Land & Cattle Dallas, TX 949 511 1,008 1,519 1,519
Texas Roadhouse Grill Atlanta, GA 554 886 886 886
Roadhouse Grill Atlanta, GA 543 868 868 868
Westminster 24 Denver, CO 16,840 5,850 17,314 5,850 17,314 23,164
Westminster Center Denver, CO 6,204 12,600 733 6,204 13,333 19,537
Subway Denver, Co 27 27 27
Westbank Palace 10 Westbank, LA 5,471 4,378 12,330 4,378 12,330 16,708
Houma Palace 10 Houma, LA 3,028 2,404 6,780 2,404 6,780 9,184
Hammond Palace 10 Hammond, LA 3,028 2,404 6,780 2,404 6,780 9,184
Elmwood Palace 10 Elmwood, LA 6,890 5,264 14,820 5,264 14,820 20,084
Clearview Palace 12 Clearview, LA 3,919 11,740 11,740 11,740
Sterling Forum 30 Sterling Heights, MI 7,998 5,975 17,956 5,975 17,957 23,932
Olathe Studio 30 Olathe, KS 6,666 4,000 15,935 4,000 15,935 19,935
Cherrydale 16 Greenville, SC 1,660 7,570 1,660 7,570 9,230
Livonia Livonia, MI 4,500 17,525 4,500 17,525 22,025
Hoffman 22 Alexandria, VA 22,035 22,035 22,035
Little Rock Rave Little Rock, AR 3,858 7,990 3,858 7,990 11,848
Development Various -- 12,218 367 400 12,985 -- 12,985
-------- ------- ------- ------ ------- ------- -------
Total $346,617 164,763 560,791 15,840 166,884 572,276 739,160
======== ======= ======= ====== ======= ======= =======
ACCUMULATED DATE DEPRECIATION
DESCRIPTION MARKET DEPRECIATION ACQUIRED LIFE
- ---------------------- ----------------- ------------ --------- ------------
Grand 24 Dallas, TX 1,719 11/97 (1) 40 years
Mission Valley 20 San Diego, CA 1,803 11/97 (1) 40 years
Promenade 16 Los Angeles, CA 2,487 11/97 (1) 40 years
Ontario Mills 30 Los Angeles, CA 2,188 11/97 (1) 40 years
Lennox 24 Columbus, OH 1,427 11/97 (1) 40 years
West Olive 16 St. Louis, MO 1,418 11/97 (1) 40 years
Studio 30 Houston, TX 2,254 11/97 (1) 40 years
Huebner Oaks 24 San Antonio, TX 1,537 11/97 (1) 40 years
First Colony 24 Houston, TX 2,430 11/97 40 years
Oakview 24 Omaha, NE 2,125 11/97 40 years
Leawood 20 Kansas City, MO 1,538 11/97 40 years
Gulf Pointe 30 Houston, TX 2,645 2/98 40 years
South Barrington 30 Chicago, IL 3,354 3/98 40 years
Mesquite 30 Dallas, TX 2,370 4/98 40 years
Hampton Town Center 24 Norfolk, VA 2,777 6/98 40 years
Pompano 18 Pompano Beach, FL 1,344 8/98 40 years
Raleigh Grand 16 Raleigh, NC 645 8/98 40 years
Paradise 24 Miami, FL 2,053 11/98 40 years
Pompano Kmart Pompano Beach, FL 243 11/98 40 years
Nickels Restaurant Pompano Beach, FL 80 11/98 40 years
Aliso Viejo 20 Los Angeles, CA 1,400 12/98 40 years
Bosie Stadium 20 Boise, ID 1,600 12/98 40 years
Woodridge 18 Chicago, IL 780 6/99 40 years
Cary Crossroads 20 Cary, NC 874 6/99 40 years
Tampa Palms 20 Tampa, FL 987 6/99 40 years
Palms Promenade San Diego, CA 1,294 6/99 40 years
On The Border Dallas, TX 11/97
Bennigans Dallas, TX 71 11/97 20 years
Bennigans Houston, TX 83 11/97 20 years
Texas Land & Cattle Dallas, TX 11/97
Texas Roadhouse Grill Atlanta, GA 3/99
Roadhouse Grill Atlanta, GA 3/99
Westminster 24 Denver, CO 469 12/01 40 years
Westminster Center Denver, CO 356 12/01 40 years
Subway Denver, Co 4 4/2 5 years
Westbank Palace 10 Westbank, LA 244 3/2 40 years
Houma Palace 10 Houma, LA 134 3/2 40 years
Hammond Palace 10 Hammond, LA 134 3/2 40 years
Elmwood Palace 10 Elmwood, LA 293 3/2 40 years
Clearview Palace 12 Clearview, LA 232 3/2 40 years
Sterling Forum 30 Sterling Heights, MI 224 6/2 40 years
Olathe Studio 30 Olathe, KS 199 6/2 40 years
Cherrydale 16 Greenville, SC 95 6/2 40 years
Livonia Livonia, MI 182 8/2 40 years
Hoffman 22 Alexandria, VA 138 10/2 40 years
Little Rock Rave Little Rock, AR 8 12/2 40 years
Development Various --
------
Total 46,238
======
52
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation (continued)
Reconciliation
December 31, 2003
Real Estate:
Reconciliation:
Balance at beginning of the year $ 739,160
Acquisition of rental properties during the year 209,954
Acquisition of development properties, including related capitalized
costs, during the year 16,167
----------
Balance at close of year $ 965,281
==========
See accompanying independent auditor's report.
ENTERTAINMENT PROPERTIES TRUST
Schedule III - Real Estate and Accumulated Depreciation (continued)
Reconciliation
December 31, 2002
Real Estate:
Reconciliation:
Balance at beginning of the year $ 563,878
Acquisition of rental properties during the year 161,514
Acquisition of rental properties in exchange for minority interest in
subsidiary during the year 15,000
Acquisition of development properties, including related capitalized
costs, during the year 2,160
Net proceeds from sale of real estate (3,533)
Gain on sale of real estate 201
Correcting reclassification between cost and accumulated depreciation (60)
----------
Balance at close of year $ 739,160
==========
See accompanying independent auditor's report.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company previously reported a change in certifying accountants for 2002 in
its current report on Form 8-K filed on April 12, 2002.
ITEM 9A. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO") and Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
annual report. Based on that review and evaluation, the CEO and CFO have
concluded that the Company's current disclosure controls and procedures, as
designed and implemented, were effective. There have been no significant changes
in the Company's internal controls subsequent to the date of their evaluation.
There were no significant material weaknesses identified in the course of such
review and evaluation and, therefore, no corrective measures were taken by the
Company.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's definitive Proxy Statement for its Annual Meeting of Shareholders
to be held on May 12, 2004 (the "Proxy Statement"), contains under the captions
"Election of Trustees", "Officers", and "Section 16(a) Beneficial Ownership
Reporting Compliance" the information required by Item 10 of this Form 10-K,
which information is incorporated herein by this reference.
We have adopted a Code of Business Conduct and Ethics that applies to our Chief
Executive Officer, Chief Financial Officer, and all other officers, employees
and trustees. A copy of the Code may be viewed on our website at www.eprkc.com.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement contains under the captions "Election of Trustees --
Compensation of Trustees", "Executive Compensation", "Compensation Committee",
and "Company Performance" the information required by Item 11 of this Form 10-K,
which information is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Proxy Statement contains under the captions "Share Ownership" and "Equity
Compensation Plan Information" the information required by Item 12 of this Form
10-K, which information is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement contains under the caption "Transactions Between the Company
and Trustees, Officers or their Affiliates" the information required by Item 13
of this Form 10-K, which information is incorporated herein by this reference.
54
PART IV
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Proxy Statement contains under the caption "Ratification of Appointment of
Independent Auditors" the information required by Item 14 of this Form 10-K,
which information is incorporated herein by this reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits, Financial Statements and Financial Statement Schedules:
Financial Statements:
Reports of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002.
Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001.
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K:
Form 8-K filed October 23, 2003 in connection with the release of the
Company's earnings for the quarter ended September 30, 2003
Form 8-K filed November 12, 2003 announcing the acquisition of interest
in New Roc Associates, LP, which occurred on October 27, 2003, and as
amended by Form 8-K/A on January 12, 2004.
(c) Exhibits
21 Subsidiaries of the Company
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young LLP
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act
32 Certifications furnished pursuant to Section 906 of the
Sarbanes-Oxley Act.
(d) Financial Statement Schedules
55
Schedule III - Real Estate and Accumulated Depreciation
No other schedules meet the requirement for disclosure.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENTERTAINMENT PROPERTIES TRUST
Dated: March 5, 2004 By /s/ David M. Brain
-------------------------------------------
David M. Brain, President - Chief Executive
Officer
Dated: March 5, 2004 By /s/ Fred L. Kennon
-------------------------------------------
Fred L. Kennon, Vice President - Chief
Financial Officer Treasurer and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE AND TITLE DATE
- ------------------------------------------------------ -------------
/s/ Robert J. Druten March 5, 2004
- -------------------------------------------------
Robert J. Druten, Chairman of the Board
/s/ David M. Brain March 5, 2004
- ------------------------------------------------
David M. Brain, Chief Executive Officer and Trustee
/s/ Morgan G. Earnest, II March 5, 2004
- ----------------------------------------------
Morgan G. Earnest, II, Trustee
/s/ Scott H. Ward March 5, 2004
- -------------------------------------------------
Scott H. Ward, Trustee
/s/ James A. Olson March 5, 2004
- ------------------------------------------------
James A. Olson, Trustee
57
EXHIBIT INDEX
Exhibit Description
- ---------------------------- ---------------------------------------------------------
21 Subsidiaries of the Company
23.1 Consent of KPMG LLP
23.2 Consent of Ernst & Young LLP
31 Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act
32 Certifications Furnished Pursuant to Section 906 of the
Sarbanes-Oxley Act
58